Political Economy of Central American State-building under Globalization
Aaron Schneider
Contemporary Central American state-building has to be understood in the context of
recent transformations of capitalism, in which economic integration has accelerated rapidly to
reach a global scale. In the domestic context, this brings forth new economic actors, especially
those adapted to transnational processes of accumulation, and they operate alongside and in
competition with previously established elite and popular sectors. The task of promoting further
dynamism and accommodating these groups falls significantly to state institutions, yet Central
American institutions have historically been inadequate. The states of the region continue to be
inadequate under current formations of globalized accumulation. Still, it is precisely the
precarious nature of states in the region that makes all the more clear the lessons to be drawn
about the nature of state-building under globalization.
This chapter proceeds in six sections. The first section addresses the concept of
globalization as a stage in the evolution of capitalism, characterized especially by the integration
of economic activity across multiple territories. The next section addresses the concept of statebuilding as it has been viewed in the literature and the dimensions of state-building important to
elite in Central America adapted to transnational patterns of accumulation. Subsequent sections
address the actually existing state-building patterns in the region. Emerging elites may recognize
the need for a state-building project but 1) they are not always clear on what actions are
appropriate, 2) they are not always politically united or victorious in imposing their agenda, 3)
and the precise strategies that appear and come to dominate may differ across countries. As a
result, examples from different countries can be explored to shed light on the real-world practice
of state-building under globalization.
1
Globalization
Contemporary state-building has to be understood in the context of a changing
international economy which has expanded, integrated, and transformed over centuries
(Wallerstein, 1974). This process has moved in fits, starts, and occasional reversals,
characterized best by “punctuated equilibrium” in which long periods of gradual change are
interrupted by moments of rapid transformation (Eldredge and Gould, 2002). These
transformations alter patterns of production, distribution, and consumption, marked by shifting
patterns of accumulation.
The transformations that occurred in the 1970s shifted world capitalism towards a
globalized pattern of liberalized trade and capital markets and integrated global production
processes. This liberalization and globalization were associated with a technological shift in the
emergence of high speed information and transportation flows; an international regime shift with
the breakdown of Bretton Woods arrangements; and a policy shift in removing many national
level regulations (Harvey, 1999; Marglin and Schor, 1990; Eichengreen, 1995). The process of
economic integration that this produced brought more people, from more distant regions, into
greater contact with one another in the process of capitalist production. As a concept, this
process entails a more intensive application of capitalist social relations – liberalization - to a
more extensive number of places and people – globalization (Arrighi and Silver, 1999; Arrighi,
2010). 1 As such, it was a particular kind of globalization, liberal globalization, which is different
from empire, embedded liberalism, socialism, or other potential forms of global integration.
1
The process is of course partial and political. Liberalization has occurred for some countries but not others, for
example as the U.S. and Europe retain agricultural subsidies and protections while requiring developing countries to
remove theirs. In addition, there are large parts of the world which remain significantly outside of globalized
production and exchange, such as parts of sub-Saharan Africa.
2
The impact on production processes was a shift towards globalized chains. Productive
chains extract raw materials, transform them into intermediate goods, assemble them into
finished products, distribute them to final consumption markets, and they are disposed. These
processes need not occur in close geographic proximity, and firms reorganize themselves to
locate stages of production in the locations that provide the greatest returns. 2
The entrepreneurs and elites who adapt to these requirements are qualitatively different
from those emerging in prior moments of capitalism. As contemporary enterprises operate across
borders in integrated production chains, their owners are no longer bound by residence or
productive activities located in one territory. 3 Further, the interpenetration of national capitalist
sectors through cross-border mergers and acquisitions, interlocking of financial networks, and
strategic alliances among business associations and networks have produced a transnational class
of emerging elites.
This requires close attention to the character of emerging, transnational elites in each
country. They sit atop transnationalized sectors, but they do not enjoy the same economic or
political success in each place. They will be more dynamic in some places than others, and their
strategies for international integration can significantly differ. This introduces national
particularities into the content of their state-building agendas, as they attempt to hold together
diverse factions of transnational actors, encounter rivals, remodel national institutions, and
pursue distinct political strategies.
2
The result for firms is that they can adapt management techniques to respond more quickly to market demands.
Firms set up production chains with tight turnarounds, minimal inventories and quick outputs, so production can
occur “just in time” for each link in the production chain. Workers are trained and machines are designed to be
specialized, but flexible, allowing them to switch quickly from production of one output to another to meet rapidly
changing consumer tastes (Zysman, 1984; Piore and Sabel, 1986).
3
This differs from periods in which capitalists operated in several markets, but they organized their activities from
start to finish in processes limited to one jurisdiction at a time. For example, a Ford factory could be built from
bottom to top to produce cars in several countries, making it a national or multinational concern. The greater
integration of globalization now allows them to operate transnationally, making parts in one country to be assembled
in another and sold finally in yet another (Dicken, 2007; Gereffi, 1990).
3
In Central America, the homogenizing external pressure of international integration and
the persistence of national particularities are both evident. The changes associated with
globalization were accelerated by 1980s debt crisis and revolutionary upheaval, which ushered in
governments favoring neoliberal reforms. With slight variations, the region followed the rest of
Latin America in adopting the liberalization, deregulation, and privatization policies that
characterized structural adjustment.
These were locked into trade arrangements, such as the Caribbean Basin Initiative begun
during the 1980s, and the Central American Free Trade Agreement of 2006, which gave
producers in Central America access to the U.S. market. Deeper integration with the U.S.
attracted Central American entrepreneurs into new export activities and attracted U.S. and thirdcountry investors to locate in the region, creating and empowering those emerging elites who
could ally with foreign capital to advance processes of production adapted to transnational
organization.
This process has played out in Central America in specific ways. The sectors most
attractive to U.S. markets have been tourism, final assembly manufacturing (called maquilas in
Spanish), non-traditional agriculture, and remittances. In addition, financial sectors and other
services have prospered by acting as intermediaries between local interests and transnational
firms (Segovia, 2006; Schneider, forthcoming). As these sectors expand, the emerging elites who
lead them devise unique strategies of accumulation and advance state-building programs that can
advance their accumulation.
The question posed by the current project is what kind of state-building projects are
appearing in Central America in the context of globalization? What are the dimensions of statebuilding evident in the region, and how do these relate to the state-building projects advanced by
4
emerging elites? Before turning to these questions in more depth, it makes sense to consider the
concept of state-building itself.
State-building
The current project considers state functions under globalization as an opportunity to
reevaluate previous conceptualizations. Liberal observers of globalization posited that the
transnational character of contemporary capitalists would eclipse the nation state as they outgrew
state institutions as either unviable or unnecessary (Williamson, 1990; Friedman, 2007). Shifts in
the international regime in the form of treaties and new institutions such as the WTO appeared to
confirm the increasing constraints on the regulatory power and the role of states, while structural
adjustment programs imposed limits on the policy space of individual governments (George,
1992).
For critical globalization scholars, “economic integration processes and neoliberal
structural adjustment programs are driven by transnational capital’s campaign to open up every
country to its activities, to tear down all barriers to the movement of goods and capital, and to
create a single unified field in which global capital can operate unhindered across all national
borders” (Robinson, 2009: 19). This view holds that owners of capital had removed their
obligations to the state or to other members of society and could simply pursue accumulation
wherever and however they wanted (Amin, 1994).
This stateless and apolitical version of globalization misses the continued relevance of
national political patterns. In many national contexts, the legacy of prior institutional
arrangements has proven durable. The character of nation-states has not been so easily brushed
aside, and there is significant room for divergence, even as economies integrate. These national
particularities remain evident in enduring institutions and political practices, indicated by wide
5
varieties in the size of states, the structure of welfare systems, and the regulation of work and
environment, among other areas (Evans, 1997; Hall and Soskice, 2001).
In addition, there remain unique historical functions necessary to manage globalization
(Rodrik, 1996). 4 The functions of states have not so much disappeared as transformed to deal
with challenges of economic integration. For example, state leaders now compete to attract
stages of production to their borders, offering incentives that attract footloose capital, what some
observers label the “competition state” (Cerny, 1997). 5 Thus, the question is not whether the
state has disappeared, but rather the nature of the states being built in the context of
globalization.
Before addressing the dimensions that characterize state-building in Central America, it is
worthwhile to note the theoretical contribution that the cases of the region can offer to broader
understanding. Most traditional approaches to state-building rest on two assumptions. First, statebuilding is something that occurs with the establishment of national, sovereign authority over a
territory, generally at the founding moment of a national unit, in which boundaries and national
myths are set (Anderson, 1981). Second, state-building includes those efforts to approximate or
move towards a Weberian ideal (Evans and Rausch, 1999).
Max Weber defined the state by its unique power of coercion within a territory, “a 'state'
if and insofar as its administrative staff successfully upholds a claim on the monopoly of the
legitimate use of violence in the enforcement of its order” (Weber, 1968: 154). For early modern
states, this was a process of asserting power, especially military power, by central governments
over principalities, fiefdoms, and warlords (Ziblatt, 2008).
