Envío Digital
Central American University - UCA  
  Number 173 | Diciembre 1995


El Salvador

Does this Economic Model have a Future?

What is happening with the Salvadoran economy? The application of growth patterns proper to developed economies accentuates a dual economy: a minority with the lifestyles of the rich North and a majority that can not even subsist: they neither eat nor work.

Juan Hernández Pico, SJ

Bad omens were in the Salvadoran air throughout October. Rising inflation, restricted credit and a drop in growth have submerged the government in a Byzantine discussion about whether these indicators reflect a simple "deceleration" or are part of an authentic "recession." Whether the economic policy is creating equitable wellbeing or is in fact increasing the problems of the majority is not even broached.


The state's "modernization" assumes thousands of layoffs. A temporary economic compensation law was rapidly approved for the state employees who are soon to find themselves unemployed, but no one first listened to those who will be affected by such drastic measures. Nor are those who do retain their jobs being told about the conditions that will make their work more efficient.

President Calderón Sol asked the UN Mission to produce a report on the deficiencies of the National Civil Police. Yet when the report was received and its critical emphasis was made public, the official reaction was defensive.

ARENA keeps postponing legislative approval of electoral reforms agreed to by the opposition and Calderón himself. The opposition is exerting pressure by saying that it will not give the necessary votes to other proposals. ARENA in turn speaks of "blackmail" and of not giving in to pressure. In all this, the country's democratization remains at a standstill.

Peasants took over land on farms they claimed were larger than the 245 hectares the Constitution and the peace accords allow per private owner or business. ARENA responded in the National Assembly by increasing the penalties in the Penal Code for engaging in or inciting property takeovers. The Interior Ministry, in the hands of ARENA hardliners, is suggesting that the governing party request removal of the constitutional clause limiting land ownership size.

The confrontational climate among political and social leaders and party militants is increasingly aggressive. Meanwhile the people, despite their great frustration, still value peace and are rejecting a return to sterile, costly and unresolvable confrontations. Only inveterate insensitivity toward the social problems facing the majority of Salvadorans could make the desperation once again uncontainable.

What's Happening in the Economy

The Ministry of the Economy published inflation data at the start of October showing that inflation had reached 10.3% by September 30. Central Reserve Bank predictions had spoken of one digit inflation by the end of 1995, as was the case in 1994.

An increase in the value added tax (IVA) from 10% to 12% was blamed for the unexpected inflation, as were increases in rates for basic services (electricity, water, telephones, fuel, etc). Some even point to the skimpy 8% increase in public employee salaries. The rainy winter was also blamed the vegetable and bean crops have been poor as was increased insecurity due to rising crime.

But none other than Juan Héctor Vidal, executive director of the National Private Enterprise Association (ANEP), stated that "the expectations of the economic agents" also accentuated inflation. Translated, this means that producers and merchants even more so raised their market prices above that implied by the IVA hike. They did so not only to protect their profit margins but also to cover losses in an economy dominated by tertiary activities import trade and financial and personal services and their increasing dependence on foreign resources (remittances, loans, donations), which project great limitations to sustained growth.

Such insecurity takes front stage precisely during signs of "deceleration" or "recession." The drop in growth is seen much more in the tertiary activities than in productive ones. The economic activity index in services for the first quarter of 1995, for example, was 88.4% with respect to the same period of 1994. But by now, the end of the third quarter of 1995, it has dropped to 64% of last year. And the drop in the trade sector is almost as drastic; the end of the third quarter shows 31% less trade activity than this time last year. A notable drop in construction activity (about 24%) has also been observed since the first quarter.

A Serious Short Circuit

There is disagreement about the consequences for the Gross Domestic Product's growth rate. From the government side, the Central Bank president states that a 5 6% annual GDP rate will be maintained. The private enterprise economic research institute FUSADES believes that the growth rate will drop to 4%. The point is that no one is emphasizing that the reduced economic activity is occurring within a GDP structure in which the productive industrial and agricultural sectors have less and less participation. The domination of the Salvadoran economic structure by trade and services negatively affects the availability of goods needed to satisfy the population's basic needs and generate productive employment.

Looking not only at the Salvadoran situation, but also at that of the whole Central American region, policy options toward tertiarizing the economies assume a short circuit in development. The growth pattern of the United States or Europe is being applied to economies that do not have sufficiently developed agricultural or industrial sectors and thus have no population able to consume services. This accentuates a dual consumption economy: a minority with living standards resembling the wealthy in the North, and a majority excluded even from the probability of being able to reproduce; neither their food supply nor their jobs are guaranteed.

