El Salvador Essay
After El Salvador’s civil war which lasted for 12 years the economy has experienced mixed results from the ARENA government. The ARENA party known as the Nationalist Republican Alliance started in 1981. ARENA government's commitment to free market initiatives and conservative fiscal management that include the privatization of the banking system, telecommunications, public pensions, electrical distribution, and some electrical generation, reduction of import duties, elimination of price controls, and an improved enforcement of intellectual property rights. The GDP has been growing at a steady and moderate pace since the signing of peace accords in 1992, in an environment of macroeconomic stability. A problem that the Salvadoran economy faces
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is the inequality in the distribution of income. In 1999, the richest fifth of the population received 45% of the country's income, while the poorest fifth received only 5.6%.
As of December 1999, net international reserves equaled US$1.8 billion or roughly five months of imports. Having this hard currency buffer to work with, the Salvadoran Government undertook a monetary integration plan beginning January 1, 2001, by which the U.S. dollar became legal tender alongside the colon, and all formal accounting was undertaken in U.S. dollars. This way, the government has formally limited its possibility of implementing open market monetary policies to influence short term variables in the economy. Since 2004, the colon stopped circulating and is now never used in the country for any type of transaction; however some stores still have prices in both colones and U.S. dollars. In general, people were unhappy with the shift from the colon to the U.S. dollar, because wages are still the same but the price of everything increased. Some economists claim this rise in prices would have been caused by inflation regardless even had the shift not been made. Some economists also contend that now, according to Gresham's Law, a reversion to the colon would be disastrous to the economy.
Some banks however claim that they still do some transactions en colones, keeping this change from being unconstitutional. The change to the dollar also precipitated a trend toward lower interest rates in El Salvador, helping many to secure credit in order to buy a house or a car; over time, displeasure with the change has largely disappeared, though the issue resurfaces as a political tool when elections are on the horizon.
A challenge in El Salvador has been developing new growth sectors for a more diversified economy. As many other former colonies, for many years El Salvador was considered a monoexporter economy. This means, an economy that depended heavily on one type of export. During colonial times, the Spanish decided that El Salvador would produce and export indigo, but after the invention of synthetic dyes in the 19th century, Salvadoran authorities and the newly created modern state turned to coffee as the main export of the economy. Since the cultivation of coffee required the highest lands in the country, many of these lands were expropriated from indigenous reserves and given or sold cheaply to those that could cultivate coffee. The government provided little or no compensation to the indigenous peoples. On occasions this compensation implied merely the right to work for seasons in the newly created coffee farms and to be allowed to grow their own food. Such policies provided the basis of conflicts that would shape the political situation of El Salvador in the years to come.
For many decades, coffee was one of the only sources of foreign currency in the Salvadoran economy. The civil war in the 80's and the fall of international coffee prices in the 90's, pressured the Salvadoran government to diversify the economy. ARENA governments have followed policies that intend to develop other exporting industries in the country as textiles and sea products. Tourism is another industry Salvadoran authorities regard as a possibility for the country. But rampant crime rates, lack of infrastructure and inadequate social capital have prevented these possibilities from being properly exploited. The government is also developing ports and infrastructure in La Union in the east of the country, in order to use the area as a "dry canal" for transporting goods from Fonseca Gulf in the Pacific Ocean to Honduras and the Antlantic Ocean in the north. Currently there are fifteen free trade zones in El Salvador. The largest beneficiary has been the maquila industry, which provides 88,700 jobs directly, and consists primarily of cutting and assembling clothes for export to the United States.
El Salvador signed the Central American Free Trade Agreement (CAFTA), negotiated by the five countries of Central America and the Dominican Republic, with the United States in 2004. In order to take advantage of CAFTA, the Salvadoran government is challenged to conduct policies that guarantee better conditions for entrepreneurs and workers to transfer from declining to growing sectors in the economy. El Salvador has already signed free trade agreements with Mexico, Chile, the Dominican Republic, and Panama, and increased its exports to those countries.
