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El Salvador - ECONOMY

El Salvador - The Economy

UNTIL THE GOVERNMENT IMPLEMENTED a major land reform in 1980, the most notable characteristic of El Salvador's economic structure was the unequal distribution of landownership. The economy was dominated by a few large plantations that produced cash crops, especially coffee, for export. The slow and difficult implementation of a sweeping three-phase land reform begun in 1980, however, considerably altered the pattern of unequal landownership.

El Salvador's economic development in the 1980s was hindered by a resource drain caused by the country's civil conflict, natural disasters, a lack of economic expertise, and adverse changes in the terms of trade. Consequently, by 1987 El Salvador's economic output barely equaled 80 percent of its 1978 level, and exports were only the third most important source of foreign exchange after foreign aid and remittances from Salvadorans living abroad. The most damaging of these factors was the civil conflict, particularly its impact on the country's infrastructure. By mid-1987 observers estimated that the total cost to the economy based on lost agricultural production, damaged infrastructure, and funds diverted from economic to military purposes was about US$1.5 billion.

El Salvador entered the 1970s as a relatively poor middleincome country with per capita income greater than that of Thailand and slightly less than that of the Republic of Korea (South Korea), Malaysia and Costa Rica. Its overall level of development was roughly comparable to these countries as well, judging by such indicators as industrial contribution to the gross domestic product (GDP), life expectancy, the cost of labor, and per capita income. El Salvador had one other important characteristic in common with these other four countries--a hard-working, productive, and motivated labor force. El Salvador's annual rate of investment growth (3.5 percent), however, lagged substantially behind the other four during the 1960s. During this decade, gross investment grew annually by 24 percent in South Korea, 16 percent in Thailand, 7.5 percent in Malaysia, and 7.1 percent in Costa Rica. El Salvador's inferior rate of investment growth continued and in some cases widened during the 1970s.

By 1982 Salvadoran development had fallen far behind that of South Korea, Malaysia, Thailand, and even Costa Rica. Industrial production hovered around 20 percent of GDP, whereas in the other countries it accounted for between 27 percent (Costa Rica) and 40 percent (South Korea). Salvadoran per capita income fell to about a third of South Korea's and Malaysia's, half of Costa Rica's, and 15 percent below that of Thailand. Making matters worse, El Salvador's terms of trade had deteriorated much more rapidly than had that of the other countries.

Between 1982 and 1986, El Salvador fell even further behind as it failed to diversify its exports away from agricultural commodities and into manufactured goods. In 1986 per capita GDP was almost half its level of 1977, and the country entered a period of disinvestment. As other middle-income countries appeared to be taking off, El Salvador was regressing.


El Salvador's economy has always been highly dependent on a single agricultural export commodity. Following independence, indigo was the most important commodity to the Salvadoran economy and represented most of the country's exports. In the midnineteenth century, however, indigo was replaced in the European and North American markets by artificial dyes. Consequently, indigo producers were forced to seek alternative commodities that would permit them to maintain their level of earnings. Fortunately for El Salvador's wealthier landowners, the decline of indigo was concurrent with the rise in world demand for another crop that thrives in tropical climates--coffee. The coffee export sector dominated the Salvadoran economy by the 1870s.

During the 1950s and 1960s, coffee export earnings helped fuel the expansion of cotton and sugar cultivation (which subsequently became the country's second and third most important export crops, respectively) and financed the development of light manufacturing. In fact, in the years immediately following the Revolution of 1948, which reduced the direct political influence of the coffee interests, the taxes on coffee exports were increased tenfold in order to finance industrialization. These funds were used to develop the country's transportation infrastructure and electricity generation capabilities.

Light manufacturing developed rapidly in El Salvador during the 1960s, largely as a result of the establishment of the Central American Common Market (CACM). El Salvador's industrial development hitherto had been hindered by the absence of a domestic market for these goods. The small class of wealthy landowners generally preferred high-quality imports, while the large lower class lacked the disposable income to buy most manufactured goods. The CACM, however, improved this situation by expanding the market for Salvadoran goods through the elimination of intraregional trade barriers. As a result, the manufactured goods produced in El Salvador became more competitive in Honduras than those from the United States or other non-Central American countries. The CACM-stimulated industrial growth never threatened the predominance of coffee production within the Salvadoran economy, however. Moreover, the stimulus proved to be short lived because the CACM broke down in the 1970s.

The civil conflict and the disincentives inherent in some government policies disrupted coffee, sugar, and cotton production during the 1980s, resulting in a general lack of dynamism in the Salvadoran economy. GDP increased at a 4.3 percent annual rate between 1965 and 1978 but, reflecting the effects of civil unrest, declined by 23 percent between 1979 and 1982. The economy modestly expanded between 1983 to 1986, with average annual growth rates of about 1.5 percent. The country's total GDP equaled approximately US$4.6 billion in 1986. Real per capital GDP was approximately US$938.

During the 1960s and 1970s, gross capital formation increased by an impressive 6.6 percent annual rate, reflecting investor confidence and the positive effects of the CACM. Between 1980 and 1986, however, as investors reacted to the instability caused by the civil conflict, depreciation outstripped investment at an annual rate of 0.8 percent. Private outflows of capital slowed in 1987, resulting in a less drastic capital account deficit of US$34 million, less than a quarter of the outflow registered in 1986.

El Salvador`s economy expanded an estimated 2.5 percent in 1987, representing the largest single-year gain since 1978. This moderate improvement in the country's overall economic activity was primarily the result of a modest rebound in agricultural output and a substantial reactivation of construction activity led by the private sector. Gains in construction investment reflected efforts to replace structures damaged in the 1986 earthquake, which caused an estimated US$1 billion in damage to the country's buildings and infrastructure. Two additional sources of growth were transfer receipts (mostly from Salvadorans working in the United States) and official grants from the United States government. In 1987 net private transfers, or transfer receipts, accounted for over 4 percent of GDP, while grants or official transfers from the United States government represented 5 percent.

Although 1987 was the Salvadoran economy's most positive year since the beginning of the civil conflict, attempts to measure and judge the economy's health should compare the country's economic performance in 1987 with its most recent economic peak in 1978. Using this method to evaluate El Salvador's economy casts a less favorable light than the alternative year-to-year measurement. Although El Salvador's economy grew rapidly in 1987 compared with other years in the 1980s, real income was still almost 20 percent below its 1978 level.

One important but ominous indicator of future economic health was the low level of gross fixed capital formation in 1987, which remained substantially below the levels necessary to expand production capacity and generate productivity gains. Gross fixed capital formation, 14 percent of GDP in 1987, was at a level significantly below those experienced in the 1960s and 1970s.

