Sunday 4 June 2023

How are Guatemala and El Salvador similar to Switzerland?

These are three surprising facts about the economies of Central America.

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QREPORTS (BBC Mundo) Guatemala has unemployment as low as Switzerland or the United States, and El Salvador is the country with the lowest inequality in all of Latin America.

Guatemala has unemployment of 3%.

Sounds a bit weird, doesn’t it? The explanation has nothing to do with false data, but rather with the trick that figures can play on us when we don’t put them in context.

Based on some data that seems hard to believe – but that is true -, we take the opportunity to take a look at the economic and social situation of a region that is going through difficulties as tough as food shortages.

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We present you three figures about the economies of Central America that you may not have known. And we explain them to you…

1. Low unemployment in Guatemala

In Switzerland unemployment decreased to 2%, while in the United States it is at 3.4%. At such low levels, in developed countries we speak of full employment, because the percentage is so minimal that, in the end, there are almost no unemployed.

In Latin America, Guatemala has an unemployment rate similar to that of rich countries: 3%

But how is it possible if Guatemala is one of the poorest countries in the region?

Unfortunately, the experts explain, we are facing a statistical illusion. In Guatemala there is very little unemployment because the majority of the population works for a few hours in precarious conditions, but from a statistical point of view it gives the impression that they are people who are part of the labor force.

“The problem in Central America is underemployment,” says Ricardo Castaneda, a researcher at the Central American Institute for Fiscal Studies, ICEFI.

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And especially in Guatemala.

“People do work, but they usually do so without access to social security, without a pension system, with extremely low wages or with extremely long working hours.”

Under these conditions, “the unemployment indicator makes the reality of the labor market invisible to you,” he points out.

Women are the most affected by underemployment.

Hugo Beteta, director of the Subregional Headquarters in Mexico of the Economic Commission for Latin America and the Caribbean (ECLAC), says that it is a “misleading statistic.”

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Not because it is false, but because usually the unemployed person is a person who has to be actively looking for work and who does not get it.

“If you threw in the towel and don’t keep looking, then you’re not unemployed, according to the surveys,” he explains.

Then, if the person answers that he worked at least one hour a week, then he is considered employed.

“I prefer to look at underemployment and especially underemployment among women because their labor participation is even lower,” he adds.

In the field of macroeconomics, Guatemala has the lowest public debt in all of Latin America, at 30.7% of GDP.

How do you explain such healthy fiscal health in a country with so many deficiencies? In this case, experts say, it is not a misleading figure, but an economic model that favors keeping fiscal accounts in order over anything else.

Guatemala has had a very conservative economic management. The country has never had a payment crisis and the country has always prided itself on having a low debt”, says Beteta.

But “this low public debt is at the cost of a large social debt,” he points out.

The social spending of the central governments in Guatemala is very low, he adds, standing at 7% of the Gross Domestic Product.

2. Low inequality in El Salvador

Just as unemployment in Guatemala is disconcerting, so is the very low income inequality in El Salvador, which, as measured by the GINI Index, gives it a score of 42, according to the latest available data based on household surveys that are carried out periodically in each country.

This classification leaves El Salvador as one of the most equal countries in Latin America, that is, with the smallest gap between rich and poor, only surpassed by Uruguay and Argentina.

But once again, experts say, it is a mirage.

What happens in El Salvador, explains Beteta, is that the household surveys do not collect the necessary data to make the calculation.

“They have a problem that is technically called truncation, which is a fancy way of saying that rich people do not open the door to answer the survey,” says the economist.

In practice, what the richest 1% of national income accumulates is so high, says Beteta, that an underestimation of inequality occurs when the GINI is used from surveys.

According to the GINI Index, El Salvador has one of the lowest income inequalities in Latin America.

For this reason, it has been proposed to carry out analysis based on fiscal data or estimation through national accounts.

“El Salvador is not the country with the least inequality,” says Castaneda, who agrees with the problem of the data collected by household surveys.

“It is a mirage and that is confirmed by the great food insecurity in the country or the low education coverage. If the country were so egalitarian, no one should be starving,” he adds.

Experts consider that the level of “equality” in El Salvador is a mirage.

3. The sixth largest economy in Latin America

Although individually the six Central American countries are small, when taken as a single block, they make up the sixth largest economy in Latin America.

That is why for decades the countries of this subcontinent have tried to reach an agreement in order to have a better negotiating position in the international trade system and increase their competitiveness. Yes, it is true, it has been very difficult. With the political differences between six countries and the agendas of each government on duty, it is not easy for them to agree at the same table.

All in all, 28.8% of the trade carried out by the Central American countries is among themselves, a much higher figure than the intraregional trade of the Southern Cone, which only reaches 9%.

“The high level of intraregional trade is surprising to me,” says Beteta, considering that after the pandemic the global economy has moved towards regionalization and that gives Central American countries an advantage.

“In the current geopolitical juncture, regions matter a lot in the international economy. Now everyone is talking about economic blocs in the world after the effects of the covid”, says the economist.

Another thing that strikes the expert is that Central America exports raw materials to the rest of the world, but intraregional trade includes manufacturing and a certain level of technological content.

They are often pieces of equipment that end up being incorporated into a larger production chain, ultimately opening up more opportunities for a region that has historically sold products with little added value.

The countries of the subcontinent also share electricity, a very valuable resource that in few parts of the world works in an integrated way between several countries.

It is the Electrical Interconnection System of Central American Countries, SIEPAC.

“It is a unique system in Latin America. It is a physical transmission line that connects from Guatemala to Panama,” says Beteta.

For example, he points out, when there is a lack of electricity in El Salvador, energy is dispatched from Guatemala. Then, countries can buy or sell energy through the interconnected system.

An extremely difficult economic time

After the consequences of the covid pandemic and the global economic effects of the war in Ukraine, Central America is going through a deep economic crisis.

“The economic contraction of the last decade is worse than the one we experienced in the lost decade” of the 1980s, says Beteta, the ECLAC economist.

Starting in 2014, the region had been experiencing much lower growth than in previous years, and when the pandemic hit, things got even more difficult.

Half of the people in Guatemala, Honduras and El Salvador live in conditions of food insecurity, says Castaneda, from the Central American Institute of Fiscal Studies, ICEFI.

And in those same countries, “one in three children is outside the educational system,” says the economist. “Central America is one of the most unequal regions in the world.”

In the world of work, two out of three Central American workers are in the informal market, that is, they do not have a contract or any type of social security.

A pressing situation that, in the midst of a climate of insecurity and lack of opportunities, continues to drive the migratory flow to the United States.

18.6% of people in Nicaragua are undernourished.

Furthermore, levels of public investment, which used to fuel the engines of growth, have fallen and foreign direct investment is concentrated in Costa Rica and Panama.

“Little foreign investment is arriving and the conditions are not in place to boost the growth of Central American countries only with national investment,” says Castaneda.

“You have economic models that are exclusive, incapable of generating quality employment,” he points out.

Living conditions have become very precarious on the subcontinent with the increase in food insecurity and hunger in recent years.

The Central American country where there is currently the most hunger is Nicaragua, where 18.6% of people are undernourished, according to the Food and Agriculture Organization of the United Nations, FAO.

Nicaragua is followed by Guatemala and Honduras, according to FAO estimates for the period 2019-2021.

And in the case of acute child malnutrition in children under five years of age, Nicaragua once again leads the list, exceeding 2%.

The high levels of corruption in the Central American region do not help to improve the economic and social situation of the population either, argues Castaneda.

«In each act of corruption, the resources that could be used to improve education or health are lost. They’re really stealing those opportunities.”

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Reports by QCR staff

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