RESTRICTED
WORLD TRADE WT/TPR/G/23
14October 1996
ORGANIZATION(96-4058)
Original: Spanish
TRADE POLICY REVIEW
ELSALVADOR
Report bytheGovernment
Pursuant totheAgreement Establishing theTrade Policy Review Mechanism (Annex 3ofthe
Marrakesh Agreement Establishing theWorld Trade Organization), thepolicy statement bythe
Government ofElSalvador isattached.
Note:Thisreport issubject torestricted circulation andpress embargo untiltheendofthemeeting
oftheTrade Policy Review Body onElSalvador.ElSalvador WT/TPR/G/23
Page i
CONTENTS
Page
1. EXECUTIVE SUMMARY 1
2. MAJOR ECONOMIC AND SOCIAL REFORMS (1989-1994) 1
3. NEW DEVELOPMENT STRATEGY AND OUTLOOK 2
4. MULTILATERAL, REGIONAL, SUBREGIONAL AND BILATERAL
TRADE LINKS 5ElSalvador WT/TPR/G/23
Page 1
1. EXECUTIVE SUMMARY
ElSalvador hasprogressed dramatically since theendofthe1980s. In1989, thecountry was
immersed inanarmed conflict, percapita income was15percentlower thanin1978, andtheeconomy
wasdepressed, plagued byserious macroeconomic imbalances anddistortions.
Thanks toanumber offar-reaching economic reforms initiated inJune1989 withaviewto
liberalizing theeconomy, andapolicy ofpeace anddemocratization, theGovernment putanendto
thearmed conflict andwasabletore-establish economic stability, restore economic growth andlaunch
asystematic offensive against extreme poverty. These efforts permitted ElSalvador toemerge from
theserious economic crisis ofthe1980s andachieve solid economic growth accompanied by
macroeconomic stability.
Inorder tosustain thehigheconomic growth rate,efforts were made todeepen theprocess
ofopening uptheeconomy aspartofanewdevelopment strategy based onproductivity andinternational
competitiveness. ElSalvador aimsassoonaspossible toachieve growth ratessimilar tothose ofthe
mostdynamic economies oftheworld, andrapidly toestablish apolitically, economically andsocially
stable environment which would permit thecountry tointegrate itselfintotheglobal production chain
andbecome anattractive geographical areaforinvestment.
2. MAJOR ECONOMIC AND SOCIAL REFORMS (1989-1994)
Thestabilizationandstructuraladjustmentprogrammeimplementedduringtheperiod1989-1994
provided theimpetus foratrade reform involving areduction oftariffs fromarange of5to290per
centtoarange of5to20percent, andareduction inthenumber oftariff levels from 25toonly4.
Thevastmajority oftariffexemptions, non-tariff barriers andpricecontrols wereeliminated, together
withallexport taxes, exchange controls andimport deposits. Statemonopolies onforeign trade and
State enterprises controlling themarketing ofagricultural products were alsoabolished.
Inthefieldoftaxes, stepsweretaken toadjust toataxstructure based onfewtaxes, lowrates
andabroad taxbase. Thus, thestamp taxwasreplaced byavalue-added tax;anumber oftaxes were
eliminated, including thewealth taxandtheinheritance tax;theincome taxbrackets weresimplified,
themaximum marginal ratereduced to25percentandtheexemption floorraised. Aregister ofmajor
taxpayers wascreated, theLawonTaxEvasion adopted, andotherstepsweretaken toreduce distortions
andrationalize taxbreaks.
During thisperiod, ElSalvador completed itsaccession toGATT andparticipated actively
intheUruguay Round, thereby providing itstrade regime withgreater reliability andtransparency,
andhelping toensure theirreversibility ofitseconomic reform process.
Inthemonetary andfinancial area,theCentral Reserve Bank(Banco Central deReserva, BCR)
completely liberalized deposit andlending interest ratesandeliminated allrediscount windows. The
exchange ratewasliberalized andunified andtheBCR'sloanportfolio wastransferred toasecond-tier
bank, theMultisectoral Investment Bank (Banco Multisectorial deInversiones, BMI).TheCentral
Reserve Bank successfully completed theprocess ofrestructuring, recapitalizing andprivatizing the
fivetrade banks thathadbeennationalized atthebeginning ofthe1980s, aswellasfoursavings and
loans associations.
