Central America since 1979 has been in the grip of a regional crisis with many dimensions. There have been civil wars in three countries (El Salvador, Guatemala and Nicaragua) producing substantial loss of life and a massive refugee problem. The consolidation of a Marxist régime in Nicaragua and the revolutionary challenge from Marxist guerrilla movements in El Salvador and Guatemala has turned Central America into an area of East-West conflict with the Sandinista government in Nicaragua increasingly reliant on support from Cuba and the Soviet Union, and the other Central American republics (Costa Rica, El Salvador, Guatemala and Honduras) in receipt of unprecedented aid flows from the United States of America. Efforts by Latin American countries in the Contadora group (Colombia, Mexico, Panama and Venezuela) have since 1983 been aimed at reducing regional tension in Central America, but the crisis has not diminished and living standards in all five republics have fallen sharply.

The current crisis has been widely studied and there is general recognition that economic factors help to account for its origins. There is, however, a certain amount of confusion about the nature of these economic factors, which is very understandable. First, for several decades prior to the current crisis economic performance in Central America on the basis of conventional indicators (e.g. growth rates, inflation rates) looked satisfactory. Secondly, all five republics followed roughly the same economic model before 1979, but social and political upheaval in Costa Rica and Honduras has been much less severe since 1979 than in the other three republics. The role of economic factors in the generation of the current crisis is therefore not immediately obvious.