Position regarding the Plan of the Alliance for Prosperity in the Northern Triangle

Transcription

1 Position regarding the Plan of the Alliance for Prosperity in the Northern Triangle Central America, March, 2015

2 Position regarding the Plan of the Alliance for Prosperity in the Northern Triangle 1. Current circumstances: the challenges to be confronted The Road Map for the Plan of the Alliance for Prosperity in the Northern Triangle 1 contains agreed upon guidelines which identify high-priority measures over the medium term to help accelerate development in the region. 2 The document commences with a rapid review of the situation in Guatemala, El Salvador and Honduras, sketching out the human dramas which constitute the main development challenges faced by these countries. Twelve subsections then outline the overwhelming, multidimensional character of social, economic and political problems in the region. Lack of employment opportunities, violence and other forms of exclusion are effectively the structural causes of migration, apparently a priority of the Plan. Context: economic growth and jobs In the last ten years, the economies of El Salvador, Guatemala and Honduras have grown at an average rate of 1.8, 3.6 and 4.1 percent respectively, rising from USD48.4 billion to USD96.5 billion. This growth, however, has been concentrated in economic sectors related to services, which create relatively few jobs and, in many cases, are subject to tax regimes that reduce or exempt businesses from tax liability. The limited official employment data warns that a large percentage of the population is occupied in the labor market without any guarantee of their rights. In 2011, between 51.2 percent (Honduras) and 66.2 percent (Guatemala) of workers had no employment contract. Furthermore, only 5.4 percent (Honduras) and 46.5 percent (El Salvador) of salaried employees were saving for future retirement. Finally, around two thirds of workers in these countries are employed in economic units with low productivity and little technological transformation, as a result of an economic model based on the export of primary products and the sale of basic services. All statistics show that women, youth and rural inhabitants record the worst results. 1 Document was prepared by the Inter-American Development Bank (IDB) in September 2014 in its capacity as Technical Secretary of the Plan. The document was presented during the meeting between the President of the United States of America, Barack Obama, and the Presidents of Guatemala, El Salvador and Honduras, (Otto Pérez Molina, Salvador Sánchez Cerén and Juan Orlando Hernández, respectively), in Washington DC, in November The English version of the document is available online at 2 Ibid, p.2. 2

3 Central America: Minimum Wage Purchasing Power, 2012 Country Minimum wage in current USD Cost of basic food basket in current USD Purchasing Power of the minimum Wage Costa Rica % El Salvador % Guatemala Proposal submitted in 2015 for a differentiated wage % 38.5% Honduras % Nicaragua % Panamá % Source: Icefi, based on data from the State of the Region Program. Social context: exclusion gaps that drive migration Inequality in the Northern Triangle is primarily a result of two factors: first, differences in the quality of work, which constitutes the element foremost in determining existing income inequality; 3 second, the lack of public goods that meet minimum standards of social protection, and which would, if provided, help break the vicious cycles of poverty and marginalization. Differences in household income denote widespread inequality in the three countries. Salvadoran households in the highest quintile earn on average 11 times more income than those in the lowest. In Guatemala, this indicator rises to 24 and reaches 28 in Honduras. This is why, in the Northern Triangle, the richest 20 percent of the population concentrate more than half of the income, while average poverty rates in rural areas exceed the national average of 40 percent (reaching around 50 percent of the rural population). Of the 30 million inhabitants in El Salvador, Guatemala and Honduras, about 17 million live in poverty, while 6.7 million live in extreme poverty. Dropout rates in secondary education level exceed 15 percent, and the public education system, despite being an essential service, is of poor quality and does not reach the entire school-age population, which totals around 13.3 million people. Lack of coverage affects about 5.3 million children and adolescents. Meanwhile, child malnutrition reached tragic levels in this part of Central America. Despite some progress, Guatemala remains the country with the highest prevalence of chronic child malnutrition in Latin America (50 percent), a statistic that is even more acute in high poverty areas, reaching 70 percent or above. Honduras and El Salvador also have alarming levels of child malnutrition (42 and 33 percent respectively in the lowest income quintile). Child and teen pregnancy is another important indicator for understanding the realities in the Northern Triangle: on average 91 pregnancies per thousand are recorded for girls aged between 15 and 19, a figure significantly above the regional average of 75. This means that of the more than seven hundred thousand (700,000) children born annually in the Northern Triangle, approximately one in five are born to girls or adolescents. 3 Paes et al (2005). Crecimiento con equidad: la lucha contra la pobreza en Centroamérica. Ipea/Pnud Bogotá. 3

