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Economics and Business in El Salvador

According to COUNTRYAAH, El Salvador is Central America's most industrialized country. However, the civil war from 1979 to 1991 led to a 25 percent reduction in the economy. In line with a comprehensive modernization and privatization program during the first half of the 1990s, the country achieved annual economic growth per capita of 4.5 percent, but since then the rate of growth has dropped to below two percent and reforms have stopped.

Business of El Salvador

Thus, El Salvador has fallen backwards in the group of lower middle-income countries, both globally and compared with neighboring countries. Among the causes of the stagnation, it is common to point to widespread crime, low investment and savings levels, low levels of education and vulnerability to climate change. These factors are closely linked and are at the same time the result of a long history of strong social inequality and unilateral concentration on a few export products.

Economic stagnation and persistent poverty

In 2016, the proportion of poor people was calculated at 38 per cent of the population, against 42 per cent in 2010 and 44 per cent in 2000. The proportion affected by "absolute poverty" declined somewhat more; from 14 per cent in 2010 to ten per cent in 2016. While the share of the country's national product for the very poor has increased somewhat after 2000, the middle class has shrunk, in contrast to Latin America by the way. With some exceptions (infant mortality, water supply), the country thus did not reach the UN Millennium Development Goals. The country is in a poverty trap.

The mass migration to the United States, which began during the Civil War, increased beyond the 2000s and has helped to some extent to alleviate poverty. In 2017, the money sent home by millions of Salvadorans accounted for over 17 percent of GDP. However, since these funds are largely for consumption, the effect on the economy as a whole has been negative. Large parts of the labor force are abroad, and consumption growth is directed at imported goods.

The massive gang crime costs the country about $ 4 billion annually, which is roughly 16 percent of the national product. The gangs (las maras) have around 60,000 members and are present in 247 of the country's 262 municipalities. 70 per cent of all enterprises are affected by threats, violence and blackmail and it is estimated that the security measures on average cost businesses 3.4 per cent of turnover.

While the transition to the US dollar as a currency in 2001 meant lower interest rates (perhaps even lower inflation), foreign and domestic investment in domestic production has remained low. At the same time, the level of education remains relatively low. The dropout rate is high and there are few links between school and a changing business sector. In addition to the insecurity created by the crime and the imbalances in the economy caused by migration, there is a continuing mistrust between the country's two major parties. The peace agreement created political stability, but the political elite has not been able to come together for a common strategy to develop the country further. Simply put, the right-hand side prioritizes free trade and get regulations, while the left wants state routing. As major decisions require a two-thirds majority in the National Assembly, initiatives from both sides are halted. Seen from below, gang membership is still the option for tens of thousands of youth in El Salvador.

Agriculture and primary industries

Today, agriculture does not account for more than ten percent of El Salvador's economy, but historically, harvesting and cultivating tropical plants such as cocoa, indigo and balsam (during the colonial era) as well as sugar, coffee and cotton (after about 1850) have been the cornerstone of an international oriented economy. Export agriculture has seized most of the country's best land and has largely taken place on large estates owned by a small elite. In parallel, corn, beans, rice and millet are grown(sorghum) for domestic consumption, most often by smallholders and in steeper and steeper terrain. This so-called dual economy, with its associated social and political polarization, has continued to characterize the country even though agriculture no longer dominates.

El Salvador has long been one of Latin America's largest coffee producers. In the peak year 1980, the value of coffee production accounted for as much as 50 per cent of the national product; in 2002 this percentage had dropped to only 3.5 per cent. The decline is linked to the civil war, extensive land reforms during the 1980s and 1990s (22 percent of the land was handed over to those who cultivated it), but primarily increasing competition and falling prices on the world market. In addition, the coffee industry was severely affected by both earthquakes and droughts in the 2000s. In total, 70,000 people in rural areas lost their jobs during this decade, but overall agriculture still accounts for 20 percent of employment.

In addition to coffee, cotton, sugar and meat (cattle, pigs) are important export products, while the country must import grain to supplement domestic small-scale production. Shrimp and other shellfish are also important export products.

Industry

The industry accounts for about 25 percent of El Salvador's national product and employs about 20 percent of the workforce. From the 1970s, the so-called free trade zones (the maquila industry) grew. Foreign companies (often from the US and Taiwan) established businesses based on good access to cheap labor and favorable financial schemes. Textiles - partly made of Salvadoran cotton - are the most important single product from the free-trade zones, along with electronic components. In the 2010s, plastic and synthetic fibers have been added.

The country's industry also supplies furniture, food, chemicals and metals to the regional market. Tourism is growing and accounts for 3.5 per cent of the national product.

Some gold and silver were mined in colonial times and later, but when President Antonio "Tony" Saca in 2008 refused to renew the license of a Canadian mining company, amounted mining only 0.3 percent of the economy. In 2017, a unanimous National Assembly declared that all mining operations were illegal.

Foreign trade is essentially done with the United States receiving 60 percent of exports and 43 percent of imports. The most important trading partners are neighboring countries in Central America, as well as Caribbean countries. Together with Guatemala, Honduras, Nicaragua and Costa Rica, as well as the Dominican Republic and the United States, El Salvador formed in 2004 the CAFTA-DR free trade area. Since then, El Salvador has also entered into free trade agreements with Mexico and Chile.

Transport and energy

El Salvador has a better developed road network than the other states of Central America with about 12,000 kilometers of road, of which 1,700 kilometers are paved. The main road through the country from northwest to southeast is at the same time part of the Pan-American main road. What remains of a fairly extensive narrow-gauge railway network from the 1920s is of less importance today. The country has two international airports. The largest, formerly called Cuzcatlán, but now named after Archbishop Óscar Romero, was built in the 1970s and is Central America's largest and most important airport, and also houses a comprehensive service area for international aviation. The airport is the main seat of the national airline TACA (which in 2013 merged with the Colombian Avianca). The other, Ilopango, is the base for the air defense and serves as a charter airport.

The main port cities are Acajutla and La Unión. Some ship traffic also goes via Puerto Barrios in Guatemala.

Four hydropower plants along Río Lempa supply around 20 per cent of the country's electrical energy production. Next to Iceland, El Salvador is the country in the world where geothermal energy is most important. Power plants that utilize volcanic geothermal heat contribute about 25 percent of electricity production. The rest is mainly covered by oil power plants (40 per cent).

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