Consumption expenditures increased by less than 1 percent in 1987, primarily because of an 8.7 percent drop in general government expenditures. Because the International Monetary Fund (IMF) supervised the economic stabilization program, the government was obligated to reduce its budget deficit. Also, because revenue sources consistently failed to close the gap between expenditures and revenues, the government was forced to reduce consumption expenditures in 1987.

El Salvador - Income Distribution

Moderate economic growth in 1987 did not make up for the uneven income distribution in El Salvador. Poorer segments of the population did not share in the modest gains of the economy in 1987. In the agricultural sector, for example, the minimum wage remained unchanged at c8 per eight-hour day; at the same time, inflation, as measured by the consumer price index, rose by 27 percent during the first half of 1987. Real wages in both the private and the public sectors continued their precipitous descent to 13.3 percent in 1987. In 1987 private sector monthly wages averaged approximately C889. Although no current measure of income distribution was available in mid-1988, the combination of negative wage gains and positive aggregate growth implied a worsening of income distribution between employers and labor.

El Salvador - Sectors of the Economy

An examination of GDP by sector confirmed that, despite a modest recovery in 1987, El Salvador's economy was still vulnerable. Even though most sectors showed some growth in 1987, all registered below their 1978 or 1979 peaks.

Thanks to improved weather conditions, the agricultural sector recovered in 1987 from its 1986 decline, rising 3.1 percent, which merely erased the sector's 3.1 percent loss in 1986. The importance of the agricultural sector, particularly coffee, in the economy cannot be overemphasized. In 1987, for example, despite a decrease in coffee production value attributable to lower international coffee prices, coffee still represented approximately 7 percent of GDP, 30 percent of agricultural output, and 60 percent of total exports. Coffee production recovered substantially, about 6 percent, in 1987 as a result of improved weather conditions and increased use of fertilizers. Fortunately, because most coffee was grown in the western part of the country, away from the civil conflict, production was unaffected.

Analysts believed that in the future the fate of El Salvador's coffee earnings would depend on both producer prices and government-imposed price or exchange controls. According to some estimates, producer prices might eventually decline to levels at or below the average cost of production. Such a decline in prices could have catastrophic consequences for the country in both the short term and the long term. A decline in coffee prices would limit the country's ability to earn foreign exchange, resulting in foreign exchange allocation problems. Foreign currency shortages would then exert upward pressure on prices. Unprofitable production could impede further investment in coffee production and eventually reduce the coffee industry's capacity to generate export surpluses.

Government policies had a major impact on the profitability of coffee production. Price controls and exchange rate policies pursued by the government of Jose Napoleon Duarte Fuentes during the early 1980s led many coffee growers to claim that coffee growing was unprofitable. Even in years of strong world prices, coffee growers were adversely affected by the exchange rate manipulation and price controls effected by the National Coffee Institute (Instituto Nacional de Cafe--Incafe). It was unclear, however, whether Incafe would continue to operate under a more conservative government.

Sugar and cotton, once important agricultural crops, accounted for less than 10 percent of agricultural value added in 1987 and less than 5 percent of total Salvadoran export earnings. Low world prices adversely affected sugar production and inhibited investments. Cotton production declined because of the armed conflict and low international prices. For example, in 1986 average production costs of cotton exceeded international prices.

During 1987 manufacturing accounted for about 15 percent of total value added and continued its consistent recovery. Nevertheless, the sector's estimated 2.7 percent growth left value added in manufacturing almost 10 percent below the 1980 level. The gradual recovery in manufacturing could be attributed to increased demand for food products, beverages, and nonmetallic products. In 1987 food processing and beverages represented more than half of the value added in the manufacturing sector.

The construction industry proved to be the economy's only bright spot in 1987, registering growth for the third consecutive year with 14 percent growth above 1986. Compared with 1979, however, activity remained low. Moreover, rapid growth in 1987 reflected efforts to replace the structures and units damaged in the 1986 earthquake rather than a general revival of the construction industry.

Services represented almost half of GDP in 1986. Like construction and manufacturing, service activity continued on an upward trend in 1987 after falling by almost 25 percent between 1978 and 1982. As in other areas, however, 1986 value added by services remained approximately 17 percent below its 1978 peak. Between 1970 and 1978, service output grew by 54 percent. With the slowdown in economic activity after 1978, services declined by 17 percent between 1978 and 1987.

Service activity was tied closely to prevailing trends in the economy and therefore didn't have the dynamism of agriculture and industry. Service activity was also oriented exclusively toward domestic markets and thus did not affect the country's external economic position. Services included transportation, commerce, insurance, health care, utilities, and other services provided by public enterprises.

El Salvador - The Labor Force

The Salvadoran labor force has been traditionally characterized as industrious, motivated, and reliable. Of new entrants to the labor force in 1986, it was estimated that 4 percent possessed executive, technical, or professional skills. Some 25 percent of all job seekers were classified as semiskilled , while 71 percent were unskilled laborers. The labor force was young, reflecting the demographic profile of the population; in 1985 more than 52 percent of workers were less than thirty years of age. The labor force remained largely agrarian and rural in the late 1980s.

Labor suffered because of a variety of economic and institutional circumstances: real wages declined, unemployment rose, and efforts to unify the fragmented labor movement were thwarted by the failure of President Duarte to implement promised labor reforms and by the polarization of union leadership. The negative trend for labor continued in 1987. The legal real minimum wage fell by 28 percent, and average real private sector and public sector wages dropped by 13.3 percent. Between 1983 and 1987, real wages declined by about one-third.

The Salvadoran Constitution details the right to organize unions and associations, but the establishment of "closed shops" (enterprises employing only union workers) was forbidden by law. The law also required the use of collective bargaining, conciliation, and arbitration before a strike could be called.

In 1986 there were approximately 150 recognized unions, employee associations, and peasant organizations, which represented 15 percent of the total work force. Although union membership stabilized in the 1980s, union activism fluctuated with prevailing economic and political conditions. For example, in 1982, while membership remained fairly constant in relation to past years, the number of workers involved in strikes fell from 13,904 in 1981 to just 373. In 1984 the number jumped to 26,111.

In 1987 the labor movement vocalized its frustrations as economic conditions stagnated and the civil conflict dragged on. Such frustrations were exacerbated by the perception that Duarte failed to implement the labor reforms he had promised during the 1984 presidential campaign. Labor leaders protested Duarte's failure to fulfill his end of the "social pact" after labor had put its weight behind him in exchange for pledges of increased inclusion of union members in the government and greater responsiveness to labor and peasant issues.

