From: rich@pencil.cs.missouri.edu (Rich Winkel)
Subject: El Salvador: PROCESO 529: Controversial economic measures
Followup-To: alt.activism.d
Originator: rich@pencil.cs.missouri.edu
Organization: PACH
Date: Mon, 14 Sep 1992 22:53:50 GMT

/** reg.elsalvador: 167.0 **/
** Topic: Proceso 529: Economy **
** Written  8:58 am  Sep 14, 1992 by cidai@huracan.cr in cdp:reg.elsalvador **
From: cidai@huracan.cr (Centro de Informacion Documentacion y Apoyo a la Invest. - UCAJSC)
Subject: Proceso 529: Economy

Center for Information, Documentation and Research Support (CIDAI)
Central American University (UCA)
San Salvador, El Salvador
 
PROCESO 529
September 9, 1992
 
ECONOMY:
Controversial economic measures
 
     The Value-Added Tax (VAT) officially went into effect last
September 1. This tax reform has awakened all types of conflicting
reactions, ranging from acceptance all the way to demands for its
repeal. At the same time, rate increases were authorized for public
transportation and electricity (cf. Proceso 528). Since the
measures have gone into effect, a number of reactions from
political and business sectors have been heard; all invariably
question the overall effects of the recently-implemented economic
policies.
     Aside from the negative effects on general price levels of the
new taxes and rates, no one should underestimate the added effects
of speculation on the part of some merchants.
     The postures taken by different sectors toward the new
economic measures reflect opposition on the part of even those who
are least hard-hit by them, given their content which so clearly
counteracts the war on poverty.
 
Reactions by big business
 
     The business sector has expressed conflicting opinions about
the VAT. But most have agreed that the overall effect of the
economic measures initiated in September is negative.
     The Salvadoran Chamber of Commerce and Industry (CCIES)
expressed concern about the implementation of the VAT, both because
it will make it harder for businesses to process the documents
required by the government, and because it will produce increased
prices for almost all goods and services. The CCIES therefore urged
the government, business and the public in general to adopt a
sensible attitude toward the problem.
     The CCIES asked the government to facilitate the legal
transactions required by the VAT, while asking business to exercise
moderation in setting new price levels, since previously existing
prices already included 5% of stamp taxes. This means that prices
should only go up another 5% in order to meet the 10% VAT rate. The
Chamber also explained that anyone who resells goods can deduct the
VAT paid along previous steps in the production/distribution
process, thereby minimizing the increase in retail prices. Finally,
the group asked the public to patronize businesses which offer
lower prices, correct weights and measures, and better quality in
goods and services.
     The CCIES has yet to make a statement about the rate increases
for public transportation and electricity.
     The National Association of Private Enterprise (ANEP)
expressed its agreement with the implementation of the VAT, adding
that it is not an inflationary tax, but rather will cause only a
temporary increase in prices. Yet ANEP felt this was not the best
time to implement rate hikes for public services. According to
ANEP, the government has "let itself be overly influenced by
international organizations such as the International Monetary
Fund, the Inter-American Development Bank, and the World Bank."
According to ANEP president Camilo Bolanos, the rate increases
should have been more gradual, since raising them all at once will
have a strong impact on the population as a whole.
 
Position of the PDC and the FMLN
 
     Some political forces have also made statements about the
recent economic measures. Just as with the business organizations,
the politicians have also challenged the policies.
     The Christian Democratic Party (PDC) declared that by its own
calculations, prices had already gone up almost 40% the day before
the VAT went into effect. According to PDC leader Fidel Chavez
Mena, the government should have launched an education campaign to
teach people how to use the VAT correctly, which may have avoided
the immoderate increases in current prices. Chavez warned that if
the government fails to rectify the measures taken, they could be
capable of destabilizing the country, adding that his party would
respond with a broad national movement aimed at obtaining the
suspension of the VAT and rate hikes.
     The FMLN, in response to the measures, presented an eight-
point proposal aimed at reducing the impact of the VAT. The steps
included "reforming the tax system, freezing rates of basic
services at their pre-September level, immediate implementation of
the Consumer Defense Law, reprogramming the government budget,
transportation subsidies, protection of basic food prices, higher
wages and a new credit program for agriculture sectors."
 
Final reflections
 
     The postures taken by ANEP, CCIES, PDC and FMLN invariably
reflect their concern about the negative effects of the recent
economic measures on family pocketbooks. An important point to
stress is the justified concern shown by the CCIES and PDC about
the multiplier effect on prices of the rate increases and,
especially, the VAT.
     It is expected that overall prices will increase appreciably
during September, not only if the VAT is correctly applied, but
especially given the factor of speculation and/or ignorance on the
part of some merchants. It has already been commonplace to see the
VAT implicitly included in prices, yet the final price is much
higher a 10% increase would warrant.
     To the above must be added the effect on prices of the
speculation which took place during the months prior to the
implementation of the VAT. According to official sources, the
consequences of the VAT were felt well before it went into effect.
According to sources close to the Central Reserve Bank, business
expectations in recent months translated into higher exchange
rates, which in turn increased the rate of inflation, leading it to
hit its highest point this year in August.
     There is an urgent need for a tax reform capable of correcting
the budget deficit. Yet there is no doubt that the government's
recent tax reform has had its greatest effect on lower-income
sectors which, added to the other measures, will have a strong
impact on the standard of living of the majority.
     The recent decision by ANEP to join the Forum for Economic and
Social Consensus-Building could help promote more discussions about
the negative effects of the VAT on prices, as well as about new
public service rates. Both are key to the war against poverty which
the government claims to be waging.
 

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