From Stratfor Global Intelligence

Following a slowdown after the 2008-2009 global financial crisis, Central American and Caribbean economies expanded significantly. The regional gross domestic product grew 2.5 percent in 2013 and is expected to have grown 3.7 percent in 2014. The Dominican Republic and Nicaragua are particularly strong performers. Both have benefited from expanding their export infrastructure under the Dominican Republic-Central America Free Trade Agreement and have received sizable investment into their low-end manufacturing industries, making them key alternatives to China. Panama has also seen strong growth and investment rates, though this is primarily because of its canal and associated service industries rather than an expansion of low-end manufacturing.

The World Economic Outlook published by the International Monetary Fund in April foresees strong growth in the region during the next two years. Projected growth in 2015 is 4.2 percent for Central America and 3.7 percent for the Caribbean; in 2016 it remains strong at 4.3 percent and 3.5 percent, respectively. One factor driving this growth is that most countries in the region are net importers of oil. Therefore, low oil prices, which hurt oil-producing countries such as Venezuela and Brazil, have the opposite effect on most of the region. Strong U.S. economic recovery also aids growth in Central America and the Caribbean because of the region’s dependence on tourism and on U.S. trade.

Despite recent growth, Central American and Caribbean economies will encounter certain obstacles — both longstanding and newly emerging — in the years to come. One enduring regional challenge is security-related: Central America and the Caribbean are part of key narcotics transit routes from South America to the United States, and several countries within the region have high homicide rates and drug-related violence. In addition, while low-end manufacturing is expanding in countries such as the Dominican Republic and Nicaragua, most states in the region lack the population and transportation network necessary for significant industrial growth. Whereas Mexico has a large population and diversified manufacturing base close to the United States, countries in Central America and the Caribbean are much smaller and farther from the United States. Lack of easy access to U.S. oil and natural gas makes it harder to meet the electricity demand that accompanies growth in manufacturing and tourism.

Ultimately, the same factors that lead to growth in Central America and the Caribbean will increase U.S. influence in the region. Recent economic growth is due, at least in part, to economic recovery in the United States and will continue to depend on ties with the U.S. economy. Meanwhile, the decline of Venezuela may cause leftist governments to re-engage with Washington, opening up new trade and investment opportunities. Whatever challenges and opportunities Central America and the Caribbean face, the region will remain strategically important to the United States in the years to come.

IMAGE: Central America And Caribbean Respond Well To U.S. Market Integration Click to Enlarge

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