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PRESS/TPRB/51
18November 1996
ELSALVADOR 'SECONOMIC STABILIZATION AND REFORM PROGRAMMES
HELP PAVE THE WAY TOWARDS NEW GROWTH
ElSalvador'smacro-economicstabilizationandstructuraladjustmentprogrammes,accompanied
bytrade reforms andprivatization oftraditional marketing boards forcoffee, sugar andcotton, are
nowresulting innewopportunities forexpanded tradeandincreased investment. According toaWTO
Secretariat report onElSalvador 'strade policies andpractices, thisneweconomic environment has
resulted instrong economic growth of6.5percentin1995, withinflation falling to11percent.
ElSalvador hasprogressively rationalized andreduced itstariffs since 1989, when applied
most-favoured-nation rates ranged from 5to290percent. They nowrange from 1to30percent,
withanunweighted average of10.1percentin1995. Fewduties arehigher than25percentand
further reductions areplanned tobring therange ofapplied tariffs to0to15percentby1999.
ElSalvadorboundmostofitstariffsonaccessiontotheGATTin1990andextendeditsbindingcoverage
to100percentintheUruguay Round.
Mostnon-tariff barriers havebeeneliminated. According tothereport, authorization isrequired
fortheimportation ofsugar, import licences remain onlyforjutesacks andsaltandimport controls
remain fortheduty-free entry ofsome sensitive products fromother members oftheCentral American
Common Market (CACM).1Thereport alsonotes thatlicence procedures haveyettobedeveloped
fortheimplementation oftariff quotas under ElSalvador 'sWTO tariffication commitments for
agriculture. ElSalvador hasbeenapproving various lawsonrulesoforigin, anti-dumping, andsafeguard
procedurestobringitslegislationinlinewithWTOrequirements.Workcontinuesoncustomsvaluation.
Theagricultural, industrial andservices sector havebeenundergoing aprocess ofadjustment
inElSalvador asthepastprotectionist, state-controlled régime hasbeendismantled andmarket forces
havebecome more relevant. Theagricultural sector, traditionally important, suffered badly inthe
1980s asaresult ofthearmed conflict, anill-advised landreform andthecreation ofmarketing boards.
1CACM members include: Costa Rica, ElSalvador, Guatemala, Honduras andNicaragua
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ElSalvadorian industry, developed under animport-substitution strategy toserve theCentral
American market, hasfaced difficulties inadjusting tothenewtrading environment, andsome sectors
continue toreceive higheffective tariff protection inthehome market. Industries utilizing benefits
provided bythefree-zone andtax-free arearégimes havebeensuccessful. Exports fromthefree-zones
andtax-free areas rosetosome 40percentofthetotalin1995, andtheycontinue toincrease. The
United States andtheEuropean Union areElSalvador 'smajor markets foragricultural products and
clothing. Industrial goods aremainly soldtoCentral American countries.
Services account for62.1% ofElSalvador 'sGDP. TheGovernment ispresently engaged
inaprocess ofreconstructing andrenovating infrastructure suchasroads, ports andairports, which
areessential fortrade. TherôleoftheState inother services sectors hasbecome secondary because
oftheprivatization programme.
ElSalvadorhasunifieditsexchangeratesandeliminatedexchangecontrols.TheCentralReserve
Bank'smain objective nowistocontrol inflation andtheleveloftheexchange rate,ataskwhich has
beencomplicated bylargeinflows ofremittances fromSalvadorians working intheUnited States. While
inflation hasbeensubstantially reduced, itstillexceeds international levels. Foreign direct investment
isallowed inallsectors inElSalvador, withverylimited areasreserved fornationals. Notrade-related
investment measures areapplied. Atthesametime,thereisnoexplicit legislation toregulate competition
conditions intheSalvadorian market andthere isnocompetition authority.
Thereport notes thatin1993 alawconcerning intellectual property rights came intoforce
butthatenforcement hasbeendifficult because ofinsufficient resources andalackofawareness that
thelawisbeing infringed. Thegovernment is,however, making efforts toenforce thelaw.
ElSalvador haspursued itstrade policy objectives through itsunilateral reform programme,
aswellasthrough regional, bilateral andmultilateral trade andinvestment negotiations. While
multilateral activity hasbeen intensified through theWTO, regional trade negotiations atthe
Central American levelandwithin theframework oftheFreeTrade AreafortheAmericas (FTAA)
areseenasveryimportant.
Efforts under CACM include aprocess ofconvergence towards acommon external tariff.
Harmonized legislation exists inseveral areas, including customs valuation, intellectual property, and
dumping andcountervailing measures. ElSalvador, together withGuatemala andHonduras, is
negotiating afreetrade agreement withMexico.
ElSalvador 'strade relationships withdeveloped markets depend toagreat extent onits
participation inbilateral trade agreements. Itbenefits from duty-free privileges intheUnited States
under theCaribbean Basin Initiative andwiththeEUunder theGeneralized System ofPreferences.
Since 1989, theobjective oftheSalvadorian authorities hasbeentocreate anefficient and
diversified economy, driven byexport-led growth. Thesolid growth since thereform istestimony
tothesuccess ofthemacroeconomic stabilization, theextensive tradeliberalization andthederegulation
policies pursued. However, realappreciation oftheexchange rateinthefaceofsubstantial financial
inflows (mainly remittances) maycreate difficulties forexport development anddiversification.
ElSalvador 'sstable macroeconomic environment needs tobesupported byon-going efforts
tofurther liberalize theeconomy andupdate thelegalframework, speed upcustoms operations, facilitate
trade andinvestment andenforce theintellectual property rights law.Initsconclusions, thereport
notes thatconsideration should alsobegiven tothemoreactive promotion ofcompetition inthedomestic
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market.Effortsneedtocontinuetorebuildanddevelopthecountry'sphysicalandservicesinfrastructure,
aswellastodeepen itshuman capital base.
Notes toEditors:
TheWTO Secretariat 'sreport, together withareport prepared byElSalvador willbediscussed
bytheWTO Trade Policy Review Body (TPRB) on25and26November 1996.
TheWTO 'sTPRB conducts acollective evaluation ofthefullrange oftradepolicies practices
ofeachWTO member atregular periodic intervals andmonitors significant trends anddevelopments
which mayhaveanimpact ontheglobal trading system.
Thetworeports,togetherwithareportoftheTPRB'sdiscussionandoftheChairman'ssumming
up,willbepublished induecourse asthecomplete Trade Policy Review ofElSalvador andwillbe
available fromtheWTO Secretariat, Centre William Rappard, 154ruedeLausanne, 1211Geneva 21.
Thereports cover thedevelopment ofallaspects ofElSalvador 'strade policies, including
domestic lawsandregulations, theinstitutional framework, trade policies bymeasure andbysector.
Since theWTO cameintoforce, the"newareas" ofservices tradeandtrade-related aspects ofintellectual
property rights arealsocovered. Attached arethesummary observations from theSecretariat and
government reports. Fullreports willbeavailable forjournalists fromtheWTO Secretariat onrequest.
Since December 1989, thefollowing reports havebeencompleted: Argentina (1992), Australia
(1989 &1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992 &1996), Cameroon
(1995), Canada (1990, 1992, 1994&1996), Chile (1991), Colombia (1990 &1996), Costa Rica(1995),
Côted'Ivoire (1995), theCzech Republic (1996), theDominican Republic (1996), Egypt (1992), the
European Communities (1991, 1993 &1995), Finland (1992), Ghana (1992), Hong Kong (1990 &
1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and1994), Israel (1994), Japan
(1990, 1992&1995), Kenya (1993), Korea, Rep.of(1992 &1996), Macau (1994), Malaysia (1993),
Mauritius (1995), Mexico (1993), Morocco (1989 &1996), NewZealand (1990 &1996), Nigeria
(1991), Norway (1991 &1996), Pakistan (1995), Peru(1994), thePhilippines (1993), Poland (1993),
Romania (1992), Senegal (1994), Singapore (1992 &1996), Slovak Republic (1995), South Africa
(1993), SriLanka (1995), Sweden (1990 &1994), Switzerland (1991 &1996), Thailand (1991 &1995),
Tunisia (1994), Turkey (1994), theUnited States (1989, 1992, 1994&1996), Uganda (1995), Uruguay
(1992), Venezuela (1996), Zambia (1996) andZimbabwe (1994).
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TRADE POLICY REVIEW BODY
ElSalvador
Report bytheSecretariat -Summary Observations
Introduction
Since 1989, attheendoftenyears ofinternal conflict, ElSalvador hasbeen following
macro-economic stabilization andstructural adjustment programmes, which haveseengrowth increase
to6.5percentandinflation falling toaround 11percentin1995. Theeconomy hasbeenliberalized
through trade reforms anddomestic de-regulation, reducing theanti-export biasoftheprevious trade
andindustrial policy régime. Theneweconomic environment, together withtheongoing modernization
oftrade lawsandregulations, havecreated opportunities forinvestment which arenecessary topave
thewayforstable long-term growth.
General Economic Developments
Theprogress achieved under thereform programme hasallowed ElSalvador tostartrebuilding
itseconomy aftertheconflict. Increased investment ininfrastructure andinhuman capital hasbeen
achieved, interalia,bytherationalization ofexpenditures, aspartofawide-ranging fiscal reform aimed
atcutting government expenditure andincreasing taxcollection. These measures haveresulted ina
reduction ofthefiscal deficit from 4.7percentin1989 tolessthan1percentofGDP in1995.
Under thefiscal reform, thetaxsystem hasbeensimplified sothatonlyafewtaxes ofgeneral
application remain inplace (VAT, income taxandthetariff). TheVAThasbecome themostimportant
tax.Export taxes andsectoral taxincentives havebeenabolished; theonlyremaining taxincentives
arethose provided under thefree-trade andtax-free areas régime anddrawback system.
