The World Bank supports efforts by Central American countries to ensure that a free trade agreement with the United States, negotiations for which will be launched this month, fulfills its potential to reduce poverty in the region.

The Central America Free Trade Agreement (CAFTA) will offer opportunities for the Central American economies to boost long-term growth, create jobs and reduce poverty, as the U.S. is the major trading partner to all the countries concerned—Guatemala, El Salvador, Costa Rica, Honduras and Nicaragua. But to realize this potential, CAFTA must be accompanied by government policies to enhance productivity growth and address possible short-term social dislocations.

The World Bank supports a growth and poverty reduction strategy in Central America that includes enhancing private sector productivity to take advantage of the opportunities that international trade offers. This strategy includes a total of $41.3 million in already-approved World Bank loans to enhance competitiveness of firms in Nicaragua, El Salvador and Guatemala. These loans are currently being adapted to focus more directly on the immediate challenges posed by CAFTA. A new competitiveness project for Honduras will be presented to the Bank’s board in 2003.

The Bank has also responded to requests from Central American governments for analytical and advisory support to address the policy challenges of implementing the CAFTA so as to maximize its potential to reduce poverty. Specifically, the Bank is currently undertaking a study of strategic CAFTA-related issues that emerged in consultations held across the region. The subject of this study was discussed with senior trade officials from the five countries at a workshop in San Jose, Costa Rica in December, where World Bank staff presented recent studies of the North American Free Trade Agreement (NAFTA) and the lessons for Central America.

The World Bank also supports projects to strengthen governance and institutions, which are vital to create the sound investment climate required for the success of CAFTA. World Bank projects on this front include judicial modernization in El Salvador, Guatemala and Honduras, support for anti-corruption efforts in Guatemala, Honduras, Nicaragua as well as public sector modernization and institutional development in Guatemala, Honduras, Nicaragua and El Salvador.

For CAFTA to boost long-term growth and strengthen poverty reduction trends, Central American countries will also need complementary actions and investments. With this in mind, the World Bank will sustain its lending and policy advisory services in health and education, rural development, environmental protection, and on strengthening trade-related infrastructure.

For more information on the World Bank’s trade-related support for Central America, please click here