_Central America and NAAFTA_ _9_ 33. The scatter of labor intensive net exports per worker compared with capital per worker in Figure E.8 reveals the nonlinearity suggested by the multi-cone HeckscherOhlin model. At very low levels of capital per worker, capital accumulation causes increasing dependence on imports of labor-intensive manufactures. This reverses itself at a capital/labor ratio of around US$5,000 in 1965 dollars, and net exports of laborintensive manufactures become positively related to capital abundance. Then, at capital per worker of around US$15,000 in 1965 dollars, the effect of capital accumulation reverses again, and capital accumulation leads to growing dependence on imports of these products.

34. The potential nonlinearity in the trade dependence function is captured empirically with a model including higher order terms. The models that are estimated control for different types of land and disaggregate workers roughly into skill groups.

# **Heckscher-Ohlin Simulations**

35. The estimated H-O-V model can be used to predict how the labor intensive net exports of Central America will evolve in the future. The 1988 scatter diagram (Figure E.8) includes three different paths generated from the preferred model. The solid curve uses world average levels of the land variables; the upper curve uses the El Salvadoran land-scarce data; the lower curve uses the Nicaraguan land-abundant data. The curve for El Salvador is very similar to the world average, but land scarcity forces greater dependence on exports of labor-intensive manufactures. The land-abundant Nicaraguan case is rather different, with capital accumulation associated always with increasing dependence on imports of labor-intensive manufactures. The placement of this curve is dictated by limitations of the functional form and the influence of the countries which combine both capital and land abundance including Australia and Canada. For our purposes, it is more appropriate mentally to adjust downward the Nicaragua curve to give it net imports of labor-intensive manufactures earlier in the development process.

36. Curves like those in Figure E.8 can be used to form projections of the future levels of net exports of labor-intensive manufactures. These projections are driven by both the capital/labor ratio and the land/labor ratio. The land variables can change but only slightly over time. Labor growth can be predicted with a reasonable degree of accuracy from demographic trends. Thus future reductions in the land/labor ratios can be foreseen with a rather high degree of accuracy. The capital/labor ratio is both more important and also more difficult to project. We will deal with our inability to project accurately the capital accumulation in Central America by forming several different scenarios, for both the labor force and the investment rate. The labor force has been assumed to grow pari-passu with population. We consider initially three different scenarios in which the labor force grows at the average population growth rate of the last decade, and in which it deviates by 10 percent above and below. This amount of variability in the labor force growth does not alter the land/labor ratios or the capital/labor ratios enough to affect substantially the predicted net exports of labor-