A Portrait of the Region’s Large Economic Groups
Central America’s rapid “real” integration
over the last 15 years, according to this author,
has been led by the region’s large economic groups,
which originated with old capital but are now globalized
and allied to the transnationals operating in the region.
This second of three articles describes these groups,
their history and their economic behavior,
and ventures a projection of their future.
Central America’s economic groups are increasingly operating on a regional and international scale and the transnational corporations with activities in Central America are rapidly integrating the region with their strategies to expand and penetrate its market. Who are these powerful local actors? The intention here is not to quantify their wealth or their profits, which would be virtually impossible in any event, as they prefer to keep their activities, particularly their investments and profits, a secret despite the greater openness and transparency they’ve displayed in recent years. In its July-August 2005 issue, América Economía stated that the success of the big groups from El Salvador, Honduras and Guatemala could not be quantified as none of them reports its results, concluding that “the still abundant Club of Central American Obscurity is the last paradox of an increasingly open and competitive market.”
Increased foreign investment Central America has undergone notable business integration since the early nineties, promoted by these main regional economic groups and their transnational allies and rooted in their increased investments in the different countries. As both cause and effect of this integration, foreign direct investment has increased considerably in the last 15 years, with an annual average of over $1.33 billion flowing into Central America between 1990 and 1999 for a total of US$13.33 billion. That rose to an annual average of over $2.12 billion in the first half of this decade, totaling nearly $10.61 billion just between 2000 and 2004. This foreign direct investment reached its highest level relative to the region’s GDP in the second half of the nineties, a period in which most of the region’s privatizations took place. The transnationals and local economic groups exploited this opportunity to invest in sectors previously closed to them, such as telecommunications, electricity and the financial system.
Most of the foreign direct investments were in services—including maquila assembly plants for re-export, telecommunications and electricity—and commerce. This is a notable difference from the sixties and seventies when it mainly focused on manufacturing. These new foreign direct investment trends have consolidated a new growth pattern in Central America based on the dynamism of services and commerce, accelerating the tertiarization of the area’s economies.
In Costa Rica’s case, most of the resources were invested in industry, services and tourism, helping foster a series of nontraditional activities such as the electronics industry, medical materials, tourism, business services and real estate development. The majority of these investment flows to Costa Rica—an average 63.6% between 1997 and 2004—came from the United States. In recent years, European countries such as Holland and Germany, and regional neighbors, particularly Mexico, El Salvador and Panama, have also made important investments in Costa Rica.
Foreign direct investment in El Salvador between 1997 and 2003 was mainly in the electrical and manufacturing industries, communications and commerce. Like Costa Rica, most investments came from the United States, 67% of the total as of June 2003. Other important investor countries were Venezuela, France, Spain and Panama.
Increased Central American investmentInformation on direct intra-regional investment—by Central American investors in other Central American countries than their own—is limited and unreliable, as much of it is not registered in the official figures. In addition, the little information that is available in certain countries only covers a very short period. Even so, the existing data clearly shows the growing importance of such investments, with the most significant amounts emanating from Panama and El Salvador. The sizable investments by Salvadorans in Costa Rica in 2002 and 2003 ($23.4 million and $25.4 million, respectively) are related to the construction of a shopping mall belonging to the Salvadoran Poma Group, while the countries that have invested most in El Salvador in recent years are Costa Rica, Guatemala and Panama, mainly in industry and commerce.
It is worth highlighting the importance of Nicaraguan investment in the Salvadoran financial sector ($33.1 million). The Nicaraguan financial groups (BAC-Credomatic, Pacific and Lafise) were among the first to regionalize due to the internal situation in Nicaragua during the Sandinista revolution. Their initial regional business expansions were linked to money-changing, credit cards and offshore banking services.
In addition to confirming the existence of a growth dynamic based on secondary and tertiary activities, the intra-Central American investment trends in Costa Rica and El Salvador show that these investors have played an important part in the regional integration process. Although the lack of statistical information makes it impossible to determine the exact percentage made by small, medium and large companies, there is broad consensus that the big economic groups operating in the region are responsible for much of these investments.
