The Global Zeitenwende
How to Avoid a New Cold War in a Multipolar Era
The number of migrants attempting to cross the border into the United States is already reaching record highs—and the number is expected to rise by late summer. Leaders from the countries that send the most people—Cuba, El Salvador, Guatemala, Honduras, Nicaragua, and Venezuela—didn’t attend this month’s Summit of the Americas in Los Angeles. U.S. President Joe Biden didn’t extend an invitation to Cuba, Nicaragua, and Venezuela, citing their dictatorial regimes. But the other three countries, which make up the Northern Triangle, rebuffed entreaties to attend from administration officials, including Vice President Kamala Harris and Secretary of State Antony Blinken. The brush-off does not bode well for U.S. cooperation with these governments, which are vigorously attempting to fend off international scrutiny of corruption in their administrations and judicial systems.
The Biden administration, however, has unfurled a plan—the aptly named Root Causes Strategy—to shore up Central American economies in a bid to make these countries more hospitable places to live. The initiative, led by Harris, appears to follow a playbook U.S. administrations have used in the past: namely, emphasizing growing investment from large U.S. corporations without addressing the region’s breathtaking income gap. Other initiatives cut from the same cloth—such as the Dominican Republic‒Central America‒U.S. Free Trade Agreement, or CAFTA—have ended up mostly benefitting multinational corporations and the region’s ruling families. Extending this business-as-usual approach will likely fail to improve conditions for the very people who are most apt to pick up stakes and head for the United States.
To make a difference in the lives of the majority of Central American residents, who live on just a few hundred dollars a month, the Biden administration should focus on changing the underlying structures of these countries’ economies. Rather than tout pledges from big companies to expand manufacturing hubs in the region, U.S. policymakers should use their leverage with Central American leaders to reduce the size of the informal economy and usher more of their citizens into jobs that provide more security and a modicum of benefits. They should attempt to diversify Central American exports, which are focused too heavily on a small number of goods, such as apparel and fruit. Finally, any successful effort would do well to harness the potential of the billions of dollars of remittances immigrants send home to better strengthen the communities they have left behind.
Workers in the informal sector hold jobs that stand outside a country’s tax and regulatory systems. Perhaps the most visible members of this economic class are the people at the corner store or those hawking products in open-air markets or on the side of the road across Latin America. The vast majority of these individuals have no access to financing and cannot obtain credit.
These businesses, which are typically run by one person, make a very small contribution to Central American countries’ national income. In part because of government red tape, they don’t make tax contributions on their income or sales (except through the indirect sales taxes, a regressive method of obtaining public revenue). However, they capture more than two-thirds of the region’s labor force. And competition among them is high, limiting businesses to near-zero profit margins.
CAFTA—which was negotiated when U.S. President George W. Bush was in office—was supposed to help expand and diversify these countries’ economies. But that diversification has not happened: just 11 commodities make up 90 percent of U.S. imports from Central America, a higher proportion than in the early 2000, before CAFTA’s passage and ratification. Apparel accounts for 48 percent of these exports. Workers in the industry often earn more than the minimum wage, but that doesn’t mean much: in El Salvador, workers in small factories earned just $300 a month in 2019, on average. The real winners are the multinational corporations and oligarch families that own the garment factories.
The Biden administration should focus on changing the underlying structures of Central American economies.
The other half of the region’s exports to the United States are agricultural products such as bananas and coffee. Here again, the farms and plantations that grow these products are concentrated almost exclusively in the hands of landed elites or transnational corporations such as Cargill, which, according to the German-based market and consumer data company Statista, controls at least one-third of the Central American poultry sector. These entities do quite well—but their workers earn sustenance wages. This dynamic also holds true in extractive industries: in Nicaragua, mining companies exported $800 million in gold (accounting from more than ten percent of all U.S. imports from the country) but paid miners toiling underground, in dangerous conditions, less than $600 a month, on average.
The United States bears some responsibility for these disparities. When U.S. leaders were negotiating CAFTA in the early years of this century, they failed to control for the fact that the region’s elites would monopolize gains from increased market access. Biden’s first executive order on migration included a review of CAFTA. His administration should use the United States’ leverage as the major market for Central America to pressure the region’s governments to spread profits more broadly by pushing monopolistic industries to pay their workers a fair wage and by promoting more market access for smaller businesses.
Meanwhile, Central American countries must diversify their exports away from material goods and toward services, especially those in the knowledge economy. To be sure, education systems in the region are dismal, particularly in Guatemala. But some residents who have backgrounds in fields such as computing and accounting could augment their wages with basic entrepreneurial training.
Consider an initiative launched by the Inter-American Dialogue, a U.S.-based think tank I am affiliated with, in the western highlands of Guatemala, which provided microenterprises with guidance on business development and using technology to expand their reach. Roughly 300 people participated over four years, and as their businesses grew, they hired more employees. The wages they paid were better than in other industries: their salaries were on average 12 percent higher than average wages for employees in the business sector and 170 percent higher than the income for agricultural daily laborers.
U.S. policymakers should also leverage the remittances that U.S.-based workers send home to Central American countries to strengthen their communities. In 2021, there were four million remittance-recipient households in Central America; on average, each one received over $5,000 a year, a transfer of wealth that accounted for 23 percent of the region’s gross domestic product. Most recipients save remittances informally and eventually use the cash to migrate themselves. Over 70 percent of remittance recipients in El Salvador, Guatemala, Honduras, and Nicaragua save money, but only half own savings accounts. Moreover, the average amount saved informally is typically above $600. A financial inclusion strategy for remittance recipients could help root more families in the region because those who own bank accounts are less likely to migrate themselves. And giving financial institutions more money to loan would increase the capital available to local entrepreneurs hoping to open or grow their businesses. That would help diversify these communities’ economies beyond subsistence agriculture.
To see this effort to fruition, U.S. policymakers will need to forge partnerships with power brokers in the region. And that includes Central American elites, who have traditionally been loath to contribute to society writ large. But a younger generation of elites across the region wants to move away from business plans that depend on economic favors from government and generous inheritances as the sole means to grow their enterprises. These people, who tend to specialize in financial technology, telecommunications, and other service sectors, could prove to be helpful partners in creating stronger and more cohesive polities in their countries.
Along with economic elites, public servants need to be included in forging solutions. Although prosecutors leading major anticorruption cases against politicians in Guatemala and Honduras receive most of the press attention, the majority of such cases are investigated by lower-level officials who chafe at clientelism and respect rules and procedures. These individuals could be potent allies in making Central American countries more hospitable places to live.
The last time the United States paid real attention to Central America was when it was seen as a battleground of the Cold War. Now, it is the arrival of hundreds of thousands of migrants that is prodding a U.S. president to take notice. The challenges facing Central America are formidable and will not be solved within a single U.S. president’s tenure. But by working with partners to build up the region’s economies, Washington can help the region’s governments make progress in getting more people to stay and build stronger communities at home.
How Washington Can Reset Relations With a Region That Needs It Less