During the early 1990s, the Central American and Caribbean states, along with Mexico, suffered through an economic slowdown that became known as the "Tequila Crisis." Now, as the global recession threatens to devastate Central America, the region's economic situation could make the Tequila Crisis look like a mild bender. Still, even in these grim times savvy businesspeople are finding opportunities in Central America, since the recession won't destroy the region's strongest economies, and actually may prompt regional economic integration.

As Goes America...

Central America today is paying for developing close ties with its huge northern neighbor. "Manufacturing in the region has become almost exclusively dependent on exports to the U.S., so as American consumer consumption falls, Mexico and Central America are in trouble," says Erwan Quintin, senior economist at the Dallas branch of the Federal Reserve.

Central America's reliance on tourism and commodities hasn't helped either. With the world drowning in cheap coffee, the price of arabica has fallen by 60 percent over the past two years, and the Juan Valdezes of Nicaragua and Guatemala are out of work, exacerbating income divides in an already stratified region.

"Nicaragua and Guatemala may have to move to other crops, but their land may not be suitable for alternatives to coffee," says Robert E. Scott, international economist at the Economic Policy Institute, a research institution. And with U.S. citizens increasingly afraid to fly, the Caribbean's swank resorts are reporting skyrocketing vacancy rates. "The Caribbean is so dependent on tourism, and that's gone down the tubes," says David Ruccio, a Central America specialist at Notre Dame University.

Double-Edged Sword

Still, many businesspeople see bright spots amidst the gloom. Over the past decade, most countries in the region have developed relatively stable political climates. What's more, in recent years Central America's most forward-thinking states have enacted economic reforms that reduced barriers to entry and privatized state enterprises. These reforms should help the best-positioned states weather the downturn, and should provide opportunities for foreign investors.

Costa Rica and El Salvador have been particularly successful in combating corruption, reducing barriers to entry, and luring investment. The region's most stable democracy, Costa Rica, receives high marks fighting graft from Transparency International, a global non-governmental organization that tracks corruption. Costa Rica also has used its reforms--including an eight-year tax exemption for foreign manufacturers--to convince Intel to locate factories near its capital city, helping to reduce the country's dependency on commodities and tourism. Little wonder that Costa Rica's economy grew rapidly the past two years and the country is poised to bounce back from the global recession.

Meanwhile, El Salvador has slashed tariffs so much that last year it was rated the freest economy in Latin America by the Heritage Foundation, a conservative U.S. think-tank. By reducing tariffs, El Salvador has drawn significant amounts of foreign investment and, in the past year, has set up new maquiladoras--textile export factories owned by multinationals--which are projected to provide jobs for 150,000 workers.

Lagging only slightly behind Costa Rica and El Salvador, Panama, Jamaica, and the Dominican Republic have improved their prospects for growth and attractiveness to foreign companies.

Panama has positioned itself not only as the region's shipping hub but also its financial center by cleaning up its notoriously lax banking laws. These reforms, combined with low taxes on financial services, have allowed Panama to attract branches of the world's leading investment banks.

Jamaica has proven particularly successful at branding: it has used advertising to make Jamaica's Blue Mountain coffee, Appleton rum, and Walker's sauce well-known--and thus more expensive--in North America.

Meanwhile, the Dominican Republic has become a leader in telecommunications privatization. The small Caribbean nation has slashed restrictions on foreign investments in cellular telephony, allowing one Dominican Republic-based group, Tricom--which is owned in part by American telecom behemoth Motorola--to develop plans to unite Central America into a single cellular network.

Unfortunately, other nations in the region haven't proven as proactive as these five states. Nicaragua, Haiti, and Honduras, in particular, remain relatively corrupt and unfriendly to foreign companies.

The Nicaraguan government has attempted to combat its reputation for sloth by abolishing siestas for civil servants, but Transparency International's 2001 report noted dryly that, "in Nicaragua last year, accountability and anti-corruption efforts collapsed." Nicaragua has been largely unable to shed the red tape and graft left over from its 1980s socialist era. Haiti remains a combustible mix of street crime, poverty, and domestic political in-fighting--factors that inhibit any chances for structural economic reform.

For its part, Honduras has consistently reverted to high tariffs to protect its markets, slapping punitive duties on Nicaraguan goods and scaring off investors.

'Dollarization' on Tap?

Even laggards such as Haiti would be forced to reduce barriers to entry and reform their economies if Central America and the Caribbean embark on long-stalled plans for economic integration, a prospect that may get a boost from the slowdown in the United States.

"When times are tight, that can be an imperative for more economic integration," says Richard Feinberg, a Latin America specialist at the University of California, San Diego. Ruccio agrees: "In this economic climate, we will see more discussion of a Central American common market." Ultimately, Central America may join South and North America in a Free Trade Area of the Americas, which would extend NAFTA all the way to Chile--a far-reaching trade agreement that would revolutionize business in the hemisphere.

These trade deals would help both Central American and foreign companies. Economists believe a Central American common market could add as much as $1 billion to growth in the region, and Jeffrey Schott, an economist who focuses on Latin America, notes that eliminating "common external tariffs and other domestic regulatory restrictions would open substantial new trading opportunities for U.S. firms." In the long run, economic integration might prompt Central America to adopt the U.S. currency, a process called "dollarization," that some economists believe promotes fiscal stability.

Already, Panama and El Salvador have adopted the greenback, and Johns Hopkins University economist Steve Hanke has predicted virtually all of the region will be dollarized in ten years.