4 The quantitative and qualitative housing deficit severely affects access to basic services such as health, education and food: in 2012, 61 percent of families were homeless or living in poor conditions, while in rural areas the deficit exceeded 70 percent. In El Salvador, 70 percent of the population has access to sanitation facilities, down from the 82 percent average for Latin America. In Guatemala and Honduras, around 18 percent of the population lacks access to electricity, compared to an average of 5 percent for Latin America. Violence remains an obstacle to development in the region, and the Northern Triangle concentrates the highest levels of violence in Central and Latin America, with Honduras being exceptionally high. In 2012, the homicide rate per 100,000 population was 90 in Honduras, while in El Salvador it reached 41, and in Guatemala 34, all markedly above the regional average of 25. Of the 14,300 homicides registered during 2013, more than 90 percent were located in municipalities with high emigration. In Guatemala, for example, during 2012, the violent death rates for young people reached 55 per 100,000, almost double the already alarming total rate of homicides. 4 The Northern Triangle is highly vulnerable to natural disasters and climate change, and El Salvador and Guatemala occupy the top positions in the World Risk Index for disasters associated with natural hazards and climate change. In Honduras, the population living in areas at risk is greater than 50 percent. This discouraging outlook poses daunting challenges for states and in particular for the generation of public goods. However, strengthening public policies to improve the population s welfare is made impossible by the chronic fiscal weaknesses of Northern Triangle countries. For example, while tax reforms were recently approved, progress is still insufficient, with tax revenues representing 10 to 15 percent of GDP. This problematic is aggravated by business organizations and associations which insist on demanding increasingly aggressive tax privileges, a posture gravely divorced from the reality described above. Deficient tax collection efforts and the urgent need to increase the quantity, quality and effectiveness of public spending exert a growing pressure to resort to public credit mechanism for finance. Analysis undertaken by Icefi reveals the acceleration of the growth of public debt in Honduras, limited growth in El Salvador, and a deficient ability to meet payments in Guatemala, all which pose serious risks to fiscal sustainability. Meanwhile, growing public debt requires a substantial rise in the share of revenue and budget resources allocated to service it, which in turn further limits the ability to finance the necessary investments for development in the Northern Triangle. 4 Icefi/Unicef (2014). Adolescencia un presente y un futuro en claroscuro. Contamos! número 14. Agosto. p.31. 4

5 2. What does the Plan of the Alliance for Prosperity contain? Además de contener un análisis sobre la situación de El Salvador, Guatemala y Honduras, el plan revela cuatro líneas estratégicas sobre las que se pretenden coordinar las diferentes acciones. A continuación se presentan dichas líneas y, de manera resumida, sus respectivas acciones 5. (1) Stimulate the productive sector to create economic opportunities (2.7) In order to attract the private investment needed for the productive transformation of our region, we need measures that go beyond simply improving the operating conditions of the private sector. To develop the productive sector it is not enough just to create an adequate business environment. We also need to pursue an active policy of attracting private investment and promoting strategic sectors and areas. (2.8) We will take the measures needed to enhance the competitiveness of our countries and attract investment. We have to address problems related to the cost and reliability of electricity, so as to cut production costs and allow our companies to compete on better terms in international markets. We need to upgrade and expand our logistical infrastructure in order to secure greater access to export markets and reduce the costs of international trade. We need coordinated measures at the regional level to create a platform for an expanded market and to strengthen individual conditions of each country, attract investment and allow us real integration with the rest of the world. Our actions will focus on: Principal actions will focus on: promoting strategic sectors and attracting investment; reducing energy costs and improving the reliability of the electricity supply; modernization and expanding infrastructure and logistics corridors; coordinating border management; encourage international trade. (2) Develop opportunities for Our People (2.22) In order to make better use of economic opportunities, we must strengthen the links between the productive sector and training programs that allow for more effective and permanent inclusion of people into the workplace, especially our young people and women. We need to implement policies aimed at improving labor market conditions. We should make efforts to improve skills through greater investment geared to broadening and enhancing the quality of secondary education and raising retention rates. We will also work on improving nutrition, healthcare and early childhood development. Actions are proposed are: Tightening links between labor supply and demand from businesses; as well as the building of human capital. 5 See the Road Map for the Plan at 5