TheGovernment carried outanaggressive privatization programme, andsucceeded inselling
thePresident Hotel, theassets oftheInstituto Regulador deAbastecimiento (Supply Regulation Institute)
which hadbeenwound up,andmore than70percentoftheSanBartolo FreeZone, andinselling
thepreviously mentioned banks andfinancial associations totheprivate sector.WT/TPR/G/23 Trade Policy Review
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Anumber ofsocial welfare programmes, essentially implemented through theSocial Investment
Fund andother components ofthePoverty Relief Action Plan, wereintroduced withaviewtoattending
tothemost vulnerable social sectors andrelieving poverty.
After more thanadecade ofeconomic disarray, structural adjustment measures havecaused
therealgrowth rateofGDP torisefrom1percentin1989to3.5percentin1991, andfrom5.2per
centin1993 to5.8percentin1994. Thepercapita GDP growth raterosefrom-1percentin1989
to3.5percentin1994. Inflation fellto10percentin1994afterhaving reached 33percentin1986.
Thecurrent account deficit fellfrom 7percentofGDP in1990 to3.5percentin1994.
3. NEW DEVELOPMENT STRATEGY AND OUTLOOK
Since 1994, thepresent Government 'sbasic objective hasbeentodeepen themajor economic
reforms introduced since 1989 while maintaining theconditions necessary toensure ahighgrowth
rate,preserving themacroeconomic balance andtransforming theincreased paceofeconomic activity
intoequitable economic development.
TheGovernment aimstoboost economic growth, making itsustainable andequitable, while
atthesametimeraisingtheeconomy'soverallcompetitiveness,proceedingfromthepremisethatrestored
peace andthenewinternational economic reality provide anexcellent opportunity forthecountry 's
future development.
ElSalvador 'starget istocreate thenecessary conditions forreally consolidating theruleof
law,togivepriority toinvestment inhuman capital andthebuilding ofaforward-looking economic
andsocial infrastructure, toensure complete openness toforeign investment andtechnology andto
carry outathorough modernization ofthepublic sector strictly based onamarket economy model.
These measures willbecarried outinfullrespect forenvironmental conservation, which willasfar
aspossiblebetransformedintoaprofitableeconomicactivity,inordertoensurethatapermanentbalance
isstruck between thesatisfaction ofcurrent material needs andabetter standard ofliving forfuture
generations.
ElSalvador iscurrently working tobuild aneconomy equipped withadiversified, efficient
andflexible production capacity capable ofadapting tochanging domestic andinternational market
situations. Inorder tobeabletocompete properly inamore dynamic andinterdependent world
economy, efforts arebeing made tobuild aneconomy specializing inproduction processes andtrade
inhighvalue-added services which, withtheincorporation ofadvanced technology andbacked bya
steady increase inproductivity, willunderpin economic activities capable ofgenerating robust, dynamic
andsustainable long-term economic growth.
Theobjectives oftheSocial Development Planarebased onthefundamental premise thatthe
transformation ofeconomic growth intoincreased opportunities forallinacontext ofequity, social
mobilityandfreedomtomoveaheadisaprerequisitetotheachievementofsocialwell-beingandbuilding
ofapermanent peace.
Within thisconceptual framework, social policies arereflected intwotypes ofprogrammes:
immediate impact programmes which contribute directly tosocial welfare andsupport human
achievement; andhuman resources investment programmes aimed atachieving fulldevelopment of
individuals andenhancing theirproductivity, anddesigned tobearfruitinthemedium andlong-term.
