The Effects of Free Trade Zones on Secondary School Enrollment Rates in Nicaragua from 1997-2007 (2010)

Undergraduate: James Waters

Faculty Advisor: Patrick Conway
Department: Economics

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This thesis answers the question of how Nicaragua’s free trade zones affected secondary school enrollment rates from 1997-2007. The policy of establishing “zonas francas,” or free trade zones, began in the early 1990s to promote exports of goods and bring large-scale manufacturers to Nicaragua from the USA, China, Korea, Japan, Spain, Panama, Mexico, and other countries. These zones bring large numbers of relatively high-paying jobs to Nicaraguan states where the national working age is 14. Does the establishment of these zones affect school enrollment rates among secondary school students, who are often between the ages of 13 and 17?

This is essentially a microeconomic question; a family’s decision to enroll its children in school will be affected by both income and substitution effects as a result of the introduction of the free trade zone.

Econometric analysis using two-stage least squares regression leads to the conclusion that the income effect tends to outweigh the substitution effect and that there is a net increase in secondary school enrollment rates. This analysis supports the broader theory that free trade can be positive for the overall development of a country because it facilitates the accumulation of human capital, which can raise the overall productivity of its workers.