Looking Back on Central America’s 200 Years of Independence
September 15, 2021 marked the 200th anniversary of Central America’s independence. With countries’ policy efforts focused on responding to the COVID-19 pandemic and supporting the recovery, it is worth taking a brief look at the economic performance of the region.
Two hundred years ago, on September 15,1821, the Act of Independence was signed in Guatemala’s Royal Palace, marking the beginning of the autonomy of the region from Spain. The initial period was characterized by several political entities in the region, including the United Provinces of Central America and the Federal Republic of Central America. However, political divisions, a precarious economy and a weak financial system eventually led to the dissolution of the federation into five republics that now constitute Central America—Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.
All five countries have independent political systems and are working toward greater integration through regional agreements and institutional frameworks such as the Central American Integration System, the Common Market, the Monetary Council, the Electrical Interconnection System, as well as through a regional Parliament and Court of Justice. These initiatives have been valuable for improving the region’s competitiveness and helping attract more foreign investment.
The region’s performance over the last century
Data from the last 100 years (1920-2020)—the longest time period for which consistent economic data is available—shows that the region has suffered the consequences of several significant shocks. Two shocks in particular, the Great Depression and World War II, caused the sharpest economic contractions regionally, even more so than the ongoing pandemic.
Despite these, regional growth has been positive every decade since 1920. The average real GDP growth rate over the last century has been about 3.8 percent. The region has also moved ahead with several important milestones aimed at economic integration, such as the Dominican Republic-Central America Free Trade Agreement and the European Union and Central America Association Agreement.
The region’s GDP per capita, however, remains low compared with the United States (US), its main trade partner. It managed to converge to US levels by less than 5 percentage points over the past two decades, following a period of divergence in the 1970s and the 1980s, amid social and political instability.
Divergent growth paths
Performance across countries has varied widely over the past 100 years.
Costa Rica, the richest country in 1920, achieved the fastest average growth rate through a strategy based on openness to foreign investment and gradual trade liberalization. This helped substantially improve the country’s living standards.
Honduras, by contrast, had the lowest GDP per capita in 1920 and experienced one of the slowest average growth rates over the past 100 years. Together with Nicaragua—the slowest growing economy over this period—Honduras continues to have the lowest levels of GDP per capita in the region and struggles with relatively low living conditions.
A better future for all
With the exception of Costa Rica, countries in the region have been unable to markedly narrow the gap with the US. They now have a lower GDP per capita (as a percentage of US GDP per capita) than they did in the 1950s or 1960s.
All countries in the region need to make important structural changes to their economies to accelerate growth, enhance economic development, and improve living conditions. Countries should focus on reducing corruption, crime, and emigration, and strengthening resilience to climate change, with a view to reversing the loss of skilled labor, reinvigorating economic growth, and tackling high levels of poverty and inequality.
This historical moment offers an opportunity for Central American countries to take stock, evaluate the progress to date and press ahead with reforms aimed at addressing challenges that would help create a better future. Two hundred years of independence is an important milestone to reflect and mark the beginning of a new future for the region as it emerges from the pandemic.