Central America

Poverty
Central America is considered to be part of the developing world. In general, people that live in the developing world tend to be poor, have shorter life spans, have higher rates of illiteracy, and lack quality health care.

Within the six countries of Central America, there is significant economic diversity. For instance, Nicaragua is considered to be the least developed of the six countries because it has the worst indicators (see chart below) of the Central American countries for infant mortality rate, adult literacy rate, and GDP.

Comparisons of Central America and the United States on Key Indicators*

*Sources: United Nations Development Programme. 1999. Human Development Report 1999. New York: Oxford University Press and United Nations Development Programme. 1997. Human development Report 1997. New York: Oxford University Press. This table uses 1997 statistics, with exception of the Adult Literacy Rate for the United States (which uses 1995 statistics).

In contrast to Nicaragua, Panama and Costa Rica are more developed. With respect to GDP per capita, Panama has the highest ($3,080). However, Costa Rica is considered to be the most "developed" of the Central American countries because it has a relatively high GDP per capita and has the best indicators of the Central American countries for life expectancy at birth, infant mortality rate, and adult literacy rate.

It is widely believed that Costa Rica’s economy has been relatively successful because when the Spanish arrived, there was not a large indigenous population. Therefore, a two-tier society, with the Spaniards on top and the indigenous population on the bottom, did not evolve as it did in Guatemala, El Salvador, Honduras, and Nicaragua. Instead, its population was primarily made up of Spaniards.

There are not only economic differences between countries, but also within countries. For example, each of the Central American countries has a small group of very rich individuals and a large group of very poor individuals.

Trade
Historically, Central American trade has been very dependent on two products: coffee and bananas. During much of this century, coffee has been the single largest Central American export. Likewise, bananas have been a very important export for Honduras, Panama, and Costa Rica. Due to the importance of bananas and the fact that these countries are republics, these three countries have often been called "banana republics." Photo: Banana trees in Central America. Photo by Michael Snarr.

CAecon18.2.jpg (15112 bytes) Most of these exports went to the United States, which created a strong trade link between the United States and Central America. In fact, during the 20th century, the United States has been the main purchaser of Central American products. In addition, most of the products that Central America purchases come from the United States. This relationship, however, is not as important to the United States as it is to Central America since the goods the United States sells to and purchases from Central America are only a small amount of total U.S. trade. Photo: Exporting goods from Central America to the United States. Photo by Michael Snarr.

In recent decades, Central America has had success in diversifying its exports (so that it is less dependent on bananas and coffee) and diversifying its trading partners (so that it is less dependent on the United States as a trading partner). Nevertheless, this poor region is struggling to develop its economy.

The Central American Common Market
In 1960 Guatemala, Honduras, El Salvador, and Nicaragua created the Central American Common Market (CACM) in an effort to promote economic development (Costa Rica joined in 1963). The CACM, however, has suffered from political disagreements between El Salvador and Honduras. In 1969 political tensions resulted in a war between these two countries, which slowed economic cooperation in all of Central America. In recent years, efforts have been made to increase economic integration among the six countries. One of the obstacles, however, has been wealthy Costa Rica’s reluctance to tie its economy to its poorer neighbors.