World Bank - Investment Climate In Central America

Central American Leaders, Bank Officials Discuss Investment Climate In Central America

SAN SALVADOR, February 4, 2005 – Central American policy makers will meet today with officials from the private sector, academia, civil society, as well as representatives from multilateral agencies, including the World Bank, to discuss how Central American countries can increase growth and reduce poverty by improving the climate for investment.

“Central American countries are poised to accelerate growth and reduce poverty if they continue to adopt policies that are conducive to increased investment and job creation,” said Pamela Cox, the Bank’s Vice President for Latin America and the Caribbean. “Our challenge is to cultivate a climate for investment that benefits society as a whole.”

Cox made her remarks at the opening of a two-day conference, “Improving the investment climate to promote growth and reduce poverty”, co-sponsored by the Salvadoran Foundation for Economic and Social Development (FUSADES), the World Bank Group and the United Kingdom’s Department for International Development (DFID). The conference – which is drawing leaders from Central American countries, including Salvadoran President Antonio Saca and government officials from five other countries, in addition to representatives from the private sector, academia, think tanks, and civil society.

The conference agenda features presentations and discussion drawing from three recent World Bank studies: 1) the World Development Report 2005; 2) Doing Business 2005: Removing Obstacles to Growth; and 3) Investment Climate Assessments for Central American countries. The presenters and commentators will include representatives of the Inter-American Development Bank, policy-makers and members of Central American organizations, such as the Central American Institute for Business Administration (INCAE) and the Central American Bank for Economic Integration (BCIE).

Central American countries have made great strides in improving their investment climates after a series of substantial reforms in the 1990s, resulting in improved management of public finances, advances in deregulation, adoption of market-friendly institutional frameworks, increased coverage of social services, such as education and health, and the consolidation of democratic systems after years of civil conflict. Despite these advances, Central American countries continue to pay an unnecessary toll for retaining barriers that discourage investment in the region, stifle job creation and hinder competitiveness.

With this in mind, Central American leaders have gathered in El Salvador today to discuss measures to improve their national investment climates and explore possible cooperation at the regional level, in order to increase productivity and attract the foreign direct investment needed to reduce poverty.

“There is much Central America can do to improve its investment climate,” said Jane Armitage, Country Director for Central America, “and each country stands to gain from the others’ experience and progress in reforms.”

Although each country has made progress in particular areas of improving its investment climate, as a region, Central America faces many common challenges, including:

• adopting policies to improve governance, in areas like policy and regulatory uncertainty, red tape, corruption and crime;

• increasing the quantity and quality of available physical infrastructure;

• improving access to and lowering the cost of financial services; and

• promoting the development of national quality systems and enhancing firms’ access to skilled workers and new technologies.

Governance

Governance constraints alone can result in costs equal to 25% of a typical firm’s sales or three times more than what a company pays in taxes, according to the World Development Report 2005. The result of these costs, and of bureaucratic impediments to starting a business, is that more than 40 percent of Central American businesses are informal, compared to less than 15 percent in a country like China. It is estimated that the financial losses to the national economy in Central American countries as a result of firms operating in the informal sector amount to about six percent of GDP.

While Central American countries struggle with the problems of corruption that affect many developing countries, the region compares well with other developing regions when it comes to the costs associated with corruption. Private firms in Central America spend an average of 2.1 percent of their sales to bribe public officials to “get things done”, less than in Indonesia, the Philippines, Cambodia and South America, but comparable to rates paid in Bangladesh and Pakistan.

Infrastructure

One of the main constraints facing large and small enterprises in Central America is related to infrastructure. According to the World Bank’s Investment Climate Surveys, monetary losses due to power outages consume 2.6 percent of manufacturing firms’ revenues in Central America, and on average 26% of manufacturing firms own or share a generator. Larger firms suffer fewer total hours of interruption and bear lower costs measured in relation to their total sales. On average, it takes approximately 70 days to get a phone connection in Central America, much longer than in China, South East Asia or South America.

Finance

Another important constraint facing Central American enterprises, large and small, is the cost and availability of credit. On average, 42 percent of Central American firms indicated that the availability of external funds, or difficulties associated with accessing them, such as high collateral requirements, are a major or severe obstacle to their operations. In particular, small firms are discouraged from applying for bank loans as many cannot meet the collateral requirements, which average approximately 153 percent of loan value. These requirements are at least partly due to difficulties in enforcing secured claims and liquidating collaterized assets.

Innovation and Education

In order to remain competitive, manufacturing firms in Central America need to upgrade and renew their production technology. One of the three most important methods of acquiring technology in Central American plants is the purchase of new machinery and equipment, emphasized by 76 percent of firms. However, Central American firms may not be receiving the full productivity and technological gains from new machinery and equipment due to relatively low levels of education of their labor forces. Although Central American countries have made considerable advances in raising the average education level of their workforces, they lag behind other regions of the world in terms of average years of schooling. In addition, the shortage of workers with secondary education creates obstacles to technological upgrading and to attracting trade and foreign direct investment with a high technological content.

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