The Debate Over Public-Private Partnership Law and MCC Funding in El Salvador

Last week Pacific Rim Mining Company announced it is seeking $315 million dollars in damages from El Salvador. It was a stark reminder that the 8-year old mining debate, which included several years of threats and violence between mining supporters and opponents, has yet to been resolved and could still result in a devastating economic blow to El Salvador.

As the mining issue continues, another debate with the potential to become just as volatile is brewing. In March the Funes Administration provided some details about its proposal for a second round of funding from the Millennium Challenge Corporation (MCC), a US aid program started by President Bush in 2004. The proposal is worth $413 million dollars, half of which will likely go towards an infrastructure project like improving the Litoral Highway that runs along El Salvador’s southern coast. The other half is likely to help finance public-private partnerships and improve human capital, which seems to mean education.

As details of the proposal emerge, opposition to a second round of MCC funding is growing. So far, opposition has opened on two fronts. The Salvadoran labor movement has been the most outspoken opponent, denouncing the proposed Law on Public Private Partnerships (P3 Law) since last year. Environmentalists and communities in the Lower Lempa region of Usulután have been less outspoken, but oppose the MCC proposal because the public-private partnerships will support tourism, which they strongly oppose. In 2011, members of the anti-mining movement also spoke out against the P3 Law fearing it would result in mining activities.

Mangrove Forests near La Tirana, a community targeted for a large tourism project

Mangrove Forests near La Tirana, a community targeted for a large tourism project

Because politicians within the FMLN are supporting the MCC, the politics of opposing the P3 Law and tourism are a little more complicated than opposition to mining was. Other than a protest outside the US Embassy in March and other small activities organized by the labor movement, opposition has remained largely behind closed doors, which may change soon.

            The Public Private Partnership Law

US Ambassador Maria Carmen Aponte said in October 2012 that approval of a second round of MCC funds relies on the passage of the P3 Law. The labor movement and their international supporters, argue that the P3 Law will privatize government operations including the airport, seaports, health care facilities, and other important services. They fear it will result in the loss of thousands of jobs, increasing the country’s already high rates of unemployment and driving wages down even further.

The labor movement and other opponents also do not want the private sector to control important resources and services like water, education, and health controlled. For example, Salvadoran civil society has fought against privatization of water for many years, making it such a toxic issue that politicians are unable to advocate for it publicly. Just like the government has not been able to privatize water, civil society organizations have not been able to pass a water law they have been promoting for over 8 years. Among other things, the law would protect water resources from privatization. Similarly, in 2002 then President Francisco Flores tried to privatize part of the health care system, but health care workers and many others took to the streets and forced the government to back off. Opponents of the P3 law fear it will make it easier for the government to accomplish what it has failed to do in the past – privatizing water and health care.

Supporters of the P3 Law, including President Funes, counter that public-private partnerships are not privatization, and the government will not privatize any important services, like health and education. They argue, instead, that public-private partnerships will result in more foreign direct investments, injecting capital into services and industries that are lagging behind.

The labor movement and other activists fear, however, that while not called privatization, the P3s are a way to accomplish the same goals. Concessions could last as long as 40 years, which means the state is essentially relinquishing control of an asset. Similarly, while capital investments are needed, the P3 Law will allow private, international investors to generate profits from basic services in El Salvador and take the profits overseas instead of re-investing in El Salvador.

Public-private partnerships are not new in El Salvador – they government has contracted out many operations to private companies over the years. One regular criticism is that these relationships prioritize profits over the well being of Salvadorans. For example, in the aftermath of the October 2011 floods, communities and organizations in the Lower Lempa blamed the CEL for washing them out. The CEL is the state-owned agency that manages the dam, generating electricity that private power companies sell for profit. The more electricity produced, the more money the companies make. In the months after the 2011 floods CEL representatives responded frankly, stating they operate the dams to make electricity and generate profits, not protect the people downstream.

FESPAD and Voices on the Borders 2012 legal interns recently published a full analysis of the P3 Law.

Tourism and other Investments

One of the public-private partnerships being proposed in the second MCC compact is tourismhotels and resorts being built along El Salvador’s Pacific coast. In December the government solicited proposals from the private sector and received 49 responses, 27 of which are tourism projects in Usulután, La Paz, and La Libertad.

Tourism is not inherently bad, but communities in the Lower Lempa of Usulután fear that building hotels and resorts in and around their important and fragile ecosystems will cause irreparable harm. One Lower Lempa community targeted for a tourism project is La Tirana, an isolated and economically poor community located at the edge of one of the most pristine mangrove forest in Central America. In addition to its immense natural beauty, the forest supports thousands of species of flora and fauna. The nearby beaches are protected as a nesting ground for several species of endangered sea turtles. Residents of La Tirana fear tourists would damage the fragile mangroves with construction of houses and resorts, jet skis and motorboats, and solid waste and sewage, while displacing local residents and their farms.