Thefirsttypeofprogramme isconducted bytheLocal Development Corporation, whose objective
istoaddress thechallenge oflocal development withtheadded innovative concept ofproductive
development. Resources arebeing channelled through theCorporation inorder tocreate conditions
favourable toproductive investment inthecommunities, generating employment andincome andElSalvador WT/TPR/G/23
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improving thestandard ofliving ofthepopulation. Thesecond typeofprogramme isessentially being
implemented viathedecentralization oftheadministration ofservices bycreating projects inwhich
private citizens orfoundations areresponsible forimplementation andbudget management.
Theeconomic programme comprises policies aimed atasteady increase inproductivity leading
toenhancedcompetitiveness,therebyhelpingtocreatea"virtuouscircle"resultinginhigh,distortion-free
economic growth withlowinflation andsteadily rising remuneration oftheproductive factors. This,
initsturn, willleadtogreater social justice andahigher standard ofliving forallSalvadorians.
Inorder toattain thisgoal, ElSalvador hasdesigned adevelopment strategy based on
productivity, andisimplementing aneconomic policy directed towards theachievement ofsustained
growth, withrates exceeding 6percentinrealterms, while maintaining astable macroeconomic
environment andmaking thecountry attractive fordomestic andforeign investment bydeepening the
structural reforms andlowering thecosts ofoperating inthecountry.
Theattraction ofinvestment andtheefforts tointegrate thecountry intotheglobal production
chain reflect policies aimed atmaking thecountry more competitive, butwithout basing its
competitiveness onlowwages, which would beinconsistent withitssocial development objectives.
Productivityisbeingstimulatedthroughpromotionofinvestmentsinhumanresources;increased
investments inphysical infrastructure; promotion offreeandhealthy competition; reduction ofall
production costs thatdonotrepresent added value interms ofinternational prices; anddevelopment
ofthephysical andinstitutional infrastructure forscience andtechnology.
Avigorous programme ofinvestment inhuman resources iscurrently being implemented.
Thecurrent Government 'starget istoincrease expenditure onhuman resources development from
approximately 31percentofthecountry 'smaster budget in1996 to50percentin1999. There is
akeenawareness thattheeducational system willhavetoplayaleading roleinimproving thedistribution
ofincome andsocial justice andingenerating economic growth, especially nowthateconomic
globalization hasmade acountry 'sworldwide competitiveness contingent onabetter educated labour
force withfarmore inthewayofskills andabilities.
ElSalvador 'seducational system isbeing thoroughly reformed withaviewtoimproving the
quality ofeducation, increasing coverage andmodernizing theentity responsible foritsadministration.
Thisreform includes aprogramme ofmodernization ofbasic education financed byloans from the
World Bank andtheInterAmerican Development Bank totalling more thanUS$75 million andaimed
primarily atincreasing enrolment inpreschool andprimary education anddecreasing therepetition
anddrop-out rates. Theprogramme alsoinvolves areform ofthecurriculum aimed atraising thequality
ofsecondary education, andprovides forteacher training courses.
Worker education andtraining (non-formal education) together withtheimprovement ofthe
country 'sscientific andtechnological capacity arebeing dealtwiththrough theNational Competitiveness
Programme. Financed byaloanfromtheWorld Bank exceeding US$16 million, thisProgramme 's
objective istosupport theGovernment 'seconomic programme aimed ataccelerating thedevelopment
process thatisbeing driven bytheprivate sector, andatincreasing productivity.
Another programme currently being implemented istheStateModernization Programme aimed
atcreating acompetitive market inthecountry, guaranteeing anefficient supply ofessential public
goods andservices, redirecting public resources towards supporting economic growth, andaddressing
themost pressing needs ofthepoor.WT/TPR/G/23 Trade Policy Review
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Thekeyelements oftheProgramme aretheprivatization ofpublic services, thegranting of
concessions anddecentralization. Privatization oftheNational Telecommunications Administration
(ANTEL) andfourelectricity distribution companies should becompleted within thenextsixmonths
atthelatest. Moreover, inconnection withacomprehensive reform ofthepensions system currently
under way,theadministration ofpension funds willbehanded overtoprivate management companies.
Private companies willalsobegranted licences fortheadministration oftheports, airports andcertain
highways. Thesupply ofwater, health andeducational services, currently under State control, will
beopened uptoprivate participation.