Fiscal policy has been the biggest challenge for the Salvadoran government. The 1992 peace accords committed the government to heavy expenditures for transition programs and social services. The Stability Adjustment Programs (PAE, for the initials in Spanish) initiated by President Cristiani's administration committed the government to the privatization of banks, the pension system, electric and telephone companies. The total privatization of the pension system has implied a serious burden for the public finances, because the newly created private Pension Association Funds did not absorb coverage of retired pensionists covered in the old system. The government lost the revenues from contributors and absorbed completely the costs of coverage of retired pensionists. This has been the main source of fiscal imbalance. ARENA governments have financed this deficit with the emission of bonds, something the leftist party FMLN has opposed. Debates surrounding the emission of bonds have stalled the approval of the national budget for many months on several occasions, reason for which in 2006 the government will finance the deficit by reducing expenditure in other posts. The emission of bonds and the approval of a loans need a qualified majority (3/4 of the votes) in the parliament. If the deficit is not financed through a loan it is enough with a simple majority to approve the budget (50% of the votes plus 1). This would agonize an otherwise long process in Salvadoran politics.
Despite such challenges to keep public finances in balance, El Salvador still has one of the lowest tax burdens in the American continent (around 11% of GDP). Many specialists claim that it is impossible to advance significant development programs with such a little public sector (the tax burden in the United States is around 25% of the GDP and in other developed countries of the EU it can reach around 50%, like in Sweden). The government has focused on improving the collection of its current revenues with a focus on indirect taxes. Leftist politicians criticize such a structure since indirect taxes (like the value added tax) affect everyone alike, whereas direct taxes can be weighed according to levels of income and are therefore fairer taxes. A 10% value-added tax (VAT), implemented in September 1992, was raised to 13% in July 1995. The VAT is the biggest source of revenue, accounting for about 52.3% of total tax revenues in 2004.
Remittances from Salvadorans working in the United States sent to family members are a major source of foreign income and offset the substantial trade deficit of around $2.9 billion. Remittances have increased steadily in the last decade and reached an all-time high of $2.9 billion in 2005—approximately 17.1% of gross domestic product (GDP). As of April 2004, net international reserves stood at $1.9 billion.
In recent years inflation has fallen to single digit levels, and total exports have grown substantially.
El Salvador's external debt decreased sharply in 1993, chiefly as a result of an agreement under which the United States forgave about $461 million of official debt. As a result, total debt service decreased by 16% over 1992. External debt stood at $2.8 billion at the end of 1999. Debt service amounted to 2.5% of GDP in 1998 and is considered moderate. The Government of El Salvador has been successful in obtaining significant new credits from the international financial institutions. Among the most significant loans are a second structural adjustment loan from the World Bank for $52.5 million, another World Bank loan of $40 million for agricultural reform, a $20 million loan from the Central American Bank for Economic Integration to be used to repair roads, and a $60 million Inter-American Development Bank loan for poverty alleviation projects. Total non-U.S. Government aid, excluding NGO assistance and bilateral loan programs, reached $38 million in 1999. Although official figures show relatively small and diminishing aid flows, the total is probably larger. Significant amounts come in through nongovernmental organizations and are channeled to groups not generally included in official statistics, such as political parties, unions, and churches. Some $300 million has been contracted from international institutions and governments for infrastructure works and social programs to be undertaken. The debt profile is expected to increase over the next several years as the international donor community has pledged $1.26 billion to finance El Salvador's reconstruction and modernization. Large loans now being sought to finance reconstruction from the 2001 earthquakes will further alter the country's debt profile.
El Salvador historically has been the most industrialized nation in Central America, though a decade of war eroded this position. In 1999, manufacturing accounted for 22% of GDP. The industrial sector has shifted since 1993 from a primarily domestic orientation to include free zone (maquiladora) manufacturing for export. Maquila exports have led the growth in the export sector and in the last 3 years have made an important contribution to the Salvadoran economy.
El Salvador's balance of payments continued to show a net surplus. Exports in 1999 grew 1.9% while imports grew 3%, narrowing El Salvador's trade deficit. As in the previous year, the large trade deficit was offset by foreign aid and family remittances. Remittances are increasing at an annual rate of 6.5%, and an estimated $1.35 billion will enter the national economy during 1999. Private foreign capital continued to flow in, though mostly as short-term import financing and not at the levels of previous years. The Central American Common Market continued its dynamic reactivation process, now with most regional commerce duty-free. In September 1996, El Salvador, Guatemala, and Honduras opened free trade talks with Mexico. Although tariff cuts that were expected in July 1996 were delayed until 1997, the Government of El Salvador is committed to a free and open economy. Total U.S. exports to El Salvador reached $2.1 billion in 1999, while El Salvador exported $1.6 billion to the United States. U.S. support for El Salvador's privatization of the electrical and telecommunications markets has 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. The Department of State maintains a Country Commercial Guide for U.S. businesses seeking detailed information on business opportunities in El Salvador.
