The New Geopolitics of Energy
Last month set a dubious record for U.S. immigration policy. More than 100,000 asylum-seekers reached the country’s southern border in March—the highest number in more than a decade. Detention areas are overflowing, and stories of children being separated from their parents at the border have left an unfortunate mark on American political discourse. As in previous years, most migrants set out from El Salvador, Guatemala, or Honduras—also known as the Northern Triangle—to escape gang violence, poverty, and lack of opportunity.
Instead of addressing the root causes of the desperation that drives families and unaccompanied minors to embark on this risky journey, the Trump administration has railed against illegal immigration and drugs while slashing aid to the region. In his first two years, President Donald Trump has cut U.S. funding to Central America, most of which is destined for the Northern Triangle, from nearly $700 million to roughly $530 million. For the coming fiscal year, he is trying to bring this number down to $400 million—less than five percent of what his government has requested to build the border wall with Mexico. None of the $5.8 billion pledged last December by the State Department “to promote institutional reform and development in the Northern Triangle” has ever materialized.
Critics have rightly denounced the cuts as shortsighted and counterproductive. But even with a more accommodating occupant in the White House, it would be unrealistic to expect Congress to provide enough aid to solve the ills of the Northern Triangle. What is needed is a strategy that addresses the origins of the crisis and can be sustained by the region after Washington’s attention turns elsewhere, as it inevitably will.
The good news is that promising solutions already exist. They include popular but incipient domestic initiatives to strengthen porous tax regimes, combat corruption, and use worker remittances from abroad to spur economic growth at home. Washington should use its aid to expand these programs.
The crisis afflicting the Northern Triangle runs deeper than the failures of any single government. Leaders of all political stripes in the region have floundered in the face of criminal gangs, failing education systems, widespread poverty, and natural disasters. Their impotence is above all a consequence of their penury.
Consider the scourge of gang violence. In 2013, when Honduras had the world’s highest murder rate, the country’s attorney general admitted that his office had the resources to investigate only one-fifth of all homicide cases. Even if every single investigation were successful, 80 percent of murders would go unpunished.
To provide the essential services that citizens everywhere expect from their governments, Honduras and its neighbors will need to do a better job at funding themselves. At the moment, however, they lack the institutional capacity to do so. Tax evasion is the norm: by some estimates, 70 percent of wage earners in Guatemala and one-third in El Salvador do not pay any personal income tax. Economic elites do not contribute their fair share of taxes either, complaining that whatever they pay will end up in the offshore bank accounts of corrupt politicians. (One wonders why the rich even bother cheating. The average effective tax rate for the richest ten percent is a risible 1.8 percent in Guatemala and 4.1 percent in Honduras.) Value-added tax and corporate tax avoidance are also rampant—sometimes high enough to offset GDP growth altogether.
All this makes for tax collection rates that are among the lowest in the world. Honduras’ tax revenue is a mere 19 percent of GDP; El Salvador’s is 16 percent and Guatemala’s a paltry 10.3 percent. Each country ranks below the Latin American average and falls far short of the OECD standard. (In 2017, the U.S. tax-to-GDP ratio was almost triple that of Guatemala.)
Targeted aid can help improve this dismal performance. It’s been done before: in 2004, USAID partnered with the Salvadorian government to upgrade El Salvador’s revenue collection capacity and launch new IT and auditing systems at the national tax collection agency. Over the next five years, this joint $10 million investment helped El Salvador raise an additional $1.5 billion in taxes without increasing tax rates. Despite this success, neither the United States nor international development agencies place much emphasis today on improving tax collection in the Northern Triangle. But even a small investment, along with technical assistance, could bring billions more into government coffers.
Of course, El Salvador’s current convulsions show that more revenue is no panacea. Better tax collections won’t achieve much unless more taxpayers are brought into the formal economy and governments put the collected funds to good use. Yet the Northern Triangle countries rank among the world’s most corrupt. In Transparency International’s 2017 Corruption Perception Index, they are stuck in the bottom third of the 180 nations listed. In all three, former presidents are currently doing jail time.
Corruption has come at a steep cost. According to a respected local think tank, Honduras lost an estimated $367 million in 2015, or 4.3 percent of GDP, from just a few high-profile cases of graft. That same year, losses from similar cases in El Salvador amounted to $550 million—almost half of the public health expenditures in a country where the infant mortality rate is worse than in the Gaza Strip.
Rather than a lost cause, the Northern Triangle is ripe for an anti-corruption movement.
Efforts to punish venal officials have been sporadic and have met with stiff resistance from powerful local groups. But despite the roadblocks, civil society and international organizations are pushing for change, and some recent initiatives have shown progress. The most successful by far has been Guatemala’s UN-backed International Commission Against Impunity in Guatemala (known by its Spanish acronym, CICIG). Established in 2006 to prosecute high-level corruption cases in cooperation with the country’s judiciary, CICIG quickly made its mark. Within three years of its founding, impunity levels for serious crimes in Guatemala plummeted from 95 to 72 percent, and homicide rates have steadily fallen ever since. The commission became, in the eyes of Human Rights Watch, “one of the most effective anti-corruption mechanisms in Latin America today.”
In 2015, CICIG’s investigations brought down Guatemala’s sitting president, Otto Pérez Molina, who is now in jail awaiting trial. Molina’s deputy was sentenced to over 15 years for fraud and influence peddling in 2017. But when CICIG turned its sights on Molina’s successor, President Jimmy Morales, its efforts were thwarted by the Guatemalan legislature. Morales ordered CICIG to leave the country, and when judges invalidated his decision, he announced that he would not renew the commission’s mandate upon its expiration next September.