6 (3) Improve public safety and Enhance Access to the Legal System (2.36) Atender integralmente las problemáticas de inseguridad que afectan a nuestros países es una tarea urgente. Se requiere trabajar en todos los espacios de socialización (familia, escuela y ciudad) durante todo el ciclo vital y fortalecer el tejido social, para proteger a nuestros niños y jóvenes de la exposición a entornos violentos y contribuir a la reducción de la violencia, inseguridad y vinculación de éstos en las pandillas y maras. Es necesario apuntalar programas y acciones que promueven la prevención de la violencia y la convivencia pacífica, el fortalecimiento institucional para la lucha contra la violencia y el delito y la modernización del sistema de justicia. Todas estas acciones complementarán los esfuerzos que estamos realizando para el combate al narcotráfico y el crimen organizado. Las acciones a implementar son: reforzar programas de prevención de la violencia; fortalecer las instituciones de seguridad ciudadana; y modernizar el sistema de justicia. (4) Strengthen institutions to increase People s Trust in the State (2.45) In order for the efforts envisioned in this Plan to continue over time, it will be necessary to strengthen public finances. But this will not happen if we do not generate greater trust in the State among citizens. To achieve this, better mechanisms for accountability and transparency must be introduced. We envisage the following courses of action to achieve these goals: ensure the state s financial capacity; increasing transparency. The final section of the Plan highlights four key elements for implementation. First, a territorial focus and regional coordination as a cornerstone to maximize impact. Second, the financial viability of the Plan will depend on extent to which countries can achieve clear, medium-term fiscal planning. Public-private initiatives will be sought to carry out priority projects. The search for cooperation will include the participation of allied countries, multilateral cooperation and development partners; alternative financial tools such as debt reduction and donations Third, the scheme for the execution of initiatives will need to channel resources in a transparent and effective way. Fourth, in terms of an assessment and follow-up scheme, the Plan must contain clearly defined goals that lend themselves to monitoring and objective evaluation. 3. A Plan for an alliance for prosperity can only be legitimate and effective if its formulation and execution is democratic, transparent and inclusive The magnitude and scale of development challenges and attaining eventual prosperity in the Northern Triangle concerns all socioeconomic sectors in the region. For this reason, the Plan s approach and proposed solutions cannot be formulated in an exclusive manner, nor should they serve the interests of one particular sector. However, the preparation of the Road Map for the Plan of the Alliance for Prosperity in the Northern Triangle lamentably did not observe participatory, transparent and open processes. For example, the Inter-American Development Bank (IDB), the Technical Secretary of the Plan, did not publicly convene civil society organizations to participate and contribute to the elaboration of the guidelines, 6

7 and consultations were limited to governments and business representatives in the region, in what was a closed and opaque process. The exclusionary nature of the Plan s preparation detracts from its legitimacy. Evidence exists of a bias in favor of private business agendas, which is most notoriously apparent in Plan s Strategic Lines of Action. Icefi considers that if implemented, these actions will be detrimental to the already fragile and weak taxation systems in Northern Triangle countries. Of particular concern are the following clauses: 2.7, (an) active policy of attracting private investment and the promotion of «strategic» sectors and areas; 2.8, reducing business costs, especially in the electricity sub-sector; 2.9, targeting the promotion of policies in specific geographic areas and sectors such as textiles, food processing, light industry (including maquila), and tourism; and, 2.10, creation of special economic zones with a proposal to grant preferential treatment to new investments, for which the State would provide infrastructure and public services needed to stimulate economic activity, selected according to criteria that include minimizing fiscal cost. In contrast to this wide and extensive agenda around private business interests, the Plan s guidelines do no contemplate measures for Northern Triangle countries to meet standards for ensuring access to decent work with just wages and social security coverage and benefits. In the case of Guatemala, the fact that diplomatic and private sector representatives realized closed door meetings and presentations in Washington DC in February 2015 is cause for concern. 6 Such meetings seem more oriented to align the Plan to business interests than contribute to solving the dire situation in the Northern Triangle. 7 Regrettably, the activities and presentations of the other participating countries have followed the same format, 8 with Honduran and Salvadoran business organizations enjoying priority status and privileged access to the Plan s formulation and agreement, while representatives of civil society, academia, church and migrant organizations were excluded. Evidence of this unacceptable exclusion was clear in the First Meeting for the Plan, held on February 26, 2015, in the Honduran port city of Tela, where participation was limited to business organizations in the region 9. It is imperative that the Plan and its guidelines are subject to scrutiny and auditing from all sectors of society, recognizing the capacity of organized civil society in these countries to contribute. Particular priority should be given to migrant groups, which understand better than anyone the causes 6 See: 7 Similar approaches have been seen with Salvadoran and Honduran business groups. In the case of El Salvador, see: o 8 See: 9 As part of the host country s initiative, Honduran businessmen sought to take a leading role during the meeting in Tela, exacerbating the vacuum created by the absence of civil society. See for example the press releases: y The Salvadoran private business sector was also present in Tela, but with a lower profile than the host country (see In general, the Alliance for Prosperity enjoys the support of the Business Council of Latin America ( with representation from the Northern Triangle. 7

8 driving migration. The international community and cooperation are urged to support socialization, consultation, review and validation processes for the Plan and its guidelines, particularly with organized civil society. The governments of Guatemala, El Salvador and Honduras must adopt concrete transparency and openness measures to validate, implement and evaluate the Plan. 4. El Salvador, Guatemala and Honduras can be prosperous and democratic countries The citizens of the Northern Triangle can aspire to live in a different society, prosperous, equitable and democratic. However, to transform the current reality and change trends, it is imperative that the participating Central American states agree on an agenda for development and democratic consolidation, one that focuses efforts on sustainable economic growth, building equality and greater public sector effectiveness. The scope and nature of any political agreement will require establishing not only consensus on common visions for the future, but also, that each state assumes the responsibility of realizing the necessary fiscal policy changes such that policy can be completely linked to the ambitions, commitments and goals of development and democracy. As a starting point for achieving sustainable economic growth, we briefly highlight five indispensable elements: the transformation of production and rural development; regional integration; the adjustment of monetary policy to economic growth needs and fiscal policy; take fuller advantage of domestic markets; and, develop a model of social protection as a determining factor of the state s presence and obligation to guarantee rights, and as a tool to distribute jobs territorially and boost public and private investment within the country. To achieve the construction of equality, progress must be made by stimulating three key elements: the generation of public goods with universal character prioritizing traditionally excluded groups, among them children, adolescents and young people; the development of a model of progressive and sustainable social protection; and, the emancipation of women as a determining factor for ethical, social and economic success in Central America. In relation to the effectiveness of the public sector, initial discussions in Central American societies should include, as a minimum, four elements: effective public policies to pursue progress and equality; advocacy for fiscal transparency that legitimizes the concept of public good to citizens; accountability, to provide citizens with information about the state s work; and, strengthening the political system, to give political parties new roles in strategies to save and guarantee Central American democracy. A different, more prosperous Northern Triangle with greater wellbeing for all inhabitants requires tax agreements based on a search for justice and equality to allow for sufficient and sustainable public finances. Four spheres delimit the essential elements for such an agenda. i. Revenue: the urgent need exists to strengthen tax administration and provide greater political autonomy to obtain increased productivity for existing taxes, develop better plans for monitoring and control and simpler administration systems for taxpayers. Building more progressive tax 8

9 systems is crucial, for example, reducing tax privileges mainly those in the form of direct taxes exemptions, as well as augmenting the tax base and progressivity in the income tax. Combating major tax fraud (customs fraud, smuggling and tax evasion, among others); will also help increase the will and honesty of taxpayers in Central American societies. ii. Public spending: evaluation of the impact of public policy execution is a significant but necessary challenge, as a precondition to calculate disparities between expenditure and results, particularly in relation to investment in children, adolescents and youth, women, rural development and climate change. The other important discussion on spending is the need for greater engagement with planning, as well as determining the current rigidities in relation to development goals. Economic and social public investments, neglected in recent years, must take center stage in discussions on a fiscal pact, given they are key mechanisms to accumulate social capital and make possible sustainable economic growth. iii. Fiscal sustainability and sufficiency: it is essential to recognize that structural imbalances in fiscal policy inevitably require studying public debt and a consideration of how to reduce financial burdens on budgets, both in terms of funding mechanisms and the ability to meet payment obligations. One of the key strategic issues for sustainability for Northern Triangle countries will be studies on how to absorb the cost of social security. Meanwhile, fiscal sufficiency demands recognition of the quantity of resources necessary such that the state can fulfill its obligations to society in the medium term. This signifies the development of a multi-year fiscal plan that passes from being mere reference to an instrument of economic and social policy. iv. Transparency, accountability and fiscal education for citizens: this seems to be one of the biggest challenges facing states today. Making public more tax information and in formats readily understandable for the general public is an urgent task. The will and honesty of citizen taxpayers can be increased if transparency and accountability are accompanied by a frontal attack against all forms of corruption. Modernization of current institutional and legal frameworks is urgently required, including: reforms and new probity and responsibility laws; laws against corruption and illicit enrichment; laws for access to public information, both concerning expenditure (execution) and public revenue (beneficiaries of fiscal privileges, plans for monitoring and control, regulation of banking secrecy for purposes of tax control, etc.). The modernization of the Comptroller s Office of Public Accounts and institutions responsible for ensuring the state s transparency is also essential. Finally, the issue here is not simply about informing the population, but as part of a new social contract, citizen participation in spaces is required for reflection and discussion over the direction that Central American fiscal policy should take. Official spaces, closely linked to executive and legislative branches, must deepen the democratization of fiscal policy and decision making, which currently is almost the exclusive domain of emerging and traditional economic elites. The Ministry of Finance, the Treasury and tax administration institutions can strengthen programs around the culture of taxation that exist today, incorporating the Ministry of Education an integral part of a systemic model for fiscal information and discussion with citizens. 9

