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Costa Rica

Executive Summary

Costa Rica is the oldest continuous democracy in Latin America and the newest member of the Organization for Economic Cooperation and Development (OECD), with an established government institutional framework, stable society, and a diversified upper-middle-income economy. The country’s well-educated labor force, relatively low levels of corruption, geographic location, living conditions, dynamic investment promotion board, and attractive free trade zone incentives all appeal to investors. Foreign direct investment inflow in 2020 was USD 1.76 billion, or 2.8 percent of GDP, with the United States accounting for USD 1.2 billion. Costa Rica recorded 7.6 percent GDP growth in 2021 (the highest level since 2008) as it recovered from a 4.5 percent contraction in 2020 largely due to the effects of the Covid-19 pandemic.

Costa Rica has had remarkable success in the last two decades in establishing and promoting an ecosystem of export-oriented technology companies, suppliers of input goods and services, associated public institutions and universities, and a trained and experienced workforce. A similar transformation took place in the tourism sector, with a plethora of smaller enterprises handling a steadily increasing flow of tourists eager to visit despite Costa Rica’s relatively high prices. Costa Rica is doubly fortunate in that these two sectors positively reinforce each other as they both require and encourage English language fluency, openness to the global community, and Costa Rican government efficiency and effectiveness. A 2019 study of the free trade zone (FTZ) economy commissioned by the Costa Rican Investment and Development Board (CINDE) shows an annual 9 percent growth from 2014 to 2018, with the net benefit of that sector reaching 7.9 percent of GDP in 2018. This sector continued to expand during the pandemic. The value of exports increased by 24 percent in 2021, representing the highest growth in 15 years.

The Costa Rican investment climate is threatened by a high and persistent government fiscal deficit, underperformance in some key areas of government service provision, including health care and education, high energy costs, and deterioration of basic infrastructure. The Covid-19 world recession damaged the Costa Rican tourism industry, although it is recovering. Furthermore, the government has very little budget flexibility to address the economic fallout and is struggling to find ways to achieve debt relief, unemployment response, and the longer-term policy solutions necessary to continue compliance under the current stabilizing agreement with the International Monetary Fund (IMF). On the plus side, the Costa Rican government has competently managed the crisis despite its tight budget and Costa Rican exports are proving resilient; the portion of the export sector that manufactures medical devices, for example, is facing relatively good economic prospects and companies providing services exports are specialized in virtual support for their clients in a world that is forced to move in that direction. Moreover, Costa Rica’s accession in 2021 to the Organization for Co-operation and Development (OECD) has exerted a positive influence by pushing the country to address its economic weaknesses through executive decrees and legislative reforms in a process that began in 2015. Also in the plus column, the export and investment promotion agencies CINDE and the Costa Rican Foreign Trade Promoter (PROCOMER) have done an excellent job of protecting the Free Trade Zones (FTZs) from new taxes by highlighting the benefits of the regime, promoting local supply chains, and using the FTZs as examples for other sectors of the economy. Nevertheless, Costa Rica’s political and economic leadership faces a difficult balancing act over the coming years as the country must simultaneously exercise budget discipline and respond to demands for improved government-provided infrastructure and services.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 39 of 180 https://www.transparency.org/en/cpi/2021/
index/cri
Global Innovation Index 2021 56 of 132 https://www.globalinnovationindex.org/analysis-
indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 USD 2.0bill https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2020 USD 11,530 http://data.worldbank.org/indicator/NY.GNP.
PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

Costa Rica’s total of 28 state-owned enterprises (SOEs) are commonly known by their abbreviated names. They include monopolies in petroleum-derived fuels (RECOPE), lottery (JPS), railroads (INCOFER), local production of ethanol (CNP/FANAL), water distribution (AyA), and electrical distribution (ICE, CNFL, JASEC, ESPH). SOEs have market dominance in insurance (INS), telecommunications (ICE, RACSA, JASEC, ESPH) and finance (BNCR, BCR, Banco Popular, BANHVI, INVU, INFOCOOP). They have significant market participation in parcel and mail delivery (Correos) and ports operation (INCOP and JAPDEVA). Six of those SOEs hold significant economic power with revenues exceeding 1 percent of GDP: ICE, RECOPE, INS, BNCR, BCR and Banco Popular. The 2020 OECD report “Corporate Governance in Costa Rica” reports that Costa Rican SOE employment is 1.9% of total employment, somewhat below the OECD average of 2.5%. Audited returns for each SOE may be found on each company’s website, while basic revenue and costs for each SOE are available on the General Controller’s Office (CGR) “Sistema de Planes y Presupuestos” https://www.cgr.go.cr/02-consultas/consulta-pp.html . The Costa Rican government does not currently hold minority stakes in commercial enterprises.

Costa Rican state-owned enterprises have not in recent decades required continuous and substantial state subsidy to survive. Several (notably ICE, AyA and RECOPE) registered major losses in pandemic year 2020, while others (INS, BCR, BNCR) registered substantial profits, which are allocated as dictated by law and boards of directors. Financial allocations to and earnings from SOEs may be found in the CGR “Sistema de Informacion de Planes y Presupuestos (SIPP)”.

U.S. investors and their advocates cite some of the following ways in which Costa Rican SOEs competing in the domestic market receive non-market-based advantages because of their status as state-owned entities.

  • According to Law 7200, electricity generated privately must be purchased by public entities and the installed capacity of the private sector is limited to 30 percent of total electrical installed capacity in the country: 15 percent to small privately-owned renewable energy plants and 15 percent to larger “buildoperatetransfer” (BOT) operations.
  • Telecoms and technology sector companies have called attention to the fact that government agencies often choose SOEs as their telecom services providers despite a full assortment of private-sector telecom companies. The Information and Telecommunications Business Chamber (CAMTIC) has long protested against what its members feel to be unfair use by government entities of a provision (Article 2) in the public contracting law that allows noncompetitive award of contracts to public entities (also termed “direct purchase”) when functionaries of the awarding entity certify the award to be an efficient use of public funds. CAMTIC has compiled detailed statistics showing that while the yearly total dollar value of Costa Rican government direct purchases in the IT sector under Article 2 has dropped considerably from USD 226 million in 2017, to USD 72.5 million in 2018, USD 27.5 million in 2019, USD 54 million in 2020, and USD 5 million in 2021, the number of purchases has actually increased from 56 purchases in both 2017 and 2018 to 86 in 2019, 104 in 2020, and 115 in 2021.
  • The state-owned insurance provider National Insurance Institute (INS) has been adjusting to private sector competition since 2009 but in 2021 still registered 66 percent of total insurance premiums paid; 13 insurers are now registered with insurance regulator SUGESE: ( https://www.sugese.fi.cr/SitePages/index.aspx ). Competitors point to unfair advantages enjoyed by the stateowned insurer INS, including a strong tendency among SOE’s to contract their insurance with INS.

Costa Rica is not a party to the WTO Government Procurement Agreement (GPA) although it is registered as an observer. Costa Rica is working to adhere to the OECD Guidelines on Corporate Governance for SOEs ( www.oecd.org/daf/ca/oecdguidelinesoncorporategovernanceofstate-ownedenterprises.htm ). For more information on Costa Rica’s SOE’s, see the OECD Accession report “Corporate Governance in Costa Rica”, dated October 2020: https://www.oecd.org/countries/costarica/corporate-governance-in-costa-rica-b313ec37-en.htm  .

8. Responsible Business Conduct

Corporations in Costa Rica, particularly those in the export and tourism sectors, generally enjoy a positive reputation within the country as engines of growth and practitioners of Responsible Business Conduct (RBC).  The Costa Rica government actively highlights its role in attracting high-tech companies to Costa Rica; the strong RBC culture that many of those companies cultivate has become part of that winning package.  Large multinational companies commonly pursue RBC goals in line with their corporate goals and have found it beneficial to publicize RBC orientation and activities in Costa Rica.  Many smaller companies, particularly in the tourism sector, have integrated community outreach activities into their way of doing business. There is a general awareness of RBC among both producers and consumers in Costa Rica.

Multinational enterprises in Costa Rica have not been associated in recent decades in any systematic or high-profile way with alleged human or labor rights violations.  The Costa Rican government maintains and enforces laws with respect to labor and employment rights, consumer protection and environmental protection.  Costa Rica has no legal mineral extraction industry with its accompanying issues, but illegal small scale gold mining, particularly in the north of the country, is a focal point of serious environmental damage, organized crime, and social disruption.  Large scale industrial agriculture is also occasionally the focus of health or environmental complaints, including in recent years the pineapple industry for allegedly affecting water supplies and a banana producer with many workers with rashes allegedly induced by pesticide use. The government appears to respond appropriately. Indigenous communities in specific areas of the country have longstanding grievances against non-indigenous encroachment on their reserves, which has led to recent incidents of violence.

Costa Rica encourages foreign and local enterprises to follow generally accepted RBC principles such as the OECD Guidelines for Multinational Enterprises (MNE) and maintains a national contact point for OECD MNE guidelines within the Ministry of Foreign Trade (see https://www.comex.go.cr/punto-nacional-de-contacto/  or  http://www.oecd.org/investment/mne/ncps.htm ). Costa Rica has been a participant since 2011 in the Montreux Document reaffirming the obligations of states regarding private military and security companies during armed conflict.

Costa Rica has a national climate strategy and a sophisticated system for monitoring natural capital, biodiversity, and ecosystem services. While the Central Bank compiles environmental accounts ( https://www.bccr.fi.cr/en/Economic-Indicators/environmental-accounts ), the Ministry of Environment and Energy oversees policies on environmental impact assessments and emissions. As part of Costa Rica’s nationally determined contribution to the United National Framework on Climate Change, Costa Rica targets maximum national net emissions in 2030 of 9.11 million tons of CO2. This number is consistent with the targeted trajectory of their National Decarbonization Plan which seeks to achieve net-zero emissions by 2050. Within the transportation sector Costa Rica aims to adopt standards to migrate towards a zero-emission motorcycle fleet by 2025, have 8% of their fleet of small vehicles be electric, and by 2030 have 8% of the public transportation fleet fully electric. There are currently no regulatory incentives or rebates for private sector contributions to achieve these goals. Costa Rican government efforts to reach net-zero emissions are largely limited to encouraging purchase and use of electric vehicles through tax reduction. In the absence of any significant budget for climate change response, the Costa Rican government necessarily relies on the private sector and international donors to implement its ambitions to be net zero by 2050. Costa Rica supports labels or designations meant to encourage good behavior with some considerable success: blue flag program at beaches and the Costa Rican country brand “Essential Costa Rica”. Official procurement policies do not include environmental or green growth considerations beyond those otherwise mandated by law.

9. Corruption

Costa Rica has laws, regulations, and penalties to combat corruption. Though the resources available to enforce those laws are limited, Costa Rica’s institutional framework is strong, such that those cases that are prosecuted are generally perceived as legitimate. Anti-corruption laws extend to family members of officials, contemplate conflict-of-interest in both procurement and contract award, and penalize bribery by local businessmen of both local and foreign government officials. Public officials convicted of receiving bribes are subject to prison sentences up to ten years, according to the Costa Rican Criminal Code (Articles 347-360). Entrepreneurs may not deduct the costs of bribes or any other criminal activity as business expenses. In recent decades, Costa Rica saw several publicized cases of firms prosecuted under the terms of the U.S. Foreign Corrupt Practices Act.

Costa Rica ratified the Inter-American Convention Against Corruption in 1997. This initiative of the OECD and the Organization of American States (OAS) obligates subscribing nations to implement criminal sanctions for corruption and implies a series of follow up actions: http://www.oas.org/juridico/english/cri.htm . Costa Rica also ratified the UN Anti-Corruption Convention in March 2007, has been a member of the Open Government Partnership (OGP) since 2012, and as of July 2017 is a party to the OECD Convention on Combatting Bribery of Foreign Public Officials.

The Costa Rican government has encouraged civil society interest in good governance, open government and fiscal transparency, with a number of NGO’s operating unimpeded in this space. While U.S. firms do not identify corruption as a major obstacle to doing business in Costa Rica, some have made allegations of corruption in the administration of public tenders and in approvals or timely processing of permits. Developers of tourism facilities periodically cite municipal-level corruption as a problem when attempting to gain a concession to build and operate in the restricted maritime zone.

For further material on anti-bribery and corruption in Costa Rica, see the 2020 OECD study: https://www.oecd.org/countries/costarica/costa-rica-has-improved-its-foreign-bribery-legislation-but-must-strengthen-enforcement-and-close-legal-loopholes.htm 

Also on the OECD website, information relating to Costa Rica’s membership in the OECD anti-bribery convention: https://www.oecd.org/countries/costarica/costarica-oecdanti-briberyconvention.htm 

10. Political and Security Environment

Since 1948, Costa Rica has not experienced significant domestic political violence. There are no indigenous or external movements likely to produce political or social instability. However, Costa Ricans occasionally follow a long tradition of blocking public roads for a few hours as a way of pressuring the government to address grievances; the traditional government response has been to react slowly, thus giving the grievances time to air. This practice on the part of peaceful protesters can cause logistical problems.

Crime increased in Costa Rica in recent decades and U.S. citizen visitors and residents are frequent victims.  While petty theft is the main problem, criminals show an increased tendency to use violence. Some crime in Costa Rica is associated with the illegal drug trade.  Please see the State Department’s Travel Advisory page for Costa Rica for the latest information- https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/costa-rica-travel-advisory.html

11. Labor Policies and Practices

Although the unemployment rate fell in 2021, unemployment remains a major issue for Costa Rica’s economy. According to the National Statistics Institute (INEC) as of January 2022, the unemployment rate was 13.1 percent, or 319,000 unemployed workers. The unemployment rate among the male population was estimated at 10.6 percent and the female population at 16.8 percent. When comparing these figures with the same quarter in 2020-21, there was a 4.6 percent decrease among males and a 7.8 percent reduction among females. 45.7 percent of work was in the informal sector (45.7 percent among males and 45.6 percent among females) with no significant variation compared to the same period in 2020-21. From the percentage of individuals with informal employment, 91.5 percent were self-employed, and 29.4 percent received a salary.

INEC reported that from November 2021 to January 2022, 532,000 persons in the labor force (employed and unemployed) were negatively affected by COVID-19. Of the country’s employed population, 213,000 had a reduction in salary or income associated with suspension or reduction in working hours or had to suspend their own activity or business during the pandemic, which represented 10.1 percent of the employed population, of which 63.5 percent were male, and 36.5 percent were female. Of the total number of unemployed persons, 318,000 were negatively affected by the pandemic. Of those, 48.7 percent were men and 51.3 percent were women. Of the total number of unemployed persons affected, 97.5 percent indicated that they could not find a job due to COVID-19; and 2.5 percent stated that they were fired, suspended, or closed their business or activity.

INEC reported that during the pandemic more formal jobs were preserved and more informal jobs were lost. It is possible that some of the informal businesses that survived the pandemic chose to seek formal work, given increased demand for health insurance. Some of the activities most affected by health restrictions and the consequences of the pandemic (such as tourism, commerce, construction, and entertainment activities) had high demand for workers, including informal workers, before the pandemic.

According to the Central Bank of Costa Rica, formal employment returned to levels registered before the beginning of the pandemic, while as of November 2021, the number of informally employed persons was 11.4 percent lower than in February 2020. The recovery of employment for workers operating in the informal sector and those with medium qualifications has been much slower than that of the most qualified and those who work in the formal sector. Workers in the informal sector were not covered by wage, hour, and occupational health and safety laws and inspections, nor were they enrolled in the public health system.

The Costa Rican labor force has high educational standards. The country boasts an extensive network of publicly funded schools and universities while Costa Rica’s national vocational training institute (INA) and private sector groups provide technical and vocational training.

The growth of Costa Rica’s service, tourism, and technology sectors has stimulated demand for English-language speakers. The pool of job candidates with English and technical skills in the Central Valley is sufficient to meet current demand. However, the current finite number of job candidates with these skills limits the ability of foreign and local businesses to expand operations.

The government implemented a controlled entry of foreign migrant workers (Migration Traceability System, SITLAM) through the northern and southern borders. In a joint effort, the Costa Rican Social Security System (CCSS), Ministry of Labor and Social Security (MTSS) and the Costa Rican Coffee Institute implemented a program to enroll coffee workers in the health insurance system while taking into account turnover, migratory conditions, and harvest seasons while protecting the families of the workers.

The government does not keep track of shortages or surpluses of specialized labor skills. Foreign nationals have the same rights, duties, and benefits as local employees. The government is responsible for ensuring that foreign nationals do not displace local employees in employment. Labor law provisions apply equally across the nation, both within and outside free trade zones. The Immigration Law and the Labor Ministry’s regulations establish a mechanism to determine in which cases the national labor force would need protection. The Labor Ministry prepares a list of recommended and not-recommended jobs to be filled by foreign nationals.

There are no restrictions on employers adjusting employment to respond to fluctuating market conditions. The law does not differentiate between layoffs and dismissal without cause. There are concepts established in the law related to unemployment and dismissals such as the mandatory savings plan (Labor Capitalization Fund or Fondo de Capitalizacion Laboral, FCL), as well as the notice of termination of employment (preaviso) and severance pay (cesantia). The FCL, which is funded through employer contributions, functions as an unemployment insurance; the employee can withdraw the savings every five years if the employee has worked without interruption for the same employer. Costa Rican labor law requires that employees released without cause receive full severance pay, which can amount to close to a full year’s pay in some cases. Although there is no insurance for workers laid off for economic reasons, employers may voluntarily establish an unemployment fund.

