REINVENTING CENTRAL AMERICA.

Central America's empresarios are fighting back against foreign invaders with regional integration.

MAURICIO MENDIETA NEVER IMAGined he would earn a living cooking chicken. Trained as a plastic surgeon, he left his native Nicaragua for Costa Rica during the Sandinista era. Unable to practice his profession, he watched his savings dwindle. Finally, he took his last US$500, bought a 20-squaremeter location near San Jose and began selling wood-roasted chicken.

That was 1983. Today his medical career has been forgotten in favor of his business, Rostipollos. The restaurant chain was the second Central American food company to expand across the region and now has nine franchise outlets in San Jose, five in Honduras and two in Nicaragua.

The business climate in Central America has changed from when I began:' he says. The turmoil of the previous decade, which prevented many businesses from setting their sights regionally, has disappeared. Now, it's time to take advantage of the change."

United front. Like Mendieta, many Central American entrepreneurs are reacting to the fall of business barriers- and the invasion by foreign companies- by expanding across the region or forging alliances with other companies. The similarities in political systems across Central America 'has led to led to more regionwide business," says Eduardo Montiel, a finance specialist at the Costa Rica-based Instituto Centroamericano de Administracion de Empresas, INCAE. 'We have finally realized that we are a small market, and that we need to present a united front:'

A decade ago this would have been unthinkable. Central America was a cold-war battle zone. Civil wars, guerrilla activity and interference from the world's superpowers shook the region. But today, obstacles to foreign investment are disappearing, and instead of peace treaties, governments sign free-trade accords. Since the so-called lost decade of the 1980s, commerce among Central American nations has increased dramatically. According to central banks in the area, intra-regional trade totaled US$1.8 billion in 1997, three times the level of 1990.

Trade winds. Though it may seem paradoxical, the devastation wrought by Hurricane Mitch has opened windows of opportunity in the region, as international aid pours in and foreign lenders forgive repayments of debt.

Mitch added urgency to a process that had already begun. For example, Central American countries had dropped the import-substitution model, which had turned the region into one of the most protectionist in the world. According to INCAE. Central American import tariffs once averaged 63%, and almost all foreign products faced other obstacles as well. "Today the average import tariff is 11%, and it is estimated that this will drop to about 8% this year or next:' says Montiel.

Trade with the United States has increased by a third since 1996. All countries in the region have bilateral treaties with Mexico, including open-skies accords. Though trade with Mercosur nations is still minimal, it is no longer uncommon to see Argentine and Brazilian products in Central America and representatives of Mercosur have met with their counterparts in the Sistema de Integracion Economica Centroamericana (SIECA) to discuss commerce.

In 1996, Chile proposed linking trade with the Central American bloc, although to date no firm agreement has materialized. In September 1997, the five nations that make up SIECA signed an accord with Taiwan that calls for both sides to increase their flow of trade and investment Short term, the goal is to create more sources of capital in the region and to speed technology transfer. Long term, the goal is a free-trade agreement.

Faced with these opportunities--and the challenge posed by the presence of foreign Amen conglomerates--Central can companies have not followed similar growth mod4. Some groups have opted to combine resources across national boundaries and work together. A large part of this is being accomplished through distribution agreements, strategic alliances and joint investments.

Analysts such as Montiel say that private financial groups, mostly Nicaraguan and Salvadoran, were the pacesetters for growth, though today the capital is coming from other countries as well. In the 1980s, many of those bankers left their countries, taking their capital with them and establishing roots in their adopted homelands. These bankers have now returned, their networks have and allowed the giant multinationals to conduct dollar transactions efficiently.

Common coinage. But currency exchange among the different countries of Central America has been more difficult. The Tela Acord among El Salvador, c Guatemala and Honduras permits trade payments in any currencies of the three nations. Trade among the rest of the region's countries is done in dollars, adding to the cost and complexity of transactions.