CICIG has enjoyed broad bipartisan support in the U.S. Congress, which has traditionally contributed about a third of CICIG’s $18 million annual budget. But when the commission came under threat, the reaction from Washington was little more than a shrug. Instead, U.S. Secretary of State Mike Pompeo took to Twitter to praise the Guatemalan government for its “efforts in counternarcotics and security,” with no mention of the existential threat to CICIG. None of Trump’s own Twitter screeds has ever drawn a connection between the migrant “caravans” and dysfunctional states hollowed out by corruption.
A similar scenario is playing out in Honduras, where another international body has taken up the fight against impunity only to be stymied by political elites. Created in 2016 following nationwide anti-corruption protests, the Mission to Support the Fight Against Corruption and Impunity in Honduras has contributed to a new campaign finance law and the arrest and conviction of several high-level officials, including a former first lady, for fraud and embezzlement. But unlike its Guatemalan counterpart, the Honduran mission does not have the UN imprimatur and has received only tepid support from its regional sponsor, the Organization of American States (OAS).
El Salvador took a different path from its neighbors but has ended up in the same unhappy place. Starting in 2016, a crusading attorney general, Douglas Meléndez, secured the conviction of former President Tony Saca, accused Saca’s successor of embezzling $351 million, and led the successful prosecution of the previous attorney general. But instead of praising his achievements, the Salvadorian legislature denied Meléndez a second term last year and replaced him with a stalwart from one of the main political parties—to only feeble objections from Washington.
Across the region, the political establishment’s hostility to effective anti-corruption measures runs deep. Yet all three initiatives initially enjoyed far more success than could have been expected, especially considering their limited budgets. Each had lasting popular support. CICIG, for example, is trusted by more than 70 percent of all Guatemalans, making it the most respected institution in Guatemala today. To this day, protesters fill the streets in Honduras in anger over the government’s failure to stem graft. And El Salvador’s newly elected president, Nayib Bukele, won in a landslide on an anti-corruption platform and has argued that the country should get its own anti-corruption panel. Rather than a lost cause, the Northern Triangle is ripe for an anti-corruption movement.
The United States could provide the necessary nudge. Washington should propose a regional commission to coordinate the disparate UN and OAS initiatives, strengthen domestic institutions, and provide technical assistance to local prosecutors. Such a commission could count on the backing of other Latin American states, many of which are eager to combat the curse of corruption. Unequivocal backing from the U.S. government would go far in protecting anticorruption activists from the political pushback that has hindered their work. U.S. support for a region-wide effort against corruption would also signal to the Northern Triangle that any effort to get out of the current quagmire must start with reducing graft. And if the success of Guatemala’s CICIG is any guide, the benefits of additional U.S. funding would far outweigh the costs.
The Northern Triangle countries also need to make better use of the money flowing in from abroad. Remittances from nationals working abroad are a lifeline for the region. They constitute over ten percent of GDP in Guatemala and nearly 20 percent of GDP in Honduras and El Salvador, where they exceed foreign direct investment. For millions of households in the three countries, money sent by relatives abroad is the biggest source of income.
Still, remittances remain an untapped resource for the economic development of a region that is chronically short of capital. The vast majority of remittances received—as much as 85 percent by some accounts—is spent on food, housing, and other basic necessities. What remains is kept under the mattress and does not make it into the financial sector. Capital that could otherwise flow into the economy and create jobs remains idle. According to the Inter-American Dialogue, if one-quarter of remittance recipients could be brought into the financial system annually, local banks could increase their lending to microenterprises in the Northern Triangle by $750 million.
Remittances remain an untapped resource for the economic development of a region that is chronically short of capital.
Private investors in several Latin American countries once regularly tapped worker remittances from abroad. From 2000 to 2004, banks in Brazil, El Salvador, Mexico, and Peru raised approximately $3.5 billion by using future remittance flows as collateral. In most of these cases, the banks received easier loan terms and better credit ratings than even their home governments, because originating the loans in dollars instead of local currencies lowered the risk profile of the financings. But none of these transactions raised funds destined for development projects in the Northern Triangle.
Remittance securitization structures fell into disuse during the Great Recession, even though remittance flows remained stable and none of the more than 40 transactions involving borrowers in the Western Hemisphere ever missed a payment. BRIDGE, a 2010 pilot program by the United States, El Salvador, and Honduras to build local infrastructure using securitized worker remittances, never resulted in any projects despite the support of the InterAmerican Development Bank and much local interest.
In a region where development needs are immense but funds scarce, remittances are too valuable a resource to ignore. Tapping into them anew would not require significant U.S. aid besides some support from agencies such as the Overseas Private Investment Corporation, which is well-versed in evaluating infrastructure and other public projects. Nor would these programs disrupt the flow of remittances to their intended recipients. They would, however, help foster the long-term growth necessary to alleviate the poverty that drives so many to make the dangerous trek north.
Make no mistake, U.S. aid to the Northern Triangle needs to be increased rather than slashed. But it must also be focused on addressing the underlying causes of today’s mass migration and enable the region to fund its own future by tapping into stable funding sources from within—and from its diaspora in the United States. Washington already has several cost-effective, proven, and widely-supported tools at its disposal. They should be expanded. If they prove successful, the Trump administration could find that these initiatives are more sustainable and less costly than a wall.