El Salvador - Overview of economy

El Salvador's civil war, which lasted from 1979 until 1990, had a devastating impact on the country's economy. Rebel guerillas during the fight engaged in widespread sabotage, damaging the nation's infrastructure and undermining production and distribution. Export levels dropped during the war and earnings declined. Revenue losses during this period amounted to $2.2 billion.

Since the signing of the peace accord between the government and rebel factions in 1992, the economy has improved. Alfredo Cristiani, who as head of the Arena party became president in 1989, launched free market initiatives and tightened fiscal control. Competition was

increased in a number of sectors; banks were privatized , import duties were lowered, and price controls on consumer products were virtually eliminated. Successive administrations have continued market liberalization . Tariffs were further reduced under Armando Calderon Sol, who was elected president in 1994. The Calderon administration also sought to strengthen intellectual property rights, and in 1998 the government privatized the country's main power plants and telecommunications firms, marking the most extensive efforts thus far to liberalize the economy.

Improvements in economic performance in the first half of the 1990s boosted investor confidence and led to a significant rise in the inflow of foreign capital. However, by 1995 the post-war boom was over, and the economy began to cool. Agriculture, once one of the country's primary export producers, registered little growth in the latter part of the 1990s, diminishing its role in the economy. The manufacturing industry, on the hand, grew rapidly during the 1990s, although by the end of the decade its performance, too, had begun to decline. In the late 1990s, no sectors registered significant gains. Overall, GDP growth rates fell: 4.0 percent in 1997, 2.6 percent in 1999, and to 2.5 in 2000.

Commercial and financial services are fast replacing industry and agriculture as the mainstays of the country's economy. As the once rural-based economy gives way to urban dominance, peasants are abandoning farm labor and moving toward the cities in search of higher paying jobs, leading to the development of shantytowns around many urban areas.

The growth in industry, primarily in the maquila sector (offshore assembly for re-export ), added new jobs to the economy in the 1990s. However, a majority of those were taken by women. Unemployment among young males is still high, which some associate with El Salvador's high crime rates.

With no discovered reserves of oil or coal, the country is dependent on imports for fuel and energy. Trade deficits in El Salvador, while historically broad, widened in the 1990s. Remittances from Salvadorans working overseas, which in 1999 totaled US$1.6 billion, help to offset trade imbalances. However, at least a portion of the trade deficit is generally financed through borrowing, which adds to the country's debt.

Remittances from expatriates are the country's largest source of foreign currency, bringing in more money than all the traditional exports combined. Some of the cash inflows likely come from smuggling and drug-running operations. Money laundering is becoming prevalent as well. If El Salvador is unable or unwilling to crack down on these illicit operations, establishing favorable trade deals with the United States will become difficult.

Taxes also provide a significant source of revenue. The value-added tax (VAT), which was established in September 1992 at 10 percent, was raised to 12 percent in 1995 to offset losses from tariff reductions. The VAT accounts for more than half of all current government revenue. While tax collection is more efficient than it used to be, the system is still hampered by inefficiency and corruption.