Partnership for Growth: Part 1

On November 3rd, government representatives from the U.S. and El Salvador signed the Partnership for Growth Agreement with the goal of promoting economic development in El Salvador. The five-year program seeks to overcome two constraints to economic growth in El Salvador – crime and insecurity, and low productivity in the tradables sector.

Partnership for Growth “is a signature effort of President Barak Obama’s development policy, focused on economic growth as the core priority for United States development efforts.” El Salvador is, so far, one of only four countries to sign a Partnership for Growth agreement. The other countries are Philippines, Ghana, and Tanzania.

Over the next few weeks, Voices on the Border will examine what the Agreement says, what the Agreement does not discuss, and what the Agreement means for communities in El Salvador.

A fact sheet released by the U.S. Department of State lists five general goals for the Partnership Agreement:

–       Reduce the effects of the constraints to economic growth (crime and insecurity, and low productivity in tradables) over the next 5 years;

–       Provide conditions so that other countries can participate in the Partnership;

–       Demonstrate to the people of El Salvador the commitment to addressing the constraints to economic growth;

–       Increase the partnership between the government and private sector; and

–       Reinforce a bilateral relationship of mutual respect and action.

A team of economists from El Salvador and the United States spent the first few months of 2011 generating an economic report that defines the main constraints to economic growth in El Salvador. A link to the report can be found on the U.S. Embassy in San Salvador website, along with a statement of Principals and the Joint Country Action Plan. According to the report, the “shadow price” (potential GDP missed due to the constraints) of crime and insecurity and low productivity in the tradables sector is substantial.

In addition to providing a detailed review of the country’s economy, the report states,

“ the prevalence of crime represents a weakening of property rights because it demonstrates government failures to protect property from unlawful seizure and reduces the ability of economic actors to reliably recover returns on their investments.”

Citing statistics from the World Bank, the report says that small businesses in El Salvador lose an average of over 7% of their sales to crime. Medium size businesses report a 5% loss to crime. Businesses also have to pay for security, costing small and medium businesses an average of 3% of their total sales. Combined, the loss of sales and cost of security are 10% of sales for small businesses and 8% for medium size businesses.

The El Salvador Constraints Analysis (CA) determined that the effect of crime on El Salvador is between 4.8% and 10.8% of the country’s GDP, depending on whether health costs are included. Both figures are higher than the Central American average, and double the figure in Costa Rica, the only country in the region that does not have an epidemic level of crime. The report also states, “in the Global Competitive Report, El Salvador ranks last out of 139 countries under the Organized Crime Indicator, and next-to-last in Business Costs of Crime and Violence.” In coming blog posts, we will consider the Joint Country Action Plan and the activities the governments are planning to minimize insecurity as a constraint to economic development.

The CA also determined that low productivity in tradables is another constraint, suggesting that Salvadoran goods and services are less competitive internationally than those from countries such as Nicaragua, Honduras, and Costa Rica. As a result, El Salvador exports less than it could, and imports products that could potentially be made domestically. The CA calculates that the effect of low productivity in the tradables sector is “as much as 8 percent” of GDP.

The Partnership for Growth Agreement was just signed a couple weeks ago, and people and economists are still trying to fully understand its implications. Some have already begun holding it up as the most important development for El Salvador’s economy in recent history. Others are calling it the worst thing that could happen to El Salvador. In the coming weeks we will try to present a balanced analysis of the Agreement and how it fits into the larger picture of sustainable development in El Salvador.

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