Efforts toreduce bureaucratic procedures inconnection withthereform oftheStatecurrently
underwayinvolvethemodernizationandstreamliningofthepublicsectorinordertoincreaseitscapacity
andefficiency.
TheState Reform andtheNational Competitiveness Programmes embody anewvision of
development, "ElSalvador 2021", which isdestined toturnintoaNational Programme, supported
byallsectors, tohelpElSalvador attain levels ofeconomic, social, political, technological andcultural
development asclose aspossible tothose ofthedeveloped countries bytheyear2021, 300years after
achieving independence.
Inadditiontothesereforms,whichcouldbedescribedas"secondgeneration"reforms,anumber
ofothermeasures havebeentaken toimprove thebusiness climate andreduce thecostsofdoing business
inthecountry; toincrease thetechnological capacity ofprivate sector companies andofthelabour
force inorder toboost productivity andinternational competitiveness; andtobuild aconsensus on
theimplementation ofthenewdevelopment strategy byfacilitating theflowofpublic information and
fostering dialogue between private sector, public sector andlabour.
Aware oftheneedtoenhance macroeconomic stability, thecountry iscontinuing todevelop
aneconomic policy agenda aimed atimproving budget performance, internationalizing thefinancial
sector, enhancing themacroeconomic management capacity todealwiththeproblems arising from
thesteady andincreasing inflow offamily remittances, andrelieving thepressure ontheinterest rate
andprices.
Inthisrespect, ElSalvador hasmade considerable progress. LastAugust, theriskrating
company, Standard andPoors included ElSalvador among theworld economies withgoodprospects
formaintaining long-term economic stability andoffering agood investment climate. Thecountry 's
foreign currency debts wererated BB,anditsnational currency debts BBB. Thedebtburden isnow
modest, andwellbelow theaverage similarly-rated sovereign debt. Traditionally, ElSalvador has
always beenscrupulous andpunctual infulfilling itsinternational financial obligations.
Trade policy under thisnewstrategy isbased onatariff-cutting programme aimed atreducing
domestic production costs, contributing tothemodernization ofindustry andturning thecountry into
acompetitive production area. Thetariffs applied tocapital goods andrawmaterials were reduced
from 5percentto1percentandfrom 5percentto3percentrespectively, andwillreach zeroper
centinDecember ofthisyear. Inother words, more than55percentofthetariff universe willbe
unilaterally reduced tozeropercent. Thetariff-cutting programme thathasbeenintroduced provides
foraunilateral reduction oftheceiling by1percentevery sixmonths starting inJune1997, sothat
byJune1999, thetariffstructure willhaveafloorofzeropercentandaceiling of15percent,reflecting
areduction inthedispersion andaverage levels.
Acomprehensive review oftheadministrative procedures andformalities affecting exports
andimports isalsobeing conducted withaview tointroducing greater transparency andflexibility
andreducing redtape. Plans areunder wayforthecreation ofa"Trade Point" tobeadministeredElSalvador WT/TPR/G/23
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bytheprivate sector, bytheendof1997, bywhich timetheCustoms Modernization Programme, calling
fortheprivatization ofcertain services, should havebeencompleted aswell.
Other steps worth mentioning inconnection withtrade policy aretheplanned submission to
theLegislative Assembly nextOctober ofaDraft LawonFreeCompetition andthepreparation of
anewLawonInvestments, designed tobring thelegal benefits andguarantees offered toinvestors
intolinewiththeneweconomic reality inthecountry.
In1996, theHeritage Foundation rated ElSalvador, together withChile, asthecountry with
thesecond freest economy inLatin America thanks toitsperseverance indeepening theprocess of
liberalization oftheSalvadorian economy.
4. MULTILATERAL, REGIONAL, SUBREGIONAL AND BILATERAL TRADE LINKS
Inresponse tothechallenges ofglobalization, considerable efforts andresources arebeing
directed towards theimprovement andexpansion oftheCentral American economic integration process.
