Tag Archives: dollarization

El Salvador

Three-way Salvadoran presidential election focuses on security

1 Comment
CentralAmerica
Map credit to cartographer Daniel Feher. You can find more of his work here: http://www.freeworldmaps.net/centralamerica/political.html.

In the same week that conservative Juan Orlando Hernández was inaugurated as Honduras’s new president, both neighboring El Salvador and Costa Rica will vote for new presidents on Sunday, February 2, capping a whirlwind of electoral action that will continue with expected runoffs in both countries throughout the spring and the May Panamanian presidential election.el salvador

El Salvador, which lies chiefly along the Pacific coast of Central America, has less than 20% of the area of its neighbor Honduras, but it has 6.3 million residents, nearly 80% of Honduras’s population.  That makes El Salvador the densest country, population-wise, on the Latin American mainland, and that’s not counting between 1.65 million and 2 million Salvadoran Americans, many of whom emigrated north during the Salvadoran civil war and whose remittances back to El Salvador account for 28.2% of El Salvador’s gross domestic product.  Salvadorans abroad, for the first time in Salvadoran political history, will be able to vote in Sunday’s election and the widely expected runoff between the top two finishers on March 9.

Like Honduras (and Costa Rica and Panamá), the Salvadoran president is constitutionally limited to one term in office, which means that the center-left incumbent, Mauricio Funes, is ineligible to run for reelection.

It’s fairly difficult to understand Salvadoran politics without understanding that it’s still in many ways recovering from the brutal civil war from 1979 to 1992  between the US-backed Salvadoran government and the left-wing guerrilla group, the Frente Farabundo Martí para la Liberación Nacional (FMLN, Farabundo Martí National Liberation Front) that killed between 70,000 and 80,000 people.

The conservative Alianza Republicana Nacionalista (ARENA, Nationalist Republican Alliance) formed in 1981 in direct opposition to the FMLN, and it held power in El Salvador in the early 1980s and again from 1989 until 2009.  Under the administration of Alfredo Cristiani, El Salvador finalized the 1992 Chapultepec Peace Accords ending the civil war.  His successor Armando Calderón Sol worked to restore a sense of normalcy to the country through the end of the 1990s and to spearhead a series of reforms to privatize and liberalize the Salvadoran economy.  Francisco Flores, who led El Salvador from 1999 to 2004, continued ARENA’s broad center-right agenda, strongly pushed for the US-Central American Free Trade Agreement (CAFTA) in alliance with US president George W. Bush and oversaw the dollarization of El Salvador’s economy, a policy that remains controversial even today among Salvadoran economists.  Flores, however, is under investigation for misuse of public funds and, earlier this week, skipped a congressional hearing on the investigation and is accused of trying to flee the country on Tuesday.

Meanwhile, the FMLN strived throughout the 1990s and 2000s to shed its radical leftist past and is now El Salvador’s chief center-left political party with an orientation that’s more social democratic today than Marxist.  Funes’s narrow election victory (with 51.3% of the vote) in March 2009 represented the first non-ARENA government in El Salvador’s post-civil war history.  Funes, a former journalist, campaigned on a moderate agenda that largely accepted much of the neoliberal architecture of the Salvadoran economy, including dollarization.  But as president, Funes has expanded social welfare benefits — abolishing public health care fees, combatting illiteracy, providing food and clothing to schoolchildren, granting title to disputed land claims, introducing monthly stipends and job training for the poorest Salvadorans, and signing legislation to protect women, sexual minorities and indigenous communities.  He’s also oriented El Salvador closer to the Venezuela-led Alianza Bolivariana (ALBA, Bolivarian Alliance) while retaining strong ties with the United States.

Funes, however, has not been so successful in reducing the violent gang-driven crime and drug trafficking that has also afflicted Honduras, Guatemala and México in recent years.  Since a truce between the two top Salvadoran gangs, the Mara Salvatrucha (M13) and Barrio 18, fell through in 2013, Salvador homicides have been on the rise.