Before 1980, a small economic elite owned most of the land in El Salvador and controlled a highly successful agricultural industry.
About 70% of farmers were sharecroppers or laborers on large plantations. Many farm workers were under- or unemployed and impoverished. The civilian-military junta, which came to power in 1979, instituted an ambitious land reform program to redress the inequities of the past, respond to the legitimate grievances of the rural poor, and promote more broadly based growth in the agricultural sector. The ultimate goal was to develop a rural middle class with a stake in a peaceful and prosperous future for El Salvador. At least 525,000 people--more than 12% of El Salvador's population at the time and perhaps 25% of the rural poor--benefited from agrarian reform, and more than 22% of El Salvador's total farmland was transferred to those who previously worked the land but did not own it. But when agrarian reform ended in 1990, about 150,000 landless families still had not benefited from the reform actions. The 1992 peace accords made provisions for land transfers to all qualified ex-combatants of both the FMLN and ESAF, as well as to landless peasants living in former conflict areas. The United States undertook to provide $300 million for a national reconstruction plan. This included $60 million for land purchases and $17 million for agricultural credits. USAID remains actively involved in providing technical training, access to credit, and other financial services for many of the land
beneficiaries.
Despite the 12 year civil war El Salvador encountered, many of us native to the country are astonished on how the country has prospered during these past 15 years since the war. We are still calling out to the government for help in the delinquency in the country .Much has to do with the low paying jobs in this country. As mentioned above the monetary integration of the US dollar has affect the country .Never the less we are still a successful country after coming out of the war. We see the country as one of the most prosperous countries in Central America.
My opinion on the economy in El Salvador is that we can be a very wealthy country if it’s not for the government not taking action into increasing the wages and lowering the cost of goods. We have many resources to make the country successful and we’ve been lucky to have a lot of countries such as the United States and countries in Europe invest in our maquila industries. Recently there was news that French investors were in plans of rebuilding the current airport Comalapa International and expanding it. That means more international airlines will be flying in and out of El Salvador and as for me that means since there will be more competition in airlines coming in, I will be paying less to fly out to El Salvador.
is the inequality in the distribution of income. In 1999, the richest fifth of the population received 45% of the country's income, while the poorest fifth received only 5.6%.
As of December 1999, net international reserves equaled US$1.8 billion or roughly five months of imports. Having this hard currency buffer to work with, the Salvadoran Government undertook a monetary integration plan beginning January 1, 2001, by which the U.S. dollar became legal tender alongside the colon, and all formal accounting was undertaken in U.S. dollars. This way, the government has formally limited its possibility of implementing open market monetary policies to influence short term variables in the economy. Since 2004, the colon stopped circulating and is now never used in the country for any type of transaction; however some stores still have prices in both colones and U.S. dollars. In general, people were unhappy with the shift from the colon to the U.S. dollar, because wages are still the same but the price of everything increased. Some economists claim this rise in prices would have been caused by inflation regardless even had the shift not been made. Some economists also contend that now, according to Gresham's Law, a reversion to the colon would be disastrous to the economy.
Some banks however claim that they still do some transactions en colones, keeping this change from being unconstitutional. The change to the dollar also precipitated a trend toward lower interest rates in El Salvador, helping many to secure credit in order to buy a house or a car; over time, displeasure with the change has largely disappeared, though the issue resurfaces as a political tool when elections are on the horizon.
A challenge in El Salvador has been developing new growth sectors for a more diversified economy. As many other former colonies, for many years El Salvador was considered a monoexporter economy. This means, an economy that depended heavily on one type of export. During colonial times, the Spanish decided that El Salvador would produce and export indigo, but after the invention of synthetic dyes in the 19th century, Salvadoran authorities and the newly created modern state turned to coffee as the main export of the economy. Since the cultivation of coffee required the highest lands in the country, many of these lands were expropriated from indigenous reserves and given or sold cheaply to those that could cultivate coffee. The government provided little or no compensation to the indigenous peoples. On occasions this compensation implied merely the right to work for seasons in the newly created coffee farms and to be allowed to grow their own food. Such policies provided the basis of conflicts that would shape the political situation of El Salvador in the years to come.