Proponents of tourism argue that resorts and hotels in places like Tirana would provide jobs and spur the local economy. They believe this to be especially important in communities, such as those in the Lower Lempa, that have had their agricultural economy diminished by free trade. But locals doubt resorts will help the local economy. They know that hotels are much more likely to hire bilingual youth from San Salvador who have degrees in hotel management than poor campesinos who barely have a sixth grade education.

Voices staff recently met with community members in La Tirana, and they are very much against outside investors building resorts in their region. Recognizing that they live in a special place, the community board is proposing that the community build a series of small, humble cabanas that would have a small ecological footprint, but provide comfortable housing for a small number of guests. They are also proposing that the community build a small community kitchen that could feed guests. The community wants to develop its own small eco-tourism industry that it can regulate and ensure does not harm the forest or turtle nesting ground. It would also mean that the money from tourism would benefit the community, and not just make wealthy investors in San Salvador or abroad even richer.

Other communities in the region are even more vulnerable than La Tirana. In El Chile and other small communities, many residents still do not have title to their land. They fear that if a private investor wants to build a hotel or resort the State could take their land and they would have no legal recourse.

Our staff also met with other communities in the Lower Lempa – Comunidad Octavio Ortiz, Amando Lopez, Nueva Esperanza – and several local organizations. They are also completely opposed to tourism projects in the region. They fear that hotels and resorts will further destroy agricultural land, use up limited water resources, and destroy local culture. The community of Octavio Ortiz even wrote in their strategic plan that they see tourism as a large threat to farming and their peaceful way of life.

While most of the public-private partnership proposals involve tourism, there are quite a few agricultural projects. According to PRESA, the government agency managing the project proposals, they received 14 requests to support production of exports in dairy, mangoes, limes, and honey. In order to be considered for a public-private partnership, investors have to have $100,000 in capital and be producing export crops. The capital requirement means local farmers will not be able to participate. And the requirement that products be grown for export means even more land will be dedicated to products that do not contribute to food sovereignty, which is a top priority for the region.

There are also civil society leaders and academics in El Salvador who oppose the MCC because they see it as the latest phase in implementing a neoliberal economic agenda in their country. They hold it in the same regard as the privatization of state assets (1990s), dollarization (1995-2001), Central American Free Trade Agreement (2006), the first MCC compact (2007-2012), and Partnership for Growth (2011). Similarly, Gilberto Garcia from Center for Labor Studies (CEAL, in Spanish) believes the

highway projects, including the northern highway funded by the first MCC compact and the Litoral Highway project planned for the second compact, are part of an effort to build a land bridge in Guatemala. The “Inter-Oceanic Corridor” will connect ports on the Pacific coasts of Guatemala and El Salvador with Caribbean or Atlantic ports in Guatemala. ODEPAL is managing the project in what they call a public-private partnership. The land bridge is located in Guatemala, but it is right on the borders with El Salvador and Honduras, giving both countries easy access.

Politics of Opposing the MCC and P3 Law

Building a strong national movement around opposition to the second MCC compact and the P3 Law may be more difficult than organizing Salvadorans against mining. While the anti-mining movement was able to reduce the debate to a single issue that all Salvadorans could understand – i.e. gold mining will destroy water resources for 60% of the country – most people believe that tourism, better highways, and other capital investments are always good. Similarly, the P3 Law is fairly abstract and difficult to reduce into a simple message that the majority of Salvadorans can relate to their everyday lives.

The politics around the MCC and P3 Law will make it more difficult to achieve the kind of nation-wide opposition that the anti-mining movement was able to garner. During the mining debate, the FMLN (leftist political party) was the opposition party and had the political freedom to take an anti-mining position. The FMLN is now in power and has to consider the economic and political interests that helped them get there. President Funes and FMLN presidential candidate Sanchez Cerén support the P3 Law and MCC compact, arguing the investments will be good for the economy. According to anonymous sources, many of the same business interests that helped Mauricio Funes with the 2009 presidential elections will benefit from the P3 Law and MCC funds. FMLN legislators have been a slower to sign on to the P3 Law. At times FMLN legislators have said it was not their top priority, and more recently they have tried to negotiate amendments to exclude certain sectors such as health and education from public-private partnerships. Officials from the conservative ARENA party have accused the FMLN legislators of not supporting the law because they want to implement a socialist economy agenda.

But the civil society organizations, communities, and labor unions that are opposed to the P3 Law and the MCC funding generally make up much of the FMLN’s base. If Sanchez Cerén and his supporters continue to embrace the P3 law and the MCC funding, while many in their base protest against it, it could exacerbate an existing split within the party in the months leading up to the February 2014 presidential elections. Many former FMLN militants and supporters, especially in the Lower Lempa, already believe the movement they once fought for no longer represents their interests and values.