10 5. Funding for executing the plan: adhering to criteria for fair taxation The guidelines contained in the Road Map for the Plan of the Alliance for Prosperity in the Northern Triangle recognize that the implementation of the Plan requires an important fiscal effort, although no quantitative detail is included as to the amount and origin of resources. 10 While the Road Map affirms that the definition of clear, medium-term tax planning, along with measures to mitigate risks and institutional strengthening, will generate confidence and incentives and secure private sector participation, the absence of concrete figures impedes development of a reliable framework or reference to assess the Plan s feasibility. On the other hand, the guidelines dedicate major emphasis on business agendas like active investment attraction policies, quite vulnerable to follow obsolete models of investment attraction based on fiscal and non-fiscal privileges, a risk to push the region in self-destructive intraregional competition, in which each country competes with the rest offering more and more aggressive privileges than its neighbors. If these components of the Plan are not corrected, its implementation may even be counterproductive, given that on one hand governments are urged to strengthen taxation systems, while on other, certain policies would weaken already fragile collection capacities. It is of fundamental importance then that the Plan clearly defines the nature of the tax effort that countries in the Northern Triangle will adopt; otherwise any approved tax policy measures could sharpen the already serious income distribution inequalities. The risk exists that countries will choose to use rapid response tax mechanisms, for example, the leverage of simple taxes or increasing indirect taxes such as sales or value added tax. Event the IDB s own studies 11 show that the prevalence of indirect taxes, like those already in the tax systems, has a negative effect on income distribution: the implementation therefore of any such tax policy would aggravate an already worrying situation. With regard to funding from the international cooperation, such contributions must be fully included as revenue in public budgets, while the destination of funds should be the result of democratic, open and transparent processes. In particular, it is expected that these criteria apply to the USD 5 billion in support offered by the US government, of which USD 1 billion would be granted to Northern Triangle countries annually over a five year period from 2015 or This would constitute 20 percent of the Plan s total funding, while the remaining 80 percent would come from government resources, multilateral development banks and the private business sector. Finally, private sector contributions must be as transparent as funds from other sources. In particular, funds must constitute a real contribution in the sense that inputs should not be the result of tradeoffs for exemptions or other special treatments or tax advantages. 10 The document includes a table entitled Regional Investment Plan , which does not contain data. 11 Banco Interamericano de Desarrollo -BID-. (2009). Equidad fiscal en Centroamérica, Panamá y República Dominicana. Washington: BID. 10

11 6. Evaluation, monitoring and accountability The Washington Office on Latin America (WOLA), presented 12 principles for evaluating the Plan of the Alliance for Prosperity in the Northern Triangle, 12 which highlight the need for coordinated and integrated strategies in each country, firm commitments from each government, comprehensive tax reforms with justice and equity, and, mechanisms to ensure that the Plan does not focus only on individual elements of the broader problematic or prioritize business agendas in the region. An ambitious plan of this nature requires effective monitoring and evaluation mechanisms as well as ensuring transparent implementation in order to provide proper accountability to both the donor community and beneficiaries in the Northern Triangle. The Plan s legitimacy rests on a capacity to demonstrate that it is not simply additional funding (credit) for the region, but a legitimate and representative effort to close the vast development gaps that exist in the region. This, and no other, must be the basic criterion for evaluating effectiveness and success. 12 Available on line at: la_prosperidad_del_triangulo_norte 11