Theregion ismore thansimply anatural market fornon-traditional exports from ElSalvador: itis
themostimportant market (excluding themaquila (in-bond processing) sector). Total exports from
ElSalvador totheCentral American region increased from $257 million in1990 tomore than
$430 million in1995.
Central American integration isviewed asaprerequisite tothefullintegration ofthecountry
intotheinternational economy, asacontribution totheeffort toestablish balanced economic relations
withother regions oftheworld, andasaboost totheeconomic andsocial reforms currently under
way. ElSalvador hastherefore actively backed andparticipated inefforts tomodernize theinstitutional
framework ofCentral American integration together withthesubstantive legalarrangements bywhich
itisgoverned, andtoadopt traderegulations fullyconsistent withtheprovisions, rulesanddisciplines
oftheWTO.
ElSalvador alsoparticipates inother regional integration schemes suchastheFreeTrade Area
oftheAmericas (FTAA). TheFTAA willtransform thewestern hemisphere intothelargest andmost
powerful integrated economic areaintheworld, withacombined GDPofover$7.7trillion andamarket
ofmore than745million consumers. Thefactthatthree important working groups -investments,
intellectual property andmarket access -arechaired byCosta Rica, Honduras andElSalvador
respectively isanindication ofthecommitment ofElSalvador andtheCentral American countries
toachieving freetrade inthewestern hemisphere bytheyear2005.
Atthesubregional level, ElSalvador, Guatemala andHonduras haveresumed thenegotiation
ofafree-trade agreement withMexico covering trade ingoods andservices, andarealsonegotiating
innewareas (intellectual property, government procurement andinvestment).
ElSalvador recently concluded bilateral agreements forthepromotion andreciprocal protection
ofinvestments withArgentina, Ecuador, Spain, Peru, theRepublic ofChina andSwitzerland. Similar
agreements arecurrently being negotiated withGermany, Brazil, Canada, Chile, Colombia, Korea
andtheUnited States.
ElSalvador 'spolicy withrespect totrade negotiations focuses onthestrengthening and
diversification ofeconomic relations withtradepartners andeconomic groupings throughout theworld,
inthebelief thatintegration processes nolonger formpartofastrategy ofinward-looking development,
butconstitute, rather, ameans ofachieving more effective integration intotheglobalization process
byrevitalizing trade andinvestment flows bymeans ofoutward-looking development.WT/TPR/G/23 Trade Policy Review
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Atthemultilateral level, theLegislative Assembly ofElSalvador approved, on9March 1995,
theFinal ActoftheUruguay Round andtheMarrakesh Agreement Establishing theWorld Trade
Organization (WTO) withitsAnnexes. After completing thenecessary formalities, ElSalvador acceded
totheWTO asafullMember on7May1995. Thisimportant step,likeitsaccession toGATT in
1991, hasplayed animportant roleinthedevelopment ofElSalvador 'strade regime bymaking it
possible forthecountry toadopt apolicy ofpromoting greater openness andensuring thecontinuity
ofthatprocess, using multilateral principles asoneofitsprimary legalfoundations.
TheWTO Agreements areconsidered critical toensuring proper access tothemarkets ofour
trading partners, toobtaining reciprocity inconnection withtheunilateral trade liberalization process
and,ingeneral, tosafeguarding thecountry 'strade interests against anyrestrictive measures which
undermine itsrights asaMember oftheWTO.
ElSalvador isparticularly concerned thatalloftheMembers oftheWTO should strictly apply
alloftheUruguay Round Agreements, inparticular theAgreement onTextiles andClothing.
Compliance withtheAgreements isessential totheOrganization 'scredibility andtoobtaining the
confidenceoftheprivatesectorintheWTOasaforumfordiscussion,negotiationanddisputesettlement.
Inspiteoftheobvious budgetary restrictions duetotherelatively small sizeofoureconomy
andtothefinancing ofthePeace Agreements, which havecosttheGovernment more thanUS$2 billion
overthepastthree years, ElSalvador istrying todirect resources towards building andimproving
theentire institutional infrastructure andlegalframework needed toadminister andfullyrespect all
oftheWTO Agreements. Onthedomestic front, considerable progress hasbeenmade inadopting
lawsandrevisingprovisionsrelatinginparticulartotheprotectionandpromotionofintellectualproperty;
sanitary andphytosanitary regulations; regional arrangements governing rulesoforigin, unfair trading
practices andsafeguard clauses; customs procedures; andagricultural policy.
