Covering El Salvador, or not

Lest anyone think I live in a country of any importance to the rest of the world, at least as judged by press coverage in the New York Times and Washington Post, think again. In those papers' respective Americas sections you'll find nary a word about the recent inauguration of Tony Saca. (Nothing of note either in any major progressive, centrist or even conservative magazine.)

Marcela Sanchez did bid farewell to Paco Flores in her widely syndicated column last week, but apart from providing some useful information, I really didn't see her point.

So leave it to the Financial Times to educate the virtual world, with a story that looks at some of the challenges facing Saca. I got a peek at it when if first came out, but now it appears to be available only through subscription. So here it is in its entirety, with key grafs highlighted:

President faces stagnation battle in El Salvador
By Sara Silver and John Authers
Published: June 1 2004 19:20 | Last Updated: June 1 2004 19:20

When Antonio Saca took office on Tuesday as the fourth president of El Salvador since the end of the civil war in 1992, he faced a difficult task in preserving the country's status as a Central American success story and a laboratory for neo-liberal economic reforms.

More than a decade of rigid financial orthodoxy has left El Salvador with a stable economy, a distinction it shares in the region only with Chile and Mexico. The country privatised its electricity and telecommunications industries, limited its deficits, and two years ago even abandoned its currency when it chose to adopt the dollar.

"Dollarisation has underpinned and locked in economic stability," said Juan José Daboub, finance minister under the incumbent president, Francisco Flores. "That's reflected in the lowest interest rates in the region, including Panama, which has been dollarised for a century."

However, the problem for Mr Saca is that growth has stopped. El Salvador's gross domestic product per capita has remained static for the last five years, leaving the country more dependent than any other on remittances from migrant workers. Last year, remittances accounted for 14 per cent of GDP.

Francisco Molina, a San Salvador-based independent economist, said: "The economy is in a process of stagnation, which it's been in now for eight years," he says. "They've run out of steam and ideas. The only thing they've done in that time was the madness of dollarisation."

Mr Daboub and supporters of the government point to the problems caused to El Salvador by two earthquakes in 2001 and the collapse in the world coffee price. But critics say the reconstruction effort should have created a stimulus to the economy, and that growth had been static for several years before the country was hit by natural disasters.

The economic stagnation has created a political problem for Mr Saca. The public showed their dissatisfaction last year by electing leftwing opponents of the government into a majority in Congress. That Congress will remain in place until March 2006.

Mr Saca, like his three predecessors, comes from the rightwing, pro-business Arena party, and won a surprisingly emphatic victory in the election two months ago. But he is a more emollient and less ideological candidate than his predecessors.

In his victory speech in March, Mr Saca said he would be a president of "renewal," charged with softening the impact of the government's economic policies. That will mean an increased "strong hand" policy against the gang warfare which has given the country the worst crime rate in Central America, and an attempt to concentrate on social policy.

His team is also hoping that El Salvador's stability will help it benefit from the Central American Free Trade Agreement (Cafta) with the US. The country could become the strategic base for companies wanting to do business in Guatemala, Honduras and Nicaragua.

However, many analysts are urging Mr Saca to use his political honeymoon to try to raise taxes.

Guido Cipriani, a director of UBS financial services group, says delay in pursuing "major tax reform" could undermine the government's ability to fund its new social programmes and, in the longer-term, could hinder its ability to finance its debt.

El Salvador's tax take last year was only 12.1 per cent of GDP, up from 11.8 per cent the year before. Mr Cipriani suggests that the country needs a budgetary adjustment of 3 percentage points of GDP, something that could only be achieved with significant fiscal reform.

William Pleitez, who compiled the latest United Nations development programme report on human development in El Salvador, says the country suffers from chronically high production costs - a problem exacerbated by dollarisation, which removed the option of devaluation.

"Truly there are structural obstacles to growth now," Mr Pleitez says. "How do we break this vicious circle? I'm of the opinion that if you have a strong exchange rate there are only two ways to deal with this - reducing the costs of production, and increasing the productivity of the workforce. That requires strong levels of public investment."