4
Even the World Bank acknowledged a new set of requirements of the “State in a Changing World,” in its 1997
World Development Report (World Bank, 1997).
5
The difficult task is to ensure that the stages of production attracted are high value-added processes with linkages
to other sectors and firms, such that they allow for decent livelihoods and sustainable development (Reich, 1992).
6
Weber also emphasized the institutionalization of the state through the establishment of
rational-legal authority, removing the crutch of traditional or charismatic legitimacy. Under
rational-legal authority, professional politicians establish the legal authority of a meritocratic and
impersonal bureaucracy, resting on “a belief in the ‘legality’ of patterns of normative rules and
the right of those elevated to authority under such rules to issue commands (legal authority)”
(Weber 1947: 328).
In the context of capitalist modernization, the bureaucracy manages the challenges of
public administration through the application of rules, science, and rationality. This replaces the
communal values, religious principles, and traditional practices which might have guided
decision-making under pre-modern arrangements. As a more effective and efficient mechanism
of organizing authority, Weber believed that rational-legal bureaucracies would eventually outlive and out-compete bureaucracies organized along alternative lines.
Al Stepan specifies additional dimensions focused on the nature of state linkages to
groups within society. These are important to carry interests into the state, such as through
mechanisms of representation, and also to allow the state to shape the social groups and
cleavages that exist in society. “The continuous administrative, legal, bureaucratic and coercive
systems that attempt not only to structure relationships between civil society and public authority
in a polity but also to structure the many crucial relationships within civil society as well”
(Stepan, 1978: xii). Mann refers to this as “infrastructural power” - the capacity to penetrate
society and make effective the intentions of the state (Mann, 1986).
To these domestic efforts, state-builders must also look outward, as “states are inherently
Janus-faced, standing at the intersection of international and domestic processes” (Evans,
7
Reuschemeyer, and Skocpol, 1985: 350). 6 As Skocpol notes, international “contexts impinge on
individual states through geopolitical relations of interstate domination and competition, through
the international communication of ideals and models of public policy, and through world
economic patterns of trade, division of productive activities, investment flows, and international
finance” (Evans, Rueschemeyer, and Skocpol, 1985: 8).
This suggests two distinct mechanisms of pressure from the external environment. The
first is in terms of direct challenges or influences on national state authority, as in the form of
war, economic competition, and policy diffusion. The second mechanism is through a shift in the
domestic social structures and social coalitions that provide support to national states. For
example, under globalization changes to international relations of trade, production, and
investment can trigger domestic socioeconomic changes in the fortunes of rising and declining
sectors.
The internal and external dimensions of states have been incompletely incorporated into
our conceptualization of state-building. In part, this is because contemporary state-building
discussions are limited to formative moments of nationhood, directing attention to centuries old
processes in Europe (Tilly, 1992), but only extended to limited contemporary contexts. These
include apparently failed states in places like sub-Saharan Africa and attempts by external actors
to rebuild states after conflict and invasion in places like Iraq and Afghanistan.
The current project suggests that state-building tasks are not reserved to formative
moments of nationhood; rather, state-building occurs repeatedly, triggered by major shifts in
international capitalism. Economic shifts stimulate domestic sectors who then press for political
changes to advance a policy agenda that can help them sustain their dynamism. This can include
administrative adaptations and the construction of new political institutions, where necessary, as
6
This draws on Otto Hintze, who traced the nature of domestic regimes to external military threats (Gilbert, 1975).
8
well as creating new state-society linkages to link themselves to the state and manage relations
among rising, falling and excluded groups. Successful contemporary state-building generates
power and resources that can protect emerging sectors where they are vulnerable and help to
insert them into transnational processes of accumulation where they are not.
A combined external-internal approach is especially important in the context of
contemporary liberalized markets in Central America. Global integration has accelerated changes
in domestic actors and placed new and more sophisticated requirements on state institutions, but
the capacity of political elites and state institutions to accomplish these tasks is by no means
assured. National territories remain pocked with spaces and policy areas in which governance is
incomplete, and the recent international financial crisis has shaken the foundations of ongoing
integration processes (O’Donnell, 1994). 7 The crisis has exposed, once again, fundamental
ideological and political struggles over the appropriate role for the state.
These struggles are expressed in Central America in terms of competing state-building
agendas. One such agenda draws on liberal traditions and seeks to capitalize on moments of
crisis to roll back the state, removing it from economic functions, at once resolving crisis and
preventing the state from intervening in the economy in the future. This view orients some
potential state-builders in Central America, who are drawn to the liberal view out of both
conviction and fear. They are convinced that the appropriate role for the state is a minimal one,
and they are even more fearful of the populist alternative, in which short-term amelioration of
crisis becomes a long-term threat to managing limited resources (Corrales, 2002). 8 This fear of
7
Further, the assumption that state-building occurs only at foundational moments creates the misguided impression
that it occurs on a blank slate, wiped clean with each invasion or regime change.
8
This echoes fears of public choice theorists that expanding state mandates during crises creates self-interested
bureaucrats who protect themselves and their lobbies even after the crisis has passed (Brennan and Buchanan, 1980).
9
populism has motivated elites and middle classes to occasionally support authoritarian solutions
in coups, dictatorship, and undemocratic practices (Avritzer, 2002).
In recent years, the general disapproval of authoritarian interruptions has limited
attempted coups, and domestic elites have sought alternatives consistent with democracy,
focusing on pluralism as a manageable form of democratic opening. Under pluralism, politics is
limited to a competition among interest groups, directed by political institutions and mechanisms
of social control to protect minorities from the whims of the majority (Dahl, 1971). 9 The kinds of
institutional rules this has included in Central America are electoral rules to limit majorities and
powerful constitutional courts, not to mention the implicit veto-power held by militaries over
legislative and executive decisions.
As a complement to pluralism, technocratic insulation removes popular demands and
democratic process from core areas of decision-making (Centeno, 1994). Under technocratic
arrangements, democratic competition is limited to non-economic areas, with areas essential to
capitalism, such as finance or industrialization, placed in the hands of a protected bureaucracy
(Dominguez, 1998). 10 The residue of such practices litters the region with semi-autonomous
institutions and bureaucracies granted independence from party politics and executive discretion,
though many such agencies are abandoned or absorbed once policymakers lose interest or move
onto other challenges (Geddes, 1996).
Some conflicts over state-building are waged within the state itself (Hirsch, 1996).
Conflicts within and among branches of the government and the executive bureaucracy express
9
Mechanisms of social control include using the state to demobilize popular mobilization and prevent organization
(Kurtz, 2006).
10
The neoliberal fear of self-interested bureaucrats seems at odds with the faith in technocrats. This has been
resolved by Weberian assumptions about the role rational and meritocratic bureaucrats as shepherds to capitalist
expansion, rather than inherent threats to it (Evans, 1995).
10
these internal struggles for power, dislocating ideological and political struggle from society into
state institutions.11
What has not yet occurred is a pattern of state-building that renegotiates international
patterns of economic insertion while also reorganizing domestic political and economic
relationships. This is what happened in the developmental state models of East Asia, and to a
lesser extent in the statist development models of post-World War II Brazil, Mexico, and
Argentina (Evans, 1995). 12 Such efforts included institutional characteristics of modernizing
bureaucracies, especially in terms of meritocratic and rational-legal orientation (Amsden, 1992);
changes in the relationship of the state to leading social sectors, especially dynamic, exportoriented ones (Evans, 1995); and increased state ability to trade on geopolitical position to
renegotiate the terms of international engagement, for example by securing markets for exports
and upgrading technology (Wade, 2003). Peter Evans describes this as a triple alliance between
the state, domestic capital, and international capital (Evans, 1979).
Such an alliance would require a domestic balance of class forces which has not appeared
in Central America. Galbraith, in describing U.S. capitalism, coined a term to describe such a
balance: “countervailing power” (Galbraith, 1993). His focus was the post-war industrialization
boom, in which large-scale business organizations confronted large-scale unions, and the balance
of class power produced a state capable of reproducing accumulation while satisfying popular
needs. Such an arrangement was appropriate to the nature of Fordist industrialization, and even
had its imperfect reflection in the national populist models of Latin American developmentalism.
11
Fiscal crisis is taken by some to indicate fundamental conflicts over the goals of the state and the inability to
accommodate competing visions within a limited fiscal envelope (Schumpeter, 1919).
12
He observed that even in the best of circumstances, Latin American states tended to be more “predatory than
developmental,” stifling dynamic sectors rather than “shepherding” them towards sustainable patterns of
development (Evans, 1995).