Some banks have created ways for the private sector to conduct large-scale regional transactions. Latin American Financial Services, Lafise, based in Miami, was one of the first such banks. Founded by a Nicaraguan banker in Miami in the late 1980s, Lafise began offering its clients--among them Dutch airline KLM--the means to easily exchange dollars into Central American currencies. Nicaragua's Grupo Pellas also was a step ahead of regional integration. For some time it provided the only means to carry out trade with credit cards, A subsidiary, Credomatic, handles the purchase of products and services in the region, with payment made in national currencies.

According to several analysts, Panamanian financial organizations concentrated on their country's dollar economy, shying away from the high risk posed by regional commerce, with its unstable currencies and inflexible financial standards. "Panamanian bankers, who are more advanced than others in the region, should have taken the initiative," says Montiel. "Yet it's been only recently that Panamanian and Guatemalan financial groups have begun the process of regional integration."

But as foreign-investment laws have changed and currencies have stabilized, growth has increased. Banco Agricola Comercial in El Salvador, probably the largest in the region, acquired a majority stake in Nicaraguan bank Caley Dagnall, as well as majority interests in Honduras' Banco de Ia Producci6n, More recently, Panamanian institutions such as Grupo Financiero del Istmo, Panabank and Grupo Continental have expanded into neighboring countries looking for investment opportunities.

Another initiative that has paved the way for regional integration is the so-called Central American check. With a special checkbook offered by banks that participate in the program, customers can make bank drafts in any regional currency. The importance of this, analysts say, is that it may create the basis for the establishment of a unified currency, the Central American peso.

The increased regionalization of commerce has been a lifesaver for some businesses that face competition from foreign companies. For example, Salvadoran airline Taca not only increased its stake in the area when it bought out all the other airlines in the region, it also was able to forge an alliance with American Airlines, just as Central American nations were signing an open-skies pact with the United States in 1998.

In a somewhat similar case, Compania Cervecera de Centroamerica was formed after Salvadoran and Guatemalan breweries bought out Nicaragua's Cerveceria Victoria y Cerveza Tona.

"This strategy helps keep foreign companies such as Corona or Budweiser from being able to come into the region and buy a ready-made way to compete in the native companies' own markets;' says Silvio Conrado, president of Investa SA of Nicaragua. "Businesses now see regional countries more like states, and prefer to forge alliances to maintain those gentlemen's agreements that existed among them before."

For businesses such as Guatemalan restaurant chain Pollo Campero, regional growth has come from franchising. The company has increased its presence in the past few years, despite fierce competition from multinationals like Kentucky Fried Chicken. Pollo Campero has 58 outlets in Guatemala, 31 in El Salvador and six in Honduras. In December 1997, the company opened its first franchise in Panama and now boasts three there, as well as five restaurants in Costa Rica, two in Nicaragua and three in Ecuador.

In the case of Grupo Roble, the financial services firm has put together a solid team of managers who handle investments according to the differing needs of local markets. "The strategy has been to focus resources in areas where we have a competitive advantage, so that we can later expand it into the rest of Central America," says Alfredo Lacayo, general manager of Roble Internacional, a diversified business group boasting Nicaraguan, Salvadoran, Honduran and Costa Rican financing.

Among the group's businesses are hotels, shopping centers and, soon, office towers and middle-income homes. By 2001, when it finishes construction of a new hotel, Grupo Roble will have invested about $55 million in Nicaragua

"One of the obstacles that jumps out at you when you start doing business on a regional basis is that productivity differs among workers from different countries. Also, the cost of living is still significantly different in each country. This creates problems;' says Lacayo, who hastens to add, "Every day there are fewer barriers, and labor laws are similar across the region!'

Another financial organization, Grupo Pellas, has decided to leave strategic decisions on regionalization in the hands of the family that owns the company But day-to-day decisions are made by managers the family trusts. The Pellas have consolidated their regional financial operations, including a credit card business and an international bank. Recently, the group started an international campaign to promote its rum business.