The origin of the big economic groupsHistorically, most Central American countries—with the notable exception of Costa Rica—have been characterized by a very high concentration of income and wealth in a few hands, making our region one of the most unequal in the world. With no effective distribution mechanisms, and with low wages and scarce, poor-quality employment, the vast majority of Central America’s populations suffer poverty and exclusion. This concentration of wealth has produced increasingly powerful economic groups that have historically used their power to influence all spheres of the countries’ social life and exercise direct or indirect control over the state. This control has in turn played a central role in the groups’ expansion strategies, generating and maintaining the conditions they require to accumulate capital.
These economic groups were originally linked to agriculture. Particularly following the Second World War, they expanded from there to other economic activities such as industry, banking and construction, although their main axis of accumulation continued to be traditional export agriculture, which provided them the profits to invest in other sectors. During the same postwar period, when the import substitution industrialization strategy was in full swing, new economic groups emerged, linked to the new manufacturing categories and commerce. Some of these groups came from the middle classes, which were largely strengthened by to the expansion of public employment, while others came from sectors linked to the armed forces, which attained control of the state in some countries and from there promoted accumulation strategies in various economic activities.
According to Donald Castillo Rivas (Acumulación de capital y empresas transnacionales en Centroamérica, Siglo XXI Editores, 1980), “military officers represent a growing economic group in Central America, as well as having political power in their hands and becoming the arbiters of differences between the other groups or factions of the dominant class. However, they play a different economic role in the different countries. In Nicaragua and Guatemala they have become businessmen allied to foreign capital, with considerable economic and political power. In Honduras and El Salvador they would appear to play the role of intermediaries between foreign capital and the local economies.”
Why these economic groups expandedAs the substitution industrialization strategy depended on foreign currency and the profits generated in the traditional agroexport sector, the new economic groups were subordinated to the traditional agrarian elites. Although some national economic groups began expanding into the rest of the Central American region in the sixties and seventies, the accumulation arena for most of them was confined to their national territory, to the domestic market, which they fiercely defended with all kinds of protectionist measures. As a result, their political influence was fundamentally reduced to their respective countries. By the end of the seventies, they started to expand their operations to Central America as a whole, and in some cases to the United States, Mexico and the Caribbean.
This was triggered by various factors: the armed conflicts of the eighties, which led some entrepreneurs from El Salvador and Nicaragua to leave their countries of origin or invest their capital in neighboring countries and the United States; the structural crisis affecting traditional export agriculture, which forced many agricultural businesspeople to switch economic activities in search of new investment opportunities in the rest of Central America; and greater foreign competition, which fostered a business culture that favored opening up, allowing the natural expansion of the main national groups towards the regional market. Another factor was the appearance of a new external source of surplus, namely the family remittances sent back by Central American emigrants living in the United States, which along with the financial reforms and banking re-privatization in El Salvador and Nicaragua enabled the main local financial groups to expand regionally in the nineties.
The expansion was also due to the business modernization process resulting from generational changes and the improved preparation of the younger generations, generally educated in US universities; intra-regional investments; and the coming to power of business or at least pro-business governments that have favored institutional integration and eliminated obstacles to trade.
The Salvadorans and theAll this has meant that in the last two decades economic groups have emerged throughout the region whose sphere of operations is the regional market rather than the national one. These groups come from all of the region’s countries, although the Salvadorans and Guatemalans are the most powerful and have close economic, social and political relations between them, due to ideological affinities, the high degree of integration between the two countries and the fact that some of the most powerful Salvadoran families temporarily emigrated to Guatemala during the armed conflict in their own country and ran their businesses from there.
Guatemalans are the most powerful
They are followed in numerical importance by economic groups from Costa Rica—some with a long presence in the region—and Nicaragua, which are mainly in the financial sector and were the first to internationalize, forced to by the domestic political situation during the Sandinista revolution. The Panamanian groups are particularly strong in the financial sector and the Honduran ones in commerce.
