The Environment and Central America’s
Competitiveness
CEN 702
May 1999
1
WORKING PAPER. This work seeks to stimulate thought about: new conceptual
frameworks; possible alternatives to framing problems; suggestions to put in place public
policies; regional, national and sectorial investment projects; and, business strategies. It
does not intend to prescribe models or policies. Neither does it make the authors or
CLACDS responable for incorrect interpreation of its content, nor for good or bad
management or public policy practice. The objective is to elevate the level of discussion
regarding competitiveness and sustainable development in the Central American region.
Under the prior stated conditions, CLACDS, and not necessarily its contributing partners,
is responsible for its content. May, 1999
2
ACKNOWLEDGMENTS ............................................................................................................................ 5
THE ENVIRONMENT AND CENTRAL AMERICAN COMPETITIVENESS ................................... 6
I.
INTRODUCTION ................................................................................................................................ 6
II.
ENVIRONMENT AND COMPETITIVENESS THEORY.............................................................. 9
A. ENVIRONMENTAL ISSUES AND THE RELATIONSHIP TO COMPETITIVENESS.......................................... 9
1. Global Level .................................................................................................................................. 9
2. National Level ............................................................................................................................... 9
3. Industry Level.............................................................................................................................. 10
4. Firm Level ................................................................................................................................... 10
B. REGIONAL AND NATIONAL COMPETITIVENESS AND THE ENVIRONMENT ......................................... 11
1. Factor Conditions ....................................................................................................................... 12
2. Demand Conditions..................................................................................................................... 12
3. Related and Supporting Industries .............................................................................................. 13
4. Firm Strategy, Structure and Rivalry .......................................................................................... 13
C. NATIONAL LEVEL COMPETITIVENESS – “PHASES” ........................................................................... 13
D. CENTRAL AMERICAN COMPETITIVENESS AND THE ENVIRONMENT .................................................. 15
III. THE ENVIRONMENT AND CENTRAL AMERICA’S TRADE AND INVESTMENT
CLIMATE........................................................................................................................................... 18
A. COMPETITIVE COUNTRIES HAVE DEMANDING ENVIRONMENTAL REQUIREMENTS........................... 18
B. SERIOUS ENVIRONMENTAL STANDARDS ENCOURAGE HIGH QUALITY FOREIGN INVESTMENT ........ 20
C. IMPROVING ENVIRONMENTAL PERFORMANCE WILL ENHANCE CENTRAL AMERICAN FIRM-LEVEL
COMPETITIVENESS ................................................................................................................................ 24
D. A CENTRAL AMERICAN AGENDA FOR ENVIRONMENT AND BUSINESS CLIMATE UPGRADING .......... 25
1. Vision........................................................................................................................................... 25
2. Agenda......................................................................................................................................... 25
IV.
TOURISM ...................................................................................................................................... 28
A. TOURISM IN CENTRAL AMERICA ...................................................................................................... 28
B. CENTRAL AMERICA’S POSITION AND STRATEGY IN THE MARKET.................................................... 30
C. DEVELOPING CENTRAL AMERICA’S TOURISM CLUSTERS BY STRENGTHENING AND PROMOTING
THEIR ENVIRONMENTAL ATTRIBUTES .............................................................................................. 32
1. Factor Conditions ....................................................................................................................... 33
2. Demand Conditions..................................................................................................................... 39
3. Firm Structure, Strategy and Rivalry .......................................................................................... 40
4. Related and Supporting Industries .............................................................................................. 40
D. CENTRAL AMERICAN AGENDA FOR ENVIRONMENTALLY DRIVEN TOURISM .................................... 41
1. Vision........................................................................................................................................... 41
2. Agenda......................................................................................................................................... 41
V.
SUSTAINABLE AND COMPETITIVE AGRICULTURE............................................................ 44
A. CREATING GREATER REAL VALUE IN CENTRAL AMERICAN AGRICULTURE..................................... 44
B. CHANGING ORIENTATION ON VALUE CREATION .............................................................................. 45
C. ALIGNING ENVIRONMENTAL ATTRIBUTES WITH MARKET DEMAND TRENDS .................................. 48
D. ADAPTING ENVIRONMENTAL PERFORMANCE TO INTERNATIONAL TRADE RULES ............................ 50
E. AGENDA FOR COMPETITIVE AND SUSTAINABLE AGRICULTURE IN CENTRAL AMERICA ................... 52
1. Factor Conditions ....................................................................................................................... 52
2. Demand Conditions..................................................................................................................... 53
3. Industry Strategy, Structure and Rivalry..................................................................................... 53
4. Related and Supporting Industries .............................................................................................. 54
5. Obstacles ..................................................................................................................................... 54
3
6.
7.
VI.
Vision........................................................................................................................................... 55
Agenda......................................................................................................................................... 55
GLOBAL CLIMATE CHANGE AND CARBON MARKETS ................................................. 58
A. GLOBAL CLIMATE CHANGE .............................................................................................................. 58
B. CENTRAL AMERICA AND CLIMATE CHANGE MARKETS.................................................................... 61
1. Demand Conditions..................................................................................................................... 61
2. Central America’s Supply Positioning ........................................................................................ 63
3. Competitor Actions...................................................................................................................... 66
C. CENTRAL AMERICAN AGENDA FOR PARTICIPATING IN GLOBAL CLIMATE CHANGE MARKETS ........ 67
1. Vision........................................................................................................................................... 68
2. Agenda......................................................................................................................................... 68
VII.
CONCLUSIONS ............................................................................................................................ 72
4
ACKNOWLEDGMENTS
This CLACDS Working Paper is intended to provide a concise vision of how
Central America could improve its competitive position through better environmental
performance, and some concrete steps to help move in that direction. This effort has
drawn on extensive work by members of the INCAE and Harvard Institute for
International Development teams. The authors have sought to draw upon some of the
most relevant highlights of recent research on the role of the environment in Central
America’s development under the framework of the Central American Agenda for
Competitiveness and Sustainable Development. There is much more breadth and depth
to the team’s research that is not presented here. Other working papers and printed
volumes will provide richer and more in-depth presentations on the variety of topics
included in this paper.
5
THE ENVIRONMENT AND CENTRAL AMERICAN COMPETITIVENESS
I.
INTRODUCTION
Central America’s competitive future and development potential are inextricably
linked to the natural environment. Successful incorporation of environmental factors into
the Region’s competitive fabric will make the Region’s business climate more attractive
to foreign investors, align the agricultural and tourism sectors with more valuable
markets, and offer new and exciting commercial opportunities in climate change
markets. Linking environment and competitiveness will not solve the Region’s
environmental problems, but it will contribute significantly to improving the quantity,
quality and economic importance of the Region’s unique natural resource endowment.
High quality agricultural land, ample rainfall, a variety of climatic conditions,
extensive forested areas of high biological and water capture value, productive coastal
zones, unique biological diversity and year-round growing seasons constitute a
recognized set of comparative advantages unparalleled in the rest of the world -- even
more extraordinary given the size of the Region.1
! Seven percent of all the planet’s species live in the Region, a significant portion of
which are found no where else in the world.2
! The Region has 17 distinct climatic life zones, one of the world’s highest
concentrations. This provides for the broad range of biological diversity and the
extensive variety of crops.
! Forests cover 181,233 km2, 35% of the land areas of the isthmus.
! There are over 300 distinct landscape forms that provide scenic diversity.
! There is abundant fresh water in all the countries except for El Salvador.
! The Region possesses over 30,000 megawatts of readily available hydroelectric
capacity, representing nearly ten times current generating capacity
Detailed analysis of Central America’s competitive position shows that the
environment is Central America’s base, representing two of the three critical axes of
potential competitive advantage.3 This position is vulnerable, however. Due to a
combination of market and government factors, the Region’s natural resources tend to
be used as extremely low valued inputs in production processes, or as the receptacles of
1
Central American Commission on Environment and Development (CCAD), State of
Environment and Natural Resources in Central America 1998, CCAD, Guatemala City, 1998.
2
All Central American data reported here include Panama and Belize due to statistical collection
methods.
3
Based on Porter, M. “Competitividad en Centroamerica” in Competitividad en Centroamerica:
preparacion de las empresas para la globalizacion, CLACDS, INCAE, Alajuela, Costa Rica,
1996.
6
waste. The result is lost value to the society, and a host of lost opportunities in
environmentally aware markets. Development policies and historic circumstances of the
previous decades have shown that these comparative advantages are vulnerable. A
1996 study of El Salvador by the Harvard Institute for International Development
illustrates the point. In spite of five percent annual GDP growth, that country is not
creating wealth when one factors in the costs of environmental and human health
damage.4
While El Salvador is perhaps the most dramatic example, we do observe that
Central America’s current development patterns cannot be sustained if the Region
expects to improve societal well-being in the long term. The Region’s environment is
neither adequately managed to protect existing comparative advantages, nor is it being
actively developed as an important competitive advantage. Central America has
tremendous potential to create value and competitive advantage through its
environmental capital. It has an equally great potential to destroy its principal
comparative and competitive advantage through poorly conceived or coordinated
commercial development strategies that prey on the environment, rather than exploit its
competitive potential.
One of Central America’s greatest challenges will be to assure its environmental
sustainability by preserving its natural resource base and at the same time enhancing its
international competitiveness by drawing on this same resource base. In other words,
Central America must maximize the flow of income (or interest) from its natural
resources (capital) without impairing the stock of these resources (principal). This
requires that three conditions be met: (a) the waste of scarce resources to environmental
pollution is minimized; (b) economic production, whether agricultural crops or tourist
services, must be flexible enough to constantly adjust to changing world market
conditions and shifting comparative advantage; and (c) profits from success are
channeled back to the protection, regeneration and enhancement of the resource base
to sustain productivity and profitability.
Increased globalization will amplify the costs of low levels of environmental
performance as international market trends favor higher levels of performance. However,
global forces can also help Central America create unprecedented opportunities and
greater levels of societal value from high levels of environmental performance.
Partly because of an economically strategic location, and a rich natural resource
endowment, and partly because of past inefficiencies and a failure to tap emerging
opportunities, the prospects for growth with sustainability are unparalleled. In the shortrun, more transparent and effective environmental policies and better strategic
orientation of key industries -- and in the long-run a cleaner environment -- should attract
foreign investment and trade which, if properly channeled, would enhance not only
competitiveness but also sustainability.
CLACDS and HIID have been examining the potential for Central America to
weave its unique environmental endowment and emerging environmental obligations
into the fabric of its global competitiveness. This examination has been carried out within
4
This was a key finding in FUSADES and Harvard Institute for International Development, From
Peace to Sustainable Development, FUSADES, El Salvador, 1996.
7
the context of the basic principles of modern competitiveness theory, and is based on
detailed examination of key regional industries and analysis of important global trends.
There is convincing evidence that reorientation of the role of the environment in the
Region’s competitive strategy will greatly enhance its competitive position for the future.
The challenge for Central America is to leverage international market forces to rapidly
create value based on natural resources endowment. The environmental agenda
presented here includes four key areas to help Central America improve its
competitiveness and its environmental sustainability in a mutually reinforcing manner.
These four areas are:
1) Creation of the correct business climate to stimulate and support foreign investment
and trade,
2) Competitive success in the tourism sector,
3) Competitive success in the agricultural sector, and,
4) Successful participation in emerging global climate change markets.
The next section of this paper will develop the theoretical links between the
environment and Central America’s competitive potential. The following sections will
directly address the four areas.
8
II.
ENVIRONMENT AND COMPETITIVENESS THEORY
The importance of environmental concerns has been recognized as an important
part of development strategy and economic development for decades. Competitiveness
theory has only recently begun to incorporate this variable into the fabric of theoretical
and empirical work. As we understand more about its links with competitiveness, the
environment comes to play an increasingly important role in the competitive position of
firms and nations.
A.
Environmental Issues and the Relationship to Competitiveness
Linkages between environment and competitive strategy can be best understood
by examining environmental concerns and needs at global, national, industry and firm
level.
1.
Global Level
At the global level, we now know that current patterns of consumption, product
choices and means of production cannot be sustained for much longer. The input
consumption and waste production levels of our current approach, in light of an
increasing world population, show an unsustainable path for the coming decades. We
already see irreparable harm to global climate systems and biological networks that will
be aggravated rapidly in the coming years.5 Fisheries are critically depleted and many
areas of the world are experiencing desertification and other less serious soil productivity
losses due to unsustainable land use practices.6
These challenges provide unprecedented opportunities. Commercial opportunities
in the development of new products, processes and services that help us steer a more
sustainable path are estimated to be in the trillions of dollars in the coming decades.7
This represents the single most important global commercial trend for the foreseeable
future.
2.
National Level
Concerns over our current societal approach are leading to actions by nations,
particularly among developed countries, but increasingly among developing countries as
well. These actions take the form of regulatory structures to reduce pollution and other
negative effects of existing manufacturing technology, and to establish user fees for
5
Intergovernmental Panel on Climate Change (IPCC). Climate Change 1995: Impacts,
Adaptations and Mitigation of Climate Change: Scientific-Technical Analyses. Edited by R.T.
Watson, M.C. Zinyowera, R.H. Moss and D.J. Dokken. New York: Cambridge University
Press, 1996.
6
See for example, Barg, U., D. Bartley, J. Kapetsky, M. Pedini, B. Satia, U. Wijkstrom and R.
Willmann. "Integrated Resource Management for Sustainable Inland Fish Production," FAO
rd
Fisheries Department. This paper was presented as document COFI/99/2 to the 23 Session
of the FAO Committee on Fisheries, 15-19 February 1999.
www.fao.org/WAICENT/FAOINFO/FISHERY/NEWS/NEWS.htm
7
Hart, Stuart A. “Beyond Greening: Strategies for a Sustainable World,” Harvard Business
Review, Boston, January 1997.
9
natural resources (including water and land) that reflect full social costs of their use.
Increasingly, however, developed countries are extending their concerns about
environmental effects to their trade and other international relationships. Country level
environmental performance and reputation are already an extremely important aspect of
bilateral trade relationships. The U.S. and the European Union, for example, call into
question the suitability of other countries as trading partners based on their
environmental reputation. This was a critical issue for Mexico’s entry into NAFTA; one
which required the construction of complicated and expensive institutional structures and
a great deal of investment of political capital to move forward.8 The European Union’s
relationship with the former socialist countries of Eastern Europe has also brought to
light important environmental concerns. Multilateral relationships are also directly
affected by environmental issues. Environmental concerns are among the most hotly
contested and debated issues in GATT and WTO negotiations. In spite of efforts to
reduce the potential for environmentally related non-tariff trade barriers, it is becoming
increasingly clear that countries can and will use laws and regulations to improve the
health and environmental characteristics of products entering their borders. 9
3.
Industry Level
At the global and regional level, industries are increasingly driven by
environmentally related concerns. Many industries are creating environmentally
responsible value chains in response to consumer demand and environmental
regulations. Notable examples include the computer industry, which has moved
aggressively into environmentally responsible production, largely driven by product
“take-back” programs. Industries that adopt more aggressive environmental strategies
tend to capitalize on global trends. U.S dominance in the pulp and paper industry has
been successfully challenged by Sweden, largely based on environmental
characteristics. Sweden’s very stringent environmental standards in the pulp and paper
sector led Swedish companies to develop extremely efficient and clean production
technologies that now dominate world markets in developed and developing countries.10
Numerous examples in dozens of industries as varied as automobiles, machine tools,
consumer electronics and tourism, show similar characteristics.
4.
Firm Level
At the individual firm level, seeking to improve environmental performance is found
to lead to greater efficiency in raw materials and energy usage, process innovations,
creation of new products and process, decreased waste generation, lower costs of
financing, decreased risk of accidents and other competitive improvements.
The mutual reinforcement of these different levels of environmental action implies
a very stable trend. No serious observer of these dynamics predicts that this will be a
passing fad. The underlying fundamentals of global needs will ensure the direction.
8
Schatan, Claudia, "Trade Liberalization and Free Trade Agreements: Environmental
Perspectives for Central America," HIID Background Paper, 1999.
9
Esty, Daniel C. Greening the GATT: trade, environment, and the future. Institute for
International Economics, Washington, DC, 1994
10
For a more detailed discussion of this case, The Management Institute for Environment and
Business. Competitive Implications of Environmental Regulation: A Study of Six Industries.
U.S Environmental Protection Agency: Washington, DC, 1995.
10
Commentators mainly disagree over the speed at which these trends will evolve, and
whether technological and management innovation can occur fast enough to respond to
the global society’s needs.
These trends provide the overall framework within which competitive strategy at
the firm, industry and national level must evolve in order to maintain an advantage.
B.
Regional and National Competitiveness and the Environment
Analysis of the experience of many nations in the 1970s and 1980s, particularly
the nations of the European Union, suggest that competitiveness of nations is closely
linked to microeconomic factors operating at the industry and firm level. These findings
challenge more traditional notions of competitiveness that suggest relative prices and
availability of resources to be the primary determinant of competitive position, and
consequently economic development.11
From this newer perspective, the competitiveness of a nation is built upon the
competitiveness of the leading firms and industries within an economy. Firms achieve
competitive advantage when several conditions come together. First, they rapidly
accumulate know-how and competitive assets in industries where they can gather and
manage high quality, up-to-date information and transform it into clear product and
process attributes valued by their customers and society. Second, the owners,
managers and employees share a common dedication to excellence and sustained
levels of investment in continuous improvement, And third, their industrial sector
operates in a business climate that is truly dynamic and challenging, and which
stimulates companies to be successful, improve continuously, and seek long-term
competitive advantage. The cumulative effect of these firms’ competitiveness drives a
business climate capable of supporting and driving innovation, which in turn drives
further competitiveness at the industry and national level.
The role of the environment in this competitive and business climate process is
complex because commercial relationships with the environment are multifaceted.
Natural resources are production inputs or repositories for waste products, but they also
sustain the health and well-being of the population. Trading partners, financing
organizations and international clients are important stakeholder groups who express
specific values regarding environmental performance of firms, industries, and countries.
Civil society also increasingly focuses on the type and quality of firm-level interaction
with the natural resource base. So, in spite of the compelling nature of trends and
competitive necessities in the long term, strategies and the actions to carry them out are
frequently specific to industries and countries.12 The direction of necessary development
strategies is quite clear, and can best be observed by analyzing the characteristics of
national level competitiveness.
According to recent research on the microeconomic foundations of development,
national or regional competitive advantage is based upon four sets of characteristics that
11
See Porter, Michael E. The Competitive Advantage of Nations. New York: Free Press, 1990,
and subsequent research based on frameworks presented in this volume.
12
Subsequent sections of this document will address strategies and actions in several key areas.
11
create the competitive framework in which a firm or an industry operates. Porter’s
“diamond” hypothesis synthesizes these factors into a simple analytical framework.13
1.