Though the US and Salvadoran governments want to pass the P3 Law and sign the MCC compact before the elections, many opponents are gearing up for a long struggle. Even if the P3 Law passes, when the government wants to enter into a public-private partnership the Legislative Assembly will have to approve it. They are likely to face great scrutiny and opposition. Similarly, developers wanting to break ground on tourism projects in La Tirana and other communities are likely to face some rather significant legal and social barriers – much like Pacific Rim faced in Cabañas.

Dollarization: “A Sack of Unfulfilled Promises”

In January 2001, El Salvador began the dollarization process, which changed the official currency from the Salvadoran Colon to the U.S dollar. According to an article posted on Tim’s El Salvador Blog, former President Francisco Flores and his Minister of Finance, Manuel Enrique Hinds, made the change in order to keep interest levels low, control inflation and increase foreign investment.

In the twelve years since, Salvadorans have engaged in a constant debate over dollarization – has it been good or not, and should they keep the U.S. currency or revert back to the Colon. In June 2011, we posted an article on this blog looking back at ten years of dollarization, concluding that it has not brought about the positive benefits promised.

Others have reached the similar conclusions, including the current President of El Salvador’s Central Reserve Bank, Carlos Acevedo who earlier this month said dollarization was “a sack of unfulfilled promises.” The Central Reserve Bank is a government-controlled entity that regulates many aspects of El Salvador’s economy, including its currency, and Acevedo’s opinion carries some weight.

This is not the first time Acevedo has criticized dollarization. In March 2012 he penned an opinion piece for El Faro that described the process of planning for and implementing dollarization as “hasty and improvised.” He also said that reversing dollarization (de-dollarization) would be even more detrimental. Acevedo, however, also told Contrapunto that “the next government will be forced to consider the possibility of de-dollarization to allow for a monetary policy that provides greater flexibility of public finance, and so it will be able to return to printing money and adjusting interest rates to stimulate the economy.

Bank President Acevedo made his most recent statements (reported by Active Transparency) following the release of a government study on dollarization, which reached some rather negative conclusions. The report found that many key economic indicators, including exports and GDP fell, while inflation and interest rates rose. Dollarization has failed to shield the economy from downturns and instead made El Salvador more susceptible to instabilities in the U.S. economy, as witnessed during the 2009 recession. The Economista published an article yesterday reaching very much the same conclusions.

In his statements this month, Acevedo said dollarization was “badly designed, improvised and lacking consultation,” and that El Salvador’s fiscal performance with dollarization was the worst in sixty years. He also said the performance was so poor that even proponents of dollarization could not ignore its negative impacts. Even in his most recent comments, however, Acevedo stressed that the Funes administration is not considering de-dollarization and that doing so would cause more economic hard and instability. One of his fears is that Salvadorans would make a run on the banks, withdrawing dollars before they were converted to Colones or another currency.

While President Funes may not have de-dolarization plans for the last year of his administration, Vice President and FMLN 2014 presidential candidate Sanchez Ceren said in May 2012 that dollarization was the cause of the current economic recession and that El Salvador’s currency had to be changed back to the Colon.

Norman Quijano, the Mayor of San Salvador and the ARENA party’s 2014 presidential candidate stated in the past that dollarization would be beneficial to consumers. In a more recent interview he said, “reversing dollarization would be the worst thing to do.” Former President Tony Saca, who may run as the GANA party’s 2014 presidential candidate, stated in the past that he supported dollarization and that de-dollarization would be detrimental.

Acevedo’s comments paint a pretty difficult position for El Salvador in terms of the country’s economic policy. Dollarization has been bad, but de-dollarization would be really bad. While the current slate of presidential candidates have made general statements, it is unclear whether they are open to more nuanced positions that will give government economists more tools to promote a more stable economy.

Street Vendors Ousted from Downtown San Salvador

San Salvador looks a bit like a war-zone today after mayor and ARENA presidential candidate Norman Quijano deployed 1,000 police officers and 4,000 city employees to oust 970 vendors from 33 blocks in the downtown area.

When police and city workers showed up Friday with heavy machinery and began clearing the area, vendors fought back by setting up barriers and lighting fires. They were eventually removed, but not before 10 people were injured including 6 police officers. The mayor has asked for locals to be patient as 2,500 workers clean up the area, a process he expects to continue through Tuesday. He also estimates that the clean up will cost taxpayers a whopping $200,000!

Downtown El Salvador has been the home to an informal market for many years. Venders sell just about everything – food, clothing, videos and music, school supplies, hardware, and so much more.

Vendors did not have advanced notice of the removal and many lost all of their merchandise and other capital investments including refrigerators, jukeboxes, slot machines, video games, antennas, and much more. One vendor, who lost $10,000 worth of merchandise, told La Prensa Grafica, “they did not give us the opportunity. They arrived and threw us out and we lost all of our things. The mayor is responsible for everything.”

