Central American Common Market

The Central American Common Market (CACM) is a trade organization originally created for Guatemala, El Salvador, Honduras, and Nicaragua. These four nations signed the General Treaty on Central American Economic Integration on December 13, 1960, in a meeting held in Managua, the capital of Nicaragua. The objective of CACM was to improve the living conditions in Central America by unifying the economies of the four countries and promoting joint development of Central America. The treaty was ratified by Guatemala, El Salvador, and Nicaragua in May 1961 and came into force on June 3, 1961. Honduras ratified the treaty in April 1962 with certain reservations. Costa Rica also joined the CACM in 1963. CACM collapsed in 1969 because of an armed conflict between El Salvador and Honduras, but was reinstated in 1991, when Panama also agreed to cooperate with the association even though it is not a member. The CACM countries cover an area of 163,172 square miles with a population of almost 38 million.

The CACM attempted an import substitution industrialization using protectionist barriers to guard the local industries from global competition. The CACM experiment seemed to be successful as intraregional trade increased significantly, from US$33 million in 1960 to US$1.1 billion in 1980. The intraregional exports as a percentage of total exports grew from 7 percent in 1960 to 26 percent in 1970. By 1967 about 95 percent of the traded goods were duty free. In addition to providing a large protected market for regional goods, CACM also promoted industrial investments and infrastructure development by providing fiscal incentives and creating several organizations for specific infrastructure projects.

Even though CACM made significant progress as mentioned above, the member countries could not carry forward the momentum to take the organization to the next level of economic integration. Several factors led to this stagnation. First, the member states could not undertake structural reforms in their economies, which could have provided a level playing field for all the members and an opportunity to create an economic union. Second, the trade policies were such that they promoted growth of consumer [Page 250]goods industries for which capital-intensive machineries needed to be imported from outside the trade bloc. This meant that CACM countries still faced the foreign exchange problems that they had before the formation of the trade bloc. Third, the member states had some significant differences in terms of their size, economic status, and relations with other countries. The CACM led to further rise in disparities, which resulted in Guatemala, El Salvador, and Costa Rica becoming net creditors and Nicaragua and Honduras becoming net debtors. Besides unbalanced trade, there were also issues related to migration and protection of investment, particularly between Honduras and El Salvador. The disparities were so stark that they led to a four-day war between Honduras and El Salvador in July 1969. In the same year, Honduras quit the CACM, failing to secure concessions from other member states in its favor.

Despite Honduras's exit from CACM, trade continued to grow between other countries in the 1970s. However, a debt crisis and the civil wars in El Salvador and Nicaragua in the 1980s led to a steep fall in intraregional trade. There were no further efforts to revive the organization and the treaty expired in 1982. Efforts were again made to revive the CACM during the eighth summit of Central American Presidents, held in June 1990. The European Economic Community gave active assistance by providing a 120-million European Currency Unit support fund to develop a new payment system for trade. The new payment system was designed to manage creditor-debtor relations on a multilateral basis rather than a bilateral basis. During the 10th summit of Central American Presidents, held in July 1991, the five original signatories to the General Treaty admitted Panama as a nonmember state, but with full privileges in terms of preferential treatment in trade with the member states.

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