Central America is made up of a long, tapering isthmus that forms a bridge between North and South America and through the Panama Canal, the only passage between the Atlantic and the Pacific Ocean. This first phrase is illustrative for the importance of this region. Its proximity to leading global markets like North America and Europe in combination with its climate and attractive production costs, make agriculture to a logical pillar of Central American economies and rural development. Central America measures around 500.000 square kilometres and is inhabited by approximately 40 million persons.
Central America can be characterized in many different ways. One of them is the fact that politics are stabilizing. Although the political systems in Guatemala, Honduras, El Salvador and most of all Nicaragua are still fragile, there is a clear tendency to more democracy. Bureaucracy is still wide spread; especially Costa Rica can be regarded as a country with major restraints on this topic.
On social aspects, Costa Rica can be regarded as number one together with Panama. The middle class of Costa Rica is substantially bigger than in other Latin American countries although decreasing. Guatemala has historically faced great internal social differences due to its multi ethnic society. Honduras, El Salvador and Nicaragua are still recovering socially from decades of internal conflicts and / or exploitation and corruption.
Safety is mentioned as a separate aspect besides social aspects because of its significance for foreign investors. Especially in Guatemala, El Salvador and Honduras, safety can be considered as a decisive factor. It should also be considered as an additional cost for doing business in these countries. Costa Rica has an increasing crime rate but not to be compared to the before mentioned countries. Panama and, surprisingly, Nicaragua, can be considered as safer.
The economy of Central America as a region increases rapidly. Most countries are showing positive growth figures with Panama in the lead and Nicaragua showing the lowest figures. Most economies can be defined as stable and investment climates have strongly been improved.
Investment capital for the agricultural sector remains to be a problem for most countries although positive signs can be detected due to increasing foreign financial investment and takeovers by international banks and an increasing emphasis by governments on rural development and as a result, agriculture.
The infrastructure in Central America is acceptable. Roads are being improved in most countries but most countries lack master plans to cope with increasing pressure on its infrastructure. Electricity is, except for Nicaragua, not considered to be a restraint for the agricultural sector in Central America.
Infrastructure for export is regarded to be good with quick access to Europe (average around 2 weeks) and to North America (Miami around 2 – 3 days). The main exception on this is Nicaragua which faces substantial higher transport costs due to the fact that is has no access to the Caribbean Sea. Airports are being renovated and expanded in various countries in Central America which can be regarded as a sign of improved confidence in the region’s future.
Communication systems have improved greatly since the start of the century. Costa Rica is by far the cheapest but considered by users and by international studies to have the weakest system, especially on mobile phone communication. Costa Rica still has a state run system implying the risk of strikes which can have a severe impact. All other countries still have a long way to reach Western levels but communication can be considered to be very acceptable.
All Central American countries (except Costa Rica) have signed DR-CAFTA which can be considered to be the most important trade agreement for the region. At the date of publication of this study, Costa Rica has just had its referendum (7th of October) on which 51% of the votes were in favour of DR-CAFTA meaning that it will most probably be ratified in the near future. It also means that state run monopolies will have to open their markets for foreign competitors.
Central America is a leading region on the world production of agricultural products like banana, coffee, pineapple and various other fruits. Besides a very attractive climate, with micro climates to be found on different altitudes, land is available and affordable. Water is available all over the region and quality is generally good.
The agricultural sector organization is different in each country and in general ready to be improved. Due to the fact that each country has to take care of its own agricultural sector, there is a lack of funds and a lack of international exposure. As a region, numerous benefits can be summed up to make the organization of the agriculture sector more efficient and more effective if a more regional approach would be applied.
A similar comment can be made for phytosanitary services in Central America. Each country has its own system and although OIRSA is making an effort to harmonize Central American agricultural laws and tariffs, there is still a long way to go. For Dutch exporters, this lack of harmonization should be considered as a substantial problem entering Central American markets.
The main problem regarding agricultural supplies is that there is hardly any access to latest developments as Central American countries are considered to be too small for European and American agricultural suppliers to set up subsidiaries or to work actively in each country with distributors. Products are available but local suppliers are the major decision makers on what type of products become available for the market. Large multinational producers take care of imports themselves.
Labour is one of the major differences between the six countries, with Costa Rica scoring the lowest due to costs and availability. Nicaragua is the ‘cheapest of all’ and all others have attractive labour costs as well. Panama is, due to its rapidly growing economy, facing increasing labour costs. Skilled labour is available in most countries but, except for Costa Rica, there is a lack of professionals with practical experience. Hardly any Central American professionals have been educated or trained in Europe which can be regarded as a weakness for foreign companies willing to invest or to set up subsidiaries in Central America.
Subsidies and development programs from foreign sources are available in most countries but to a much lesser extent in Costa Rica and Panama. Local subsidy programs exist in Panama. Various Ministries and trade organizations have programs to stimulate agricultural growth but for Dutch companies such programs are less relevant. PSOM, PESP and the new Match Making Facility from the EVD can be considered as most interesting programs for Dutch investors.
Trade
The six countries in Central America have a total export of US$ 2,8 billion in the sectors of ornamentals, vegetables, fruits and prepared/preserved vegetables and fruits. A total export value of US$ 323 million of agricultural products is being exported to the Netherlands (2006). The biggest share of all exports is taken by fruits (banana, pineapple and melons). Overall a growth in export value of agricultural products can be seen of 50% compared to 2002. Costa Rica is by far the biggest exporter followed by Guatemala. Panama, Honduras, Nicaragua and El Salvador play a minor role in the international market.
