A REVIEW OF ECONOMIC POLICIES AND STRATEGIES FOR TRADE AND INDUSTRIALIZATION IN CENTRAL AMERICA
Juan J. Buttari
The economic policy orientation of Central America has shifted dramatically over the last decade. The trend in the 1990s is towards economic liberalization, with less direct state intervention in economic activities. This chapter reviews the previous policy setting, discusses problems that still remain and further policy reforms that may be needed, and examines, within a regional and world context, the implications of this new orientation on trade and development.
Policy reforms have taken place over a broad range of economic activities. 1 + ̰/ For example, in the financial sector there has been interest rate liberalization and a reduced reliance on government- directed and subsidized credit. Simultaneously, serious efforts have been aimed at strengthening the regulation and supervision of financial institutions, especially commercial banks. The goal is to strengthen these financial institutions for monetary policy.
There have also been exchange rate reforms, with a shift toward market- based foreign exchange systems, although the shift has not been very direct or transparent. The pattern that took shape in most countries was to allow for parallel (or interbank) markets where, for authorized transactions, the exchange rate was negotiated among buyers and sellers. The authorities would then gradually shift transactions from the official to the parallel market, thus, in effect, devaluing the currency. In contrast, Costa Rica has been maintaining a "crawling peg" system since 1985, wherein the exchange rate is adjusted to compensate for the inflation rate differentials that exist between Costa Rica and its trading partners.
In the fiscal arena, all the countries in Central America have reduced capital expenditures, attempted to establish more effective control of expenditures, strengthened tax administration, reduced tax avoidance and