Factor Conditions
The competitive position of a nation is derived at its most basic level from the
factors of production present in that country. The array of factors, which include natural
resources, labor, education, telecommunications, transportation infrastructure, capital
markets and legal frameworks, provide the basic conditions for firm competition and
comparative and competitive advantage. It is important to note that both the quantity
and quality of these factors are important in competitive considerations. The
environment plays several roles in these considerations. Natural resources comprise
both the product and the means of production in many countries’ competitive sectors14.
Environmental considerations affect the quality of labor inputs through health and safety
considerations in the communities, on the farms and in the factories. The quality of one
industry’s inputs can also be altered (positively or negatively) by the environmental
relationship of other industries in the country or the Region. A nation’s legal system, tax
systems and other policy instruments approach environmental protection and control can
also influence the manner in which natural resources are put to use.
Like objectives for labor and other factor conditions, the environmental objectives
in this competitive element are oriented toward increased factor specialization and
continuously increasing levels of value added through differentiation, economies of
scale, and shifting uses of these inputs toward higher value uses.
2.
Demand Conditions
The characteristics of national demand can greatly influence the development of
competitive position of an industry. The level of demand for quality, service, durability,
function, and environmental attributes will send important signals to domestic producers.
Demanding local customers have been identified as an important driving force for
innovation, continuous improvement and increased specialization by domestic firms. The
environmental role is to create the demand for products and services that provide more
value for consumers and the society as a whole, and drive specific performance
characteristics that will be valued by international markets.
Domestic demand for safer, cleaner and healthier products will increase the value
of products for domestic consumption, and push local firm competition toward cleaner,
more efficient production, and toward the desires and expectations of demanding
international markets, thus improving global competitiveness. A secondary benefit is
that meeting these domestic and international demand trends can create increased
value to the society through more sustainable forms of production. (See agriculture and
tourism sections below.)
13
This work and the diamond framework are reviewed in detail in Porter, Michael E. The
Competitive Advantage of Nations. New York: Free Press, 1990.
14
This is especially true in Central America with the importance of agriculture, forestry and
tourism – all natural resource based industries.
12
3.
Related and Supporting Industries
This element refers to the presence or absence, at a country and industry level, of
industrial suppliers and other support industries. Companies have difficulty developing
competitive capability when they have to “go it alone” instead of interacting with
sophisticated suppliers working to develop innovative inputs and supporting services.
Empirical research on successful industrial clusters shows a critical role for this element
in generating new and improved inputs, services and practices capable of reinforcing
innovation-driven competitiveness in leading firms. The environmental dimension of this
element relates to the breadth and depth of products and services available to support
the levels of environmental performance demanded by domestic and international
customers, as well as stakeholder groups such as governments, employees, banks and
firms.
Strong characteristics in this area would include designers and producers of
specialized clean production technology, laboratory services, waste management firms,
and environmental certification services – all supporting international demand
characteristics and more sustainable production techniques.
4.
Firm Strategy, Structure and Rivalry
This refers to the national-level conditions that determine the creation, organization
and management of companies and the nature of national level competition. Intense
and positive rivalry between firms in a country or region prepares firms for global
competition and helps create a business climate attractive for foreign and domestic
investment. A competitive, transparent policy climate with clear “rules of the game” is
most conducive to promoting the higher levels of competitiveness that drive innovation.
In the environmental policy arena, these conditions include user fees that reflect full
social costs for natural resource inputs and evenly and effectively enforced regulatory
structures.
The environmental goals are to: 1) drive increasing levels of efficiency and value
creation in the use of natural resources, 2) provide foreign investors assurance that
competition will be based on natural resource prices that reflect their true costs and
even-handed enforcement of environmental rules.
C.
National Level Competitiveness – “Phases”
As countries develop competitive potential in these characteristic areas of the
“diamond” they achieve greater competitive potential. Porter suggests that countries
evolve through a set of “phases” as they develop this potential.15 According to Porter’s
empirical research, these phases relate directly to the level of sophistication of the
competitive approach exhibited by the nation’s overall business climate and its leading
industrial groupings or “clusters.”16
Sustaining these competitive conditions over a relevant time period will help
Central America to advance through several phases of competitive development. From
15
16
Porter 1990, see Chapter 10 for general discussion.
Ibid.
13
development driven by relative endowments of factors (such as low cost labor and
abundance of cheap raw materials), countries and their leading industrial clusters can
advance to development strategies based on high quality direct investment, and then to
internally driven strategies based on high levels of innovation. In this manner, the
countries develop new capabilities that permit higher levels of competitiveness for their
business clusters, and reinforce the conditions for the general business climate. Table
2.1 summarizes the environmental characteristics of different phases of competitive
development.
Chart 2.1: Environment and the Determinants of National Competitive
Advantage
Development Phase
Determinants
Factor Driven Phase
Investment Driven
Phase
Innovation Driven
Phase
Factor Conditions
Primary means of
competition is through low
price and low value
contribution of natural
resource inputs.
Traditional uses of
natural resources still an
advantage. Increased
specialization sustains
some differentiation and
value-added.
Continuous creation
and improvement of
highly specialized
environmental factors
(resources, services,
infrastructure)
Demand Conditions
Environmental and health
concerns not part of local
demand, not offered to
international customers.
Environmental aspects
of demand in home
market is consistent with
demand in export target
markets. Demand for
processes that are as
“clean” as those in
investing countries.
Sophisticated demand
in local markets
anticipates desires and
needs of international
markets.
Related and
Supporting Industries
Absence of all but the most
basic governmental services
such as garbage collection
and issuance of harvest and
mining permits.
Minimal infrastructure to
attract and support
investors from
developed countries.
Variety and creativity of
suppliers provide
competitive advantage
through innovative
products and services
that improve
environmental protection
and performance.
Basic, but not highly
specialized.
Strategy, Structure
and Rivalry
Firms compete only on price
characteristics, and do not
incorporate much
environmental value in
planning or sales.
Nascent competition to
meet minimal
environmental
characteristics for
products and processes.
Firms develop highly
specialized global
positions based on
environmentally superior
strategies.
In the factor-driven phase, successful sectors are those supported by basic
resource and labor inputs. In the “diamond” analytical construct, factor conditions are
the primary, and frequently only, means of competing. Firms are limited to competing on
price (with little or no product differentiation), technology is imported and local
consumers tend to show little sophisticated demand in their preferences for products,
and entire sectors are highly vulnerable to international market price fluctuations.
14
Environmental resources are used as low-price natural resource inputs sold with little or
no value added, or as a waste disposal and absorption mechanism to accept the impact
of polluting industries and destructive natural resource management practices.
The investment-driven phase is based on the capacity to develop through
investment in, and successful adaptation and use of, technology. In terms of the
"diamond" conditions, factor conditions remain relatively important, but these factors are
improved and increasingly specialized and diversified to add ever-greater levels of value.
Other factors become increasingly important. Internal customers become more
demanding, and domestic firm rivalry begins to motivate higher quality products and
processes.
In this phase, new commercial opportunities are identified that offer the potential
for creating value through higher valued human and natural resource inputs.
Environmental issues become a more integral part of the business climate of a nation.
! Natural resources serve a more active role in the competitive positioning of firms and
industries, through more specialized and higher value use.
! Customers and other important stakeholders (both domestically and internationally)
are important players in driving environmental performance of products, services and
processes.
! Investors have more demanding expectations about factor conditions, supporting
industries and government actions and intervention.
In the innovation-driven phase, all of the "diamond" elements are actively
engaged and with increased importance. Relations between the elements become
increasingly important. Factor inputs become very specialized, firms connect more
directly with international markets and supporting industries become more sophisticated
and specialized participants in creating value for export driven firms.
Environmental issues:
! Specific natural resources are exploited for competitive advantage through
sophisticated use of the natural resource base in innovative products and services.
! Basic public natural resources (air, water, forests, coastal areas) are assigned to
high value uses across the society (drinking water instead of waste receptacle,
forests for watershed protection, vulnerability reduction and biological diversity
storage rather than burned for cattle pasture and subsistence farming)
! General environmental conditions are used as an advantage in trade negotiations,
investment attraction, and in providing preferential access to demanding international
markets.
D.
Central American Competitiveness and the Environment
Central America has a long way to go in making the environment an integral part of
its competitive advantage. Nearly all industries in all countries exhibit the characteristics
of the factor driven phase of development. In spite of Central America’s remarkable
diversity of natural attributes, its size, population density, and relative scarcity of land
15
and other extensive natural resources, factor-based competition is probably not viable in
the long term.17 Upgrading the factor conditions and overall competitive environment
toward investment-driven development must occur rapidly. Failure to do so could cause
serious deterioration in the Region’s principle comparative advantage and source of
future competitive advantage.
Recent research on Central America’s competitive potential identified three key
poles of comparative advantage, upon which Central America could work to develop
meaningful long-term competitive advantages.18
This research suggest that Central America’s competitive potential is based upon:
1) its geographic location (a bridge between North and South America and the Atlantic
and Pacific oceans), 2) its unique environmental and biological resources, and 3) its year
round agricultural growing seasons.
These three core comparative advantages provide the basis for Central America to
develop competitive potential in certain industrial clusters. Tourism, agriculture,
environmental technology, transportation and logistics, among other industries, offer
such potential.
Two of the three “poles” of the Region’s future competitive advantage depend on
environmental variables (unique natural resources and year round agricultural potential),
and most of the potentially competitive clusters are inextricably linked to the health and
well-being of the Region’s natural resource base. The Region’s unique and valuable
natural endowment will not continue to exist indefinitely (or even in the medium term) if
not managed as an important Regional asset.
Analysis of the performance of firms in Central America and the status of
environmentally-related policy across the Region indicates a troubling situation. Little
attention is being paid to the long-term competitive advantage that these resources can
provide for the Region. For example, leading industries in the region do not routinely
protect these natural resources. Over-consumption of water, energy, and chemical
inputs lead to lack of efficiency and take valuable resources out of the economy.
Pollution, due to inefficient processes, and lack of appropriate management reduces
land and water productivity, endangers communities and threatens the viability of
businesses dependent on inputs being polluted “upstream.”
A variety of governmental policies ranging from tariff policies to tax incentives also
adversely affect natural resources and the environment – generally by subsidizing (either
explicitly or implicitly) behavior that harms or undervalues the Region’s natural resource
base. Furthermore, businesses are missing valuable opportunities to take advantage of
the Region’s resources and potential in differentiating products or in the creation of new
forms of market value through innovation in products, processes or services.
17
Central America will have difficulty in achieving the economies of scale necessary to sustain a
position as low cost competitor in extensive sectors, such as forestry with Brazil, Indonesia,
the U.S. and Canada, or in range land with Australia or Argentina. In specific cases, Central
America may be able to compete based on rapid forest and agricultural growth rates.
18
Based on Porter, M. “Competitividad en Centroamerica” in Competitividad en Centroamerica:
preparación de las empresas para la globalización, CLACDS, INCAE, Alajuela, Costa Rica,
1996.
16
More alarming than the observed problems is the lack of attention to these
problems by the public and private sectors in either 1) protecting the value that these
comparative advantages provide to the Region; 2) identifying ways to convert the
comparative advantages into competitive ones; or 3) anticipating the demands of
investors, international consumers and trading partners.
Serious efforts in the environmental area could dramatically improve Central
America’s firm and industry level competitiveness and provide an important impetus
toward the investment-driven development. There are also interesting opportunities in
tourism, carbon markets and perhaps agriculture for Central America to “leap-frog” to the
innovation-driven phase using environmental characteristics as the mechanism.
Where are the Opportunities?
The changes associated with moving from the environmental conditions of the
factor-driven phase to investment-driven phase offers numerous opportunities for the
Region. International market forces pushing toward more environmentally aware
products, processes and services can be harnessed as drivers to achieve a selfreinforcing competitive position. Aligning the environmental aspects of the Region’s
business climate with high-level international expectations will support and encourage
desperately needed investment by leading international firms. Producing and delivering
tourism and agricultural products with the attributes that demanding international
markets value will ensure continued access to these markets and provide the
opportunity for developing more specialized high-value niches. Failure to move toward
this new level of competitive development will permit continued destruction of the
Region’s comparative advantage (thus eliminating its conversion into future competitive
advantage), will reduce the important, though limited, safety net of rural communities
and will result in increasing cost drains on the societies.
The following sections of the paper will address the relationship between Central
America’s environment and its competitive potential within the theoretical construct
examined in this section.
17
III.
THE ENVIRONMENT AND CENTRAL AMERICA’S TRADE AND INVESTMENT
CLIMATE
By adopting stable and stringent environmental requirements, Central America can
greatly enhance its business climate and better attract and support foreign investment to
upgrade the competitive profile of the Region.
The conventional view has been that improving environmental standards in
developing countries impedes competitiveness and discourages foreign investment. The
arguments have been that stringent standards will make Central America’s companies
less competitive, and that requirements to adhere to stringent standards will make the
countries of the Region less attractive to foreign investment.
Recent research dramatically demonstrates that this view, if ever true, is certainly
not true today. Compelling evidence exists now that the stability and credibility of
environmental rules are critically important to a competitive business climate, in addition
to providing significant advantages to the environment and public health.
The most competitive countries in the world are also those with the most stringent
environmental standards. In many cases, leading competitive nations attribute their
competitive success in part to their environmental regulatory climate. Stringent rules that
are flexible in their means to achieving results appear to be the most competitiveness
enhancing.
Leading firms around the world now come to expect stringent and credible
standards that are equitably enforced as a part of desirable business climate. Firms that
create the most value tend to be those that adhere to the highest environmental
standards. These firms will view serious environmental standards as an attractive aspect
of the Central American business climate – one that provides stability, adequate
infrastructure and discourages “bottom –seeking” behavior by suppliers and competitors.
Central America’s most competitive firms are already engaged in improving
environmental management and performance in response to customer demand, foreign
country import rules, and international expectations about firm environmental
responsibility. These firms’ competitive positions, and those of their clusters, would
likely be enhanced by standards that more closely matched those of their customers.
The following is more detailed discussion of key findings.
A.
Competitive Countries Have Demanding Environmental Requirements
The prevailing myth has been that competitive countries are those with weak
environmental controls. The World Economic Forum’s Global Competitiveness Report
surveys hundreds of business leaders about business climate conditions in their
countries. The survey includes a number of questions regarding perceptions of the role
of environmental issues in the competitive position of the countries. Summary results are
shown in Tables 3.1 to 3.4. Some of the most relevant findings include the following:
18
Tables 3.1 to 3.4- Responses to Business Survey's of Business Leaders as
Presented in the Central America competitiveness Report 1998
(counties' overall competitiveness ranking out of 59 countries are shown in parenthesis)
Table 3.1
Table 3.2
Environmental Regulations in your
country greatly enhance your
company's profitability
Environmental Regulations are
transparent and stable
1
2
3
4
5
6
7
8
9
10
Singapore (1)
Ireland (11)
Finland (15)
Jordan (36)
Denmark (16)
Nicaragua (48)
Thailand (22)
Hong Kong (2)
Turkey (35)
Zimbabwe (56)
4.71
4.42
4.37
4.32
4.29
4.28
4.21
4.2
4.19
4.18
1
2
3
4
5
6
7
8
9
10
Singapore (1)
Hong Kong (2)
Finland (15)
Switzerland (9)
Norway (7)
Ireland (11)
Canada (5)
Australia (14)
United Kindom (4)
China (28)
5.54
4.87
4.84
4.79
4.67
4.58
4.57
4.57
4.56
4.56
23
34
40
43
Guatemala (43)
Costa Rica (29)
Honduras (52)
El Salvador (47)
4
3.87
3.78
3.67
38
44
51
56
57
Costa Rica (29)
Guatemala (43)
Nicaragua (48)
El Salvador (47)
Honduras (52)
3.93
3.73
3.53
3.21
3.18
Table 3.3
Table 3.4
Environmental Regulations have
made your company conserve on
energy, water or material inputs
1
2
3
4
5
6
7
8
9
10
Norway (7)
Denmark (16)
Finland (15)
Netherlands (8)
Germany (24)
Mexico (33)
Austria (20)
Switzerland (9)
Canada (5)
Singapore (1)
5.67
5.43
5.42
5.29
5.24
5.22
5.11
5.02
5.01
4.96
15
43
47
55
58
Costa Rica (29)
Nicaragua (28)
El Salvador (47)
Guatemala (43)
Honduras (52)
4.76
3.8
3.72
3.44
3.3
In our industry, products
perceived by consumers as
"environmentally friendly" enjoy a
great market advantage
1 Denmark (16)
5.43
2 Finland (15)
5.21
3 Germany (24)
5.06
4 Sweden (21)
5.05
5 Taiwan (6)
4.96
6 Austria (20)
4.81
7 Japan (12)
4.64
8 Canada (5)
4.62
9 New Zealand (13)
4.54
10 China (28)
4.53
25
31
49
50
55
Nicaragua (48)
Costa Rica (29)
Guatemala (43)
Honduras (52)
El Salvador (47)
4.71
4.04
3.73
3.7
3.54
* all scores are on a scale of 1 to 7, with 7 being complete agreement with the statement
presented, and 1 being the logical opposite.
19
! Firms in many of the most competitive countries in the world believe their
environmental regulations enhance their company’s profitability. (See Table 3.1)
Examples include countries such as Singapore, Ireland, Finland, Denmark, Hong
Kong, which all have very demanding environmental standards. Highly competitive
countries that rated the relationship low tend to be those with rigid rules regarding
methods for achieving very demanding environmental standards (examples include
U.S. and Norway). A score of 4.0 in Table 3.1 would indicate that the perception of
business leaders is that their countries’ environmental regulations are roughly neutral
with regard to profitability. Interestingly, 21 out of 59 countries in the survey scored
higher than 4.0, indicating that they these countries’ business leaders believe their
environmental regulations are slightly or moderately profit enhancing.
! Highly competitive countries tend to have the most transparent and stable
regulations. (See Table 3.2) Examples include Singapore, Hong Kong, Finland,
Switzerland, Norway, Ireland, Canada, Australia, and the United Kingdom. These
characteristics ensure fair and even enforcement and allow for longer firm planning
horizons, improving stability of an important aspect of the national business climate.
! Environmental regulations have played an important role in improving energy, water
and materials efficiency for many of the most competitive nations. (See Table 3.3)
Business leaders from 34 out of the 59 countries surveyed thought that their
countries environmental rules drove process efficiency.
! Environmentally friendly products enjoy a great market advantage in many countries.
(See Table 3.4) Most importantly for Central America, many are current or future
export clients of the region’s agricultural and tourism products. More than half of the
countries indicated slight to strong market advantage for “environmentally friendly”
products. This variable has increased dramatically in recent years, reflecting an
important trend in Europe and other Regions of the world.
From these responses we observe that leading business people in many leading
competitive nations see a strongly positive association between the environment and
their competitive position. A serious approach to protecting the environment is part of a
world-class competitive business climate.
Central America’s current situation lags far behind those of leading competitive
nations.
B.