La Prensa Grafica noted that this was not the first action of its kind. Since 2009, the San Salvador municipal government has removed vendors from 167 blocks in the city in more than 31 interventions.

The mayor’s office says the vendors are able to move to a central market in the area where there are 623 stalls available for them to use. Of course that is not enough space to accommodate for the 970 vendors removed over the weekend.

This has been a complex issue for many years (downtown street vendors organized their first union in 1962) and there are some real issues, all of which stem from the systemic exclusion of people from the formal economy. Salvadorans without jobs can generate income by selling things on the street, generally to other poor people who can’t afford to shop in the formal economy. These informal markets are a bad deal all the way around. The street vendors lack the security, rights, and benefits that their counterparts in the formal sector have (or are supposed to have, but that’s another article). But they also don’t collect or pay taxes, which has been a point of contention for the international community (World Bank, IMF, U.S, and other). Many street vendors also violate international intellectual property laws by selling pirated movies, music, software, and clothing ($10 knockoff Ray Bans). Street venders also clog downtown streets, and if you’ve ever tried to take a bus through downtown on a Friday afternoon, you know how bad it can be.

Spending $200,000 to clear street vendors with bulldozers is in no way a sustainable solution to these problems. It doesn’t help venders get work in the formal sector and it definitely doesn’t mean low-income folks will all of a sudden start buying their blue jeans at Metro-Centro (a San Salvador shopping mall).

These evictions only mean that the poor have even fewer and fewer options – but that seems to be a global trend.

Here is a link to photos of the destruction.


U.S. Beef with El Salvador!

The U.S. Meat Export Federation (USMEF) reported this week that El Salvador has “lifted all age and product restrictions on U.S. beef, eliminating the need for an export verification program.”

USMEF regional director for Central America said El Salvador is “a potentially strong market, as it currently imports a significant amount of beef (about 28 million pounds last year) from Nicaragua.” The article reports that U.S. beef exports more than doubled between 2009 and 2011, totaling more than $1.2 million. Now that the restrictions have been lifted, exports of beef and beef products from the U.S. are expected to rise dramatically.

El Salvador’s age restrictions meant that beef and beef products had to be from cattle that were no more than 30 months old. This is a fairly common restriction meant to protect against the spread of bovine spongiform encephalopathy (mad cow disease). Japan has one of the more restrictive age-limits; beef and beef products have to be from cattle no more than 20 months old. So far in 2012, the U.S. has reported four cases of mad cow disease – the last was in April.

A report from the US Department of Agriculture Foreign Agricultural Service says that since 2008 the USDA/FAS/San Salvador has been “in an intense negotiation with the Government of El Salvador [Ministry of Agriculture] to allow full access for U.S. bovine meat and its products to the local market.” The report says that until recently, El Salvador did not recognize the U.S. mad cow disease “controlled risk status granted by the World Animal Health Organization.” As a result, El Salvador restricted access of “bone-in beef, and beef and products of animals over 30 months of age.” These products were not completely banned; they just had to go through an Export Verification program that increased the cost of the products and made them less competitive with local products.

Last year, USMEF led a campaign to promote U.S. beef consumption in El Salvador. They set up stands in “18 high-end Super Selectos retail locations” throughout the country. USMEF told customers that the majority of their meat was produced domestically or in Nicaragua, meaning that it is grass-fed and therefore “severely lacking in tenderness.” But in the U.S., there is actually a movement to promote grass-fed beef. Whole Foods Market and many others have even organized campaigns of to inform their customers about the benefits of grass-fed beef and introduce customers to their producers. The Tallgrass Beef Company has even declared, “the grass-fed revolution is here.” So either the USMEF really only likes grain-fed beef or their campaign to educate Salvadoran consumers is more an effort to run their competition out of town and sell U.S. beef.

While doing away with the age restriction may increase competition for cattlemen in Nicaragua, it probably won’t have much of an impact on Voices’ local partners in the Lower Lempa who mostly raise dairy cattle. And as in most rural communities throughout El Salvador, beef sold in local markets is from local cattle. U.S. beef will mostly end up in higher-end grocery stores that are already full of goods imported from the U.S.

Anti-Walmart Action in Mejicanos, El Salvador

This past Thursday civil society organizations, international solidarity groups, students, and community associations came together to protest the construction of a mega Walmart store in Mejicanos, a municipality in northern San Salvador.

Protest organizers issued a statement that read,

“We are aware that transnational companies like Walmart create more precarious environmental conditions, exploit our workers, and put our lives at risk.  We demand that the Environmental Ministry, the Office on Metropolitan Planning, and the Mejicanos Mayor’s Office, release the technical information that demonstrates the viability of Walmart’s construction in the area.  The communities must be consulted, since they are the ones threatened by floods and landslides, and who have resisted the project for years.”

