From: rich@pencil.cs.missouri.edu (Rich Winkel)
Subject: El Salvador: Proceso 531: Economy
Followup-To: alt.activism.d
Originator: rich@pencil.cs.missouri.edu
Organization: PACH
Date: Tue, 29 Sep 1992 00:34:00 GMT

/** reg.elsalvador: 120.0 **/
** Topic: Proceso 531: Economy **
** Written  5:09 pm  Sep 26, 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 531: Economy

Center for Information, Documentation and Research Support (CIDAI)
Central American University (UCA)
San Salvador, El Salvador
 
PROCESO 531
September 23, 1992
 
ECONOMY:
The reduction of poverty: Comments on the MIPLAN report
Special report by the Economic and Social Research Institute of the
UCA
 
     On August 17, the Ministry of Planning (MIPLAN) presented the
first and principal results of its latest household surveys
covering the periods between October and February of 1990/92 and
1991/92. The report stresses two great facts: first, there has been
some improvement in urban employment, and second, there is a
tendency toward reduced urban poverty as a result of the economic
recovery generated by the government's economic stabilization and
structural adjustment policies.
     This brief study will attempt to reinterpret the figures
presented by MIPLAN, with the goal of drawing attention to some
aspects of the labor market and living conditions which may have
been overlooked or insufficiently analyzed in the report. We divide
our work into two parts: the first studies employment tendencies
and transformations in the employment structure, and concludes with
a less optimistic vision than the one presented by MIPLAN. The
second part will attempt to question the assertion that urban
poverty was reduced by approximately 4% between the Oct-Feb 1988/89
period and the same period in 1991/92.
     We are aware that the results presented last month are still
preliminary, and we also know that efforts are currently underway
in MIPLAN to clean up the results. For this reason, our comments
are not meant to open a polemic about the objectivity of MIPLAN's
figures, but rather aim to make a constructive contribution to the
discussion in order to help generate greater and better
understanding of the national problems we Salvadorans face.
 
Employment conditions
 
     On this point, there is certainly clear improvement to be seen
between 1988/89 and 1991/92 in terms of reducing unemployment and
underemployment, as well as absorbing the economically active
population. However, some of the assertions contained in the
accompanying analytical texts must be toned down, since the
relationships among different sets of figures could be concealing
another reality. For example, the drop in unemployment registered
between 1988/89 (8.3%) and 1991/92 (7.9%), combined with an
increase in the total rate of participation (demand for work), is
certainly worth highlighting; nevertheless, this should not conceal
the fact that the 1991/92 period shows a slight increase in urban
unemployment compared to the previous year's rate (7.5%). This
sheds some doubt on the system's capacity to absorb job-seekers
given current levels of economic growth.
     With regard to the drop in underemployment, we believe that
the comparison should have been made between the past two years,
and not between 1991/92 and 1988/89, given that this drop could
fundamentally be due to the reactivation of agricultural exports,
given that the periods covered by the surveys coincide with periods
of high seasonal employment. They might have then dropped as a
consequence of the marked difference in agricultural growth rates
between 1990 (7.4%) and 1991 (-0.3%). Even so, we should take care
not to downplay the importance of reduced underemployment, but
rather take greater care not to present it as a definitive change
in employment tendencies.
     In terms of the systematic reduction of informal sector
employment (-3.5%) between 1988/89 and 1991/92, no one can deny
that this clearly indicates that there has been economic recovery
during this period. However, we are not convinced that the drop
represents a new tendency, because MIPLAN itself notes that the
high level of informal sector employment found in the Jan-June 1988
and Jan-June 1990 surveys was due to the fact that "many [urban]
informal sector workers have already returned [to their traditional
activity] of harvesting crops." We must also consider the fact that
since that period showed an increase in trade activity, some
establishments with fewer than four employees [considered informal
sector] were temporarily able to employ more, becoming "formal"
sector businesses for the time being. Thus, rather than a tendency
toward greater labor participation in formal activities, the
results could be pointing to a temporary reverse in country-to-city
migration as a consequence of opportunities for temporarily
obtaining greater income harvesting crops than in urban informal
sector activities.
     Finally, we must point out that, although the overall level of
participation in the job market could reflect increased job
opportunities, it could also be due to the so-called need factor,
by which more members of the family are forced to enter the labor
market in order to compensate reductions or irregularities in
family income. Since the growth in the urban economically active
population took place especially among youths between 10-19 years
of age, as well as women, it is crucial to break down these figures
even more. For instance, an increase in the economically active
population between 10 and 14 years of age could reflect a higher
school dropout rate due to economic need; this means reduced human
capital in the long run.
 