In response to government-ordered temporary business closures due to the Covid-19 pandemic, in 2020, the Labor Ministry implemented the temporary suspension of employment contracts, a procedure established in the Labor Code, which grants employers the option of stopping the payment of wages temporarily during an emergency. Executive orders (Nos. 42522-MTSS and 42248-MTSS) established the procedures for employers to request the temporary suspension of labor contracts with their employees. Employers requested the suspension of contracts through the Labor Inspectorate of the Labor Ministry. In 2021, the Labor Ministry continued implementing the temporary suspension of employment contracts but only in sectors most adversely affected by the COVID-19 pandemic due to the restrictions and closures imposed by authorities.

The National Assembly approved a law (Law 9832) in 2020 to reduce working hours during the pandemic. Under the law, if income in a company decreases by 20 percent, compared to the income during the same month in 2019 or compared to the income of the previous three months, the employer can reduce the employees’ hours and salary up to 50 percent. If the decrease in income is greater than 60 percent, the reduction in salary can reach 75 percent. Legislators initially authorized this reduction for three months and employers could request extensions for two equal terms (9 months) and then to five terms (15 months) as the emergency continued. In May 2021, the National Assembly approved an extension (Legislative Order No. 9982) in the tourism sector which authorizes a reduction for four equal terms with previous approval from the Labor Ministry.

In 2020, the National Assembly authorized employees, whose labor contracts were terminated or suspended or whose salaries were reduced during the state of emergency declaration, to withdraw their contributions to the FCL plan (Law 9839).

Costa Rican labor law and practice allows some flexibility in alternate schedules; nevertheless, it is based on a 48-hour week made up of eight-hour days. Workers are entitled to one day of rest after six consecutive days of work. The labor code stipulates that the workday may not exceed 12 hours. Use of temporary or contract workers for jobs that are not temporary in nature to lower labor costs and avoid payroll taxes does occur, particularly in construction and in agricultural activities dedicated to domestic (rather than export) markets. No labor laws are waived to attract or retain investment‒all labor laws apply in all Costa Rican territory, including free trade zones. The government has been actively exploring ways to introduce more flexibility into the labor code to facilitate teleworking and flexible work schedules.

Costa Rican law guarantees the right of workers to join labor unions of their choosing without prior authorization. Unions operate independently of government control and may form federations and confederations and affiliate internationally. Most unions are in the public sector, including in state-run enterprises. Collective bargaining agreements are common in the public sector. “Permanent committees of employees” informally represent employees in some enterprises of the private sector and directly negotiate with employers; these negotiations are expressed in “direct agreements,” which have a legal status. Based on 2021 statistics, 15 percent of employees were union members. The Labor Ministry reported that from 2019 to 2021, they approved 27 collective agreements and accompanied 43 negotiation processes and handled 7 conciliation processes of a social economic nature. In 2021, the Ministry reported that collective bargaining agreements covered 10.6 percent of the working population, 50.7 percent within public sector entities and 1.1 percent within the private sector. The Ministry reported that 13,897 workers were covered by “direct agreements” in different sectors (agriculture and manufacturing industry) during 2021.

In the private sector, many Costa Rican workers join “solidarity associations,” through which employers provide easy access to saving plans, low-interest loans, health clinics, recreation centers, and other benefits. A 2011 law solidified that status by giving solidarity associations constitutional recognition comparable to that afforded labor unions. Solidarity associations and labor unions coexist at some workplaces, primarily in the public sector. Business groups claim that worker participation in permanent committees and/or solidarity associations provides for better labor relations compared to firms with workers represented only by unions. However, some labor unions allege private businesses use permanent committees and solidarity associations to hinder union organization while permanent workers’ committees displace labor unions on collective bargaining issues in contravention of internationally recognized labor rights.

The Ministry of Labor has a formal dispute-resolution body and will engage in dispute-resolution when necessary; labor disputes may also be resolved through the judicial process. The Ministry of Labor’s regulations establish that conciliation is the mechanism to solve individual labor disputes, as defined in the Alternative Dispute Resolution (ADR) Law (No. 7727, dated 9 December 1997). The Labor Code and ADR Law establish the following mechanisms: dialogue, negotiation, mediation, conciliation, and arbitration. The Labor Law promotes alternative dispute resolution in judicial, administrative, and private proceedings. The law establishes three specific mechanisms: arbitration to resolve individual or collective labor disputes (including a Labor Ministry’s arbitrator roster list); conciliation in socio-economic collective disputes (introducing private conciliation processes); and arbitration in socio-economic collective disputes (with a neutral arbitrator or a panel of arbitrators issuing a decision). The Labor Ministry also participates as mediator in collective conflicts, facilitating and promoting dialogue among interested parties. The law provides for protection from dismissal for union organizers and members and requires employers found guilty of anti-union discrimination to reinstate workers fired for union activities.

The law provides for the right of workers to conduct legal strikes, but it prohibits strikes in public services considered essential (police, hospitals, and ports). Strikes affecting the private sector are rare and do not pose a risk for investment.

Child and adolescent labor is uncommon in Costa Rica, and it occurs mainly in agriculture in the informal sector.  In 2020, the government published the results of a child labor risk identification model and a strategy to design preventive measures at local level. In 2021, the government continued a pilot project for the prevention of child labor in two at-risk cantons in the province of Limón. The government also activated the Houses of Joy (“Casas de la Alegría”) during the coffee harvest season 2021-2022. These are daycare centers for children of workers in different coffee regions of the country, mainly in the Brunca, Los Santos, and Western Valley regions.

Chapter 16 of the U.S.-Central American Free Trade Agreement obliges Costa Rica to enforce laws that defend core international labor standards. The government, organized labor, employer organizations, and the International Labor Organization signed a memorandum of understanding to launch a Decent Work Program for the period 2019-2023, which aims to improve labor conditions and facilitate employability for vulnerable groups through government-labor-business tripartite dialogue.

The National Assembly recently approved a public employment reform bill that aims to establish the same salary for equal responsibilities in the public sector, eliminating different wage systems and salary bonus structures, which is projected to reduce the fiscal deficit.The legislation will take effect in March 2023.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $62,158 2020 $61,847 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 $26,306 2020 $2,000 BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) 2020 $124 2020 $-86 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2020 1.2% 2020 2.9% UNCTAD data available at

https://unctad.org/topic/investment/world-investment-report

* Source for Host Country Data: Costa Rican Central Bank. The “FDI Stock” positions detailed here are an accounting expression of the accumulation of FDI through 2020, while the “FDI inflow” statistic given in the first paragraph of the executive summary is the sum of foreign direct investment made in Costa Rica during calendar year 2020, as reported by the Costa Rican Central Bank.    

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 46,115 100% Total Outward 3,578 100
United States 26,306 57% Nicaragua 1,065 30%
Spain 2,810 6% Guatemala 1,023 29%
Mexico 2,173 5% Panama 867 24%
The Netherlands 1,777 4% United States 124 4%
Colombia 1,681 4% Luxembourg 90 3%
“0” reflects amounts rounded to +/- USD 500,000.

14. Contact for More Information

Attention: Investment Climate Statement
Economic Section
Embassy San Jose, Costa Rica
2519-2000
SanJoseEcon@state.gov 

Dominican Republic

Executive Summary

Foreign direct investment (FDI) plays an important role for the Dominican economy, and the Dominican Republic is one of the main recipients of FDI in the Caribbean and Central America. The government actively courts FDI with generous tax exemptions and other incentives to attract businesses to the country. Historically, the tourism, real estate, telecommunications, free trade zones, mining, and financing sectors are the largest FDI recipients.

Besides financial incentives, the country’s membership in the Central America Free Trade Agreement-Dominican Republic (CAFTA-DR) is one of the greatest advantages for foreign investors. Observers credit the agreement with increasing competition, strengthening rule of law, and expanding access to quality products in the Dominican Republic. The United States remains the single largest investor in the Dominican Republic. CAFTA-DR includes protections for member state foreign investors, including mechanisms for dispute resolution.

Foreign investors report numerous systemic problems in the Dominican Republic and cite a lack of clear, standardized rules by which to compete and a lack of enforcement of existing rules. Complaints include perceptions of widespread corruption at both national and local levels of government; delays in government payments; weak intellectual property rights enforcement; bureaucratic hurdles; slow and sometimes locally biased judicial and administrative processes, and non-standard procedures in customs valuation and classification of imports. Weak land tenure laws and interference with private property rights continue to be a problem. The public perceives administrative and judicial decision-making to be inconsistent, opaque, and overly time-consuming. A lack of transparency and poor implementation of existing laws are widely discussed as key investor grievances.

U.S. businesses operating in the Dominican Republic often need to take extensive measures to ensure compliance with the Foreign Corrupt Practices Act. Many U.S. firms and investors have expressed concerns that corruption in the government, including in the judiciary, continues to constrain successful investment in the Dominican Republic.

The current government, led by President Luis Abinader, made a concerted effort in its first full year of government to address issues of corruption and transparency that are a core issue for social, economic, and political prosperity, including prosecutorial independence, long-awaited electricity sector reform, and the empowerment of the supreme audit institution, the Chamber of Accounts. More work has repeatedly been promised, but passage remains uncertain as each measure is still subject to administrative or legislative processes, including approval of new public procurement legislation, passage of draft civil asset forfeiture legislation, the law for reform of the management of government assets, and a modern foreign investment law.

The Dominican Republic, an upper middle-income country, has been the fastest growing economy in Latin America over the past 50 years, according to World Bank data. It grew by 12.3 percent in 2021, 4.7 percent when compared with 2019 (pre-pandemic). Tax revenues were 12.7 percent higher than what was stipulated in the Initial Budget for 2021; coupled with budgetary discipline, the government closed its deficit to 2.7 percent of GDP. However, inflation at the end of 2021 was 8.50 percent, double the target of 4.0 percent ±1.0. Despite the government efforts to reduce public spending and increase revenues, absent meaningful fiscal reform, public debt continued to grow in 2021, reaching $47.7 billion at the end of November 2021 (if debt to the Central Bank is added, the public debt reached $62.04 billion), and a total service of debt of $5.9 billion – resulting in decrease in the debt to GDP ratio, but an increase in the total value of government debt. The government continues to apply large subsidies to different sectors of the economy such as the electricity sector and hydrocarbons. In 2021, the government allocated $1.03 billion to the subsidy for Electricity Distribution Companies (EDE’s) and $266.9 million directly to fuel.

According to the 2022 Climate Change Performance Index, the Dominican Republic is one of the most vulnerable countries in the world to the effects of climate change, though it represents only 0.06% of global greenhouse gas emissions. As a small island developing state, the Dominican Republic is particularly vulnerable to the effects of extreme climate events, such as storms, floods, droughts, and rising sea levels. Combined with rapid economic growth (over 5 percent until 2020) and urbanization (more than 50 percent of population in cities, 30 percent in Santo Domingo), climate change could strain key socio-economic sectors such as water, agriculture and food security, human health, biodiversity, forests, marine coastal resources, infrastructure, and energy. The National Constitution calls for the efficient and sustainable use of the nation’s natural resources in accordance with the need to adapt to climate change. The government is acting, both domestically and in coordination with the international community, to mitigate the effects of climate change.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 128 of 180 http://www.transparency.org/research/cpi/overview
Global Innovation Index 2021 93 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 $2,806 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2020 $7,260 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

The legacy of autocratic rule in the mid-twentieth century and the practice of distributing social services as political patronage have resulted in a relatively larger role for state-actors in the Dominican economy when compared with the United States. Since 1997, by means of the approval of the General Law of Reform of Public Companies No. 141-97, State-Owned Enterprises (SOEs) have been on the decline and do not have as significant a presence in the economy as they once did, with most functions now performed by privately held firms. Notable exceptions are in the electricity, banking, mining, and refining sectors.

The Dominican Corporation of State Enterprises (CORDE) was established by Law No. 289 of June 30, 1966, with the purpose of managing, directing, and developing all the productive and commercial companies, goods, and rights ceded by the Dominican State as a result of the death of the dictator Rafael Leónidas Trujillo. Among the state-owned companies that came to be managed by CORDE are the salt, gypsum, marble, and pozzolana mines. In 2017, the dissolution of CORDE was entrusted to a Commission chaired by the Legal Consultancy of the Executive Power, which assumed the operational, administrative, and financial management of this entity until the dissolution process was definitively completed. Within the framework of the dissolution process of CORDE, the ownership of the mining concessions of the Dominican State was transferred to the Patrimonial Fund of Reformed Companies (FONPER) through the Mining Concessions Transfer Agreement between CORDE and FONPER dated July 2, 2020.

Shortly after being sworn into office, in August 2020, President Abinader issued Decree 422-20 forming the Commission for the Liquidation of State Organs (CLOE) under the charge of the Ministry of the Presidency. Since then, the CLOE has been in the process of dissolution and liquidation of CORDE, and on December 8, 2020, CLOE requested the FONPER Board of Directors revoke the Concessions Transfer Agreement. FONPER’s Board of Directors approved the revocation through Minutes No. 02-2021 of March 11, 2021, authorizing the president of FONPER to sign an agreement with CLOE that revokes and nullifies the Transfer Agreement. It is not clear whether this revocation has been completed.

In 2021, the Office of the President proposed a bill to regulate government business assets, government participation in public trusts, and to create the National Center for Companies and Public Trusts (CENEFIP). The bill’s intent is to reform the management of state assets and replace the disgraced Patrimonial Fund of Reformed State Enterprises (FONPER), which is being investigated for alleged irregularities that may have personally benefited politically affiliated persons. The CENEFIP bill is under review in the legislature.

Also in 2021, the executive branch transferred the functions and properties of the State Sugar Council [Consejo Estatal del Azúcar] to the Directorate General of National Assests [Dirección General de Bienes Nacionales]. The State Sugar Council maintains one remaining sugar mill, Porvenir.

In the partially privatized electricity sector, private companies mainly provide electricity generation, while the government handles the transmission and distribution phases via the Dominican Electric Transmission Company (ETED) and the Dominican Corporation of State Electrical Companies (CDEEE). This sector is undergoing additional reforms, including the dissolution of the CDEEE and privatization of the management and operation of the distribution companies. The CDEEE and the distribution companies have traditionally been the largest SOEs in terms of government expenditures. The government also participates in the generation phase, too (most notably in hydroelectric power), and one of the distribution companies is partially privatized.

The Dominican financial sector consists of 112 entities, as follows: 47 financial intermediation entities (including large commercial banks, savings and loans associations, financial intermediation public entities, credit corporations), 41 foreign exchange and remittance agents (specifically, 35 exchange brokers and 6 remittances and foreign exchange agents), and 24 trustees. According to the latest available information (January 2022), total bank assets were $47.7 billion. The three largest banks hold 69.7 percent of the total assets – Banreservas 32.6 percent, Banco Popular 21.9 percent, and BHD Leon 16.4 percent. The state-owned, but autonomously operated BanReservas is the largest bank in the country and is a market leader in lending and deposits. Part of this success is due to a requirement for government employees to open accounts with BanReservas in order to receive salary payments. BanReservas was also utilized to distribute government social support payments during the pandemic. Roughly a third of the bank’s lending portfolio is to government institutions.

In the refining sector, the government is now the exclusive shareholder of the country’s only oil refinery; Refinery Dominicana (Refidomsa), after having extricated Petroleos de Venezuela, S.A. (PDVSA) in August 2021. Refidomsa operates and manages the refinery, is the only importer of crude oil in the country, and is also the largest importer of refined fuels, with a 60 percent market share. The price for fuel products is set by the Ministry of Industry, Commerce, and SMEs. Fuel prices are heavily subsidized.

Law No. 10-04 requires the Chamber of Accounts to audit SOEs. Audits should be published at https://www.camaradecuentas.gob.do/index.php/auditorias-publicadas . While audits have not always been publicly available, the new President of the Chamber is making a concerted effort to conduct and publish all audits required by law.

8. Responsible Business Conduct

The government does not have an official position or policy on responsible business conduct, including corporate social responsibility (CSR). Although there is not a local culture of CSR, large foreign companies normally have active CSR programs, as do some of the larger local business groups. While most local firms do not follow OECD principles regarding CSR, the firms that do are viewed favorably, especially when their CSR programs are effectively publicized. There is a growing trend for businesses to align with the United Nations Sustainable Development Goals and small and medium enterprises are beginning to follow examples of the CSR work of the larger local business groups of being more responsible to societal and environmental issues. These entities are viewing CSR as a competitive advantage. The CSR Risk Checker  is a tool designed to help companies understand some of the CSR risks associated with countries from which they may import or in which they may have production facilities. The report lists a total of 19 possible risks for the Dominican Republic, of which 11 are related to labor rights, three to human rights and ethics, three to environment, and two to fair business practices.

The Dominican Constitution does guarantee consumer rights stating, “Everyone has the right to have quality goods and services, to objective, truthful and timely information about the content and characteristics of the products and services that they use and consume.” To that end, the national consumer protection agency, ProConsumidor, offers consumer advocacy services.

The Dominican Republic also joined the Extractive Industries Transparency Initiative (EITI) in 2016 ( https://eiti.org/dominican-republic)  and is rated as achieving meaningful progress in its efforts to incorporate EITI standards into its regulatory framework. Its fourth country report, covering 2019 and 2020, was recently approved and can be found at https://eiti.org/document/dominican-republic-20192020-eiti-report.  The Ministry of Energy and Mines, as the government entity in charge of sectoral policy, is carrying out reform processes in the area of mining and hydrocarbons, including modernizing, organizing, and streamlining its own role. Other reforms include 1) modification and modernizing of the Mining Law of 1971, which was submitted to the Presidency for review in February 2021; 2) public consultation and revision of the regulation that will govern creation and management of the 5% of the net benefits generated by the exploitation of non-renewable natural resources that accrue to the state, established in article 117 of Law No. 64-00 of Environment and Natural Resources, and 3) drafting the regulation governing Artisanal Mining.

