Introduction

Until the late 1970s, the Central American economies were growing, although only the growth rates of Costa Rica and Panama surpassed the average annual GDP per capita of the world. In hindsight, this record, for all its limitations, was a golden age on the isthmus as it was for much of the world. Since 1990, most Central American countries have fallen farther behind, with Nicaragua failing to recover the ground it lost since the late 1970s. The inability of dictators to reform imposed painful costs on most Central Americans.

Ill-timed external shocks compounded the effects of war. As states battled insurgents, the sudden drop in the terms of trade in 1979, along with the rise in interest rates on foreign loans, led to a contraction of economic activity. Both external shocks were central components of a generalized economic crisis highlighting the weaknesses of a growth model that relied on exporting agricultural commodities, ones whose prices were volatile and whose benefits concentrated among landowners, as I showed in Chapter 1.

Although many of them were waging war, Central American policy makers had little choice but to stabilize their economies. They devalued currencies , renegotiated foreign debts , and balanced state budgets, which reduced incomes and worsened recessions. Like their South America counterparts, Central American states opted to shrink their role in the economy as they stabilized (Kingstone, 2011 ). By the end of the decade, policy makers in both countries – even Costa Rica, the country with the region’s largest state and most successful economy – had returned to the libertarian doctrines of the past, ones associated with decidedly mixed results for economic growth and development.