Between 1978 and 1984, private employment fell from 147,000 to 122,000, a 17 percent decline. Employment in the construction industry suffered the most during this period, declining almost 75 percent (see fig. ). Employment opportunities in 1987 continued the downward trend that began with the country's civil conflict. Although no official unemployment rates were available for 1986 or 1987, it is likely that counterbalancing forces stabilized the rate during these two years at the 1985 level, or 33 percent. First, the civil conflict continued to displace many workers and to limit employment growth. Second, the agricultural sector grew by 3.1 percent, recouping losses experienced in 1986. Finally, an estimated 2.5 percent economic growth rate in 1987 was insufficient to reduce the unemployment rate.

The impact of El Salvador's civil conflict was demonstrated in the evolution of the unemployment rate between 1978 and 1985. Over this period, the rate rose almost tenfold, from 3.1 percent to 33 percent. Labor's situation would have been even more grave without the emigration of an estimated 500,000 Salvadorans to the United States between 1978 and 1985. Remittances from workers abroad totaled US$350 million officially in 1987, although some estimates were as high as US$1 billion or more.


Traditionally, the government has played an important role in the country's economy. This role increased substantially after 1979, provoking considerable controversy and fueling domestic political polarization. Economic policy was coordinated among the central and municipal governments and seventeen decentralized agencies, which included the Salvadoran Social Security Institute (Instituto Salvadoreno del Seguro Social--ISSS) and the Salvadoran Institute for Agrarian Reform (Instituto Salvadoreno de Transformacion Agraria--ISTA). Nine state-owned companies provided utility services to the Salvadoran public. In 1980 the government nationalized the marketing and export of coffee and sugar, two of El Salvador's most important export commodities. Since then, Incafe and the National Sugar Institute (Instituto Nacional de Az�car--Inazucar) have acted as financial intermediaries between domestic producers and foreign markets. These bodies have been widely criticized by coffee and sugar producers because they imposed heavy export taxes and service charges that totaled some 50 percent of the sale price abroad.

Although considerable domestic criticism of the government's economic policy focused on the disincentives and inefficiency of land reform and the creation of Incafe and Inazucar, some critics maintained that another drawback of the government's economic policy was its failure to take into account the counterinsurgency effort. Many Salvadoran policymakers tended to accept the conflict as inevitable, calculating its effect only in terms of a shrinking growth rate. They apparently failed to assess a project's viability in the context of the civil conflict.

El Salvador - ECONOMY - Monetary and Credit Policies

Between 1979 and 1982, El Salvador experienced a 23 percent fall in real per capita GDP, a 35 percent decline in export earnings, and a sharp rise in its unemployment rate to an estimated 27 percent. External and internal imbalance convinced the government to stabilize the situation under the guidance of the IMF. The government targeted monetary growth and other areas and, according to the IMF, accomplished most of its goals. In 1986, after a moderate reactivation of the economy in 1984 and 1985, the government adopted a short-term adjustment program to correct remaining internal and external imbalances. This program included the following changes: unification of the exchange rate, exchange and import restrictions, a more aggressive export promotion program, new fiscal revenue-generating mechanisms, agrarian reforms, a macroeconomic and external debt management committee, and strict monetary policies to curb the country's accelerating inflation rate, a major goal of government policy.

The rate of inflation in El Salvador was determined largely by the conduct of monetary policy and by variations in exchange rates and wages. Because of a net decline in capital formation and a major devaluation of the colon, inflation doubled during the 1980s relative to the 1965-80 period. El Salvador maintained an average annual inflation rate of 14.9 percent between 1980 and 1986, compared with 7 percent per year between 1965 and 1980.

Throughout the 1980s, the government employed monetary aggregate targets, price controls, wage controls, and exchange rate freezes as mechanisms to avoid accelerated price increases. On January 1, 1981, following a surge in wholesale and consumer price inflation, the government decreed a price freeze on basic goods and services. Efforts by the Regulatory Supply Institute (Instituto Regulador de Abastecimientos--IRA) to control prices through market intervention had failed to arrest the price rises for certain necessities, and prices seemed to be out of control. The government's price freeze, in 1981 was accompanied by an intended six-month wage freeze, which actually lasted until the end of 1983. Over the 1981-83 period, real wages dropped by 29 percent in the private sector and 26 percent in the public sector.

In response to the increase in the number of transactions occurring in the parallel market as a result of the unofficial depreciation of the colon, 1985 price controls were relaxed. The result was a sudden increase in consumer price inflation from 12 percent to 22 percent, which by the end of 1985 had accelerated to a 32 percent annual rate.

When El Salvador unified its exchange rate in 1986, the price of some goods, such as oil derivatives, increased by 50 percent, while others, such as foodstuffs and clothing, held constant. Since 1986 some price controls have been lifted, allowing prices to reflect market forces. In 1986 inflation rose to 30 percent by year's end but declined to 27 percent in 1987. Continued wage controls through government intervention in employer-labor wage negotiations, an officially fixed exchange rate since 1986, and slow monetary growth ostensibly tamed the country's high inflation rate. Overall, the major results of the government's anti-inflation program were slower price inflation and real wage losses for workers.

The Central Reserve Bank of El Salvador (Banco Central de Reserva de El Salvador--BCR) set interest rates and rationed credit, generally targeting available capital for high-priority government projects. The Central Reserve Bank also regulated--and often executed directly--transactions involving foreign exchange, under a 1980 regulation to curb capital flight and control monetary supply. Small businesses, especially export businesses, were granted a majority portion of the credit, often at preferential low interest rates.

The Salvadoran government pursued restrictive monetary policies during 1987 to satisfy IMF recommendations for improving the Salvadoran balance of payments and for controlling inflation. By restricting credit to the private sector and to public enterprises, the government had hoped to curb demand, which in turn would have reduced imports and saved precious foreign exchange. In fact, despite the government's austerity program, imports increased by 9 percent in 1987. Furthermore, the government hoped to slow the monetary expansion that had tripled the money supply between 1979 and 1986 to 15 percent during 1987.

The government provided credit to the industrial sector through the National Industrial Development Bank (Banco Nacional de Fomento Industrial--Banafi), which was created in 1981 to replace the former Salvadoran Institute of Industrial Development (Instituto Salvadoreno de Fomento Industrial--Insafi). Banafi provided credit to promising new industries that were not able to obtain credit from other sources.

