How does the North American Free
            Trade Agreement (NAFTA) affect Central America
Most Central American economies
            experienced slower growth in the 1980s than in the 1960s and
            1970s, trailing far behind the Asian Tigers. Contributing to
            slow growth were severe external shocks, sizable
            macroeconomic disturbances, and widespread political
            instability. The challenges Central America faces now may be
            even greater, conclude the authors, because of Mexican
            liberalization, continuing instability of the real exchange
            rate, low savings rates, and, finally, the North American
            Free Trade Agreement (NAFTA). Improvements in per capita
            income are closely linked with exports to North America of
            labor-intensive manufactures. Earnings from the export of
            tropical agricultural products are important, but the
            Central American labor force is unlikely to earn higher
            wagers unless countries diversify more into manufacturing.
            The Asian Tigers began their economic miracles by shifting
            into such labor-intensive manufactures as apparel and
            footwear, which they could export to a vast high-wage
            market. But the US market for such exports is now more
            crowded and threatens to become more so, with exports from
            China and other very low-wage countries. With Asian
            competition hurting Central America's chances, it could
            be said that wages in Central America are set in Beijing,
            not in San Jose. The authors examine the critical drivers of
            Central America's future competitiveness: economic
            liberalization, uncertainty about the real exchange rate,
            distance from key markets, savings rates and NAFTA. Central
            American economies have low wage rates, and considerable
            advantage of location over Asia in selling in North American
            markets, especially Mexico. But real exchange rates in
            Central America are more unpredictable than those in Asian
            countries. Central America faces a chicken-and-egg problem.
            To stabilize its terms of trade, it must expand exports of
            manufactures. But instability in the terms of trade deters
            the investments that would lead to expanded exports of
            manufactures. By greatly increasong Mexico's
            attractiveness to foreign investors, NAFTA could be the
            straw that breaks the camel's back, as far as Central
            America is concerned. For this reason, the governments of
            Central America need to do all in their power to increase
            domestic savings and reduce investment risks. Exchange rate
            stabilization should be carried out obviously with
            appropriate macroeconomic policies -- but also by
            encouraging exports of labor-intensive manufactures with
            appropriate incentives, supporting infrastructure and
            educational investments. The key conclusion is that the
            future of Central America rests importantly on exports to
            Mexico, a market today which is pretty much untapped.
            Investments in transportation infrastructure that can
            facilitate this emerging trade are likely to have very large
            payoffs for the Central American economies.