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 - GROWTH AND STRUCTURE OF THE ECONOMY
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
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.
El Salvador - ECONOMY - ROLE OF GOVERNMENT
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.
Military
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
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.
El Salvador - AGRICULTURE
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
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
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
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
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.
