Old elites in new waters: understanding how Central American economic groups navigate a globalized economy
What happens to old economic elite groups when economic liberalization removes old privileges and economic globalization requires outward orientation and competition for home markets? And what are the implications of their strategies to confront these new challenges for the sustainable development of their home countries?
Hilde Hartmann Holsten
These are the key questions guiding the research project “Confronting transnationalization: the economic, environmental and political strategies of Central American economic groups”, funded by the Latin America program of the Norwegian Research council. It is led by Associate professor Benedicte Bull at the Centre for Development and the Environment (SUM), and includes PhD student Yuri Kasahara also at SUM, Fulvio Castellacci, head of the economics department at the Norwegian Institute of Foreign Affairs (NUPI) and Alexander López, director of the School of International Relations at the Universidad Nacional de Costa Rica in its group of researchers.
The transformation of Central America
Photo: Alexis Cruz / flickr
Central America is a region that has undergone deep structural transformations over the last 20 years. For most of the 20thcentury its economy was dominated by the production and export of a handful of agricultural and agri-industrial products: coffee, sugar, bananas, in addition to cotton and cattle. This economic structure – often called “the dessert economy” due to the dominance of the three former products – gave rise to a local economic elite, which also dominated politics for most of the last century. The process of economic liberalization that started in the 1980s has produced a deep change in the economic structure of most of the Central American countries. Light industry, services and remittances have now taken over from the traditional products as the main sources of income from abroad. Nevertheless, there is a popular perception that the old elite groups continue to dominate economic as well as political life, now in alliances with foreign capital.
- The aim of this project is to understand better how these elite groups handle increased economic openness, a process that in many Central American countries have occurred in parallel with democratization. The popular perceptions are in most cases based on journalistic accounts and widespread “feelings” rather than facts, explains project leader Bull. – We want to provide an understanding with a stronger empirical basis.
The fact that the project has chosen to focus on economic groups as their main variable reflects the fact that most large companies in Central America are organized as multisectoral economic groups, or business groups.
- By business groups or economic groups we mean large groups of companies that are joined together by common leadership in some way. We mostly look at family owned business groups because they are the dominating ones in Central America. They tend to control large shares of the economy. One example of a business group is Grupo Motta from Panama. The group controls Copa Airlines, one of the biggest in Central America, and also has a share in one of the biggest banks in Panama that is called Banco General. The group is also involved in tax free shops in airports, and owns local TV channels in Panama. The group is not only in Panama but also in other parts of the region such as Bolivia, Nicaragua, Colombia and Costa Rica, explains Kasahara. He has a main responsibility for studying the cases of Panama, Costa Rica and Nicaragua, whereas Bull has a particular responsibility for the northern triangle: El Salvador, Guatemala and Honduras.
- We study to what extent these groups still dominate the economy and the political life in many of the Central American countries, how they deal with economic openness, competition from abroad, and globally integrated production. In general you can say we study their political, economical and environmental survival strategies. The strategies include alliances with multinational firms, becoming multinational themselves as well as selling out in sectors controlled by multinational firms, says Bull.
What is special in Latin America is that these diversified groups still dominate in spite of many hypothesis in the literature that globalization would lead many of them to be absorbed by large multinational companies, and that the global competition would force them to specialize, and not be diversified in different sectors that are only remotely connected or that are not connected at all. In the academic literature there are many hypotheses about why this is the case, and some studies exist of economic groups in Mexico, Colombia, Brazil, Argentina and Chile, but no one has ever made a similarly comprehensive study of the Central American groups. Thus, the project also intends to make a significant contribution to the academic literature on economic groups, as well as that of the more general literature on political economy and globalization.
- On the theoretical part, one of our main contributions would be to bridge the local understanding of these groups, with the general theoretical understanding of economic groups in the literature. The majority of the theories sees them as phenomena of corporate management, that it is a corporate management decision to form a business group or not, for example related to market failures. In the literature they are seen as reacting to the framework conditions in a country. However, in small countries the groups' strategies would by themselves influence the framework conditions, says Bull.
One reason why there exist so few studies of economic groups in Central America is the difficulties of getting access to information about them. They are not required to publish information about turnover and profits, and most business leaders are reluctant to give interviews .
The project uses multiple strategies combining quantitative and qualitative methods. It has created a database with an overview over all the main economic groups in the region and their companies. This is developed based on detailed studies of public registries as well as business magazines, websites and newspaper articles. A second step is to conduct a survey of a selection of the firms. In addition to this qualitative case studies are conducted of selected groups in all the countries.
- The lack of public information about individual firms has been a big challenge for our work. Most of the companies are not listed in the stock markets and they have no obligation to publish for instance financial reports. There exists no public information about how much money they make, or how many employees they have. We are trying to fill in the blanks as well as we can, in order to do a more quantitative analysis and to have a broader overview of the firms in the region, says Kasahara. - The database now contains about 2000 firms grouped in around 40 economic groups, but it is constantly updated and changed as new information is added.