Poverty and income
 
     The most important -and also most debatable- results of the
MIPLAN report lie in the ministry's assertion that 90% of families
surveyed claim to have increased their buying power (increased real
income), and that the proportion of poor dropped almost 4% compared
to the 1988/89 period.
     The first assertion is more like a half-truth, and the second
is the product of an error and of the ministry's urgent need to
come up with positive results to address the weakest area of the
government's policies: the social sphere.
     With regard to improvements in real urban family income, no
one can deny that, with the exception of the poorest 20% of all
households, Salvadoran families saw a discernible improvement in
their buying power, especially the wealthiest ten percent of the
population, whose real household income increased by 20%.
     Now, this recovery was seen between 1990/91 and 1991/92, but
if we compare real income in 1991/92 with the 1988/89 period, we
can see clearly that all but the wealthiest one-fifth of all
households suffered a drop in their buying power. The loss in real
income for the bottom six-tenths of the population between 1988/89
and 1990/91 was about 15%, with less than 10% recovery by the
following year (1991/92), in other words, a net loss in real income
of almost 5%. The 71st to 90th percentile showed a better-than-
average rate of recovery, but still did not recoup the loss in real
income suffered during the 1989-1990 period.
     Furthermore, if we consider how unequal was the recovery of
real income (60% recovered less than 10% of real income lost, while
the wealthiest 10% saw a net 20% gain) we can only infer that this
unequal growth in real income is based on an unequal growth in
nominal income and how it is appropriated; in other words, we are
seeing a process of concentration of wealth, at least compared to
the 1988/89 survey.
     Taking all this into account, we are left with an obvious
question: How is it possible to assert that there has been a
reduction in urban poverty? And if we consider that, according to
MIPLAN itself, real family income dropped between 12.5% and 16.9%
for all families between 1988/89 and 1990/91, how could poverty
have been reduced during that period?
     We will concentrate on the second question, given that the
empirical evidence available to sustain our line of argument only
goes up to 1990/91. In El Salvador, the ratio of poor households
compared to all households is calculated by the method of the
poverty line. This method is based on the definition of a basic
"basket" of food used as an equivalent of a basic consumption norm,
and when calculated at market prices, constitutes a line of vital
minimum income, in other words, extreme poverty line (the relative
poverty line is obtained by multiplying the minimum income line by
two).
     According to the above, it becomes clear that calculating the
scope of poverty depends on the following factors:
  - the definition of the basic consumption norm;
  - the evolution of the cost of the consumption norm (evolution of
food prices) during the period in question;
  - the evolution of nominal household income, in particular of
those households previously classified as poor.
     We have seen how, between the 1988/89 and 1990/91 surveys, all
households experienced a drop in real income, in other words, that
the prices of consumer goods (consumer price index) outstripped the
growth of nominal income. In other words, the evolution of nominal
household income cannot serve as a factor in calculating a
reduction in poverty.
     We know that in El Salvador, the poverty lines (both extreme
and relative) are based on a diet formulated by the Executive
Secretariat of the National Commission on Food and Nutrition
(SECONAN), which contemplates a minimum daily food consumption
equivalent to 2,160 calories per day per person. This definition of
the poverty line has been used in urban surveys since 1988, and is
invariable -except in cases of official announcements and
explanations- because otherwise it would make it impossible to
compare poverty measurements from survey to survey.
     Given the above, the only way to explain the so-called drop in
poverty is through variations in the cost of the basic "food
basket." According to MIPLAN, a food basket valued at 5.70 colones
per day per person was used for the October 1990-February 1991
survey. This line was only two cents higher than the poverty line
used by the survey conducted between January and June of 1990. We
believe, therefore, that this criterion was underestimated,
especially if we recall that in 1990 the inflation rate hit 24.0%
when calculated year to year, and 19.3% when calculated from
December to December.
 
