Documents menu
Date: Mon, 6 Nov 1995 23:10:45 GMT
Sender: Activists Mailing List <>
Subject: D'GAP Paper on SAPs in Latin America (4/4)

Structural Adjustment in El Salvador. An alternative emerges

By Roberto Rubio, Fondacion Nacional para el Desarrollo, and Karen Hansen-Kuhn, The Development GAP, 6 November 1995

In the wake of the economic crisis in Mexico, citizens' groups throughout the Americas intensified their demands that the structural adjustment programs imposed by the World Bank, the International Monetary Fund and other international financial institutions be re-examined and that alternative programs designed to promote equitable and sustainable development be seriously considered. This debate is particularly advanced in El Salvador, a country emerging from years of civil war to confront a harsh new world order. El Salvador has experienced massive foreign capital inflows in recent years that have helped to increase the country's economic growth rate. These inflows have been primarily in the form of remittances from Salvadorans working overseas and exceptional levels of foreign aid, sources that could prove to be as ephemeral as foreign investment in the Mexican stock market.

For this reason, the National Development Foundation (FUNDE), a Salvadoran research institute with ties to popular organizations, has initiated a process to define an alternative development program for the country. In November 1994, FUNDE published an initial draft entitled, "A New National Economic Agenda for El Salvador." In that document, FUNDE critiques the current neoliberal model and recommends a series of measures designed to promote democratic, equitable and environmentally sustainable development.

Background: Growth or Development?

Former President Alfredo Cristiani began implementing economic stabilization and structural adjustment policies shortly after taking office in mid-1989, eliminating price controls, increasing water, electricity and transportation fees, and restructuring the tax system. These measures were deepened in 1991 through the implementation of a Stand-by Arrangement with the IMF, a Structural Adjustment Loan (SAL) from the World Bank and an Investment Sector Loan from the Inter-American Development Bank.

In its August 1993 report to its Executive Directors recommending approval of a second SAL, the World Bank listed the major achievements of the first round of adjustment in El Salvador: unification of exchange rates; unification and reduction of tariff rates; simplification of the tax system and implementation of a value-added tax; privatization of several state-owned banks; implementation of agricultural-sector reforms; and introduction of a Social Investment Fund to "cushion the potentially negative impact of adjustment on the poor." The rate of inflation was reduced from an average of 23.3 percent during the 1985-1989 period to 11.2 percent in 1992, accompanied by an average annual increase of 3.8 percent in the GDP between 1990 and 1992, compared to 1.6 percent for 1989-1990.

FUNDE points out that these improvements in macroeconomic indicators, while impressive, are symptoms of a pattern of accumulation that is both artificial and fragile. They are based on what could prove to be fleeting external resources and conditions rather than on the development and integration of the country's national productive structure, its export capacity, or the quality of its products. One indication of this vulnerability is the doubling of the country's trade deficit, which rose from US$524 million in 1989 to US$1.125 billion in 1994 as imports soared while exports increased only moderately. This deficit was financed mostly by extraordinary levels of remittances from Salvadoran workers living overseas, particularly in the United States, as well as public and private foreign assistance. In 1994, officially registered remittances amounted to over US$1 billion, while official aid grants totaled US$284 million. Combined, these inflows easily surpass the country's US$817 million in export earnings that year.

One of the most notable aspects of this fragile pattern of growth in recent years has been the privileged expansion of the export and financial-services sectors at the expense of production in tradable goods, particularly agricultural production. In El Salvador, this growth has been based much more on consumption than on production, on demand fueled by resource flows from abroad rather than on domestic supply, and on speculative rather than productive activities.

This economic growth has also been exclusive in nature, enriching a narrow segment of the population. While persons connected to the export or financial sectors have benefitted from the recent growth, the majority population -- landless peasants, small-scale farmers, industrial and service-sector workers, public employees and small-scale businesspeople -- have been left out. Income distribution has worsened dramatically: the richest 20 percent of the population increased its share of income from 43 percent in 1989 to 54.2 percent just two years later, while the poorest 20 percent's share of income dropped from 5.6 to 3.4 percent. Given that the vast disparities in wealth and income were principal causes of the country's civil war, this pattern of growth does not bode well for the future.

Women have suffered the worst consequences from this pattern of growth. It is no accident, for example, that the great majority of the unstable jobs in the maquiladoras are held by women, as they are forced into the labor market without the training and support mechanisms they require and suffer for lack of alternative opportunities. Likewise, the devastating effects of the neoliberal program on the environment is felt especially hard by women, who are usually more involved than are men in the dynamics of the ecosystems in which they live. The reduction in water supplies caused by increases in agricultural production and deforestation, for example, affects most those rural women or women from poor urban zones who must haul water every day.

