Episodes of Job Creation in Contemporary Central America By Isaac Cohen, President, INVERWAY LLC Presented to the US State Department Seminar on Job Creation in the Western Hemisphere, Washington DC, October 21, 2004

Introduction Most episodes of intense job creation in Central America have been caused by increases in foreign direct investment (FDI) and international trade. Two of the most prominent are: –Import substitution ( ) –Maquilas ( ).

Background Perhaps the best known precedent of job creation in Central America, through FDI and exports, is the emergence, by the end of the 19 th century of bananas as an export product. It caused major displacements of workers from El Salvador into Honduras and from Nicaragua into Costa Rica. It also generated the first permanent concentrations of workers, leading to the emergence of trade unions.

Import Substitution ( ) By the end of the Second World War, industry represented 10 percent of Central Americas GDP and hired about the same amount of the labor force. By 1980, manufacturing contributed about one fourth of the regions product and hired about one fifth of the workforce. With increased urbanization and industrialization labor relations became more intense and confrontational, due to the emergence of unions and organized demands. FDI and intraregional trade expansion contributed decisively to industrialization

Maquilas ( ) In the 80s, maquilas started in Central America as a result of domestic legislation on draw back operations, mainly from the US. Foreign direct investment, mainly in textile firms to process raw materials from the US, to benefit from duty free access to the US market. In 2003, this amounted to US$6.6 billion in exports, almost 1/2 of total exports of US$14.9 billion and almost 2/3 of total exports of manufactures of US$9.7 billion.

Maquilas (contnd) Yearly rates of growth of value added by maquilas were impressive, 30% in both 1996 and 1997 and 57 and 87 % in1998 and 1999, respectively. In 2000 and 2001 value added declined 11.2 and 25.5%, to regain strength in 2003, increasing 42%. In 1995, value added by the maquilas was around US$600 million. Last year, it increased to US$3 billion.

Maquilas (cntnd.) FDI has been mainly in textile manufacturing, with the exception of Costa Rica where INTEL in 1998 set up a US$300 million plant to produce computer chips, that employs 2,000 persons. Some investment in maquilas comes from South Korea and Taiwan, mainly in textile processing.

Maquilas (cntnd) Employment in maquilas has doubled from almost 250,000 persons in 1996 to an estimated 500,000 in 2002 Textile maquilas employ mostly young women and labor relations have been strained because allegedly labor regulations are applied differently.

Maquilas (cntnd) Debate on the costs and benefits Benefits: employment foreign exchange superior labor and management techniques linkages with domestic production Criticisms Non compliance with labor regulations Low salaries Feminine labor