Serious Environmental Standards Encourage High Quality Foreign
Investment
The conventional view in developing countries has been that serious
environmental standards will discourage foreign investment. This view is at least partly
true. Serious environmental standards will be a deterrent to low value firms interested in
exploiting the Region’s precious resources and leaving behind little value. For Central
America to advance from development based on its factor conditions to more investment
driven strategies, it will need to attract firms that see value in more productive and
responsible use of its environment and natural resources.
20
Recent research shows that the most successful and valuable multinational firms
adhere to the highest environmental standards.19 Multinationals that have internal
worldwide standards higher than any countries’ standards are those with the highest
value. In contrast, firms that adhere to the lowest standards in the countries in which
they operate are those with the lowest value.
In addition, there is growing evidence that foreign-owned firms or joint ventures
tend to be cleaner than local firms in developing country for five reasons: 1) higher
standards are embedded in the technologies of multinational firms, 2) these firms tend to
export to environmentally-sensitive markets, 3) greater control is exercised in
environmental management to avoid tarnishing the company image in developed
countries, 4) some firms may be potentially liable for accidents, and 5) pollution intensive
industries from developed countries have learned to be careful after decades of scrutiny
by regulators and civil society.20
Stringent Central American environmental standards will not discourage leading
firms from investing. A variety of studies have documented that multinationals base their
location decisions on other factors, such as high quality infrastructure, low labor costs,
and large domestic market.21 Further studies have shown that the relative stringency of
environmental regulations in different countries has not had a negative impact on net
In general, there is little evidence to support the hypothesis that
exports.22
environmental regulations have had a large adverse effect on competitiveness. Authors
reviewing this literature have concluded that this is not surprising since, even in the
U. S., the costs of environmental regulation are a relatively small fraction of total
production costs - variations in the costs of labor, energy and raw materials, and
infrastructure adequacy would be expected to overwhelm the environmental effect.
Further even where there are substantial differences between environmental regulations
in the U. S. and elsewhere, multinational firms are reluctant to build less than state of the
art plants in foreign countries.23
In fact, demanding environmental requirements could be a powerful signaling
device to attract high-value firms and “screen out” poor performers. The countries should
19
Dowell, Glenn, Stuart Hart and Bernard Yeung. "Do Corporate Global Environmental
Standards Create or Destroy Market Value?" Management Science, June 1998. The authors
researched the relationship between firm value creation and the stringency of company
environmental standards for over 500 publicly traded, U.S. based multinationals in non-service
sectors.
20
For a more detailed discussion of this point and other issues relating to globalization and
environment, see Panayotou, Theodore, “Globalization and the Environment” Background
Paper for the Human Development Report 1999. United Nations Development Program. 1999
21
See for example, Wheeler, David and Ashoka Mody. 1992. “International Investment Location
Decisions: the Case of US Firms.” Journal of International Economics. Vol. 33: 57-77; and
Panayotou, Theodore and Jeffrey R. Vincent. 1997. “Environmental Regulations and
Competitiveness: 1997 Global Competitiveness Report.” Geneva, Switzerland: World
Economic Forum.
22
See for example, Tobey, James A, 1990. “The Effects of Domestic Environmental Policies on
Patterns of World Trade: An Empirical Test.” Kyklos. Vol. 43 (2): 191-209.
23
Jaffe, Adam et al. “Environmental Regulation and the Competitiveness of US Manufacturing:
What Does the Evidence Tell Us?” Journal of Environmental Literature, Vol. XXXIII (March
1995): 1132-163.
21
focus their attention on environmental attributes that would encourage these top-flight
firms to invest in the region.
The most desirable attributes for top firms are 1) transparent, stable and evenly
enforced environmental standards, and 2) the high level of availability of specialized
infrastructure and related and support industries to provide basic environmental services
consistent with company policies and programs. Developed country-based
multinationals most fear the lack of predictability associated with regulatory vacuums.
Clear expectations and rules of the game provide a “safe haven” for investing firms by
protecting them against shifting rules and arbitrary or misguided enforcement of unclear
environmental laws and regulations. Infrastructure and support services include
hazardous waste management capacity (transportation, incineration and removal
services) and technically sound solid waste disposal mechanisms (appropriate
transportation and landfill technologies). Without these supporting services, responsible
companies must bring with them their own support at significant cost. Generally, only
very large companies could afford to develop their own infrastructure systems. Lack of
this support might therefore discourage investment by smaller high value companies.24
Central America demonstrates signs of weakness in creating the environmental
conditions for attracting high quality firms. Lack of involvement of leading firms in the
Region in environmental matters signals a weak environmental business climate and an
unstable situation for high quality foreign investors. Table 3.5 summarizes the findings
from a recent CLACDS-HIID survey 100 leading firms in each country of the Region.
24
See Vieto, Jorge, “Environmental Implications of Costa Rica’s Emerging Electronics Cluster”,
CLACDS Working Paper, INCAE, 1998.
22
Table 3.5 Summary of Central American Leading Firm’s Environmental
Activities
Summary of Central America Leading Firm's Environmental Activities
% Firms with
% with
Written Plan
Specific
to Reduce programs in
Env. Impact
place
% Familiar
with Env.
Laws
% Have Plans
to Comply with
Environmental
Laws and
Regulations
% Train
% with Written
workers in
Emergency
Health and
plan
safety
Guatemala
29%
39%
48%
45%
88%
33%
El Salvador
48%
24%
59%
31%
82%
20%
Honduras
42%
39%
60%
42%
91%
23%
Nicaragua
40%
25%
55%
26%
61%
24%
Costa Rica
62%
33%
70%
40%
97%
24%
Central
America
42%
31%
58%
36%
82%
24%
Numbers represent percentages of firms claiming to have the listed attributes. Total sample
population was approximately 100 per country for a total of approximately 500 responses.
Source: Survey of Central American Business Leaders on Business Climate (1997).
Publication as CLACDS Working Paper expected in July 1999.
World class competitive economies consistently show awareness of environmental
requirements close to 100 percent.25 International benchmarks show levels of observed
(the Central American survey data is self-declared, which may be higher) environmental
compliance in the range of 90 percent in many OECD countries.26
More detailed analysis of 16 leading industries across Central America found
general levels of environmental performance to be low.27 In all countries, and in most of
the industries, environmentally related information and supporting services were found to
25
OECD, Environmental Performance Reviews 1991-1998.
Ibid
27
This discussion is a brief summary of the findings of CLACDS study of the factors affecting the
environmental performance of 16 leading Central American industries. More detailed summary
analysis will be published later in 1999. Individual industry reports are from 1997 and 1998
and are available as CLACDS working papers.
26
23
be weak. Environmental rules were found to be unclear, frequently out of date and
largely irrelevant for most of the industries; market pressures and access to international
markets were found to be more important drivers of environmental protection choices by
most firms. Of particular concern were policies that send highly distorted signals to the
private sector. For example, subsidized water, and implicit subsidies for imported
chemical inputs and machinery are inducing resource allocations that cause
environmental harm. Financial policies and banking practices were also found to
promote environmentally harmful, and in some cases even illegal, behavior.
C.
Improving Environmental Performance will Enhance Central American
Firm-level Competitiveness
Again, the conventional view of environmental standards diminishing
competitiveness is not supported by the evidence. Competitive theory holds that
demanding customers will drive performance-enhancing innovation.
In the
environmental area, years of empirical research demonstrates that companies
responding to environmentally driven demand, regardless of its source, may find
efficiency improvements from changes in technology and in capital stock, as well as
“first-mover” advantages in new markets.28 Central America’s leading competitive
industries -- agriculture and tourism -- sell to increasingly environmentally-conscious
markets. Trends point to more environmentally demanding markets, and to valuable
opportunities for fulfilling these market expectations. These opportunities will help move
these industries toward more dynamic competitive advantages, and away from reliance
on short-term comparative advantages.29 More detailed discussion of these two sectors
follow in later sections of this paper.
At a more macro level, we observe firm behavior that is consistent with the
competitive model. Due to increased market pressures and visibility of the firms, Central
America’s export-oriented firms are more engaged in improving their environmental
performance than domestically-oriented firms. In each country, the export-oriented firms
and those with multinational capital sources show a greater level of awareness and
action on environmental issues.
In the same survey of 500 Central American business leaders discussed above,
multinational companies (defined for purposes of this survey as those with more than 30
percent of their total capital owned by foreigners) were almost twice as likely to have
written plans to reduce environmental impact. Export-oriented firms were also much
more likely to have written plans than domestically-oriented ones.
Internationally oriented firms are responding more strongly than domestic firms to
competitive pressures, such as customer demand and the need to maintain a good
28
Porter, Michael. “America’s Green Strategy,” Scientific American, April 1991; Porter, Michael
and Claas van der Linde, “ Green and Competitive: Breaking the Stalemate,” Harvard
Business Review, Sept-Oct. 1995. Xepapadeas, A and A. de Zeeuw, “Environmental Policy
and Competitiveness: The Porter Hypothesis and the Composition of Capital,” Journal of
Environmental Economics and Management, Vol. 37: 151-164, March 1999.
29
Porter cites this as the most important element of movement from factor-driven innovation to
investment-driven innovation. Competitive Advantage of Nations. New York: Free Press,
page 621.
24
company image. Evidence of firm response to these pressures is found in the rapid rate
of adoption of the ISO 14000 environmental management standards. Leading firms
around the world, nearly all export oriented, are certifying to provide assurances to
customers, regulators and other stakeholders that the company is aggressively
addressing environmental matters in its operations. These same externally driven
competitive pressures will increasingly affect Central American companies in their quest
for competitiveness. It makes sense to put in place demanding environmental
requirements that are consistent with consumer demand and can drive improved
performance of an ever-increasing portion of Central America’s businesses.
D.
A Central American Agenda for Environment and Business Climate
Upgrading
Central America must upgrade the environmental aspects of its business climate.
Developing improved environmental rules with predictable and transparent enforcement
mechanisms, and developing more sophisticated infrastructure and supporting industries
will make the countries of the Region more attractive to international investors. More
stringent environmental standards for products and processes, and more sophisticated
local demand will help the Region’s industries meet the needs of its most demanding
international customers. They will also, of course, protect Central America’s unique
natural resource base and provide a healthier living environment for its citizens and
investor firms.
1.
Vision
Central America should provide a competitive platform that attracts and supports
high quality foreign investment through strict, clear, and fairly enforced environmental
rules, and develop factor conditions and support industries that support world-class
environmental performance at home and abroad for all firms doing business in the
Region.
2.
Agenda
The goal of the specific agenda is to put in place concrete, measurable activities
and processes that will lift the performance and competitive capabilities of important
regional clusters, which will in turn lift the entire business climate.
1) The nations of the region must, in the very near future, adopt the environmental
product and process standards that their most demanding country-customers expect
to have three to five years into the future. At the market level, failure to do so will
limit Central American exports to lower priced market niches. At a political level,
failure to do so will allow environmental differences to become nearly insurmountable
non-tariff trade barriers. Those clusters most critically affected by evolving
environmental demand should begin immediately. Other industries should be
incorporated as rapidly as human and financial resources allow.
2) In their strategies to attract leading “flagship” firms in critical clusters, the countries
should investigate the specific environmental requirements, expectations and desires
of the world’s leading firms and its principle suppliers and invest accordingly.
Creating the right environmental business climate will, along with tax regimes,
25
educational systems, and logistics, create desirable conditions for top international
firms.
3) Each country must work in the short to medium term to incorporate stringent but
flexibly achieved environmental standards into its investment promotion strategies.
This will send important signals to international investors about the seriousness of
Central America’s desires to be a legitimately competitive Region.
4) The Region’s financial sectors will need a more in-depth understanding of, and
performance on, environmental matters. The Region’s financial sectors are not
aware of the linkages between firm level competitiveness and the environment. The
BCIE should lead efforts to help the clusters “unlock” hidden value within firms and
facilitate upgrading to keep up with current trends and new market opportunities.
Matrix 3.1 provides greater detail on implementation of these Agenda items.
26
MATRIX 3.1 Agenda for Action: Central America´s Trade and Investment Climate
Policy Instrument/
Description
Sources
targeted
Geographical Focus
Timing
Institutional Roles
Institutional/Legal
Changes
Approximate Costs/
Financing
Expected
Impacts/
Benefits
Adopt the
environmental product
and process
standards that the
most demanding
country-customers
expect to have three
to five years into the
future.
National
governments,
chambers of
industry,
Regional, by
country
action
Begin
research
now,
recommend
by end of
1999
National environmental
authorities will have lead
role in developing legal
and institutional
mechanisms.
Economies of scale can
be achieved by
coordinating regionally
Many possible. Will
require improved
capacity within
environment, health,
and investment
promotion
organizations
Research will be relatively
inexpensive. Changing of
rules will require significant
investment in consultation
and review. Governmental
authorities will require
additional resources to
implement new approach
An investment
climate more
attractive to high
quality multinational
firms looking for
long-term
investment
opportunities
Investigate the
specific environmental
requirements,
expectations and
values of the world’s
leading firms and their
principle suppliers
and invest
accordingly.
Investment
promotion
organizations
Regional
effort
targeted at
the United
States and
European
Union
Now
National governments
sponsorship.
Coordinated by
investment promotion
and export promotion
organizations.
None. This research
effort is to inform
choices regarding
the nature and scope
of regulatory changes
Low to moderate. Costs of
research, fact finding travel,
and presentation of results in
multiple forums in all
countries
A framework on
which to ensure that
regulatory
improvements are
perceived as
valuable by high
quality multinational
firms considering
investing in the
Region
Market Central
America´s new
stringent, but flexible,
environmental
standards in
investment promotion
strategies.
National
governments,
investment
promotion
offices, export
promotion
offices
Regional, by
country
action
Medium term
- after
adjustments
to regulatory
process
Investment promotion
agencies should take
lead role in ensuring
consistency of
environmental position
with “ventanilla única”
programs and other
investor friendly
mechanisms.
Governments must
validate with actions.
None, after
environmental
regulations have
been established
Low costs of incorporating
into promotional programs.
Requirements are for training
of staff in requirements and
incorporating into promotional
materials.
Awareness among
potential investors
that Central America
provides a serious,
but business-friendly
approach to
environmental
protection.
The Region’s financial
sectors will need a
more in-depth
understanding of, and
improved
performance on,
environmental
matters.
Financial
sector,
Ministries of
finance
Regional
Now
National governments,
regional and
international
development banks,
private banks.
New procedures for
credit analysis that
incorporate more
comprehensive
understanding of
environmental risks
and opportunities.
Moderate. This is largely an
effort to educate a fairly large
business sector about a new
trend. Training, handbooks
and other tools will need to
be developed.
Higher quality loan
portfolios through
improved decision
making. More credit
available for projects
that better meet
changing
international
demand conditions
Regional
Environmenta
l integration
organism
27
IV.
TOURISM
Aggressively incorporating positive environmental considerations into the Regional
tourism cluster development strategy will align Central America with industry growth
trends, increase value-added to tourism offerings and solidify an emerging unique selling
position in world markets.
Improving the environmental policies that support the tourism cluster will solidify
the region’s unique selling position, increasing the profitability of the industry as well as
boosting the level of employment and government revenues generated by this sector.
Sector leaders should recognize that tourism is produced by a partnership between the
tourism industry and the public sector, each of which has a unique set of environmental
responsibilities. The industry’s responsibility is to provide commercial services such as
lodging, restaurants, and transportation services in a manner that conserves a country’s
tourism resources. The government’s responsibility is to manage resources such as
beaches, volcanoes, rainforests, and archaeological and historic sites so as to provide
tourists with high quality attractions. If either the industry or the government fails to live
up to its environmental responsibilities, the cluster will not achieve its growth potential.
A.
Tourism in Central America30
Arrivals in Central America are progressively recovering from the negative impact
of the adverse historical events that occurred in several of the countries, primarily during
the 1980s. Most of the absolute growth in arrivals in Central America in the past decade
has come from increased visitation to Costa Rica, but some of the countries affected by
political turmoil during the 1980s had the highest percentage rate of growth in the 1990s.
30
For more detailed information on this topic see Inman, Crist and Gustavo Segura. "Turismo en
Centro América: El Reto de la Competitividad", INCAE Working Paper CEN-605, Alajuela,
Costa Rica, 1999, upon which this section is largely based.
28
Table 4.1 International Tourism Arrivals and Receipts in Central America and
Worldwide2 1986 – 1996
Arrivals in Central America
(000’s)
1986
1990
1994
1995
1996
1,228
1,748
2,368
2,555
2,649
9.2%1
7.9%1
7.9%
3.7%
869
1,397
1,530
1,571
13.1%1
3.4%1
9.5%
2.7%
458
550
564
595
7.9%1
4.7%1
2.6%
5.5%
268
353
401
434
17.0%1
7.1%1
13.6%
8.2%
% annual change
Receipts in Central
America (US$ million)
531
% annual change
Arrivals worldwide
(millions)
338
% annual change
Receipts worldwide
(US$bi)
% annual change
143
10-year
avg.
% chge
8.0%
11.5%
5.8%
11.7%
Source: World Tourism Organization.
1
2
Compounded Average Yearly Growth for 1986-1990 and for 1990-1994, respectively.
Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama.
Central America has shared in the staggering growth of worldwide tourism. Rapid
tourism growth is projected over the coming decades. The growth rates of arrivals and
receipts, although erratic, have averaged 8 percent and 11.5 percent per year,
respectively, between 1986 and 1996. The percentage increase in Central American
arrivals is substantially greater than the global average growth rate; Central American
receipts however grew at approximately the same rate as the global average during the
same period.31 Forecasts for the tourism industry are promising. On a global basis
“[tourism’s] GDP contribution is forecast to grow at a healthy 46 percent in real terms
over the next decade.”32
31
32
Ibid.
Cummings, Barbara and Jeff Mills, "Open Travel Markets - Creating Jobs", World Travel and
Tourism Council, June 1997. Cited and discussed in Inman, Crist et al. Impacts on Developing
Countries of Changing Production and Consumption Patterns in Developed Countries, UNDP,
1998.
29
Matching Tourism Supply to Shifting Tourism Demand
More important for Central America, however, are the trends in tourism
preferences. First, the traditional “sun and sand” tourism is losing ground to nondominant tourism such as ecotourism, cultural tourism and soft adventure tourism. While
the total market for these alternative destinations is still only 5% of the total market
share, demand is growing at a rate of 25 to 30 percent a year as compared with 2 to 4
percent for traditional "sun and sand.” 33 Second, tourists increasingly demand a portfolio
of diverse destinations on a single trip. Evidence of this new demand for diversity in a
destination is manifest in the booming cruise industry that offers tourists access to a
range of natural, cultural and recreational activities. Third, tourists also now evaluate a
country’s environmental responsibility and conservation efforts. Consumers from
developed countries may change their buying decisions based on the perception of
negative environmental impacts or performance.34
A study of German tourists found that one out of every two choose destinations
based on their environmental performance characteristics, including the environmental
operations of hotels.35 Over 70% of all Japanese overseas trips are for the purpose of
enjoying nature.36 These preferences, coupled with heightened awareness of
environmental issues in their home countries, are leading to more focused interest in the
environmental aspects of tourism decisions. Based on these trends, a variety of studies
predict a trend in tourism marketing away from mass marketing toward multi-niche
marketing.