Given thecritical importance, asmentioned above, oftheWTO Agreements, theincreasingly
frequent application ofunilateral andextraterritorial trade restrictions areasource ofdeepconcern.
Suchmeasures hinder andoften block access ofourprincipal exports tothemarkets ofthecountries
thatimpose them.
Another source ofconcern istheexaggerated useofthesafeguard mechanisms provided for
intheUruguay Round multilateral agreements ontrade ingoods, inparticular thecontinuous calls
forconsultations tolimitexports oftextiles andclothing since theentry intoforce oftheAgreement
onTextiles andClothing. Quantitative export restrictions arecausing enormous damage tothepotential
development tooneofthebranches ofindustry inwhich thecountry iscompetitive attheinternational
level andwhich offers thebestprospects forthegeneration ofemployment andeconomic growth,
economies ofscale, vertical integration andhigh-value-added production.
Nevertheless, aninitial overall assessment ofthefirsttwoyears following theentry intoforce
oftheWTO leadstotheconclusion thatonbalance, therevitalized world tradesystem hashadapositive
effect. Today, therules areclearer andmore transparent andthedispute settlement mechanism
reinforced, twoessential elements intheopening upofmarkets, andeven more important, an
organization hasbeencreated which hasagreater capacity toensure compliance withtheAgreements.
Inthefinalanalysis, allofthishasledtogreater reliability andpredictability oftrade.
There canbenodoubt thatthecreation oftheWTO hascontributed greatly inhelping the
Membercountriestodealmoreeffectivelywiththeopportunitiesandchallengesofeconomicglobalization
andinplacing them inabetter position topursue theireconomic andsocial aims. However, much
stillremains tobeaccomplished iftheMarrakesh Agreements aretobeimplemented infullandonElSalvador WT/TPR/G/23
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time, atthepacewhich hasbeensetbytheWTO 'swork programme fordealing withthetasksderiving
from theUruguay Round, including thenegotiations thathavenotyetbeencompleted.
ElSalvador takes theviewthattheSingapore Ministerial Meeting tobeheldnextDecember
should concentrate above allonthecomprehensive review ofthereports presented bythedifferent
councils, committees andworking groups, ontheprogress made inimplementing theAgreements,
andondeciding onhowtosupport thecountries thatarehaving difficulty fulfilling them. Itshould
alsoconsider ways offinding better trade opportunities forthedeveloping countries.
ElSalvador isparticularly worried thatnewissues willbeincluded intheSingapore Agenda
before sufficient information hasbeengathered onthebenefits ofthesystem andbefore anyanalytical
studies havebeencarried outtoprovide abroader andclearer viewoftheproblems andlimitations
faced bytheMember countries infulfilling theconcessions granted andthecommitments assumed.
Wethink itwould bewrong toextend thescope oftheWTO tocover subjects suchaslabour rights,
which should bedealt withinother multilateral forums specialized inlabour issues, suchasthe
International Labour Office. Wehaveobserved withdeepconcern thatinmany cases, theperfectly
legitimate concern forthepromotion oflabour rights isbeing exploited forother purposes. Indeed,
wehavenoticed thatinpractice, theassertion ofthegenuine rights ofworkers -which theGovernment
ofElSalvador protects, respects andpromotes -isusedasacover forprotectionist aims, impeding
market access.
ElSalvador willcertainly come totheSingapore Ministerial Meeting inapositive and
contributive frame ofmind, thoroughly committed tofulfilling theWTO 'swork programme and
cooperating towards enhancing theOrganization 'sstrength andcredibility. TheWTO iscrucial to
thecompletion ofthedeep-seated economic andsocial reforms introduced byElSalvador withaview
toimproving itscapacity totakeadvantage ofthenewopportunities offered byeconomic globalization
andliberalization.