The Future of Remittances

In analyzing Salvador's economic situation, the executive director of ANEP, the umbrella organization of large private business, believes that neither what he considers an overvalued colón nor the "commercial opening," with huge spending on imports not directed to modernizing agriculture and industry, could be sustained without "the massive resources coming from family remittances." But it is very unlikely that the remittances will increase beyond today's levels; in fact they can be expected to diminish as descendants of the emigrants are born in the United States and Canada.
It thus does not seem to make sense to attribute to the remittances a structural weight equivalent to coffee in other periods, as Minister of the Treasury Hinds has done. Even less sensible is to continue programming economic policies based not on monoculture but on mono income. The ANEP director has a point when he says that those who hold that "the current GDP structure does not guarantee sustained growth" should be listened to, and that "the sources that have determined economic growth in recent years" may well be used up. As Vidal says, one need not support state control to understand that the state cannot evade either drawing up economic policies or its role in the market economy. This businessman's words unveil the neoliberal dogma of "discoordination" that has trapped the Salvadoran government.

Calderón: Very Satisfied

Upon returning from the Iberoamerican Summit in Bariloche, President Calderón Sol indicated when presented with the inflation information that it was not important to quibble over inflation fractions. "Most important," he commented, "is that my people have bread, tortillas and jobs." He said that the people's whip is not inflation, but unemployment; that is where the battle lies. He made clear his displeasure with questions from the press about the economic crisis. "So much talk about recession is going to trigger it," he retorted. "If an economic group reiterates that we are in a recession, recession, recession because they did not sell, things turn negative. We should look with the same positivism as those abroad see us. I feel more satisfied with the economy. We are reducing unemployment and facing the problems of marginality head on."
Confidence is obviously necessary for a healthy economy, but fantastic evocations, foreign to the experience of the majority of the people, are not the same as confidence.

Various questions come up in response to the President's reaction. A CID GALLUP poll in mid September showed that Salvadorans are even more concerned about unemployment (35%) and the high cost of living (23%) than about violence and crime (18%). The two evils that the President wants to pit against each other are both knocking on the doors of Salvadoran homes, and neither can be minimized. Perhaps what the President wanted to communicate is that the government raised the IVA to collect funds for its social development plan. But, ignoring for the moment whether the absorption of the Social Investment Fund (FIS) by the National Reconstruction Secretariat will contribute to social development or not, the first step in any social development plan in a region like Central America is to develop an economic policy that guarantees food and industrial goods production for living and for work, as well as tradable goods that can be exported to get the currency to import always in sensible proportions needed items and even luxury items the country does not produce.

The fundamental problem with this second ARENA government is that there has been no export growth, and credit favors import trade and financial investments far more than agriculture and industry. As if this were not enough, the "maquiladoras" are emigrating to Mexico because salaries there severely lowered due to the crisis and the lowering of duties through NAFTA make the Salvadoran assembly plants less competitive. ARENA began the year with the announcement that it would move the country toward becoming "one huge free trade zone." But the year is ending by showing the falseness of this "Panamanianization" of El Salvador, as the country's growth rhythm slows down even more. This would not be catastrophic or irremediable if the road to Central American regional integration were being built on less ephemeral and more coordinated foundations.


October saw rapid approval of the Law of Economic Compensation for those who will lose their state jobs. This compensation is far higher than the Civil Service Law guarantees for retired or pensioned state workers, but retirement now will be obligatory. The law provides that the ministers or directors of public autonomous institutes will decide what work posts will be closed down.

That evaluation is to be delivered to the Treasury Ministry on October 31, so that on January 1, 1996, the Salvadoran state will awake without unnecessary weight. The National Assembly will, after analyzing the evaluation, eliminate the posts. The only voluntary aspect will thus be acceptance of the evaluation. Once notified, the worker at the post will have until December 15 1995 to deliver his or her resignation. If this deadline is not met, the person will lose the right to compensation, and the current Civil Service Law will be applied instead. Seniority will only be applied to retirement pensions. All those who already meet the minimum age and length of service requirements for retirement can retire right now, even if their post has not been eliminated, and accept the compensation within the time stipulated by the law.

This is one more step in "state modernization." After the drafting of the 1996 budget which included an increase of some 12,000 new jobs, above all in the National Civil Police the scandal caused in the private sector and among some opposition forces forced the government to quickly present its Economic Compensation bill, which was approved with 63 votes. The FMLN abstained because it objected to the haste and asked to delay the approval in order to consult with labor organizations.

The labor organizations protested then and still are, now mainly because the evaluation of posts to be eliminated was left in the hands of ministers and directors the bosses. Among other things, this leaves open the possibility of eliminating posts held by union leaders. Workers believe that the occupants of the posts will be analyzed rather than the posts themselves. They also protested because they think the promise that the private sector will take charge of giving jobs to all those laid off by the state is unrealistic.