B.
Central America’s Position and Strategy in the Market
In light of these trends in demand, Central America has a comparative advantage
because of its rich natural and cultural patrimony, its geographic location, as well as its
high concentration and spatial accessibility of attractions. Several non-dominant product
lines that Central America has already begun developing provide the basis for the
Region’s strategic position. “Environment and nature conservation tourism” has been
identified as the leading product line of a four product strategy that also includes, “PreColombian History,” “Ethnic Groups and Live Culture,” and “Urban Architecture and
Colonial Heritage.” Table 4.2 highlights the potential of countries within Central America
to develop a diversity of non-dominant tourism.
33
See: Lizano, Rodolfo. "Tendencias del turismo en América Latina". San José: Instituto
Costarricense de Turismo, 1997; Inman et al 1998, op. cit.; Inman and Segura 1999, op cit.
34
Cook, Suzanne. “Changing Demographics, Attitudes, and Lifestyles of the U.S. Consumer” in
World Travel and Tourism Review: Indicators, Trends and Issues, Vol. 3, eds. J.R. Brent
Ritchie,and Donald E. Hawkins. United Kingdom: CAB International, 1993.
35
st
Ayala, Hana. "Resort Ecotourism: A Paradigm for the 21 Century," Cornell Hotel and
Administration Quarterly 37 (Oct. 96): 46.
36
World Tourism Organization, Global Tourism Forecasts to the Year 2000 and Beyond: Vol 3:
The Americas, Madrid, 1994.
30
Table 4.2
Availability of Tourism Resources by Type of Attraction
Costa
Rica
El
Salvador
Honduras
Guatemala
Nicaragua
Tourism Products
1. Environmental
Beaches
High
Moderate
High
Moderate
Moderate
Volcanoes
High
High
Low
High
High
Rainforest
High
Moderate
Low
High
Moderate
Low
Low
Moderate
High
Moderate
3. Archeological Sites
Low
Low
Moderate
High
Low
4. Colonial and
Architectural
Heritage
Moderate
Moderate
Moderate
High
Moderate
2. Indigenous
Communities
Source: Deshazo, 1999a
Environment and Nature Conservation tourism or “ecotourism37 is considered to be
the fastest growing market worldwide. Its popularity points to a switch away from
“passive” resort-based vacations, which have characterized the development of mass
tourism since the 1970s. “Theme” travels centered around special-interest activities such
as discovery and adventures, sports, and education are increasingly popular. The
experience is increasingly valued not only on the quality of destinations or activities, but
also on the conformity of the lodging facilities and management practices with
environmental guidelines.
The diversity of Central America climate, topography and ecosystems offers
unmatched environment and nature-based activities including38:
• Guided tours of natural reserves and parks,
• Special interest tours, such as wildlife, plant and coastal tours,
• Educational tours on conservation management and efforts,
37
Ecotourism is an all-encompassing concept covering tourism demand for the visit of
unmanaged natural landscapes, fauna and flora in its unspoiled native environment, live culture
and spectacular natural phenomenon (volcanoes, animal nesting or migration, etc.)
38
See section on Tourism Strategy in Inman and Segura, 1999, op cit.
31
• “Soft” adventure tourism, such as hiking, camping, and rafting, and
• Recreational sports, such as surfing, scuba diving and sport fishing.
These opportunities are consistent with individual marketing efforts carried out by
the countries. A recent survey of tourism wholesalers, corroborated by the numerous
regional travel guides and validated by their returning clients, confirms that these efforts
have created a clear perception among this important set of customers and
stakeholders.39 Tourism wholesalers know and differentiate Central America based on
its endowment of natural and cultural attributes. For example,
•
66% of the wholesalers believe the proximity to North America and the biological
diversity found in a small region, along with the complementary attractions are the
major strengths of Central America.
•
More than half of the wholesalers believe the natural attractions (parks, volcanoes,
etc) of the region and the past and present culture are the other major strengths.
•
Wholesalers have a positive perception of Central American attractions: More than
40% of the wholesalers believe that Central American birds, animals and plants are
better than in other destinations.
•
Further, 44% of wholesales think natural parks are superior in Central America (to
other destinations), and 31% think animal reserves are better.
Not surprisingly, specific data on tourists coming to Central America demonstrate a
strong interest in natural attractions. A survey conducted by the Costa Rican Institute of
Tourism (the governmental body in charge of tourism development and regulation) found
that 70 percent of all tourists visiting Costa Rica came with the specific intent of naturebased tourism.40 Similar surveys in Guatemala confirm primary visitation for natural and
archeological purposes.
Contrary to much rhetoric in the tourism sectors, eco-tourists tend to be more
educated and affluent than average tourists and are willing to spend great sums of
money on high quality natural attractions. For example, total trip expenditures were
$2,200 for the average tourist who spent 80 percent of their time at beaches in Costa
Rica. In contrast, trip expenditures were $2,750 for a visitors who spent 80 percent of
their time at rainforests, volcanoes or other protected areas in Costa Rica – a 25%
higher spending level.41
C.
Developing Central America’s Tourism Clusters by Strengthening and
Promoting their Environmental Attributes
Central America could easily be one of the most attractive destinations in the world
to the industry’s fastest growing niche segments– responsibly managed tourism, eco-
39
Inman, Crist and Nathalia Mesa. "North American Wholesaler Survey", CLACDS, INCAE,
Alajuela, Costa Rica, 1998.
40
Lizano 1997. op cit.
41
DeShazo, J.R. “The Economic Benefits from Natural and Cultural destinations in Central
America” Harvard Institute for International Development. 1999a.
32
tourism and cultural tourism. To credibly establish and maintain this valuable position
requires the commitment and concerted action of public and private sector actors across
the Region. This commitment must be directed to building the appropriate business
climate to support a world class tourism cluster whose competitive position is based on
high quality, environmentally-related tourism attributes. There are a number of
challenges that must be addressed for Central America to support this competitive
position. If competitive forces are not correctly aligned, the cluster will advance very
slowly, resulting in greatly reduced development potential.
1.
Factor Conditions
The availability and quality of the Region’s natural and cultural resources
determine the Region’s competitiveness. The availability, quality and degree of
specialization of the Region’s natural resources are the key competitive drivers. Noted
for its biodiversity, Central America has between 18,000 and 20,000 of the 250,000
species of flora known in the world. The region boasts 1,306 known mammalian species
and 4,835 species of birds. A study done in 1995 by the FAO estimated that
approximately 19,546,000 hectares of land in Central America are covered by forests,
representing almost 38% of the Region; within the coastal areas are extensive
concentrations of mangrove swamps and coral reefs.42 The Region boasts volcanoes
and a wide variety of geology and scenery. Also noted for its cultural resources, the
region boasts extensive pre-Columbian and colonial cultural tourism opportunities. In
addition, in various areas current indigenous groups manage tourism within their lands.
It is these resources that attract the tourists and provide recreational value during
their visits to the region. Failure, or perceived failure, to protect these resources will
destroy the Region’s competitiveness in the world tourist market. Central America must
manage these resources sustainably to develop its competitive advantage. The tourism
industry and the governments must be partners in improving factor conditions by
undertaking different, but complementary, responsibilities for conserving and enhancing
these tourism resources.
The resources that provide the basis for Central America’s comparative advantage
are fragile. These include coral reefs, coastal ecosystems, rain forests, cloud forests,
and wildlife. The consequences of not protecting them are extremely serious. Damage
or destruction of the resources themselves would reduce competitive potential. Further,
the perception on the part of potential customers that the countries of the Region are not
making serious efforts to protect the natural environment would tend to eliminate the
Region from consideration by the fastest growing and most affluent segment of the
tourism market.
The natural resource factor inputs are subject to threats from within the tourism
sector and from external forces. The most notable and dramatic example in Latin
America is the destruction of Cancun’s coral reefs. Over-development and improper
management of waste has led Cancun’s once attractive, valuable and productive coral
reef system to be declared officially dead.
42
Comisión Centroamericano de Ambiente y Desarrollo (CCAD). Estado del Ambiente y Los
Recursos Naturales en Centroamerica 1998, San José, Costa Rica: CCAD, 1998.
33
Much of the tourism development in Central America exhibits troubling
characteristics. Lack of environmental considerations in site planning has led to direct
and indirect destruction of extremely valuable coastal habitats (such as mangroves).
Waste discharge from coastal communities and tourism operations contaminates many
beaches, wetlands and rivers, increasing the possibility of water-borne diseases, and
reducing the desirability of these attractions due to visible garbage, scum and insects.
While large-scale tourism development is of greatest concern due to the scope of
operations and past evidence of destructive practices, smaller scale development can
also present significant risks. The long-term viability and success of environmentally
based tourism development are based primarily on site selection, planning, infrastructure
design and operational practice.
The natural resources that provide the basis for tourism are also threatened by
other activities. Deforestation from timber extraction, agricultural expansion and forest
fires are reducing populations of wild animals that tourists are willing to pay thousands of
dollars for the chance of seeing – particularly birds, wild cats and other large mammals.
These same animals are also hunted and killed, either for sport or simply to reduce
harassment of pets and poultry. Deforestation is also leading to increased flooding in
coastal areas, increased siltation of rivers and the attendant destruction of mangroves,
reefs and other coastal ecosystems. Large-scale commercial fishing may be reducing
availability of sport fish. Pesticide and fertilizer run-off, as well as urban and industrial
waste, contaminate nearly all the Region’s major rivers, reducing the possibility of riverbased tourism in all but a handful of areas, and displacing populations of fauna and flora.
While not all-inclusive, this list signals how broadly the public and private sectors will
need to work in the long term to protect the value it provides to increasing numbers of
tourists.
All sectors of Central American society can work together in two areas to create a
strong, competitive and sustainable tourism sector. The first is to continuously improve
the Region’s base of tourist attractions. The second is to align the behavior of tourist
sector actors with the Region’s competitive position.
a) Improving the Supply, Quality and Marketing of Natural and Cultural
Attractions43
Currently, government agencies perform several functions essential to tourism.
First, natural and cultural resource agencies are responsible for the supply of the product
that includes attractions such as beaches, volcanoes, rainforests, indigenous
communities, as well as archaeological and historic sites. Second, resource agencies
are also responsible for product quality which is determined by quality of on-site services
such as water, waste water, solid waste services, parking, security, trail maintenance,
signage, wildlife management and other conservation measures. Third, the tourism
agency is responsible for product marketing whose efforts not only attract tourists to the
country but also direct them to specific attractions within the country.
Currently, the region has officially designated a considerable fraction of its land as
protected, as shown in Table 4.3. It is also spending a relatively large amount on
marketing of the countries and their attraction. This effort is largely self-financed through
hotel taxes throughout much of the region.
43
This section is based on Deshazo, J.R. 1999a.
34
Table 4.3
Declared National Parks in Central America
Country
Number of
Declared Parks
% of National
Territory
Number of
hectares (000s)
Costa Rica
126
30.5
1,559
El Salvador
4
.4
9
Guatemala
48
19.0
2,061
Honduras
42
9.6
1,070
Nicaragua
75
18.2
2,161
Source: Sistemas Nacionales de Areas Protegidas de Centromerica, UICN-ORMA 1997
Across the Region, natural resources agencies are under-funded leading to poor
or non-existent services at over 80 percent of all tourist attractions in the region.44 Partly
in response to this situation, the private sector throughout the region is developing
private natural reserves to complement the protection of public lands and to distinguish
their tourist offerings, though data are available only for Costa Rica. In 1995-96 there
were 29 private reserves in Costa Rica, an 11.5% increase from 1993-94, bringing the
number of hectares of reserves up to 20,534.45
Critical on-site services, such as waste management and wildlife management,
are absent from over 80 percent of the primary tourist attractions in Central America.46
Improving services will enhance tourists’ on-site experience and protect valuable natural
and cultural resources from destruction.
The potential damage to attractions incurred from higher levels of visitation can
only be offset through greater investment in on-site infrastructure and management.
Nearly all tourist attractions in Central America are currently being degraded due to the
lack of solid waste and wastewater treatment. Beaches are especially threatened by the
lack of such facilities. Managers of fragile attractions such as rainforests, volcanoes,
and archaeological sites need to better control the spatial impact of visitation through
improved trail and walkway systems. Finally, attractions that focus on indigenous
communities and their markets would benefit greatly from local support for toilets,
sewerage and solid waste management as well as local visitor centers that provide
information and interpretation on the group’s heritage and craft production.
Carefully considered improvements in infrastructure are also good investments. A
recent survey of 5,000 visitors to Guatemala and Costa Rica showed that tourists were
44
DeShazo, J.R “Policies to Enhance Natural and Cultural Tourism in Central America.” Harvard
Institute for International Development. 1999b.
45
CCAD 1998, op cit.
46
DeShazo 1999a, op cit.
35
willing to pay significantly more in entrance fees to improve the availability of water,
toilets, access roads, guides and most importantly an increase in the quality of wildlife
viewing. Interestingly, both nationals and internationals were willing to pay to not have
additional on-site commercial development, such as restaurants. (See Table 4.4)
Table 4.4
Visitors’ Willingness to Pay for Improvements in Services at a Rainforest
National Park in Costa Rica47
Site Characteristic
National
International
($US)
($US)
Probability of Seeing
Wildlife
Increase in likelihood from
“possible” to “highly likely”
.97
5.80
Toilets and Water
Increase in availability from one
location to several locations
.86
5.10
Access Roads
Improvement from
.55
3.27
“fair” to “good”
Guides and Maps
Improve from offering only
maps to include guides
.36
2.15
Restaurants
Upgrade snack bar (soda) to a
full restaurant on site
-.0748
-.42
Source: Deshazo 1999a.
The public and private sectors will need to work together to identify models to
finance improvements in the parks if they are to reach their potential as competitive
assets. Unless the tourism industry becomes a more effective political advocate for the
natural and cultural resources that generate profits, these resources will be underfinanced and under-managed and the competitive position of the region will decline.
Three changes to current institutional approaches will improve the development of
key tourist resources.
(i)
Integrate product marketing and product development.
No firm could be competitive if its marketing department and production
department did not coordinate their activities. Yet, throughout Central America, tourismmarketing agencies tend to operate independently of, and often in conflict with, the
47
The numbers in the columns are the calculated incremental amount tourists would be willing to
pay for the described site characteristic for a one-day entry pass.
48
This negative number indicates that visitors would want to pay less to visit the site if it had a full
service restaurant.
36
resource agencies whose attractions they market. This institutional arrangement
diminishes competitiveness in several ways. First, marketing efforts direct tourists to
sites with inadequate on-site services that tend to disappoint visitors. Second, the
resource agencies are not given information on the preferences of tourists, demand for
new attractions and on-site services collected by tourist institutes. Third, tourism
institutes tend be relatively better financed than resource agencies managing the
attractions because they have self-financing fiscal mechanisms. The tourism industry
has accepted taxation in order to support marketing the country, and implicitly their
business establishments. However, little effort is expended in lobbying for or investing in
tourist attractions.49 This has led to marketing a product that is under-financed and
whose quality is being jeopardized by higher rates of visitation.
(ii) Consolidate the organizations responsible for site management.
Because of the creation of multiple public agencies and the devolution of
management responsibilities to non-governmental organizations, the number of
agencies managing sites has proliferated. Table 4.5 provides a conservative estimate of
the number of public or non-governmental organizations that are responsible for at least
one publicly owned area. The sheer number of resource agencies and organization has
made coordinating, implementing and financing country national polices difficult.
This institutional fragmentation makes it difficult to develop a unified tourism
attractions strategy based on the country’s portfolio of current and potential tourist
destinations. Similarly, the number of organizations involved makes it difficult to develop
countrywide on-site environmental programs such as improved wildlife management,
water and sanitation infrastructure, and public safety initiatives. The absence of
adequate public resources has lead many government to relinquish management of
these destinations to non-governmental organizations. While NGO management has
provided an important interim approach, this fragmentation has stifled the ability of the
national government to direct monies to sites and prioritize the management needs of
sites. The national governments should slow down the devolution of exclusive
management to NGOs and work to consolidate the government agencies that manage
publicly visited sites.
49
Monestel, Luis “Reporte de Instituciones y Financiamiento de Areas Silvestres Protegidas y
Turismo para Costa Rica,” HIID, 1997; and Chavez, Magda “Reporte de Instituciones y
Financiamiento de Areas Protegidas y el Sector del Turismo en Guatemala”, HIID, 1997.
37
Table 4.5
Institutional and Financial Comparison of Tourism and Resource
Management
Number of Organizations
Responsible for Managing
Protected Areas
Sustainable Financing
Mechanism Exists for:
Tourism
Protected
Marketing
Areas
Costa Rica
9
Yes
No
El Salvador
3
No
No
Honduras
5-6
Yes
Partial
Guatemala
8-9
Yes
No
Nicaragua
4-5
No
No
(iii) Develop self-financing mechanisms for the resource agencies to ensure that
product quality does not deteriorate.
Throughout Central America, public funding for tourist attractions—especially
protected areas, beaches and indigenous communities—has been declining over the
last decade. Funding for the resource agencies that manage these sites is determined
by the national congresses as they authorize the annual budgets. Two problems arise
through this funding mechanism. First, because there is not a coherent and powerful
political constituency for these sites within the private or public sector, legislators are not
usually given information on the economic importance of these attractions. The tourism
sectors and natural resource agencies do not “make the case” for the important link
between the health of attractions and the competitiveness of the tourism sector.
Legislators are not routinely provided with information on changes in visitation and the
costs imposed on sites. Consequently, funding has fallen even as visitation and
management costs have increased dramatically.
Improved funding mechanisms could help tourist attractions be more competitive.
One remedy is replace the existing financing system with one that links the level of
visitation with the level of funding for a site or system of sites. This approach reduces the
need to collect and transfer information to the legislature, enables park managers to
ameliorate the cost of higher visitation and generates revenues from the beneficiaries of
these sites. This could be achieved by: allowing site managers to retain a fraction of all
entrance, parking and other user fees charged to visitors; providing for a special tax on
all food and merchandise sold within a site’s boundaries and permitting a fraction of
these revenues to return to the site.
Another approach would be to invest current tourism tax revenue in the attractions
that sustain the industry’s competitive position. A small percentage of existing hotel,
airport and taxi taxes reinvested in the sites that attracted tourists in the first place would
be a sound investment in helping future revenue streams grow.
38
b)
Aligning the tourism sector with the Region’s Competitive Position
The Region needs an agile and powerful mechanism to orient public and private
sector actors toward international demand. CLACDS research has identified an existing
mechanism with the potential to achieve this goal at a Regional level. While not the
complete long-term “solution,” the Certificate of Sustainable Tourism (CST) program
could greatly strengthen regional positioning, and help upgrade the entire cluster.
