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El Salvador - Economy

The smallest country in Central America geographically, El Salvador has the third-largest economy in the region. In the past quarter century, El Salvador has made considerable progress in social and economic transformation, undertaking significant social sector reforms that led to improvements in social indicators. These reforms contributed to an increase in the countrys Human Development Index--which aggregates measures of life expectancy, adult literacy and school enrollment, and income per capita--from 0.524 in 1990 to 0.674 in 2010, and a decrease in the share of households living in poverty by 23.2 percentage points, from 59.7% in 1990 and 36.5% in 2010. El Salvador ranked 105th in the Human Development Index worldwide as of 2012.

El Salvador's economy is lower middle income (gross national income per capita is U.S. $5,915), although large socioeconomic disparities are present.2 Poverty declined from just over 60 percent of households in 1991 to 35 percent in 2008, but increased to 38 percent in 2010, with higher levels in rural than urban areas.

Years of civil war, fought largely in the rural areas, had a devastating impact on agricultural production in El Salvador. The agricultural sector experienced significant recovery, buoyed in part by higher world prices for coffee and sugarcane and increased diversification into horticultural crops. Seeking to develop new growth sectors and employment opportunities, El Salvador created new export industries through fiscal incentives for free trade zones. The largest beneficiary has been the textile and apparel (maquila) sector, which directly provides approximately 80,000 jobs. Services, including retail and financial, have also shown strong employment growth, with about 63% of the total labor force now employed in the sector.

Remittances from Salvadorans working in the United States are an important source of income for many families in El Salvador. In 2011, the Central Bank estimated that remittances totaled $3.6 billion. UN Development Program (UNDP) surveys show that an estimated 21.3% of families receive remittances.

There have been noticeable improvements in the reductions of levels of poverty: in 1991, 66% of the population was classified as poor but in 2002 that number had come down to 43%. However, poverty has different faces: in the rural areas, 56% of the population lived in poverty in 2002 but in urban areas the comparable figure was 34%. 73 That is to say, the reduction of poverty was greater in urban areas than in rural ones. On the other hand, as poverty levels drop, it becomes more difficult to maintain the same rate of reduction because those cases that are left are the ones in extreme poverty, those who live in great social or geographic marginality.

El Salvador's economy is disproportionately dependent on money sent home by Salvadorans working abroad, many of them in the United States. By 2004 over a quarter of the Salvadoran population lived in the United States, and the money they sent home totalled roughly 15 percent of the nation's economy.

The reduction in poverty levels can be explained in terms of a satisfactory economic performance (especially between 1990 and 1995) and family remittance flows that originate among the hundreds of thousands of Salvadorans who live abroad. (These remittances were in excess of US$2 billion in 2002.) While economic performance has been variable, the volume of remittances has not let down, although its growth rates are lower with the passing of time. The material benefits of remittances must be weighed against the social costs, expressed in broken families and personal sacrifices. But for many people, the remittances received from the north mean the difference between living in poverty or at a level where opportunities can be had for education and health that will contribute, in turn, to better living standards in the future without having to depend on remittances.

By 1991, 23.9% of Salvadoran homes did not have access to drinking water either from a water main, a well, or a public faucet; in 2002, this proportion had come down to 11.9%. In rural areas, improvements have been even more dramatic: from 43.3% to 26.3% in the same period. The reduction in the number of people without access to sewage (latrines, sewage mains) is also very impressive, dropping on a national level from 21.9% to just 7%; however, in rural areas there are still 15.7% of homes that did not have access to sewage.

Much of the improvement in El Salvador's economy is a result of the privatization of the banking system, telecommunications, public pensions, electrical distribution and some electrical generation; reduction of import duties; elimination of price controls; and improved enforcement of intellectual property rights. Capping those reforms, on January 1, 2001, the U.S. dollar became legal tender and the economy is now fully dollarized. However, El Salvadors economy remains strongly linked to world and U.S. economic cycles. From 2000 to 2010, the Salvadoran economy averaged 2% annual economic growth, with GDP receding by 3.1% in 2009 due to the financial crisis and recovering only to 1.4% growth in 2010. El Salvador was expecting 1.4% economic growth in 2011, lower than previously anticipated. These rates of growth are decidedly below the Latin American average, and the Government of El Salvador is determined to reverse these trends by laying the groundwork for a development model built on a new cycle of investment and economic growth through the Partnership for Growth (PFG) initiative.

The Salvadoran Government has maintained fiscal discipline during post-war reconstruction and reconstruction following earthquakes in 2001 and hurricanes in 1998 and 2005. Taxes levied by the government include a value added tax (VAT) of 13%, income tax of 30%, excise taxes on alcohol and cigarettes, and import duties. The VAT accounted for about 51.7% of total tax revenues in 2011. El Salvadors public external debt in December 2011 was about $11.9 billion, 53.2% of GDP. Performance under a 3-year Stand-By Arrangement with the International Monetary Fund remains on track.

