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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