Photo courtesy of Georgina Salinas

According to community leaders , construction of the super-store poses a serious risk to the surrounding communities along the folds of the San Salvador volcano.  Mejicanos is already ranked as the third most vulnerable urban center in El Salvador, and 45% of the households lack at least one basic service such as water, electricity or proper shelter.[1]

Mauricio Cortéz of the Inter Communal Coordinating Committee has been demanding answers to the various risks that the municipality faces for decades.  The Picacho ravine of the volcano is unstable, and residents fear a repeat of the devastating 1934 and 1982 landslides that covered entire communities.  Intense urbanization has forced poor families off of the their land in favor of up-scale residential development and new boulevards  – projects which heavily impact watershed patterns and hill side stability.

Rene Bermudez, who has been part of the Walmart resistance movement for the past 5 years, also denounced Walmart’s demolition of an important access road along the parameter of the property.  Municipal land-use maps establish the Arenal road to provide residents of Las Marias access to their community. In order to prepare for the new Walmart, contractors bulldozed the road claiming that it was just a drainage ditch.  Las Marias residents now have to use a winding path through residential properties.

Today’s protest was in response to the new mayor’s sudden approval for the construction permits.  Prior permits had been denied due Walmart’s inability to meet environmental regulations, but within weeks of taking office, the new conservative mayor, Juanita Lemus de Pacas, announced that Walmart would be open by December of this year.

Walmart has been in Central America since 2005 and is already the region’s largest retailer. Walmart Centroamérica has 79 stores open in El Salvador; Despensa Familiar – 51; La Despensa de Don Juan -25; Walmart Supercenter – 2; and Maxi Despensa -1.

Community leaders are upset by the mayor’s eager support of the project, and have signaled that Walmart was able to cull favor with the new administration through tactics that were similar to those used in Mexico and exposed this past April.  Lemus de Pacas’ entire campaign was based on inviting large business contracts into the area, and she has continued to align the mayor’s office with private interests.  Gloria Andrade, a community leader in San Pedro, Mejicanos, said that local market women had planned on participating in the protest, but the mayor threatened to pull funds for their new market if they were to attend.


Photo courtesy of Georgina Salinas

[1] FLASCO, Mapa de Pobreza urbana y exclución social. FLASCO-MINED. 2008.

Protest Against Walmart in Mejicanos, El Salvador Next Thursday

Last month, Walmart received permits to build a store in Mejicanos, a municipality within the greater Metropolitan San Salvador Area. The 86,100 square foot store will be located on a lovely 6.6-acre lot on the Constitution Boulevard, at the base of the San Salvador Volcano. Walmart officials estimate that the store will create 500 new direct jobs and 250 new indirect jobs and inject a bunch of new tax revenue into the local and central governments.

Sadly, the 6.6 acres where Walmart is going to build was a forest, which was removed to accommodate the large building and parking lots.

Destruction of the forest and other reasons have sparked a group of Salvadorans to oppose the new Walmart. They are organizing a protest on Thursday June 21 at the Shafik Plaza in front of the new store’s location. In an email invitation to the protest, organizers provided a top-ten list of reasons they oppose the new Walmart. Their reasons include:

  1. The reduction of income and the closing of local businesses as the result of competition with Wal-Mart;
  2. The cutting down of thousands of trees;
  3. Floods, landslides and the obstruction of drainage pipes as a result of deforestation;
  4. Damage to hydraulic basins which would mean less water for human consumption;
  5. Higher temperatures: if there are fewer trees, the temperature will increase;
  6. Labor rights violations: poor employee compensation, with difficult working conditions such as the denial of the right to form a union;
  7. Increased dependence of small producers that sell to Wal-Mart, because as the sole business partner of these producers, Wal-Mart controls the terms and prices of trade;
  8. More genetically modified and unhealthy products would enter the country;
  9. More imported products would worsen the country’s economic crisis; and
  10. There will probably be more illicit processes in the acquisition of permits; which could include corruption and intimidation.

Anticipating that Salvadorans would not appreciate their cutting down trees, the mega-giant store plans to plant 10,000 trees in a deforested areas in the nearby municipality of Nejapa. Whether their reforestation efforts will offset losing 6.6 acres of forest at the base of the volcano remains unclear, but opponents are doubtful.

Protest organizers have a Facebook page with information about the protest and their opposition. Here is a poster advertizing the event: published an article on May 1st of this year giving the new ARENA mayor, Juanita Lemus de Pacas, credit for getting Walmart the permits they need to start building. Up to the March 2012 elections, the leftist FMLN party had held the mayor’s office in Mejicanos and Walmart was unable to secure their permits. Shortly after the new ARENA government took over the municipal government, Walmart broke ground on the project.

Walmart has been in Central America since 2005 and is already the region’s largest retailer. Walmart Centroamérica has 79 stores open in El Salvador; Despensa Familiar – 51; La Despensa de Don Juan -25; Walmart Supercenter – 2; and Maxi Despensa -1.

