Download El Salvador Economy

NS4540
Winter Term 2017
El Salvador Economy
Overview
• With a GDP per capita of US $7,613(ppp) in 2014 El
Salvador is classified as a lower middle income country
by the World Bank
• El Salvador is one of the least developed countries in
Latin America and the Caribbean
• In 2014 the country was ranked 116th out of 188 countries
in the UN’s Human Development Index (HDI)
• The country has one of the highest population densities
in the western hemisphere (310 people per sq. km)
• A high level of violence is also a problem
• El Salvador has one of the highest murder rates in the
world.
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El Salvador: Stages of Growth I
• El Salvador has slowly moved from a primary-based
economy to one that depends on manufacturing exports
from free trade zones and remittances from abroad.
• This process of change has taken place in five different
phases since independence in 1821
• First, from the mid-19th century coffee superseded indigo
and cotton as the dominant commodity
• Second, after the abolition of common land in 1882 vast
haciendas emerged
• Third, coffee barons branched out into finance and
commerce
• In the 1960s their capital helped establish a manufacturing base
that exported throughout Central America
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El Salvador Stages of Growth II
• The new process of industrialization based on the Central
American Common Market (CACM) resulted in an
acceleration of economic growth
• However deterioration in the price of coffee and other
commodities, together with adverse international
conditions and a crisis in the CACM led to a downturn at
the end of the 1970s
• Unemployment, combined with underemployment
affected more than 40% of the workforce
• In an attempt to ease social tensions the new military
Government nationalized banks and the coffee industry
and began breaking up large haciendas and handing
them to worker co-operatives
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El Salvador Stages of Growth III
• These reforms initiated a fourth phase of development
which was hampered by the civil war from 1980-1992
• War caused
• More than 80,000 deaths
• The internal and external displacement of over 1 million people
• A massive flight of capital, and
• Economic damage estimated at more than US $2,000m
• External assistance, 90% of which came from the US
helped to keep the economy from sliding into recession
• Between 1980 and 1990 to total external financial
assistance to El Salvador exceeded $5,000m
• One of the main purposes of US assistance was to offset
economic sabotage – coffee, transport and power
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transmission by the FMLN
El Salvador Stages of Growth IV
• The fifth state of development began in 1980 involving
the adoption of the Washington Consensus
• El Salvador one of the most radical reformers in Latin
America and the Caribbean with policies ranging from
• External liberalization
• Domestic deregulation
• The dollarization of the economy and
• Privatization
• In 1989-94
• Key public companies were returned to private ownership
• Public spending was cut and
• Price controls and subsidies were reduced or abolished
• The tax system was simplified and tariffs reduced
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El Salvador Stages of Growth V
• Market reforms continued after the peace accords under
successive governments
• Most important reform -- the dollarization of economy
• The colon was phased out by 2003, replaced by the US
dollar
• Idea was to
• Reduce real interest rates close to US levels
• Encourage investment, and
• Integrate El Salvador into the global economy
• El Salvador was the first country to approve CAFTA-DR
with the US – came into effect in 2006
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El Salvador Stages of Growth VI
• Mauricio Funes from the left-wing FMLN became
president in 2009
• Emphasized moderate nature of his agenda
• Intent to develop a business environment attractive to investors
• Maintained broad continuity of economic policy rather than any
significant change to the neoliberal model
• In march 2014 FMLN’s Salvador Sanchez Ceren former
guerrilla won presidential election. Despite radical past
• Also adopted a moderate policy stance and pledged to maintain
dollarization
• Has shown no sign of backtracking on these promises.
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Outlook I
• Two decades of growth in which economic expansion
averaged less than 2% annually points to structural
problems in the economy that have to be addressed
• External conditions helped El Salvador to expand its
economy faster between 2006 and 2008 than at any time
in previous decade
• Global financial crisis slowed this considerably and
exposed country’s vulnerability to high external food and
energy prices
• Recovery has remained weak in 2016
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Outlook II
• Despite reforms, many challenges persisted
• GDP per capita grew slowly and was affected by repeated
natural disasters
• Poverty remained widespread, and
• Dollarization eroded some of the country’s competitive
advantages
• Areas that need to be addressed in order to increase
annual GDP growth rates
• High levels of poverty
• Exposure to agricultural price cycles
• Environment
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Outlook III
• Whether President Sanchez Ceren can overcome
entrenched political polarization to implement an
economic agenda capable to tackling long-standing
structural issues remains to be seen
• As for now the country continues to have the weakest
growth in central America
• Growth remains to weak to sustain the productivity and
attractiveness of the country (least popular FDI destination in the
region
• The level of criminality by discouraging investors and
undermining consumer confidence is effectively restricting the
the country’s economic growth rate
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Outlook IV
• The limited purchasing power of households and lack of
natural resources together with the level of corruption
will also limit private investment
• In addition there is also the ongoing measures to balance
that budget that are hampering growth
• Political disagreements between president Sachnez
Ceren and the Legislative Assembly where his party has
only 31 of the 84 seats are blocking the reforms needed
to help reduce the budget deficit
• AREMA party wants to cut social programs and pensions
which account for more than half of the budget. FMLN
against cuts in these areas.
• Public spending will continue to increase in 2017
propelled in particular by subsidies (energy, agriculture
and pensions and measures aimed at countering gang
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violence