11
Contemporary transnational Central American elites have been preoccupied with the
policies that can stimulate their expansion and smooth their profits, seeking state assistance to
insert dynamic sectors into rapidly changing transnational processes. While these efforts will be
discussed in more detail below, they include policy and institutional reforms to expand profit
margins within existing sectors, open new opportunities for accumulation that did not previously
exist, and reorganize social and political life to ensure ongoing hegemony for emerging elites.
The room available for state-building projects in peripheral economies like those of
Central America is difficult and qualitatively different than what happens in other parts of the
world. The pattern of accumulation that has taken hold in the region produces too little wealth, in
too few hands, through sectors with limited potential for sustained development (Agosín, et al,
2004). 13 The resources they generate are hardly sufficient to the requirements of renewing
accumulation, sustaining the state, and meeting popular demands. Nor have the social formations
produced by the patterns of growth occurring in the region created the coalitions that might
provide a countervailing balance of class forces. Still, despite the overall limitations on Central
American state-building, there are important variations in what has occurred. To explore the
patterns of state-building emerging in the region, the next section outlines the dimensions that
usefully characterize the behavior of transnational elites in state-building efforts.
Transnational State-building in Central America
This section explores the dimensions of state-building relevant to emerging elites in the
region. Under current patterns of international insertion, emerging elites are defined above all by
their transnational strategies of accumulation, in which they direct one stage in a chain of
13
Writing within the confines of economic theory, Chu, Davoodi, and Gupta (2000) note the intersection of
economic distribution and problems of state capture, referring implicitly to structuralist traditions associated with
dependency and underdevelopment (Frank, 1969).
12
production that crosses several borders. Three key dimensions characterize their state-building
agenda: expanded accumulation, accumulation by dispossession, and regulation of the life-world.
Expanded accumulation seeks to increase profit margins in existing economic activities.
Accumulation by dispossession generates wholly new opportunities for accumulation in areas or
activities that were not previously open to market operations. Regulation of the life-world
transforms society and politics such that long-term hegemony of transnational elites can be
assured.
In each dimension, emerging elites pursue a particular agenda. It is of course the case that
a more complete understanding of state-building might incorporate additional dimensions and
the perspectives of other actors. For example, other dimensions might include the consolidation
of democracy and other actors could include the preoccupations of popular sectors or
international actors.
Still, the perspective of emerging elites is of critical importance because their success, or
failure, in advancing a state-building agenda has implications for long-term patterns of
development and democracy. Also, the unique ways in which transnational elites have advanced
their objectives on each dimensions helps to contrast the state-building patterns across countries.
Finally, the perspective of emerging elites is especially illustrative of state-building under
globalization because of their interest in aligning with and deepening the transnational patterns
of accumulation which brought them to the fore.
Expanded Accumulation in Transnationalized Sectors
The first dimension to be considered is that of expanding accumulation in the
transnational sectors that have appeared as a result of global integration. Integration presents
opportunities to economic actors, and they pursue state assistance to expand their profitability.
13
This can come through policy and institutional changes that reduce the cost of inputs, raise the
value secured for outputs, increase the efficiency of production processes, and provide dynamic
advantages to domestic firms over the long-term.
The sectors that have been most adapted to transnational production in Central America
present various opportunities to reduce the price of inputs. Key inputs are land, labor, and
capital, including those forms of capital represented by access to financing as well as
accumulated in technological improvements. Fiscal and monetary restraint keeps interest rates
down, making it possible for investors to access capital markets easily.
Other costs, such as labor costs in the maquila, have also been held down. In the case of
wages, costs have been kept down by incorporating new workers into the workforce, especially
women, thereby increasing the potential number of low-skilled workers available, as well as
undercutting traditionally male-dominated unions with little capacity or history of mobilizing
female workers (Frank, 2005).
Government actions can also raise the returns for outputs. Efforts to identify and diversify
export markets and monetary policies that stabilize a competitive value for the currency can
increase the attractiveness of Central American goods in foreign markets. In addition,
government policies can capture greater value for Central American producers by decreasing the
number of intermediaries to reach international consumers. In the case of tourism, for example,
Central American countries have created or expanded ministries of tourism that cut out some of
the marketing costs and tour-operator fees that stand between developed country tourists, and a
devalued currency keeps Central American destinations attractive.
A third route to expanded accumulation is to raise the efficiency of existing enterprises.
This can come from certain kinds of inputs, such as the infusion of capital and technology, as
14
well as a reorganization of enterprise management and productive practices. To spur such
upgrades, government policies can allow competition with more efficient firms, such as foreign
firms operating with greater technology and international experience. Governments can
selectively apply regulatory sanctions and incentives to encourage firms to improve their
efficiency to match and surpass levels of international efficiency (Schrank and Piore, 2009).
Finally, states can keep borrowing rates low by offering concessionary terms for credit as well as
balanced fiscal policies that keep borrowing rates low. In Central America, and other peripheral
countries, weak domestic capitalists tend to have great difficulty responding to such regulations,
but upgrading has occurred in moving producers from less efficient traditional agricultural
products to niche, non-traditional agriculture outputs such as off-season fruits and vegetables for
Northern markets (Barham, Clark, Katz, and Schurman, 1992: 43-82).
In the rapidly changing contemporary economic environment, the ability to secure
expanded returns in the future is just as important as expanded accumulation in the current
period. These ongoing returns can come from several sources. One possibility is through the
possibility of multiple linkages that certain chains of production provide forward and backward
to other activities. For example, Central American governments have assisted producers into
productive chains like organic coffees with backward linkages to organic fertilizers and forward
linkages to high-end brews. Such chains offer more opportunities for accumulation in-country, as
multiple stages of production can be captured by national firms.
In addition, innovations in productive techniques and technology provide temporary
advantages while other firms catch-up. To retain the advantages of operating at the front of the
technology frontier, governments invest in research and development; institutions attract
15
investment from foreign companies bearing leading technologies; and regulations privilege
domestic participation in the most advantageous stages of production (Ross Schneider, 2009).
Accumulation by Dispossession
An additional way emerging elites use states to facilitate their dynamism is by creating
opportunities for accumulation that did not previously exist. This can take several forms,
including the creation of new markets, opening areas of activity to transnational actors that were
previously controlled by others, reorganizing existing markets to facilitate concentration and
monopoly rents, and financializing economic activity.
State efforts can open new outlets for Central American producers. For example,
arrangements such as the Central American Common Market open opportunities for producers to
extend their operations across regional markets. In addition, agreements with developed
countries, either bilateral or multilateral agreements as in the Central American Free Trade
Agreement (CAFTA), present additional opportunities for export and exchange (IMF, 2005).
Some existing activities offer profitable opportunities but have to be transferred to
transnational actors and subjected to market relations. One set of examples in Central America
are those entities created and controlled by the state, including public services and enterprises
built up in prior decades, especially under import substitution development strategies and the
welfare state and populist arrangements that accompanied them. Telecommunications, financial
services, and energy offer opportunities for profit when privatized and handed to domestic and
international actors. Other sectors, such as social services and public infrastructure tend to
remain under public ownership, but they present opportunities for accumulation by factions of
capital that can capture contracts providing services to the state.
16
Another opportunity for accumulation exists in sectors controlled by non-market actors.
For example, during a period of commodity price booms, territories rich in natural resources
offer opportunities for profit, but they are frequently occupied in communal, environmental, and
indigenous uses. State actions in regulatory and other policies turn these territories over to
market uses and facilitate the entrance of domestic and international private sector actors.
Finally, government action can facilitate accumulation by helping to concentrate market
power. In particular, moments of domestic and international crisis destroy the assets of
competing factions of capital, and create opportunities for accumulation by survivors. State fiscal
and monetary policies deepen crisis and protect certain factions of capital, thereby setting them
up to profit from the market power they wield during post-crisis rebounds. In Central America,
the 1980s was a period of generalized crisis across the region, and periodic crises have affected
individual countries in subsequent years. Financial sectors have been particularly affected, and
those actors favored by the regulatory, fiscal, and monetary actions of the state have been able to
reap the subsequent windfall of newfound market power, something Harvey labeled as
“accumulation by dispossession” (Harvey, 2003). 14
Harvey also refers to the financialization of economic activity as an opportunity for
accumulation by dispossession. As financial sectors grow and gain leverage over the real
economy, they can manipulate credit and stock markets to force the firesale stripping of assets.
This concentrates wealth and control, and offers a further opportunity to reap rents from market
power.
Regulating Social and Political Life to Preserve Elite Hegemony
14
Harvey draws on the work of Rosa Luxembourg, who understood this process to be a form of primitive
accumulation.
17
The final dimension of state-building relevant to the interests of emerging elites is in
terms of the regulation of social and political life. For emerging elites seeking access to power
and legitimacy for their actions, state institutions and policies offer crucial tools to structure the
ways societies operate such that elites can maintain their dominance. This can include efforts to
reframe the social rules and norms that govern interpersonal relationships and understandings,
ameliorative policies to coopt or distract potential opponents of their changes, and the
reorganization or invention of channels of access to political power.