Call Center Industry Growing in El Salvador

According to recent article on, El Salvador’s call center (aka contact center) industry has grown by 29% over the past six years, now employing 12,000 people in 45 different facilities around the country.

PROESA, the Agency for Promotion of Exports and Investments, began planning to bring call centers to El Salvador in 2001, and by 2004 several companies had opened facilities in San Salvador, including Dell, Sykes, Teleperformance, and others. The call centers are primarily used to provide customer service and make sales calls in the United States. A 2004 article reporting on the emergence of the call center industry in El Salvador says the Central American country has a “state of the art telecommunications infrastructure, stable dollar-based economy, a sizeable bilingual workforce, competitive operation costs, and a government supportive of facilitating foreign investment.”

One of the limitations to growth over the years has been the relatively small bilingual workforce. In 2006, PROESA tried recruiting English-speaking Salvadorans in the US, promising salaries as high as $1500 a month to move to El Salvador and work in contact centers. Tim’s blog posted an article at the time about the recruitment efforts, which sparked an interesting series of comments about the reality of such a plan.

Because the majority of El Salvador’s contact centers serve US cliental, they have to compete with countries such as India and Philippines, both of which have larger populations of English-speakers. El Salvador, however, has a couple of advantages that make it competitive. One is its proximity to the US, which makes the cost of doing business less. Government officials also argue that because Salvadorans have a better understanding of US culture, they are better able to serve their customers. The average salary for a bilingual contact center agent in El Salvador is $600, roughly the same as in India and Philippines.

One company, Transactel, has grown its call centers in El Salvador by 35% in just the past year, increasing from 1,700 employees, to 2,300. They will also add another 120 contractors to help with the November – December holiday season. Transactel is also offering online services so that customers can receive help via email or chat.

Another company, Sykes, claims to provide high quality call center services to prestigious companies. Since 1999, Sykes has opened several call centers throughout Latin America, including El Salvador, Costa Rica, Mexico, and Brazil. The company claims they take good care of their employees, offering educational assistance, medical services, life insurance, and more.

While contact centers are probably not the solution to El Salvador’s economic issues, it is becoming an important industry, and could provide youth with the opportunity to build their language skills, get a paycheck, and get their foot into the service sector.

Cities: El Salvador’s Growing Problem

Urbanization is something that every country faces at one point or another in its development. The US, for example, experienced urbanization during the industrial revolution and on to the early 20th century. Today, many developing countries are also experiencing it. Because it is part of the path to development, urbanization is an indicator worth analyzing in the context of El Salvador as it becomes increasingly problematic, specifically in terms of poverty, violence and health.


As nations’ economies move from rural farms to more modern technologies, cities begin to form as hubs for commerce and other economic activity. Urbanization’s momentum grows when even more poor people then decide to relocate to the city in an effort to find better opportunities. This can be seen from Mexico City to Shanghai. Problems arise, however, when cities begin to get overcrowded and the poor create squatting communities along the outside of the cities. Often times these individuals have no rights to the land; more so, living conditions in these communities are terrible.


El Salvador has cities that are not unlike those of other developing countries. In fact, about 60.3% of Salvadorans now live in urban areas. El Salvador’s main urban hubs are San Salvador, San Miguel, and Santa Ana. While Salvadorans decide to go to cities to pursue better lives, city life is often not that glamorous. Typically, urban homes are made out of bricks and cement. Homes in the slums however, are essentially huts made out of aluminum, plastic, and cardboard. It is important to note that these homes are especially susceptible to constant flooding in the rainy season. There are also instances where the single water source in these communities is contaminated.


Urban poverty in El Salvador currently stands at 56%; that is, more than half of those living in cities are barely able to afford to survive. Fewer job opportunities and high costs of living explain why urban poverty is so widespread. Even so, the urban population in El Salvador is growing by about 1.9% each year while the rural population is only rising at 0.6% each year. It becomes a problem when far too many Salvadorans are living in the cities because the government is not able to provide the necessary services to everyone.


Another problem related to urbanization is urban violence. Poverty alone does not explain why crime in cities is more common. It seems that inequality, which is more distinguishable in urban areas, is also a key indicator of crime. Inequality, coupled with daily living conditions, is likely to result in conflict and violence. Violence specifically affects developing countries by stifling necessary economic growth. Urban conflict drains financial capital by requiring greater investments in judicial services and healthcare. Human capital is also reduced by the presence of persistent violence. Deaths and reductions in life expectancy, lower levels of personal security, fewer educational opportunities and lower productivity in the workplace all function to weaken the labor force. Lastly, social capital is also reduced through the ongoing fear and lack of trust within communities that result in less coordination.


Health is yet another problem affected by urban growth; slums are inherently unhealthy living arrangements. Because these individuals do not own the land and are residing in informal communities, they cannot demand better living standards from the government. Living in city slums, like those in San Salvador, Santa Ana, and San Miguel, where there has been little to no urban planning also facilitates the spread of illnesses. More than that, traffic accidents and pollution, two seemingly trivial consequences of urbanization, account for an alarmingly high number of deaths and illnesses.