The 2014 election pits three candidates against each other, and it’s expected that none will win the absolute majority required to avoid a March runoff.  Though polls vary, a January 13 Mitofsky poll shows the ARENA’s candidate, former San Salvador mayor Norman Quijano leads with 35.5%, FMLN’s candidate, vice president Salvador Sánchez Cerén trails narrowly with 31.8% and former president  Elías Antonio ‘Tony’ Saca in third place with 16.0%.  Other polls in the past two months have shown Sánchez Cerén with as much as a 14% lead, and other polls have shown Saca with up to 27% support, though the trend seems to indicate that Saca’s supporters are partly flocking to Quijano, thereby making the race between Quijano and Sánchez Cerén much tighter. 

So how would each of the three candidates govern El Salvador?  Continue reading Three-way Salvadoran presidential election focuses on security →

El Salvador

El Salvador’s experience in dollarization

23 Comments

CIMG1235

On the way back home from Honduras, my plane landed briefly in El Salvador at San Salvador’s airport.el salvador

Not wanting to pass up a brief opportunity to try my first Salvadoran pupusa in El Salvador*, I started looking for a cash machine to withdraw some local currency.  Within seconds, however, I remembered that El Salvador switched from the colón to the US dollar 12 years ago, so of course there was no need, and I began thinking a little more about why El Salvador adopted the US dollar and whether it has seen any benefits from doing so in the past decade or so.

That decision was among the most important of the administration of Francisco Flores, El Salvador’s president between 1999 and 2004, and a member of the conservative Alianza Republicana Nacionalista (ARENA, National Republican Alliance).  Flores became one of the top US allies in the region at a time when Hugo Chávez was cementing his control on power in Venezuela.  Not only did he stand firmly with US president George W. Bush over regional affairs, he even deployed Salvadoran troops to Iraq in support of the US invasion.

Dollarization was controversial even at the time, but the policy goal was that it would reduce El Salvador’s interest rates and facilitate trade — this was in the era before the Central American Free Trade Agreement (CAFTA), which came into effect in 2009 among the United States, the Dominican Republic and four Central American countries.**

But the broader economic benefits haven’t materialized as fully as Flores might have hoped a decade ago — El Salvador’s GDP growth rates have lagged behind even some of its poorer Central American peers in the past 12 years:

Screen Shot 2013-11-11 at 10.51.36 AM

The entire Central American economy is tied heavily to the US economy due to massive trade and remittances from family members living and working in the United State.  That’s especially true for El Salvador, because many Salvadorans migrated during the brutal civil war during the 1980s (in the Washington, DC metro region, for example, Salvadorans represent the largest Latino nationality group, outpacing even Mexicans).  With around 6.3 million people, El Salvador has over three-fourths of the population of Honduras, but less than one-fifth of the area of Honduras.***

But it’s been essentially the sick man of Central America for some time, routinely underperforming Honduras, which is struggling under the weight of political polarization, trafficking-related violence and massive corruption.  El Salvador faces those problems as well, but it’s generally believed that those problems are at least slightly less drastic in El Salvador.

What’s clear is that while dollarization may (or may not) have worked for Panamá and Ecuador, the benefits have either been too small for El Salvador to realize or, worse — and more likely, dollarization has actively hampered the Salvadoran economy.

Salvadoran central bank president Carlos Acevedo earlier this year admitted that dollarization was ‘a sack of unfulfilled promises’:

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.

Prices in San Salvador’s airport do seem to be higher than prices in Tegucigalpa’s airport, though perhaps the better comparison is to the swankier airport in San Pedro Sula.  But there’s definitely a sense among Salvadorans that consumer prices rose after 2001, though the reasons for that phenomenon remain an open question, even among economists.

Another IMF report from 2011, however, indicated that dollarization had reduced interest rates between 4% and 5%, thereby contributing to savings and boosting GDP by 0.25% to 0.5% annually.

It’s tempting to argue that El Salvador is suffering from the same fate as the eurozone — i.e., that El Salvador and the United States do not comprise an optimal currency zone), Salvadorans are ‘stuck’ with US monetary policy, which may not be appropriate for the Salvadoran economy, and there’s obviously no mechanism for fiscal transfers from the US federal government to the Salvadoran government.   Continue reading El Salvador’s experience in dollarization →