With respect to the regulation of social life, emerging elites require state-building efforts
to legitimate their strategies of accumulation. As new sectors and opportunities for accumulation
emerge, they can disrupt existing social arrangements, practices, and identities. Transnational
elites pursue state-building efforts to legitimate the social changes provoked by their
accumulation strategies. Essential tools in this regard are the instruments of cultural production,
such as education systems and specialized agencies, as well as sites of knowledge production in
media, thinktanks, and universities.
One example is in the management of social change triggered by a changing workforce.
Many transnational sectors include high levels of female participation in formal employment,
with women making up as much as 70% of the workforce in assembly manufacturing and service
and tourism economy. This implies a massive shift in the way women work and live and interact
within society, with implications for families, workplaces, politics, and industrial relations.
Emerging elites have legitimated the increase in women’s labor force participation with a new
set of policies, media messages, and institutions, and all of the countries now boast Institutes of
Women and the Family or some similar agency dedicated to the condition of women.
18
Other measures address the condition of actors displaced by economic and structural
change. Rival elites from declining sectors and popular actors excluded from the benefits of
international integration pose potential opposition to transnational strategies of accumulation. To
limit their oppositions, concessions, side-payments, patronage, and outright coercion offer a
menu of options (Etchemendy, 2001). In all countries, a mix of items selected from this menu is
evident, particularly in response to zero-sum conflicts such as those surrounding free-trade
agreements and privatizations.
Finally, other measures attempt to regulate the operation of political life. It is no longer
sufficient, as it was for parts of the 20th century, for dominant elites to cede control of the state to
other actors, usually the military, while they concentrated on economic activities (Stanley, 2006).
There are too many policy and institutional changes required to expand, extend, and legitimate
their accumulation. This has led emerging elites to directly occupy elected office, form new
political parties, finance political candidates, and create lobbying entities, among other efforts.
Each of these strategies secures or creates a channel of access to power, and potential targets
include executive, legislative, and judicial branches, along with a variety of electoral,
bureaucratic, and public opinion strategies. In many ways, efforts to reorganize political life are
the clearest indicators of elite state-building efforts, as they both reflect and determine the degree
to which emerging elites can secure their ongoing hegemony.
The paragraphs above have described three dimensions in which state-building is
essential to the project of transnational emerging elites: expanded accumulation in existing
sectors, extending accumulation to new sources, and regulating social and political life to
preserve elite hegemony. Emerging elites seek to expand their accumulation in the sectors they
occupy; introduce market relations in places and areas of life that were previously subject to non-
19
market control; and secure these changes for the long term by achieving ideological and political
hegemony.
The next section will examine these dimensions by observing examples as they appear in
Central America. The examples are collections of policy changes, institutional adaptations, social
constructions, and political practices. For each dimension, an example will be chosen from the
region to demonstrate the kind of state-building occurring on each dimension. The objective is
not to describe each country case in full; rather, country case examples offer useful illustrations
of potential variations on the dimensions of state-building.
Expanded Accumulation in Central America
Expanded accumulation refers to those efforts made to boost profits by raising profit
margins. As discussed above, this can include lowering the cost of inputs, increase the price
secured for outputs, raising productivity, and increasing the efficiency of operations. In Central
America, this has taken various forms, for example in the incorporation into the maquila
workforce of women workers who were previously not economically active in the formal sector
and not organized, fiscal and monetary restraint to keep capital costs low, investment in
infrastructure and other public goods used by exports, and trade agreements that ease access to
foreign markets.
Examples drawn from Honduras and Costa Rica show the divergent patterns of
intervention adopted by states, and the impacts these can have on development. In Honduras, tax
incentives have been one of the key tools of the state to increase the profitability of transnational
sectors, and these incentives have been characterized by abuse and ambiguous developmental
impacts. In Costa Rica, a successful state push to scale-up production towards products with
greater value-added and more technology content has included tax incentives, but these
20
incentives have been more strategically applied and combined with other measures to diversify
Costa Rica’s export profile by attracting foreign investment with higher technology content and
requiring more skilled labor.
Expanded Profits, but not Development in Honduras
In Honduras, exporters have pushed for and received a steady series of tax exemptions.
The first such incentive was established in 1976, in the form of a tax exemption for foreign firms
operating in an export processing zone around the Port of Cortes (ZOLI - Dto. 356-1976). 15 By
1998, the entire country had been designated tax free, so long as firms were producing for export
(Dto. 131-1998). 16 Businesses taking advantage of this legislation do not have to pay tariffs,
duties, property taxes, taxes on profits, local sales tax, taxes on capital imports, or excises and
enjoy unlimited repatriation of profits and access to special customs offices in industrial parks.
Almost all transnational sectors are now privileged by some form tax incentive
legislation, including mining (dto. 292-1998), tourism (Dto 314-1998), and agricultural exports
(Dto. 233-2001). These special regimes have increased exports, but are poorly applied and prone
to abuse. For example, among the first firms to take advantage of the tourism exemption have
been fast food franchises, taking advantage of a designation that for some reason is not applied to
other restaurants. 17
15
Expanded to other municipalities in 1979 (Dto. 787-1979).
The ZOLI was reformed and expanded in 1986 (Dto. 190-1986), though certain benefits were rolled back in 1994
(dto. 135-1994). Other regimes include the Temporary Import Regime (RIT – Dto. 37-1984) by which firms could
import goods for assembly and reexport within a short amount of time and the Law for Zones of Industrial
Processing for Exports (ZIP – Dto. 37-1987). Both of these included twenty-year holidays for income tax
exemptions and ten years exemption on municipal taxes (Alonso, 2005).
17
To all new tourism projects, income tax was exempted for 10 years, and exemptions offered for all taxes and
levies produced by import of goods and new services to construct or begin operations, except inputs, repairs,
construction materials, arms, foods, toxic products, and printed materials. Exemption was also offered for all
cultural activities, and deductions offered for up to 15% of all taxable income for businesses undertaking new
projects.
16
21
There is little evidence to suggest that firms operating in privileged sectors alter their
investment decisions primarily because of the fiscal incentives offered (IMF, 2005; ICEFI,
2006). Further, many firms oriented towards the domestic market make use of exemptions meant
only for exporters, distorting economic activity and gaining an unfair advantage over competitors
(Gómez Sabaini, 2005). In many cases, domestic producers have been successful in introducing
their own products in the list of exempted products. For example, while sales tax exemptions for
basic goods can decrease the regressivity of sales tax, Honduras provided exemptions for more
than 180 goods, far more than those consumed primarily by the poor. As a result, the array of
privileges increase vertical inequality by offering wealthier income groups increased
opportunities to escape taxes, and increase horizontal inequity by offering different tax rates to
firms operating within the same sector ((Matute López, 2008: 198; Gómez Sabaini and
Cetrángolo 2006).
It is difficult to calculate exactly how much is lost through these incentives. 18 According
to Gómez Sabaini (2007), the losses associated with exemptions totaled 29.2% of actual receipts.
Meza, et al (2008) estimate, with figures from the Executive Revenue Directorate (DEI), that the
total amount of tax exemptions to textile exports was equal to sixteen percent of total taxes in
2003. 19
In sum, the Honduran state has expanded profits in transnational sectors through the use
of generous tax incentives, but these incentives have done little to promote development. New
exports have emerged, but incentives have cost the state significant resources and distorted
18
Much depends on the assumptions made. The easiest assumption to calculate though unlikely to be accurate is that
economic actors keep their behavior the same regardless of tax incentives. Alternatively, one can compare actors
exempted and not exempted from specific rules. Finally, costs can be calculated in terms of expenses needed to
equalize losses.
19
The amounts were 19% in 2004 and 17% in 2005, with exemptions for fast food enterprises from 2003 until 2006
totaling L66 million, equal to about $3.7 million.
22
domestic markets meant to be shielded from their impacts. This experience stands in contrast to
the experience of Costa Rica, where tax incentives have been combined with other efforts to
promote transnational sectors while also altering the technological capacity and export diversity
of the country.
Scaling-up Profits and Development in Costa Rica.
After a deep but short debt crisis at the start of the 1980s, the Costa Rican state embarked
on a rapid transformation of the export sector. The state used tax incentives, privileged access to
credit, partnership with foreign firms, and export promotion to direct producers into transnational
sectors, expand their profits, and coax towards higher-end production.
Early currency devaluation kept Costa Rican exports competitive, and firms were
directed to sign an export contract with the state that included tax incentives, called Tax
Incentive Certificates (CATs in Spanish), as well as other incentives to encourage industrial
restructuring. These included duty free imports of raw materials, inputs, and capital goods,
subsidized interest rates, lower port costs, and simplification of the export process. The CATs
could be used to reduce tax obligations and were valid for up to 42 months, resulting in an
immediate 15% increase in the profitability of exports (Arriagada, 1992). Corrales and Monge
(1990) attribute much of the credit for export promotion to the CATs.