In May 2018, the Ministry of Energy and Mines presented the Shared Production Model Contract that regulates hydrocarbon exploration and exploitation activities in the Dominican Republic, there are separate version of the contract for on and offshore explorations. These contract models are used in the awarding of oil and gas blocks in the country, which began in November 2019. The government is exploring another licensing round, but dates have not been released. After being signed, contracts must be approved by the National Congress and promulgated by the President.

On December 15, 2003, through Decree No. 1128-03, the government established the Superintendency of Surveillance and Private Security (SVSP) to exercises control, inspection, and surveillance, over all persons and institutions that carry out surveillance and private security activities and their users, in the Dominican Republic. Despite the sizeable sector, there do not appear to be any government, civil society, or private firms in the Dominican Republic affiliated with the International Code of Conduct Association (ICoCA) and the government is not a signatory of the Montreaux Document.

According to the 2020 List of Goods Produced with Child and Forced Labor, there are indicators of child labor in the production of baked goods, coffee, rice, and tomatoes in the Dominican Republic and indicators of child and forced labor in the production of sugarcane. Stakeholders have raised serious inquiries regarding inhumane labor conditions in the Dominican Republic’s sugar sector for many years. In December 2011, Father Christopher Hartley filed a submission under the labor chapter of DR-CAFTA alleging numerous labor violations across the Dominican Republic’s sugar production industry. The U.S. Department of Labor (DOL) conducted an investigation and found “evidence of apparent and potential labor violations in the sector,” including concerns regarding acceptable conditions of work, child labor, and forced labor. Since issuing its report in 2013, DOL has engaged directly with the Government of the Dominican Republic (GODR), the International Labor Organization (ILO), and Dominican Republic industry stakeholders; provided technical assistance and related program funding; and conducted six public periodic reviews. The most recent review in 2018 found that “while concerns remain, the GODR continues to take positive steps towards addressing some of the labor issues identified in the report.” Another DOL periodic review is expected to be released in 2022.

At the same time, recent findings by investigative journalists assert that, despite ten years of effort, labor conditions in the Dominican Republic’s sugar sector remain abhorrent. Reports from the Washington Post, Mother Jones, and the Center for Investigative Reporting focusing on conditions at the Central Romana Corporation (owner of the world-famous Casa de Campo resort), include written and video testimonies by laborers about the conditions they experience in the bateys, colonos, sugar cane fields, and throughout the country’s sugar production. These testimonies describe poverty-level wages and crippling debt, excessive work hours, inadequate safety or protective equipment, abhorrent housing conditions with limited access to water and electricity, denial of public benefits such as pensions, social security, and medical care, and harassment, intimidation, and retaliation by supervisors, company representatives, company armed guards, and police.

9. Corruption

The Dominican Republic has a legal framework that includes laws and regulations to combat corruption and provides criminal penalties for corruption by officials. While challenges remain, overall enforcement of these laws has improved thanks to a heightened focus on transparency by the Abinader administration and concerted efforts by the Office of the Attorney General. In a change from prior years, investigations targeted well-connected individuals and high-level politicians, both from prior administrations and the current one. The Dominican Republic’s rank on the Transparency International Corruption Perception Index rose to 128 in 2021 from 137 in 2020 (out of 180 countries assessed).

Nonetheless, U.S. companies continued to identify corruption as a barrier to FDI. Firms often complained about a lack of technical proficiency in government ministries that resulted in public tender opportunities that were not competently drafted or executed in accordance with international best practices. Some firms went so far as to suggest that more problematic tenders had been set up intentionally to favor politically connected firms. The business community has also complained about corruption at the municipal level and its relevance to such things as permitting procedures. U.S. businesses operating in the Dominican Republic often need to take extensive measures to ensure compliance with the Foreign Corrupt Practices Act.

President Abinader has generally made good on his commitment to make fighting corruption a top priority of his administration. He appointed officials with reputations for professionalism and independence and went to great efforts to respect the independence of his appointed head of the Public Procurement General Directorate, the Chamber of Accounts (the country’s Supreme Audit Institution), and the Attorney General’s Office. In addition, the Abinader administration has publicly committed to prioritizing passage of institutional reforms that will advance the fight against corruption, such as new public procurement legislation, and a bill that would allow for civil asset forfeiture. Passage of this legislation, however, remains in question as the measures are in various levels of administrative and legislative review.

In a notable change from prior administrations, investigations into corruption and arrests have targeted senior officials not just from the opposing parties, but also from the ruling coalition. These moves have sent a powerful signal that the Abinader administration no longer tolerates the sort of pervasive corruption that was seen under prior administrations.

Civil society has been a critical voice in anti-corruption campaigns to date. Several non-governmental organizations are particularly active in transparency and anti-corruption, notably the Foundation for Institutionalization and Justice (FINJUS), Citizen Participation (Participacion Ciudadana), and the Dominican Alliance Against Corruption (ADOCCO).

The Dominican Republic signed and ratified the UN Anticorruption Convention. The Dominican Republic is not a party to the OECD Convention on Combating Bribery.

10. Political and Security Environment

Despite political stability and strong pre-pandemic economic growth, citizen and public security concerns in the Dominican Republic impose significant costs on businesses and limit foreign and domestic investment. There are no known national security threats affecting foreign investment within the Dominican Republic.

11. Labor Policies and Practices

The Dominican labor market continues to regularize as pandemic-related economic impacts subside. An ample labor supply is available, although there is a scarcity of skilled workers and technical supervisors. Some labor shortages exist in professions requiring lengthy education or technical certification. According to 2021 Dominican Central Bank data for July-September (the latest available), the Dominican labor force consists of approximately 4.6 million workers. The labor force participation rate is 63.1 percent; 57.7 percent of the labor force works in services, 10.0 percent in industry, 9.8 percent in education and health, 7.9 percent in agriculture and livestock, 9.2 percent in construction, and 5.4 percent in public administration and defense. Approximately 41.1 percent of the labor force works in formal sectors of the economy and 58.9 percent in informal sectors.

From January to September 2021, unemployment decreased from 8.0 percent to 6.8 percent as the economy continued its rebound from the COVID-19 pandemic. When factoring in discouraged workers and others who were not actively seeking employment, however, the unemployment rate increased from 6.8 percent to 13.6 percent in the period July-September 2021. Youth unemployment remained steady at 13.5 percent, indicating the pandemic had a greater impact on employment for older, more vulnerable segments of the population. Central Bank data from 2021 indicates that the labor market has nearly recovered to pre-pandemic levels, with the percentage of employment reaching 97.5 percent of the levels before the pandemic.

With respect to migrant workers, the most recent reliable statistical data is from 2017 and shows a population of 334,092 Haitians aged ten or older living in the country, with 67 percent working in the formal and informal sectors of the economy. Migration experts believe that this number has increased to approximately 500,000 or more since 2017. The Dominican government and the United Nations are expected to provide an updated migrant survey in 2022.

The Dominican Labor Code establishes policies and procedures for many aspects of employer-employee relationships, ranging from hours of work and overtime and vacation pay to severance pay, causes for termination, and union registration. The code applies equally to migrant workers; however, many undocumented Haitian laborers and Dominicans of Haitian descent working in the construction and agricultural industries do not exercise their rights due to fear of being fired or deported. The law requires that at least 80 percent of non-management workers of a company be Dominican nationals. Exemptions and waivers are available and regularly granted. The law provides for severance payments, which are due upon layoffs or firing without just cause. The amount due is prorated based on length of employment.

Although the Labor Code provides for freedom to form unions and bargain collectively, it places several restrictions on these rights, which the International Labor Organization (ILO) has characterized as excessive. For example, it restricts trade union rights by requiring unions to represent 51 percent of the workers in an enterprise to bargain collectively. In addition, the law prohibits strikes until mandatory mediation requirements have been met. Formal requirements for a strike to be legal also include the support of an absolute majority of all company workers for the strike, written notification to the Ministry of Labor, and a 10-day waiting period following notification before proceeding with the strike. Government workers and essential public service personnel, in theory, may not strike; however, in practice such employees, including healthcare workers, have protested and gone on strike.

The law prohibits dismissal of employees for trade union membership or union activities. In practice, however, the law is inconsistently enforced. The majority of companies resist collective negotiating practices and union activities. Companies reportedly fire workers for union activity and blacklist trade unionists, among other anti-union practices. Workers frequently have to sign documents pledging to abstain from participating in union activities. Companies also create and support company-backed unions. Formal strikes occur but are not common.

The law establishes a system of labor courts for dealing with disputes. The process is often long, with cases pending for several years. One exception is workplace injury cases, which typically conclude quickly – and often in the worker’s favor. Both workers and companies report that mediation facilitated by the Ministry of Labor was the most rapid and effective method for resolving worker-company disputes.

Many of the major manufacturers in free trade zones have voluntary codes of conduct that include worker rights protection clauses generally aligned with the ILO Declaration on Fundamental Principles and Rights at Work; however, workers are not always aware of such codes or the principles they contain. The Ministry of Labor monitors labor abuses, health, and safety standards in all worksites where an employer-employee relationship exists, however, resources for adequate monitoring and inspection are insufficient. Labor inspectors can request remediation for violations, and if remediation is not undertaken, can refer offending employers to the public prosecutor for sanctions.

14. Contact for More Information

Economic Office
Embassy of the United States of America
Avenida República de Colombia #57
Santo Domingo, Dominican Republic +1 (809) 567-7775
InvestmentDR@State.gov

El Salvador

Executive Summary

El Salvador’s location and natural attributes make it an attractive investment destination. The macroeconomic context and declining rule of law present some challenges. El Salvador’s economy has registered the lowest levels of growth in the region for many years, with average annual GDP growth of 2.5 percent from 2016 to 2019. After a deep pandemic-related contraction (7.9 percent) in 2020, the Central Bank estimates GDP rebounded to 10.3 percent growth in 2021. The IMF expects the economy to grow 3.2 percent in 2022, with growth rates declining to 2 percent in the medium-term. Economic underperformance is mainly driven by fiscal constraints. Persistent budget deficits and increased government spending – exacerbated by the pandemic – have contributed to a heavy debt burden. With public debt at an estimated 88.5 percent of GDP in 2021, the Government of El Salvador (GOES) has limited capacity for public investment and job creation initiatives. Large financing needs are projected for 2022.

The Bukele administration continues to make efforts to attract foreign investment and has taken measures to reduce cumbersome bureaucracy and improve security conditions. However, the implementation of the reforms has been slow, and laws and regulations are occasionally passed and implemented quickly without consulting with the private sector or assessing the impact on the business climate.

After being announced in June 2021, Bitcoin became a legal tender in El Salvador on September 7, 2021, alongside the U.S. dollar. The Bitcoin Law mandates that all businesses must accept Bitcoin, with limited exceptions for those who do not have the technology to carry out transactions. Prices do not need to be expressed in Bitcoin and the U.S. dollar is the reference currency for accounting purposes. The GOES created a $150 million trust fund managed by El Salvador’s Development Bank to guarantee automatic convertibility and subsidize exchange fees. The rapid implementation caused uncertainty in the investment climate and added costs to businesses.

Government of El Salvador actions have eroded separation of powers and independence of the judiciary over the past year. In May 2021, the Legislative Assembly dismissed the Attorney General and all five justices of the Supreme Court’s Constitutional Chamber and immediately replaced them with officials loyal to President Bukele. Furthermore, in August 2021, the legislature amended the Judicial Career Organic Law to force into retirement judges ages 60 or above and those with at least 30 years of service. The move was justified by the ruling party as an effort to root out corruption in the judiciary from past administrations. A September 2021 ruling from the newly appointed Constitutional Chamber allows for immediate presidential re-election, despite the Constitution prohibiting presidential incumbents from re-election to a consecutive term. Legal analysts believe these measures were unconstitutional and have enabled the Legislative Assembly and the Bukele administration to exert control over the judiciary.

The Legislative Assembly is not required to publish draft legislation and opportunities for public engagement are limited. With the Nuevas Ideas ruling party holding a supermajority, legislation is often passed quickly with minimal analysis and debate in parliamentary committees and plenary sessions, contributing to an overall climate of regulatory uncertainty.

Commonly cited challenges to doing business in El Salvador include the discretionary application of laws and regulations, lengthy and unpredictable permitting procedures, as well as customs delays. El Salvador has lagged its regional peers in attracting foreign direct investment (FDI). The sectors with the largest investment have historically been textiles and retail establishments, though investment in energy has increased in recent years.

The Bukele administration has proposed several large infrastructure projects which could provide opportunities for U.S. investment. Project proposals include enhancing road connectivity and logistics, expanding airport capacity and improving access to water and energy, as well as sanitation. Given limited fiscal capacity for public investment, the Bukele administration has begun pursuing Public-Private Partnerships (PPPs) to execute infrastructure projects. In August 2021, El Salvador’s Legislative Assembly approved the contract award of the first PPP project to expand the cargo terminal at the international airport.

As a small energy-dependent country with no Atlantic coast, El Salvador heavily relies on trade. It is a member of the Central American Dominican Republic Free Trade Agreement (CAFTA-DR); the United States is El Salvador’s top trading partner. Proximity to the U.S. market is a competitive advantage for El Salvador. As most Salvadoran exports travel by land to Guatemalan and Honduran ports, regional integration is crucial for competitiveness. Although El Salvador officially joined the Customs Union established by Guatemala and Honduras in 2018, implementation stalled following the Bukele administration’s decision to prioritize bilateral trade facilitation with Guatemala. In October 2021, however, the GOES announced it would proceed with Customs Union implementation. El Salvador rejoined technical level working group discussions and resumed testing of system interconnectivity.

The Bukele administration has taken initial steps to facilitate trade. In 2019, the government of El Salvador (GOES) relaunched the National Trade Facilitation Committee (NTFC), which produced the first jointly developed private-public action plan to reduce trade barriers. The plan contained 60 strategic measures focused on simplifying procedures, reducing trade costs, and improving connectivity and border infrastructure. Measures were not fully implemented in 2020 due to the coronavirus pandemic. In 2021, the NTFC revised the action plan to adjust measures under implementation and finalized drafting the national trade facilitation strategy, which will be launched in March 2022. In January 2022, the NFTC met to evaluate progress on the action plan. The NFTC released the action plan for 2022 on February 17th. The 2022 action plan has 29 measures to facilitate cross-border trade and improve road and border infrastructure.

Table 1
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 115 of 180 http://www.transparency.org/research/cpi/overview 
Global Innovation Index 2021 96 of 132 http://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2020 3,4133 https://apps.bea.gov/international/factsheet/factsheet.html#209 
World Bank GNI per capita 2020 3,630 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

2. Bilateral Investment Agreements and Taxation Treaties

El Salvador has bilateral investment treaties in force with Argentina, Belize, BLEU (Belgium-Luxembourg Economic Union), Chile, the Czech Republic, Finland, France, Germany, Israel, Republic of Korea, Morocco, the Netherlands, Paraguay, Peru, Spain, Switzerland, the United Kingdom, and Uruguay. El Salvador is one of the five Central American Common Market countries that have an investment treaty among themselves.

The CAFTA-DR entered into force in 2006 between the United States and El Salvador. CAFTA-DR’s investment chapter provides protection to most categories of investment, including enterprises, debt, concessions, contract, and intellectual property. Under this agreement, U.S. investors enjoy the right to establish, acquire, and operate investments in El Salvador on an equal footing with local investors. Among the rights afforded to U.S. investors are due process protections and the right to receive a fair market value for property in the event of expropriation. Investor rights are protected under CAFTA-DR by an effective, impartial procedure for dispute settlement that is transparent and open to the public.

El Salvador also has free trade agreements (FTAs) with Mexico, Chile, Panama, Colombia, and Taiwan. Although the GOES announced the cancellation of the Taiwan FTA in February 2019, the Supreme Court halted the cancellation in March 2019. The FTA remains in force pending a Supreme Court ruling.

In January 2020, the South Korea-Central America FTA became effective. This FTA includes investment provisions. El Salvador’s FTAs with Mexico, Chile, Dominican Republic, and Panama also include investment provisions. El Salvador continues trade agreement negotiations with Canada, which will likely include investment provisions. The Salvadoran government signed a Partial Scope Agreement (PSA) with Cuba in 2011 and an additional Protocol to the PSA in October 2018. El Salvador and Bolivia signed a PSA in November 2018 that is pending ratification in the Legislative Assembly. A PSA with Ecuador entered into force in 2017.

El Salvador, along with Costa Rica, Guatemala, Honduras, Nicaragua, and Panama, signed an Association Agreement with the European Union that establishes a Free Trade Area. The agreement entered into force with El Salvador in 2013. On March 1, 2022, El Salvador ratified the Protocol to the Association Agreement to take account of the accession of the Republic of Croatia to the European Union. The United Kingdom-Central America Association Agreement entered into force in January 2021. The agreement ensures continuity of commercial ties following Brexit and provides a framework for cooperation and investment.

El Salvador does not have a bilateral taxation treaty with the United States. El Salvador has one tax agreement with Spain, in effect since 2008.

El Salvador is a signatory of the Central American Mutual Assistance and Technical Cooperation Agreement in Tax and Customs Matters in force since 2012. On October 2018, El Salvador’s Legislative Assembly ratified the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters . The jurisdictions participating in the Convention can be found at:  www.oecd.org/ctp/exchange-of-tax-information/Status_of_convention.pdf

El Salvador became a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes in 2011. The OECD published El Salvador’s Phase 1 peer review report, which demonstrates its commitment to international standards for tax transparency and exchange of information, in 2015. The Phase 2 peer review on implementation of the standards, published in 2016, concluded that El Salvador is “largely compliant.”

El Salvador is not a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting.