Our study shows quite clearly that Nicaragua and Honduras have been the recipients of the most Central American investment and that the region’s main investors in both countries are from Guatemala and El Salvador.
These regional economic groups are characterized by very high levels of diversification. They operate fundamentally in services (finance, transport, tourism), construction, trade and industry, although some have important investments in agroindustry and a few in nontraditional agriculture. This concentration of investments in services and commerce clearly signals that the region’s economies are fundamentally service economies, which raises both opportunities and serious challenges for future development, as unlike developed economies they have made this shift without a solid and competitive productive base to support tertiary activities over the medium and long run.
The fact that most of these economic groups have interests in the financial sector has resulted in a fairly generalized interpretation in the region that the financial groups are the most powerful and hegemonic in each country and Central America as a whole. It is worth clarifying that while the financial sector is one of the fastest growing and most lucrative and that the groups linked to it do indeed have considerable political weight, bankers do not necessarily represent the hegemonic groups in all of the countries. In Guatemala and Honduras they are neither the most powerful nor the most influential. The main sources of accumulation for the most powerful groups in these two countries are industry, agroindustry, other services and trade, even when they also have investments in the banking sector.
Some of those interviewed who are knowledgeable about the region’s business sectors stated that the banking industry has been quite lucrative up to now, but no more so than other economic activities. According to them, the difference is that the banks are the only ones forced to publish the results of their operations. One person interviewed in Guatemala commented that one of the country’s economic groups had decided to invest in the banking sector not because it was great business, but because it was more prestigious.
Strategic alliances and family tiesThe region’s economic groups have formed alliances in some of the areas in which they operate, but maintain strong competition in the most lucrative activities: real estate projects such as shopping malls, business centers and housing construction; financial services; and certain commercial activities such as vehicle distributorships. There are well-known alliances among different groups in real estate activities (Grupo Poma and Grupo TACA in El Salvador; Grupo La Fragua, Grupo Pantaleón, Grupo Gutierrez-Bosch and Grupo Castillo in Guatemala); in the financial sector (Grupo Cuscatlán, Grupo La Fragua and Grupo Pantaleón); and in technology (Grupo Pellas and Grupo Motta).
The most powerful groups have strategic alliances with transnational corporations and extra-regional economic groups. Some of the most notable are the alliances of Grupo Agrisal with SABMiller, Grupo CABCORP with Ambev, Grupo La Fragua and CSU with Wal-Mart, Grupo Pellas with General Electric and IBM, Banco Cuscatlán with Citigroup and Grupo Poma with Grupo Carso from Mexico.
The vast majority of the national groups have family links that have been well studied in the different countries. This helps them establish alliances, exchange information and coordinate their political advocacy activities. Many of the now globalized groups belong to families that have traditionally wielded economic power in the region, which demonstrates the notable modernization within the Central American economic elites.
These groups play an important role in Central American integration and have enormous economic—and therefore political—power, which is now more concentrated than ever. This has reinforced the differentiation and polarization that has begun to be registered within the private sectors since the early nineties, as these powerful groups have literally cut loose of the other business sectors, forming a much more polarized and unequal national and regional business structure that poses serious challenges for democracy and development in our region.
Hand in hand with powerful transnationalsThe other actors in Central American business integration are the transnational corporations, which played such a central role in the integration of the sixties and seventies, when they controlled the most dynamic and capital-intensive industries and established monopolies and oligopolies in each country’s national market. In addition, they either directly or indirectly controlled the intra-regional market, particularly in the area of manufactured and agroindustrial products, which served as a platform for their exportation of diversified foods to the United States.
Depending on the political sensitivity of the sector in which they were operating and on transport costs, the transnationals defined the number of production centers required to achieve important market quotas in the region’s countries during those years. The transnational beverage, tobacco and pharmaceutical companies were thus characterized by having production centers in each Central American country, while some of the canned food industries concentrated regional production in two or three centers.
