Volume 44, Number 174,
July-September 2013
Central America: The Urgency of Coherent
Commercial Diversification
Juan Sebastián Castillo, Esther Aguilera and Carmen García Cortijo
Estimating the Simulation Model for International Commerce

The fact that only geographic diversification was found to be significant for economic growth in the general commerce model and sub-model meant it was necessary to propose a scenario to combine diversifying the product basket in combination with current geographical distribution. In analytical terms, the estimate of the simulation model (expression 19) is as follows:


with di = 1 for country i and di = 0 if not.

It is odd that neither scenario has a significant coefficient for diversifying the product basket (IDPit), which is likely due to the fact that Central America needs to identify its priorities in the basket of export goods to find those that have the greatest aggregate impact. Still, it is clear that in Central America, only geographic diversification is driving the economy, and nothing conclusive has been shown with regards to the basket of goods. In econometric terms, the model is equally valid as the prior estimates (expression 21 and expression 22).

Estimating the Intra-Regional Commerce Model

Finally, the estimate of the intra-regional commerce model (expression 20) was as follows:


with di = 1 for country i and di = 0 if not.

In this case, it is confirmed that intra-regional commerce makes the largest contribution to the Central American economy. Trade carried out among the five countries that make up the bloc is three times as important as commerce with the rest of Latin America (0.58 versus 0.19) and nearly double that of global trade.

Moreover, with regards to the coefficients that measure the fixed effects of countries (di), the maximum likelihood test for the redundancy of fixed effects determined that the five countries of Central America have similar commercial patterns in their relationships with the US, China and the EU, given that the associated p-value is 0.15 and 0.13 in the models (expression 21) and (expression 22), respectively. However, when intra-regional commerce is taken into account and a hypothetical basket of diversified products is used, very different behavior emerges with a p-value of 0, both for the sub-model (expression 22) and the simulation model (expression 24).

Verifying the Hypotheses

The above results allow us to compare the ex-post suitability level of the previously proposed hypotheses:

Regarding the first hypothesis (H1: The concentration of commerce in the United States is a systematic risk factor), the three international commerce models indicate that geographic diversification is the key factor behind Central American growth, and it is therefore a risk to concentrate commerce too closely on the US. Lederman and Maloney (2003: 14-15), Bacchetta et al. (2009: 1) and Mejía (2011: 20) all reached this same conclusion.

In terms of the second hypothesis (H2: Trade with China has not led to benefits and is still un-explored terrain, while growing commerce with the European Union is still a promise to be fulfilled), the general model and the sub-model showed that relations with China and the US have positive results, although not sufficiently significant. This conclusion is in keeping with proposals from Cruz (2005: 282) and Diéz and Villalobos (2010: 3), respectively, for China and the European Union.

With respect to the third hypothesis (H3: There may be a hypothetical virtuous cycle between product diversification and markets and growth), the results indicate that diversifying the product basket is not significant. It is definitely clear that in Central America, only geographic diversification drives economic growth. Our models do not provide a conclusive comparison regarding diversification of the basket of goods. Even so, other studies (Stanley and Bunnag, 2001: 1369; Taylor, 2003: 77; Foster and Jara, 2005: 2) have concluded that diversification of goods is inherently related to economic growth.

Finally, the fourth hypothesis (H4: In these circumstances, intraregional trade with Latin America as a whole constitutes a space that should grow significantly and have an important impact on the major national macro-scale) verified that intra-regional commerce is a basic mechanism to consolidate gdp growth in Central America. The border effect, geographic proximity and the homogeneity of commercial channels present in commerce among the five countries was extremely significant. These effects are much stronger among the regional countries than between Central America and the rest of Latin America. These results are in accordance with conclusions from Durán and Lo Turco, 2010: 92-93).

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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