In November 2020, El Salvador eliminated the Security Special Contribution on Large Taxpayers (CESC). Enacted in 2015, the CESC levied a five-percent tax on companies whose net income exceeded $500,000 to finance security measures, including the GOES’ Plan Control Territorial (Territorial Control Plan).

In May 2019, the legislature also approved an Authentic Interpretation of the Income Tax Law to clarify that energy distributors may deduct energy losses from the income tax, as energy losses are an unavoidable cost of distribution.  Prior to the authentic interpretation, tax authorities repeatedly imposed back taxes, interest, and penalties for improper deductions. Companies successfully challenged most of the tax assessments but had incurred legal costs and increased financial exposure.

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

El Salvador has successfully liberalized many sectors, though it maintains state-owned enterprises (SOEs) in energy generation and transmission, water supply and sanitation, ports and airports, and the national lottery (see chart below).

SOE 2022 Budgeted Revenue Number of Employees
National Lottery $51,553,600 148
State-run Electricity Company (CEL) $403,309,045 795
Water Authority (ANDA) $255,939,465 4,281
Port Authority (CEPA) $186,895,990 2,551

Although the GOES privatized energy distribution in 1999, it maintains significant energy production facilities through state-owned Rio Lempa Executive Hydroelectric Commission (CEL), a significant producer of hydroelectric and geothermal energy.

In October 2021, El Salvador’s legislature enacted the Creation Law of the Power, Hydrocarbons, and Mines General Directorate. The new General Directorate will be responsible for dictating the national energy policy and proposing amendments to energy legislation and by-laws, as well as implementing the energy policy. The law allows the President of the state-owned power company (CEL) to serve as the Director General of the new entity. The law will enter into force in November 2022. Industry stakeholders are concerned about the potential conflict of interest that would result from CEL making energy policy and participating in the sector as SOE.

The primary water service provider is the National Water and Sewer Administration (ANDA), which provides services to 96.6 percent of urban areas and 77 percent of rural areas in El Salvador.

The Autonomous Executive Port Commission (CEPA) operates both the seaports and the airports. CEL, ANDA, and CEPA Board Chairs hold Minister-level rank and report directly to the President.

The Law on Public Administration Procurement and Contracting (LACAP) covers all procurement of goods and services by all Salvadoran public institutions, including the municipalities. Exceptions to LACAP include: procurement and contracting financed with funds coming from other countries (bilateral agreements) or international bodies; agreements between state institutions; and the contracting of personal services by public institutions under the provisions of the Law on Salaries, Contracts and Day Work. Additionally, LACAP allows government agencies to use the auction system of the Salvadoran Goods and Services Market (BOLPROS) for procurement. Although BOLPROS is intended for use in purchasing standardized goods (e.g., office supplies, cleaning products, and basic grains), the GOES uses BOLPROS to procure a variety of goods and services, including high-value technology equipment and sensitive security equipment. As of October 2021, public procurement using BOLPROS totaled $157.1 million. The United Nations Office for Project Services (UNOPS) and United Nations Development Program (UNDP) also support government agencies in the procurement of a wide range of infrastructure projects. Procurement for municipal infrastructure works is governed by the Simplified Procurement Law for Municipal Works in force since November 2021 and centralized in the National Directorate of Municipal works created by the Bukele administration to oversee investment in infrastructure and social projects in municipalities. The GOES has created a dedicated procurement website to publish tenders by government institutions. https://www.comprasal.gob.sv/comprasal_web/ ).

In August 2020, President Bukele signed an executive order allowing the submission of bids for contractual services via email and eliminating bidders’ obligation to register online with the public procurement system (Comprasal), as well as lifting the responsibility of procurement officers to keep a record of companies and individuals who receive tender documents. Transparency advocates and legal experts have noted that the order would decrease potential bidders’ ability to access and compete fairly for government tenders. The order is pending review in the Supreme Court of Justice, but without injunctive effect.

Alba Petroleos is a joint venture between a consortium of mayors from the FMLN party and a subsidiary of Venezuela’s state-owned oil company PDVSA. As majority PDVSA owned, Alba Petroleos has been subject to Office of Foreign Assets Control (OFAC) sanctions since January 2019. Alba Petroleos operates a reduced number of gasoline service stations and businesses in other industries, including energy production, food production, convenience stores, and bus transportation. Alba Petroleos has been surrounded by allegations of mismanagement, corruption, and money laundering. Critics charged that the conglomerate received preferential treatment during FMLN governments and that its commercial practices, including financial reporting, are non-transparent. In May 2019, the Attorney General’s Office initiated an investigation against Alba Petroleos and its affiliates for money laundering. Alba Petroleos’ assets are frozen by court order and some of its gasoline service stations are being managed by the National Council for Asset Administration (CONAB).

8. Responsible Business Conduct

The private sector in El Salvador, including several prominent U.S. companies, has embraced the concept of responsible business conduct (RBC). Many companies donated to COVID-19 relief efforts in 2020. Several local foundations promote RBC practices, entrepreneurial values, and philanthropic initiatives. El Salvador is also a member of international institutions such as Forum Empresa (an alliance of RBC institutions in the Western Hemisphere), AccountAbility (UK), and the InterAmerican Corporate Social Responsibility Network. Businesses have created RBC programs to provide education and training, transportation, lunch programs, and childcare. In addition, RBC programs have included inclusive hiring practices and assistance to communities in areas such as health, education, senior housing, and HIV/AIDS awareness. Organizations monitoring RBC are able to work freely.

Following a reorganization under the Bukele administration, the Legal Secretariat is responsible for developing strategies and actions to promote transparency and accountability of government agencies, as well as fostering citizen participation in government. The watchdog organization Transparency International is represented in-country by the Salvadoran Foundation for Development (FUNDE).

El Salvador does not waive or weaken labor laws, consumer protection, or environmental regulations to attract foreign investment. El Salvador’s ability to enforce domestic laws effectively and fairly is limited by a lack of resources. El Salvador does not allow metal mining activity.

9. Corruption

U.S. companies operating in El Salvador are subject to the U.S. Foreign Corrupt Practices Act (FCPA).

Corruption can be a challenge to investment in El Salvador. El Salvador ranks 115 out of 180 countries in Transparency International’s 2021 Corruption Perceptions Index. While El Salvador has laws, regulations, and penalties to combat corruption, their effectiveness is at times questionable. Soliciting, offering, or accepting a bribe is a criminal act in El Salvador. The Attorney General’s Anticorruption and Anti-Impunity Unit handles allegations of public corruption. The Constitution establishes a Court of Accounts that is charged with investigating public officials and entities and, when necessary, passing such cases to the Attorney General for prosecution. Executive-branch employees are subject to a code of ethics, including administrative enforcement mechanisms, and the government established an Ethics Tribunal in 2006.

In June 2021, El Salvador terminated its 2019 agreement with the organization of American States (OAS) to back the International Commission Against Impunity and Corruption (CICIES). CICIES audited pandemic spending in 2020. After receiving CICIES preliminary findings in November 2021, the Attorney General’s Office began criminal investigations in 17 government agencies for alleged procurement fraud and misuse of public funds. In May 2021, the Legislative Assembly passed the “Law for the Use of Products for Medical Treatments in Exceptional Public Health Situations Caused by the COVID-19 Pandemic” to protect vaccine manufacturers from liability, a precondition for Pfizer to sell vaccines to El Salvador. However, the law’s broad liability shield provisions, including civil and criminal immunity for a wide range of medical product manufacturers and healthcare providers, raised concerns about the future of investigations into fraudulent purchases of medical supplies and PPE. The law was subsequently amended in October 2021 to clarify there is no immunity for acts of corruption, fraud, bribery, theft, counterfeiting or piracy and trafficking of stolen goods. Even though the reforms removed some of the most controversial aspects of the bill, investigations stalled after the Attorney General appointed by the Bukele Administration removed prosecutors working on pandemic-related probe against GOES officials.

Corruption scandals at the federal, legislative, and municipal levels are commonplace and there have been credible allegations of judicial corruption. Three of the past four presidents have been indicted for corruption, a former Attorney General is in prison on corruption-related charges, and a former president of the Legislative Assembly, who also served as president of the investment promotion agency during the prior administration, faces charges for embezzlement, fraud, and money laundering. The former Minister of Defense during two FMLN governments is being prosecuted for providing illicit benefits to gangs in exchange for reducing homicides (an agreement known as the 2012-2014 Truce). In February 2020, the Attorney General’s Office indicted high-ranking members of the ARENA and FMLN parties under charges of conspiracy and electoral fraud for negotiating with gangs for political benefit during the run up to the 2014 presidential elections. In September 2020, the Attorney General’s Office launched a probe against the Director of Penal Centers, the Vice Minister of Justice, and the Chief of the Social Fabric Reconstruction Unit for covert dealings with gangs on a homicide reduction in exchange for better prison conditions. Since the appointment of the current Attorney General, the investigation into Bukele administration’s gang pacts has not progressed. U.S Treasury designated the two officials and Bukele’s Chief of Cabinet for financial sanctions in December 2021. The law provides criminal penalties for corruption, but implementation is generally perceived as ineffective. Former President Funes faces criminal charges for embezzlement, money laundering, and misappropriation of public funds. Although there are several pending arrest warrants against Funes, he has fled to Nicaragua and cannot be extradited because he was granted Nicaraguan citizenship. In 2018, former president Elias Antonio (Tony) Saca pleaded guilty to embezzling more than $300 million in public funds. The court sentenced him to 10 years in prison and ordered him to repay $260 million.

The NGO Social Initiative for Democracy stated that officials, particularly in the judicial system, often engaged in corrupt practices with impunity. Long-standing government practices in El Salvador, including cash payments to officials, shielded budgetary accounts, and diversion of government funds, facilitate corruption and impede accountability.  For example, the accepted practice of ensuring party loyalty through off-the-books cash payments to public officials (i.e., sobresueldos) persisted across five presidential administrations. President Bukele eliminated these cash payments to public officials and the “reserved spending account,” nominally for state intelligence funding. At his direction, in July 2019, the Court of Accounts began auditing reserve spending of the Sanchez Ceren administration. In July 2021, the Attorney General’s Office accused ten former FMLN legislators and former cabinet members who served in the Funes administration (2009-2014), including former President Salvador Sanchez, of money laundering, embezzlement, and illicit enrichment for allegedly receiving sobresueldos from the President’s Office reserved spending account.

El Salvador has an active, free press that reports on corruption. The Illicit Enrichment Law requires appointed and elected officials to declare their assets to the Probity Section. The declarations are not available to the public, and the law only sanctions noncompliance with fines of up to $500. In 2015, the Probity Section of the Supreme Court began investigating allegations of illicit enrichment of public officials. In 2017, Supreme Court Justices ordered its Probity Section to audit legislators and their alternates. In 2019, in observance of the Constitution, the Supreme Court instructed the Probity Section to focus its investigations only on public officials who left office within ten years. In 2020, the Supreme Court issued regulations to standardize the procedures to examine asset declarations of public officials and carry out illicit enrichment investigations, as well as to set clear rules for decision-making. At the end of 2021, the Probity Section had a total of 452 active investigations on illicit enrichment. Between 2015 and 2021, the office completed economic examinations in 58 cases, but the Supreme of Court recommended civil prosecution for illicit enrichment in only 21 of those cases. In an October 2021 interview, the President of the Criminal Chamber of the Supreme Court indicated that 127 illicit enrichment cases were nearing the end of the 10-year constitutional statute of limitations.

In 2011, El Salvador approved the Law on Access to Public Information. The law provides for the right of access to government information, but authorities have not always effectively implemented the law. The law gives a narrow list of exceptions that outline the grounds for nondisclosure and provide for a reasonably short timeline for the relevant authority to respond, no processing fees, and administrative sanctions for non-compliance. The Bukele administration has weakened the autonomy of the Access to Public Information Agency (IAIP) – charged with ensuring compliance with the law – by reforming IAIP’s regulations to increase the President’s Office control over the appointment of its commissioners. Enacted amendments also add requirements for accessing information, including for the release of restricted information. Civil society organizations claim it is common practice of the Bukele administration to declare information to be reserved (confidential) or deny information without justification and in violation of the law to avoid citizen oversight and accountability.

In 2011, El Salvador joined the Open Government Partnership. The Open Government Partnership promotes government commitments made jointly with civil society on transparency, accountability, citizen participation and use of new technologies ( http://www.opengovpartnership.org/country/el-salvador ).

10. Political and Security Environment

El Salvador’s 12-year civil war ended in 1992. Since then, there has been no political violence aimed at foreign investors.

The crime threat level in El Salvador is critical, with high rates of crime and violence. Most serious crimes in El Salvador are never solved. El Salvador lacks sufficient resources to properly investigate and prosecute cases and to deter crime. For more information, visit: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/ElSalvador.html

El Salvador has thousands of known gang members from several gangs including Mara Salvatrucha (MS-13) and 18th Street (M18). Gang members engage in violence or use deadly force if resisted. These “maras” concentrate on extortion, violent street crime, carjacking, narcotics and arms trafficking, and murder for hire. Extortion is a common crime in El Salvador. U.S. citizens who visit El Salvador for extended periods are at higher risk for extortion demands. Bus companies and distributors often must pay extortion fees to operate within gang territories, and these costs are passed on to customers. The World Economic Forum’s 2019 Global Competitiveness Index reported that costs due to organized crime for businesses in El Salvador are the highest among 141 countries.

11. Labor Policies and Practices

According to the National Directorate of Statistics and Censuses (DIGESTYC), in 2021 El Salvador had a labor force of about 2.9 million people. Female labor force participation remained low at 41.2 percent. Around 70 percent of the workers were employed in the informal sector. The number of people working in the informal sector increased during the pandemic due to high unemployment rates. These workers do not have access to government health and pension benefits, and according to the 2020-2021 Salvadoran Foundation for Economic and Social Development report, 63.9 percent of workers the informal sector belong to vulnerable groups, such as women, children, and the rural poor.

http://fusades.org/publicaciones/informe-de-coyuntura-social-2020-2021 

https://www.elsalvador.com/noticias/negocios/trabajo-informal-pocos-incentivos-alejan-salvadorenos-tener-pension/829945/2021/ )

Labor laws require 90 percent of the workforce in plants and in clerical positions be Salvadoran citizens. While Salvadoran labor is regarded as hard-working, general education and professional skill levels are low. According to many large employers, there is a lack of middle management-level talent, which sometimes results in the need to bring in managers from abroad. Employers do not report labor-related difficulties in incorporating technology into their workplaces.

The law provides for the right of most workers to form and join independent unions, to strike, and to bargain collectively. The law also prohibits anti-union discrimination, although it does not require reinstatement of workers fired for union activity. Military personnel, national police, judges, and high-level public officers may not form or join unions. Workers who are representatives of the employer or in “positions of trust” also may not serve on a union’s board of directors. Only Salvadoran citizens may serve on unions’ executive committees. The labor code also bars individuals from holding membership in more than one trade union.

Unions must meet complex requirements to register, including having a minimum membership of 35 individuals. If the Ministry of Labor (MOL) denies registration, the law prohibits any attempt to organize for up to six months following the denial. Collective bargaining is obligatory only if the union represents most workers.

In 2021, some unions were concerned about the MOL’s delay in approving their organization’s credentials, required to continue operating as a union and to participate in various tripartite consultative committees between government, the private sector, and the unions. Without credentials, unions cannot participate in decision-making within tripartite committees on subjects such as worker social security benefits, minimum wage, housing, and other worker benefits. The members of the unions also lose their immunity from termination by their employers if their unions do not have credentials. As of January 2022, the MOL failed to grant credentials to more than 250 unions before their certifications expired. These unions represent workers in municipal, healthcare, education, and judicial trades, leaving these workers vulnerable to termination by their employers. The unions receiving their credentials quickly were those aligned with the political party of the Nuevas Ideas dominated government.

The law contains cumbersome and complex procedures for conducting a legal strike. The law does not recognize the right to strike for public and municipal employees or for workers in essential services. The law does not specify which services meet this definition, and courts therefore interpret this provision on a case-by-case basis. The law requires that 30 percent of all workers in an enterprise must support a strike for it to be legal and that 51 percent must support the strike before all workers are bound by the decision to strike. Unions may strike only to obtain or modify a collective bargaining agreement or to protect the common professional interests of the workers. They must also engage in negotiation, mediation, and arbitration processes before striking, although many unions often skip or expedite these steps. The law prohibits workers from appealing a government decision declaring a strike illegal.

The government did not effectively enforce the laws on freedom of association and the right to collective bargaining. Penalties remained insufficient to deter violations. Judicial procedures were subject to lengthy delays and appeals. According to union representatives, the government inconsistently enforced labor rights for public workers, maquiladora/textile workers, food manufacturing workers, subcontracted workers in the construction industry, security guards, informal-sector workers, and migrant workers.

Unions functioned independently from the government and political parties, although many generally were aligned with the traditional political parties of ARENA and the FMLN. Workers at times engaged in strikes regardless of whether the strikes met legal requirements.

Employers are free to hire union or non-union labor. Closed shops are illegal. Labor laws are generally in accordance with internationally recognized standards but are not enforced consistently by government authorities. Although El Salvador has improved labor rights since the CAFTA-DR entered into force and the law prohibits all forms of forced or compulsory labor, there remains room for better implementation and enforcement.

The MOL is responsible for enforcing the law. The government proved more effective in enforcing the minimum wage law in the formal sector than in the informal sector. Unions reported the ministry failed to enforce the law for subcontracted workers hired for public reconstruction contracts. The government provided its inspectors updated training in both occupational safety and labor standards and conducted thousands of inspections in 2019.