For many decades, coffee was one of the only sources of foreign currency in the Salvadoran economy. The civil war in the 80's and the fall of international coffee prices in the 90's, pressured the Salvadoran government to diversify the economy. ARENA governments have followed policies that intend to develop other exporting industries in the country as textiles and sea products. Tourism is another industry Salvadoran authorities regard as a possibility for the country. But rampant crime rates, lack of infrastructure and inadequate social capital have prevented these possibilities from being properly exploited. The government is also developing ports and infrastructure in La Union in the east of the country, in order to use the area as a "dry canal" for transporting goods from Fonseca Gulf in the Pacific Ocean to Honduras and the Antlantic Ocean in the north. Currently there are fifteen free trade zones in El Salvador. The largest beneficiary has been the maquila industry, which provides 88,700 jobs directly, and consists primarily of cutting and assembling clothes for export to the United States.
El Salvador signed the Central American Free Trade Agreement (CAFTA), negotiated by the five countries of Central America and the Dominican Republic, with the United States in 2004. In order to take advantage of CAFTA, the Salvadoran government is challenged to conduct policies that guarantee better conditions for entrepreneurs and workers to transfer from declining to growing sectors in the economy. El Salvador has already signed free trade agreements with Mexico, Chile, the Dominican Republic, and Panama, and increased its exports to those countries.
Fiscal policy has been the biggest challenge for the Salvadoran government. The 1992 peace accords committed the government to heavy expenditures for transition programs and social services. The Stability Adjustment Programs (PAE, for the initials in Spanish) initiated by President Cristiani's administration committed the government to the privatization of banks, the pension system, electric and telephone companies. The total privatization of the pension system has implied a serious burden for the public finances, because the newly created private Pension Association Funds did not absorb coverage of retired pensionists covered in the old system. The government lost the revenues from contributors and absorbed completely the costs of coverage of retired pensionists. This has been the main source of fiscal imbalance. ARENA governments have financed this deficit with the emission of bonds, something the leftist party FMLN has opposed. Debates surrounding the emission of bonds have stalled the approval of the national budget for many months on several occasions, reason for which in 2006 the government will finance the deficit by reducing expenditure in other posts. The emission of bonds and the approval of a loans need a qualified majority (3/4 of the votes) in the parliament. If the deficit is not financed through a loan it is enough with a simple majority to approve the budget (50% of the votes plus 1). This would agonize an otherwise long process in Salvadoran politics.
Despite such challenges to keep public finances in balance, El Salvador still has one of the lowest tax burdens in the American continent (around 11% of GDP). Many specialists claim that it is impossible to advance significant development programs with such a little public sector (the tax burden in the United States is around 25% of the GDP and in other developed countries of the EU it can reach around 50%, like in Sweden). The government has focused on improving the collection of its current revenues with a focus on indirect taxes. Leftist politicians criticize such a structure since indirect taxes (like the value added tax) affect everyone alike, whereas direct taxes can be weighed according to levels of income and are therefore fairer taxes. A 10% value-added tax (VAT), implemented in September 1992, was raised to 13% in July 1995. The VAT is the biggest source of revenue, accounting for about 52.3% of total tax revenues in 2004.
Remittances from Salvadorans working in the United States sent to family members are a major source of foreign income and offset the substantial trade deficit of around $2.9 billion. Remittances have increased steadily in the last decade and reached an all-time high of $2.9 billion in 2005—approximately 17.1% of gross domestic product (GDP). As of April 2004, net international reserves stood at $1.9 billion.
In recent years inflation has fallen to single digit levels, and total exports have grown substantially.