In addition, the Costa Rican state also offered Law 6695 for the Zones for Processing,
Export, and Industrial Parks (Ley de Zonas Procesadoras de Exportación y Parques
Industriales). The zones were built by a public corporation and located in underdeveloped
regions. Firms locating in the zones enjoyed preferential loans, reduced rents, and partial tax
exemptions, though these were phased out over time.
23
During the second half of the 1990s, the government sought to diversify exports away
from the simple assembly that tended to dominate the firms locating in export processing zones.
The government adopted “an aggressive policy of investment attraction” in sectors that made “a
sophisticated and well paid use of productive resources and not extensive and poorly rewarded
use of cheap labor” (MIDEPLAN, 1998, 51, as cited in Martínez Franzoni and SánchezAncochea, 2012). The entrance of the computer company INTEL in 1997 rapidly shifted exports
towards higher-value added and more sophisticated technological products and attracted other
foreign firms such as Abbot, Procter and Gamble and Microsoft.
These efforts have been coordinated by state institutions, some of which were created
specifically to promote exports and direct industrial up-grading. The Ministry of Foreign Trade
and the National Investment Board were both created to coordinate trade policy and promote
foreign investment, and the the Costa Rican Investment Promotion Agency (Coalición
Costarricense de Iniciativas de Desarrollo, CINDE) was created with financial assistance from
USAID (Ulate, 2000; Villasuso, 2008).
Costa Rica slowly became a regional leader not only in electronics but also in medical
devices, medicines, back-office services and other high tech goods and services. In the case of
electronics, the country has 47 different foreign firms in the FTZs that specialize in
telecommunications, semiconductors and assembly of electronic products. They generate 12,000
direct jobs and account for approximately 30% of the total exports of goods (Martínez Franzoni
and Sánchez-Ancochea, 2012).
High-technology exports now account for 29% of Costa Rican exports, far above the
regional average of 4%. Much of these exports are produced by foreign firms operating in the
free trade zones, and Costa Rica has become a major recipient of foreign direct investment.
24
Much of this investment targeted outputs with high levels of technology content, requiring higher
skills and sustaining relatively higher wages (Sánchez-Ancochea, 2004). In recent years, there
has been an additional influx of services provided by foreign firms, including customer service
centers and back-office tasks (Ernst and Sánchez-Ancochea, 2008).
Despite these accomplishments, it should be noted that few Costa Rican producers have
been able to benefit from the high-tech portions of transnational productive chains. While foreign
firms provide the investment into the higher-end areas of export, they offer few linkages or spillovers to domestic suppliers, and the positions occupied by Costa Rica firms tend to remain in the
primary sector (Sanchez-Ancochea, 2009). As a result, the overall impact on employment
upgrading has been limited, and the export shows widening levels of inequality, as primary
product exports, where most of the employment remains, continues to show lower levels of
growth and productivity increases.
While the Costa Rican case demonstrates some of the limitations of even the most
successful state efforts at upgrading, the contrast with Honduras demonstrates some of the ways
states contribute to expanded accumulation. While both countries have witnessed concerted
policy campaigns to boost profit margins, in Honduras there have been much more ambiguous
developmental impacts. In Honduras the main tool has been the proliferation of tax incentives,
and these have produced distortions to the economy and complicated state administration. By
contrast, while Costa Rica has also used tax incentives, these have been accompanied by policies
and institutions that direct foreign investment into production with higher amounts of
technology, rapidly increasing productivity in the export sector and upgrading skills in the
workforce. Costa Rica continues to face problems in a lack of linkages and spillover from the
higher-end outputs, and differences in productivity and skill are becoming more evident in
25
inequality. Still, the two cases demonstrate the kinds of variation possible in this particular
dimension of state-building.
Accumulation by Dispossession in Central America
Accumulation by dispossession refers to those efforts made to open new opportunities for
accumulation that did not previously exist. This can take several forms, including the creation of
new markets, opening areas of activity to transnational actors that were previously controlled by
others, reorganizing existing markets to facilitate concentration and monopoly rents through the
manipulation of crisis and financialization of economic activity. In Central America, this has
taken various forms, including the privatization of state assets, transfer of public and communal
lands, and corruption of state resources.
Examples drawn from El Salvador and Guatemala display some of the ways in which
emerging elites engage in accumulation by dispossession. In El Salvador, the nationalization,
privatization, and subsequent internationalization of banking has provided a windfall for those
fractions of capital privileged by the state. In Guatemala, political and economic fortunes have
been seized by those factions of capital that can capture areas of public service contracts. In
neither case have the developmental impacts been laudable, but they demonstrate some of the
variations evident across the region.
The Transfer of Wealth through Salvadoran Banking
The financial sector in El Salvador has provided a windfall return to a fraction of the
transnational elite who garnered control of the sector. The privileges of control have been
expressed in massive fortunes, political power, and linkages that reached into multiple other
areas of the productive economy, both domestically and in the region. Interestingly, the latest
26
phase of restructuring in the sector has involved a sell-off to foreign interests, placing Salvadoran
financiers in the position of shareholders and domestic managers of international interests.
The fiscal crisis of the 1980s coincided with the breakdown of the previous regime and
the onset of civil war, and it hit the financial sector with widespread insolvency. The government
nationalized banks and financial institutions in 1980 in the Nationalization of Credit Institutions
Law (dcto. 158), and they remained under government control for most of the duration of the
war. Bank deposits fell drastically, as did the availability of capital, represented in a collapse of
total credit, which fell 31%, and rates of debt default which rose to $786.7 million in 1988.
Once transnational elites had gained control of the state with the election of ARENA in
the 1989 election, the banks were quickly recapitalized in preparation for privatization. The 1990
law for Cleansing and Strengthening Commercial Banks and Savings and Loan Associations
absorbed bad debts and transferred approximately $400 million to the banking sector from public
coffers.
The rules under the subsequent privatization encouraged the purchase of shares by the
workers of the institutions and the pension funds, and approximately 20% of the shares went to
these actors. Within only a few years, however, traditionally powerful families and networks had
absorbed the controlling interest in most of the banks, including the Murray Meza, Simán, Poma,
Kriete, and the then president and current leader of ARENA, Alfredo Cristiani.
The limited number of banking conglomerates that emerged came to occupy an
increasing portion of the national economy. A limited number of financial interests dominated
the sector, including Cuscatlán, Banagrícola, Banco Salvadoreño, Banco de Comercio, Agrisal,
Grupo Poma, Grupo de Sola and Grupo Hill. Through financial arms, these conglomerates
27
extended their reach into other transnational sectors, including commerce, real estate, tourism,
and maquila production.
The net assets of the financial sector rose from $1.88 billion in 1990 to $6.88 billion in 2000
(Dada, 2000).
The state took additional steps to provide opportunities for financial accumulation were
created with the privatization of the pension system, handing the revenues from contributions to
financial services providers while retaining for the state the responsibility to already retired
pensioners (Moreno, 2000). The system was copied from the Chilean model, a country with a far
more developed financial markets, and it has provided relatively low returns (4.7%) as well as
left the Salvadoran state with significant shortfalls in funding for current benefits. This has
forced the state to secure bonds, many of which are now held by the private financial firms and
pension operators (Rodrik and Hausman, 2004).
As domestic markets began to slow, Salvadoran finance turned to an accumulation
strategy focused on the rest of the region (Segovia, 2005). They successfully pushed to dollarize
the Salvadoran currency in 2001, facilitating their own access to international capital and
transfers. While the strategy increased prices domestically, raised the price of Salvadoran exports
internationally, and removed policy autonomy from the Salvadoran state, it also facilitated access
to international capital and convertibility of the assets of Salvadoran conglomerates (Towers and
Borzutsky, 2004).
This allowed them to extend their investment to transnational sectors in the rest of
Central America, partnering with or absorbing the leading sectors in those countries also. By
operating across the region, nontraditional agricultural producers insured themselves against bad
seasons; hoteliers and shopping mall owners replicated their investments; and manufacturing
28
assembly firms in multiple export processing zones could share inputs and contracts. This degree
of integration required coordination, led by Salvadoran finance capital, which allocated
investments to ensure the compatibility of activities in different territories. For example, Banco
Credomatic shifted to a regional outlook, changing its name in 2003 to BAC – Banco de
América Central. From 1999 to 2003, average Salvadoran investment in Costa Rica, was almost
$20 million per year and, between 1997 and 2004, 85 percent of all intraregional investment in
Central America came from El Salvador (Segovia, 2005). According to one estimate, external
investment equaled 98 percent of national income (Freedman, 2010a). In short, dollarization was
part of the process by which financial conglomerates deepened their control over the domestic
economy and extended their activities to an integrated economic network operating throughout
the region (Segovia, 2005).
The latest transformation of Salvadoran finance has occurred in the years surrounding the
international financial crisis of 2008. Once their activities had saturated the domestic market and
extended to regional markets, Salvadoran financial assets became attractive to international
firms. International banks and financial services firms such as Scotiabank, HSBC, Bancolombia,
and Citibank absorbed domestic firms, and El Salvador now has the largest presence of foreign
banks in the region. The previous owners have been turned into shareholders and domestic
managers for international operations, earning approximately $4 billion for their stewardship of
the financial sector for the past two decades and the subsequent sell-off (Envio, 2009).
Crony Capitalists in Guatemala
In Guatemala, a different pattern of accumulation by dispossession is evident. In certain
sectors, such as health, education, and infrastructure, wealth is available through crony capitalist
contracts with the state. Well-connected providers can secure lucrative contracts providing
29
materials and services to the state for public programs. All states engage the private sector in
various forms of partnership, but in Guatemala the lack of transparency and multiple
mechanisms funnel public resources into private hands.
A few areas are relevant: social funds, trust funds, non-governmental and international
organizations, and transfers. All demonstrate a basic pattern by which funds are shifted off
budget or outside of the formal institutions that might preserve transparency and participation.
Instead, poorly monitored and narrow political processes allocate resources, with predictable
impacts on developmental impact and state capacity.
During the 1990s, international organizations, especially USAID, World Bank,
Interamerican Development Bank, and the IMF promoted social funds to accompany structural
adjustment. Social policy was meant to soften the impact of structural adjustment in such a
fashion that minimized the potential for social policy to intrude on the stabilization and
liberalization goals of structural adjustment (Bigio 1998). This meant minimizing fiscal costs, for
example by targeting benefits and limiting their amounts. It also called for shifting social policy
away from the state and away from the political process, reserving funds from privatization or
international aid to social funds managed outside traditional budgetary and bureaucratic
regulations. The strategy followed a general skepticism of government and sought to include
participatory, decentralized mechanisms that would channel public money through private
entities (Ruthrauf and Carlson 1997).
In practice, social funds tended to proliferate and absorb general budgetary resources,
rather than those reserved from unusual sources of income. The funds, which lacked the same
type of oversight and deliberation as other areas of expenditure, evolved into a convenient
mechanism for obscuring public spending for use in promoting accumulation by well-connected
30
interest-groups, corruption by political elites and their supporters, and a mechanism of
clientelism to secure political support. The total amount dedicated to social funds averaged
around 10 percent of the budget, and each government made use of the funds to position favored
candidates for future office. In total, social funds account for over five billion quetzales (US$640
million).
The next major area of alternative expenditure channels are trust funds. Trust funds are
set up in various areas to hold deposits to be released over various time periods, occasionally
extending various years. By placing the money in trust, Guatemalan governments avoid some of
the planning limitations of annual fiscal expenditures that must be used within the fiscal year,
and theoretically facilitate execution while protecting the funds from use for other priorities. In
addition, by channeling low interest deposits into the banking sector, the state may facilitate
easier credit terms to those who do business with the trusts. Still, the proliferation of such funds,
their use for expenditures that might easily fit within traditional ministries, and their liberal use
of contracting with third-party providers suggests that the trust funds have turned into vehicles
for other purposes.
By placing funds into a trust, private and public banks receive an influx of capital for
which they charge a commission and can increase their turnover and reserves while offering the
state a minimal interest return on their deposits. In addition, the regulations on the outlays of
trust fund expenditures are more difficult to trace and less subject to traditional mechanisms of
oversight and accountability. Those who provide materials or services to the state or benefit from
soft loans may benefit beyond what was originally intended.
The funds themselves are authorized through the budget and recognized in the Organic
Budget Law, but the only legal architecture to govern them exists in a Commercial Code passed
31
in 1970 (Acción Ciudadano/DESC 2006: 36). Since 1998, the Ministry of Finance has issued a
number of ministerial agreements to orient their use, and created a Department of Trust Funds
within the Public Credit Directorate. Only in 2004 did the Congress assign responsibility to
oversee movements in the trust funds to the Comptroller General Office (Dcto. 35-2004, art. 41).
Examples of trust funds include a fund for the peace agreement and land payouts,
FONAPAZ, and another road and highway maintenance, COVAL. These are the two largest, at
Q6 billion each, followed by Q4 billion for Rural Cooperative Education, Q1.8 billion for
reforestation and preserving water sources on public lands and in the countryside, Q1.5 billion
for subsidized housing, and almost Q700 million for transportation in Guatemala City
(Ministerio de Finanzas Públicas 2011, checked July 2011).
The amounts passed through trust funds vary from year to year. They were as low as Q15
thousand in 1996 and as high as Q3.7 billion in 2008 and Q3.6 billion in 2006. In total, active
trusts have been allocated over Q26 billion, filtered through more than twelve bank and financial
institutions. In certain years, outlays through trust funds are as high as 15 percent of the entire
budget and 22 percent of the investment budget (Sistema de Contabilidad Integrada
Gubernamental, checked 2/5/2009).
According to the Transparency International representative in Guatemala, “there can be
two motivations to create a trust fund. One is that the bureaucrat wants to use the funds to
deliberately realize corrupt transactions. . . Or that the institution has the mandate to apply said
funds to a specific program or to a specific target population . . . The trust fund is the guarantee
that the funds will not be exposed to transfer to other priorities” (Accion Ciudadana/DESC 2006:
40). There have been scandals within the trust fund accounts, as in 2005 when the Guatemalan
32
Housing Fund, with fourteen sub-fund accounts, transferred Q266 million on a nongovernmental organization with no experience in construction.
Another area of dubious transparency and participation is in contracts with nongovernmental organizations and international organisms. Sometimes, instead of executing
projects directly, governments contract non-governmental and international organizations to
undertake core functions, thereby evading some requirements of Government Contracts Law.
The main justification to work through non-governmental and international organizations is to
pursue effective and efficient execution of outlays without having to operate within cumbersome
government bureaucracy. Trust funds, social funds, and line ministries all use this mechanism to
facilitate their expenditure.
Yet, mechanisms of oversight for these entities are weak. Some are created simply to
execute an outlay, with no other capacity or function except to find a private sector entity that
can be subcontracted to actually undertake the project. In such cases, the non-governmental or
international organization operates solely as a broker, securing the budget allocation, charging a
commission, or simply holding onto the funds to earn interest while waiting to spend the money.
The political economy of such entities can operate through several possible mechanisms.
The most consistently cited in interviews was the Congress, generally through deputies on the
Finance Committee. Deputies introduce amendments to specify the non-governmental entity or
type of entity that should receive an allocation, and they have been particularly adept at using the
List of Public Works to channel resources. The List of Public Works, an appendix to the budget
that outlines the jurisdiction and characteristics of multiple public works programs, can be used
to channel spending to well-connected contractors and non-governmental organizations
operating in narrow geographic bases, generally the bases of support for particular deputies.
33
Such contractors and non-governmental organizations can also insert their requests
through the communal, municipal, and departmental development councils, as well as directly
through the relevant ministries, with the Communications, Infrastructure, and Housing ministry
of particular importance in executing public works. Deputies then play the role of pressuring
ministers to execute the projects, bringing potential recipients into Congress to embarrass
ministries that have failed to execute a promised public work (Interview, Carlos Barreda ex. Vice
Ministry of Transparency, 6/14/11).
The lack of oversight of these transfers and more generally in the execution of the budget
becomes clear in isolated examples of corruption that are unveiled by civil society, the media,
and occasional efforts by transparency advocates within the state itself. In 2010, a joint technical
commission of Congress and the Ministry of Health examined the execution of public funds
through NGOs and found 49% were not meeting the terms of their agreements. 20 Deputies who
supported the delinquent NGOs quickly mobilized to shut down the commission.
One deputy, Taracena, recommended doing away with the obscure and non-transparent
mechanisms of non-governmental organizations and contractors currying favor with deputies or
deputies creating their own, shadow non-governmental organizations and firms to receive
budgetary allocations. “If we pretend to be Puritans, we hide our sins under the table. Better,” he
said, “to simply give every deputy Q3.5 million to allocate, and let them spend the money
transparently in the municipality or project they desire” (Interview, Dep. Mario Taracena,
6/16/11). 21
20
The commission was created in response to pressure from various NGOs that had been allocated funds through
the List of Public Works but had never received the money from the Ministry.
21
The critiques of the Center for International Human Rights (CIIDH) are more damning, “These irregularities
indicate that annual allocations are dragged from one fiscal year to the next using administrative agreements,
contracts with and reservation of trust funds for non-governmental organizations and international organizations.
The management of funds and implementation of public works through these mechanisms evade the Law of
Purchases and Contracts; limit the oversight of the Comptroller General and neutralizes the action of control and
34
The Guatemalan public sector is characterized by multiple mechanisms of channeling
resources to the politically-connected allies of power-holders. Social funds and trust funds move
resources into accounts that are difficult to monitor, and contracts with third parties are written
directly into legislative amendments or ministerial budget requests. These mechanisms support a
faction of capital dependent on contracts with the state for their accumulation. This pattern of
crony capitalism is analogous, but different from the example drawn from El Salvador. In El
Salvador, public financial assets were capitalized, privatized and concentrated in the hands of
powerful political allies. These actors used their resulting economic and political power to direct
policy such that they could regionalize their interests, and subsequently sold off their controlling
interests and turned themselves into the shareholders and managers of transnational financial
firms operating in El Salvador.
Preserving Elite Hegemony in Central America
Preserving elite hegemony refers to those efforts made to ensure the social and political
dominance of transnational elites. As discussed above, this can include efforts to reframe the
social rules and norms that govern interpersonal relationships and understandings, ameliorative
policies to coopt or distract potential opponents, and the reorganization or invention of channels
of access to political power.
State action in this area includes efforts to manage the impacts of market processes on
sectors that lose out in international markets. Some countries have sought to protect such sectors,
such as the efforts of Costa Rican welfare state policies to decommodify pensions by providing
them to urban and now rural workers. . In recent years, a more common practice has been to use
social policies to bring people closer to, rather than farther from, market operations. For
oversight of the Congress. The use of funds through these schemes is the site of doubts and anomalies, as the money
is not executed rapidly and has been discovered to deposit in banks to earn interests” (CIIDH 2006).
35
example, Nicaraguan social policies distributing livestock to poor farmers has sought to provide
them access to markets by distributing key inputs that would otherwise lie beyond their reach.
Of course, the more sinister side of managing potential opponents is repression, and
several countries have shown that this tool remains all too relevant. In Nicaragua, the
criminalization of abortion places the female population in a vulnerable position and reasserts the
authority of the Catholic Church to regulate life decisions. In Honduras, brutal repression has
been directed towards peasants in the Bajo Aguan Valley, where agribusiness interests hope to
direct production towards large-scale biofuel production, pushing subsistence peasants and
small-farmers from their lands. In Guatemala, indigenous protests over energy increases and
constitutional changes have been met with repression, leaving 8 dead and scores wounded when
military forces fired on unarmed protestors.
The examples drawn below from El Salvador and Honduras show the divergent strategies
that can be part of efforts to establish emerging elite hegemony. In El Salvador, a wellarticulated set of institutions coordinate transnational interests within civil society, project them
into politics, and secure their access to power through the party system and state institutions.
This coordination and projection is exemplified by the ideologically oriented thinktank,
FUSADES, and the right-wing political party ARENA, both of which took shape during the civil
war. By contrast, in Honduras the emerging transnational elite has remained divided between
two patronage oriented parties, sharing space with traditional elites and popular sectors, and
securing a route to political power only when traditional patronage institutions can be bypassed
at moments of crisis or political stalemate.
The Rise and Fall of Hegemony within Salvadoran Civil Society and Politics.
36
In El Salvador, transnational elites emerged during the 1980s civil war as a result of a
combination of factors. Among the most important was the violence in the countryside, which
forced traditional elites to shift their activities to alternative sectors, where they were joined by
rising commercial elites and financial interests. The war itself created a new source of
accumulation, as U.S. counterinsurgency support summed more than $4.5 billion in economic
and military aid.
As the war progressed, business sectors found ways of capturing these funds, diverting
them towards their institutions and entities, led especially by the Salvadoran Foundation for
Economic and Social Development (FUSADES), formed in 1983. FUSADES and its network of
allied foundations received more than $100 million from 1984 to 1992, with $150 million
programmed in total (Rosa, 1993: 76-86). FUSADES had the explicit goal of promoting a new
national economic model and established an autonomous intellectual unit, named the Department
for Economic and Social Study (DEES), which grew rapidly to 250 people in 1991 and counted
offices in Miami and New York (Rosa, 1993: 80). In addition, it secured political influence
through its Legislative Department, offering development plans to each incoming government
beginning in 1989.
Starting in that year, members of the FUSADES Executive Committee put themselves
forward and won candidacies to the presidency of the country through the ARENA party, and
they carried with them FUSADES influence. This included FUSADES members and staff as
cabinet ministers and members of the executive bureaucracy. 22
22
One of the first directors of FUSADES who was also the first ARENA president and is once again president of the
ARENA party, Alfredo Cristiani, took with him no fewer than seventeen FUSADES allies to fill ministerial and
bureaucratic posts.
37
The ARENA election of 1989 signaled the arrival of a state-building agenda oriented
towards the interests of transnational elites (Paige, 1997; Wood, 2000; Stanley, 1996). The new
president, Alfredo Cristiani, had been a director of FUSADES, and the two subsequent
governments of Calderón Sol and Flores drew heavily from its ranks. Instead of the limited state
and repressive apparatus that traditional exporters had sustained, ARENA presidents orchestrated
a FUSADES agenda that included privatization of public sector assets and close integration with
transnational production. This included liberalization of trade and prices and the provision of
infrastructure to promote non-traditional exports. When financial sectors expanded in
importance, FUSADES emphasized macroeconomic stability and access to credit, objectives
institutionalized by dollarization in 2001.
ARENA held the presidency from 1989 to 2009 and held an approximately equal share of
the legislature as its main competitor, the Farabundo Martí National Liberation Front (FMLN)
(Gaspar Tapia, 1989; Paniagua Serrano, 2002; Rubio, 1997). This relative balance in the
legislature forced ARENA to purchase majorities with the cooptation of smaller “taxi” parties, as
the smaller right-wing parties are called – the Christian Democrats (PDC) and the National
Conciliation Party (PCN). Both the PDC and the PCN were large enough to provide ARENA
with a majority, but small enough to have little to gain in the legislature except patronage. Both
parties have limited ideological content, and were willing to vote for ARENA projects in
exchange for material benefits for their supporters.
A second implication of ARENA’s slim legislative margin was to discourage moderation.
With only a slim legislative advantage, ARENA was constantly threatened with the possibility it
could lose power. The party and its base behaved as though every election could be their last,
38
and resisted any attempt to soften their stance during elections or to moderate their policy
proposals while in office.
The policies pursued eventually led to a slowdown in the domestic economy, as
Salvadoran exports priced in dollars faced competition from products valued in weaker
currencies. Though domestically-based exporters grumbled, they could not defect from the
ARENA coalition out of fear it would lead to an FMLN victory. The fourth consecutive ARENA
president was their candidate, Tony Saca, who had been president of the Salvadoran Industrial
Enterprise Association (ANEP). He represented more domestically-based emerging elites, and he
pursued greater investments in domestic infrastructure and incentives to exporters.
The financial elite resisted leaving his side until the very end of his presidency, and he
skillfully brokered their complaints through ARENA and his office, governing in a more
personalist manner than the presidents who had preceded him. Though their truce fell apart in the
2009 election, domestically-based exporters and off-shore financial interests had held together
until the end of his administration, capping 20 years in which they advanced a coherent statebuilding agenda (Segovia, 2002: 10-11; Salazar Candál, 1995). 23
The victory of the FMLN in the 2009 election marked the collapse of ARENA
dominance and drove a wedge between factions of the capitalist elite backing Saca and his rivals
in ARENA. While FUSADES sustains the ideological coherence of transnational interests within
civil society, ARENA no longer provides the smooth channel to power that it did over the
previous 20 years. The FMLN government has worked to identify elements within the elite
amenable to alliances, even as they attempt to renegotiate some elements of the way Salvadoran
economic actors fit into the international economy.
23
According to Segovia, “seen in this light, the adjustment did not refer to the promotion of non-traditional exports,
but rather to restructure the economy towards strengthening the power of finance capital” (2005: 51).
39
Strategies of Hegemony for a Divided Transnational Elite
Efforts to establish hegemony in Honduras look different because transnational elites
have remained divided into rival factions, business networks, and political parties. As a result,
their efforts to establish political access have required alliances with traditional political elites
and popular sector actors within patronage-oriented institutions. Clear channels of access occur
only at the moments of stalemate or crisis, when traditional elites are otherwise occupied and
transnational elites can work around existing institutions.
Honduran business is organized around powerful networks of firms operating in finance,
manufacturing, agriculture, other services, and media (Torres Calderon, 2008: 155-158). Though
there was a basic agreement on the transnational strategy to be pursued among leading Honduran
firms, this did not prevent frequent division and competition. Regional, historical, and familial
networks split, and they expressed these splits in political terms, dividing between the two main
political parties. Seven of the major families are associated with the Liberal Party (Bueso,
Ferrari, Kafati, Rosenthal, Bográn and Villeda Toledo) and five with the Nationalists (Goldstein,
Callejas, Kattan, Rivera López, and López Arellano) (Romero, 2008: 107). Members of these
same families also served in governments and those who did not directly serve are major
financiers of political parties and shapers of public opinion.
