External Shocks, Food Security, and Development: Exploring Scenarios for Central America

44 Pages Posted: 11 Jan 2017

See all articles by Eugenio Diaz-Bonilla

Eugenio Diaz-Bonilla

International Food Policy Research Institute (IFPRI)

Valeria Pineiro

A member of the CGIAR Consortium - International Food Policy Research Institute (IFPRI)

Pablo Elverdin

International Food Policy Research Institute (IFPRI)

Date Written: December 23, 2016

Abstract

We conduct an ex ante evaluation of the impacts of a potential global recession within the next years and the possible policy responses to support economic activity and improve social indicators in five Central American countries: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.

We review the economic and social evolution of the past decades in those countries, and we consider a global scenario that includes further deceleration of world growth, lower commodity prices, and a decline in remittances and capital flows to those countries.

We simulate those scenarios and related policy issues using recursive dynamic CGE models for the countries considered. The global shock is run under fixed exchange rates and flexible exchange rates (in the case of El Salvador, which has adopted the US dollar as the domestic currency, the simulation of a flexible exchange rate is just indicative). In all cases, a flexible exchange rate delivers better results in terms of GDP per capita, by softening the overall economic impact of the external shocks.

Two possible interventions to deal with the recession are simulated: one focuses on policies to strengthen the safety net for the poor; the other applies a more general macroeconomic stimulus (a tax cut plus a modest increase in public investments, financed by unconventional monetary policy) to try to cushion the shock. For all countries except El Salvador, these two simulations are run with a flexible exchange rate.

In the first policy simulation GDP per capita in those countries does not change much, but the poor groups targeted clearly improve their incomes and consumption, helping them the most during the years of the negative shocks.

In the second simulation, the macroeconomic stimulus improves the performance of the economies, allowing GDP per capita to be higher than in the case of the shock alone.

In summary, facing a potential global downturn as the one simulated here, those countries that have flexible exchange rates and the use of domestic monetary policies can use a mix of adjustment in exchange rates combined with targeted poverty transfers and macroeconomic stimulus to alleviate the shock. El Salvador, which does not have the exchange rate and monetary instruments, will require further support from multilateral and bilateral sources to soften the shock.

Keywords: Central America, Latin America, Macroeconomics, Economic Growth, social Protection, social Safety Nets, Economic Shocks, Resilience

Suggested Citation

Diaz-Bonilla, Eugenio and Pineiro, Valeria and Elverdin, Pablo, External Shocks, Food Security, and Development: Exploring Scenarios for Central America (December 23, 2016). IFPRI Discussion Paper No. 1592, Available at SSRN: https://ssrn.com/abstract=2897098

Eugenio Diaz-Bonilla (Contact Author)

International Food Policy Research Institute (IFPRI) ( email )

2033 K Street, NW
Washington DC, DC 20006
United States
202 862-5601 (Phone)

Valeria Pineiro

A member of the CGIAR Consortium - International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

Pablo Elverdin

International Food Policy Research Institute (IFPRI) ( email )

United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
38
Abstract Views
468
PlumX Metrics