The law sets a maximum normal workweek of 44 hours, limited to no more than six days and to no more than eight hours per day, but allows overtime, which is to be paid at a rate of double the usual hourly wage.  The law mandates that full-time employees receive pay for an eight-hour day of rest in addition to the 44-hour normal workweek. The law provides that employers must pay double time for work on designated annual holidays, a Christmas bonus based on the time of service of the employee, and 15 days of paid annual leave. The law prohibits compulsory overtime. The law states that domestic employees are obligated to work on holidays if their employer makes this request, but they are entitled to double pay in these instances. The government does not adequately enforce these laws.

There is no national minimum wage; the minimum wage is determined by sector. On July 1, 2021, the government announced an increase in the minimum wage by about 20 percent for all industries in the formal sector. This was implemented on August 1, 2021, resulting in a one-month implementation period for industry. The increase had no impact on the majority of workers because most are employed in the informal sector.

El Salvador adopted the Telework Regulation Law in March 2020. The law is applicable in both private and public sectors and requires a written agreement between employer and employee outlining the terms and conditions of the arrangement, including working hours, responsibilities, workload, performance evaluations, reporting and monitoring, and duration of the arrangement, among others. Legislation prescribes employers as responsible for providing the equipment, tools, and programs necessary to perform duties remotely. Employers are subject to the obligations contained in labor laws, while workers are entitled to the same rights as staff working at the employer’s premises, including benefits and freedom of association.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $27,022.64 2019 $27,023 https://data.worldank.org/country/el-salvador
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 $2,104.22 2019 $3,413 BEA data available at
https://apps.bea.gov/international/
factsheet/factsheet.cfm?Area=209
 
Host country’s FDI in the United States ($M USD, stock positions) 2019 N.A. 2019 N.A. BEA data available at
http://bea.gov/international/direct_
investment_multinational_companies_
comprehensive_data.htm
Total inbound stock of FDI as % host GDP 2020  40.9% 2020 N.A,

* Central Bank, El Salvador. In 2018, the Central Bank released GDP estimates using the new national accounts system from 2008 and using 2005 as the base year.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (2020)*
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 10,075 100% Total Outward 3.1 100%
Panama 3,656 36.3% Guatemala 1.6 49.5%
 United States 2,104 20.9% Honduras 0.8 24.3%
Spain 1,339 13.3% Costa Rica 0.5 17.3%
Colombia 833 8.3% Nicaragua 0.3 8.9%
Mexico 670 6.7%      
“0” reflects amounts rounded to +/- USD 500,000.

*Coordinated Direct Investment Survey, International Monetary Fund 

14. Contact for More Information

Aaron Feit
Deputy Economic Counselor
U.S. Embassy San Salvador
Address: Final Blvd. Santa Elena, Antiguo Cuscatlán, La Libertad, El Salvador
Phone: +503 2501-2999
Email: FeitAL@state.gov

To reach the U.S. Foreign Commercial Service (FCS) Office, please email: Office.Sansalvador@trade.gov 

Guatemala

Executive Summary

Guatemala has the largest economy in Central America, with a $ 85.9 billion gross domestic product (GDP) in 2021. The economy grew by an estimated 7.5 percent in 2021 following a 1.5 percent retraction in 2020. Remittances, mostly from the United States, increased by 34.9 percent in 2021 and were equivalent to 17.8 percent of GDP. The United States is Guatemala’s most important economic partner. The Guatemalan government continues to make efforts to enhance competitiveness, promote investment opportunities, and work on legislative reforms aimed at supporting economic growth. More than 200 U.S. and other foreign firms have active investments in Guatemala, benefitting from the U.S. Dominican Republic-Central America Free Trade Agreement (CAFTA-DR). Foreign direct investment (FDI) stock was $21.4 billion in 2021, a 21.9 percent increase over 2020. FDI flows increased by 272.6 percent in 2021 mostly due to the purchase of outstanding shares of a local company by a foreign telecommunications company. Some of the activities that attracted most of the FDI flows in the last three years were information and communications, financial and insurance activities, manufacturing, commerce and vehicle repair, water, electricity, and sanitation services.

Despite steps to improve Guatemala’s investment climate, international companies choosing to invest in Guatemala face significant challenges. Complex laws and regulations, inconsistent judicial decisions, bureaucratic impediments, and corruption continue to impede investment.

Citing Guatemala’s CAFTA-DR obligations, the United States has raised concerns with the Guatemalan government regarding its enforcement of both its labor and environmental laws.

Guatemala’s Climate Change Framework Law established the groundwork for Guatemala’s Low Emission Development Strategy (LEDS) and is designed to align Guatemala’s emissions and development targets with national planning documents in six sectors: energy, transportation, industry, land use, agriculture, and waste management. In November 2020, the Guatemala government endorsed the LEDS as the country’s official strategy for climate change mitigation.

As part of the government’s efforts to promote economic recovery during and after the COVID-19 pandemic, the Ministry of Economy (MINECO) began implementing an economic recovery plan in September 2020, which focuses on recovering lost jobs and generating new jobs, attracting new strategic investment, and promoting consumption of Guatemalan goods and services locally and globally.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 150 of 180 http://www.transparency.org/
research/cpi/overview
Global Innovation Index 2021 101 of 132 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 USD 789 https://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2020 USD 4,490 https://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

Guatemala has three main state-owned enterprises: The National Electricity Institute (INDE) and two state-owned ports, Santo Tomas on the Caribbean coast, and Port Quetzal on the Pacific coast. INDE is a state-owned electricity company responsible for expanding the provision of electricity to rural communities. INDE owns approximately 14 percent of the country’s installed effective generation capacity, and it participates in the wholesale market under the same rules as its competitors. It also provides a subsidy to consumers of up to 88 kilowatt-hours (kWh) per month. Its board of directors comprises representatives from the government, municipalities, business associations, and labor unions. The board of directors appoints the general manager. The Guatemalan President appoints Santo Tomas Ports’ board of directors, and the board of directors appoints the general manager. The Guatemalan President also appoints the president of Port Quetzal’s board, and the president of the board appoints the general manager. The Guatemalan government also appoints the manager of state-owned telephone company GUATEL, which split off from the fixed-line telephone company during the 1998 privatization program. GUATEL’s operations are small, and it continuously fails to generate sufficient revenue to cover expenses. The GUATEL director reports to the Guatemalan President and to the board of directors.

The Guatemalan government currently owns 16 percent of the shares of the Rural Development Bank (Banrural), the second largest bank in Guatemala, and holds 3 out of 10 seats on its board of directors. Banrural is a mixed capital company and operates under the same laws and regulations as other commercial banks.

8. Responsible Business Conduct

There is a general awareness of expectations of standards for responsible business conduct (RBC) on the part of producers and service providers, as well as Guatemalan business chambers. A local organization called the Center for Socially Responsible Business Action (CentraRSE) promotes, advocates, and monitors RBC in Guatemala. They operate freely with multiple partner organizations, ranging from private sector to United Nations entities. CentraRSE currently has over 100 affiliated companies from 20 different sectors that provide employment to over 150,000 individuals. CentraRSE defines RBC as a business culture based on ethical principles, strong law enforcement, and respect for individuals, families, communities, and the environment, which contributes to businesses competitiveness, general welfare, and sustainable development. The Guatemalan government did not have a definition of RBC as of March 2022. Guatemala joined the Extractive Industries Transparency Initiative (EITI) in February 2011 and was designated EITI compliant in March 2014. The EITI board suspended Guatemala in February 2019 for failing to publish the 2016 EITI report and the 2017 annual progress report by the December 31, 2018 deadline. Guatemala published the 2016-2017 EITI report and the 2017 annual progress report in February and March 2019. The EITI board suspended Guatemala again in January 2020 after deciding that Guatemala has made inadequate progress in implementing the 2016 EITI standard. The EITI board requested Guatemala to undertake corrective actions before a second validation related to the requirements started on July 23, 2021. On December 24, 2020, the EITI board postponed the date to start Guatemala’s second validation process to April 1, 2022. Guatemala published the 2018-2020 EITI report in November 2021 but remained suspended as of March 2022.

The State Department has recognized U.S. companies such as McDonald’s, Starbucks, and Denimatrix for corporate social responsibility (CSR) programs in Guatemala that aimed to foster safe and productive workplaces as well as provide health and education programs to workers, their families, and local communities. Communities with low levels of government funding for health, education, and infrastructure generally expect companies to implement CSR practices.

Conflict surrounding certain industrial projects – in particular mining and hydroelectric projects – is frequent, and there have been several cases of violence against protestors in the recent past, including several instances of murder. On October 24, 2021, President Alejandro Giammattei declared a State of Siege in El Estor as dozens of protestors, including environmental defenders, indigenous activists, and outside agitators blocked coal trucks from accessing a nickel mine and clashed with National Police (PNC). Media reported that the government maintained a force of 500 police and military in El Estor during the 30-day State of Siege to carry out patrols, manage vehicle checkpoints, and conduct raids. Indigenous leaders, journalists, and civil society organizations alleged that they faced arbitrary detentions and persecution for participating in anti-mining protests. Lack of clarity over indigenous consultations continues to impact Guatemala’s investment climate. On December 10, 2021, the government declared the successful conclusion of the ILO consultations with those indigenous groups they designated as participants in the consultation process for the nickel mine. The community’s self-determined governance structure, the Ancestral Council of Q’eqchi Peoples, was excluded from the consultations, and critics claimed that the government purposely neglected to include the group.

9. Corruption

Bribery is illegal under Guatemala’s Penal Code. Guatemala scored 25 out of 100 points on Transparency International’s 2021 Corruption Perception Index, ranking it 150 out of 180 countries globally, and 28 out of 32 countries in the region. The law provides criminal penalties for official corruption, but the Public Ministry (MP) prosecuted very few government corruption cases.

Investors find corruption pervasive in government procurement, including payment of bribes in exchange for awarding public construction contracts. Investors and importers are frequently frustrated by opaque customs transactions, particularly at ports and borders. The Tax and Customs Authority (SAT) launched a customs modernization program in 2006, which implemented an advanced electronic manifest system and resulted in the removal of many corrupt officials. However, reports of corruption within customs’ processes remain. In 2021, SAT implemented additional customs reforms that route flagged shipments to a dedicated secondary inspection team for resolution, rather than assigning the case to the original inspector. The change eliminates opportunity for an inspector to impose deliberate delays.

From 2006 to 2019, the UN-sponsored International Commission against Impunity in Guatemala (CICIG) undertook numerous high-profile official corruption investigations, leading to significant indictments. For example, CICIG unveiled a customs corruption scheme in 2015 that led to the resignations of the former president and vice president. Since then-President Morales terminated CICIG in 2019 and actions by Attorney General Consuelo Porras to impede anti-corruption prosecutors, impunity has increased and poses significant risks for potential new investors.

Guatemala’s Government Procurement Law requires most government purchases over $116,363 to be submitted for public competitive bidding. Since March 2004, Guatemalan government entities are required to use Guatecompras ( https://www.guatecompras.gt/ ), an Internet-based electronic procurement system to track government procurement processes. Guatemalan government entities must also comply with government procurement commitments under CAFTA-DR. In August 2009, the Guatemalan congress approved reforms to the Government Procurement Law, which simplified bidding procedures; eliminated the fee previously charged to receive bidding documents; and provided an additional opportunity for suppliers to raise objections over the bidding process. Despite these reforms, large government procurements are often subject to appeals and injunctions based on claims of irregularities in the bidding process (e.g., documentation issues and lack of transparency). In November 2015, the Guatemalan congress approved additional amendments to the Government Procurement Law that tried to improve the transparency of the procurement processes by barring government contracts for some financers of political campaigns and parties, members of congress, other elected officials, government workers, and their immediate family members. However, there continue to be multiple allegations corruption and nepotism in the procurement process. The 2015 reforms expanded the scope of procurement oversight to include public trust funds and all institutions (including NGOs) executing public funds. The U.S. government continues to advocate for the use of open, fair, and transparent tenders in government procurement as well as procedures that comply with CAFTA-DR obligations, which would allow open participation by U.S. companies.

Guatemala ratified the U.N. Convention against Corruption in November 2006, and the Inter-American Convention against Corruption in July 2001. Guatemala is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. In October 2012, the Guatemalan congress approved an anti-corruption law that increased penalties for existing crimes and added new crimes such as illicit enrichment, trafficking in influence, and illegal charging of commissions.

10. Political and Security Environment

According to the National Civil Police (PNC), the murder rate in 2020 dropped 28 percent – from 20.8 per 100,000 to 15 per 100,000, compared to 2019, continuing a downward trend in recent years. The Guatemalan government attributed the general decline in violence to the economic downturn during the first months of the coronavirus pandemic, including interdepartmental travel restrictions and the prohibition of most alcohol sales. The murder rate increased to 16.6 per 100,000 in 2021, a 9 percent increase compared to 2020. Rule of law is a challenge and the judicial system is faces significant delays in case processing and inefficiency. Local police may lack the resources to respond effectively to serious criminal incidents. Major criminal groups operating in Guatemala are involved in a number of illicit activities, including violent street crime, drug trafficking, kidnaping, extortion, arms trafficking, illegal adoption rings, and environmental crimes. Although security remains a concern, foreigners are not usually singled out as targets of crime.

The political climate in Guatemala, marked by its 36 years of armed conflict, is characterized by periodic civil disturbances. For example, in October 2021, President Alejandro Giammattei declared a State of Siege in El Estor as dozens of protestors, including environmental defenders, indigenous activists, and outside agitators blocked coal trucks from accessing a nickel mine and allegedly clashed with National Police (PNC) forces who attempted to clear the road for mining traffic. Protests and highway roadblocks organized by transportation workers and military veterans have caused disruption and heightened security, impacting general mobility and traffic condition, on a recurring basis in recent years.

In November 2020 civil unrest sparked by congressional approval of the 2021 budget proposal, which added to long-standing grievances. Largely peaceful protests were marred by isolated acts of vandalism and violence, including fire damage to the national congress building, as well as acts of violence by both security forces against some protestors and by some protestors against security forces. The main source of tension among indigenous communities, Guatemalan authorities, and private companies is the lack of prior consultation and alleged environmental damage.

Damage to projects or installations is rare. However, there were instances in October 2018 and January 2019 in which unidentified arsonists burned machinery and other equipment at the site of a hydroelectric construction project near the northern border with Mexico. Additionally, activist groups at times have engaged in blockades to prevent personnel, materials, and equipment from entering or leaving disputed installations.

11. Labor Policies and Practices

According to the 2021 national survey of employment and income, the Guatemalan workforce consists of an estimated 2.1 million individuals employed in the formal sector. Additionally, roughly 5.1 million individuals, or 70.8 percent of the total workforce, work in the informal sector, including some who are too young for formal sector employment. According to the 2017 Survey on Employment and Income, the most recent survey with child labor data available, child labor, particularly in rural areas, remains a serious problem in certain economic activities. The informal economy represented 22 percent of GDP in 2019 according to official data. About 75.7 percent of female workers and 84.9 percent of indigenous workers were employed in the informal sector. Approximately 30 percent of the total labor force is engaged in agricultural work. The availability of a large, unskilled, and inexpensive labor force led many employers, such as construction and agricultural firms, to use labor-intensive production methods. Roughly, 14 percent of the employed workforce is illiterate. In developed urban areas, however, education levels are much higher, and a workforce with the skills necessary to staff a growing service sector emerged. Even so, highly capable technical and managerial workers remain in short supply, with secondary and tertiary education focused on social science careers. The Ministry of Labor issued a regulation in March 2022 that requires recruiters of Guatemalans being employed outside of Guatemala to be registered and to comply with all the requirements related to contracts established in Article 34 of the Labor Code.

No special laws or exemptions from regular labor laws cover export-processing zones. The Ministry of Labor issued a regulation in December 2021 that allows to set different minimum wages for two economic regions of the country starting in 2023. In July 2021, the Constitutional Court revoked the provisional suspension of the Ministry of Labor’s agreement on part-time work, based on ILO Convention 175, which enabled companies to hire workers for six hours or fewer per workday for wages equivalent to the fraction of full time work they complete.

The Labor Code requires that at least 90 percent of employees be Guatemalan, but the requirement does not apply to high-level positions, such as managers and directors. The Labor Code sets out: employer responsibilities regarding working conditions, especially health and safety standards; benefits; severance pay; premium pay for overtime work; minimum wages; and bonuses. Mandatory benefits, bonuses, and employer contributions to the social security system can add up to about 55 percent of an employee’s base pay. However, many workers, especially in the agricultural sector, do not receive the full compensation package mandated in the labor law. All employees are subject to a two-month trial period during which time they may resign or be discharged without any obligation on the part of the employer or employee. For any dismissal after the two-month trial period, the employer must pay unpaid wages for work already performed, proportional bonuses, and proportional vacation time. If an employer dismisses an employee without just cause, the employer must also pay severance equal to one month’s regular pay for each full year of employment. Guatemala does not have unemployment insurance or other social safety net programs for workers laid off for economic reasons.

Guatemala’s Constitution guarantees the right of workers to unionize and to strike, with an exception to the right to strike for security force members and workers employed in hospitals, telecommunications, and other public services considered essential to public safety. Before a strike can be declared, workers and employers must engage in mandatory conciliation and then approve a strike vote by 50 percent plus one worker in the enterprise. If conciliation fails, either party may ask the judge for a ruling on the legality of conducting a strike or lockout. Legal strikes in Guatemala are extremely rare. The Constitution also commits the state to support and protect collective bargaining and holds that international labor conventions ratified by Guatemala establish the minimum labor rights of workers if they offer greater protections than national law. In most cases, labor unions operate independently of the government and employers both by law and in practice. The law requires unions to register with the Ministry of Labor and their leadership must obtain credentials to carry out their functions. Delays in such proceedings are common. The law prohibits anti-union discrimination and employer interference in union activities and requires employers to reinstate workers dismissed for organizing union activities. A combination of inadequate allocation of budget resources for labor rights enforcement to the Ministry of Labor and other relevant state institutions, and inefficient administrative and justice sector processes, act as significant impediments for more effective enforcement of labor laws to protect these workers’ rights. As a result, investigating, prosecuting, and punishing employers who violate these guarantees remain a challenge, particularly the enforcement of labor court orders requiring reinstatement and payment of back wages resulting from dismissal. The rate of unionization in Guatemala is very low.

