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This page is where David provides periodic commentary on issues he considers important, and on which he pretends to have more than a passing knowledge.

May 26, 2009

The El Salvador Mauricio Funes Inherits: The Economy
In my three most recent postings, I discussed the recent election of FMLN candidate Mauricio Funes, to the presidency of El Salvador. A former correspondent with CNN Español, he is the first leftist ever elected to that post. (Although José Napoleon Duarte was elected president during the civil war years, he was a Christian Democrat, and thus something of a socially conservative economic moderate. To be sure, he was considered a Communist by the hard-line right, but the left saw him as a straw man for the Americans and the oligarchy.)

This posting deals with the economic crime situation Funes faces in El Salvador upon taking office.
Like President Obama in the U.S., Mauricio Funes is inheriting a national economic mess.

Interestingly, the mess itself seems to have escaped the notice of the same people who left the U.S. in shambles. Former U.S. Vice President Dick Cheney cited the El Salvador example as a model for a pacified Iraq. Before leaving office as World Bank president, Paul Wolfowitz declared that El Salvador had the best economy in Central America. In truth, the reality has never been so glowing.

In March 2009, Standard and Poor's lowered El Salvador's credit rating to "BB" from "BB-plus," and revised El Salvador's real GDP growth estimate to negative 1.5 percent in 2009. The weak performance expected for 2009 is due to falling consumption, investments, and exports as a result of a significant pass-through from the global recession. Remittances from the United States fell by 8 percent in the first two months of the year, and exports are shrinking at a double-digit pace. Worsening the outlook is the fact that the macroeconomic deterioration comes at a time of limited policy flexibility.

S&P guardedly remarked that the outlook for El Salvador is stable, reflecting the agency's expectation that prudent policymaking and liquidity support from official creditors will help the country surpass the credit crisis, provide budget financing, and sustain investors' confidence. (The assistance will include $950 million from the Inter-American Development Bank (IADB) and the World Bank; roughly $800 million from a precautionary stand-by agreement with the International Monetary Fund, and another $400 million from the IADB liquidity facility.) However:
"We expect that economic activity will recover gradually, with the real GDP forecasted to be nearly flat in 2010 and then slowly increase to 3 percent in 2011, a trend still below that of many of El Salvador's peers."

Funes and his transition team have already met with international financial institutions, doing so once it was confirmed the new administration will take office with its coffers significantly diminished. According to Funes:

"There is need to adjust a series of strategies based on false assumptions."
Previous government estimates of positive 4.0 percent GDP growth were based on false assumptions, Funes remarked, after meetings with the outgoing Finance Minister. This led to baselessly optimistic projections for tax revenue, a great deal of which never materialized. He will inherit a fiscal deficit near the $500 million mark, a pit of red ink from which he hopes to escape without butchering social programs first and foremost.

Julia Evelyn Martinez, a Funes advisor and an economist at the University of Central America, has identified the privatization of social services, El Salvador's adoption of the U.S. dollar in 2001, and free-trade agreements—such as CAFTA—as the principal causes of the country's financial hardships, having placed the country at the mercy of foreign corporations and made it too dependent on imports.

Remittances from Salvadorans living in the United States—which by some estimates represent as much as 20 percent of the country's gross domestic product—are keeping the economy afloat, and as many as one-third of all Salvadorans live abroad. But the crisis in the U.S. economy has severely limited these funds, adding another blow to the Salvadoran bottom line. The U.S. recession will create a serious drag on economic growth in El Salvador in other ways as well, particularly since the United States remains by far the largest buyer of Salvadoran exports.

This is now the third year of CAFTA, and its negative effects on the economy have become quite evident. Various agricultural sectors are losing productivity and the country is being flooded with relatively cheap basic grains, including corn and rice, imported from the United States. Salvadoran farmers cannot compete against U.S.-subsidized prices. Moreover, El Salvador's trade deficit has increased since the inception of CAFTA.

CAFTA has been sharply criticized repeatedly by FMLN legislators. Its constitutionality came into question in the spring of 2007 when the Supreme Court agreed to review 14 of 30 arguments presented against the trade pact by the FMLN. The court eventually found a number of violations in the pact pertaining to investments, conflict resolution, and most-favored-nation-status. The court initiative was part of another doomed attempt by the FMLN to secure the renegotiation or at least the reform of CAFTA. Along with CAFTA's other problems, the drop in value of the U.S. dollar, El Salvador's official currency, has further impaired the economy. However, the U.S. has held that there can be no renegotiation of the terms of the agreement while the Salvadoran courts are still addressing the issue.

At the heart of much of this controversy is the soaring price of basic foodstuffs in El Salvador, which have in no way been alleviated by CAFTA—quite the contrary. Approximately 40% of El Salvador's population currently lives in poverty, particularly in rural areas. An estimated 100,000 Salvadorans—approximately one out of every 60—fell below the poverty line between September 2007 and June 2008, according to the World Food Program.

A recent report by the Center for Defense of the Consumer found that the country now features the highest price of corn in Central America. Additionally, the price of beans increased by 60% in the last year, that of rice went up 66%, and the overall cost of a family's basic market basket has gone up 21% in rural areas and 14% in urban areas. A can of beans that cost 30 cents a couple years ago now sells for over $1. Gasoline prices topped $5 a gallon in mid-October. Those staple products cost more in El Salvador than they do in parts of the United States. This drastic increase in the prices of food staples has left many in El Salvador fearful of having to face the prospect of starvation.

This has created a bitter irony. For farmers, life is often more difficult than it was during the revolution. One such farmer, Jesus Landaverde, remarked:
"It hasn't been possible to get ahead because of the severe poverty we live in. We buy a sack of fertilizer for $37 and sell a sack of corn for say $25. We're screwed even worse than before."
Thus, as pointed out by the FMLN and other groups opposed to CAFTA-style free trade, the initiation of the trade pact has failed to fulfill four promises: There has been no noticeable increase in employment, only a minor increase in foreign investment, sustained high consumer prices, and only a marginal increase in exports.

Again, Sigfrido Reyes, the FMLN's chief of communication:
"El Salvador was told that CAFTA would create thousands of businesses, that it would create an inundation of foreign investment, a transfer of technology, and that the institutions of justice and labor would work better. The reality is that hasn't happened."
Farmers may find some satisfaction if a new FMLN government slows free-trade agreements that, for example, bring Guatemalan tomatoes to El Salvador at lower prices than local tomatoes. But any hope for a robust tourist industry must await new controls on crime, another major challenge facing the new Funes administration. (See my most recent Commentary.)

El Salvador is considered by most observers to be one of the most successful examples of United Nations nation-building in the last century, and it definitely is an outstanding success when compared with most other U.N. attempts at the process. But the country also demonstrates the limits of nation-building and shows that the most important aspects of such endeavors are the efforts that inhabitants of the affected country must themselves make. Real success within a previously war-torn country depends to a very large extent on how much cohesion either already exists or can be developed over time. And cohesion definitely is something still very much lacking in Salvadoran society.

As noted in previous my Commentaries on this transition, it remains to be seen if ARENA, the right-wing party that ruled El Salvador from 1988 until now, will be able to be a constructive loyal opposition or an obstructive one. It's traditional interests—the oligarchy and those elements within the military devoted to it—are historically inimical to what the FMLN hopes to achieve. And ARENA, with its fellow right-wing allies in the PCN party, hold a four-vote majority in the general assembly.

Denise Dresser, a political science professor in Mexico, remarked:
"What you [have] is a perverse system of oligopolistic elites with vested interests and a willingness to use their veto power to prevent the changes that are needed but which they don't want."
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Sources consulted for this piece include:


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