El Salvador - ECONOMY - The Banking System

Since 1980 the entire Salvadoran banking system has been owned and operated by the government. Under nationalization, the Central Reserve Bank, through the Operative Fund (Fondo Operativo), rationed foreign exchange to the commercial banks. The Central Reserve Bank assigned each commercial bank a maximum allowable balance of foreign exchange and required a weekly balance report. The Central Reserve Bank also covered foreign exchange deficits of the commercial banks but required that they transfer large surpluses to the Central Reserve Bank. In turn, these commercial banks agreed to disburse foreign exchange for imports on priorities set by the Central Reserve Bank in exchange for the services rendered. The highest priorities for foreign exchange disbursements included food, medical supplies, raw materials, and petroleum products, followed by intermediate goods, money for medical expenses and activities abroad, and debt servicing.

Prior to the nationalization of the banking sector, El Salvador had numerous private financial institutions that were called banks but that actually functioned like investment companies. Members, who had contracts with the companies, contributed funds on a regular basis and then used this capital as collateral. Some of the more important "banks" included the Investment and Savings Bank, the Credit and Savings Bank, the Commercial Farm Bank, and the Popular Credit Bank. The Popular Credit Bank had broader powers than the others and could accept time deposits and savings accounts, deal in foreign exchange, and extend letters of credit. The Salvadoran Coffee Company and the Salvadoran Cotton Cooperative also provided seasonal credit to their members. Their activities were not financed by deposits, but rather by loans from foreign banks (mostly United States institutions).

As a result of the civil conflict and the 1980 government decree nationalizing the banking system, many Salvadorans transferred their savings out of the country. Consequently, private savings fell from a 34 percent share of GDP in 1979 to a 32 percent share in 1980. Capital outflows, however, were heavier than this statistic would indicate because GDP fell by 8 percent in the same year. By 1982, nonetheless, private sector confidence in the banking system had been tentatively restored, and private savings increased to 39 percent of GDP. The increase was primarily attributed to a 1982 rise in interest rates, which provided an incentive for saving.

El Salvador - ECONOMY - The Tax System

Taxes, including sales, export, property, income, capital gains, profit, and stamp taxes (a 5 percent levy on goods and services), accounted for a 95 percent annual average of the Salvadoran government's revenue between 1976 and 1985. Tax revenue as a share of GDP increased from 11.6 percent in 1972 to 14.7 percent in 1986. Domestic sales taxes, representing 37 percent of total current revenue in 1986, were the most important source of revenue for the government. Taxes on international trade transactions provided an additional 27 percent of current revenue (two-thirds came from export duties), and taxes on income, profits, and capital gains provided 19 percent. Property taxes constituted only 5 percent of government revenue.

All residents, regardless of citizenship, were required to pay personal income tax, which was assessed according to a progressive scale, with a graduated minimum tax plus a percentage. In 1986 wage earners who garnered less than the equivalent of US$2,400 per year paid no income tax, while those whose income exceeded the equivalent of US$50,000 paid at a 60 percent rate. The maximum corporate tax was also set at 60 percent. In addition, businesses were subject to a net worth tax based on their net capital investment; the maximum rate of this levy was 2.5 percent.

The relative importance of export duties as a revenue source has been problematic for the government. Besides being unpopular among coffee producers, these taxes fluctuated with world coffee prices. In 1986, for example, government revenues rose by 57 percent, compared with 1985. Although higher income taxes, stamp taxes, and increased foreign aid also increased revenue in 1986, the size of the increase resulted largely from a jump in world coffee prices from US$1.43 per pound in 1985 to US$1.71 per pound in 1986. Conversely, when world coffee prices fell to only US$1.11 per pound in 1987, the Salvadoran government reported a fiscal deficit of US$160 million.

El Salvador - ECONOMY - Fiscal Policy and the Budget Process

Salvadoran law stipulated that fiscal budgets of the central government, the decentralized agencies, and public enterprises such as Incafe and Inazucar had to be approved by the Legislative Assembly. Budgets were generally approved for one fiscal year (FY) at a time. Special projects, such as those funded by the United States Agency for International Development (AID) and other foreign agencies, were considered extrabudgetary operations, however, and were not subject to legislative approval.

In nominal terms, government spending doubled between 1976 and 1982, from US$335 million to US$658 million. Government spending was stable relative to GDP, however; government expenditures represented 12.8 percent of GDP in 1972, compared with 12.9 percent in 1986. In 1986 the government maintained a surplus in its current account and an overall deficit equal to 5.4 percent of GDP.

The central government's fiscal deficit increased significantly as a share of GDP during the 1980s as compared with the 1970s. The deficit was 0.5 percent of GDP in 1976 but reached 3.4 percent in 1986. Most of the capital needed to cover the growing fiscal deficits between 1979 and 1987 was obtained from the Central Reserve Bank. The government could in fact cover about 85 percent of its annual fiscal deficit with financing from the Central Reserve Bank. In order to fund operations of public enterprises and additional development programs, however, the government had to rely heavily on foreign aid and international loans. The government owed only US$88 million to foreign creditors in 1970, but this indebtedness had increased to US$1.5 billion by 1986.

United States assistance greatly increased in importance to the Salvadoran economy during the 1980s. Between 1980 and 1986, the United States provided a total of US$2.5 billion in economic and military aid. This represented an increase of more than 3,000 percent over the US$7 million in economic, military, and development aid sent during the entire 1970-79 period. By 1987 United States assistance totaled US$608 million, larger than the fiscal budget of the Salvadoran government of US$582 million.

El Salvador - ECONOMY - Allocation of Government Expenditures

The allocation of government spending changed markedly after 1978, mainly as a result of the civil conflict. While expenditures on education and health fell as a share of total government spending, military spending rose dramatically.


The percentage of total government expenditures on the Salvadoran military increased from 6.6 percent in 1972 to 28.7 percent in 1986. Most of this increase was a result of the country's civil conflict and the need to establish and maintain the 59,000-member armed forces and security forces. If one also considers the military's operating expenditures (wages and purchases of goods and services related to national security), military spending increased from 22.2 percent of all government outlays in 1980 to 47.3 percent in 1986.

The huge amounts spent on counterinsurgency were further underscored when one considers foreign military aid; as much as 75 percent of the US$2.5 billion in United States assistance between 1980 and 1986 may have been applied directly or indirectly to the war effort. A study released in late 1987 by the bipartisan Arms Control and Foreign Policy Caucus of the United States Congress alleged that aid targeted for "stabilization, restoration, and humanitarian needs" was being used instead to repair damage, thus freeing more of the Salvadoran budget for military expenditures. The caucus advocated stricter measures to ensure that aid was used to improve health care, nutrition, and education.