An evaluation of the 17 key aspects described in this report per country can be found in the table below.
Business opportunities per country
The World Bank publishes its ‘ease of doing business indicator’ on a yearly basis. The ranking for ‘doing business 2008’, based on statistics from 2006, indicates that Panama (number 65 worldwide), coming from number 3 in Central America, has become the easiest country in the region for doing business. Nicaragua (93), the former number one, has decreased drastically mainly due to the change of government leading to a decrease of foreign confidence in the country’s economy and political and social stability. Panama is followed by El Salvador (71) in the ranking. Guatemala (114), Costa Rica (115) and Honduras (121) follow respectively with low scores. Especially Costa Rica should be mentioned as it is the regions biggest exporter having the most stable political and social system. Nevertheless, bureaucracy is fierce and slowing down all kinds of processes when doing business.
Business Ideavelopment Charts visualize the current position of each product(group) in each country. Besides these ‘country’ charts, ‘product’ charts have been worked out indicating the business proposition of each country for a specific product(group). Finally, a Central American chart defines the actual share of each Central American country as part of total agricultural Central American exports.
If these charts would have been drawn up five years ago, most of the countries would have ended up much lower on the vertical axis than nowadays. Exceptions on this are Costa Rica and possibly Nicaragua. Nevertheless, the general conclusion for Central America is that region starts to show itself to the rest of the world as a region with more open borders and less bureaucratic hassle, while most of the individual countries are showing progress on their competitiveness for investors, suppliers and importers with an interest in vegetables, fruits and/or ornamentals. For the individual countries, the following can be said.
Figure 1 Position of Central American countries in agriculture.
Nicaragua has, together with El Salvador, the lowest export market share but also shows the lowest business competitiveness. Unfortunately, the land of the everlasting opportunities seems to remain that way for some time more. Access to the Caribbean Sea, stable politics as well as a stable juridical system, would change the agricultural face of Nicaragua drastically.
El Salvador is a country of services without a dominant agricultural sector. Nevertheless, the country shows interesting opportunities for international supply companies to set up subsidiaries or to start alliances with Salvadorian companies. It can even be considered for some sectors to set up their own production facilities.
Another interesting option for El Salvador is the set up of specialty produce supported by innovative and international minded local companies. The first examples of such companies are starting to initiate projects at this very moment.
Honduras is, as mentioned before, frequently referred to as the ‘forgotten country’ and that says it all. Safety is a major problem in Honduras but not any worse than in Guatemala or El Salvador. Besides safety, most relevant aspects for producing either commodities or specialties are good or at least acceptable. Nevertheless, international interest has always been very limited for Honduras and there are no real signs that this situation is likely to change.
Panama is in one word booming. Spurred by the new investments related to the Canal, the international world has picked up Panama as a future financial and logistic hub to the Americas. Besides the enormous investments taking place, this statement can be proven by the great interest of Dutch companies in business meetings organized and the fact that KLM will start flying directly to Panama from March 2008 onwards. The agricultural sector is likely to benefit from all these developments, also because the government is quite aware of the importance of rural areas in stabilizing the country in a social and economic way.
Guatemala is torn apart by internal conflicts but is definitely on the way up and the Berger government has shown quite some progress in all kinds of levels. The agricultural sector is active and broad and climatologic conditions are very favourable for various crops. Foreign companies are already present in Guatemala and their number is increasing. Safety is not under control and is one of the main issues which this government has not managed to tackle. Nevertheless, Guatemala is a country to be taken into count in the near future.
Costa Rica is by far the biggest exporter of fruits, vegetables and ornamentals but has to start watching its steps. Bureaucracy is fierce, state ruled institutes still exist in many sectors (telecommunications, insurances, etc.) and costs in the agricultural sector are increasing rapidly due to high costs of labour and land as a result of competition with the construction sector and tourism. Availability of labour is a concern for the near future as well.
Like one of the interviewed persons said: ‘Costa Rica has never been hungry or had to face internal problems’. The time has come to use its strengths to assure its competitiveness.
Probably the biggest challenge for Central America and the main opportunity for Dutch companies, is the need for ‘omnipotent’ strategic partners that can complement the local company and can create added value to their products. The needs of local companies are knowledge on production and marketing, finance, and access to high tech materials. Therefore, it can be considered as ‘incorrect’ when this survey discusses opportunities for just investors. In fact, there is a need for companies who can add more than just financial assets. The key word for the Central American needs in the non-traditional agricultural sector is the strategic partner.
There is an increasing tendency amongst Central American companies to broaden their view and to start thinking global. This change of attitude certainly opens doors for new alliances with Dutch companies with or without the possible support from programs like PSOM which recently have become available in Central America (Nicaragua and Guatemala since 2005, El Salvador and Honduras since 2007).
Central America is likely to become a key player in the non-traditional agricultural sectors fruits, foliage and plants and to a lesser extent in flowers and vegetables taking into consideration that safety has to be taken care of and that the region will have to develop a joint strategy to work together and to promote Central America as a potential region for (agricultural) investments.