The transnationals also had important political, social and economic influence in those years. On the one hand they helped modify the balance of power within the region’s business sectors, strengthening the new industrial, trade and finance sectors linked to the import substitution strategy. On the other, they helped create middle classes by their need for corporate executives. They also cooperated with the development of local small-scale producers and their integration into agro-food production chains. On the political plane, they exercised considerable influence in the governments and in the political system in general, frequently supporting the military governments of the time or conspiring against governments they considered hostile to their interests.
According to Castillo Rivas, one of the allies of foreign investment in almost all of the countries, was a new business class “whose origin appears to directly descend from the old agricultural oligarchy, descendents of regionally based foreign traders and a continuous flow of new businesspeople whose upper middle class origin comes from the state bureaucracy and technocracy, as well as high-ranking military officers.” He also notes that the traders, particularly Jews, Arabs, Poles and other European minority residents, controlled the most important commercial activities.
In the last 15 years, the transnational corporations have increased their presence in the region significantly. This has been encouraged by the facilities each country has offered to foreign investment, as well as the expansion of accumulation arenas as the result of the privatization and concession of basic public services, particularly in telecommunications and electricity, which belonged to the state before the 1990s.
Through the buying up of existing private companies, they also made inroads into sectors previously in the hands of family businesses, as in the case of beer breweries and cement companies. More recently, they have expanded this practice into the banking sector. Two of the world’s four largest multinational corporations—CEMEX and Holcim—have moved into the Central American region in recent years. Holcim has invested in all of the region’s countries, while CEMEX is only in Costa Rica, Nicaragua and Panama so far.
Purchasing private companies,Of the 100 most important companies currently operating in Central America, over half (56) come from the United States, 28 from Europe (England, France, Spain, Holland, Luxemburg, Switzerland, Germany), 9 from Asia (Japan, South Korea), 5 from Latin America (Costa Rica, Mexico, Colombia) and 2 from Canada. There has also been a significant increase in the presence of Mexican companies, particularly in Guatemala, due among other reasons to the signing of free trade agreements between Mexico and some of the region’s countries and to the internationalization of the main Mexican companies, which are very interested in the Central American market as it’s a natural for gaining international experience and is an important platform for exporting to the United States.
hogging national wealth
Generally speaking, the transnational corporations invest in local companies to control them. In most cases, they try to appropriate over 50% of the shares, although on some occasions they start with minority participation with the commitment to increase it by a determined deadline. Buying up private companies is a way for the transnationals to break into the market quickly and exploit the local companies’ knowledge of it, its established distribution systems and its contacts with government, suppliers and clients. But such purchases don’t always increase the capital stock for production or generate new jobs, as happens with new companies. What they can be counted on to do is increase the concentration of wealth and weaken the national companies. This kind of acquisition produces changes in family-owned companies, because the structure of capital becomes more open and the administration modernizes as professionals who are pursuing a career within the company are hired in place of family members.
In addition to investing in basic public services and traditional industry, some transnationals such as INTEL have invested in the region in search of competitive production and logistics platforms to produce goods and services whose final destination is the United States or other extra-regional markets.
Today’s growing “foreignization”Just as has happened in the rest of Latin America as a result of these processes, Central America is witnessing the “foreignization” of its productive apparatus, which is changing the economic power structure in favor of the transna-tionals as the hegemony of both the state and certain traditional industries disappears. This has opened the way for a new business class led by executives of the transnationals’ subsidiaries, which is particularly important in Costa Rica and Guatemala, the countries with the greatest concentrations of foreign investment. The influence of the countries from which these investments are coming has also increased, along with the hegemony of the transnational companies.
Is tomorrow’s subordination
This foreignization of Central America’s economies will undoubtedly become more profound in coming years, as the US Free Trade Agreement with Central America and the Dominican Republic (CAFTA-DR) takes effect, opening up new investment opportunities for transnational corporations and offering greater security for their investments. Given these companies’ enormous economic and political power, it can be expected that their incipient acquisition of local companies belonging to the region’s economic groups will increase. With that, these groups will end up subordinated to transnational interests sooner or later.