El Salvador - ECONOMY - Utilities and Communications

Most major utility companies in El Salvador were state owned and operated. These included the National Water and Sewerage Administration (Administracion Nacional de Acueductos y Alcantarillados--ANDA), the National Telecommunications Administration (Administracion Nacional de Telecomunicaciones-- Antel), and the National Electric Company, known formally as the Rio Lempa Executive Hydroelectric Commission (Comision Ejecutiva Hidroelectrica del Rio Lempa--CEL). These companies, responsible for providing public services, operated fairly autonomously, even though their budgets were controlled by the Legislative Assembly. Government expenditures on economic services (including road construction and maintenance, communications facilities, and power plants and lines) declined from 29 percent of total expenditures in 1976 to only 12 percent in 1985. Spending on these services increased by 37 percent in nominal terms from US$98 million in 1976 to US$135 million in 1985; during the same period, government spending increased by 31 percent, from US$334 million to US$1.1 billion. In 1978 about 70 percent of these service-oriented expenditures went for the building and maintenance of roads, communications facilities, and power plants and lines. This share declined to 53 percent in 1986, largely because of increased spending on services to the agriculture sector and the fishing industry.

El Salvador - ECONOMY - Health, Education, and Entitlements

Historically, El Salvador's health care system has fallen short of the country's needs. The government's ability to provide adequate health care eroded during the 1980s because of the civil conflict's costliness and guerrilla attacks that destroyed many previously existing facilities. Spending on health care, as well as other social services, was supplanted by increases in military spending. Consequently, government spending on health services declined as a share of total expenditures from 10 percent in 1978 to 7.5 percent in 1986.

Nevertheless, compared with its performance earlier in the decade, health care improved in the mid-1980s, largely because of AID efforts. With AID assistance, the Salvadoran government circumvented drastic reductions in social services--despite cuts to these services in the fiscal budget--and progressed in a number of areas. Between 1984 and 1986, malaria cases declined from 62,000 to 23,500; officials from the Ministry of Public Health and Social Services were able to make 914 prenatal visits per 1,000 births in 1986, compared with 876 in 1984; health officials also increased distribution of oral rehydration packets (vital to reducing infant mortality) by 130 percent, from 650,000 in 1984 to 1.5 million in 1986.

Education's share of government expenditures declined, a side effect of the civil conflict, from 21.4 percent in 1976 to 14.5 percent in 1986. As a result, by 1986 over 1,000 schools had been abandoned.

Government spending on social security and welfare increased from US$11 million in 1976 to US$31 million in 1985, an increase in line with that for total government spending. Spending on housing and amenities, however, declined in nominal terms, from US$11 million in 1976 to US$6 million in 1985. This category included spending on sanitary services, which declined from US$800,000 in 1976 to US$200,000 in 1985, after dropping to a low of US$100,000 between 1979 and 1981.

El Salvador - ECONOMY - Public Enterprises

In El Salvador in the late 1980s, there were nine state-owned companies, the most important of were public utility companies, such as CEL, Antel, ANDA, IRA, and the Autonomous Executive Port Commission (Comision Ejecutiva Portuaria Autonoma--CEPA). IRA, which operated under the Ministry of Agriculture and Livestock, was responsible for marketing imported or domestic foodstuffs, such as corn, rice, beans, and powdered milk. Some of these foods were sold in government stores at subsidized prices. The state also owned shares of the cement and textile industries. The establishment of the two state-owned marketing companies, Incafe and Inazucar, expanded the public sector significantly and increased public revenue at the expense of coffee and sugar producers.

Most state-owned companies turned a profit in the 1980s. Between 1980 and 1983, for example, state-sector profits increased from 0.8 percent to 1.7 percent of GDP. Some stateowned companies, however, tended not to adjust prices during inflationary periods. IRA regularly incurred large deficits by trying to provide affordable foodstuffs. IRA's deficits were generally covered by the central government. Most other stateowned companies financed their deficits abroad, or through loans from the Central Reserve Bank.


Industry and agriculture were the most dynamic sectors of the economy during the 1965-80 period, growing each year by 5.3 percent and 3.6 percent in real terms, respectively. Between 1980 and 1986, the value of agricultural output dropped by an average 2.3 percent per year. This decline was influenced by a number of factors, among them guerrilla sabotage, the comparative inefficiency of farms created by the land reform program, and the ineffectiveness of many government policies. Despite the general decline of agricultural output, coffee, which generated half the country's export earnings in 1987, continued as the most important commodity produced in El Salvador.

The agricultural sector accounted for nearly 25 percent of GDP in 1987 and was responsible for about 80 percent of the country's export revenue. Although the number of people employed in agriculture increased from 3.5 million in 1970 to 5.7 million in 1986, the share of the economically active population employed in agriculture declined from 56 percent in 1970 to only 40 percent in 1986. After coffee, sugar and cotton were the most important agricultural commodities. Basic grains (wheat, rice, and corn) were also grown extensively, but for domestic consumption.

Despite the relative importance of agriculture to El Salvador's economy, absolute levels of production declined dramatically after 1979. Several factors, especially the civil conflict, were blamed for the decline. Guerrilla attacks on farms, processing plants, and infrastructure undermined efficiency, precluded investment, and intimidated laborers. The impact of the conflict varied, however, depending on the crop. For example, the geographical location of the most important coffee-growing area--the western sector of the country--insulated most coffee producers from the violence. In contrast, cotton production, centered in the eastern part of the country, was devastated by guerrilla activities.

<>The Land Tenure System
<>Basic Grains

El Salvador - The Land Tenure System

Historically, landownership in El Salvador has been highly concentrated in an elite group of wealthy landowners. Most of the good arable land in El Salvador was located on large coffee plantations, while lower quality land was rented to peasants, who grew staple crops. Because these plots often failed to provide even a subsistence-level existence for them, the tenant farmers often worked as laborers for the coffee plantations as well.

During the colonial period, a certain tension existed between the hacendados--the owners of private plantations--and Indian communities that laid claim to, but did not always make productive use of, communal lands known as ejidos or tierras comunales. Although some encroachment by hacendados on Indian lands undoubtedly took place, this practice was not apparently widespread, mainly because the Spanish crown had supported the integrity of the Indian lands. After independence, however, the process of private seizure of communal lands accelerated, aided by the confusing and incomplete nature of the inherited colonial statutes dealing with the ownership and transfer of land. The rapid growth of coffee production in the late nineteenth and early twentieth centuries led the government to formalize the favored status of private, export-oriented agriculture over subsistence farming through the passage of the legislative decree of March 1, 1879. This decree allowed private individuals to acquire title to ejido land as long as they planted at least 25 percent of that land with certain specified crops, most notably coffee and cocoa. Tierras comunales were formally abolished in February 1881; the abolishment of ejidos in March 1882 left private property as the only legally recognized form of land tenure.

During the twentieth century, the conflict over land tenure pitted commercial export-crop producers against campesinos who sought to raise subsistence crops--mainly corn--on land to which they rarely held legal title. Some campesinos worked under various rental and sharecropping arrangements; however, an increasing number functioned as squatters, with no claim to their land beyond their mere presence on it. This occupation of private and public lands was intensified by rapid population growth, the expansion of cotton production that removed further acreage from the total available for subsistence agriculture, and the expulsion of thousands of Salvadorans from Honduras following the 1969 war between the two countries.

As of 1988, the most recent agricultural census had been conducted in 1971, but data on the 1980 land reform program corroborates that extremely unequal land distribution patterns persisted throughout the 1970s. According to the 1971 agricultural census, 92 percent of the farms in El Salvador (some 250,500 in all) together comprised only 27 percent of all farm area. The other 73 percent of farmland was combined in only 1,951 farms, or 8 percent of all farms; these parcels were all over 100 hectares. Farms between 100 and 500 hectares represented 15 percent of El Salvador's cultivated area.

The land distributed under Phase I of the land reform program included the largest plantations--all those larger than 500 hectares. Phase I divided up 469 individual properties, with a combined area of 219,400 hectares, almost 18 percent of all Salvadoran farmland. Nearly 31,400 Salvadoran heads of household benefited directly from Phase I of the land reform; if family members are included, the beneficiaries totaled almost 188,200. Most of these lands were expropriated by the government and divided among 317 cooperatives. The government hoped that the economies of scale possible under a cooperative framework would keep the farms efficient.

The government guaranteed the former landholders that they would be compensated and had planned to pay them out of the cooperatives' earnings. However, because the cooperatives experienced major difficulties during their initial years, much of the compensation had to be paid by the government. According to a report released by the inspector general of AID in February 1984, the cooperatives established under Phase I of the land reform "had massive capital debt, no working capital, large tracts of nonproductive land, substantially larger labor forces than needed to operate the units, and weak management." By the end of 1985, only 5 percent of the 317 cooperatives formed under the land reform were able to pay their debts, in spite of US$150 million in assistance from AID. Many lacked capital to buy fertilizer, so yields steadily declined. Nevertheless, by the end of 1987 almost all Phase I compensation had been paid. The restrictions placed on Phase II by the Constituent Assembly greatly limited its effect on land tenure because of the small size of the plots. As of 1987, however, phase II of the agrarian reform program had not been implemented.

El Salvador - Coffee

Coffee has fueled the Salvadoran economy and shaped its history for more than a century. It was first cultivated for domestic use early in the nineteenth century. By mid-century its commercial promise was evident, and the government began to favor its production through legislation such as tax breaks for producers, exemption from military service for coffee workers, and elimination of export duties for new producers. By 1880 coffee had become virtually the sole export crop. Compared with indigo, previously the dominant export commodity, coffee was a more demanding crop. Since coffee bushes required several years to produce a usable harvest, its production required a greater commitment of capital, labor, and land than did indigo. Coffee also grew best at a certain altitude, whereas indigo flourished almost anywhere.

Unlike those of Guatemala and Costa Rica, the Salvadoran coffee industry developed largely without the benefit of external technical and financial help. El Salvador nonetheless became one of the most efficient coffee producers in the world. This was especially true on the large coffee fincas, where the yield per hectare increased in proportion to the size of the finca, a rare occurrence in plantation agriculture. The effect of coffee production on Salvadoran society has been immeasurable, not only in terms of land tenure but also because the coffee industry has served as a catalyst for the development of infrastructure (roads and railroads) and as a mechanism for the integration of indigenous communities into the national economy.

In the decades prior to the civil conflict of the 1980s, export earnings from coffee allowed growers to expand production, finance the development of a cotton industry, and establish a light manufacturing sector. After 1979, however, government policies, guerrilla attacks, and natural disasters reduced investment, impeding the coffee industry's growth. To make matters worse, after a price jump in 1986 world coffee prices fell by 35 percent in 1987, causing coffee exports to decline in value from US$539 million to US$347 million.

Government control of coffee marketing and export was regarded as one of the strongest deterrents to investment in the industry. In the first year of Incafe's existence, coffee yields dropped by over 20 percent. During each of the ensuing four years, yields were about 30 percent lower than those registered during the 1978-80 period. Although the area in production remained fairly constant at approximately 180,000 hectares, production of green coffee declined in absolute terms from 175,000 tons in 1979 to 141,000 tons in 1986; this 19 percent drop was a direct result of lower yields, which in turn were attributed to decreased levels of investment. According to the Salvadoran Coffee Growers Association (Asociacion Cafetalera de El Salvador--ACES), besides controlling the sale of coffee, Incafe also charged growers export taxes and service charges equal to about 50 percent of the sale price and was often late in paying growers for their coffee.

Coffee growers also suffered from guerrilla attacks, extortion, and the imposition of so-called "war taxes" during the 1980s. These difficulties, in addition to their direct impact on production, also decreased investment. Under normal conditions, coffee growers replaced at least 5 percent of their coffee plants each year because the most productive coffee plants are between five and fifteen years old. Many coffee growers in El Salvador, in an effort to avoid further losses, neglected to replant.

Although most coffee production took place in the western section of El Salvador, coffee growers who operated in the eastern region were sometimes compelled to strike a modus vivendi with the guerrillas. During the 1984-85 harvest, for example, the guerrillas added to their "war tax" demand a threat to attack any plantation they thought underpaid workers. They demanded that workers receive the equivalent of US$4.00 per 100 pounds picked, a US$1.00 increase over what was then the going rate. The fact that growers negotiated with the guerrillas--while the government looked the other way--demonstrated the continuing importance of coffee export revenue to both the growers and the government.

El Salvador - Sugar

Sugar was the most dynamic of all agricultural commodities during the 1980s, showing increases in production and amount of area cultivated. Salvadoran farmers devoted 42,000 hectares to sugar production in 1986, compared with 33,000 hectares in 1979. Production rose from 2.7 million tons in 1979 to 3.2 million tons in 1986, after peaking at a record 3.4 million tons in 1984. Despite rising production, however, sugar producers still experienced problems. World sugar prices crashed from US$0.085 per pound in 1983 to US$0.04 per pound in 1984 and did not begin to recover until late 1987.

El Salvador - Cotton

Salvadoran farmers did not produce much cotton until after World War II, when several technological developments combined to facilitate farming on the coastal lowlands. One of these was the increased availability of drugs to combat malaria and yellow fever; another was the production of cheap chemical insecticides (insect infestation being the major obstacle to high cotton yields in El Salvador); and yet another was the development during World War II, when imports of cloth and clothing dried up, of a domestic textile industry. During the 1950s, cotton production increased fifteenfold. Production was boosted still further in the 1960s by the completion of the Carretera Litoral, the coastal highway running almost the length of the country.

Although it was one of the country's top sources of export revenue in the 1960s and 1970s, cotton was the major economic casualty of the civil conflict, virtually disappearing as an export commodity during the 1980s. The value of exports fell precipitously, from US$87 million in 1979, to US$56 million in 1983, and to only US$2.3 million in 1987. Many plantations in the eastern part of the country were abandoned as a result of the violence, while other plantations affected by the land reform shifted production to other crops. Those farms that continued to operate reported declining yields and a virtual cessation of investment and replanting. The cultivated area devoted to cotton declined from 82,000 hectares in 1979 to only 27,000 hectares in 1986, a drop of almost 70 percent. Production of seed cotton declined from 169,000 tons in 1979 to 55,000 tons in 1986.

El Salvador - Basic Grains

During the late 1970s, the Salvadoran government shifted the emphasis of agricultural policy away from traditional export commodities toward increased production of staple crops for domestic consumption. Food security, defined as the ability to produce enough food domestically, was a goal of the government in the 1980s, but one that proved increasingly elusive. The area under cereals cultivation declined from 422,000 hectares in 1979 to 390,000 hectares in 1986 because farms located in conflict zones were abandoned. The shortfall was made up by an increase in imports. Salvadoran food imports totaled only 75,000 tons in 1974; by 1986, however, this figure had risen to 212,000 tons. In response to the insurgency, food aid was increased. In 1974-75, for example, El Salvador received only 4,000 tons of food aid; by 1985-86 this figure had risen to 278,000 tons.

Maize production declined steadily from 517,000 tons in 1979 to 391,000 tons in 1986. The area for maize cultivation also declined from 281,000 hectares to 243,000 hectares, while yields shrank from 1.8 tons per hectare to 1.5 tons per hectare. Rice production, however, remained fairly steady. Salvadoran farmers maintained approximately 15,000 hectares in rice from 1979 to 1986 (rising to 17,000 hectares in 1985); harvests rose from 56,000 tons in 1979 to 69,000 tons in 1985, only to drop to 53,000 tons in 1986. Sorghum production and cultivation also declined slightly. In 1979 farmers devoted 126,000 hectares to the cultivation of sorghum, compared with 119,000 hectares in 1986. Sorghum harvests declined from 145,000 tons in 1979 to 135,000 tons in 1986.

El Salvador - Livestock

Cattle raising accounted for some 10 percent of the value added in agriculture for 1986. The cattle population dropped from 1,317,000 head in 1979 to only 1,010,000 head in 1986. Salvadoran farmers raised only 400,000 pigs in 1986, an 11 percent decline from 1979. The declines in production were attributable to widespread overslaughtering--a result of the land reform, which caused some large landowners to slaughter their livestock and sell them rather than lose them to the cooperatives--smuggling, to avoid export taxes, and the effects of the civil conflict.

El Salvador - Fisheries

El Salvador's fishing industry, although responsible for only 0.1 percent of GDP, produced the fourth largest source of export revenue for the country in 1986. In 1987 the fishing industry consisted of two main sectors, a modern, capital-intensive shrimp fishery, and a small artisanal fishery. Of the two, the shrimp industry was the big money-maker, with shrimp exports totaling 3,700 tons in 1986, valued at US$18.4 million. Shrimp fishermen caught an annual average of about 5,400 tons from 1980 through 1987, up from the 3,000 to 4,000 tons caught each year during the 1960s and 1970s. The abundant shrimp resource supported both a modern shrimp fleet and an artisanal shrimp fishery.

In 1981 the government established the Center for Fisheries Development (Centro de Desarrollo Pesquero--Cendepesca) to develop the fishing industry. Cendepesca regulated the industry and promoted its expansion through such devices as tax credits on the importation of machinery, fishing boats, and inputs for processing and exemptions of five or ten years on municipal and income taxes for companies devoted to fishing. Cendepesca also tried to manage the shrimp fishery (to prevent overfishing) through required registration and licensing of shrimp boats. Cendepesca repeatedly sought to impose a closed season during shrimp reproduction periods, but these efforts were thwarted by powerful lobbyists in the face of opposition from major shrimp companies. Consequently, there was a fear that overfishing would deplete stocks, a development that could reduce the shrimp catch and have a major impact on the country's export earnings.

El Salvador also had an embryonic shrimp culture industry. According to an AID feasibility study, El Salvador has 5,000 hectares of land particularly well suited for shrimp farming. By the end of 1987, however, only four small shrimp farms were operating in El Salvador.

The government also tried with a US$50 million loan from France to establish a major tuna fishery. The funds were used to build a large tuna port, complete with processing facilities, at La Union, already a major shrimp fishing port. The project was completed in 1981 but was never initiated because of the government's poor management of the vessels and the project. The Salvadoran government, which purchased two large tuna seiners for operation in 1981 and 1982, reported meager catches because of technical difficulties. By 1985 the facilities at La Union had languished, and the government was unable to sell the vessels. The weakness of the Salvadoran tuna industry became clear in September 1986 (and again in August 1988) when the Salvadoran government ignored the United States Marine Mammal Protection Act, an act that requires tuna exporters to the United States to report their efforts to reduce concomitant porpoise mortalities. Consequently, the United States embargoed Salvadoran tuna in September 1986 and again in 1988.

El Salvador - Forestry

El Salvador's forestry industry developed rapidly after 1969, when the "Football War" cut off shipments of lumber from Honduras, a primary supplier. The lumber industry was encouraged by the developing paper and wood pulp production industries and the ongoing traditional furniture industry. By the mid-1980s, however, El Salvador was once again highly dependent on wood imports. Lumber imports in 1985 totaled US$36.7 million, compared with US$13 million in 1974, while lumber exports reached US$6.6 million in 1985, compared with only US$400,000 in 1974.

El Salvador - INDUSTRY

The creation of the CACM fostered development of industry in El Salvador during the 1960s by reducing intraregional trade barriers, which increased aggregate demand for manufactured goods. The Salvadoran and Guatemalan manufacturing sectors benefited from and conversely suffered the most when the CACM lost momentum after the 1969 Salvadoran-Honduran war. During the 1980s, however, industrial output, affected by guerrilla attacks on power plants and by reduced investor confidence, also suffered declines by an average of 0.7 percent each year between 1980 and 1986.

