Fiscal Policies Worsen Security Crisis in Central America

From left to right: Aaron Schneider, Maynor Cabrera and Hugo Noe Pino at the June 5 event on Central American fiscal policy.

Economists are warning that Central America – unlike some South American countries and Mexico – has still not rebounded from the 2007 global economic crisis, and that current fiscal policies dim prospects for improvement.  After making progress reducing poverty prior to 2007, the subregion has been stymied by static tax policies, insufficient investment in physical infrastructure, corruption, and natural disasters induced by climate change.  This is the assessment of Hugo Noe Pino, Ricardo Barrientos and Maynor Cabrera, economists from the Central American Institute on Fiscal Studies (ICEFI), and Aaron Schneider, Professor of Tulane University, who presented their work at a CLALS-sponsored seminar at the Woodrow Wilson Center on June 5.

The specialists’ research indicated that political resistance to fiscal reform is strong and comes from both new and traditional political and economic interests.  Elites have not found common ground with the middle and lower class in most of Central America – a key element of Costa Rica’s success prior to the financial crisis.  Absent an enduring fiscal pact, countries in the region are likely to remain plagued by persistently slow growth and unusually skewed income distribution.

Violence and security dominate Washington’s agenda on Central America, but this focus largely misses the underlying dynamic between economic decline and crime throughout the subregion.  Elites favor policies that discourage effective state‑building – including investment in security forces paid well enough that they are less vulnerable to corruption – and that exacerbate social inequalities.  Political fragmentation and low citizen confidence in government institutions have dire consequences for national security, and countries get caught in the Catch‑22 of being unable to attract investment from abroad and encourage development from within as long as fiscal policies fail to promote an educated, healthy and skilled workforce.

CLALS currently has a program investigating how traditional, renewed and emerging elites shape the political and economic landscape of Central America.  For more information click here.  And click here for a video of the ICEFI presentation and discussion at the Woodrow Wilson Center.

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