From: rich@pencil.cs.missouri.edu (Rich Winkel)
Subject: Proceso 542: Contradictory economic policies
Followup-To: alt.activism.d
Originator: rich@pencil.cs.missouri.edu
Organization: PACH
Date: Tue, 15 Dec 1992 07:04:19 GMT

/** reg.elsalvador: 146.0 **/
** Topic: Proceso 542: Economy **
** Written  4:21 am  Dec 13, 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 542: Economy

Center for Information, Documentation and Research Support (CIDAI)
Central American University (UCA)
San Salvador, El Salvador
 
PROCESO 542
December 9, 1992
 
ECONOMY:
Contradictory economic policies
 
     Ever since early 1991, we have heard repeated warnings about
the ineffectiveness of economic stabilization policies. Although
the Development Plan foresaw an eighteen-month period (June 1989 -
December 1990) for "creating the conditions necessary for gradually
eliminating [macroeconomic] imbalances," 42 months later, the
stabilization policies have yet to produce a more stable situation.
On the contrary, the last six months have resulted in a more
precarious situation for the government in terms of achieving the
goals laid out by its Economic Development Plan.
     The trade and budget deficits have widened considerably;
inflation has also risen. These tendencies have been severely
affected by the exchange rate, because of its influence on both the
balance of trade and the rate of inflation and, as a result, on the
budget deficit.
     The leadership provided by economic policymakers has worsened
the nation's macroeconomic imbalances. The lack of policies to
provide decisive support to exports, as well as the drop in tariff
rates, which have widened the trade gap, are some of the elements
which can be mentioned as causal factors of the current rise in the
exchange rate.
     Although there are undeniably some outside factors, such as
foreign loans and donations, which have helped stabilize the
exchange rate, we must point out that the bulk of the problem lies
in the contradictions inherent in the current economic policies
which prevent them from overcoming structural obstacles to
stabilization and economic growth.
     Despite efforts on the part of economic policymakers, the
exchange rate has risen sharply over the past several months. At
the beginning of December, the exchange rate exceeded 9.30:1, a 15%
increase since June. Furthermore, the inflation rate reached levels
unseen since December 1990 (17%); the trade deficit for the first
eight months of the year grew to $693.5 million; the public sector
deficit could reach 2.6 billion colones by year's end, which would
be 4.7% of the GNP.
     The situation is far from promising, despite contingency
measures taken by the Central Reserve Bank (BCR) to flood the
market with dollars and reduce the supply of national currency, in
an attempt to stabilize the exchange rate and reduce the spiral of
inflation. These measures have not had the hoped-for effect due to
the persistence of factors which continue to prevent economic
stabilization, such as tariff reductions and the lack of an export
policy.
     The tariff range dropped from 5%-to-50% in 1989 to 5%-to-20%
in 1992. During the Tenth Summit of Central American Presidents,
1993 was set as the target date for each government to adopt the
new range. Furthermore, although the adoption of free trade
policies was seen as a way to increase exports, these have not
responded favorably.
     We must also stress the lack of an industrial reconversion
policy capable of promoting the expansion of export products, and
the weaknesses seen in the government's monetary exchange policies.
The government's Economic and Social Development Plan states that,
in order to increase exports and make them more competitive on the
world market, "a realistic and dynamic monetary exchange policy is
fundamental in order to promote a greater volume of exports, as
well as to diversify export products." However, the desire to keep
inflation as low as possible led the government to postpone
measures necessary to establish a realistic exchange rate; it has
tried to maintain a stable exchange rate in order to stabilize
domestic prices.
     On this issue, even business appears reluctant to face the
possibility of seeking a more realistic exchange rate in the medium
term. After the nominal exchange rate became severely destabilized,
meetings were held between the Chamber of Commerce and the BCR in
order to discuss contingency measures. The National Association of
Private Enterprise (ANEP) and the BCR also reached agreements
around the issue. Basically, the BCR is proposing to stabilize the
exchange rate through financial mechanisms aimed at controlling
sudden increases.
     This posture, however, makes the goal of economic growth
increasingly elusive. ARENA's model of trade liberalization
requires the promotion of exports in order to achieve growth with
stability, which in turn necessarily implies a "realistic and
dynamic" monetary exchange rate. The Corporation of Exporters
(COEXPORT), however, appears to have a better grasp of the role of
the exchange rate in achieving sustained production growth.
Obviously, such a measure should be accompanied by a more active
role in reducing the social debt which would be generated.
     The influx of foreign exchange in the form of family
remittances, donations and loans has played a key role in
compensating for the trade gap, but these inflows are neither
constant nor predictable, and are clearly incapable of sustaining
the exchange rate indefinitely. On the other hand, the tendencies
seen in the balance of trade could be modified in such a way as to
have a favorable influence on the stabilization of the economy. For
the moment, contradictions between stabilization policies and
efforts to reorient the economy are making it difficult to correct
the trade imbalance; in this context, they have spurred inflation
and the rising exchange rate.
     A monetary exchange policy which hopes to be at all effective
in terms of stabilizing the economy must be coherent with an
industrial reconversion policy aimed at expanding exports.
Furthermore, one must take into account the possible effects of
tariff reductions such as the ones which have been implemented
recently, and far too quickly. So far there has been no defined
industrial reconversion policy to confront the challenge of trade
liberalization; at the same time, the greatest share of tariff
obstacles to foreign competition have been removed, without
guarantees of reciprocity.
     An orthodox handling of economic policy is apparently not
compatible with the goals of the Development Plan. The mechanical
application of economic models to different types of economies
produces different results. The specific result in El Salvador has
been the postponement of a realistic adjustment of the exchange
rate, due to the artificial maintenance of the rate on the basis of
a temporary influx of foreign exchange. The relative stabilization
of domestic prices seen over the past two years has been largely
due to this factor.
     The meager results of the measures taken to reduce foreign
dependence are forcing the government to consider new strategies to
confront the imbalance in the external sector, among other
problems.
 

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