The political climate in El Salvador fundamentally changed in 1972 when the military overturned a national election that had been won by the Partido Democrata Cristiano (PDC). Groups of students, peasants, and members of the labor movement abandoned the electoral process, forming guerilla groups in opposition to military rule. Throughout the 1980s, rebels and government forces clashed. Attempts to suppress the rebellion by the army and paramilitary death squads were brutal but ultimately unsuccessful. In November 1989, the guerillas—under the party banner Frente Farabundo Marti para la Liberacion Nacional (FMLN)—launched an attack on the capital, San Salvador. The 2-week siege was effective, convincing government and business elites in El Salvador to seek an end to the war. Negotiations brokered by the UN resulted in the signing of a peace accord that went into effect on 16 January 1992. Members of the FMLN agreed to lay down their arms in return for political and military reforms, including a reduction in the size and role of the military. By the time the war had ended, 70,000 people had been killed.
In March of 1989, the right-wing party Alianza Republicana Nacionalista (Arena) won control of the presidency with its candidate, Alfredo Cristiani. Arena has held the executive branch ever since.
The Salvadoran constitution, enacted 23 December 1983, stipulates that the country be headed by a president and vice president who are elected to 5-year terms. The legislature is made up of an 84-member body elected every 3 years, which is responsible for taxes and the ratification of treaties signed by the executive. Members of the Supreme Court, El Salvador's highest judicial authority, are selected for fixed terms by members of the legislative assembly. El Salvador considers itself a representative democracy.
The Arena party, while controlling the executive branch, has been struggling to maintain its power in the legislature. The FMLN, since laying down its arms, has become a force in mainstream politics. It captured 31 seats in the legislative assembly in 2000, making it the largest party in the unicameral (one chamber) congress. It has also gained control of the municipalities in most major cities, including San Salvador, giving it governing authority over about half the country at the local level. The FMLN's rise to power has forced Arena to abandon some of its far-right positions in an effort to gain legislative support for its policies.
The 1980s in El Salvador were marked by chronic trade deficits and fiscal imbalances. Expenditures out-paced revenues, destabilizing the currency and raising the rate of inflation . When Alfredo Cristiani came to office in 1989, he introduced fiscal austerity, liberalization, and privatization as a means to induce economic stability. He also passed a series of tax reforms to lure foreign investment, including the abolition of export tariffs on coffee and sugar. To offset losses from the cut, a 10 percent VAT was implemented in September of 1992. The VAT was increased to 12 percent in 1995 in order to fund cuts in the asset tax, which was revoked in 1994, and capital gains taxes, which were removed in 1996.
The VAT in 1999 accounted for over half of the government's revenue. Still, public sector revenues have suffered as tax collection has been persistently corrupt and inefficient.
Armando Calderon Sol, elected in 1994, expanded on the policies of the Cristiani administration, seeking higher investment by reducing import tariffs, accelerating the privatization of state assets, and introducing a fixed exchange rate . The Calderon administration privatized 75 percent of the country's 4 regional power plants and split up the national phone company, which was sold to consortia made up of private investors and local partners. The shift from a state-run to a liberal, market economy has continued under the current president, Francisco Flores, but economic growth has been slow.