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DR-CAFTA: Challenges and Opportunities for Central America (World Bank study)

World Bank

DR-CAFTA: Challenges and Opportunities for Central America

CAFTA will boost trade and investment, helping reduce poverty in Central America

Washington, June 28, 2005. DR-CAFTA, the Free Trade Agreement that five nations of Central America and the Dominican Republic have signed with the U.S., promises to increase trade and investment, boosting economic growth and poverty reduction in Central America. To maximize these benefits, a new World Bank report advises countries to undertake complementary investments and reforms to enhance the agreement’s growth impact and ensure benefits for all.

DR-CAFTA: Challenges and Opportunities for Central America, co-authored by World Bank economists Carlos Felipe Jaramillo and Daniel Lederman, provides an assessment of the agreement negotiated by Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua with the U.S. It examines the impact of trade, the ways to capitalize on the new opportunities, and identifies the groups that might require assistance.

"Greater trade opportunities are essential to improving living standards in developing countries," said World Bank President Paul Wolfowitz, commenting on the release of the report. "This agreement will help secure and expand the access of Central American nations to their largest trading partner and help provide the potential for increased trade and investment in the region —critical factors in boosting economic growth and reducing poverty."

The report says that greater trade levels will arise from the removal of virtually all tariff and quota barriers, consolidating the preferential market access Central America already has in U.S. markets through the Caribbean Basin Initiative. DR-CAFTA should also deepen regional integration among the Central American nations themselves and promote greater levels of foreign investment.

"DR-CAFTA is not a silver-bullet, but it offers significant opportunities to increase growth and reduce poverty," said Jane Armitage, World Bank Director for Central America. "The benefits can be greatly enhanced if countries complement the agreement with investments and reforms in areas such as education, trade infrastructure and governance."

The study says the agreement needs to be accompanied by a complementary development agenda in order for countries to reap maximum benefits. This agenda should highlight actions in areas such as:

- Investments in trade facilitation, such as ports, roads, and customs;
- Institutional and regulatory reforms (e.g. transparency, rule of law, red tape);
- Innovation and education;
- Assistance to the most vulnerable groups to adapt to the new competitive environment.

According to the report, economies that sign free trade agreements tend to see an increase in their overall growth rates of about 0.6 percent annually during the first five years after implementation. For the case of DR-CAFTA, this would translate into nearly half a million fewer Central Americans living in poverty by 2010.

"The vast majority of families in Central America will benefit from the lower food prices resulting from the removal of trade barriers," said Carlos Felipe Jaramillo, World Bank Lead Economist for Central America and co-author of the report. "While a small share of the population living in rural areas could be adversely affected by lower prices of sensitive foodstuffs, timetables of up to 20 years for tariff reduction and government programs should help them find new opportunities."

According to specific research carried out as part of the study, 90 percent of households in Nicaragua, 84 percent in Guatemala, and 68 percent in El Salvador are net consumers of sensitive agricultural commodities, and as such can be expected to benefit from the decrease in food prices. Only about 9 percent of households in Nicaragua, 16 percent in Guatemala, and 5 percent in El Salvador are net producers of sensitive commodities.

Nonetheless, the report says that appropriate attention needs to be paid to ensuring that poor households among net producers are protected. For this, the design of appropriate support programs will be needed, such as technical assistance, conditional cash transfers, and selective investments in education, rural infrastructure, and rural finance to ensure that the poor have the means to take full advantage of the new opportunities arising out of DR-CAFTA.

 source: World Bank