Central America: The Great Failure of Capitalism

By Alexander Segovia*

San Salvador’s Torre El Pedregal opposite a slum/ ContraPunto-Diario Digital El Salvador

Central American capitalism is inefficient, concentrates wealth within small elites, and hinders broader economic and political participation – and, even as the COVID pandemic underscores its failures, shows little prospect of changing. With the exception of some aspects of the Costa Rican version of Central American capitalism, the entire region has categorically failed in at least four fundamental areas: building productive, competitive, and integrated economies; achieving social progress for the majority of the population; consolidating democracy; and protecting the environment.

My recently published comparative historical review of the region’s brand of capitalism analyzes the development and implications of its two main stages.

Agro-export capitalism. In the 1870s, Costa Rica, El Salvador, and Guatemala – and later Honduras and Nicaragua – found that they could incorporate themselves into world capitalism through the production and exportation of coffee and bananas, and subsequently through other primary products. That strategy brought certain innovation, economic modernization, and national cohesion. After World War II, despite extreme dependence on enormously volatile foreign markets, the model generated some material wealth and even some temporary social progress, especially in urban areas. 

  • Agro-export capitalism, however, caused deeper poverty among the population, especially in rural areas; a greater concentration of wealth and power within a small elite; and a disproportionate exploitation of natural resources. The result was a system that concentrated wealth and power on some while excluding others – a system incompatible with democracy everywhere except Costa Rica. The failure to create jobs, promote social progress, and create conditions for democracy was a major driver of the region’s armed conflicts of the 1980s.

Rentier-transnational capitalism. The wars in the 1980s (along with the mass migration and internal economic, political and social crises they entailed), a deepening of capitalist globalization, and a wave of neoliberal reforms throughout the region brought about a transformation that modified the region’s capitalist model for the first time. The new rentier-transnational capitalism, based on the dynamism of services and trade and favoring consumption over production, turned out to be even less productive than before. 

  • These changes worsened the concentration of wealth and power on elites, who were even further bolstered by kinship with a transnational economic elite that emerged in the 1990s. Rather than create wealth, rentier-transnational capitalism deepened dependency on family remittances from abroad – from the very people who left their homeland to escape violence and unemployment that the failed economic model aggravated. 

COVID-19 has deepened Central America’s socioeconomic crisis, worsening poverty and inequality, putting democracy at even graver risk, and increasing the urgency for socioeconomic, legal, and institutional reforms of the system of privileges and perks for the elites and to establish a more equitable distribution of income and wealth. But the region’s form of capitalism, which has so obviously failed, continues to operate with impunity – and very few national and international actors, including most academics, ask why. Without rupturing this model of elite accumulation, neither democracy nor inclusion will come about.

  • Last century and in the first two decades of this, national and international actors tried to make changes, including efforts to adjust the role of the state. They argued that a democratic and social state with enough autonomy from the economic elites could create a capitalism that is more inclusive and compatible with democracy. But their efforts were either simply not permitted by the local conservative forces (often buttressed by regional and international allies) or were modified in such a way that they did not change the status quo. The problems of inequality, weak institutions, and undemocratic practices are clearly not going to fix themselves.
  • The United States has enormous historic responsibility for the configuration, functioning, and maintenance of the Central American variety of capitalism. It had great influence over the formation of national states and economies, especially in Honduras and Nicaragua, and was a fundamental actor in impeding the modernization of capitalism, such as in Guatemala in the 1950s. It has also been consistently the principal ally of the economic elites opposed to democracy and redistribution, and it has promoted neoliberal economic reforms and electoral strategies that further strengthened their economic and political power. If Washington is serious about addressing the root causes of Central America’s troubles, it could shift toward supporting reforms that would move the region toward a capitalism that is inclusive, sustainable, and compatible with democracy. 

January 12, 2022

* Alexander Segovia is a Salvadoran economist who has held wide-ranging positions in government, multilateral institutions, and academia. His book, El gran fracaso: 150 años de capitalismo ineficiente, concentrador y excluyente en Centroamérica (also available on Amazon) was published in October by F&G Editores (Guatemala).

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2 Comments

  1. I am wondering how the United States can help move Central America “toward a capitalism that is inclusive, sustainable, and compatible with democracy” when the country is moving in precisely the opposite direction as income is ever more concentrated in fewer hands, meeting COP commitments to reduce greenhouse emissions are illusory (and insufficient to have any meaningful impact as well), and the U.S. Supreme Court allows corporations to effectively “buy” legislators and other elected officials?

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  2. Laura

     /  October 31, 2022

    The role of capitalism in Latin America has always been extremely complex. While widespread desire for more democratic political systems throughout much of the region might seem to create a space for capitalism to flourish, it is true that, particularly in Central America, attempts at capitalism have continually failed. Despite a wealth of natural resources throughout the continent providing potential for thriving economies, many factors have prevented the economies of many Central American countries from reaching their full potential.

    Looming large among these factors is the politics that define the region. Neoliberalism embraced the idea of an open, capitalist market, a concept which began to take root in Latin America in the 1980s and 90s, during which many countries in the region began to implement market reforms and embrace a globalizing economy. During this time, the Washington Consensus gained support of policymakers in response to the macroeconomic turbulence and debts that plagued the region, encouraging the expansion of exports and international trade. However, the Washington Consensus was routinely denounced throughout the region, particularly due to far-left political movements of the era. Left-wing leaders were notoriously opposed to the idea of capitalist economies, swinging far in the other direction and embracing socialism instead.

    One of the defining features of the Latin American region, from a global perspective, is its widespread desire for democracy. Along with North America and Europe, Latin America accounts for one of the top three regions of widespread democracy. Despite significantly higher rates of extreme poverty, wealth inequality, crime, and political corruption, Central and South America continue to attempt to implement successful democratic systems. While democracy and capitalism are not mutually exclusive, they have often overlapped in societies throughout history. In Latin America, the denouncement of capitalism in numerous societies has often made democracy seem out of reach as well. More often than not, failure of states, political corruption, and disparity of wealth has led to the failure of capitalism throughout most of Central America.

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