The Central American Free Trade Agreement (CAFTA): Impact on Agriculture and Rural Sectors in Five Central American Countries

MOTIVATION

Aiming to inform governments, the private sector, and civil society of the likely macroeconomic impacts of the Central American Free Trade Agreement (CAFTA) in five Central American countries—Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua—IFPRI, with support from the Netherlands, evaluated the agreement’s impact at the regional and country levels, incorporating considerable detail on how households within these countries could be affected as well.

This analysis, supported by the Netherlands, found that CAFTA’s trade liberalization would have a positive, albeit small, impact on economic growth. Furthermore, it concluded there would be a positive impact on reducing poverty levels due to the consolidation of unskilled labor in the maquila industry and recommended restructuring domestic and foreign demand in favor of sectors that employ unskilled laborers while increasing the rate of foreign direct investment.

OUTCOMES

  • The World Bank designated this a "best practice project,” presenting it with the AAA award and showcasing it at a 2009 Knowledge Fair.
  • The project has been successful in raising awareness among Central American government agencies and other rural sector stakeholders. In particular, the research provided a detailed analysis of how each country’s various sectors will respond to the increased competition produced by CAFTA, as well as how best to prioritize and coordinate investments in infrastructure projects to diminish the potential negative effects of CAFTA on the rural poor.
  • By filling in substantial knowledge gaps on the impact of trade-related reforms, the project has promoted meaningful discussion among governments and key stakeholders. The study led to mainstream awareness of proposals about preparing for rural competitiveness operations in Guatemala and Honduras. The results of the initiative are expected to contribute to the debate on trade in the countries involved.
  • The datasets, models, and other tools used in the project are a sustainable resource that are not only publicly available online but can also be readily updated for use in analyzing other trade agreements throughout the world.
  • This work resulted in individual country governments—through the Council of Central American Ministers of Agriculture—and donor agencies helping the Central American rural sector adapt to the changing international environment.