Impacts of the Global Economic Crisis in El Salvador

Since 1992, the political right has aligned itself with the US and pushed a neo-liberal agenda in El Salvador. This has resulted in free trade agreements, the deregulations of markets, and the privatization of banking, telecommunications, and other important sectors. While Salvadorans with the capital to take advantage of these neoliberal policies have benefited significantly, many have not. Economic stagnation, inequality, and a lack of gainful employment continue to characterize El Salvador’s economy.

Now, in addition to these chronic problems, El Salvador faces the effects of the global financial crisis, which only just beginning to become apparent. It’s estimated that already 10-12 thousand jobs have been lost in the last 4 months. The predictions for growth in GDP range from the government’s optimistic 3% to JP Morgan’s prediction that GDP will actually fall by 0.5% (See article in El Faro for more info in Spanish)

Economic analysts predict that the worst impacts will be felt in 4 main areas: 1) decline in the value of the dollar, 2) contraction in the credit market, 3) a decline in the demand for Salvadoran exports resulting in unemployment, and 4) a decline in remittances from Salvadorans abroad.

1) In 2001, El Salvador adopted a bi-monetary system in which the dollar and the colon were both legal tender. By 2002, however, the Salvadoran government completely phased out the colon, leaving the dollar as the lone currency in El Salvador. While the goal of dollarization was to provide stability in the Salvadoran financial markets and facilitate trade with the US, it also means that El Salvador’s fiscal policy is determined in the US, leaving El Salvador exposed to fluctuations in the US economy. Some economists maintain that if El Salvador had kept the colón, it would have given the government greater flexibility and control in its fiscal policy, and allowed officials to insulate the country from the worse effects.

2) Studies by the Salvadoran Foundation for Economic and Social Development (FUSADES)  found that loans are becoming less available. They predict that capital available for third world nations could be reduced by up to 9 times. According to opinion surveys, they found that among business owners there is already the perception of an acute credit crunch.

This could have a tremendous impact in El Salvador, where small business owners and farmers need credit to stock their shelves and plant their crops. If unable to access credit, businesses and farmers will go out of business and result in even higher rates of unemployment.

3) El Salvador ships over half of its exports to the US, so as the U.S. economy continues to contract, so will the demand for Salvadoran exports. A decrease in the demand for exports will cause factories and maquilas in El Salvador to close or reduce their workforce, resulting in higher rates of unemployment.

These effects are beginning to be felt. Between November 2007 and November 2008, the volume of industrial production fell by 36%. According to the National Association of Private Enterprise, most of this drop was from the manufacturing sector. Because of a drop in demand, (in January 2009 alone, clothing sales dropped 7%) Between September 2008 and January 2009, 12 maquila businesses have closed, resulting in the loss of nearly 9,000 jobs. (See ” JP Morgan pronostica que economia caera -0.5% en 2009″ for more information in Spanish.) 

Employment is already a serious problem in El Salvador. The UN’s El Salvador Human Development Report found a 7% unemployment rate in El Salvador in 2006. Perhaps more significantly, the UN report found that 43% of Salvadorans were underemployed, and nearly a third of Salvadorans  earn the minimum wage or better, but are still unable to cover their basic needs. Unemployment and underemployment rates are expected to rise over this year.

4) It would be an understatement to say that remittances are an important part of El Salvador’s economy. El Salvador’s GDP equaled $20.4 billion in 2007, while remittances from Salvadorans living and working abroad (mostly in the US) totaled for $3.8 billion in 2008. (See the US State Department’s Country Profile of El Salvador.)

As the US job market contracts, immigrants (documented or undocumented) will likely be one of the groups hardest hit by the recession. A study by the Pew Center found that in 2008 unemployment among Latino immigrants in the US grew by 2.9%. Furthermore, while across all groups in the US, income in 2008 fell 1.3% compared to the same period in 2007, incomes for Latino immigrants fell 7.3%. (See “Desempleo latino fue 9.5% en 2008″)

Accordingly, remittances to El Salvador began to fall in August 2008, as the crisis in the United States began to deepen. Studies by FUSADES found that remittances will fall in 2009, possibly as much as 6%. This means that the 22.3% of families in El Salvador that receive remittances could receive $230 million less in this year. The decline in remittances affects more than the direct recipients, but there are also serious ripple effects in the communities where recipients spend the remittances. The Chair of the Economics Department at the Central-American University, Lilian Vega considers the drop in remittances the most serious of the effects of the financial crisis in terms of human welfare.

The next administration, whether led by Avila or Funes, must develop a plan for long-term economic growth that provides opportunities to all Salvadorans. This is a major challenge that will require key reforms in a number of policy areas, such as health, education, trade, agriculture, energy, infrastructure, the environment, finance, law, and justice. The greatest barriers to progress on these may be corruption, the extreme political polarization that exists in the country, and a national budget that is already spread thin. The new president, whoever it may be, faces enormous challenges.