Manufacturing of consumer goods predominated in the industrial sector. About 50 percent of manufactured goods produced were either food products or beverages. Intermediate goods, such as chemicals and pharmaceuticals, increased in importance during the 1970s but still constituted only about 15 percent of manufacturing output in 1986. El Salvador also had small industries that produced tobacco products, petroleum products, clothing, textiles, wood products, and paper products. Construction was the second leading contributor to the industrial sector, but its contribution to GDP was considerably less than that of manufacturing.

El Salvador - Manufacturing

The manufacturing industry developed slowly. In 1950, when manufacturing accounted for about 7 percent of GDP, it comprised mostly cottage industries. Of the fourteen larger manufacturing firms (with more than 100 employees), thirteen were located in San Salvador and produced mainly textiles, tobacco, and beverages; most of the smaller firms manufactured clothing, shoes, furniture, and wood or straw products.

The development and manufacturing industries was slowed by a shortage of reliable year-round labor--most Salvadorans worked seasonally as agricultural laborers--and an even more acute lack of skilled workers. In 1952, however, when the government offered tax breaks to small businesses, industry grew almost 5 percent a year from 1955 to 1958. During this period, cement, chemical, and transportation equipment industries began. The intermediate goods sector was much more dynamic than the capital goods sector; with the development of modern chemical, pharmaceutical, and petroleum product industries, it grew rapidly in the 1960s and 1970s. The production of machinery and transport equipment remained fairly stable in terms of its share of the value added for total Salvadoran manufactured goods, rising from 3 percent of total value added in 1970 to 4 percent in 1985.

By 1960 the manufacturing sector represented 14.6 percent of El Salvador's GDP, the highest percentage of any Central American country at the time. The creation of the CACM boosted the rapid development of manufacturing firms in El Salvador throughout the 1960s. By 1965, following three years of 12 percent average annual growth, manufacturing represented 17.4 percent of GDP. Between 1961 and 1970, value added in manufacturing increased (in nominal terms) from US$89.2 million to US$194.1 million.

The manufacturing sector received a temporary setback because of the 1969 war with Honduras, which disrupted CACM trade. Even the CACM's share of Salvadoran exports fell from 40 percent in 1968 to 32 percent in 1970. Nevertheless, manufacturing output increased by a modest 3.9 percent in 1969. Following the war, however, foreign investment replaced CACM trade as the engine of growth for the Salvadoran manufacturing industry.

During the 1970s, manufacturing was the most dynamic segment of the Salvadoran economy, growing by an impressive 16.8 percent yearly between 1971 and 1978. Consumer goods (especially foodstuffs, textiles, clothing, and shoes) continued to be the most important products. Because of the CACM's decline, El Salvador was forced to seek new export markets like the United States, which in the 1970s imported over 20 percent of the country's food exports and almost 35 percent of its exports of beverages and tobacco products. El Salvador also sought export markets for textiles and other light manufactures in the United States and the Federal Republic of Germany (West Germany). The project was not competitive, however, because of poor product quality and outmoded manufacturing techniques and expensive foreign materials. Eventually Japan and West Germany became important export markets for the bulk of El Salvador's nonedible raw materials, fats, and oils.

Because foreign investors funneled their capital to industries producing intermediate goods these industries increased in importance relative to consumer goods during the 1970s. As a result, El Salvador increased the percentage of its exports of manufactured goods exported to industrialized countries. In 1965 over 90 percent of Salvadoran manufactured exports went to other developing countries (primarily CACM states), but by 1986 about 87 percent were being shipped to industrialized countries. Overall exports of manufactured goods increased (in real terms) from US$32 million in 1965 to US$170 million in 1986.

During the 1980s, the manufacturing sector, buffeted by the chaos of the civil conflict, labor unrest, declining investor confidence, and world recession, experienced a major decline. Aside from the generalized capital flight spurred by political instability, the second most damaging effect of the conflict, after guerrilla sabotage of the electrical grid, was attacks on factories.

The industries hit hardest by guerrilla attacks were those producing nontraditional capital goods such as transportation equipment, intermediate goods such as metal products and machinery, and capital-intensive consumer goods such as electric appliances. Traditional industries (foodstuffs, beverages, tobacco, wood products, and furniture) were least affected because their factories tended to be smaller and thus less subject to guerrilla attacks. These industries also had welldeveloped domestic markets and consequently were less affected by the 1980-82 world recession. Exports of manufactured goods declined by 48 percent in value and almost 80 percent in volume between 1979 and 1982, mainly as a result of lower shipments of chemicals, textiles, clothing, and petroleum products.

Labor unrest became a major contributing factor in declining manufacturing output. But it is unclear whether or not there is a direct relationship between guerilla activity and that unrest. There were, however, eighty-six strikes in 1979, involving almost 23,000 workers, compared with only one strike, involving 700 workers, in 1975.

El Salvador - Other Leading Industries

The construction industry was one of the most dynamic in El Salvador during the 1970s. Value added increased from US$50 million in 1977 to US$80 million in 1978 but then declined precipitously, reaching a low of US$17 million in 1980. The industry reported only moderate growth in the early 1980s. Also, the number of workers employed in construction declined by over 75 percent between 1980 and 1986, from 13,100 workers to only 3,100.

Paradoxically, despite the industry's general decline, the number of building permits issued tripled between 1979 and 1984. The increase, however, went for housing; the number of permits issued for the construction of factories or other commercial buildings dropped from 320 in 1979 to only 35 in 1984. It is unclear, however, whether or not all the approved buildings were actually built. When the October 1986 earthquake prompted massive capital inflows for reconstruction, however, the construction industry grew by 14 percent in 1987 and stimulated the economy's 2 percent increase in GDP that year.

El Salvador's mining industry was first established in the late nineteenth century when Charles Butters, who had pioneered the cyanide process for mineral separation, opened several gold mines. Two of his gold mines (San Sebastian and Divisadero) were highly productive; the San Sebastian mine by itself yielded US$16 million worth of gold between 1908 and 1928. Mining declined significantly by the early 1930s because world gold and silver prices dropped and costs rose. Mining, which generated only a fraction of GDP in 1987, has not played an important role in the Salvadoran economy since. El Salvador also has deposits of silver, copper, iron ore, sulfur, mercury, lead, zinc, and limestone; of these, only gold, silver, and limestone were mined in 1987, and only in limited amounts.

CITATION: Federal Research Division of the
Library of Congress. The Country Studies Series. Published 1988-1999.

Please note: This text comes from the Country Studies Program, formerly the Army Area Handbook Program. The Country Studies Series presents a description and analysis of the historical setting and the social, economic, political, and national security systems and institutions of countries throughout the world.

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