Another big challenge has been how to define and identify an economic group. Most of the economic groups do not call themselves a group, whereas many individual companies do.
- We have had to focus mainly on the family concept and define a group as those companies that are owned by one business leader or one family. That is also rather complicated in many cases as the families are large and it is difficult to know the extent to which all the companies owned by one family are coordinated so that it can be called an economic group. This can only be established through interviews and although access is a challenge, it has not been impossible, says Bull.
- The matter is further complicated by the fact that many groups are connected through intermarriages and joint ownership and board membership. Thus what appears is not a set of distinct groups of companies, but rather a dense regional network of interconnected groups. We are visualizing this through the use of particular software called UCINet, says Kasahara.
A variety of strategies
The findings so far points to that the groups are employing many different strategies, but that there are some commonalities.
Galerías, San Salvador - a modern shopping mall physically built around the mansion of a wealthy family. Photo: Lee Shaver / flickr
- Many of these groups originate from owners of coffee growers, sugar growers, cotton and cattle. Then they moved into some key industries during the period of import substituting industrialization in the ‘60s and ‘70s. Examples of such industries include food and beverage, textiles, the pharmaceutical industry and cement. Many acquired monopolies or near monopolies in their sectors. Others focused more on commerce. When globalization made its impact in the ‘90s, there was a general move from industry into services, but there are differences between countries. El Salvador is the extreme case: Here the traditional groups have pushed for economic openness and dollarization. As the Salvadorian industry has not been big on innovation, this has made local competition against external companies difficult. But many Salvadorian groups had by then moved into commerce and services and gained from cheap imports. They saw that the remittances from immigrants in the United States could foster consumption for services and foreign products. Now they are all in hotels, tourism, car dealership, building shopping malls, or representing and re-selling international brands (for example chain restaurants like McDonalds). And they have moved into the neighboring countries, becoming regional groups. So some groups are really tackling well the more open economy and market through a strategy of regionalization. Examples of this are Grupo Poma and Grupo Agrisal from El Salvador that have investments in the entire region as well as Colombia, and the United States. The question is what the implications are for the development of El Salvador, says Bull.
Many groups are also very active in politics. The focus on controlling local politics may seem surprising if they are increasingly regionally and globally focused groups.
- For example in Panama one of the biggest businessmen, Ricardo Martinelli, the owner of a chain of supermarkets, is currently the president. In Panama, Honduras and El Salvador the connection is very clear. In El Salvador businessmen have held positions ever since the democracy was introduced in 1992. El Salvador is unique in the sense that they have a strong business party, and the board of that party has been occupied by all the big business leaders and they have been in all sorts of positions. Guatemala is more influenced by the military, and the political parties are weaker than in El Salvador and Panama. Costa Rica is an outlier, since domestic business sectors play a smaller role in party politics. However, during the last elections, Grupo Poma from El Salvador was one of the biggest contributors to the current president, Laura Chinchilla Miranda’s campaign, mainly because of their big investments in Costa Rica, says Kasahara.
The groups use several methods for influencing domestic politics. The most visible is an active participation, where businessmen themselves are elected to positions. They can also participate through business associations, which in turn participate in the political process, or lobby governments and legislatures directly. The fourth way they often use to influence politics is through campaign contributions.
- In a country like Honduras, where both major parties are dominated by business elites, businessmen have stated in interviews that they don’t really care who wins an election; they contribute to both campaigns and make sure they are in a good position to influence their key areas of interests irrespective of who wins, says Bull.
- Campaign financing is tricky to reveal because there is no obligation of disclosure in these countries. Only in Costa Rica the parties have to disclose how much money they collect, but not from whom. So we depend on press reports for that kind of information. In El Salvador we started to map this systematically. We have now an overview of all the cabinet members and the deputies since 1992, and we are crosschecking all the names with the boards of the group companies, explains Bull.
Helpers to development or “the bad guys”?
- Do you have a conclusion yet as to how the strategies of these groups influence the sustainable development of the Central American countries?
- The answer to this question does of course depend on who you ask. These groups do provide employment and many now start to emphasize corporate social responsibility, improving corporate governance practices and environmental conduct, as well as respecting the participation of their counterparts which have been labor and leftist political parties. Moreover, we have seen clear differences between different groups: whereas some are actually interested in contributing to developing the local economy, others see this mainly as a platform for extracting resources to reinvest abroad. However, the economic concentration that they represent and their stronghold on parts of the political system is not a benefit for the prosperity and social inclusion in Central America, says Bull.
The results of the project will be shared widely with academics, policy makers and others interested in Central America. Three workshops/seminars are planned: the first will be next month in El Salvador. In early 2012 there will be a large workshop with academics from the whole region and the project will end with an open seminar where the group will present the project to politicians and the general public. The database will also be made available on the internet, and the project collaborates with the UN Economic Commission for Latin America and the Caribbean (ECLAC), which will get access to the data during the process. Furthermore, one book in English and one in Spanish as well as several academic articles are underway.