Central America now has a consensus-based standard for the sustainability of
hotel operations. The Certificate of Sustainable Tourism program has the potential to be
the hemispheric standard for differentiating tourism practice, thus placing Central
America in the enviable position of “market maker” in this important areas of tourism
competitiveness.
CST is a voluntary program, directed by the Costa Rican Institute of Tourism (ICT),
that evaluates hotels based on a set of over 150 peer-reviewed and consensus–based
criteria. Hotels are awarded rankings that they are then encouraged to use in
differentiating their hotel. The program is separate from the traditional “stars” rating
system, but works in conjunction with it to give customers additional information about
their hotel choices.
Following the criteria will improve environmental performance of hotels, thereby
better protecting the natural resource base the Region’s cluster depends on. It provides
a powerful mechanism to distinguish between tourism operators making serious efforts
at more environmentally friendly tourism and “free riders” – thus lifting the quality of firm
rivalry. It also will help drive demand for related and support industries as hotels look for
outside help and new ideas to improve their CST ratings.
CST links tourism performance with international consciousness, trends in tourism
demand, best management practices, and with the unique natural, cultural and societal
attributes of Central America. These aspects are all united into a differentiated
“certification” that can be made recognizable and valuable in international tourism
markets. Regional adoption of this program would differentiate Central America’s tourism
offerings, help improve quality of tourism destinations (in a manner consistent with
international tourists’ expectations, preferences, and willingness to pay) and better align
business performance with regional strategy and positioning.
2.
Demand Conditions
This is the second most important area for competitive upgrading. Central
America’s target market for all of its tourism activities, but especially environmentally
oriented tourism, is very aware of and sensitive to environmental issues. The same
attributes that make this market segment valuable to Central America also make it
vulnerable if it fails to live up to the expectations of international tourists. Because local
tourists are less demanding of environmental attributes, Central America’s tourism
sector will be “learning by doing” with a potentially tough audience. In this case,
competitive theory suggests extremely demanding local markets as the ideal driver for
long-term competitiveness. It will take a long time for local market consciousness to
reach levels that it can drive competitive levels of innovation. However, mechanisms
must be found to encourage local consumers to be more demanding. Only in this
manner can we realistically expect smaller participants in the cluster to upgrade to world
class levels.
39
3.
Firm Structure, Strategy and Rivalry
Healthy competition that upgrades overall performance of the cluster will help drive
competitiveness. In environmentally oriented competition this is critically important.
Environmentally based tourism is extremely susceptible to “free riders.” That is to say,
businesses or other actors in the economies can take advantage of the positive
environmental reputation of a country or region by associating themselves with the
positive environmental positioning, without investing or participating in any other way to
the maintenance of this position.
Costa Rica’s experience has demonstrated that the “eco” label is such a valuable
and attractive association that many environmentally uncommitted (and in some cases
damaging) businesses have incorporated environmental claims in their marketing. In the
medium and long terms, these businesses serve to undermine the position of the
tourism sector by presenting a conflicting image to visitors, and frequently by destroying
the natural resources themselves. This is especially critical since this market is
characterized by sophisticated consumers and a variety of alternative tourism
destinations.
At the current stage of tourism development in Central America, a few bad actors
could potentially undermine an entire country’s hard-earned reputation. The Region
needs simple, market driven mechanisms that provide clear signals about differentiation
to consumers and to tourism operators regarding business practices consistent with the
countries’ competitive positioning.
The CST could play a valuable role in this area. The program’s criteria and
independent verification mechanism will allow responsible operators to differentiate
themselves clearly to potential visitors, and will reduce the possibility of “free riding.”
4.
Related and Supporting Industries
Environmentally-related support services are likely to evolve relatively slowly since
they are largely demand driven, and tend to be a “following indicator” of competitive
sophistication. The most important need is for products and services that allow the
entire cluster to develop the attributes and position of the country strategy. This will
mean basic and complex environmental services for hotels, restaurants, tour operators,
transportation companies, attractions and others. These services range from factorrelated services such as park management and concessions to waste management,
consulting, engineering and product design. While Central America is relatively weak in
these areas, increasing demand will draw international expertise to augment and
upgrade local capacity.
Certain necessary services, typically provided by governments, may be
inadequate. Services such as trash collection, roadside cleaning, and beach clean-up
need to be expanded and upgraded to support increasing numbers of tourists. Private
sector cooperation in providing private investment and political support for public
investment likely will be needed to provide adequate services in the short term.
40
D.
Central American Agenda for Environmentally Driven Tourism
To move forward with desired levels of cluster development, Central America must
establish a clear market position, invest in the resources that support this position and
challenge all actors in the society to defend it rigorously.
The core of Central America’s competitive position is natural resource-based
tourism. This strategy is already consistent with the country’s perceived position in the
market and is highly desirable based on observed trends in world tourism markets. The
greatest danger to this position is not living up to market expectations. The current
situation shows a variety of correctable weaknesses in the Regional cluster’s competitive
conditions. Investment in publicly managed tourism attractions is the most important
need for the coming decade. First class forests, beaches, and volcanoes (and cultural
history sites), with appropriate infrastructure, could clearly differentiate Central America’s
competitive position. Aligning hotels, tour operators and other tourism sector participants
with the Regional positioning through use of the CST program will further solidify a
strong international competitive position.
1.
Vision
Central America will be known and respected for its environmentally and socially
responsible tourism. This position is clearly differentiated in international markets and
based on the highest international standards. Publicly managed tourism attractions are
considered to be among the world’s best. And, a sophisticated tourism cluster delivers
innovative, high-value products to the world’s most demanding consumers.
2.
Agenda
•
Increase public and private investment in those assets most critical to Regional
tourism attraction to bring them up to world class levels. Natural attractions
(especially parks and coastal zones) and cultural attractions (particularly
archaeological sites and historic areas) are the Region’s most valuable assets for
tourism development. These assets are increasing in value as tourism demand
shifts toward environmental and cultural attributes. However, these assets are
underdeveloped given the level of factor specialization they provide the tourism
cluster and the Region. The tourism cluster must become actively engaged in
environmental management and conservation. Active collaboration with the
public sector and community organizations will strengthen competitive position
for the entire cluster. Direct investment in parks, protected areas, coastal areas
and wildlife protection would provide the greatest return.
•
Self-financing mechanisms from visitation fees and tourism taxes must be
developed to ensure adequate financing for upgrading and management of
tourism attractions.
•
Tourism promotion organizations and resource management agencies must link
tourism products (parks, protected areas and cultural sites) more closely with
marketing positions. This will ensure a consistent and unique selling position in
world tourism markets based on high value experiences at natural and cultural
sites in a compact geographical area. The Region is selling high quality natural
41
and cultural destinations to the world. Yet the product delivered is of inferior
quality and is likely to worsen with increased visitation.
•
Adopt the CST as the Regional industry and government standard for tourism
certification. The CST should be the integrating mechanism to signal this position
to international markets and direct national tourism planning: it can serve as the
Regional banner that differentiates Central America from all other tourism
destinations. Regional adoption could help further disseminate the program to
other countries, placing Central America at the “heart” of the rules that define
responsible tourism. The program should be expanded beyond hotels, and
adapted to the specific needs and differences of the Central American countries.
•
Reorient investment and financing patterns toward Central America’s unique
selling position. Investment guidelines and finance criteria should be adapted and
updated to reflect new understanding of the increased value opportunities
presented by environmentally (and culturally) oriented tourism. Using CST
criteria and more detailed analysis of environmental implications of tourism
development, the BCIE and other Central American banks can improve portfolio
quality, reduce risk, and better support the Region’s competitive position.
Matrix 4.1 provides greater detail on implementation of these Agenda items.
42
MATRIX 4.1 Agenda for Action: Sustainable Tourism
Policy Recommendation
/ Description
Timing
Institutional Roles
1.
Integrate
product marketing and
product development
Short-run
Authorized by the
Presidents
2.
Reduce
fragmentation of the
management of natural
and cultural attractions
Middle-run
3.
Invest to
improve on-site services
Long-run
4.Develop self-financing
fiscal system for
investment in natural and
cultural amenities.
Middle-run
5. Implement the
Sustainable Tourism
Certificate
Short-run
6. Industry lobbies more
for product quality—in
natural and cultural
attractions
Short-run
Institutional/
Legal Changes
Approximate Costs/
Financing
Expected Impacts/ Benefits
Geographics
Focus
Sources
Targeted
Bring tourism and
resource agencies
under one
management unit.
Potential cost savings
from reduced personnel
needs and the elimination
of redundant functions.
Better coordination between
the development of tourism
products and the marketing of
these attractions.
Regional focus,
with countryspecific actions
National
public sector
Natural and Cultural
Resource Agencies to
serve as lead
managers
Unify the product
quality by coordinating
across NGOs that
manage; sites
decrease public
reliance on NGOs.
Increased costs to the
public sector which must
now manage a greater
number of attractions.
Enables the public sector to
control the quality of its
product, to coordinate the
quality of site services and
develop a consistent selling
position.
Regional focus,
with countryspecific actions
Natural and
cultural
Resource
Agencies
Natural and Cultural
Resource Agencies
None
Variable, but can be
financed by changes in
fiscal system such as
allocating a fraction of
hotel and airport taxes.
Higher product quality and
better selling position.
Regional focus,
with countryspecific actions
Private
financial and
tourism
sectors, public
sector
Central Treasury,
Tourism Agency,
Cultural and Natural
Resource Agencies
An increase in visitation and
extension of trip length.
Change tax revenue
flows.(Hotel, taxi,
airport taxes and
entrance fees)
No appreciable costs
Prevents the degradation of
tourist attractions as visitation
rises; provides for the
improvement of site quality.
Regional focus,
with countryspecific actions
National
governments
National governments
to promote the
development of the
program; private or
NGO sector may be
the appropriate locus
for certification
program
None
Self-financing eventually;
in the short-run $50,000$100,000
Encourage hotel development
and management to preserve
the local natural amenities
that attract tourists.
Regional focus
with countryspecific actions
National
governments
Chamber of
Commerce, Tourism
Agency and Natural
Resource Agencies
Strengthen and focus
the Tourism
Chambers of
Commerce.
No public monies
needed.
Ensures that the attractions
that draw tourists have a
strong political constituency to
ensure the gov’t. invests in
this patrimony.
Regional focus
with countryspecific actions
Private sector
43
V.
SUSTAINABLE AND COMPETITIVE AGRICULTURE
Agriculture has been Central America’s economic base for nearly its entire history.
Further agricultural development is considered a priority for every nation of the Region in
its quest to achieve global competitiveness. The interest in competitive agriculture is
understandable given Central America’s comparative advantages in location, climatic
variety, and endowments of water and soil.
However, the relationship between agriculture and the environment is complex on
both the production side and the demand side of agricultural products. Regional
responses to numerous challenges and opportunities related to environmental
performance will be key determinants in the success of Central America’s agricultural
sector as it moves toward global competitiveness.
The CLACDS-HIID study of numerous sectors across the Region points to three
priority areas for attention. The first is a broad conceptual concern. Central America’s
agricultural industries may not be as valuable from a growth and development
perspective as previously believed, when environmental costs are factored into the
accounting. Developing the expertise within the agricultural sector to carry out full social
costing is critical. Second, Central American agricultural sectors need to do a better job
producing products with the environmental attributes valued by consumers in
international markets. Third, changing trade rules related to the environment will place
Central American agricultural exports in peril if the private and public sectors do not
adapt to international norms and the expectations of key markets.
Changes in attitudes and policies are required to facilitate and to promote the
necessary changes. The overarching goal of agriculture for the Region is to create the
greatest value for society. For firms, this means maintaining production quality at a level
to provide access to higher-value product markets, and reducing costs of negative social
impacts (such as costs of environmental impact, worker health and safety, water
contamination, and soil erosion).
Central America’s agricultural sectors are comprised of a variety of actors, ranging
from large landholders and corporations to cooperatives to campesino subsistence
farmers. The scope of this project has led to detailed study of those sectors and
participants focused on international export markets or that possess characteristics that
make international competition feasible in the near term. Consequently, this paper does
not discuss the significant environmental issues associated with subsistence
agriculturalists, poverty-based expansion of the agricultural frontier, or very small-scale
producers out of the reach of international market forces. Impacts from these sectors
can be severe and extremely costly for the society.50 Most of the effects, however, are
unlikely to be addressed in the short to medium in the context of competitiveness. Smallscale agriculture is discussed in some detail in the Agricultural Agenda paper.
A.
Creating Greater Real Value in Central American Agriculture
In the 1960s and 1970s, Central America’s agricultural production became more
technical and intensive. This shift in techniques came as part of the “Green Revolution”
50
For a more comprehensive discussion, see Faris R. “Deforestation and Land Use on the
Evolving Frontier: An Empirical Assessment", Development Discussion Paper 10, HIID, 1999.
44
in agricultural practices. These new techniques required significant quantities of
chemical inputs, high levels of investment in machinery and other capital goods,
continuous modification of technological approaches and other costly inputs. The
techniques also brought with them costly environmental impacts that we have begun to
understand only in recent years. The increased costs of environmental impact have
been absorbed more broadly by the society in the form of degraded soils, deforestation,
contaminated surface and underground water, pesticide poisoning, accidents,
displacement of traditional communities and a host of other diffuse costs.
Government policies have contributed to the misallocation of resources in
agriculture. In the past, a major problem has been the net taxation of agriculture
primarily through the over-valuation of the exchange rate through expansive macroeconomic policies with large budget deficits, and industrial import protection policies.
These exchange rates have hurt agriculture by raising domestic prices relative to world
prices and by reducing the purchasing power of farm households. To compensate
farmers for these losses, governments in developing countries frequently have turned to
subsidizing credit and agricultural inputs such as irrigation, fertilizers and pesticides.
However, studies indicate that the subsidies primarily benefit the large farms.51
Both subsidizing agricultural inputs and taxing agricultural outputs send the wrong
market signals to farmers, creating distortions and inefficiencies in agricultural
production. For example, countries with high levels of agricultural trade protection use
more than ten times as much chemical fertilizers and pesticides per hectare as countries
with low levels of protection. Yet, these chemical products can damage the environment
and human health.52 Removal of input subsidies would reduce the fiscal drain on the
public treasuries and would improve the sustainability of agriculture; further, reduction of
subsidies generally would not hurt small farmers.
B.
Changing Orientation on Value Creation
Agricultural and other development activities are typically evaluated based on their
economic return to owners and financiers. The correct approach for Central American
development planning, and for the long run competitiveness of the Region, is to evaluate
based on the net return to the society as a whole, including worker and consumer health
as well as environmental impacts.53 After all, it is the net contribution that an industry or
cluster makes to a society that creates wealth. Planning and promotional activities must
seek out those crops and agricultural techniques that maximize the overall contribution
to society.
A detailed examination of coffee production in Central America provides an
interesting example and demonstrates the great difference observable between financial
51
See A.P.G. Moor, “Perverse Incentives”, Institute for Research on Public Expenditures 1997.
World Resources Institute, World Resources 1990-91, Oxford University Press, 1990 ;and,
Anderson K. and A. Strutt , “On measuring the environmental impacts of agricultural trade
liberalization,” Center for International Economic Studies, University of Adelaide (Australia),
1994
53
Full social costing techniques have been widely used in development policy for decades. The
simplest way to conceptualize full social costing is to think of net financial return minus
environmental costs incurred by the society other social costs incurred by the society. CLACDS
has developed a straightforward methodological document with case study explaining the
components of this type of analysis, which can be adapted for use in all agricultural sectors.
This document will be published as an INCAE Working Paper in 1999.
52
45
return and net societal return. In a comparison study of Costa Rican sun grown coffee
(representative of the newer high technology approach) versus Salvadorian shade
grown coffee production (managed largely under pre-“Green Revolution” techniques),
CLACDS researchers found interesting results.54 Although Costa Rica had an 81 %
higher yield per hectare, the net profit per hectare was 22 % less than in El Salvador.
While there were minor differences in tax structures, processing costs and marketing
board arrangements, nearly all the profit differential was due to lower production costs
and higher prices for Salvadoran coffee. Salvadoran production costs are 15% less
(primarily due to lower fertilizer and pesticide costs). The average price received for
Salvadorian coffee during July 199755 was 14% higher than those received by Costa
Rica.
Further, this return does not take into account the value of other products
produced on each hectare of land along with the coffee.
Table 5.1 Returns to Coffee Production under Different Growing Techniques
Costa Rica (sun grown)
El Salvador (shade grown)
Quintal / Hectare yield
33 qq/Ha
18.26 qq/ha
Net Profit / Quintal
$ 17.05 / Ha
$ 39.27/ Ha
Net Profit / Hectare
$ 562.54 / Ha
$ 717.06 / Ha
In addition, Costa Rica’s system for structuring price payments to farmers
penalizes quality by averaging out prices across all of the coffee received during a
harvest period. This scheme promotes quantity output, rather than quality. This
reinforces high input, high cost, high externality production since land price and
availability is a constraining factor in coffee producing areas in the Region.
El Salvador already receives a price premium of around 15% (FOB) over Costa
Rican prices because of the high quality and almost organic production techniques . In
spite of 45% lower yields, El Salvador could exceed Costa Rica’s financial returns even
if the price premium were as little as 5%. Real returns to Salvadoran farmers are actually
considerably higher. While Costa Rican coffee is grown in monocultures, Salvadoran
coffee is grown interspersed with other crops. Farmers therefore can increase returns
per hectare through sales of firewood, fruits and other products.
At the societal level, shade-grown practices create virtually no negative
environmental externalities. In fact, shade coffee farms probably produce positive
environmental externalities.56 In comparison with sun grown practices, there may be as
54
Harner, Claudia and Lawrence Pratt, “Analysis of Sustainability of Coffee Production in El
Salvador,” CLACDS Working Paper, INCAE, Alajuela, Costa Rica, 1997.
55
This was the reference month for the study. While variable, this premium level was
representative of 1997 and 1998 premiums.
56
It is important to note, however, that coffee processing produces very great impacts, regardless
of the growing techniques. The societal costs associated with water pollution overshadow the
most negative imacts of even sun-grown coffee. There are a number of efforts underway across
46
much as 30% greater net social return when financial return and social return are
factored in.57 The principal environmental benefits derive from:
•
Reduced land degradation and perhaps soil erosion
•
Providing habitat for biological diversity
•
Lower levels of pesticide and agrochemical use in ground and surface water
•
Fewer pesticide illnesses
•
More benefits from watershed management and climate regulation.
•
Micro-climate control and moderation
The analysis shows that coffee production is clearly a net positive contributor to
Central American development under either system. The interesting aspect, however, is
that even in a sector with relatively low external environmental costs, switching toward
more environmentally friendly production techniques can increase net financial returns
and create much greater societal value.
Nearly all segments of the agricultural sector studied by CLACDS showed
significant environmental costs. For example, soil quality has deteriorated so
dramatically in Nicaraguan pasture lands that carrying capacity has been reduced from
one animal unit (1 AU= 450 Kg) per manzana per year to 0.15 to .5 animal units per
manzana, a decrease of 50 to 85 %.58 Birth rates have also reduced from around 80% to
50% due to lack of adequate mineral balance in soil resulting in deficiencies in calcium
and phosphorus. Sugar cane production shows serious costs associated with water
pollution and pesticide poisonings. Shrimp production has been shown to cause direct
and indirect harm to coastal ecosystems.