At the core of the state-building efforts of transnationally oriented elites are like-minded
Honduran and international actors. For Jorge Dominguez and his co-authors, these were
“technopols,” the politically-minded technocrats who navigated new democracies in the 1980s
and 1990s to implement a marketizing agenda in most of Latin America. 24 The mechanism by
which collaboration between national and international technopols began was through the
24
Jorge Dominguez coined the term technopols to characterize “the introspection of the thinker with the sociability
of the politician” (Dominguez, 1997)
40
Foundation for Research and Business Development (FIDE). From USAID, FIDE received
approximately $1 million per year during the 1980s, providing technical support, promoting
investment in Honduras, and operating in both Miami and Honduras (Jackson, 2005: 216, 224).
By 1989, FIDE also took on the role of financier, administering $9.7 million in loans to both
local and foreign investors to establish assembly plants, and is currently managing an $85
million loan from the World Bank and IADB . 25 FIDE has also engaged directly in establishing a
supportive environment among business sectors, spending $1.6 million to bring international
experts from USAID to promote allying with transnational sectors in Honduras. 26
During the Callejas and Maduro presidencies, 18 FIDE board members, staff or directors
served in the agencies important to economic transition, such as the Ministries of Economy,
Tourism, and Finance as well state enterprises and regulatory boards for sectors such as energy
and water. 27 A USAID evaluation stated that “FIDE had become a highly competent professional
institution with influence in Honduras well beyond its small size” (Jackson, 2005: 227).
Despite relatively clear dominance of transnational interests within civil society, this did
not always translate into political access. Channels into state institutions were monopolized by
the two main parties, the Liberal Party (PL) and Nationalist Party (PN), which have dominated
politics for the last century. They occupy fairly similar Center-Right ideological positions, and
both operate as catch-all parties drawing their greatest support from clientelist bases tied to the
parties through patronage.
25
According to Norman Garcia, one of the board members of FIDE, they contracted former Arthur Anderson
USAID contractor Carlos Torres to create a consultancy firm, CARANA, which FIDE contacted to lobby USAID to
secure permission to act as financier (Interview 5/15/08).
26
Chicago economist Arnold Harberger was brought to Tegucigalpa to build support for the Structural Adjustment
Law passed in 1990. Lawyer Richard Bolean, who had been the architect of Mexican industrial parks along the U.S.
border, presented the advantages of assembly manufacturing for export to legislators and businessmen. Interview,
COHEP, Arturo Alvarado (5/8/08).
27
Interview with FIDE Policy Direct, Teresa Deras (5/14/08) and Director Norman Garcia, (5/18/08).
41
Stable, two-party competition has allowed the party system to avoid rupture. The parties
have survived repeated military interventions, including the most recent coup in 2009, military
rule from 1973-1982, and 1963-1970. With each return to civilian control, the traditional parties
reconfigured themselves to absorb new groups and adapt to transitions to and from military rule
(Acker, 1988; Taylor, 1996). Differences between the parties are minor, and when they alternate
in power the most significant policy changes that occur are different destinations for patronage
(Interview, Leonardo Villeda, National Secretary of Convergence, 02/06/2007).
Since 1994, the two traditional parties have averaged over 94 percent of the seats. Other
parties win a few seats, and a few small-party deputies demonstrate single-issue leadership, but
their most important role is as occasional legislative coalition partner as governing parties failed
to win majorities in 2001 and 2005. The parties have limited ideological content and similar
relationships to voters, which some trace to similarity in campaign finance, as both parties are
“tied to the will of economic actors by flexible but unbreakable bonds, formed by monetary
contributions during electoral campaigns” (Meza, et al, 2004). 28
When the two traditional parties cooperate, it is generally to privilege different social
bases with patronage, and there are rare occasions for transnational elites to impose a coherent
agenda. Such occasions appear at moments of crisis, such as the coup that deposed a president in
2009. The sitting Liberal president, Manuel Zelaya, was removed by the military in an act
legitimated by the two parties in the legislature and their nominees in the Supreme Court. The
government that succeeded the coup, led by Nationalist Felipe Lobo, has introduced policy and
institutional changes long demanded by transnational sectors.
28
The PN, which emerged under 1930s dictator Tiburcio Carias, is perceived as the more Center-Right party of
business, while the PL, which had some more social democratic periods in office during the 1960s under Villeda
Moraels, is perceived as a slightly more Center-Left party of urban middle and popular sectors (Torres Rivas, 1993;
Morris and Wodon, 1984; Del Cid, 1991).
42
On other occasions, the two parties simply stalemate, with internal factionalism
weakening their ability to accomplish basic tasks such as selecting candidates and platforms for
elections. At such moments, as occurred in the lead-up to the 2001 elections, leave an opening
for FIDE and other representatives of transnational elites to introduce their agenda, as they did in
2002 when they passed fiscal reforms to balance the budget and stabilize the economy
(Schneider, 2012: 166-169).
The contrast between Honduras and El Salvador in terms of transnational elite hegemony
shows some of the variations in the ways power is organized in the region. While Salvadoran
emerging elites could coordinate their interests within civil society and project them successfully
into the state over two decades, they eventually lost their dominance when internal splits and
unsuccessful development created an opportunity for the FMLN to win power. In Honduras,
while emerging elites have been forced to share political space with traditional elites and popular
sectors, they have occasionally worked through or around established political channels to insert
their agenda into state policy.
Conclusion
The previous sections have explored dimensions of state-building under globalization as
they have appeared in Central America. The three dimensions explored include expanded
accumulation, accumulation by dispossession, and regulation of social and political life. These
three dimensions are of particular importance to elites oriented to accumulation within
transnational sectors adapted to an integrated form of globalized capitalism.
To display some of the variations, particularities, and permutations of state-building
under globalization, contrasting examples from the region demonstrate the kinds of differences
that can appear in Central America. Central American transnational elites are similar to the
43
transnational interests emerging in other parts of the world, but there are certain limits on what
can be done in the small, vulnerable countries of the region. Still, the experience, success, and
failures of Central American elite state-building projects shed light on more general statebuilding patterns.
The focus on variation across Central America also offers useful contrasts. Despite
sharing relatively similar patterns of insertion into international capitalism, the countries of the
region have diverged in important ways. These divergences are useful to gain insight into the
dimensions of globalization as well as to shed light on processes occurring in each country.
This project has not sought a complete description of individual countries, but certain
observations are relevant from the comparisons highlighted in the discussion of each dimension.
For example, in the first dimension, expanded accumulation, the contrast between Costa Rican
upgrading and Honduran tax incentives identifies quite different ways of dealing with the
challenge of keep profit margins up. In Costa Rica, the strategy emphasized moving up value
chains into more sophisticated outputs, higher productivity process, and high-skill activities. In
Honduras, the strategy emphasized cutting costs by providing generous tax incentives, regardless
of the technology and skill requirements of production. This is not to argue that these are the
only or the overwhelming strategies to expand accumulation in the two countries, still it is
noteworthy that such stark differences are evident.
The contrast highlighted in the second dimension was also instructive. Accumulation by
dispossession has been occurring in both El Salvador and Guatemala, but the factions of capital
to have benefited would appear slightly different. In El Salvador, financial sector elites have
shepherded a nationalized financial regime into private hands, secured high rates of profit with
policies like pension privatization, projected themselves regionally with the help of dollarization,
44
and undertaken a highly lucrative sell-off to international capital. In Guatemala, a crony
capitalist faction of capital has found ways to place public resources outside of normal
mechanisms of accountability and then dedicated to the contracts and services they provide to the
state. This is not to argue that crony capitalism exists only in Guatemala and financial
speculation only in El Salvador, but these factions of capital would appear to wield inordinate
power in each of these countries.
Finally, the third dimension addresses the way emerging elites have adapted political and
social life to secure their hegemony. Once again, the two examples show some of the contrasts
that emerge from the historical and institutional particularities of each country. In El Salvador,
emerging elites have coordinated their interests within civil society through the FUSADES
thinktank and channeled their interests into the state through a dominant right-wing party,
ARENA. As the interests of nationally-oriented and internationally-oriented capitalists diverged,
ARENA has split, and emerging elites are only slowly rearticulating their links to the state now
that it is controlled by the FMLN. By contrast, in Honduras emerging elites have remained
divided among familial, sectoral, and partisan organizations. To secure access to politics they
have had to accommodate the interests of traditional elites and popular sectors within patronage
oriented political parties. Their ability to impose a state-building agenda has been limited to
moments of crisis or stalemate among traditional interests.
The variations across the region on each dimension begin to lay out a framework or
cluster of analysis by which state-building in Central America can be evaluated. Emerging elites
adapted to transnational patterns of accumulation are essential actors in state-building in the
region. Yet, there is no guarantee that the way emerging elites are incorporated will be beneficial
for democracy and development in the region. This project ends by inviting additional study into
45
the combination of patterns along each dimension to identify the combinations that promote
broad-based development and deeper democracy.
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