Pandemic reinforces the value of production centers in the same subregions

The free trade zones of Central America and the Caribbean have been an important driving force for the economies of the region. Favored by the increasing globalization of recent decades, they could now be boosted by a phenomenon in the opposite direction: "glocalization", the desirability of having production centers in the same sub-region, close to major markets, to avoid the problems in distant supply chains seen during this Covid-19 crisis that has so affected transportation and communications. The two leading Latin American free trade zone countries, the Dominican Republic and Costa Rica, offer affordable and sufficiently skilled labor at the doorstep of the United States.

▲ One of the Dominican Republic's free trade zones [CNZFE].

article / Paola Rosenberg

The so-called free trade zones, also known in some countries as free zones, are strategic areas within a national territory that have certain tax and customs benefits. In them, commercial and industrial activities are carried out under special export and import rules. It is a way of promoting investment and employment, as well as production and exports, thus achieving the economic development of a part of the country or of the country as a whole.

Free trade zones are important in Latin America and, in the case of the smaller economies, they are the main production and export hubs. agreement to the association of Free Trade Zones of the Americas (AZFA), there are some 3,500 free trade zones in the world, of which 400 are in Latin America, representing 11.4% of the total. Within this region, they have a special weight in the countries of Central America and the rest of the Caribbean basin. They are particularly important in the Dominican Republic and Costa Rica, as well as in Nicaragua, El Salvador, Colombia and Uruguay (also in Puerto Rico).

These countries benefit from having abundant labor (especially trained in the Costa Rican case) and at low cost (especially in the Nicaraguan case), and this close to the United States. For manufacturers wishing to enter the U.S. market, it may be interesting to invest in these free trade zones, taking advantage of the tax advantages and labor conditions, while their production will be geographically very close to their destination.

The latter is gaining ground in a post-Covid-19 world. The trend toward subregionalization, in the face of the fractured dynamics of globalization, has been highlighted for other areas of the American continent, as in the case of the Andean Community, but it also makes a great deal of sense for greater integration between the United States and the Greater Caribbean. To the extent that the United States moves towards a certain decoupling from China, the free trade zones in this geographic area may also become more relevant.

Reproduction of the graphic report of the association of Free Trade Zones of the Americas (AZFA), 2018.

Export processing zones

Free zones can be export-oriented (external market), import substitution (internal market) or both. The former may have a high industrial component, either seeking diversification or depending on maquilas, or emphasizing logistics services (in the case of Panama's free zones).

Free zones for exporting products have been particularly successful in the Dominican Republic and Costa Rica. As AZFA indicates, of the $31.208 billion exported from Latin American free zones in 2018, first place went to the Dominicans, with $5.695 billion, and second to Costa Ricans, with $4.729 billion (third place went to Puerto Rico, with $3 billion). Exports from the Dominican Republic's free trade zones accounted for 56% of all exports made by that country; in the case of Costa Rica it was 48% (the third in the ranking was Nicaragua, with 44%).

The Dominican Republic is the country with the highest issue of free trade zones (71 multi-company zones) and its 665 companies generated the highest number of direct jobs (165,724). Costa Rica has 48 free zones (in third position, after Nicaragua), and its 343 companies generated 93,496 direct work (in fifth position).

In terms of the profitability for the country of this economic modality , for every dollar exempted between 2010 and 2015, Costa Rica's free zones generated an average of US$6.2 and US$5 for those of the Dominican Republic (El Salvador ranked second, with US$6).

With specific reference to Costa Rica, a report at the end of 2019 by the Costa Rican foreign trade promotion agency, Procomer, placed the contribution of free trade zones at 7.9% of GDP, generating a total of 172,602 work, both direct and indirect, with annual growth in the issue of jobs averaging 10% per year between 2014 and 2018. These areas account for 12% of the country's formal private sector employment . An important fact about the contribution to the development the local Economics is that 47% of the purchases made by the companies located in the free trade zones were from national companies. An important social dimension is that the zones contributed 508 million dollars to the Costa Rican Social Security Fund in 2018.

The Dominican Republic's free trade zone regime is particularly applauded by the World Bank, which describes the country as a pioneer in this subject productive and commercial promotion instrument, presenting it as "the best-known success story in the Western Hemisphere". agreement to the statistics of the Nationalcommittee of Export Processing Zones (CNZFE), these have contributed in recent years to 3.3% of GDP, thus contributing to the significant growth of the country's Economics in recent years (one of the highest fees in the region, with an average of over 6% until the onset of the current global crisis). The geographical proximity to the United States makes its free trade zones ideal for US companies (almost 40% of investment comes from the US) or for companies from other countries that want to export to the large North American market (34% of exports go to the US).

High levels of corruption and impunity in the region make it difficult to eradicate millionaire bribes in public procurement contracts

The confession of the construction and engineering company Odebrecht, one of the most important in Brazil, of having delivered large sums as bribes to political leaders, parties and public officials for the awarding of works in several countries in the region has been the biggest corruption scandal in the history of Latin America. The budget B during the "golden decade" of raw materials occurred in a framework of little improvement in the effectiveness of the rule of law and control of corruption, which led to high levels of illicit deviations in public contracts.

article / Ximena Barría [English version].

Odebrecht is a Brazilian company that conducts business in multiple industries through several operating sites. It is engaged in areas such as engineering, construction, infrastructure and energy, among others. Its headquarters in Brazil are located in the city of Salvador de Bahia. The business operates in 27 countries in Latin America, Africa, Europe and the Middle East. Over the years, the construction company has participated in public works contracts in most Latin American countries.

In 2016, the U.S. department Justice published an research alleging that the Brazilian company had bribed public officials in twelve countries, ten of them Latin American: Argentina, Brazil, Colombia, Ecuador, Guatemala, Mexico, Panama, Peru, Dominican Republic and Venezuela. The research was developed from the confession made by Odebrecht's top executives themselves once they were discovered.

The company provided officials in these countries with millions of dollars in exchange for obtaining public works contracts and benefiting from the payment for their execution. The business agreed to submit millions of dollars to political parties, public officials, public candidates or persons related to the government. Its purpose was to have a competitive advantage that would allow it to retain public business in different countries. 

In order to cover up these illicit capital movements, the business created fictitious corporations in places such as Belize, the Virgin Islands and Brazil. The business set up a secret financial structure to cover up these payments. The research by the U.S. department Justice established that the bribes in the aforementioned countries totaled US$788 million (almost half in Brazil alone). Using this illegal method, contrary to all business and political ethics, Odebrecht obtained the commission of more than one hundred projects, which generated profits of US$ 3,336 million.

Lack of an effective judiciary

This matter, known as the Odebrecht case, has created consternation in Latin American societies. Its citizens consider that in order for acts of this subject not to go unpunished, countries must have greater efficiency in the judicial sphere and take more accelerated steps towards a true rule of law. 

agreement World Bank indicators, none of the ten Latin American countries affected by this bribery network reaches 60% of effectiveness of the rule of law and corruption control. This would explain the success of the Brazilian construction company in its bribery policy.

Judicial independence and its effectiveness is essential for the resolution of facts of these characteristics. The proper exercise of justice shapes a proper rule of law, preventing the occurrence of illicit acts or other political decisions that may violate it. Although this is the ideal, the countries involved in the Odebrecht case do not fully comply with this due judicial independence.

Indeed, according to the Global Competitiveness Report for 2017-2018, most of the affected countries obtain a leave grade with respect to the independence of their courts, which indicates that they lack an effective judiciary to judge those allegedly involved in this case. This is the case, for example, with Panama and the Dominican Republic, ranked 120th and 127th, respectively, in terms of judicial independence, out of a list of 137 countries.

One of the problems that the Judicial Branch of the Republic of Panama suffers from is the high issue of cases handled by the Supreme Court of Justice. This congestion makes it difficult for the Supreme Court to work effectively. The high number of processed files doubled between 2013 and 2016: the Criminalconference room of the Court processed 329 files in 2013; in 2016 there were 857. Although the Panamanian Judiciary has improved its budget, this has not represented a qualitative increase in its functions. These difficulties could explain the Court's decision to reject an extension of the research, although this could mean a certain impunity. In 2016, only two people were arrested in the Odebrecht case. In 2017, of the 43 defendants who could have been involved in the acceptance of bribes valued at US$60 million, only 32 were prosecuted.

The Dominican Republic is also in a similar status . According to a survey of 2016, only 38% of Dominicans trust the judicial institution. This low percentage may have been contributed to by the fact that active members of political parties were elected to serve as Supreme Court judges, something that tarnishes the credibility of the judiciary and its independence. In 2016, the Dominican courts only inquired about one person, when the US Supreme Court estimated that the Brazilian business had given US$92 million in political bribes, one of the highest amounts outside Brazil. In 2017, the Supreme Court of the Dominican Republic ordered the release from prison of 9 of 10 allegedly implicated in the case due to insufficient evidence.

Need for greater coordination and reform

In October 2017, public prosecutors from Latin America met in Panama City to share information on money laundering, especially in relation to the Odebrecht case. Officials expressed the need to leave no case unpunished, thereby contributing to solving one of the biggest political, economic and judicial problems in the region. Some prosecutors reported having suffered threats in their investigations. All of them valued the meeting positively, as it highlighted the need for greater fiscal coordination and legislative harmony in Latin America. However, it is important to note that the Dominican Republic was absent from the meeting.

Any awareness of Latin American public ministries is essential given the correlation observed between the countries affected by Odebrecht's bribes and their poor ranking in indexes provided by different international organizations and research centers. The ineffective rule of law and the lack of control of corruption allow companies like Odebrecht to succeed in their bribery policy to gain a competitive advantage. 

The shortcomings of the judicial systems in countries such as Panama and the Dominican Republic, in particular, may make it possible for public officials to go unpunished for crimes committed. In addition, the Odebrecht case, of great magnitude in the region, could further congest judicial activity if effective reforms are not made in each country.