In some cases, there are indications that net societal benefit of current operating
policies in key agricultural sectors may be substantially less than GDP calculations
would indicate. One externality alone, pesticide poisonings, costs the Region 2.5% of
agricultural GDP annually.59 In most cases, there are alternative production techniques
that can be employed to improve societal returns.
In many cases, however,
technologies are not well known or extensively employed in the Region.
the Region to address this problem, which is technically easily to correct with appropriate
investment in cleaner technology.
57
Preliminary result of analysis of full social costs of organic versus sun-grown coffee. Publication
as INCAE working paper forthcoming in June 1999.
58
1 manzana = 0.75 hectares of land.
59
Larson, Bruce and Jose Manuel Perez, “Sustainability and On-Farm Externalities in Central
America: A Critical Review and Synthesis of the Literature,” HIID-INCAE Working Paper,
1998.
47
C.
Aligning Environmental Attributes with Market Demand Trends
Globalization of agricultural markets will create strong competition in nearly all
segments. Central America stands a good chance of successful participation in global
agricultural markets as long as it can produce products that meet or exceed the
expectations of customers in target markets. Agricultural markets are rapidly dividing
into two general categories – high-value and commodity. Consumers in more developed
countries are moving toward high-value oriented products. While both commodity and
high quality products are experiencing more environmentally-oriented demand,
environmental expectations are now a very important component of the markets most
attractive for Central America’s competitiveness. And, the importance of environmental
attributes is quickly increasing.
Outstanding opportunities now exist for Central America to participate in the
changing patterns of demand in international agricultural markets. Price premiums for
organic and other “green seal” agriculture are available, and market demand for fresh
fruits and vegetables in the U.S., Europe and Japan is rapidly shifting in this direction.
The U.S. certified organic agricultural market in 1997 was $4.7 billion, representing
about 1% of the entire market. Total organic production sold (both certified production
and uncertified production) is estimated at approximately $10 billion.60 The European
organic market was estimated at $4.5 billion, and that of Japan at $1 billion (both figures
are for 1997 also.)61 Growth rates for the coming years are predicted to be 25%
annually, compared with a 2% growth rate in traditional markets.62 While data on price
premiums are based on many small-scale studies, it is clear that organic production has
historically received equal or higher prices at the retail and wholesale level. As
production expands, however, price premiums are decreasing.
In spite of these market trends, CLACDS analysis shows that Central American
agriculture is not moving to keep up with international trends in consumer demand or
market access requirements. It is also missing, or in danger of missing, valuable
commercial opportunities for organic, low-impact, sustainable, or other green-seal
alternatives for commercialization. Out of the 16 regional sectors studied for
environmental performance and competitiveness, only 4 were aware of, or reacting to,
market trends abroad in the environmental attributes of products. When the remainder
were responding to environmental factors, they were doing so under regulatory pressure
rather than for competitive reasons.
It is important to note that modern organic agricultural production is a high
technology endeavor, and the costs of switching to an organic technology are fairly high.
In the U.S., organic production is highly concentrated. A small number of firms controls
a very large percentage of the market. Because of the complexities of production and
distribution, major firms have been able to take advantage of the returns to scale that
exist in technology and distribution.63
60
A large percentage of organic production is not certified. This is due to a variety of factors,
including high certification cost, and immature distribution channels.
61
Rosen, Sydney and Bruce Larson, “ The U.S. Organic Market: Size, Trends, and Implications
for Central American Agricultural Exports, HIID Policy Paper, forthcoming 1999.
62
ibid.
63
ibid.
48
There are positive signs, however, even in industries with serious past problems.
Banana production in Central America has been associated with use of “dirty dozen”64
pesticides, sterilization of workers, destruction of biodiversity, and generation of solid
waste residues (plastic and biomass). In general, it has a very bad reputation with the
general public and the environmental community. However, industry leaders are rapidly
improving their environmental performance in response to criticism and in anticipation of
changing market demands. Improvements are coming in the form of improved pesticide,
waste, and overall environmental management practices, and are being verified by third
party audits to be in compliance with international standards and norms. ECO-OK, ISO
14001, and some organic certifications are the current independent certification leaders
for the industry.
Another example is the shrimp farming industry in Honduras, which has been
singled out by conservation groups for its role in mangrove destruction on the Pacific
coast. The industry, represented by its principal trade association, ANDAH, has
developed an environmental program to communicate and inform stakeholders of their
efforts and achievements in preserving coastal natural resources. They have paid
independent third parties to monitor and report on mangrove destruction, strengthened
ties with universities and research institutes to help develop cleaner production
alternatives, and worked to sensitize other groups (charcoal producers, upstream
contaminating industries, etc.) to improve their environmental performance. These
efforts are credited with averting a planned international product boycott.65
Traditional and non-traditional, as well as large and small agricultural producers
will find a challenging international business climate with regard to environmental
attributes. Experience points out that it is possible for Regional agricultural sectors to
address market trends and adapt to the attributes and performance levels required to
protect access to markets and expand commercial opportunities.
While an important trend in key export markets is toward organic products, Central
America must weigh its options carefully. Organic production is “high tech” and very
information-intensive. Costs of switching technology and of obtaining certification can
be high. Central America’s labor costs are low, providing a certain advantage in the
short term; however, potential competitors in organic production also have low labor
costs (Mexico, for example.) Organic production is dependent on the comparative
advantage of soil fertility. Many parts of Central America may have difficulty due to
slightly to significantly lower fertility and productivity.
It is clear, however, that moving toward lower-impact production and organic
production will position Central America closer to emerging demand and will help
increase the social value of agricultural activities in the Region. While organic and other
lower-impact attributes are still a niche market in the U.S., the size of the niche is
currently almost as large as all of Central America’s agricultural output and it is predicted
to be many times greater within 5 to 10 years.
Different sub-niches within the U.S. market provide interesting opportunities. For
example, processed and frozen organic foods are the fastest growing sub-segment of
64
The “dirty dozen” are a group of twelve pesticides, principally in the chloro-organic chemical
family, that been banned (or almost completely restricted) due to their persistence in the
environment and their cancer-causing and other harmful properties.
65
Personal communication with Greenpeace-Central America, one of the groups leading the
planned boycott.
49
the U.S. organic market. These segments may be more accessible to Central American
producers given existing expertise and marketing channels. Further the processed and
frozen markets avoid the product appearance issues, which motivate much of the
current heavy use of pesticides in the region.
Participating in these markets will require active certification programs to verify that
Central America’s agriculture meets international standards. A recent survey of U.S.
consumers shows much lower levels of confidence in the safety and quality of imported
produce.66 This perception will be difficult to overcome, but probably can be achieved
through certification and other mechanisms. This will require significant investment in
certification programs and auditors and in-field certifications. The key will be to link
Central American certified production to reciprocal arrangements in the United States
and Europe.
D.
Adapting Environmental Performance to International Trade Rules
Important changes in trade rules reflect newer attitudes and concerns over the
safety and quality of food, particularly in the U.S., European Union and other developed
countries. These changes have important implications for Central America.
Central America traditionally has had some difficulties with meeting
environmentally related product requirements.67 U.S. Food and Drug Administration
(USFDA) detentions for pesticide content in fruits and vegetables imported to the U.S.
from Costa Rica, El Salvador, Guatemala, and Honduras were "valued" at about $19.5
million over a 10-year period between 1984-1994. About $16 million came from
Guatemala between 1992-1994 (of which $10 million were for 1993.) Various types of
peas from Guatemala continue to be placed on an automatic detention without physical
examination by the FDA.68 Apart from the financial cost of inspection and time lost at
port, there are other intangibles that debilitate the competitive position of Guatemala by
creating doubts about pesticides in key export markets. Total costs associated with the
1997 US ban on importation of Guatemalan raspberries were estimated to be around
$10 million.69
Emerging rules in the European Union on genetically modified organisms and
forest product imports point to more environmentally demanding product requirements
for Central America. The recent debate over European acceptance of genetically
manipulated foodstuffs from the United States is a clear indication of trends that will
shape the consumer market in the near future. Although the U.S. Food and Drug
Administration says it has no evidence that genetically-engineered foods pose any
special safety concerns, consumer groups maintain there are too many unanswered
questions about unleashing unforeseen health and environmental problems to leave
consumers out of the decision-making loop.70 European regulators are siding with the
consumer organizations based on overwhelming public support of this position.
Validating that products are free of genetically manipulated origin will maintain access to
66
This information comes from the “Fresh Trends” survey for 1999 discussed in Rosen and
Larson 1999. Nearly half of consumers were concerned about risk of food-borne illness and
ingestion of toxins from imported fresh produce.
67
See Thrupp, Lori Ann, Bittersweet Harvests, World Resources Institute, Washington, DC, 1995.
68
Larson and Perez, op cit.
69
ibid.
70
“Genetically Engineered Foods Give Consumer Groups Pause,” Post Register, Idaho Falls,
Idaho Knight-Ridder/Tribune Business News.
50
European markets and keep farmers off a new path of expensive imported agricultural
inputs that could reduce long-term competitiveness.
Another example is the agreement between major suppliers of tropical timber and
major purchasers, in the Year 2000 objective under the International Tropical Timber
Agreement. The agreement stipulated that by the year 2000 all producer countries would
supply timber products only from sustainably managed forests and that consumer
countries would assist the process by maintaining free trade access and by providing
development aid. Leading international companies are rapidly certifying sources, though
at this point only Malaysia meets the requirement. Since Malaysia will not be able to
meet the world demand by itself, the International Tropical Timber Organization will have
to extend the deadline or possibly will choose to relax the guidelines and phase in the
regime instead. Central America’s emerging wood and wood products industry must
take this market requirement into account in order to continue to participate in the
market.
The most effective way for Central America to address increasingly complex and
shifting trade rules is to develop strong certification processes in the Region.
Certification of products and production techniques is becoming the basis of access to
markets. Central America must develop credible certification systems that can be made
reciprocal with U.S. and European certification in order to maintain high value markets
for Central American exports. Both the U.S. and Europe allow for special considerations
in their certification rules to allow very small-scale producers to participate in organic
markets. Similar approaches could be very valuable for expanding opportunities for
small-scale Central American farmers.
51
E.
Agenda for Competitive and Sustainable Agriculture in Central America
Central America can and should position itself as the source of agricultural products that
are brought to consumers in a manner consistent with: the most demanding world
standards for environmental attributes; ecological principles of sustainable yields; and,
with socially responsible practices. These high standards should be applied regardless
of whether the products are destined for export or domestic markets. Moving rapidly
toward these goals will help the Region develop a high-value, competitive position in
world markets, and one that is sustainable through time.
Failure to adapt to market and trade trends and requirements in the environmental
areas will exclude Central America from high-value product markets, thereby eliminating
the possibility of competitive agriculture-led development. Adoption and incorporation of
these trends can help strengthen the value of the cluster by improving competitive
potential, and improving the overall social value of the activities by reducing
environmental impacts.
The trends in both market trends and trade requirements show that “certification”
will be the key for Central American agricultural producers to demonstrate attributes to
consumers and avoid exclusion by non-tariff trade barriers. Certification standards can
also serve as an important mechanism to orient agricultural clusters toward greater
competitiveness and value creation, regardless of whether they are actually used in
certifying products.
At present some certification systems exist in Central America. The total exports of
certified products is still very small (less than 1 % of total production) due in part to: lack
of adequate information about local and foreign regulations, the perception that price
premiums are too low, lack of well organized, technically informed promotional groups,
and the relatively high costs of certification given the small share of the market currently
seeking certification services.
Market trends and Central America’s current situation suggest some specific
environmental needs to advance the cluster.
1.
Factor Conditions
Central America possesses the biological resources necessary to fulfill market
expectations. The Region, however, has not yet developed many specialized production
factors capable of meeting future demand. Specialized human resources and
infrastructure will need to be developed to support a competitive and sustainable cluster.
Specialized extension capacity will be critical to disseminate innovative practices
and make them more mainstream. This implies developing specialized infrastructure in
the form of extension centers in different countries depending on their major advantages
in specific crops. This specialization represents a significant change to the current
diffuse nature of agricultural research and extension. Preparing extension workers can
also be achieved either through strong producer organizations or company-based
technology transfer to growers through contractual agreements.
52
2.
Demand Conditions
Like the tourism sector, local agricultural consumers are less demanding than
international consumers. This is a significant weakness that can be addressed through
consumer education in local markets. Ideally, local markets would differentiate based on
different types of environmental attributes, including organic and biodiversity attributes.
To achieve competitive and sustainable agriculture will require environmentally
conscious demand in local markets. Central America has examples of disconnects. In
some countries there are strong well-organized group of organic growers that have
made little inroads into consumer demand (Jugar del Valle, Productores de la Laguna,
APOETAR in Costa Rica provide interesting examples). Meanwhile in other areas there
are well-organized organic consumer groups promoting increases in demand (Vacurú, in
Panama, for example), but a highly dispersed group of organic growers. Strengthening
local market demand by creating a knowledgeable group of consumers and producers
could quickly elevate the local competitive platform. Highly visible certification systems
could also go a long way in strengthening this dimension, as would reduced barriers to
the importation of organic and other environmentally preferred products.
3.
Industry Strategy, Structure and Rivalry
Differentiation based on positive environmental attributes would be the goal for this
dimension. Relationships with international organizations (consumer groups and trade
organizations) and participation in “green” value chains will provide better orientation to
drive the necessary competition.
Opening up investments and eliminating barriers to importation of organic and
other low impact products will create strong competition, elevate the level of local
expertise and create a stronger demand for services and supplies as the market grows.
The mechanism to convey to the consumer the assurance of certain attributes of the
product they are purchasing is through a certification system that enjoys credibility in
their community. Certification systems encourage improved resource use and cost
accounting. They promote more accurate pricing of goods in a marketplace that reflects
environmental impacts and encourages consumers to minimize those impacts. As a
result, in principle, they educate consumers and raise consumer awareness concerning
these issues.
This implies developing and strengthening private sector and governmentsponsored voluntary programs granting a seal of ecological approval; however, these
programs should be based upon foreign export market standards in order to assure
compliance with the minimum requirements to access these potential customers. There
already exist organizations such as the Rain Forest Alliance working on biodiversity
friendly certification programs (ECO-OK) in the Central and South American region.
There are also independent local certifiers in the region (Bio Latina) that work based on
harmonized standards equivalent to the European Union regulation on “Organic
Agriculture” and comparable U.S. Federal and State regulations on organic food
production. Closer ties with the European and U.S. governments and private certifying
organizations must be further strengthened to facilitate implementation of reciprocal
standards. Technology transfer from the U.S. and Europe in certification approaches will
help lower costs and maximize benefits.
53
4.
Related and Supporting Industries
Central America currently lacks effective conditions in this competitive dimension.
Since few leading agricultural firms have yet connected with changing demand trends, it
is not surprising that supporting industries are also developing slowly. Priorities in this
area include developing innovative companies dedicated to agricultural inputs,
increasing the number and quality of laboratories to verify product attributes and product
inputs, the number of consulting firms to assist in the design of farm management and
input strategies and creating a large pool of accredited certifiers.
The Region needs locally-based technical support industries, equipment
(hardware) and the capacity to extend and disseminate knowledge on practices more
consistent with target markets. Purveyors of environmentally-friendly inputs are scarce;
when these products are brought in, they are mostly done so by the suppliers of
traditional inputs, so the products will be competing in unfavorable conditions. New
technology and equipment will reduce waste and elevate output, thereby limiting
contamination and making local production more efficient and competitive. Fiscal
incentives may be warranted to import this equipment because of positive externalities.
Specialized support is needed, in the form of laboratory facilities and procedures to
certify that products are free of certain residues, in order to expand penetration of export
markets. Establishing regional facilities will reduce the high cost of these installations
and make it more economically accessible for export promotion.
5.
Obstacles
Unfortunately, there are many significant institutional obstacles to improving
environmental performance to desirable levels in this sector, and by extension to
strengthening the sector. In addition to lack of awareness of changing international
trends, current fiscal policies, current financial policies, and traditional sector practices
will provide challenges to changing behavior and business performance.71
Market structure and traditional business practices hamper business. For
example, the Costa Rican Coffee Growers Association devised a payment scheme that
was been in place for 30 years to correct inequitable payments to coffee growers. The
system (which is probably no longer relevant to Costa Rica’s current circumstances)
effectively obliges growers to sell their production within the system and accept an
average price obtained from the overall harvest that year. Because rewards are based
on average quality of the harvest, growers have an incentive to focus on quantity rather
than quality. This reduces the competitive advantages of Costa Rica’s high quality coffee
stock.
Across the Region, small scale farmers are tied to outdated technological
packages through financing rules that oblige them to use certain agricultural techniques
as a prerequisite to obtain crop loans. The use of “avios,” or technological outlines
previously determined by the technical department of the bank, hampers any innovative
or alternative practices that do without traditional inputs such as synthetic pesticides or
chemical fertilizers. In other words banking procedures exclude from the bank’s lending
71
Conclusions drawn from 16 INCAE working papers on sustainability of leading Central
American industries. See for example CEN-720, CEN-721, CEN-742, CEN-760, CEN-761,
CLACDS, INCAE, 1997 and 1998.
54
portfolio any producer that does not adhere to traditional farming practices, limiting the
expansion of more competitive and environmentally oriented agriculture.
6.
Vision
Central America’s agricultural clusters will be leaders in providing agricultural
products to the world’s most demanding markets by meeting or exceeding quality and
environmental attributes valued by their customers. The clusters maintain and improve
this position through innovation in products and production techniques developed or
improved in the Region, which are consistent with the values and needs of the Central
American people.
7.
Agenda
Central America must protect its market share and competitive position in
agriculture by adapting products and processes to match consumer demand and trade
regulations in its most important trade markets. These activities must begin immediately.
Trade rules and patterns of international consumer demand are changing rapidly.
Analysts believe that new environmental attributes (especially organic and other lower
impact production methods) will be the dominant market for high value agricultural
products in the coming decade. Regardless of the end state, the trends are quite clear
and the needs compelling.
Several specific items will assist Central America in building the competitive
business climate necessary to sustain competition in these evolving markets.
1) Use full social costing techniques for planning decisions and allocating development
finance. This will reduce negative externalities that are associated with traditional
agricultural activities by forcing the exploration of alternatives. The result will be
products that better meet changing market demands and that provide greater value
to the countries of the Region.
2) Eliminate relative subsidies on chemical agricultural inputs. Pesticides and fertilizers
are among the few goods that are imported into Central America without tariffs. This
makes them relatively cheaper than alternatives, distorting incentives in the choice of
agricultural production technology. Eliminating these implicit subsidies will increase
tax revenue and stimulate innovation toward more internationally valued production
techniques.
