The Central American Common Market (CACM)

: an analysis of economic integration and competitiveness

Abstract

The international community has been seeking more effective ways to support development since the 1960s. Many believe that regional economic integration may be one way to achieve higher levels of development, with the European Union probably become the best example of integration during the last decades. In this context, this thesis aims to assess the situation of the Central American Common Market (CACM) - not only with the aim of proposing improvements to aid competitiveness, but to simultaneously determine its effects on the welfare of the participants. The results make an important contribution to our understanding of the CACM during its second phase (after 1990 Protocol of Tegucigalpa) especially because, while there are similar studies of the first phase, just a few contemporary researches on the second phase have partially been undertake. We first reviewed on Customs Unions (CUs) theory and concluded that the region is tending to become a Free Trade Area (FTA), while conserving an imperfect Custom Union (CU); the region is a ―natural bloc‖ whose antecedents date from the pre-Columbian through economic and trade integration during the colonisation period up to the formation of the CACM. Central America has the potential to become an integrated bloc, but the individual implementation of policies has limited to accelerate integration – the implementation of free trade policies with extraregional countries is advancing faster than integration. A gravity model was produced in order to explain the intraregional trade flows (1981-2003) and, allowed us to conclude that the main barrier to increased intraregional trade is the lack of infrastructure among CACM members. Moreover, in order to determine whether the CACM fostered trade creation or trade diversion, we adopted an econometric approach based on the Balassa method (1988-2007) - and concluded that even if the bloc has been trade diverting, the PTA has promoted instances of trade creation and, if the dynamic effects would be accounted it is possible that the PTA has been positive for welfare. We also analysed the agricultural sector finding that while the Gross Domestic Product (GDP) contribution of agriculture in Central America has significantly reduced, the expected industrial development has not been achieved. Finally, an analysis of the fiscal and monetary system completed our study, permitting us to conclude that the region has not yet implemented policies to achieve a monetary union, even if the high levels of intraregional trade could facilitate monetary policy coordination (and even, perhaps, a monetary union in the future). And, at the domestic level, Central American fiscal systems have not yet compensated the loss in income due to the reduction of trade taxes - as a result of the free trade liberalisation path followed – which in developed and emerging countries happens through an increased level of domestic taxation. This suggests the need of a social pact in the near future in order to reinforce the national budgets for development.

Date of Award	2010
Original language	English
Supervisor	Andy Thorpe (Supervisor) & Martin Snell (Supervisor)