Central America Regional Program
The Development Challenge: With negotiations complete between the United States and El Salvador,
Guatemala, Honduras, and Nicaragua, Central America is poised for a Central America Free Trade
Agreement (CAFTA) with the United States and is taking a historic step toward regional integration and
opening economies to global markets. Central America’s $68 billion economy and its population of 36
million make it the seventh-largest Latin American economy. U.S. exports to Central America in 2000
exceeded $8.8 billion - more than U.S. exports to Russia, Indonesia, and India combined.
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Central America is still recovering from decades of civil conflict and dealing with spiraling crime and
widespread poverty. Four countries in the region suffered from military-controlled regimes and over a
quarter of a million lives were lost in Cold War-related conflicts of the 1970s and 1980s. During the
1990s, Central America’s annual average GDP growth rate was around 1.6%, less than population
growth. The economic situation has worsened due to combined fall-out from a decline in coffee prices
and the global economic slowdown. The result is a social crisis with increases in chronic malnutrition,
gang violence, and a proliferation of organized criminal activities such as drug smuggling, human
trafficking, and money laundering. Central America continues to rely on the “escape valve” of migration to
the United States in the face of deteriorating economic and social conditions. The rapidly growing
Hispanic population (13% of the U.S. population) is the largest minority group in the Unites States. Five
percent of the documented U.S. Hispanic population is from Central America and four of the 10 leading
source countries for U.S. undocumented immigrants are from the region. This combined population of
documented and undocumented U.S. residents sends $4 billion annually to Central America, funds which
are essential for sustaining the region’s economies.
Central America’s 2002 per capita income was $1,883. Despite its lower-middle income classification,
over one-fourth of its population lives below the poverty line and one-third is illiterate. Central America
has the worst primary school repetition and completion rates in Latin America, undermining its
competitiveness in the global economy. Regional poverty stems from reliance on traditional agricultural
products and deeply rooted social inequalities, with wide gender, ladino - indigenous and rural - urban
gaps. The low income-generating ability of the vast majority of Central Americans is reflected in poor
living conditions, including an unacceptably high rate of infant mortality (28 per 1,000 live births) and
persistent chronic malnutrition among children.
Living standards are deteriorating and economic growth is limited by environmental degradation, including
persistent and unchecked deforestation that limits water for industry, towns, and surrounding agricultural
lands. In many areas, hunting, fishing, tourism, and extraction of wood for timber, fuel, and non-wood
products have reached unsustainable levels, causing irreversible damage and growing threats to the
region’s water supply and sustainable economic growth. Environmental degradation also destroys
refuges for endangered species. Regional forests, coastal areas, and wetlands are increasingly under
pressure from human population growth, road building, and conversion of land for grazing and agriculture.
Central America is threatened by the emerging HIV/AIDS epidemic. Conservative estimates indicate that
there are currently more than 175,000 infected individuals, the majority of whom are unaware of their
condition and unable to take measures to prevent future transmission. While the epidemic began among
homosexual and bisexual men, there has been a steady increase among women. As HIV/AIDS becomes
established in the heterosexual population, vertical transmission (from mother to unborn/newborn child) is
increasing. AIDS is the leading cause of death for women of reproductive age in Honduras, and the
leading cause of death for adults aged 20 to 49 in Panama. In other countries it is one of the main
causes of admittance to hospitals. The region’s future economic development is threatened since the
costs of AIDS-related morbidity and mortality tax both human and financial resources. HIV/AIDS is most
likely to affect labor productivity, medical costs, the orphan population, and the size of the labor force.
The persistence of organized crime, including a proliferation of gangs, poses a continuing challenge. The
Mesoamerican corridor is the preferred route for illegal migrants and narcotics; up to 70% of illicit South
American narcotics shipments pass through the isthmus to the United States. Weak governments and
deteriorating living standards could undermine U.S. efforts to contain illegal migration, HIV/AIDS,
organized crime, and other potential threats to homeland security.
Although the size of Mexico’s economy (per capita GDP of $6,884 in 2002) and population (100 million)
far outweigh those of its Central American neighbors, Mexico faces some similar challenges. About 53%
of Mexicans have an annual income of less than $720, and environmental degradation presents a
significant challenge to the country’s biodiversity and continued economic growth, particularly in rural
areas. On the other hand, Mexico has developed some institutions that can serve as models for other
countries. For example, Mexico is a regional leader in its efforts to combat the HIV/AIDS. Inclusion of
Mexico in the common framework of Central America regional programs provides an opportunity for
increased cooperation across borders.
U.S. national interests in Central America include: 1) regional trade integration; 2) democracy; and 3)
containment of illegal migration, organized crime (including gangs), and narcotrafficking. Trade remains
at the top of the region’s political agenda. The United States expects to complete negotiations for CAFTA
in January, which will serve as a vital step toward completion of the Free Trade Area of the Americas
(FTAA) by 2005. Since 1990, trade between the five countries and the United States has nearly tripled.
The United States is Central America’s most important trading partner, accounting for 43% of Central
American exports and providing 41% of its imports. In spite of the region’s relative non-competitiveness,
U.S. private investment in the region is around $1 billion, and is anticipated to increase substantially
under CAFTA. The free trade agreement is expected to reinforce the region’s integration process and
help maintain stability while assisting the region to invigorate its faltering economies. U.S. assistance will
play a critical role in addressing the challenge of implementing CAFTA by engaging the region’s
governments and civil society, and, ultimately, supporting the creation of an integrated Central American
economy.
The USAID Program: The Data Sheets provided below notify four strategic objectives (SOs) for which
USAID is requesting FY 2004 funds: 1) strengthening regional economic integration by promoting open
trade and investment policies; 2) promoting environmental management and disaster prevention; 3)
diversifying rural economies; and 4) containing and controlling HIV/AIDS (this Data Sheet also notifies FY
2005 funds). Beginning in FY 2005, the Regional Trade and Investment, Regional Environment, and
Rural Economic Diversification SOs will be incorporated into SO 596-022 “Economic Freedom: Open,
Diversified, Expanding Economies” under USAID’s new Central America and Mexico Regional Strategy,
which is also notified below. A new Performance Fund for Central America and Mexico also notifies FY
2005 funds.
Other Program Elements: Central America benefits from programs managed by USAID's Office of
Regional Sustainable Development (LAC/RSD) to strengthen regional mechanisms to promote human
rights, fortify government accountability, promote decentralization and local governance, and provide
outreach to civil society on trade and economic issues. LAC/RSD also manages programs to develop
cleaner production technologies, as well as the Parks in Peril program to mitigate threats to conservation.
The Bureau for Democracy, Conflict and Humanitarian Assistance’s (DCHA) matching grant program
leverages U.S. private voluntary financial resources to improve primary health care, evaluate nonprofit
housing organizations, and promote microenterprise development. Through its farmer-to-farmer program,
the Office of Private and Voluntary Cooperation (DCHA/PVC) funds short-term voluntary technical
assistance to increase farm and agribusiness productivity and incomes. Finally, the Global Health
Bureau’s child survival program funds activities that provide technical assistance to reduce infant, child,
and maternal mortality and morbidity.
Other Donors: USAID has been successful in encouraging other donors to work together on regional
efforts in trade capacity building, the environment, and HIV/AIDS control. Overall development assistance
to the region totals around $1.8 billion per year, excluding debt relief. The United States and Canada are
the region’s first and second largest bilateral partners, followed by Japan, the Netherlands, and Germany.
Multilateral donor support is led by the Inter-American Development Bank, followed by the Central
American Bank for Economic Integration, the World Bank, the European Union, and the United Nations.
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