TABLE 1
UCA Estimate of the daily cost of the basic food basket
in February 1991
 
Basic food               Basic Diet   Unit      Price    Cost of
Item                     Grams/day/  Measure   Feb. 91   Basket
                           Person                        Feb. 91
 
Corn                        223        kg                     
(Corn Tortilla)         (334.5)        kg       2.43      0.81
Red beans                    79        kg       6.76      0.53
Rice                         55        kg       6.39      0.35
Sugar                        69        kg       2.91      0.20
Eggs                         28        kg       9.91      0.28
Fresh milk                  106        kg       5.40      0.57
Meat                         60        kg      26.09      1.57
Fats and oils                33        kg       9.06      0.30
Vegetables                  127        kg       3.87      0.49
Fruit                       157        kg       2.57      0.40
Wheat bread                  18        kg       8.00      0.14
Salt                         10        kg       1.21      0.01
10% cooking costs                                         0.57
Extreme poverty line                                      6.23
 
 
     Given the possible underestimation of the poverty line, we
have recalculated it using the same method and the same prices used
by MIPLAN, with the aim of verifying this line and the way it could
have been used to underestimate the magnitude of urban poverty in
the MIPLAN report.
     It is relatively easy to calculate this line (see Table 1),
since one only has to multiply SECONAN'S estimate of the quantities
of food (expressed in grams) necessary for the basic daily diet per
person, by the market prices of the unit of measure, also expressed
in grams.
     It is necessary to point out that the categories of meat, fats
and oils, vegetables, and fruits include a number of analogous and
substitute products, meaning that the average price is actually a
compound price, Nevertheless, it is also important to note that we
have used the average official prices provided by MIPLAN and the
Statistics and Census Bureau (DIGESTYC) for the different product
groups.
     In order to calcuate a poverty line which truly corresponds to
the period covered by the survey, we drew up an average line for
the period based on the monthly cost of the basic food basket. As
we can see in Table 2, the extreme poverty line which we
recalculated is 0.36 colones higher, per day per person, than the
one used by MIPLAN to classify households as extremely poor. This
difference is significant, since it reduces the per capita poverty
line by 10.80 colones per month, and if we take into account the
average size of urban households (4.5 members), or of extremely
poor households (5.2 members), we see that for "typical" or
"average" families, the extreme poverty line was underestimated by
anywhere from 48.60 to 56.20 colones per month.
 
TABLE 2
Daily cost of the basic food basket
Oct. 90 - Feb. 91 (colones)
 
Basic diet              Oct.   Nov.   Dec.   Jan.   Feb.  Average
(grams)                 1990   1990   1990   1991   1991    Cost 
 
Corn (223)                  
Corn tortilla (334.5)   0.81   0.82   0.85   0.87   0.81     0.83
Red beans (79)          0.57   0.54   0.50   0.52   0.53     0.53
Rice (55)               0.23   0.25   0.25   0.26   0.35     0.27
Sugar (69)              0.20   0.20   0.20   0.20   0.20     0.20
Eggs (28)               0.24   0.26   0.28   0.28   0.28     0.27
Fresh milk (106)        0.54   0.54   0.55   0.57   0.57     0.55
Meat (60)               1.47   1.45   1.45   1.50   1.57     1.49
Oils and fats (33)      0.30   0.30   0.30   0.30   0.30     0.30
Vegetables (127)        0.48   0.53   0.65   0.62   0.49     0.55
Fruit (157)             0.34   0.38   0.35   0.39   0.40     0.37
Wheat bread (18)        0.14   0.14   0.15   0.15   0.14     0.14
Salt (10)               0.01   0.01   0.01   0.01   0.01     0.01
Cost per person         5.31   5.40   5.53   5.68   5.66     5.52
10% cooking costs       0.53   0.54   0.55   0.57   0.57     0.55
 