3) Ban the importation, sale and use of dirty dozen pesticides and communicate this to
the world. Most developed countries have taken this step. The move has high
symbolic value and is very cost-effective for Central America. Any presence of
chloro-organic pesticide residues on export products nearly ensures rejection by the
U.S. or Europe. These pesticides have been outdated for over a decade. Central
American agriculturalists tend to use them because of their very low cash price
(these products are frequently “dumped” on world markets), even though there are
superior returns to newer technology. Central America could declare that it is taking
effective measures toward high quality, competitive and sustainable agriculture by
making itself free of this health and market risk.
4) Eliminate lending policies tied to outdated technical package criteria. These
practices eliminate innovation, increase production costs and have regressive effects
55
on the population since the growers that are tied to this system tend to be the poorer,
smaller farm owners.
5) Develop local infrastructure and policies necessary to certify or verify product
attributes and on-farm practices. The complicated market dynamics point to one
clear tendency – certified products maintain access to markets by signaling to
consumers and trading partners that products contain desired attributes. Desired
attributes evolve, implying that the Region must have a great variety of certification
mechanisms operating in the Region, while the market sorts out the details as to
which is most highly valued.
6) Reduce barriers to entry on organic and other certified low-impact products. This will
stimulate consumer demand, which will in turn drive innovation in local agricultural
sectors. This is the quickest way to motivate change and important learning in local
industry.
7) The BCIE should take a leadership role in adopting and using full social cost
valuation techniques in both its advisory and lending capacities. This will greatly
enhance the overall value creation associated with BCIE’s credit facilities in
agriculture and other industries.
Matrix 5.1 provides greater detail on implementation of these Agenda items.
56
MATRIX 5.1 Agenda for Action: Sustainable and Competitive Agriculture
Policy Instrument/
Description
Sources
targeted
Use full social costing
techniques for planning
decisions and allocating
development finance.
Private financial
sector, public
planning
agency; private
sector
Eliminate subsidies on chemical
agricultural inputs.
Ban the importation, sale and
use of the “dirty-dozen”
pesticides, and then
communicate the
implementation and
enforcement of this ban to the
world.
Geographical Focus
Timing
Institutional Roles
Institutional/
Legal Changes
Approximate Costs/
Financing
Expected Impacts/
Benefits
Regional
focus, by
country
actions
Now
Lead role for regional and
international development
banks in allocating finance;
lead role for National
governments in public sector
planning processes; important
role for private sector planning
as well
Many possible, although
inserting such
requirements as part of
existing EIA legislation
would probably be the
easiest
Minor to modest additional
information and analysis costs.
The region’s financial
resources allocated
toward higher value uses
with better long-run
competitive positions in
regional and international
markets.
National
governments
Regional
focus, by
country
actions
Phased in
over preannounced
time frame
National governments
Tax-code changes
Increased revenue; plus gains to the
economy from the elimination of the
subsidy (i.e. dead weight loss
associated with taxes paid to finance
subsidy)
Chemical use based on
full-cost pricing, which is
expected to reduce
chemical use in the short
run as well as provide
better long run incentives
for less-chemically
intensive agriculture.
National
governments
Regional
focus, by
country
actions
Now with
limited time
frame to
phase out
existing
stocks.
National governments
Identify complete list of
substances and place
on appropriate banned
status in each country
Perhaps additional costs to
segments of agriculture currently
using some chemicals.
Administrative costs to development,
pass, and implement the ban.
Reduced amounts of
persistent, and in many
cases carcinogenic
chemical s in soils, water
supplies, and food
products.
Enhanced reputation on
world markets for high
quality agriculture.
Eliminate lending policies tied to
outdated technical package
criteria.
Financial sector
Regional
focus, by
country
actions
Now
National governments, regional
and international development
banks, private banks.
Alternative forms of loan
guarantees and
collateral needed to
allow lenders to manage
risks through alternative
means
Unknown
Gradual shift in credit
towards agricultural
production that is less
chemical intensive, more
innovative, and more
profitable.
Develop local infrastructure and
policies necessary to certify or
verify product attributes and onfarm practices with low costs.
National
government,
private
environmental
services sector
Regional
focus, by
country
actions
Focus first
on organic
certification
Lead role for national
governments in policy-setting
Country-level organic
laws needed. Based on
national laws, need
country certification
programs that can later
qualify as reciprocal for
trade purposes with the
EU and US.
Administrative costs for development
of laws and implementing
regulations. Further analysis
needed to determine appropriate
certification roles for private and
public sector organizations.
Administrative costs for foreign
reciprocity arrangements.
Clearly defined organic
market in each country
that allows for low- cost
certification and simplified
access to foreign markets
for organic exports. A
fundamental prerequisite
that will allow farmers to
determine if organic
production is viable and
profitable in the region in
the coming years.
57
VI.
GLOBAL CLIMATE CHANGE AND CARBON MARKETS
The accumulation of greenhouse gases in the atmosphere represents both a challenge
and an opportunity for Central America. As the home of ecologically fragile ecosystems, the
isthmus is highly dependent upon its natural resources and is particularly vulnerable to the
effects of climate change resulting from the accumulation of greenhouse gases.
However the developing international policies provide a potential opportunity for Central
America to sell carbon emission reductions – and thereby to promote sustainable development
and greenhouse gas reduction at the same time. The international policies provide opportunities
to promote improved land use planning by financing forest conservation as well as opportunities
to decrease dependency on imports of non-renewable energy, by financing renewable energy
and energy efficiency programs.
Central American leadership at an international level on global climate change issues
positions the Region well for participating in future markets for greenhouse gas emissions
reductions. Entry into this new, and still largely undefined, market will be a challenge for the
countries of the Region. There are no international benchmarks with which to compare and
there are inherent market risks. However, success in this arena could bring unprecedented
benefits to the Region.
A.
Global Climate Change
At the third Conference of the Parties of the United Nations Framework Convention on
Climate Change (FCCC) held in Kyoto, Japan in December of 1997, the parties to that
convention agreed to the “Kyoto Protocol” (KP). The broad goal of the Framework Convention is
to develop an international regime under which the countries of the world can cooperate to
reduce the accumulation of greenhouse gases (GHGs), principally carbon dioxide (CO2) and
methane, in the atmosphere and thereby to reduce the scope and intensity of human-induced
changes on our global environment. The Kyoto Protocol, if ratified, would establish country
specific emission reduction commitments for developed countries and the so-called “socialist
economies in transition” (together these countries are referred to as “Annex I” countries due to
their presence in that annex of the Framework Convention on Climate Change). Though varying
across countries, Annex I countries would reduce emissions on average by 5.2% from 1990
levels for the 2008-commitment period. Non-Annex I countries, which include all the Central
American countries, have no reduction obligations.
Since the global effect of a unit of greenhouse gas accumulation in the atmosphere is
independent of its origin, the costs of achieving a given reduction can be minimized if abatement
takes place where the costs are lowest. The accumulation of gases can be mitigated by
reducing emissions into the atmosphere (for example, by burning less organic material, such as
wood and fossil fuels). Alternatively, it can be mitigated by accelerating withdrawals from the
atmosphere in “carbon sinks”, (for example, growing more organic material, since when a tree or
plant grows it extracts carbon from the atmosphere and fixes it in its roots, trunk, leaves and
understory vegetation.)
The Protocol provides for three major “flexibility mechanisms” which will provide Annex I
countries with opportunities to purchase emission reductions from other sources. First, Article
17 of the Kyoto Protocol provides for international emissions trading among Annex I countries of
“assigned amounts”, i.e., surplus emission reduction credits beyond the reduction commitments
58
of the country. The mechanisms for undertaking and regulating allowance trading will be
elaborated over time.
The flexibility mechanism of most interest to Central America is the “Clean Development
Mechanism” (CDM), which would allow for project-based transactions between Annex I
countries to finance projects that would reduce greenhouse gas emissions or increase carbon
sequestration in developing countries. The CDM includes a provision allowing credits for
transactions from 2000 to 2007 to be applied toward obligations in the commitment period of
2008-2012. In return for financing reductions, the investor would obtain credit against their
home-country emission reduction commitments. The assumption that companies will need
credits rests on the expectation that most OECD governments will allocate emission reduction
obligations to the actual emitters of greenhouse gases.72 Significant work is needed to articulate
several key provisions of the CDM before it can become operational. The design and functions
of the CDM will influence the extent to which investors are interested in buying GHG reductions
from developing countries.
Finally, the third mechanism (termed “Joint Implementation” or JI) is another project-based
trading system, similar to the CDM, but limited to investments by Annex I countries in other
Annex I countries. Essentially, JI will allow companies or governments from OECD countries to
finance projects that will result in GHG reductions in Economies in Transition (EITs), where
marginal costs of abatement are lower. 73
Numerous studies indicate that flexibility as to where GHG emission abatement can take
place would cut the estimated total cost of compliance with emission caps considerably –
perhaps by 50% or more. Differences in costs in reducing carbon emissions and increasing
carbon fixation across different locations in the globe will drive the markets. Models suggest that
international costs will be minimized with tropical forestry providing a substantial contribution to
emission reduction.
As noted above, the critical market opportunity for Central America is created through the
Clean Development Mechanism (CDM), which allows for project-based transactions between
Annex I and non-Annex I countries. The viability of such project-based trades was tested in a
pilot project, referred to as “Activities Implemented Jointly” (AIJ). Under the pilot project, over 90
bilateral projects74 have been implemented since 1995, nearly 20 of which are based in Central
America. This pilot project, which will conclude in 2000, has demonstrated the practicability of an
international scheme to develop project-based trades for GHG emission reductions. Most
analysts believe that the CDM, which is the only trading option scheduled to start in 2000, will
function as a more institutionalized form of AIJ and eventually will serve as a trading
clearinghouse through which non-Annex I countries can make GHG reductions or offsets
available for sale to Annex I countries to use to meet their reduction commitments.
Central America may have several sources of competitive advantage in the market –
competitive costs, opportunity to link emission reductions to regional peace and bio-diversity,
72
The Kyoto Protocol allows crediting of GHG reductions only for that part of a project which is
“additional” to a business-as-usual (“baseline”) scenario. The rules for JI crediting from 2000 forward
will be developed over the next few years.
73
EIT refers primarily to the former socialist countries of Eastern Europe and states of the former Soviet
Union. These countries tend to be industrialized, with relatively high emissions rates, and are in the
process of industrial reconversions that could yield significant climate change benefits.
74
Source: United States Initiative on Joint Implementation website: www.ji.org
59
experience with the pilot program to project-based trade provisions in the Kyoto Protocol (AIJ),
and an advance start of the implementation of the necessary national policies.
The major driver for this market is the cost differential between reducing GHG emissions in
developed countries and the cost of reducing or fixing GHGs in developing countries. For
example, preliminary estimates indicate that the average cost of reducing one ton of carbon in
Norway may be over $100.75 In contrast, Costa Rica has already demonstrated that it can
produce carbon offsets for sale at prices between $10 and $20 per ton.76 For Norway, a trade
with Costa Rica or other Central American country would mean a much-reduced cost of meeting
FCCC reduction obligations. For Costa Rica, the sale would mean financing to maintain and
protect national parks, programs to protect water supplies through watershed protection, and
investment in renewable energy generation such as hydroelectric and wind power.
In broad national and international policy terms, the CDM allows developing countries to
participate in global climate change by developing more climate-friendly energy policies,
protecting and regenerating forests to act as carbon sinks, and by reducing methane emissions
through improved water treatment and livestock management. They will then “trade” the climate
change benefits of these actions to developed countries that will use the offsets to fulfill their
emissions requirements. One of the important policy goals of such an approach is to ensure
that developing countries pursue a development path that leads to a more sustainable and
climate-friendly profile of greenhouse gas emissions. Figure 6.1 shows the carbon dioxide
emissions profile of thirteen countries – clearly indicating a high degree of variation in CO2
emission intensity at different levels of development (GDP per capita). The overarching global
policy goal is to help ensure that developing countries tend toward a path with a low intensity of
emissions. The philosophy behind the CDM is to create certain conditions that will support
investment to advance along this “more green” path.
75
76
Source: Intergovernmental Panel on Climate Change, Climate Change 1995. Cambridge University
Press, 1996
Costa Rica’s carbon production costs depend on the source of carbon and other factors that are
discussed in the following section.
60
Figure 6.177
CO2 Emissions per capita vs. GDP per capita
Emissions per capita vs. GDP per capita
Figure 6.1 CO2 Emissions per capita vs. GDP per
Selected
LatinLatin
America
and OECD
countries
Selected
America
and
OECD countries
Selected Latin America and OECD
Figure 6.1 CO2
20
USA
Emissions per capita (MT)
18
CAN
16
GHG-Intensive
14
Development
GER
12
NED
VEN
10
JAP
COL
8
NOR
SPA
6
More climate-friendly
PER MEX
4
Development
2
CO2
UK
CR
0
0
2,500
5,000
7,500
10,000
12,500
15,000
17,500
20,000
22,500
25,000
27,500
GDP per capita (US dollars)
B.
Central America and Climate Change Markets
Within this evolving context, CLACDS and HIID have analyzed Central America’s potential
competitive position in likely future markets for climate change mitigation.
Central America has been a leader in collaboration between Annex I and non-Annex I
countries in achieving emission reductions through the prior pilot programs testing out the “joint
implementation” concept underlying the CDM. However, other developing countries may have a
wider array of potential project-based reductions to choose from, including in sectors where
potential investors see market-entry and growth opportunities.
1.
Demand Conditions
To support the development of a strategic market plan for Central American carbon,
CLACDS conducted a survey of potential buyers from North America and Europe in the energy
and automobile sectors (and one offset trust set up to implement CO2 emission limitations
77
Tattenbach Franz and Rene Castro “The Costa Rican Experience with Market Instruments to Mitigate
Climate Change and Conserve Biodiversity.” FUNDECOR, San Jose, Costa Rica, 1998. With
modifications by authors.
61
imposed by a state).78 Respondents were questioned regarding their preferences for projects in
terms of the types of emission reduction projects (energy, forestry) and the importance of
various factors including, business development and growth opportunities, scale of reductions
offered, institutional arrangements, risk mitigation and timing. They responded with a preference
for energy projects due to the greater uncertainty regarding the CDM rules for forestry projects
at this point; further, price and credibility were identified as the critical decision criteria. Other
important factors included complementarity with company’s core business as well as supportive
host country CDM policies and investment climate. Most of the companies that responded to
the survey are either currently investing or planing their investment strategy to respond to the
emerging carbon market.
The United States provides an interesting reference point. Under the Kyoto Protocol, the
U.S. will likely be the largest buyer market, and one predisposed to dong business with Central
America for a variety of historic, political and commercial reasons. The U.S. currently emits close
to 25% of all global CO2 emissions. Based on economic growth projections, the U.S. may have
to reduce greenhouse gas emissions as much as 35% in real terms to meet its target of 7%
below 1990 emissions levels for the 2008 to 2012 commitment period. Conservative estimates
calculate reduction requirements of over 300 millions tons per year by the year 2010.
If the U.S. were to try to reduce these emissions within its own borders, the latest, and
arguably most comprehensive, estimates project U.S. production costs of approximately $42 per
ton for the first six million tons per year, and costs of approximately $77 per ton for a subsquent
470 million tons per year. The cost of offsets rises rapidly above this amount.79
Alternatively, if an international emissions market among Annex I countries is developed
implementing the Kyoto Protocol, then there will be a number of sellers and buyers participating
in a global market. Given the breadth and uncertainty of this future market, few studies have
even attempted to estimate a market-clearing price for carbon offsets: a great number of
assumptions would have to be made to make such an estimate. Information regarding marginal
costs of emissions reductions is not precise. First, it is unclear to what extent limits may be
imposed on the extent of emission reductions commitments that can be achieved through
flexibility mechanisms. Second, we do not know what type of structures Annex I countries might
put in place to provide incentives to reduce emissions, nor which industries will bear
responsibility for reduction. Further the CDM (and its cousin, JI) carries with it more uncertainties
and higher transactions costs than the market for emission reductions made within the individual
Annex I countries. Consequently, the prices for CDM (and JI) reductions are expected to be
lower.
The opportunities for Central America to produce low-cost offsets identified above suggest
that it will be possible to take advantage of the gains from trade between the US and Central
America in a project-based carbon offset market. There will of course be other competitors in the
market who will influence price and other product attributes.
78
This study was conducted for CLACDS by the Center for Sustainable Development in the Americas,
Washington, DC. Results will be published as a CLACDS-INCAE Working Paper in June 1999.
79
Stavins, R. “The Cost of Carbon Sequestration: A Revealed Preference Approach.” American Economic
Review, 1999, forthcoming.
62
2.
Central America’s Supply Positioning
Costa Rica has thus far been the pioneer in attempting to enter these markets. Costa Rica
has formally made carbon available for sale, and in the past has sold carbon offsets to finance
improved environmental management activities. That country is now offering two types of carbon
for sale. Carbon offsets produced in Costa Rican public protected areas, which is 100% certified
and insured by an international forestry certification agency is being offered at a floor price of
$20 per ton. Carbon produced in the country’s innovative private lands carbon program is
offered at a floor price of $14 per ton. This carbon is not fully certified and is backed by the
Costa Rican government, not by independent insurance. No sales have yet taken place,
primarily due to the lack of clarity in international trading rules currently under discussion.
Given the uncertainties related to the development of the carbon market itself, the issue of
price is very important. An investor today must evaluate not only the risk inherent in producing
carbon offsets (a risk that could be minimized with insurance and certification mechanisms), but
also the risk associated with the market not developing as planned. In addition, sales occurring
prior to 2008 are really future sales for “consumption” between 2008 and 2012. Notwithstanding
this uncertainty, formidable opportunities exist for Central America.
All Central American countries have a variety of carbon supplies that could be traded on
future CDM markets. Table 6.1 summarizes current GHG emissions resulting from major landuse changes and opportunities for fixing additional carbon. Reduction of GHG emissions
provides the opportunity for Central America to generate carbon offsets.
63
Table 6.1. Changes in forest area and opportunities for annual carbon offsets
through lower deforestation, secondary regeneration, and plantations.
Forest area Annual
Annual C
Annual C
deforestati emissions
emissions
(1995-97)
on
from
from
deforestation protected
areas
(Total)
Annual C
sequestration
from secondary
regeneration
Average
annual C
sequestrati
on from
plantations
(000 ha)
(000 ha)
(000 tonsC)
(000 tonsC)
(000 tonsC)*
(000
tonsC)
3,750
90
10,125
2,475
2,153
324
El Salvador
105
12
1,584
42
84
648
Costa Rica
2,012
15
3,263
3,263
1,400
648
Nicaragua
4,200
100
13,200
4,752
2,625
389
Honduras
5,179
102
16,218
4,770
2,846
227
TOTAL
15,246
319
44,390
15,302
9,108
2,236
Guatemala
* Assumes that 50% of forestland lost since 1979-81 will be allowed to recover. A uniform rate of
80
3.5 tonC/ha/yr is assumed. Most data are elaborated from Rodriguez et al (1998) with the exception of
81
Costa Rican area estimates, which come from Boscolo at al. (1999) .
