9 - The illusion of a golden age, 1960–70

Summary

By conventional measures of economic progress the decade of the 1960s was a golden age for Central America. The Central American Common Market (CACM) took shape at the start of the decade and the Alliance for Progress, launched by President Kennedy in March 1961, increased the flows of external funds to each republic and to the new institutions of the CACM, contributing to a very respectable growth in GDP and GDP per head over the decade.

The reality of the decade was somewhat different. Policy-makers failed to provide an adequate framework for ensuring that the net benefits from the CACM were distributed in an equitable fashion among the five republics, so that the industrialisation strategy was threatened at an early stage by inter-country differences. The failure, furthermore, to implement a common fiscal policy towards new industrial activities meant that Central America robbed itself of one of the major advantages (tax revenues) to be obtained from new foreign investment attracted by the CACM.

Even more serious was the response, or rather lack of response, provoked by the decline in import duties (the main source of government revenue) consequent upon the formation of the CACM. This crisis required a fiscal reform which would reduce the regressive nature of the tax system on the one hand and encourage domestic resources to shift into industry on the other. In fact, fiscal changes accentuated the regressive nature of the tax system, contributed to a worsening of income distribution and did little to reduce the relative profitability of export agriculture (EXA).