Under its export-led growth strategy, El Salvador has pursued economic integration with its Central American neighbors and negotiated trade agreements with the Dominican Republic, Chile, Mexico, Panama, Taiwan, Colombia, and the United States. In 2010, Central America signed an Association Agreement with the European Union that includes the establishment of a free trade area, which is expected to enter into force in 2012. In 2011, El Salvador signed a Partial Scope Agreement (PSA) with Cuba. The Central American countries are negotiating a free trade agreement with Canada and Peru. Exports grew by 18.4% in 2011 and imports by 19.1%. As in previous years, the large trade deficit was offset by family remittances.

In 2006, El Salvador was the first country to ratify the U.S.-Central America-Dominican Republic Free Trade Agreement (CAFTA-DR), which has bolstered the export of processed foods, sugar, and ethanol, and supported investment in the apparel sector amid increased Asian competition and the expiration of the Multi-Fiber Arrangement in 2005. From 2005 to 2011, Salvadoran exports to the US increased by 27%, while imports from the U.S. increased 84%. In addition to trade benefits, CAFTA-DR provides trade capacity building, particularly in the environment and labor areas, and a framework for additional reforms on issues such as intellectual property rights, dispute resolution, and customs to improve El Salvadors investment climate. As it has promoted an open trade and investment environment, El Salvador also has embarked on a wave of privatizations extending to telecommunications, electricity distribution, banking, and pension funds.

US support for privatization of the electrical and telecommunications markets markedly expanded opportunities for U.S. investment in the country. More than 300 U.S. companies have established either a permanent commercial presence in El Salvador or work through representative offices in the country.

On November 29, 2006, the Government of El Salvador and the Millennium Challenge Corporation (MCC) signed a 5-year, $461 million anti-poverty Compact to stimulate economic growth and reduce poverty in the countrys northern region. The grant seeks to improve the lives of approximately 850,000 Salvadorans through investments in education, public services, enterprise development, and transportation infrastructure. The Compact entered into force in September 2007 and will conclude in September 2012. In December 2011, the MCC Board of Directors approved El Salvadors eligibility to develop a proposal for a second Compact for consideration.

El Salvador is one of four countries that will participate in the Partnership for Growth, which will put into practice the principles of President Barack Obamas Policy Directive on Global Development. The Partnership for Growth represents a new way of doing business focused on using the full range of available development resources--trade, private investment, traditional financial assistance, technical assistance, private sector activity, and more--to spur higher, sustained, and more inclusive economic growth in El Salvador. To make this possible, a joint United States and El Salvador team conducted an in-depth analysis and identified the two primary constraints to economic growth in El Salvador--crime and insecurity and low productivity in trade-related activities.

Having worked together to identify the key constraints, these two teams then worked together to craft joint solutions, which form the heart of the Joint Country Action Plan (JCAP). The JCAP lays out how the two countries will work together to unlock these constraints to growth by promoting a business-friendly environment, investing in people through education, and strengthening anti-crime and violence prevention efforts. The Action Plan also provides a framework for other partners--donor governments and institutions--to work with El Salvador in a similarly focused manner.

Located on the Pacifics earthquake-prone Ring of Fire and at latitudes affected by hurricanes, El Salvadors history has included a number of catastrophes, including the Great Hurricane of 1780 that killed 22,000 in Central America and earthquakes in 1854 and 1917 that devastated El Salvador and destroyed most of the capital city. In October 1986, an earthquake killed 1,400 and seriously damaged the nations infrastructure. In 1998, Hurricane Mitch killed 10,000 in the region, although El Salvador--lacking a Caribbean coast--suffered less than Honduras and Nicaragua. Major earthquakes in January and February of 2001 took another 1,000 lives and left thousands more homeless and jobless. El Salvadors largest volcano, Santa Ana (also known by its indigenous name Ilamatepec), erupted in October 2005, spewing sulfuric gas, ash, and rock on surrounding communities and coffee plantations, killing two people and permanently displacing 5,000. Also in October 2005, Hurricane Stan unleashed heavy rains that caused flooding throughout El Salvador. In all, the flooding caused 67 deaths and more than 50,000 people were evacuated at some point during the crisis. Damages from the storm were estimated at $355.6 million.

In November 2008, rains from Tropical Storm Ida caused flooding and mudslides that killed at least 199 and left extensive property damage in the departments of Cuscatlan, La Paz, San Vicente, and San Salvador. In 2010 property evacuation operations by the authorities prevented a higher number of deaths. In June 2010, Tropical Storm Alex killed 5 people and damaged 349 homes, and in September 2010, Tropical Storm Matthew killed 3 people and damaged 141 homes. In October 2011, Tropical Depression Twelve-E and other weather systems hit El Salvador, killing 34 people and damaging 4,516 homes. The storm systems caused severe flooding, landslides, and damaged infrastructure, including 36 bridges.

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Page last modified: 06-09-2016 12:26:53 ZULU