Both the U.S. government and Guatemalan workers have filed complaints against the Guatemalan government for allegedly failing to adequately enforce its labor laws and protect the rights of workers. In September 2014, the U.S. government convened an arbitration panel alleging that Guatemala had failed to meet its obligations under CAFTA-DR to enforce effectively its labor laws related to freedom of association and collective bargaining and acceptable conditions of work. The panel held a hearing in June 2015 and issued a decision favorable to Guatemala in June 2017. Separately, the Guatemalan government faced an International Labor Organization (ILO) complaint filed by workers in 2012 alleging that the government had failed to comply with ILO Convention 87 on Freedom of Association. The complaint called for the establishment of an ILO Commission of Inquiry, which is the ILO’s highest level of scrutiny when all other means failed to address issues of concern. In 2013, the Guatemalan government agreed to a roadmap with social partners in an attempt to avoid the establishment of a Commission. The government took some steps to implement its roadmap, including the enactment of legislation in 2017 that restored administrative sanction authority to the labor inspectorate for the first time in 15 years. As part of a tripartite agreement reached at the ILO in November 2017, a National Tripartite Commission on Labor Relations and Freedom of Association was established in February 2018 to monitor and facilitate implementation of the 2013 roadmap. Based in large part on the 2017 tripartite agreement, the ILO Governing Body closed the complaint against Guatemala in November 2018.

14. Contact for More Information

John Szypula
szypulaj@state.gov
Trade and Investment Officer
U.S. Embassy Guatemala
Av. Reforma 7-01 Zona 10, Guatemala
(502) 2326-4000

Honduras

Executive Summary

Honduras contains all the ingredients for a thriving, prosperous economy: strategic location next to U.S. markets with a deep-water port, a rich endowment of natural resources, breathtaking tourist destinations, and hard-working people, including a significant cadre of skilled labor. Despite these advantages, per capita income in Honduras is the third lowest in all Latin America. Investors cite corruption, crime, and poor infrastructure and weak or nonexistent rule of law as the primary reasons that Honduras does not attract more of the private investment it needs to stimulate inclusive economic growth. According to the International Monetary Fund (IMF), real Honduran GDP grew by 12.5 percent in 2021, a rebound from the devastating effects in 2020 of the COVID-19 pandemic and twin hurricanes Eta and Iota. The IMF predicts the economy will grow by 3.8 percent in 2022.

The 2022 inauguration of Honduras first woman president, Xiomara Castro, marked the beginning of a new era in the country’s political economy. The participation of U.S. Vice President Harris at President Castro’s inauguration exemplified the strong U.S. commitment to Honduras. The two countries have committed to work jointly to address the root causes of migration, including by combating corruption and expanding economic opportunity. Since taking office, the Castro administration has launched initiatives to reduce corruption, improve education and public health, and create jobs.

These laudable efforts have been frustrated by fiscal challenges, including budget planning and debt management. Although the United States and international organizations including the IMF assess Honduras as low risk for debt distress, public messaging from the administration announcing a fiscal crisis roiled international bond markets, driving up the risk premium on Honduran debt. To address these budget shortfalls, the government announced it will utilize its foreign reserves to finance operations, which could put additional inflationary pressure on the economy. To help Honduras implement its social agenda without increasing its debt burden, the United States has begun a debt management technical assistance program with the Ministry of Finance.

In both public and private, the Castro administration emphasizes the need for job creation and private investment in Honduras. The government approved a new law in 2022 to facilitate the development and formalization of Micro, Small, and Medium Enterprises (MSMEs). The government’s Results-Based Governance system and other anti-corruption efforts are excellent examples of efforts to improve the investment climate. From the perspective of the private sector, however, these efforts have been overshadowed by policy decisions that have dramatically increased the uncertainty of investment returns. Chief among these was the May 2022 approval of a new energy law that threatens power generators with forced sale at a “just price” if they do not reduce their tariffs to the government’s satisfaction. The law provides no guarantee of future payment, stipulates that new energy investment must be majority state-owned, and all but eliminates private trade in energy. As a result of the new law, several private energy companies have discontinued planned projects in Honduras and are exploring investment opportunities in other countries in the region.

The Castro administration also eliminated the special economic zones known as “ZEDEs” by their initials in Spanish. The ZEDEs were broadly unpopular, including with much of the private sector, and viewed as a vector for corruption. Rather than pursuing reforms or seeking dialogue with the ZEDE investors, by eliminating the frameworks without any regard for the protections afforded the investors under the U.S.-Honduras Bilateral Investor Treaty (BIT) or the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR), the government has exposed itself to potentially significant liability and fueled concerns about the government’s commitment to commercial rule of law.

Another government policy contributing to uncertainty in the investment climate has been the elimination of the legal framework used by most businesses to employ per-hour workers. The law’s repeal fulfilled a Castro campaign promise, responding to criticism by labor unions that temporary work allowed companies to evade their social security obligations and exploit workers. Business representatives note, however, that many industries, including retail, tourism, and food service rely heavily on hourly labor and will be constrained by the new framework. Civil society representatives also point out that the change adversely affects women and students, who relied on hourly work to manage households and school schedules, although union leaders counter that the previous framework allowed employers to target women and young people for economic exploitation, given that their personal circumstances often do not allow them to take on full-time employment.

Many foreign investors in Honduras operate thriving enterprises. At the same time, all investors face challenges including unreliable and expensive electricity, corruption, unpredictable tax application and enforcement, high crime, low education levels, and poor infrastructure. Squatting on private land is an increasingly severe problem in Honduras and anti-squatting laws are poorly enforced. Continued low-level protests and strikes are additional concerns for private investors.

Despite these setbacks, over 200 American companies operate businesses in Honduras. Honduras enjoys preferential market access to the United States under CAFTA-DR, which has allowed for the development of intra-industry trade in textiles and electrical machinery, among other sectors. The proximity to the United States and established supply chain linkages means that opportunities exist to increase nearshoring sourcing to meet U.S. demand for a variety of goods. The White House “Call to Action to Deepen Investment in the Northern Triangle” is designed to coordinate increased U.S. investment in the region, including Honduras. This program, along with others, aims to support sustained and inclusive economic development in Honduras and surrounding countries.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 157 of 175 http://www.transparency.org/research/cpi/overview 
Global Innovation Index 2021 108 of 132 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2020 USD 1,111 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2020 USD 2180 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

Most state-owned enterprises are in telecommunications, electricity, water utilities, banking, and commercial ports. The main state-owned Honduran telephone company, Hondutel, has private contracts with eight foreign and domestic carriers. The GOH has yet to establish a legal framework for foreign companies to obtain licenses and concessions to provide long distance and international calling. As a result, investors remain unsure if they can become fully independent telecommunication service providers.

The state-owned National Electric Energy Company (ENEE) is the single largest contributor to the country’s fiscal deficit. Due to years of mismanagement and corruption, ENEE loses over $30 million every month and its debt amounts to more than 10 percent of Honduran GDP. With the May 2022 energy law, the government has reversed energy reform legislation that called for the separation of ENEE into three independent units for distribution, transmission, and generation. The law also weakened the electricity regulator and eliminated the independent systems operator. Electricity subsector experts say that dispatch decisions have become much less transparent since the elimination of the systems operator, a disincentive for new investment. The electrical subsector faces serious structural problems, including high electricity system losses, a transmission system in need of upgrades, vulnerability of generation costs to volatile international oil prices, an electricity tariff that does not reflect actual costs, and the high costs of long-term power purchase agreements (PPAs), which have often been awarded directly to companies with political connections instead of via a fair and transparent tendering and procurement process. Many businesses have installed on-site power generation systems to supplement or substitute for power from ENEE due to frequent blackouts and high tariffs.

Honduran law grants municipalities the right to manage water distribution and to grant concessions to private enterprises. Major cities with public-private concessions include San Pedro Sula, Puerto Cortes, and Choloma. The state water authority National Autonomous Aqueduct and Sewer Service (SANAA) manages Tegucigalpa’s water distribution. Persistent water shortages are another constraint on private enterprise in Honduras, especially during the spring dry season. The Honduran National Port Company (ENP) is the state-owned organization that oversees management of the country’s government-operated maritime ports, including Puerto Cortes, La Ceiba, Puerto Castilla, and San Lorenzo. Private companies Central American Port Operators and Maritime Ports of Honduras have 30-year concessions to operate container and bulk shipping facilities at Honduras’ principal port Puerto Cortes.

8. Responsible Business Conduct

Awareness of the importance of Responsible Business Conduct (RBC) is growing among both producers and consumers in Honduras. An increasing number of local and foreign companies operating in Honduras include conduct-related responsibility practices in their business strategies. The Honduran Corporate Social Responsibility Foundation (FUNDAHRSE) has become a strong proponent in its efforts to promote transparency in the business climate and provides the Honduran private sector, particularly small- and medium-sized businesses, with the skills to engage in responsible business practices. FUNDAHRSE’s approximately 110 members can apply for the foundation’s “Corporate Social Responsibility Enterprise” seal for exemplary responsible business conduct involving work in areas related to health, education, environment, codes of ethics, employment relations, and responsible marketing.

RBC related to the environment and outreach to local communities is especially important to the success of investment projects in Honduras. Several major foreign investment projects in Honduras have stalled due to concerns about environmental impact, land rights issues, lack of transparency, and problematic consultative processes with local communities, particularly indigenous communities. Although the International Labor Organization Convention 169 on Indigenous and Tribal Peoples was ratified by the GOH in 1995 and Honduras voted in favor of UN’s Indigenous People’s rights in 2007, there is still much to do in the area. There is still a need for foreign investors to build trust with local communities, while employing international best practices and standards to reduce the risk of conflict and promote sustainable and equitable development.

Examples of international best practices include the following:

Voluntary Principles on Security and Human Rights Initiative

The UN Guiding Principles on Business and Human Rights

The Organization for Economic Co-operation and Development Guidelines for Multinational Enterprises.

9. Corruption

In February 2022, President Castro fulfilled her campaign promise to request support from the UN for an international anti-corruption commission (CICIH).  A UN Technical Assistance Mission visited Honduras in May 2022 to begin work on the request.  The commission would continue the work started by the OAS Mission Against Corruption and Impunity in Honduras (MACCIH) which left Honduras in 2020 after the former administration failed to renew its mandate. Though details are still under discussion, the commission would likely fill an investigative and prosecutorial role similar to MACCIH. Its mandate would likely extend beyond the current administration.  Several risks remain; notably, a broad amnesty law passed in February 2022 that would prevent the commission from investigating a significant number of cases, and unclear financing for the commission.

U.S. businesses and citizens report corruption in the public sector and the judiciary is a significant constraint to investment in Honduras.  Historically, corruption has been pervasive in government procurement, issuance of government permits, customs, real estate transactions (particularly land title transfers), performance requirements, and the regulatory system.  Civil society groups are critical of recent legislation granting qualified immunity to government officials and a 2019 law that gave the highly politicized government audit agency a first look at corruption cases.  Congress repealed the latter in 2022.  In 2018, Congress passed a revision of the 1984 penal code that lowered penalties for some corruption offenses. The new code went into effect in June 2020 and was retroactively applied to several high-profile corruption cases resulting in a spate of dismissals and retrials.  In late 2020, the GOH created a new Ministry of Transparency to act as the government’s lead institution in coordinating and implementing efforts to promote transparency and integrity and prevent government corruption. The Castro government further institutionalized the ministry’s anti-corruption mandate, naming it the Ministry of Transparency and the Fight against Corruption. The Castro administration’s Government by Results initiative should pay off in decreased vulnerability to corruption, and the ministers of Health and Economic Development both signed cooperation agreements with the country’s Anticorruption Council.

Honduras’s Rankings on Key Corruption Indicators:

Measure Year Index/Ranking
TI Corruption Index 2021 23/100, 157 of 180
MCC Government Effectiveness FY 2022 -0.12 (35 percent)
MCC Rule of Law FY 2022 -0.42 (10 percent)
MCC Control of Corruption FY 2022 -0.40 (16 percent)

The United States Foreign Corrupt Practices Act (FCPA) deems it unlawful for a U.S. person, and certain foreign issuers of securities to make corrupt payments to foreign public officials for the purpose of obtaining or retaining business for directing business to any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. For more information, see the FCPA Lay-Person’s Guide:  http://www.justice.gov/criminal/fraud/  .

Honduras ratified the UN Anticorruption Convention in December 2005. The UN Convention requires countries to establish criminal penalties for a wide range of acts of corruption. The UN Convention covers a broad range of issues from basic forms of corruption such as bribery and solicitation, embezzlement, trading in influence, and the concealment and laundering of the proceeds of corruption. The UN Convention contains transnational business bribery provisions that are functionally similar to those in the Organization for Economic Cooperation and Development Anti-Bribery Convention.

Honduras ratified the Inter-American Convention against Corruption (OAS Convention) in1998. The OAS Convention establishes a set of preventive measures against corruption; provides for the criminalization of certain acts of corruption, including transnational bribery and illicit enrichment; and contains a series of provisions to strengthen the cooperation between its states’ parties in areas such as mutual legal assistance and technical cooperation.

10. Political and Security Environment

Crime and violence rates remain high and add cost and constraint to investments. Demonstrations occur regularly in Honduras and political uncertainty poses a challenge to ongoing stability.

U.S. citizens should be aware that large public gatherings might become unruly or violent quickly. For more information, consult the Department of State’s latest travel warning:  https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Honduras.html.

Although violent crime remains a persistent problem, Honduras has successfully reduced homicides to less than 40 per 100,000 inhabitants. Cases of violence, extortion, and kidnapping are still relatively common, particularly in urban areas where gang presence is more pervasive. Drug traffickers continue to use Honduras as a transit point for cocaine and other narcotics en route to the United States and Europe, which fuels local turf battles in some areas and injects illicit funds into judicial proceedings and local governance structures to distort justice. The business community historically had been a target for ransom kidnappings, but the number of such kidnappings dropped from 92 in 2013 to 15 in 2021, primarily through the work of the USG-supported Honduran National Police National Anti-Kidnapping Unit. Although violent crime rates are trending downward, corruption and white-collar crime, including money laundering, negatively affect economic prosperity and stability for the business community.

11. Labor Policies and Practices

The Honduran Labor Law prescribes a maximum eight-hour workday, 44-hour workweek, and at least one 24-hour rest period per week. The Labor Code provides for paid national holidays and annual leave. Most employment sectors also receive two one-month bonuses as part of the base salary, known as the 13th and 14th month salary, issued in mid-December and mid-June, respectively. New hires receive a prorated amount based on time-in-service during their first year of employment. The Labor Code requires companies to pay one month’s salary to employees terminated without cause. Companies do not owe severance to employees who resign or are terminated for cause. Employees terminated for cause can contest the basis for the termination in court to claim severance. There are no government-provided unemployment benefits in Honduras, although unemployed individuals may have access to their accumulated pension funds.

As mentioned above, in April 2022, President Castro signed the repeal of the Hourly Employment Law. Labor groups had alleged that some employers used hourly contracts to avoid responsibility for severance, provide employee benefits, and prevent union formation. The repeal did not stipulate the process for transitioning employees from hourly to salaried, but it did prevent the termination of employees.

The Secretariat of Labor and Social Security (SETRASS) is responsible for registering collective bargaining agreements. The Labor Code prohibits the employment of persons under the age of 14. Minors between the ages of 14 and 18 must receive special permission from SETRASS to work. The majority of the violations of the labor-related provisions of the children’s code occur in the agricultural sector and informal economy.

While Honduran labor law closely mirrors International Labor Organization standards, the U.S. Department of Labor has raised serious concerns regarding the effective enforcement of Honduran labor laws. Labor organizations allege the SETRASS fails to enforce labor laws, including laws on the right to form unions, reinstating employees unjustly fired for union activities, child labor, minimum wages, hours of work, and occupational safety and health. A 2015 U.S. Department of Labor report provided recommendations to address labor concerns in Honduras and called for a monitoring and action plan (MAP) to improve labor law enforcement in Honduras following a 2012 submission brought under the labor chapter of CAFTA-DR. While the government has made significant progress toward addressing areas of concern, outstanding issues to completing the Honduran government’s obligations under the MAP include resolution of emblematic collective bargaining cases and the enforcement and collection of fines for labor violations.

The U.S. Department of State Country Report on Human Rights Practices describes a number of labor and human rights compliance issues that affect the Honduran labor market: https://www.state.gov/reports/2021-country-reports-on-human-rights-practices/honduras/. These include employers’ anti-union discrimination, refusal to engage in collective bargaining, and employer control of unions.

14. Contact for More Information

Economic Counselor
Scott Hansen
U.S. Embassy
Avenida La Paz  Tegucigalpa, M.D.C.
hansensw@state.gov

Jamaica

Executive Summary

The Government of Jamaica (GOJ) considers foreign direct investment (FDI) a key driver for economic growth and in recent years has undertaken macroeconomic reforms that have improved its investment climate. However, the reform program was stymied by measures implemented to contain the impact of the COVID-19 pandemic. An early lockdown in the Spring of 2020 helped contain the number of Covid-19 cases but the impact on the economy was severe, with real GDP shrinking by 10 percent. To mitigate the impact of the pandemic on public health and the economy, the authorities suspended the fiscal rule for a year and swiftly implemented public health measures and a fiscal package to support jobs and protect the most vulnerable segments of the population. The downturn and the fiscal package resulted in a fiscal deficit of 3.1 percent of GDP in FY2020/21.