Extreme poverty line    5.84   5.94   6.08   6.25   6.23     6.06
                                                          per day
MIPLAN's 10/90-2/91                                          5.70
  Extreme poverty line                                    per day
 
 
     Evidently, given the precarious state of per capita income
among the poor -calculated at 101 colones per month per person for
extremely poor, and 80.5 colones for those pertaining to the
poorest one-fifth of the population in 1990- a poverty line which
varies by approximately 11 colones per month per person has serious
repercussions on estimates of the scope of extreme poverty.
     Considering the implications of the discrepancies found for
the 10/90-2/91 period, we decided to recalculate the poverty lines
for other periods surveyed, with the goal of verifying our
estimates (see Table 3).
     The results show a high level of coincidence between our
estimated poverty lines and the official poverty lines used by
MIPLAN for surveys before the 10/90-2/91 period. This coincidence
confirms our assertion that the figures on poverty produced by the
first three surveys are comparable, but that the comparison between
the 1988/89 survey and the one conducted in 1990/91 is invalid,
given that the poverty line used in the latter has been
underestimated. In sum, it is impossible to assert that poverty was
reduced during the period in question, since a poverty line that is
unrealistically low makes it appear as if there are fewer poor.
 
TABLE 3
Daily cost of the food basket and poverty lines
1988-1991
 
Basic diet             Avg.cost   Avg.cost   Avg.cost   Avg.cost
(grams)                1/88-6/88 10/88-2/89  1/90-6/90 10/90-2/91
 
Corn (223)
Corn tortilla (334.5)    0.61       0.61       0.77       0.83
Red beans (79)           0.51       0.39       0.42       0.53
Rice (55)                0.19       0.23       0.21       0.27
Sugar (69)               0.15       0.18       0.20       0.20
Eggs (28)                0.19       0.21       0.23       0.27
Fresh milk (106)         0.42       0.54       0.64       0.55
Meat (60)                1.05       1.06       1.32       1.49
Oils and fats (33)       0.25       0.26       0.27       0.30
Vegetables (127)         0.36       0.39       0.49       0.55
Fruit (157)              0.28       0.33       0.39       0.37
Wheat bread (18)         0.09       0.10       0.14       0.14
Salt (10)                0.01       0.01       0.01       0.10
Cost per person          4.11       4.31       5.09       5.51
10% cooking costs        0.41       0.43       0.51       0.55
 
Extreme poverty line     4.52       4.74       5.60       6.06
Poverty line             9.04       9.48      11.20      12.12
 
MIPLAN's 
  Extreme poverty line   4.48       4.70       5.68       5.70
MIPLAN's
  Poverty line           8.96       9.40      11.36      11.40
 
 
Conclusions
 
     The first conclusion which emerges from the estimates of
poverty lines is that MIPLAN's assertion that extreme poverty was
reduced from 23.3% in 1988/89 to 21.9% in 1990/91 cannot be
accepted as true, nor is it possible that overall poverty has
dropped from 55.2% to 54.1% of all urban households. The 1991/92
figures reflecting a drop in poverty are also doubtful, since it is
possible that the measurements taken were still based on an
unrealistically low poverty line.
     Our second conclusion is actually a recommendation to MIPLAN,
that it review and recalculate its lines of minimum vital income
used to classify people according to levels of poverty, so that the
nation's' top planners can provide more realistic information about
the magnitude of the problem and its evolution over time.
     Thirdly, the figures presented above demonstrate the need to
moderate the triumphalism which underlies some parts of the report
referring to the relationship between the economic structural
adjustment program and poverty, in particular the assertion, "the
reduction of urban poverty levels is a result of the economic
recovery achieved through the application of the programs of
economic stabilization and structural adjustment, accompanied by
social compensation programs."
     Finally, given the fundamental importance of the evolution of
the cost of the basic food basket in determining the overall
magnitude of poverty, as well as the standard of living of
Salvadoran households, it becomes imperative to exercise stricter
controls over the application of the Value-Added Tax in order to
prevent speculation and price chaos from translating into a greater
number of poor households and a further decline in the living
conditions of Salvadorans.
 

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