While the government has not done much to address the issue of living conditions in the cities and slums, it has attempted to address the issue of crime. As a result of its high crime rates, El Salvador has passed a substantial number of laws aimed at reducing crime. With mixed success, the government has remained dedicated to fighting crime since El Salvador became one of the ten most crime-ridden countries in the world. With that said, the government has done little to address the issues of poverty and health in the growing urban areas.


Indeed, urbanization signals progress, however it comes with its own unique set of problems. El Salvador does not have the necessary mechanisms in place to offer everyone in the cities the resources and services they need to pursue a better life. Instead, urban poverty is growing and living conditions continue to deteriorate. Poverty, violence, and health are all variables that interact with one another to create the reality of city life in El Salvador today. As such, one of these factors cannot be remedied without the other two being addressed as well. The government will be forced to address it in the coming years as more and more Salvadorans continue to move to the cities.


The Cost of Free Trade: 5 Years into DR-CAFTA

The Dominican Republic-Central American Free Trade Agreement (or DR-CAFTA) went into effect March 1, 2006. After 5 years, it is time to evaluate what kind of results this agreement has produced. Like any other free trade agreement, the logic behind CAFTA was that liberalized trade leads to a net welfare gain for both countries. Furthermore, because the seven countries involved in the agreement (US, Dominican Republic, Honduras, El Salvador, Costa Rica, Guatemala, and Nicaragua) have different resources, technologies, and preferences, there are gains to be made from trade. By pursuing each other’s comparative advantage, as David Ricardo first argued, each country may specialize in that which it is relatively better at producing. This is a powerful theory, but as economics often shows, theory cannot always be reconciled with reality; many of these models make specific assumptions that do not always match the real world. Specifically in the case of CAFTA, it appears as though the Central American countries have suffered several negative consequences of this free trade agreement. The results of the agreement that weren’t clearly negative are ambiguous at best.


The removal of tariffs lowers the costs of trade between these countries and their main trading partner–the US. That being said, because tariffs have been removed, the governments of the Central American countries have less government revenue flowing in. While the US hardly had any tariffs on imported goods from Central American countries, the Central American nations had high tariffs on US goods in order to raise revenue for their governments. Before DR-CAFTA came into effect, about 80% of all US goods were not duty free, and the removal of the tariffs caused the governments to lose a substantial amount of revenue.


Additionally, because the US subsidizes its agricultural products, it has hurt the average farmers in these Central American countries. Since most Central American farmers cannot compete with the massive, more efficient farms in the US that are subsidized by the government, many of these Central American farmers find themselves out of business.  This forces them to instead try to find work in the multi-national corporations’ factories. More individuals in the cities seeking jobs in the so-called “maquilas” means that the supply of labor rises while the number of maquilas stays the same. This leads to an excess supply of Salvadorans seeking jobs in these factories. Thus, factory owners may lower their salaries because there is so much competition for work.


Many theorists would assert that one of the largest benefits of trade is that after lifting barriers to trade, the countries involved in the agreement will be able to consume more, leaving them all better off. In reality however, the results are neither negative nor positive, but rather unclear. Data shows that over the course of the last five years and until 2010, exports and imports in El Salvador have steadily increased. One, however, cannot say for certain that this is a direct result of DR-CAFTA. More than that, while Salvadoran exports and imports may have increased, it does not necessarily mean that El Salvador is physically producing and exporting more goods. Export and import data are calculated by value, and therefore one must factor prices into the equation. It is possible that El Salvador produced just as much last year as it did five years ago. However, because prices have risen, the value of its exports has also risen even though El Salvador is not better off in real terms. There is some evidence that suggests that increases in price levels over time account for some of the rise in exports. According to the data, El Salvador has experienced inflation since 2005. Because of the difficulty of directly attributing rises in exports and imports to DR-CAFTA the actual effect of the agreement on trade is ambiguous.


The effects of DR-CAFTA remain unclear when analyzing Chapter 10 of the agreement, which eliminates barriers to investment. According to the chapter, investments are very strongly protected.  This protection is provided by the most-favored nation provision (in which the countries agree to accord one another with the same favorable terms that would be offered in treaties with any other nation) the “fair and equitable treatment” clause (which refers to a country agreeing to treat foreign investors the same as domestic ones), and the “full protection and security” clause (which refers to a country’s agreement to protect one other’s investors by providing them with security).  Because of these provisions, multi-national corporations can securely conduct their business in signatory nations and employ their citizens.  Although this is positive for El Salvador and the rest of Central America, the nature of the jobs these corporations often provide is unsanitary, unsafe, and low-paying. Thus, the citizens of Central America are not necessarily better off, especially since the multi-national corporations often do not reinvest their profits within the region but instead send it back to their home country. Due to the lack of economic development from the international investors, workers do not necessarily stand to gain.


