# **1   Introduction**

Guided by the principles of the Washington Consensus, many Central American (CENAM) countries started on a path of structural reforms beginning in the late 1980s.<sup>1</sup> Since then, the region has recorded considerable gains in multiple dimensions of reforms outpacing those of many fast-growing economies during the period (Swiston and Barrot, 2011). The growth experiences of regional economies in the pre- and post-reform periods varies markedly (Figure 1(a)). At one extreme the growth took off after 1990 in El Salvador and Panama while remaining near trend in Costa Rica, Honduras, and Guatemala. Nicaragua stands out as the outlier where the real GDP per capita dropped drastically during the 1980s following the Sandinistas’ ascension to power. The country has been on a path of slow recovery since then.

Given their unique experience, the discussion of growth in CENAMs since 1990 has primarily concentrated on the role of reforms in delivering it. Yet, there is a lack of consensus on whether reforms promote growth. Instead, the reform-growth link is found to be highly context-specific (Easterly and Levine, 2003; Rodrik, 2005; Prati _et al._ , 2013).<sup>2,3</sup> Moreover, studies concentrating on CENAMs have not found definite evidence of reform-led growth in the region (Ferreira and Harrison, 2012; Caceres, 2017; Roquez-Diaz and Escot, 2018). At the same time, some CENAMs have experienced healthy economic growth over the last few decades. Figure 1(b) highlights the relative performance of three CENAMs – Costa Rica, El Salvador, and Panama, that are the focus of this paper.<sup>4</sup> In terms of real GDP per capita expansion, Costa Rica and El Salvador lie above the 60<sup>th</sup> and 70<sup>th</sup> percentiles of the global distribution. Their relative standing is robust to the exclusion of high-income economies.<sup>5</sup> Panama lies above the 90<sup>th</sup> percentile of the global sample and 80<sup>th</sup> percentile of the sample that excludes high-income countries.

If reforms were not effective, what other factors can explain the immense gains observed over this period? In this paper, I turn the lens towards the phenomenal changes in the labor markets in the last two decades. Specifically, I investigate the shifts in the participation and occupational decisions of men and women. Table 1 provides a snapshot of these changes.

> 1 Williamson (1990, 2000) lists the set of reforms that constitute the development policies prescribed by the Washington Consensus.

> 2 Studies that concentrate on specific reforms have also not yielded a consistent takeaway. For example, see Sachs _et al._ (1995), Dollar and Kraay (2004) and Berg and Krueger (2003) for evidence on trade liberalization. Also see Juhn _et al._ (2014) and Gaddis and Pieters (2017) who report differential impact of trade liberalization on labor market outcomes of men and women in Brazil and Mexico.

> 3 Reform literature often exploits cross-country variation to investigate the reform-growth link. This leaves little room for the individual country analysis. In the context of CENAMs, Ferreira and Harrison (2012) and Roquez-Diaz and Escot (2018) are notable exceptions. The former finds that export diversification policies that replaced import substitution regime did not deliver long-run growth in Costa Rica. The latter considers the effects of trade liberalization in four CENAMs and finds no evidence of reform-led growth in any except Nicaragua.

> 4 The exclusion of other CENAMs is not because of their growth performance. Instead, the unavailability of data restricts their inclusion.

> 5 I follow the World Bank’s income definitions (The World Bank, 2020). For the fiscal year 2020, the World Bank classifies countries with GNI per capita of USD 12,376 or more in 2018 (as per the World Bank Atlas method) as highincome.

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