Many important uncertainties exist with regard to the extent of forest cover, rates of net
deforestation, levels of biomass per forested area, and effectiveness of possible carbon
sequestration programs. Within the context of these uncertainties, net deforestation is estimated
to be responsible for the release into the atmosphere of 36-51 million tons of carbon annually
(figures vary depending on the average biomass figures used), with a central estimate of 44
million tons; of these, 10 to 15 million tons are emitted from clearing forestland within existing
protected areas. Such emissions result from the annual clearing of more than 300,000 ha of
forest (2% of the regional forest cover) out of which up to a third is from protected areas.
Therefore, a successful program that could halt current deforestation would generate offsets for
80
Rodriguez, Jorge, et al “Análisis de Carbono y Fijación de Dióxido de Carbono de la Biomasa en Pie
por Encima del Suelo de Guatemala,” and similar reports for Nicaragua, Honduras, El Salvador.
Working Papers CEN-722, CEN-750, CEN- 741, CEN-730, respectively. CLACDS, INCAE. January
1998.
81
Boscolo, Marco et al, "What Role for Tropical Forests In Climate Change Mitigation? The Case of Costa
Rica,” HIID Working Paper, 1999.
64
about 44 million tons annually. Additional attractive opportunities for carbon sequestration
include secondary forest regeneration and forest plantations.
The options to generate carbon offsets could be tentatively ranked in order of costeffectiveness as follows:82
1. Protecting public land within parks and reserves. The activities involved include
demarcation of public lands, improved law enforcement, increased personnel and
infrastructure, developing economic alternatives in buffer zones through participatory
approaches with local populations, and resolving indigenous land rights issues. Up to 15
million tons of carbon emissions from 100,000 ha. could be prevented with this alternative, at
a cost of an additional $2.5-5/ha or $1-2/ton83. The protection of private and communal
lands within protected areas is likely to be more expensive. In Costa Rica, where 18% of
protected land is private, cost effectiveness has been estimated at $10-20/ton. In other
countries, this figure is likely to be significantly lower.
2. Protecting forested lands outside of protected areas. Significant opportunities exist for
reducing carbon emissions from deforestation outside of protected areas, especially in
countries like Nicaragua, Honduras, and Guatemala. The activities involved include better
allocation and monitoring of logging permits (for example through auctioning schemes and
improved taxation regimes such as heavier reliance on area taxes and performance based
incentives), improving forest management, for example, through increasing productivity of
commercial forests and increasing fire control, resolving conflicts between different interest
groups, and more effectively enforcing the law. About 30 million tons of carbon could be
protected from being released annually, at costs ranging from $0 to over $10/ton.
3. Reforestation through plantations. Forest plantations potentially provide some very costeffective opportunities to increase carbon sequestration. In areas that are not too isolated
and where technical expertise exists, carbon offsets could even be generated at a negative
cost; it is estimated that 70-80,000 hectares could profitably be planted annually on a
regional level. On average over the next 10 years, about 2 million tons of carbon could be
sequestered annually at close to zero cost. This tonnage could easily double if cattle market
prices continue to be low.
4. Secondary regeneration on marginal semi-abandoned pastureland. It is estimated that
more than 5 million ha have been cleared since the late 70s in the region. Assuming that
50% of this land is currently of marginal economic value and therefore could be recovered to
forest (as is already happening in Costa Rica, and certain areas elsewhere in the Region),
up to 9 million tons of carbon could annually be sequestered through a program that
facilitates and enhances secondary regeneration. Most of these options (up to 5 million tons
annually) would cost less than $5/ton. An additional 4 million tons could be attained at
higher cost.
82
83
This supply information is from Boscolo, Marco “XXXX”, HIID, expected June 1999.
This estimate is derived from Costa Rica where the annual budget for SINAC amounts to about 4.5
million dollars to manage about 1.6 million hectares. On average, therefore, Costa Rica parks and
reserves “cost” $3/ha. Given that many protected areas are under funded, a working figure of
additional $2.5-5/ha would seem reasonable even to cover some set-up costs. This figure is
conservatively used to estimate “additional” funding required on a per hectare basis. The exact
magnitude will, of course, depend on the size of the park (economies of scale can be attained for
larger areas) and on the severity of the threat.
65
In sum, up to 55 million tons of carbon could be marketed annually under a scenario where
all deforestation were halted and 50% of recently cleared land were brought again under forest
cover. The first 10 to 15 million could be generated at a cost below $1-2/ton, primarily by
protecting existing forest inside and outside parks and reserves. An additional 5 to 10 million
tons could be marketed at a cost between $0 and $6/ton from a combination of commercial
reforestation (for timber and fuel wood) and secondary regeneration practices. Most of the
remaining 30 to 40 million tons could be attained at a cost below $10-15/ton. These are
conservative estimates. Monitoring and verification would add additional costs. Depending on
the design and scale of projects these costs could vary between $.05 and $.50 per ton of
carbon.
Because much deforestation is symptomatic of inefficiencies and deep-rooted poverty, the
opportunities outlined above will only be realized if Governments will be able to resolve
institutional issues (increased transparency and credibility, resolution of land tenure issues and
rights of indigenous people, enforcement of law, etc.) which are “outside” the carbon market
sphere of possible initiatives. Historically commercial agriculture and the expansion of large
cattle ranches have driven deforestation in Central America. Today, the single most important
source of deforestation is the continued expansion of the agricultural frontier by small and
medium sized producers. Agricultural policies targeted at improving the situation of these
smaller producers will improve well being and complement climate change efforts. Better
access to finance, clearer land ownership structures and improved technical extension have
been identified as important variable in this area.84
Similarly, Central America could sell credits for future carbon emissions reductions from
changes toward more climate-friendly energy sources. For example, if one of the countries were
to install renewable energy or lower-carbon emitting electricity generating plants, the project
developers and the country in which the plant operates would be able to sell credits for the
carbon emissions avoided. The CDM provides an innovative source of funding for Central
America to invest in energy technologies more appropriate for the long-term – technologies that
support domestic energy production, rather than imports of fossil fuels, and that produce less
pollution. Central America has the potential to supply over 30,000 megawatts of hydroelectric
generating potential, over 1500 megawatts of geothermal generating potential and an as yet
uncalculated potential for solar and wind generating capacity.85 Currently numerous renewable
energy projects are under development – including potential supplies of an additional 700 MW
by the private sector and an additional 800 MW by the public sector.
3.
Competitor Actions
There are likely to be numerous developing country participants in this future market.
Costs of GHG offsets vary greatly across type of project and across countries. The limited
entries into this market have been at relatively low prices. For example, an internally structured
deal between a U.S. power generator, a major environmental NGO and the government of
Bolivia generated an implicit carbon price of around US$ .40 per ton. And, carbon futures are
currently trading in a New York pilot scale market for as little as $.65 per ton.86 These amounts
84
For a more comprehensive discussion, see Faris R. “Deforestation and Land Use on the Evolving
Frontier: An Empirical Assessment", Development Discussion Paper 10, HIID, 1999.
85
Fundación Solar, Central America Energy Fact Sheet, 1997.
86
Natsource, Inc. of New York has recently begun quoting and tracking suggested carbon futures. These
prices reflect public offers cleared through Natsource on March 31, 1999.
66
reflect both the different opportunities available for GHG reductions and the uncertainty
associated with the emerging market.
Most countries, including the U.S. and the Central American countries, will find emissions
reduction opportunities that are free (such as energy efficiency investments), and projects that
produce carbon at low or very low cost (such as forestry plantations or forest fire protection).
These lowest cost items are the most logical to put into production first. However, high levels of
demand will quickly absorb these cheaper opportunities. The market will likely develop more
sophisticated dynamics. For example, the “quality” of carbon can be easily differentiated based
on attributes such as: guarantees or insurance of the existence of the carbon reduction, type of
GHG reduction (renewable energy versus forestry), and ancillary attributes (additional benefits
associated with specific emissions offset strategies).
Central America looks strong in a differentiated market. The Region offers a wide variety
of potential projects in forestry, energy efficiency, renewable energy and methane reduction.
Current experience demonstrates success at obtaining insurance to guarantee delivery of
certified GHG reductions. And, perhaps most importantly, Central America can make important
differentiation of its GHG reductions. Different GHG reduction projects can be “bundled” with
protection of biological diversity, national park protection, support of indigenous communities,
reduction of vulnerability to natural disasters and a host of other attributes valuable to Annex I
countries that could potentially differentiate the Region’s offerings.
C.
Central American Agenda for Participating in Global Climate Change Markets
Although the market is not clearly defined, its potential size and value to the Region mean
that Central America should move forward in as many areas as possible. When the final rules
are set, they will be set quickly, and by necessity will almost certainly recognize certain GHG
reduction activities retroactively to 2000. If it is not ready for the launch of the market, Central
America’s position as market-maker and leader could be lost, along with many valuable
opportunities.
Central America should proceed by taking all “no-regrets” actions. These could include
fulfilling previously committed international obligations under the FCCC. Additionally, potential
public and private sector GHG project developers could begin to design, in cooperation with
likely future buyers, meaningful projects and products that could be transacted in a short time
horizon. The financial sectors could also begin designing and testing some basic financial
instruments to facilitate trading of these new financial products.
As parties to the FCCC, all Central American countries have committed themselves to do
two things – 1) develop a detailed greenhouse gas inventory establishing the countries' baseline
levels of emissions and absorption of GHG’s and, 2) establish a government-recognized office to
oversee current and future transactions under the current phase of activities implemented jointly
or the emerging Clean Development Mechanism. Only Costa Rica and Guatemala have
completed both. The remaining countries must move forward with these two relatively
straightforward tasks if they wish to be eligible for trading activity.
Central America must prepare for a fairly competitive market. Ideally positioned to be an
important early entrant, Central America could credibly assume a leadership role in this market.
Since the Region is not positioned to be the low cost competitor in the long run, it will need to
quickly adopt a more aggressive strategy of differentiation. This strategy needs to be based on
product variety, a very low risk profile, and ancillary attributes based on the Region’s unique
factor conditions.
67
The Region should also continue its active role in the international negotiations defining
the rules for the policies. A variety of issues are of critical importance to the viability of the
Region’s market for CDM projects, and for the more general functionality of the CDM program.
Among those, include:
"
Forestry: It is critically important that “carbon sinks” from forestry projects be included within
the flexibility mechanisms for achieving emission reductions.
"
Trading requirements: the percentage of reductions that will be allowed to come from
flexibility mechanisms (such as trading through the CDM) will to a great extent determine the
demand for Central American GHG products.
"
CDM fund structure: the design must be flexible enough to provide for the broad range of
possible strategies available to Central America; and
"
Equity issues: Central America should work to ensure that technical assistance is available
for project development and monitoring, and that CDM trades are not placed at a
disadvantage relative to other mechanisms by distortionary taxes or excessive transaction
costs. Success in this negotiating area may be furthered by influencing the composition of
the future executive board of CDM.
1.
Vision
Central America is the developing country leader in providing high quality, differentiated
climate change offset products and services. These products and services are offered in a
variety of packages including: custom projects, previously achieved offsets, financial products
(including investment funds and derivatives), and bundles with biological diversity protection,
agricultural frontier control, indigenous communities, and disaster vulnerability reduction.
2.
Agenda
1) To maintain credibility and leadership position, all Central American countries must fulfill their
standing commitments as signatories to the U.N. Framework Convention on Climate Change
and the Kyoto Protocol to that Convention. Those countries that have not fulfilled all their
commitments must do so quickly or risk undermining the Regional reputation.
2) Increase private sector participation in investigating and pursuing commercial opportunities
for carbon market participation in forestry, protected areas and energy. Leading international
companies are already investigating partnership opportunities and investing in early, pilotscale projects in anticipation of future emission reduction obligations and market
opportunities.
3) Foreign Ministries and embassies must take a more active role in negotiating conditions
favorable to Central America in international negotiations. The Region’s embassies in Annex
I countries should be engaged in this issue. Hundreds of millions of dollars of direct foreign
investment are at stake, making this one of the single largest foreign trade issues currently
facing the Region. Briefings for Foreign Ministries, commercial attaches, and clear
instructions from the Heads of State on this important international trade issue will increase
Central America’s chances of securing favorable trading conditions.
4) Investigate paying current or future sovereign obligations in carbon reductions or carbon
futures. The leading multilateral banks are establishing GHG portfolios, which could facilitate
68
this type of transaction. Many existing or planned development projects are consistent with
CDM objectives and the multilaterals are in a better position to take risk positions and
diversify their portfolios.
5) Involve the financial sector in the design and development of financial instruments to
transact the Region’s GHG offsets. Innovative financial instruments will be needed to
transact carbon. Development bank financing is an appropriate vehicle for start-up and early
entry into the markets. Financing market research, sales missions, office management, and
even limited investment projects would greatly increase the probability of success of the
Region’s climate change offerings. The BCIE could play a leadership role in this start-up
phase, and then evolve their position toward a climate change investment portfolio that could
be internationally transacted through a variety of financial instruments and diversified carbon
positions.
Matrix 6.1 provides greater detail on implementation of these Agenda items.
69
MATRIX 6.1 Agenda for Action: Global Climate Change and Carbon Markets
A. GENERATE CONDITIONS FOR CREDIBLE OFFSETS
Policy
Description
Instrument/
Sources
Targeted
Geographical
Focus
Timing
Institutional Roles
Institutional/
Approximate Costs/ Financing
Expected
Benefits
Impacts/
Legal
Changes
Undertake/ Complete GHG
inventory
Energy sector
Land-use &
Forestry
Nationwide, but
with greater detail
where
compementary
values
(biodiversity,
water, energy
generation
potential, health
benefits) are high.
Start now
Government to
supervise work to be
carried out by
specialized firm. Seek
third party (international)
validation.
Not necessary
Between $100,000-$200,000 per
country. Should capitalize on
existing natural resource
assessments. Additional
financing needed to complete
work.
Increased credibility,
increased ability to
negotiate country’s
position, to address
baseline issues for CDM
trades. Better
information to make
wider range of policy
decisions.
Set up mechanism (e.g., CDM
office) to inform, advise,
validate, and/or market CDM
initiatives
As above
As above
Start now, with
capacity linked
to projects in
pipeline
Office/firm should
receive endorsement
from Government
May be
needed. Can
be kept at a
minimum.
Some set-up funds needed in
the short term; then to be
financed by carbon sales.
Will reduce transactions
costs in project
development, marketing,
and Government
endorsement.
Start developing sectoral
baselines
As above
As above
Begin in the
short term
Involve private sector
and technical experts in
exercise.
No change
envisioned.
Depend on data availability and
quality and quality/specificity of
output.
Increased credibility,
increased ability to
accomplish trades.
Better information to
make wider range of
policy decisions.
Study an effective monitoring
system that could be applied
at both national and local level
As above
As above
Start now, but
capitalize on
existing
capacity
Various configurations
possible. Monitoring
should be carried out by
credible agency.
Various
Costs for monitoring carbon
changes in forested ecosystems
currently range between $0.05$0.50/ton of C.
Necessary means to
claim offsets. Better
information to make
wider range of policy
decisions.
Participate more actively in
international negotiations
As above
National and
regional (Central
America)
Start now
National governments
and regional
coordinating bodies
No change
envisioned for
participation.
Geographical
Focus
Timing
Institutional Roles
Institutional/
International rules,
particularly for CDM,
may better reflect the
interests of developing
countries
B. LOWER COSTS OF GENERATING OFFSETS
Policy Instrument/
Description
Sources
Targeted
Approximate Costs/ Financing
Expected Impacts/
Benefits
Legal
Changes
Link compensation
mechanisms for
protection/reforestation to:
Forestry
Pilot in various
regions. Then
nationwide.
Retain priority
areas based on
objective
importance of
other values.
Start now
Institutions in charge of
forestry assistance to
modify reward systems
using pilot initiatives at
first. Start with private
sector transactions first
to test feasibility of
system.
May require
amendments
where laws
specify
reward/subsid
y mechanisms
Modification will require a light
increase in administrative
burden. Some costs in training
and developing and distributing
informational material.
Large savings in the
achievement of given
outcomes.
Energy sector
Nationwide.
Start now
Government to identify
appropriate firms. An
open competition as a
possible mechanism for
selection.
Depending on
the agreement
sought with
private parties.
Minimal
Greater variety and
quality of projects.
Stimulate innovative and
market-driven capacity
of private sector.
Opportunity by
Government to learn in
the process.
opportunity cost of action
carbon offset potential
impact of action on other
values
Explore opportunities to
involve/motivate private sector
participation in the generation
of carbon offsets from both
private and public resources.
Land-use &
Forestry
C. REMOVE CONSTRAINTS
Policy Instrument/
Description
Sources
Targeted
Geographical
Focus
Timing
Institutional Roles
Institutional/
Legal Changes
Approximate Costs/ Financing
Expected Impacts/
Benefits
Clearly identify and mark
protected area boundaries
Protected
areas
Areas of high
tourism and
biodiversity value.
Begin in short
term
Activity can be
subcontracted. Final
work to be validated
by Government and
local communities.
Not necessary
Additional $2.5-$5/ha,
depending on location, threat,
and extent of park. Cost figures
include all additional
management costs, not only
demarcation.
Protection of biodiversity
and other environmental
values. Better image for
tourism and foreign
investment.
Resolve indigenous rights
issues and other land tenure
issues
Areas with
existing and
predictable
conflicts
Areas with
existing and
predictable
conflicts
Start now
Agricultural reform
institutes, Registries,
other Government
agencies.
Various
International financing needed.
Positive effects on
investment climate at all
levels.
Streamline and strengthen
law monitoring and
enforcement
Forestry
Where skills and
capacity can be
built in the short
term
Begin with
areas and
projects that
can serve as
educational
opportunities
Some activities could
be delegated to
private agencies.
Government to control
the controller.
Various
Various
Positive effects on
investment climate at all
levels.
Energy sector
71
VII.
CONCLUSIONS
Central America has numerous opportunities to enhance its competitive position
through improved environmental performance. The Region’s varied and productive
natural resource endowment is a valuable source of potential competitive advantage for
the Region.
Successful incorporation of environmental factors into the Region’s competitive
fabric will make its business climate more attractive to foreign investors, align the
agricultural and tourism sectors with more valuable markets, and offer new and exciting
opportunities in climate change markets.
Global forces relating to the environment will continue to shape Central America’s
competitive future. Successfully harnessing these forces offers the potential for
increasing levels of value creation and improved stewardship of the Region’s natural
resource base. Failure to respond to them will weaken current comparative advantages
in natural resources, and eliminate future possibilities of developing these assets into
sustainable long-term positions.
Concerted action by the private and public sectors of the Region could effectively
unlock the true value of its natural resources, allowing them to become important
contributors to the improved well-being of the people of Central America for this and
future generations.
72