Many economists insist that growth and development go hand in hand, often using the two terms nearly interchangeably. FUNDE maintains that what El Salvador has experienced under the adjustment program is actually growth without development. This model, according to FUNDE, "has favored consumption over investment, speculation over productive investment, the production of services over goods, demand over supply, [and] imports over exports," rather than developing the country's productive capacity.

FUNDE explains that the economic program promoted by the IFIs has addressed secondary problems and symptoms rather than the underlying causes of the country's underdevelopment. Reducing the relatively high inflation rate and the government budget deficit have been two of the main objectives of the adjustment program. While these problems may reflect weakness in the economy, they are not, in and of themselves, necessarily the key development problems. Lowering the inflation rate should not be the target of economic policy at the expense of rising unemployment. The truly critical economic issues confronting the country -- problems such as the chronically high un- and underemployment levels and the waste of scarce productive resources -- have not been, and most likely will not be, resolved by a narrow focus on improvements in a restricted set of macroeconomic indicators.

Unfortunately, rather than addressing problems related to the country's productive capacity and other social and economic structures, the Salvadoran government continues to implement the economic strategy pushed by the IFIs throughout the continent. The World Bank's second SAL, which was approved on 23 August 1993, obligated the government to: "modernize" the public sector through decentralization, privatization and deregulation; improve the management of public-sector revenue collection, expenditures and personnel; and increase the number of items subject to the value-added tax. It also included conditions related to financial-sector reforms and reductions in tariffs and non-tariff barriers. The loan conditions related to social-sector reform were limited to evaluating the compensatory program and implementing a new, targeted poverty alleviation program. Many of these policy prescriptions mirror those implemented in Mexico over the past decade, where adjustment has led to financial, economic, social and political instability.

In February 1995, President Armando Calderon Sol announced the central elements of his government's new economic program: a fixed exchange rate; gradual reduction in tariffs; privatization of state-owned enterprises; an increase in the value-added tax; and improvements in tax collection. He was forced to slow tariff reductions because of widespread public opposition. A public opinion poll taken at the time showed that 61 percent of Salvadorans who knew of the plan disagreed with it, and 60 percent of those polled responded that only the richest would benefit from the plan. Since then, the Calderon Sol Administration has announced plans to increase social spending, which it says will be financed through improved tax collections. Except for its determination to fix the exchange rate, however, it continues to push the same economic model that has increased poverty and inequality throughout the Americas.

The Alternative is in the Process

FUNDE insists that the time has come to open a national debate on the current economic model, its consequences and the solutions needed to correct the resulting problems. Its "New National Economic Agenda for El Salvador" has been presented to local academics, businesspeople, and NGO and popular-movement leaders, as well as to the international donor community as a first step in this debate. FUNDE is careful to insist that its proposal is not a ready-made blueprint for El Salvador, but rather a new approach to economic planning that is intended to foster a broad alliance of national productive sectors.

This strategy is based on three principles: inclusion of those excluded from the current model; reactivation of production, creating the necessary conditions for producers to achieve profitability; and conversion of the economy, leading to improvements in economic, social and ecological productivity. It stresses the importance of developing specific policies appropriate for small, medium-sized and large industrial and agricultural producers, as well as for cooperatives, consumers, and salaried and public-sector workers. In contrast to structural adjustment policies, which tend to treat the poor as targets of social spending, in this proposal the poor are considered to be underutilized actors with the potential to increase production, markets and income for all Salvadorans. In order to implement this strategy, FUNDE presents a set of six interrelated social and economic goals and the policies necessary to achieve them.

Spreading Wealth and Income throughout the Economy

In order to reduce the country's severe concentration of wealth, FUNDE proposes that the privatization of public enterprises be designed to promote the redistribution of assets, insisting that workers and affected sectors of the population be afforded complete and timely information on the sale of public assets and on available financial and technical support to make it possible for them to participate in those sales. It also recommends passage of a "free competition" law to break up monopolies and oligopolies that distort competition and lead to speculative pricing of essential goods and services. In addition, credit would be provided to producers who are currently excluded from the banking system because of the small scale of their operations. The financial system itself would be opened up to promote competition, with interest rates set to stimulate productive rather than speculative investment.

Besides these measures designed to improve the distribution of wealth, FUNDE proposes policies to redistribute income by strengthening unions and raising wages throughout the country. Union organization would be promoted in at least half of the businesses with over 100 employees, and a new legal framework would be established for collective bargaining, enabling unions to bargain more effectively to raise wages to match increases in productivity. Rather than treating wage increases as constraints to growth, as structural adjustment policies tend to do, FUNDE considers them levers to increase local demand. This purchasing power would in turn generate increases in production runs and in the number of work shifts until the country's existing productive capacity is fully utilized.