The Pellas "have been able to grow at a pace that lets them handle their operations through managers and still retain family control over strategic areas:' says Conrado of Investa. "Remember, this is one of the pioneering groups in the credit card business in Central America through Credomatic in the 1970s. They have great confidence that they can go it alone."

The consolidation strategy could be a winner, especially when one takes into account the increased competition brought about by the region's economic opening toward North America. As trade flows to the region increase, many multinational corporations are seeking a greater presence in the market through direct investments and via Mexico under the aegis of the North American Free Trade Agreement.

General Motors exports Chevys to Central America from its factories in Mexico. And Volkswagen of Mexico exports Golfs and Beetles to the region as well. A Mexican company, Mabe, distributes General Electric products, and claims to control 70% of the Central American market in household appliances.

In the tourism industry, Grupo Posadas, a Mexican hotelier with operations in Guatemala, is taking part in several projects in El Salvador and Nicaragua. In the telecommunications sector, Telefonos de Mexico (Telmex) is battling for a role in projects to unify networks in the region. Its position is particularly strong because it is part owner of an undersea fiberoptic cable dubbed MAYA-1, the first of its kind, which will link the United States, Mexico, Central America and the Caribbean. Telmex also acquired a stake in Telefonos de Guatemala and has shown interest in buying phone operations in Panama and Honduras. Meanwhile, the Mexican subsidiary of international cement maker Holderbank has bought a stake in Cemento de El Salvador.

This integration of private commerce between companies has a parallel in the public sector, where SIECA has been a main player on the political level, along with the Banco Centroamericano de Integracion. Economica, BCIA, as a financing facilitator. Since last October, SIECA, in its new headquarters in El Salvador, has made room for institutions that foster commerce. SIECA coordinates, among other things, the updating of customs regulations to reduce red tape. The project seeks to put all customs information on an Internet database.

According to INCAE, a truck carrying merchandise from Panama to Guatemala loses as much as four-fifths of its time on customs bureaucracy. "This means that trucking companies have to triple their fleets to be able to make deliveries on time:" says Montiel.

Another notable step toward regionalization is that BCIE has focused its sights on the private sector, moving away from governmental institutions. "The agency feels its main duty is the economic development of the private sector:" says Roger Arteaga, regional manager. "It will emphasize industrial growth and encourage exports, agriculture and tourism to promote the region in other markets."

The organization will also give priority to financing infrastructure projects, especially those in the fields of energy and telecommunications.

When BCIE was founded in the early 1960s the nations of Central America were the only members. But today, Mexico, Argentina, Taiwan and Colombia are "extraregional" members. "The fenefits for those countries are the business relationships they are able to maintain with Central America through banking," says Arteaga. All together, those countries contributed some $210 million in capital in 1998. Brazil, Japan and Korea have expressed an interest in joining the association.

The question now is when the consolidation of Central America as a market- and its integration into international markets--will take root. Businesses are already consolidating, and if entrepreneurs such as Mendieta, of Rostipollos, are a good barometer, integration will arrive sooner rather than later. "My confidence [in the regional market] has grown as I have seen five [Rostipollos] outlets open in Honduras much sooner than expected, and seeing sales in Nicaragua surpass expectations by 25%," he says. Mendieta says his biggest obsession is "to navigate on the crest of the integration wave sweeping over the region."

The next few months will be crucial for the economic future of Central America. Before it can compete as a bloc on world markets, it will have to overcome an old challenge: The divergent interests of each country in the region. "Some countries, like Costa Rica, argue that they are further ahead than the rest and ask why they should join an integrated effort," says a Central American diplomat based in Washington, who asked not to be identified. "There are also old rivalries between Nicaragua and Honduras, between Nicaragua and Costa Rica, and between El Salvador and Honduras."

Those squabbles will have to be brought to an end. Otherwise, sociologist Edelberto Torres will have proven prophetic when he said a few years ago: "Central America doesn't exist ... it is only a European invention."