Thursday, April 04, 2013

Is there a fix for El Salvador's economy?

El Salvador's economy is stuck in slow gear and not generating greater income or opportunities for the country's citizens.  A team from the International Monetary Fund recently visited El Salvador and issued this  statement:

Following the 2008-09 crisis, the Salvadorian economy has grown at a slow pace reflecting low domestic investment and the impact of weather shocks. In 2012, real gross domestic product (GDP) grew at an estimated 1½ percent, lagging behind the pace of the region, and inflation remained subdued. The external current account deficit widened to 5 percent of GDP due largely to lower export prices. Despite income tax revenue efforts, the overall fiscal deficit, on an accrual basis, stayed at the level of 2011 (4 percent of GDP), indicating that the fiscal stimulus used during the crisis has not been fully reversed yet. The net public debt reached 55 percent of GDP at end-2012, of which 10 percentage points have accumulated to cover past pension payments. The banking system appears well capitalized and liquid. 
The authorities and the mission concurred that the main challenges facing the economy are achieving higher sustained and more inclusive growth, ensuring fiscal sustainability, and rebuilding defenses to deal with future shocks. Under a passive scenario, the mission projected that real GDP will grow at 1½ percent in 2013-14, the fiscal deficit will remain unchanged in 2013 and beyond.
1½ percent growth is not adequate to lift standards of living in the country.

The IMF team recommended that El Salvador increase its tax revenues and decrease spending relative to GDP and that investment should be made in infrastructure projects.

Mike Allison, who writes the Central American politics blog, was asked what El Salvador needed to do for its economy, and he wrote that:
Any strategy to improve El Salvador's economy must include comprehensive measures to deal with insecurity in a holistic manner.
I certainly agree with Mike that crime and insecurity is a deterrent to economic activity and investment in the country.  Improving the crime situation will improve the economy, but I have a suggestion to add.   Ways need to be found to channel remittance flows from outside of the country into productive uses.   It is difficult to quantify, but the vast majority of spending from remittances goes to consumption, and spending on consumer goods tends to flow right back out of the country instead of circulating in the economy.    With remittances equalling one sixth of the economy, if even a small portion were moved to supporting local Salvadoran businesses, there would be a multiplier effect.   And what would be even better -- if you could attract back into the country some of the entrepreneurial Salvadorans who are running their own businesses in the US and elsewhere.  

No comments: