1. NS4540 Winter Term 2017 El Salvador Economy
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. 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.

3. 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First, from the mid-19th century coffee superseded indigo and cotton as the dominant commodity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

4. 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

5. El Salvador Stages of Growth III
These reforms initiated a fourth phase of development which was hampered by the civil war from
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 transmission by the FMLN

6. 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
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

7. 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

8. 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.

9. 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

10. 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 damage
Increasing crime and violence and high levels of emigration

11. 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

12. 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 violence