El Salvador's external debt decreased sharply in 1993, chiefly as a result of an agreement under which the United States forgave about $461 million of official debt. As a result, total debt service decreased by 16% over 1992. External debt stood at $2.8 billion at the end of 1999. Debt service amounted to 2.5% of GDP in 1998 and is considered moderate. The Government of El Salvador has been successful in obtaining significant new credits from the international financial institutions. Among the most significant loans are a second structural adjustment loan from the World Bank for $52.5 million, another World Bank loan of $40 million for agricultural reform, a $20 million loan from the Central American Bank for Economic Integration to be used to repair roads, and a $60 million Inter-American Development Bank loan for poverty alleviation projects. Total non-U.S. Government aid, excluding NGO assistance and bilateral loan programs, reached $38 million in 1999. Although official figures show relatively small and diminishing aid flows, the total is probably larger. Significant amounts come in through nongovernmental organizations and are channeled to groups not generally included in official statistics, such as political parties, unions, and churches. Some $300 million has been contracted from international institutions and governments for infrastructure works and social programs to be undertaken. The debt profile is expected to increase over the next several years as the international donor community has pledged $1.26 billion to finance El Salvador's reconstruction and modernization. Large loans now being sought to finance reconstruction from the 2001 earthquakes will further alter the country's debt profile.
El Salvador historically has been the most industrialized nation in Central America, though a decade of war eroded this position. In 1999, manufacturing accounted for 22% of GDP. The industrial sector has shifted since 1993 from a primarily domestic orientation to include free zone (maquiladora) manufacturing for export. Maquila exports have led the growth in the export sector and in the last 3 years have made an important contribution to the Salvadoran economy.
El Salvador's balance of payments continued to show a net surplus. Exports in 1999 grew 1.9% while imports grew 3%, narrowing El Salvador's trade deficit. As in the previous year, the large trade deficit was offset by foreign aid and family remittances. Remittances are increasing at an annual rate of 6.5%, and an estimated $1.35 billion will enter the national economy during 1999. Private foreign capital continued to flow in, though mostly as short-term import financing and not at the levels of previous years. The Central American Common Market continued its dynamic reactivation process, now with most regional commerce duty-free. In September 1996, El Salvador, Guatemala, and Honduras opened free trade talks with Mexico. Although tariff cuts that were expected in July 1996 were delayed until 1997, the Government of El Salvador is committed to a free and open economy. Total U.S. exports to El Salvador reached $2.1 billion in 1999, while El Salvador exported $1.6 billion to the United States. U.S. support for El Salvador's privatization of the electrical and telecommunications markets has 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. The Department of State maintains a Country Commercial Guide for U.S. businesses seeking detailed information on business opportunities in El Salvador.
Before 1980, a small economic elite owned most of the land in El Salvador and controlled a highly successful agricultural industry.
About 70% of farmers were sharecroppers or laborers on large plantations. Many farm workers were under- or unemployed and impoverished. The civilian-military junta, which came to power in 1979, instituted an ambitious land reform program to redress the inequities of the past, respond to the legitimate grievances of the rural poor, and promote more broadly based growth in the agricultural sector. The ultimate goal was to develop a rural middle class with a stake in a peaceful and prosperous future for El Salvador. At least 525,000 people--more than 12% of El Salvador's population at the time and perhaps 25% of the rural poor--benefited from agrarian reform, and more than 22% of El Salvador's total farmland was transferred to those who previously worked the land but did not own it. But when agrarian reform ended in 1990, about 150,000 landless families still had not benefited from the reform actions. The 1992 peace accords made provisions for land transfers to all qualified ex-combatants of both the FMLN and ESAF, as well as to landless peasants living in former conflict areas. The United States undertook to provide $300 million for a national reconstruction plan. This included $60 million for land purchases and $17 million for agricultural credits. USAID remains actively involved in providing technical training, access to credit, and other financial services for many of the land
beneficiaries.
Despite the 12 year civil war El Salvador encountered, many of us native to the country are astonished on how the country has prospered during these past 15 years since the war. We are still calling out to the government for help in the delinquency in the country .Much has to do with the low paying jobs in this country. As mentioned above the monetary integration of the US dollar has affect the country .Never the less we are still a successful country after coming out of the war. We see the country as one of the most prosperous countries in Central America.
My opinion on the economy in El Salvador is that we can be a very wealthy country if it’s not for the government not taking action into increasing the wages and lowering the cost of goods. We have many resources to make the country successful and we’ve been lucky to have a lot of countries such as the United States and countries in Europe invest in our maquila industries. Recently there was news that French investors were in plans of rebuilding the current airport Comalapa International and expanding it. That means more international airlines will be flying in and out of El Salvador and as for me that means since there will be more competition in airlines coming in, I will be paying less to fly out to El Salvador.