El Salvador - Economic development

Prior to 1950, the government, with moderate success, followed a policy of stimulating national economic development indirectly by building roads, developing power facilities, establishing credit facilities, and extending tariff protection to some industries. The prosperity and advantageous international position of Salvadoran coffee masked the long-term need for further diversification.

During the 1950s, it became apparent that El Salvador's primary problems were the growing population and lack of uncultivated arable land. The government therefore embarked on a program to encourage intensification of agriculture and expansion of small industry. The National Council for Economic Planning and Coordination (CONAPLAN), established in 1962, drafted a comprehensive five year plan (1965–69) embodying general objectives proclaimed by the government in line with the aims of the US-inspired Alliance for Progress. The objectives included an increase of the GNP; decrease in illiteracy; expansion of education, health, and housing programs; extension of social security benefits to areas not yet covered; and implementation of an integrated program of agrarian reform. The stimulus for the development program was to be provided by a small group of wealthy Salvadorans, with a minimum of government participation.

In early 1973, CONAPLAN drafted a development plan for 1973–77, concentrating on production, labor, and social welfare. The basic objectives of the plan were improvement in income distribution, employment, health, nutrition, housing, and education; stimulation of the agricultural, industrial, and construction sectors; acceleration of regional development; and export diversification. The plan called for adoption of a government-sponsored investment and financing program, institutional and financial reforms, and policies to stimulate private investment.

The economic reforms adopted in 1980 included a land redistribution program, and nationalization of the banking system. After the civil war was over, the country received substantial influx of economic aid and private remittances. As part of the economic reform program, initiated in 1989 by newly elected President Christiani, the country's economy recuperated at a fair pace. After the signing of the Chapultepec Peace Accords in January 1992, El Salvador boosted business confidence and stimulated private investment.

In January 1986, a comprehensive stabilization program was announced. Among its most important measures were unification of the exchange rate at C5=$1 (a 50% devaluation), raising of fuel prices and public transportation fares, imposition of price controls on consumer staples (food, medical supplies, and clothing), tariff hikes on nonessential imports, and a rise in commercial interest rates. Because of the continuing costs from the civil war, and also from a drought the program fell short of its objectives.

In 1990, the International Monetary Fund (IMF) approved a standby agreement, which was followed by another one in January 1992 and another one in May 1993. The World Bank extended a $75 million structural adjustment loan in 1991, and the Inter-American Development Bank provided additional sectoral adjustment financing. Aided by the government's economic reforms and the IMF and World Bank supported macroeconomic programs, the country's economy continued to prosper. The rising influx of private remittances, official transfer, and the return of local capital boosted domestic demand as well as construction activity, especially in transportation infrastructure and other public projects. The industrial sector also benefited from this upturn.

El Salvador's external debt decreased sharply in 1993, chiefly as a result of an agreement under which the United States forgave about $461 million of official debt. Debt still stood at around $2.4 billion in 1999, despite US forgiveness. In 1998, significant aid came from the World Bank for agricultural reform ($40 million) and structural adjustment ($52.5); from the Central American Bank for Economic Development ($20 million) for road repair; and from the Inter-American Development Bank ($60 million) for poverty alleviation. Total non-US government aid reached $600 million in 1998.

In 2001, El Salvador's external debt stood at $4.9 billion. A damaging hurricane, earthquakes, and a decline in world coffee prices in the late 1990s and early 2000s slowed economic growth. The country adopted the US dollar as legal tender in 2000, no more colónes were to be printed, and the Central Bank was due to be dissolved in 2003. The government has broadened the income tax base, by introducing a new tax code, and has implemented new banking reform legislation. El Salvador still faces the difficult challenge of reducing poverty, in part by investing in infrastructure and social programs.