1. NS4540 Winter Term 2019 El Salvador Economy
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. El Salvador Macro Overview

3. El Salvador Strengths/Weaknesses

4. El Salvador: Comparative Growth

5. El Salvador: Population

6. El Salvador: Per Capita Income

7. El Salvador: Poverty

8. El Salvador: Unemployment

9. El Salvador: Income Distribution

10. El Salvador: HDI

11. El Salvador Governance Trends

12. El Salvador: Economic Freedom

13. El Salvador: Doing Business

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First, from the mid-19th century coffee superseded indigo and cotton as the dominant commodity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

15. 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
It also began breaking up large haciendas and handing them to worker co-operatives

16. 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

17. 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

18. 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

19. 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 he
Also adopted a moderate policy stance and pledged to maintain dollarization
Has shown no sign of backtracking on these promises.

22. 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 remained weak in 2017

23. 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

24. Outlook III
In 2018, Salvador’s growth is expected to be the weakest among the countries of Central America.
However, activity may pick up if the US economy to which the Salvadorian economy is strongly correlated has a strong expansion.
In addition,
low levels of national savings and credit growth,
as well as the ongoing restrictive fiscal policy,
Will impede growth.
Agriculture, like the textile industry, will continue to be one of the key growth sectors.

25. Outlook IV
Private investment is hit by high crime levels and weak household purchasing power.
Added to this are structural weaknesses (small size of the market, income inequalities, poor natural resources, corruption), which will further weaken the country’s attractiveness as an investment destination.
Moreover, the profitability of small businesses in El Salvador suffers from gang extortion rackets, which reduces their profits and ability to invest.
Consumption, the country’s main growth engine, also suffers from the high crime rates.

26. Outlook V
Finally, the country is one of the four countries in Latin America that is the most vulnerable to climate and earthquake shocks, but low rates of investment undermine the ability to build the infrastructures needed to limit the consequences.
Given the modest growth and low levels of investment, the government’s ability to mobilize tax instruments so as to increase revenues is limited.
Moreover, political differences between the FMLN president, on the left and the National Assembly, dominated by ARENA on the right) are blocking the reforms needed to reduce the deficit, which is set to further deteriorate in 2018.

27. Outlook VI
Budget spending cuts are likely to remain limited, as almost half of the budget is devoted to popular social programs and pensions.
The legislative paralysis prevented the government from obtaining the revenues needed to pay the due sums for local pension funds (USD 57 million) in April 2017, resulting in the country’s first default in over twenty years.
Payment was eventually made, but the growing tension between the two political parties is increasing the risks associated with servicing the public debt in 2018.
With a deal between the FMLN and ARENA looking unlikely, and with external funding still limited, the country’s financial situation will remain precarious.

28. Outlook VII
The persistence of the deficit is a factor in pushing the public debt to above 60% of GDP – a worrying level for a dollarized economy.
The current account deficit, which widened in 2017, is not expected to improve significantly.
Dependent on the health of the US economy (48.2% of exports), exports will grow less rapidly than imports.
Imports will likely continue to rise, notably with the progression, though moderate, of oil prices.
The trade deficit should therefore remain substantial (19% of GDP).
The trade deficit will continue to be hit by weak FDI, with foreign investors remaining wary of the high crime rate.

29. Outlook VIII
By contrast, remittances from the Salvadorian diaspora, particularly from the United States, are expected to remain at high levels (18% of GDP).