While these policies would serve to reduce poverty levels over time, FUNDE proposes several short-term measures intended to reduce poverty rates quickly and, again, stimulate local demand and production. An emergency program of temporary employment is proposed to benefit those sectors already hard hit by adjustment measures. These would be complemented by policies to promote both public and private investment throughout the country, particularly much neglected investment in agricultural production, which would also serve to generate employment in rural areas. This investment, as well as credit and technical assistance, would be targeted at agricultural and agro-industrial production, as well as microenterprise activities with high potential for generating improvements in productivity levels and achieving better utilization of domestic resources.

These measures would be complemented by increases in social spending designed to permit greater access by the poor majority to food, education, health, housing and basic infrastructure, thus improving the quality of their lives. Efforts to decentralize these services would be undertaken with the active participation of local communities in order to take into account their particular needs and capacities and to rectify the current lack of adequate services in those areas. All of these efforts would be coordinated on a regional level, as well. As described below, changes in tax policy would help to provide the necessary funding for these programs.

Environmentally Sustainable Development

Clearly, no economic program will be sustainable without measures to eliminate growing disequilibria in the country's ecosystem. As a first step, FUNDE proposes the initiation of a massive program of reforestation and soil conservation. This would be accompanied by a program to protect the country's watershed, which would include limitations on urbanization and agricultural production in areas close to strategic water resources. Environmental education and research and the use of appropriate environmental technologies would be expanded, as would efforts to diversify agricultural production and promote the use of products that would save water. These production changes would be supported by special credit lines for agroforestry and by incentives for farmers who set aside a portion of their land for reforestation. Trade agreements, according to FUNDE, should include provisions restricting the importation of products that are harmful to human health and the ecosystem and should establish differential market access for cars according to their fuel efficiency.

Resolving the country's environmental crisis would also require changes in the country's institutional and legal structures. National and municipal governments would coordinate their environmental policies to ensure better management of natural resources, and environmental legislation would be strengthened. Included would be measures to up-date existing municipal regulations and to establish mechanisms guaranteeing their enforcement throughout the country. Improvements in the majority population's standard of living would also help them participate more effectively in the recuperation of the country's natural resource base.

Attending to Local Needs and the Real Economy

In its proposal, FUNDE also stresses the importance of reducing dependence on external resources and increasing space for a truly national development program. Production for export would serve as a tool for expanding local employment and improving technological levels, not simply as a means of generating foreign exchange. In addition, FUNDE proposes a careful and selective process of import substitution, providing temporary import protection and incentives for strategic national industries in order to avoid massive bankruptcy as they begin to compete with transnational corporations. The program would include preferences for local businesses in government purchasing, the creation and improvement of public technical- support services for local industries, and measures to improve the efficiency of state-owned enterprises. These policies would be supported through changes in fiscal policy, such as the implementation of a luxury tax to establish a national fund for public investment, as well as through the strengthening of the administrative capacity of the Ministry of Finance to collect taxes.

These efforts to improve the efficiency and increase the productive capacity of national industry would be complemented by a program to expand markets in Central America and move toward regional integration. This program would include coordination of appropriate macroeconomic and investment policies, the free movement of labor in the region, and the promotion of joint construction and infrastructure projects. All sectors of the population would be given the opportunity to actively participate in the definition of these policies.

Finally, improvements must be made in local infrastructure. Public agencies charged with the planning and construction of infrastructure and the regulation of urban services should be modernized, and mechanisms should be established to ensure that they coordinate their efforts with each other. The national budget should be redirected to reduce dependence on foreign assistance for public investment projects.


All of these measures are geared to achieve progress in the real economy, not just improvements in macroeconomic indicators. The serious structural problems in the economy will not be resolved by an approach that reduces economic policy to controlling inflation, especially when such external factors as the inflow of dollars and the presence of oligopolies are major causes of price increases. Instead, economic policy should be directed toward achieving a structural transformation of the economy, with financial and monetary disequilibria contained to sustainable limits. Monetary policy should be directed toward increasing production, particularly by the popular sectors, instead of consumption and speculative endeavors. Likewise, fiscal policy should be directed toward improving the tax system so that sufficient resources are available to invest in the country's development while holding the deficit to manageable levels.

The dramatic crisis in Mexico, along with the less striking but pervasive failure of the neoliberal model throughout the Americas, highlights the urgent need for a re-examination of current policy prescriptions. As FUNDE stresses, economic policy should not be formulated simply by setting targets for improvements in certain macroeconomic indicators, but rather through an active dialogue among all sectors of society. Countries like El Salvador can no longer afford to squander scarce human, financial and environmental resources on a model that will only deepen the desperate poverty and appalling concentration of wealth and income that have caused such social strife in the past. FUNDE's alternative development proposal, and the process of dialogue that it has initiated, represent a critical first step in the definition of policies that could, if implemented, lead to equitable and sustainable development for all Salvadorans.

Sources include: