El Salvador on the Brink of Economic Collapse?

There had been an organized, national resistance to dollarization, so it was only when activists were digging people’s homes out of the ruins that Flores risked pushing through the unpopular legislation. When asked to estimate the increase in grocery and school supply costs from 2004 to 2005, various mothers echoed Lopez’s comments about the real hike having started in 2001, not 2004.  

While individual families are tightening the purse strings to make it through hard times, the national government is also in economic crisis, coming far short of bringing in enough revenue to cover the scant national budget. Again following the IMF and World Bank neoliberal recipes, the government has privatized income-earning state companies like telecommunications and granted major tax breaks to large corporations. The result of these policies is an extremely regressive tax system, one that relies mostly on sales taxes and in much smaller part on income taxes, while generally not taxing property. Although it is not new that El Salvador’s richest protect themselves from paying taxes, over the past ten years even more of the tax burden has shifted to the poor. 

The most recent ARENA-sponsored fiscal reform law increased the taxes paid by the poor by going after “micro-business people” and making them pay income tax. In El Salvador, anyone who sells anything on the street is classified as a “micro-business,” the majority of whom government statistics report as living in extreme poverty. Thus, the supposed tax reform goes after people selling mangos or candy on the street while major corporations move millions of dollars through El Salvador while benefiting from major tax breaks. 

Any real reform to this model would mean taxing El Salvador’s rich, something ARENA is unwilling to do because it would mean taxing themselves and the interests they represent. Thus, instead of making reforms that might alleviate the problem, ARENA recently led the way to legislatorial approval for El Salvador’s biggest foreign loan package ever—$541 million in foreign bonds. This new set of high-interest loans puts El Salvador’s total foreign public debt at a new precarious high, representing about 46.5 percent of El Salvador’s GDP. Ironically, El Salvador has had to go into debt past the limit (40 percent of GDP) recommended by the very international financial institutions whose politics got El Salvador into this predicament. Thus, the new loans the government takes out are higher risk and therefore at higher interest rates, further driving El Salvador into debt. 

El Salvador’s leftist political party, the FMLN, has been calling for profound changes in the state’s economic policies. They point out that this past month’s approval of the record high foreign loan package is not a way out of the economic crisis, but rather a move that will only make the crisis worse. From the beginning of this year’s debate over state budget and fiscal policy, the FMLN proposed a series of reforms. One proposal was for a fiscal reform that would begin to change the shape of the taxpayer pyramid, taxing more those who have more. 

Another of the FMLN’s proposed reforms is to re-prioritize social spending in the national budget. Currently about half of the national budget is spent on paying interest on the debt as well as some of the debt principle. Another large portion of the budget goes to public salaries and pensions. Thus, the slice of the budget remaining for things like public health, education, crime prevention is minimal. The FMLN proposes that social spending take a higher priority and that the government search for ways out of the debt trap. For example, both Honduras and Nicaragua have successfully negotiated with international lenders to get part of their debts forgiven. Although El Salvador is in no less desperate a situation, its leaders have been unwilling to lose face (and thus, foreign investment) by accepting that the economy is sinking.

Foreign loans are only a piece of the life preserver momentarily keeping El Salvador’s economy afloat. The real mainstay of the Salvadoran economy—remittances from Salvadorans living and working abroad—has nothing to do with macro-solutions. As Salvadorans face an ever shrinking labor market, more and more see emigration to the United States as the only option for their family’s survival. Current estimates are of between two and a half and three million Salvadorans living abroad, primarily in the U.S., while six million Salvadoran remain at home. Approximately 600-700 Salvadorans leave each day for the United States.  

Salvadorans working abroad are constantly sending more and more money back to their families in El Salvador, most of which is spent on basic things like food, education, and clothing. In 2004 Salvadorans sent 2.5 billion dollars to El Salvador, significantly more than in 2003. Instead of being concerned about the dependence on this large quantity of money—remittances as a percentage of the gross domestic product in El Salvador are one of the highest in the world—conservative Salvadoran politicians and their backers in the financial sector support emigration. They see it not only as an economic escape valve, but also as a source of profits; banks skim off large percentages in service charges for wiring money from the U.S. to El Salvador. Remittances are so much a part of the economic reality for Salvadorans that one can wait many hours in line at banks around the first of the month, as hundreds of people line up to withdraw the money their families have sent. Of course, with the dramatic rise in the cost of living, remittances also don’t cover as much as they used to. Thus, the strain of the economic crisis is felt not only by those living in El Salvador, but also by Salvadorans working in the U.S., who now must send more money to cover their families’ needs. 

While the cost of living and remittances continue rising in El Salvador, its economic growth in 2004—estimated between 1.3 and 1.8 percent—was the lowest in Central America and the second lowest in all of Latin America, higher only than Haiti. As all economic indicators point toward further economic crisis in El Salvador, and possibly an economic collapse, people are making alarming predictions. FMLN deputy, Salvador Arias, El Salvador’s 2001 Economist of the Year, has been warning about the coming economic crisis for years. Yet as the situation gets worse and ARENA shows no willingness to discuss proposals for changing course, he and others are comparing El Salvador’s current situation to the months leading up to Argentina’s economic collapse in December 2001. 

FMLN leaders point out that the economic crisis is not coincidental, nor is it the result of poorly-implemented free market reforms, as institutions like the World Bank argue. The economic difficulties facing El Salvador are the result of 16 years of loyal implementation of a U.S.-backed neoliberal model that has resulted in increased wealth for the wealthy—for multinational corporations that can buy off privatized telecommunications or for El Salvador’s economic oligarchs who own the financial sector—and increased poverty for the rest of the nation. Jose Valencia, a national social movement leader, explains, “The challenge to the FMLN and all the social organizations working to build a more equitable society is to help bridge the gap between people’s understanding of their own difficult economic situation and the role the government has played in creating those problems.” 

The social movement’s work to change the course and move El Salvador out of this foretold economic crisis must come soon if the predictions of economists like Arias are accurate. Salvador Arias says, “Everything points toward economic growth in 2005 not passing 1 percent, and that is being optimistic…. Furthermore, CAFTA will only accelerate the economic damage to the agriculture, the maquiladora, and the micro, small, and mid-sized business sectors.” With the Bush administration pushing hard in the U.S. for CAFTA this spring or early summer, the future of this failing economic model is in the hands of Salvadorans and activists throughout Central America and the United States who are working to stop CAFTA and any other further imposition of economic strangleholds on El Salvador.