Central America's deindustrialization

This paper analyses industrial trends in six Central American economies by assembling and harmonizing sectoral data from multiple sources. Industrial employment share has declined by an average of 2.5 percentage points over the past two decades. Contrary to a trade-driven deindustrialization hypothesis, which suggests that cheaper imports have replaced domestic production of industrial goods, the findings indicate that this decline is primarily driven by an increase in barriers that restrict the efficient flow of labor across sectors. The paper argues that policy interventions that target these barriers could potentially lead to significant industrial expansion. However, the economic impact of such policies may be marginal, with aggregate output projected to increase by 3.2 percent or less upon eliminating these barriers. Moreover, this approach also carries risks, as it may introduce new distortions that could further hinder economic efficiency. Perhaps a more prudent growth strategy will be to concentrate on boosting productivity, which though challenging, directly affects the output.