**_Central America and NAFTA_**

10 intensive goods. For that reason, we report only the case with future labor force growth rate equal to the average growth over the last decade. These are reported in the first column of Table E.2 varying from a low of 1.5 percent in El Salvador to a high of 3.5 percent in Nicaragua.

37. The three scenarios are driven by three different assumptions about capital accumulation, differing in terms of assumed investment rates reported in Table E.2.4 In the first scenario, capital accumulation is driven entirely internally with investments as a share of GNP equal to historical levels of the domestic savings rate, varying from a low of 6 percent in El Salvador to a high of 25 percent in Mexico. The second scenario allows foreign investment and sets the investment ratio to GNP equal to the average investment rate of the last decade which varies much less than the savings rate-from a low of 13 percent in El Salvador and Guatemala to a high of 26 percent in Costa Rica. These investment rates are much higher than the savings rates for the poorer countries, and external sources of funds are essential even to maintain existing capital/labor ratios. The third high-growth scenario adjusts this last investment rate upward by a factor selected to allow the relatively capital abundant countries, Costa Rica and Mexico, to accumulate enough capital over a decade to achieve peak levels of net exports per worker of labor-intensive manufactures. These high investment rates vary from 19 to 39 percent of GNP. This is not intended to be a plausible scenario but rather helps to determine the extreme changes in net exports of labor-intensive manufactures and identifies an investment rate necessary to produce very accelerated development and perhaps a shift in the cone of specialization that these counties are in. This, in our view, would be one way to escape increased competition from China in labor-intensive manufactures.

38. By inserting the estimated capital/labor ratios and the revised land/labor ratios into the regression equation, we can forecast for the different scenarios what will lhappen to the net exports of these economies. The actual 1988 data do not of course coniform with the regression model and we do not want our projections to assume implicitly that this difference is eliminated. Denoting the estimated regression function by: y = f(x) and the actual data by y() and Xo, we form our prediction given the future value xi as: y, = y<, + f(xl) + f(x,). These projected changes are measured in comparison with an internal GNP yardstick in Table E.3 and in comparison with an external marlket-size yardstick in Table E.4.

39. Sceniarios (1) and (2) do not predict major changes in net exports of laborintensive products compared with GNP for Costa Rica, Panama, or Mexico, basically because in 1988 these countries already had relatively high levels of capital per worker. The effects are much larger for Guatemala and Honduras, and especially for El Salvador which under scenario (2) with historical investment rates increases net exports per worker froni US$-1.4 to US$192, or 5.6 percent of 1988 GNP. In 1988 Costa Rica alreadv had net exports of labor-intensive manufactures equal to 3 percent of The depreciation **rate** has been assumed to be 13.3 percenit in line **withi** previous studies.