Navigating Key Development Issues in Central America’s Dry Corridor

Summary:This paper argues that structural weaknesses may make private investment particularly sensitive to business confidence relative to other traditional investment drivers and global shocks. It gauges the importance of confidence over recent years in selected countries in Central America, including Costa Rica, the Dominican Republic, El Salvador, and Guatemala. Using a vector error correction model to carry out the empirical work, a system representing global activity and the domestic economy, including a set of investment drivers (interest rates, unit labor costs, and confidence) is analyzed. The findings suggest that confidence has been, on average, the most important driver of investment in these countries, exceeded only by global factors. Since confidence, arguably, can be influenced by policymakers’ decisions, structural reforms to improve the business climate and reduce uncertainty play an important role in promoting investment and economic growth.

Costa Rica’s financial system is at a crossroad facing short-term risks and critical challenges but also opportunities. The financial system has been resilient to the COVID-19 pandemic amid regulatory forbearance and widespread loan restructurings, but forward-looking asset quality estimates and thin capital buffers suggest lingering vulnerabilities. The scarring from the pandemic leaves the financial sector vulnerable to deal with risks from elevated indebtedness of households, dollarization and floating rate borrowing that are aggravated by the current macroeconomic juncture of rising interest rates, high inflation, a weakening exchange rate, and a worsening global context. Looming over the country are also climate change and environmental risks and the investment funding demands needed to help transition some sectors of the economy towards net zero carbon emissions. These features present also opportunities to further green the financial system and advance the development of capital markets, among others by incentivizing greater demand for local investments and utilizing the development potential of growing Pillar 2 pension assets. It is also time to carefully take stock of the State’s footprint in the system—policies, ownership, and the Sistema de Banca para el Desarrollo (SBD)--to enhance financial intermediation efficiency and development while addressing distortions built over many years. Addressing these challenges would help the country achieve a more resilient inclusive growth trajectory undergirded by a deeper, more efficient, diversified, and greener financial system.

TNC and Agence Française de Développement (AFD) outline a tested process for designing, implementing and financing watershed investment programs that drive long-term water security outcomes for people and nature.

Honduras is highly vulnerable to extreme natural hazards, which are expected to increase because of climate change. These will have significant consequences for all of Honduran society, affecting important economic sectors and threatening food and water security and human health. The impacts of climate change are expected to disproportionately affect the poorest and most vulnerable, such as indigenous peoples and afro‑descendants (IPADs) and women. These impacts will likely compound existing challenges such as migration, internal displacement, and land conflicts and insecurity. Even though Honduras’s contribution to global emissions is significantly low, the country has opportunities to pursue low‑carbon development that will create co‑benefits and foster synergies with climate change adaptation, particularly in the agriculture, water, forestry, energy, and transport sector. This CCDR recommends focusing on a parallel approach of a) cross‑sectoral recommendations in the short term that allow for the creation of an enabling environment for sectoral recommendations in the long term and long term, while b) accelerating policy reforms and investments through a phased approach for priority sectors. This phased approach to sectoral action would help the country gradually enhance ambition while also harnessing the enhanced institutional capacities and increased enabling environment.

This paper studies the drivers of the labor market performance in Nicaragua with a particular focus on informality, to identify vulnerable groups during economic downturns; and estimates the speed of adjustment of employment to shocks. The paper compares this experience with the ones in other CAPDR countries (Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Panama). Our findings are that while the high countercyclical informality in Nicaragua has been the active margin of adjustment during economic downturns mitigating unemployment, the trade-off has been a lower speed of adjustment to shocks hampering the country’s ability to revert to its potential. Policy recommendations relate to mitigating the impact of downturns on employment in Nicaragua, easing adjustments and inequalities in the labor market to hasten the employment recovery and thus, support growth.

This report activity aimed to collect data and analyze the long-term impact of 2 related interventions that ended in 2006 and 2010. Specifically, the report presents 12-year impacts of a one-year productive safety net (CCT) program, as well as 8-year impacts of an early childhood parenting (ECD) intervention. The report summarizes overall key findings for 3 cohorts of interest: (1) the adult women that were the main beneficiaries of the CCT interventions; (2) young adults 19 to 29 that were of primary or lower secondary school age during the CCT interventions; and (3) teenagers 9 to 19 that were 0 to 6 during the CCT or ECD interventions.

Migration has been demonstrated by various studies to be closely linked to improvements in individual- and household-level outcomes. Rather than examining the effects of migration, this paper explores whether an economic shock in United States negatively affected migrant households in rural Guatemala. Treating the Great Recession as a natural experiment affecting migrant and non-migrant households differently, the paper puts the spotlight on the effect on child anthropometry, including longer-term indicators of height-for-age z-scores. Panel data on children and multiple children in households enable double- and triple-difference estimation. In relative terms, migrant households fared far worse than non-migrant households over the period. In particular, large advantages in child anthropometric status for the youngest children in migrant households in 2008, just prior to the crisis, were substantially diminished four years later. The findings underscore the possible fragility of the benefits of migration, particularly in the face of a substantial economic shock, and point to the potential importance of deepening social safety nets.

... [T]he main objective of this report is to identify priority interventions at level of migration policies that governments could consider, and the CABEI could support, in order to address market failures and optimize/reduce migration flows and maximize their impact on economic and social development. The analysis is based on a review of the international and regional literature on migration; available labor market surveys and surveys of migrants; as well as the insights from the discussions of the migration forum organized by CABEI and a series of interviews with policymakers and experts. --- The core of the report is organized in three sections.
Section 2 presents a brief overview of labor market dynamics, future job opportunities and migration patterns to set the context for the study. Section 3 proposes a conceptual framework to guide the design of migration policies and identifies a long list of possible interventions that could be considered to address some of the problems discussed above. The last section proposes priority areas for migration policy and outlines the main elements of an operational agenda for the CABEI.

Poverty mapping, the spatial representation and analysis of human wellbeing and poverty indicators is becoming an increasingly important instrument for investigating and discussing socioeconomic issues, informing targeting efforts, and guiding the geographic allocation of resources. One approach to addressing poverty is the geographic approach. In the geographic approach, poor people are identified and targeted through poverty maps. Indeed, the geographical approach is one of the methods used worldwide for targeting anti-poverty programs to reduce the gaps in social protection coverage of poor and vulnerable groups, and it has been widely implemented in several countries around the world. In 2020, the Salvador's General Directorate of Statistics and Censuses (DIGESTYC) and the World Bank started working on the project ‘Poverty mapping in El Salvador‘. The project is part of the government and International Bank for Reconstruction and Development (IBRD) Programme, which is performed by experts of the National Statistical Institute (NSI) and the World Bank (WB). The main objective is to calculate the shares of households living in moderate and extreme poverty at disaggregated territorial levels (municipalities). Poverty mapping enhances our understanding of the geographic distribution of people living in poverty. This report presents poverty maps at the municipality level based on the Fay-Herriot model for small-area estimations.

As countries continue to manage the repercussions of the COVID-19 pandemic, Central America’s priority is to recover from its deepest economic contraction to restore strong, sustainable economic growth.

With increases in working age population projected to decline sharply, strong growth in the long run can only be achieved with higher productivity. More effective participation in global value chains, as well as a robust shift towards sophisticated exports of goods and services will be needed, but neither can be ensured without firms investing in productivity-enhancing innovations.

The World Bank released a study entitled "Unleashing Central America’s Growth Potential", which has identified the broad strategic directions that would help to increase sophistication of exports, reduce productivity gaps within the region and with other regions, and achieve higher productivity growth.