The Jamaican economy contracted during fiscal year (FY) 2020/21, underpinned by a near collapse in tourism and travel and weaker disposable incomes. But unlike previous shocks, the country did not experience the usual bouts of macroeconomic instability, suggesting the past decade of economic and legislative reforms are beginning to bear fruit. The Jamaican economy is also recovering from the effects of the pandemic well ahead of regional peers, with economic growth of 7-9 percent projected for FY 2021/22. Robust construction activities, a strong rebound in tourist arrivals, and record remittances, both mostly from the United States, provided the impetus for growth. The expansion in economic activity spurred a rebound in employment, with the unemployment rate falling to a historic low of 7.1 percent. The economic recovery combined with strong fiscal management allowed the government to generate the primary surplus required to reverse the debt to GDP ratio, which is expected to return to the pre-pandemic levels. The economic turnaround also contributed to a general improvement in business and consumer confidence. Notwithstanding, inflation and inflationary expectations are beginning to threaten stability, forcing the central bank to tighten monetary policy.

On March 09, 2022, Fitch Ratings Agency affirmed Jamaica’s Long-Term Foreign Currency Issuer Default Rating (IDR) at ‘B+’ and assigned a stable outlook. Fitch reported that Jamaica’s ‘B+’ rating was supported by a favorable business climate and government efforts to lower the debt to GDP ratio. The agency explained that the country remained susceptible to external shocks, low growth levels, high public debt and a debt composition that exposes the country to exchange rate fluctuations and interest rate hikes. “The Stable Outlook is supported by Fitch’s expectation that having been interrupted by the pandemic, a downward trend in public debt-to-GDP will be underpinned by political consensus to maintain a high primary surplus,” the agency continued.

Jamaica received $366 million in FDI in 2020 (latest available data), a $299 million drop over the previous year. Despite the decline, data from the 2021 UNCTAD World Investment Report showed that Jamaica was the highest FDI destination in the English-Speaking Caribbean. China and Spain were the major drivers of FDI in 2020. Up to the onset of COVID-19, tourism, mining, and energy led investment inflows into the island. Though hard hit by the global pandemic, tourism and mining continued to drive foreign investment. Mineral and Chemicals investments also picked up in 2020. There is a significant host government commitment to mining, tourism, and airport development, which could resume when economic conditions improve. Business process outsourcing (BPO), including customer service and back-office support, continued to attract local and overseas investment. Investments in improved air, sea, and land transportation have reduced time and costs for transporting goods and have created opportunities in logistics.

Jamaica’s high crime rate, corruption, and comparatively high taxes have stymied its investment prospects. The country’s Transparency International corruption perception ranking improved marginally from 74 (2019) to 69 (2020) out of 180 countries. Despite laws that prescribe criminal penalties for corrupt acts by officials, there were still reports of corruption at some ministries and agencies. Measures implemented to address crime continued into 2021, including the continuation of Zones of Special Operations in several high crime areas of the island. While these efforts resulted in lower rates of serious crime in the attendant zones, the measures did not significantly impact the overall murder rate, and Jamaica continues to have one of the highest homicide rates in the world.

With energy prices a major component of the cost of doing business, the government has instituted a number of policies to address the structural impediment. In early 2020, the government published its Integrated Resource Plan (IRP), outlining the country’s electricity roadmap for the next two decades. The plan, which has been delayed by the COVID-19 pandemic, projected 1,164 MW of new generation capacity at a cost of $7.3 billion, including fuel cost and the replacement of retired plants. Renewable sources are projected to generate 50 percent of electricity by 2037, with Liquified Natural Gas (LNG), introduced in 2016, providing the lion’s share of the other 50 percent. The increased investment in new generation is expected to increase efficiency and reduce the price of electricity to consumers.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 70 of 180 http://www.transparency.org/research/cpi/overview 
Global Innovation Index 2021 29.6 of 132 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 145 https://apps.bea.gov/international/factsheet/ 
World Bank GNI per capita 2020 USD 4,670 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

Private entities, whether foreign or domestic, generally have the right to freely establish, own, acquire, and dispose of business enterprises and may engage in all forms of remunerative activity.

6. Financial Sector

7. State-Owned Enterprises

Jamaican SOEs are most prominent in the agriculture, mining, energy, and transport sectors of the economy.  Of 149 public bodies, 54 are self-financing and are therefore considered SOEs as either limited liability entities established under the Companies Act of Jamaica or statutory bodies created by individual enabling legislation.  SOEs generally do not receive preferential access to government contracts.  SOEs must adhere to the provisions of the GOJ (Revised) Handbook of Public Sector Procurement Procedures and are expected to participate in a bidding process to provide goods and services to the government.  SOEs also provide services to private sector firms.  SOEs must report quarterly on all contracts above a prescribed limit to the Integrity Commission.  Since 2002, SOEs have been subject to the same tax requirements as private enterprises and are required to purchase government-owned land and raw material and execute these transactions on similar terms as private entities. 

Jamaica’s Public Bodies Management and Accountability Act (PBMA) requires SOEs to prepare annual corporate plans and budgets, which must be debated and approved by Parliament.  As part of the GOJ’s economic reform agenda, SOE performance is monitored against agreed targets and goals, with oversight provided by stakeholders including representatives of civil society.  The GOJ prioritized divestment of SOEs, particularly the most inefficient, as part of its IMF reform commitments.  Private firms compete with SOEs on fair terms and SOEs generally lack the same profitability motives as private enterprises, leading to the GOJ’s absorbing the debt of loss-making public sector enterprises. 

Jamaica’s public bodies report to their respective Board of Directors appointed by the responsible portfolio minister and while no general rules guide the allocation of SOE board positions, some entities allocate seats to specific stakeholders.  In 2012, the GOJ approved a Corporate Governance Framework (CGF) under which persons appointed to boards should possess the skills and competencies required for the effective functioning of the entity.  With some board members being selected on the basis of their political affiliation, the government is in the process of developing new board policy guidelines.  The Jamaican court system, while slow, is respected for being fair and balanced and in many cases has ruled against the GOJ and its agents.   

8. Responsible Business Conduct

Responsible Business Conduct (RBC) among many Jamaican companies is a developing practice, with more established companies further along the scale.  In 2013, the government provided additional financial incentives for corporations to support charity work through the Charities Act, under which corporations and individuals can claim a tax deduction on contributions made to registered charitable organizations.  Some large publicly listed companies and multinational corporations in Jamaica maintain their own foundations that carry out social and community projects to support education, youth employment, and entrepreneurship.  

In 2018, the GOJ became party to the OECD’s Base Erosion and Profit Shifting Multilateral Convention, which updates the network of bilateral tax treaties and reduces opportunities for tax avoidance by multinational enterprises.  GOJ also became signatory to the Convention on Mutual Administrative Assistance in Tax Matters, effective March 1, 2019, having deposited instruments of ratification in November 2018.  

Recent years have seen increased disputes over bauxite mining rights in Jamaica’s Cockpit Country, an area inhabited by the semi-autonomous Maroon population.  In January 2022, the Jamaican government granted a Jamaican-owned subsidiary of an international firm rights to mine on more than one thousand acres of previously protected land claimed by the Maroons despite protests by community representatives.

9. Corruption

Jamaican law provides criminal penalties for corruption by public officials, however, there is at least circumstantial evidence that some officials engage in corrupt practice.  There were also reports of government corruption in the last couple years and it remained a significant cause of public concern.  Media and civil society organizations continued to criticize the government for being slow and at times reluctant to tackle corruption.

Under the Corruption Prevention Act, public servants can be imprisoned for up to 10 years and fined as much as USD 100,000 if found guilty of engaging in acts of bribery, including bribes to foreign public officials.  

In 2017, Jamaica passed an Integrity Commission Act that consolidated three agencies with anti-corruption mandates into a single entity, the Integrity Commission, which now has limited prosecutorial powers.  The three agencies are the precursor Integrity Commission, which received and monitored statutory declarations from parliamentarians; the Office of the Contractor General (OCG), which monitored government contracts; and the Commission for the Prevention of Corruption, which received the financial filings of specified public servants.  A key area of concern for corruption is in government procurement.  However, successful prosecutions – particularly for high-level corruption – are rare.  Three Ministers of government demitted office between 2018 and March 2022, in the wake of corruption allegations.

Corruption, and its apparent linkages with organized crime, appear to be one of the root causes of Jamaica’s high crime rate and economic stagnation.  In 2021, Transparency International gave Jamaica a score of 44 out of a possible 100 on the Corruption Perception Index (CPI). 

10. Political and Security Environment

Crime poses a greater threat to foreign investment in Jamaica than political violence, as the country has not experienced any major political violence since the early 1980s.  Violent crime, mostly attributed to gangs, is rooted in poverty, unemployment, social neglect, and transnational crime, including so-called “lottery-scamming”, and is a serious problem in Jamaica.  Gang violence is highly concentrated in inner-city neighborhoods but can occur elsewhere.  The Jamaica Constabulary Force recorded 1,463 murders in 2021, a per capita homicide rate of roughly 50 per 100,000, the highest homicide rate in Latin America and the Caribbean in 2021.  Jamaica also faces a significant problem with extortion in certain urban commercial areas and on large construction project sites.  The security challenges increase the cost of doing business as companies spend on additional security measures.

The U.S. Department of State Travel Advisory (of March 2022) assesses Jamaica at Level 3, indicating travelers should exercise increased caution.  U.S. companies with personnel assigned to Jamaica are strongly advised to conduct security and cultural awareness training. 

Please refer to the Jamaica 2019 Crime and Safety Report from the Department of State’s Overseas Security Advisory Council (OSAC) for additional information (https://www.osac.gov/Country/Jamaica/Detail).

11. Labor Policies and Practices

Jamaica had an estimated labor force of 1.3 million as of October 2021 with an unemployment rate of 7.1 percent.  Women make up 46.2 percent of the labor force and have an unemployment rate of 9 percent.  Unemployment is highest within the 14-19 age cohort.  Most Jamaicans are employed in services including the retail and tourism sectors, followed by construction, transportation, and communications.  Since 1999, more Jamaicans have become trained in information technology and the business process outsourcing (BPO) industry currently employs more than 40,000 people.  

Data from the Statistical Institute of Jamaica (STATIN) show that the number of women securing employment is gradually increasing.  According to STATIN’s October 2021 Labor Force Survey, of the 76,600 additional persons gaining jobs to expand the employed labor force by 6.6 per cent to 1,234,800, women accounted for 43,700.  This out-turn represents 57 per cent of the overall additional jobs generated and pushed the number of gainfully employed females by 8.5 per cent up to 558,600.  While the margin of increase for males was smaller, at 39,900 or 5.1 per cent, the overall number of men in jobs was significantly larger, at 676,200 (https://jis.gov.jm/government/ministries/).

No law requires hiring locals, but foreign investors are expected to hire locals, especially for unskilled and lower skilled jobs.  Under the Work Permit Act, a foreign national who wishes to work in Jamaica must first apply for a permit issued by the Ministry of Labor and Social Security.  The law, which seeks to give first preference to Jamaicans, requires organizations planning to employ foreign nationals to prove that attempts were made to employ a Jamaican national.

The security guard industry adopted the practice of employing workers on extended contracts to avoid some of the cost, including severance, associated with direct employment.  Jamaica does not have a history of waiving labor laws to retain or attract investment and these laws tend to be uniform across the economy.     

There are no restrictions on employers adjusting employment to respond to market conditions, but there are severance payment requirements if a position is made redundant.  Under the law, there is a distinction between a layoff and a redundancy.  A layoff allows a temporary period without employment for up to four months.  The Employment (Termination and Redundancy Payments) Act provides redundancy pay to employees who are let go with at least two years of continuous employment.  There are no unemployment benefits in Jamaica, but low-income Jamaicans have the option of applying for social benefits under a conditional cash transfer program referred to as the Program for Advancement though Health and Education (PATH). 

The law provides for the rights of workers to form or join unions, to bargain collectively, and the freedom to strike.  Trade union membership accounts for about 20 percent of the labor force, although the movement has weakened in recent years.  The law prohibits anti-union discrimination, although it is not uncommon for private sector employers to lay off union workers and rehire them as contractors.  Labor law entitles protections to all persons categorized as workers, although it denies contract workers coverage under certain statutory provisions, such as redundancy benefits.  The law denies collective bargaining if no single union represents at least 40 percent of the workers in the unit.  Unionization is limited in Jamaica’s free zones.      

Jamaica has an Industrial Disputes Tribunal (IDT) to which the Minister of Labor and Social Security may refer disputes unsettled at the local level.    

Jamaica ratified most International Labor Organization (ILO) Conventions and international labor rights are recognized within domestic law.  Jamaica has ratified all key international conventions concerning child labor and established laws and regulations related to child labor, including in its worst forms.  However, gaps still exist in Jamaica’s legal framework to adequately protect children from child labor.  The GOJ is under-resourced for investigations on worker abuse as well as on occupational safety and health checks. 

Jamaica’s workplace policy incorporates all of the recommended practices of the ILO code of practice on HIV/AIDS but the legislation to regulate enforcement is yet to be ratified.  In conjunction with the ILO and local stakeholders, the GOJ passed legislation guiding flexible working arrangements. 

The informal economy (encompassing pure tax evasion, the irregular economy and illegal activities) represents a large and growing share of the overall economy.  This growing sector represents a diverse group of enterprises and workers, ranging from local peddlers to relatively sophisticated small entrepreneurs.  Tax evaders reduce revenue the Jamaican tax system would otherwise receive.  Tax evasion therefore contributes to lower levels of government services, higher taxes on the rest of the economy and larger government deficits.  Irregular economic activity is the least virulent portion of the informal economy, and even has beneficial aspects.  Irregular activity generates goods, services and jobs that might otherwise be unavailable.  

14. Contact for More Information

Joe James
Economic/Commercial Officer
kingstoncommercial@state.gov
142 Old Hope Road
Kingston 6, Jamaica
+1 876-702-6000

Panama

Executive Summary

Panama’s investment climate is mixed. Over the last decade, Panama was one of the Western Hemisphere’s fastest growing economies. Its economic recovery from the COVID-19 pandemic is outpacing most other countries in the region, with a 15.3 percent growth rate in 2021 (after a contraction of 17.9 percent in 2020) and a projected growth rate of 7.8 percent for 2022, according to the World Bank. Panama also has one of the highest GDP per capita rates in the region and has several investment incentives, including a dollarized economy, a stable democratic government, the world’s second largest free trade zone, and 14 international free trade agreements. Although Panama’s market is small, with a population of just over 4 million, the Panama Canal provides a global trading hub with incentives for international trade. However, Panama’s structural deficiencies weigh down its investment climate with high levels of corruption, a reputation for government non-payment, a poorly educated workforce, a weak judicial system, and labor unrest. Panama’s presence on the Financial Action Task Force (FATF) grey list since June 2019 for systemic deficiencies in combatting money laundering and terrorist financing increases the risk of investing in Panama, notwithstanding the government’s ongoing efforts to increase financial transparency.

The government is eager for international investment and has several policies in place to attract foreign direct investment (FDI). As such, it continues to attract one of the highest rates of FDI in the region, with $4.6 billion in 2020, according to the U.S. Bureau of Economic Analysis. As of March 18, 2022, Panama’s sovereign debt rating remains investment grade, with ratings of Baa2 (Moody’s), BBB- (Fitch), and BBB (Standard & Poor’s with a negative outlook).

Panama’s high vaccination rates of 80 percent of the eligible population with at least one dose and 70 percent with at least two doses as of March 21 have contributed to its economic recovery. As the global economy rebounded, Panama’s services and infrastructure-reliant industries bounced back significantly in 2021. Sectors with the highest economic growth in 2021 included mining (148 percent increase), construction (29 percent), commerce (18 percent), industrial manufacturing (11 percent), and transportation, storage, and communications (11 percent). Panama ended 2021 with a year-on-year inflation rate variation of 2.6 percent, according to data from the National Institute of Statistics and Census (INEC).

The government’s assertion that it is climate-negative creates opportunities for economic growth, aided by laws 37, 44, and 45 that provide incentives to promote investment in clean energy sources, specifically wind, solar, hydroelectric, and biomass/biofuels.

Panama’s investment climate is threatened, however, by high government fiscal deficits, unemployment, and inequality. The pandemic resulted in government debt ballooning by $3 billion in 2021 to over $40 billion. The country’s debt-to-GDP ratio stands at around 64 percent, well above the 46 percent it stood at before the pandemic. Unemployment peaked at 18.5 percent in September 2020, a 20-year high, but has since fallen to 11.3 percent as of October 2021. Yet high levels of labor informality persist. Additionally, Panama is one of the most unequal countries in the world, with the 14th highest Gini Coefficient and a national poverty rate of 14 percent. The World Bank’s 2022 Global Economic Prospects Report and the World Economic Forum’s 2022 Global Risks Report noted that Panama should focus on inclusive economic growth and structural reforms to avoid economic stagnation and an employment crisis.

Table 1: Key Metrics and Rankings 
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 105 of 180 http://www.transparency.org/research/cpi/overview
Global Innovation Index 2021 83 of 132 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 $4.6 billion https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2020 $12,420 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD

 

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

Panama has 16 non-financial State-Owned Enterprises (SOE) and 8 financial SOEs that are included in the budget and broken down by enterprise. Each SOE has a Board of Directors with Ministerial participation. SOEs are required to send a report to the Ministry of Economy and Finance, the Comptroller General’s Office, and the Budget Committee of the National Assembly within the first ten days of each month showing their budget implementation. The reports detail income, expenses, investments, public debt, cash flow, administrative management, management indicators, programmatic achievements, and workload. SOEs are also required to submit quarterly financial statements. SOEs are audited by the Comptroller General’s Office.

The National Electricity Transmission Company (ETESA) is an example of an SOE in the energy sector, and Tocumen Airport and the National Highway Company (ENA) are SOEs in the transportation sector. Financial allocations and earnings from SOEs are publicly available at the Official Digital Gazette ( http://www.gacetaoficial.gob.pa/ ). There is a website under construction that will consolidate information on SOEs: https://panamagov.org/organo-ejecutivo/empresas-publicas/ #.

8. Responsible Business Conduct

Panama maintains strict domestic laws relating to labor and employment rights and environmental protection. While enforcement of these laws is not always stringent, major construction projects are required to complete environmental assessments, guarantee worker protections, and comply with government standards for environmental stewardship.

The ILO program “Responsible Business Conduct in Latin America and the Caribbean” is active in Panama and has partnered with the National Council of Private Enterprise (CoNEP) to host events on gender equality. Panama does not yet have a State National Action Plan on Business and Human Rights.

In February 2012, Panama adopted ISO 26000 to guide businesses in the development of corporate social responsibility (CSR) platforms. In addition, business groups, including the Association of Panamanian Business Executives (APEDE) and the American Chamber of Commerce (AmCham), are active in encouraging and rewarding good CSR practices. Since 2009, the AmCham has given an annual award to recognize member companies for their positive impact on their local communities and environment.

Panama has two goods on the U.S. Department of Labor’s (DOL) “List of Goods Produced by Child Labor or Forced Labor”: melons and coffee. DOL removed sugarcane from the list in 2019. Child labor is also prevalent among street vendors and in other informal occupations.

There have been several disputes over the resettlement of indigenous populations to make room for hydroelectric projects, such as at Barro Blanco and Bocas del Toro. The government mediates in such cases to ensure that private companies are complying with the terms of resettlement agreements.

Despite human resource constraints, Panama effectively enforces its labor and environmental laws relative to the region and conducts inspections in a methodical and equitable manner. Panama encourages adherence to the OECD’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas and supports the Kimberley Process. Panama is not a government sponsor of either the Extractive Industries Transparency Initiative (EITI) or the Voluntary Principles on Security and Human Rights.

The National Council of Organized Workers (CONATO) and the National Confederation of Trade Union Unity (CONUSI) are the most active labor organizations advocating for worker rights in the private sector. They enjoy access to and dialogue with key decisionmakers. CONATO is currently participating in a nationwide dialogue to defend the sustainability of the workers retirement fund. CONUSI is focused on labor rights in the construction sector.

Panama is a signatory of the Montreux Document on Private Military and Security Companies. Panama follows the standards set by the International Standards Organization (ISO) and certifies security companies in quality management and security principles consistent with ISO standards.

9. Corruption

10. Political and Security Environment

Panama is a peaceful and stable democracy. On rare occasions, large-scale protests can turn violent and disrupt commercial activity in affected areas. Mining and energy projects have been sensitive issues, especially those that involve development in designated indigenous areas called comarcas. One U.S. company has reported not only protests and obstruction of access to one of its facilities, but costly acts of vandalism against its property. The unrest is related to disagreements over compensation for affected community members. The GoP has attempted to settle the dispute, but without complete success.

In May 2019, Panama held national elections that international observers agreed were free and fair. The transition to the new government was smooth. Panama’s Constitution provides for the right of peaceful assembly, and the government respects this right. No authorization is needed for outdoor assembly, although prior notification for administrative purposes is required. Unions, student groups, employee associations, elected officials, and unaffiliated groups frequently attempt to impede traffic and disrupt commerce in order to force the government or private businesses to agree to their demands.

Homicides in Panama increased by 11 percent in 2021, to 554, 57 more than were recorded in 2020. Strife among rival gangs and turf battles in the narcotrafficking trade contributed significantly to the increase in the homicide rate in 2021. Panamanian authorities assess that 70 percent of homicides in the country are linked to organized crime, especially transnational drug trafficking and gangs. The 2021 homicide rate of 12.95 per 100,000 people is still among the lowest in Central America, but is consistent with an upward trend since 2019, year-on-year.

11. Labor Policies and Practices

According to official surveys carried out in October 2021, the unemployment rate in Panama improved significantly, but the level of informality and the size of the economically active population (EAP) worsened. That is, fewer people were looking for work. As of October 2021, the unemployment rate stood at 11.3 percent and the informality rate at 47.6 percent, while the economically active population had decreased by 66.5 percent, according to the labor market survey (EML) carried out by the National Institute of Statistics and Census (INEC).

There is a shortage of skilled workers in accounting, information technology, and specialized construction, and a minimal number of English-speaking workers. Panama spends approximately 13 percent of its budget, or 3 percent of GDP, on education. While Panama has one of the highest minimum wages in the hemisphere, the 2018-2019 World Economic Forum Global Competitiveness Report ranked Panama 89 out of 141 countries for the skillsets of university graduates.

The government’s labor code remains highly restrictive. The Panamanian Labor Code, Chapter 1, Article 17, establishes that foreign workers can constitute only 10 percent of a company’s workforce, or up to 15 percent if those employees have a specialized skill. By law, businesses can only exceed these caps for a defined period and with prior approval from the Ministry of Labor.

Several sectors, including the Panama Canal Authority, the Colon Free Zone, and export processing zones/call centers, are covered by their own labor regimes. Employers outside these zones, such as those in the tourism sector, have called for greater flexibility, easier termination of workers, and the elimination of many constraints on productivity-based pay. The Panamanian government has issued waivers to regulations on an ad hoc basis to address employers’ demands, but there is no consistent standard for obtaining such waivers.

The law allows private sector workers to form and join independent unions, bargain collectively, and conduct strikes. Public sector employees may organize to create a professional association to bargain collectively on behalf of its members, even though public institutions are not legally obligated to bargain with the association. Members of the national police are the only workers prohibited from creating professional associations. The law prohibits anti-union discrimination and requires reinstatement of workers terminated for union activity, but does not provide adequate mechanisms to enforce this right.

The Ministry of Labor’s Board of Appeals and Conciliation has authority to resolve certain labor disagreements, such as internal union disputes, enforcement of the minimum wage, and some dismissal issues. The law allows arbitration by mutual consent, at the request of the employee or the ministry, and in the case of a collective dispute in a privately held public utility. It allows either party to appeal if arbitration is mandated during a collective dispute in a public-service company. The Board of Appeals and Conciliation has exclusive competency for disputes related to domestic employees, some dismissal issues, and claims of less than $1,500.

The Ministry of the Presidency’s Conciliation Board hears and resolves complaints by public-sector workers. The Board refers complaints that it fails to resolve to an arbitration panel, which consists of representatives from the employer, the professional association, and a third member chosen by the first two. If the dispute cannot be resolved, it is referred to a tribunal under the Board. Observers, however, have noted that the Ministry of the Presidency has not yet designated the tribunal judges. The alternative to the Board is the civil court system.

Panama does not have a system of unemployment insurance. Instead, workers receive large severance payments from their employer upon termination. During the COVID-19 pandemic, employers were permitted to furlough workers for longer than normally permitted, without paying severance. Law 201 of February 25, 2021 allowed employers to establish temporary measures to preserve employment and normalize labor relations by extending furloughs to the end of 2021, This law ended on December 31, 2021. Yet even after its expiration, some companies have kept workers furloughed because of a lack of resources to rehire them or pay their severances. Press reports suggest these companies have yet to recover from the pandemic-related economic crisis.

14. Contact for More Information

Colombia Primola
Economic Specialist – Economic Section
E-mail: PrimolaCE@state.gov
Office: +507-317-5491
Cell: +(507) 6613-4687

Trinidad and Tobago

Executive Summary

Trinidad and Tobago (TT) is a high-income developing country with a gross domestic product (GDP) per capita of $15,425 and an annual GDP of $21.6 billion (2020). It has the largest economy in the English-speaking Caribbean and is the third most populous country in the region with 1.4 million inhabitants. The International Monetary Fund predicts GDP for 2022 will increase by 5.4 percent as the economy rebounds following the economic impact of COVID-19 mitigation. TT’s investment climate is generally open and most investment barriers have been eliminated, but stifling bureaucracy and opaque procedures remain.

Energy exploration and production drive TT’s economy. This sector has historically attracted the most foreign direct investment. The energy sector usually accounts for approximately half of GDP and 80 percent of export earnings. Petrochemicals and steel are other sectors accounting for significant foreign investment. Since the economy is tethered to the energy sector, it is particularly vulnerable to fluctuating prices for hydrocarbons and petrochemicals.

Since the last ICS, TT has rolled back several pandemic-related measures that affected the investment climate including reopening borders to air travel; ending the state of emergency that only permitted essential services to operate; reopening the hospitality and entertainment sector to vaccinated individuals; and reopening schools.

TT is working towards implementing its nationally determined contribution under the Paris Climate Agreement through 15 percent reduction is emissions from power generation (including by the ongoing construction of utility-scale renewable power generation plants), public transportation (through the conversion to compressed natural gas as a fuel, and development of an e-mobility policy) and industry by 2030. The TT government (GoTT) is developing policies on carbon capture and storage, but this technology has been predominantly used to inject carbon into hydrocarbon reservoirs for greater output.

There are no significant risks to responsibly doing business in areas such as labor and human rights.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 82 of 175 http://www.transparency.org/research/cpi/overview
Global Innovation Index 2021 97 of 132 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2020 $ 4,974 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2020 $ 15,420 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD

 

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

TT has 55 SOEs comprised of 43 wholly owned companies, eight majority-owned, and four in which the government has a minority share. SOEs are in the energy, manufacturing, agriculture, tourism, financial services, transportation, and communication sectors. Information on the total assets of SOEs, total net income of SOEs and number of people employed by SOEs is not available. The Investments Division of the Ministry of Finance appoints directors to the boards of state enterprises, reportedly at the direction of the Minister of Finance. SOEs are often informally or explicitly obligated to consult with government officials before making major business decisions. According to TT’s constitution, the government is entitled to:

  • exercise control directly or indirectly over the affairs of the enterprise
  • appoint a majority of directors of the board of directors of the enterprise; and
  • hold at least 50 per cent of the ordinary share capital of the enterprise.

A published list of SOEs for 2022 can be found here: https://www.finance.gov.tt/2021/10/04/https-www-finance-gov-tt-wp-content-uploads-2021-10-state-enterprises-investment-programme-seip-2022-pdf/ 

In sectors that are open to both the private sector and foreign competition, SOEs are sometimes favored for government contracts, which might negatively impact U.S. investors in the market.

The country has not adhered to the OECD corporate governance guidelines for SOEs.

8. Responsible Business Conduct

There is general awareness of expectations of, and standards for, responsible business conduct (RBC), including obligations to proactively conduct due diligence to ensure businesses are doing no harm, including with regards to environmental, social, and governance issues.

The GoTT has not put forward a clear definition of responsible business conduct, nor does it have specific policies to promote and encourage it. The GoTT has not conducted a national action plan on RBC, nor does it currently factor it into procurement decisions.

There are five reports of forced labor in the last 12 months. There are no reported claims in the last five years by indigenous or other communities that a government entity improperly allocated land or natural resources.

There have not been any high-profile, controversial instances of private sector impact on human rights.

TT has laws to ensure protection of human rights, labor rights, consumers, and the environment. Enforcement, however, is lacking due to staffing shortages, capacity issues, and a bureaucratic judiciary.

The GoTT, in collaboration with civil society, created the TT Corporate Governance Code, which incorporates governance, accounting, and executive compensation standards to protect shareholders. The code, however, is not mandatory.

The Caribbean Corporate Governance Institute is a not-for-profit organization headquartered in TT that freely advocates for responsible business conduct and improved corporate governance practices in the Caribbean.

The GoTT does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are no domestic measures requiring supply chain due diligence for companies sourcing minerals originating from conflict-affected areas.

As a member of the Extractive Industries Transparency Initiative (EITI), the GoTT publicly declares annually all revenues received from companies engaged in the extractive industries. The companies, in turn, publicly declare payments to the government.

TT is not a signatory of the Montreux Document on Private Military and Security Companies.

9. Corruption

Various pieces of legislation address corruption of public officials:

  • The Integrity in Public Life Act requires public officials to disclose assets upon taking office and at the end of tenure.
  • The Freedom of Information Act gives members of the public a general right (with specified exceptions) of access to public authorities’ official documents. The intention of the act was to address the public’s concerns of corruption and to promote a system of open and good governance. In compliance with the act, designated officers in each ministry and statutory authority process applications for information.
  • The Police Complaints Authority Act establishes a mechanism for complaints against police officers in relation to, among other things, police misconduct and police corruption.
  • The Prevention of Corruption Act provides for certain offences and punishment of corruption in public office.

The laws are non-discriminatory in their infrequent application. Effectiveness of these measures has been limited by a lack of thorough enforcement. These laws do not extend to family members of officials or to political parties. TT does not have laws or regulations to counter conflicts of interest in awarding contracts or government procurement.

The GoTT has been a party to the development of corporate governance standards (non-binding) to encourage private companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials. Some private companies, particularly the larger firms, use internal controls and compliance programs to detect and prevent bribery of government officials, although this is not a government requirement.

TT adheres to the UN Anticorruption Convention. There are no protections for NGOs involved in investigating corruption, but investigations are not feared since corrupt actors are rarely punished.

U.S. firms often say corruption is an obstacle to FDI, particularly in government procurement, since TT’s procurement processes are not transparent.

10. Political and Security Environment

While non-violent demonstrations occasionally occur, widespread civil disorder is not typical. There have been no serious incidents of political violence since a coup attempt in 1990.

Subsequent to the closure of state oil firm Petrotrin in November 2018, which resulted in the lay-off of nearly 6,000 workers, there were reports of damage to installations.

Certain areas of TT are increasingly insecure due to a critical level of violent crime.

11. Labor Policies and Practices

The labor market includes many skilled and experienced workers, and the educational level of the population is among the top 10 in North America, according to the Human Development Index, although there is a gap between official literacy statistics and functional literacy. In 2020, the International Labor Organization’s estimate of unemployment was 4.5 percent, while youth unemployment rate (15-24 years of age) was estimated at 11.17 percent in 2020. Information on the informal economy is not widely available.

Agricultural employment accounts for 3.6 percent of total employment while employment in services accounts for over 60 percent. The estimated non-agricultural workforce in the informal economy is 10 percent of the overall labor force. TT’s workforce includes not only TT nationals but also citizens of 11 other CARICOM countries as part of the free movement of labor without the need to obtain a work permit. In 2019, TT granted 16,523 Venezuelan refugees and migrants the right to work in the country for a period of one year under a temporary protective status. In 2021, the GoTT allowed registered Venezuelan refugees a one-year extension of status. Some members of the business community have indicated that many migrant workers have returned to their countries of origin due to the unavailability of job opportunities following the pandemic related closures.

TT is a net importer of expatriate labor, including doctors, nurses, construction workers, and extractive industry specialists. There are surpluses of accountants and attorneys and shortages of unskilled workers for the hospitality, retail, and agriculture sectors. The GoTT subsidizes tertiary-level education for citizens whose income falls within a minimum range. The Multi-Sector Skills Training Program provides training in construction and hospitality and tourism for eligible citizens of TT. The GoTT also encourages continuing learning opportunities for the disadvantaged via the Skills Training Program, which develops skills that can aid in the creation of home-based production of goods and services and employment generation.

There is no government policy requiring hiring of nationals, although it is encouraged, particularly in the energy sector.

There are no restrictions on employers adjusting employment to respond to fluctuating market conditions via severance. Labor laws differentiate between layoffs and firing. The Retrenchment and Severance Benefits Act provides guidance entitlements based on specific circumstances. Severance pay is usually only paid to retirees and workers who have been made redundant. An employer is not required to pay severance to workers if everyone is severed, since the business is being closed. However, if only a portion of the workforce is rendered redundant, the employer must pay severance. Unemployment insurance does not exist for workers who have been laid off for economic reasons, but programs designed to help job seekers get employed as quickly as possible are available. Due to the COVID-19 pandemic, the government instituted a 3-6-month unemployment benefit program for those laid off.

Labor laws are not waived in order to attract or retain investment. There are no separate labor law provisions for special economic zones, trade zones, or free ports.

Collective bargaining is common, with approximately 15 percent of the population covered by collective bargaining agreements. Government workers, including civil servants, police officers, firefighters, military personnel, and staff in several state-owned enterprises, are covered by collective bargaining agreements. Unions are also quite active in the energy, steel, and telecommunications industries. Collective bargaining takes place between the firm and the recognized majority union rather than on an industry-wide basis. The government as an employer also bargains collectively. The process of collective bargaining is regulated by the Industrial Relations Act. There are close to 30 active, independent labor unions in TT.

The Industrial Relations Act provides for dispute resolution through an industrial court in instances where the issue cannot be resolved by collective bargaining or through conciliation efforts by the Ministry of Labor.

There was no strike in the past year that posed an investment risk.

The International Labor Organization has not identified any compliance gaps in law or practice regarding international labor standards that may pose a reputational risk to investors. The GoTT does not have a labor inspectorate system to identify and remediate labor violations, but the industrial court investigates and prosecutes unfair labor practices, such as harassment and/or improper dismissal of union members.

There were no new labor related laws or regulations enacted or in draft over the last year.

14. Contact for More Information

Valerie Laboy
Economic-Commercial Officer
15 Queen’s Park West
Port of Spain, TT
+1 (868) 622-6371 ext. 5926
poscommercial@state.gov 

Investment Climate Statements
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