Employing the Unemployed

For labor leaders, the country's unemployment structure indicates the "demagogy" of the proposal that speaks of giving jobs to the 25,000 people who will be laid off (which the government says will only be 15,000). Foreign Minister González Giner has explained that "we will reduce in some ministries and increase in others," adding that "modernization is not synonymous with unemployment." He assures that in some cases the government will offer opportunities for new technical training so that state employees can choose other jobs, and in other cases will offer technical assistance so those laid off can form cooperatives, get credit to buy machinery and be subcontracted by private businesses to carry out projects. He referred particularly to expert field workers in the Public Works Ministry, ANDA (Water and Sewage), etc.

In fact, the Ministry of Public Works has projected the greatest number of layoffs so far; around 5,000. The Foreign Minister says that ministry has enough funds to "carry out great works, but lacks the implementation capacity."
ANEP President Roberto Vilanova assures that laid off workers will have no major problems finding jobs in the private sector, given the "health" of the Salvadoran economy. He admits that there will be some short term problems, but that the purpose of the large economic compensation is to help those laid off make the transition from state to private employment. He does warn, however, that if the state does not facilitate investment in infrastructure and channel it through the private sector, his optimism could change. If the state, he says, initiates a rapid and significant program to improve roads, ports, airports, electric energy, telecommunications, etc., it will achieve "a dynamic economy and facilitate the workers' transition." Labor leaders argue that private enterprise will not contract former state workers who are union leaders, or those over 30 years old.

The fundamental issue is whether the economy will continue growing or not. Private enterprise has criticized as recessive the Central Bank's anti inflationary measures of restricting credit and increasing bank reserves. An editorial in La Prensa Gráfica, which communicates progressive business thinking from the Dutriz group, fears that "the cuts in January are an effort that is not articulated with that major plan the country needs to modernize its whole way of functioning." The author suggests that it is "an attempt to make services that are inherent to the state's objectives more efficient. Having fewer jobs cuts spending, but does not guarantee effectiveness; so it is not enough."

Two Business Visions

A comparison of Vilanova's declarations with those of La Prensa Gráfica reveals a huge difference. Vilanova's comments are improvised and show a certain politician's concern to calm labor concerns with promises. The editorial takes the dimensions of the problems seriously, including technical, administrative and social dynamics. It refers, for example, to the privatizations both those that have taken place and those in the future and argues that "many of the current labor tensions" originate in the absence of "a frame of reference" that gives "sense and security to all of these phenomena." Celebrating the "obsolescence" of centralized planning, it paradoxically demands today more than ever, "global plans for the future to articulate [private and public] efforts in the rhythm with which democracy develops."

Vision from the Left

Eight days after the voting for the Economic Compensation Law, FMLN leader Salvador Samayoa stated in the same edition of La Prensa Gráfica that "any halfway honest center or leftwing government would be equally obliged to carry out this task for reasons other than just playing to disputable privatizations." Samayoa's views coincide with the editorial in demanding government coherence and credibility around modernization, though he does this with less delicacy, raising suspicion that, with the sale of state institutions to multinationals, "millionaire deals are being cooked" for those who manage the state.

It should not be forgotten that President Calderón Sol has not yet accepted the ARENA president's resignation from the ANTEL (telecommunications) presidency. Nor should the mentality of the country's large landowners be forgotten. This mentality is illustrated, for example, in proposals such as that of the Interior Minister to repeal the constitutional limits on land ownership. A government that has used the police to repress protests against privatization rather than dialogue and negotiate cannot expect to be believed when it claims that layoffs do not equal unemployment. "He who gets burned by hot milk even blows on cheese," recalls Samayoa.

Calderón and Fidel

Samayoa also asks the government to discuss guarantees and compensation with those affected by the law and to prevent discrimination in the layoffs or the use of state posts to pay political favors, as well as to give on the job training to those who retain their state posts.

Samayoa also asked the government to be more decent in its official discourse, recognizing the damage that many of those laid off will personally experience, and announcing extraordinary measures to try to prevent or punish those who steal state funds through high level corruption. No one will tolerate propaganda that "offers a finger full of pudding" to state employees, thus sparking justified anger against the needed measures. And to fire workers without attacking corruption at the top would irrationally make manual workers bear the brunt of inefficiency yet again.

Modernizing "at the rhythm of democracy" is a theme that once again reveals the ongoing national dilemma: authoritarianism or democracy. The essence of authoritarianism is not just political exclusion, it is also economic and social exclusion based on the "superiority" of some.

The photo of the month on the front page of El Salvador's two main newspapers was the smile shared by Fidel Castro and Armando Calderón Sol during the Bariloche Summit. Many Salvadorans would like the President to reflect this same tolerance at home, translating it into a continuous forum to debate and negotiate El Salvador's future, with participation by the nation's majority.


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