For all of these reasons, DR-CAFTA has no clear and significant benefits to El Salvador and the other Central American members of the agreement. Salvadorans and other Central Americans need development, and because DR-CAFTA seems to facilitate it through spurring investment, but impede it through working conditions, among other things, this trade agreement is neither a sufficient nor an ideal solution to development.  DR-CAFTA, along with its effects like poor working conditions, low salaries, US subsidized exports, etc, will continue to remain an issue of concern until further investigation and/or reforms can be completed.

Ten Years Later- The Impact of Dollarization in El Salvador

Some economists argue that pursuing a dollarization strategy helps developing countries grow their economies through the stabilization of inflation and increases in investment. Other economists discourage a dollarization strategy because it causes these economically small countries to relinquish control over their own monetary policy. This past January marked the tenth anniversary of El Salvador’s adoption of the US dollar as its currency, and its worth assessing the “dollarized” currency regime to determine how successful its been.

Colones, the Salvadoran currency that was replaced by the US dollar in 2001

Adopting the US dollar as a nation’s official currency can be successful, such as in Ecuador. In the case of El Salvador however, dollarization does not seem to have improved economic development.  El Salvador’s economic growth since adopting the dollar as the official currency in 2001 has not been any higher than it was during the years leading up to dollarization. In fact, El Salvador saw higher growth rates in the years prior to its adoption of the dollar. It is difficult to directly attribute the country’s failure to obtain a higher growth rate solely to dollarization, but it most likely did play a role.

As it did in Ecuador, dollarization has helped many economies stabilize their high rates of inflation. El Salvador, however never faced hyperinflation and therefore did not reap any of the stabilizing benefits. Another argument favoring dollarization is that it lowers interest rates and stimulates investment. In the case of El Salvador however, investments did not flow into the country as much as expected due to instability caused by high crime rates and violence. If investors believe their money and capital is not secure, they will go elsewhere where labor costs are low (not denominated in dollars) and where violence and crime is less of a threat.

Under the dollarization regime, El Salvador has no control over its own monetary policy. By adopting the US dollar as its official currency, El Salvador has ceded its authority over money supply and interest rates to the Federal Reserve. It is highly unlikely that the Fed will consider El Salvador’s needs when determining interest rates. Therefore, the Salvadorian government has to depend on taxes and spending to stimulate the economy since it no longer has control over money supply and interest rates. This has caused El Salvador to run higher deficits through the last decade since the government was forced to raise expenditures to stimulate the economy as opposed to decreasing interest rates to spur consumption and investment.

The poorest Salvadorians are the most affected by dollarization. When the dollar was adopted, all businesses needed to change their prices and translate them into dollars. This led to a phenomenon known as “rounding up”. Because the colon-dollar exchange rate was not an exact value, but a fraction, the shift to the dollar caused businesses to change from colon to dollar by rounding up to the nearest dime, quarter or dollar. This left the poorest Salvadorians worse off because while prices rose, wages did not, leaving everyone with a lower real income. However, since the poorest Salvadorans have very low incomes, a fraction of a dollar comprises a larger part of their income than the average Salvadoran.

The effects of dollarization on trade have been somewhat ambiguous. Whereas it was able to compete against other developing countries when it had the colon, El Salvador’s exports have slowed because countries like China are trading with their own undervalued currencies while El Salvador trades with the dollar. Thus, El Salvador’s exports are relatively more expensive than Chinese exports. Use of the dollar, however, has helped trade with some countries by reducing transaction costs. Since so many of its goods are traded with the US, trade in El Salvador has benefitted. Thus, whether the net effect on trade has been positive or negative remains unclear.

Dollarization has provided some benefits. For instance, El Salvador has not faced hyperinflation like some of its Latin American counterparts have. Keeping inflation low is important because it allows banks to lend more, putting more money into the economy.  Additionally, having the dollar as their official currency has limited the chance of any sort of speculative attacks, which means that El Salvador is much less likely to face a Balance of Payments Crisis like Mexico or Argentina did.

The most important and perhaps disappointing part is that some economists believe a shift away from the dollar is not possible. Economists cite Gresham’s Law as the reason for this. In this context, Gresham’s Law argues that re-introducing the colon or another currency into the system would not work because Salvadorians would not trust it. The way this scenario would play out is: the government would try to introduce a new Salvadoran currency and it would ask its citizens to keep their dollars and instead use this new currency for all transactions. The problem is, without trust, that new currency will have no value. Because the dollar is much more trusted as a stable currency, Salvadorans would resist this change in currency and continue to make their transactions in dollars.

Dollarization is not for all countries. For this policy to be truly successful, hyperinflation must be a real concern and investment must be contingent on interest rates and not other factors such as violence. El Salvador has benefitted in some ways by dollarization, however in the long run, there seems to have been more costs than benefits.