El Salvador-Chapter 3 - The Economy

Farm worker drying coffee

UNTIL THE GOVERNMENT IMPLEMENTED a major land reform in 1980, the most notable characteristic of El Salvador's economic structure was the unequal distribution of landownership. The economy was dominated by a few large plantations that produced cash crops, especially coffee, for export. The slow and difficult implementation of a sweeping three-phase land reform begun in 1980, however, considerably altered the pattern of unequal landownership.

El Salvador's economic development in the 1980s was hindered by a resource drain caused by the country's civil conflict, natural disasters, a lack of economic expertise, and adverse changes in the terms of trade (see Glossary). Consequently, by 1987 El Salvador's economic output barely equaled 80 percent of its 1978 level, and exports were only the third most important source of foreign exchange after foreign aid and remittances from Salvadorans living abroad. The most damaging of these factors was the civil conflict, particularly its impact on the country's infrastructure. By mid-1987 observers estimated that the total cost to the economy based on lost agricultural production, damaged infrastructure, and funds diverted from economic to military purposes was about US$1.5 billion.

El Salvador entered the 1970s as a relatively poor middleincome country with per capita income greater than that of Thailand and slightly less than that of the Republic of Korea (South Korea), Malaysia and Costa Rica. Its overall level of development was roughly comparable to these countries as well, judging by such indicators as industrial contribution to the gross domestic product (GDP--see Glossary), life expectancy, the cost of labor, and per capita income. El Salvador had one other important characteristic in common with these other four countries--a hard-working, productive, and motivated labor force. El Salvador's annual rate of investment growth (3.5 percent), however, lagged substantially behind the other four during the 1960s. During this decade, gross investment grew annually by 24 percent in South Korea, 16 percent in Thailand, 7.5 percent in Malaysia, and 7.1 percent in Costa Rica. El Salvador's inferior rate of investment growth continued and in some cases widened during the 1970s.

By 1982 Salvadoran development had fallen far behind that of South Korea, Malaysia, Thailand, and even Costa Rica. Industrial production hovered around 20 percent of GDP, whereas in the other countries it accounted for between 27 percent (Costa Rica) and 40 percent (South Korea). Salvadoran per capita income fell to about a third of South Korea's and Malaysia's, half of Costa Rica's, and 15 percent below that of Thailand. Making matters worse, El Salvador's terms of trade had deteriorated much more rapidly than had that of the other countries.

Between 1982 and 1986, El Salvador fell even further behind as it failed to diversify its exports away from agricultural commodities and into manufactured goods. In 1986 per capita GDP was almost half its level of 1977, and the country entered a period of disinvestment. As other middle-income countries appeared to be taking off, El Salvador was regressing.

Data as of November 1988