Cut-backs inexpenditure havebeenachieved principally byreducing therôleoftheState.
Thus, keysectors oftheeconomy havebeen, orareintheprocess ofbeing, privatized. Themarketing
boards incharge ofcoffee, sugar andcotton, thethree traditional agricultural exports, havelosttheir
monopoly power; inthefinancial sector allbutonebankhasbeenprivatized; andAntel, theprofitable
public telecommunications monopoly, isintheprocess ofbeing privatized, asaresome services at
themain airport andport.
Aspartofthewidereconomicderegulation,theexchangeratehasbeenunified,exchangecontrols
havebeeneliminated andthecapital account hasbeenliberalized. Interest ratesarenowessentially
setbythemarket andcredit rationing hasbeenabolished. TheCentral Reserve Bank'smainobjective
istocontrol inflation, ataskwhich iscomplicated bylarge inflows ofremittances fromSalvadorians
working intheUnited States. While inflation hasbeensubstantially reduced, itstillexceeds international
levels sothat,taken together withthepolicy tomaintain astable nominal rateofexchange withthe
U.S.dollar, therehasbeenarealexchange rateappreciation sincethebeginning ofthe1990s. Persistent
trade deficits aremore thanoffset bytheremittances and,more recently, byprivate capital inflows.
TheGovernment hasacted tofacilitate foreign investment intheeconomy. FDIisallowed
inallsectors inElSalvador, withverylimited areas reserved fornationals. Anewlawisbeing drafted
tosimplify andexpedite theprocess ofregistration andlegalization ofinvestment, andtheopening
upofaone-step window tosimplify investment procedures isenvisaged inthenearfuture. ElSalvador
doesnotapply anytrade-related investment measures.
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ElSalvador inWorld Trade
ElSalvador 'strade isconcentrated bothingoods andinmarkets. Itsmajor markets arethe
UnitedStates,mainlyforagriculturalproductsandclothing(thelattergenerallyassembledinfreezones);
theEuropean Union (EU), alsoforagricultural products; andtheCentral American countries, for
industrial goods.
Theconcentration intradecanbeattributed tothreefactors. First, ElSalvador benefits from
duty-free privileges intheUnited States under theCaribbean Basin Initiative andtheEUunder the
Generalized System ofPreferences. Second, thefreezones havespecialized intheassembly ofclothing
tobeexportedtotheUnitedStatesundertheoff-shoreassemblyprogramme,anotherpreferentialrégime.
Third, intra-regional trade isimportant because oftheCentral American Common Market (CACM).
There isconcern about thelackofexport diversification. While theUnited States preferential
sugar quota andoff-shore assembly régime provide benefits toElSalvador, they alsoinhibit
diversification inproduction andtrade; resources thatmight beputtoother usesareallocated tothe
productionofsugarandtheclothingindustrieslocatedinthefreezones.Inaddition,therealappreciation
ofthecurrency inrecent years hasalsobecome aconstraint onbroadening theexport basebecause
ofthelossincompetitiveness forSalvadorian exports.
Trade Policy Objectives
ElSalvador 'strade policy objectives include moving toward amore outward-oriented trade
régime, strengthening andincreasing overseas market access forSalvadorian products, anddeepening
theintegrationofElSalvadorintheworldeconomy.Ithaspursuedtheseobjectivesthroughitsunilateral
reform programme, aswellasthrough regional, bilateral andmultilateral trade andinvestment
negotiations. Regional trade negotiations attheCentral American levelandwithin theframework of
theFreeTrade AreafortheAmericas (FTAA) areseenasveryimportant, butElSalvador hasalso
intensified itsparticipation atthemultilateral levelthrough theWTO.
ElSalvador acceded totheGATT in1991, butdidnotparticipate inanyoftheTokyo Round
Agreements. Itbecame amember oftheWTO inMay1995, participating inallMultilateral Trade
Agreements butnotinthePlurilateral Agreements. TheGovernment intends toimplement theWTO
Agreements within thetimeperiods available todeveloping countries.
Asaninternational treaty inElSalvador, theWTO Agreements constitutionally takeprecedence
overanyconflicting domestic legislation; however, theauthorities areprogressively introducing
amendments aimed atbringing specific lawsintolinewiththeprovisions totheWTO. Forexample,
newlegislation hasbeenapproved since theentry inforce oftheWTO intheareas ofrulesoforigin,
anti-dumpingandsafeguardprocedures,whileareasthatstillrequireattentionincludecustomsvaluation.
TheCentral American Common Market (CACM) isthecentrepiece ofElSalvador 'sregional
trade relations, andElSalvador hasputspecial emphasis inrevitalizing theCACM. Inthiscontext,
aprocess ofconvergence hasbeenengaged towards theCACM common external tariff, negotiated
in1993, andcommon legislation exists inseveral areas, including customs valuation, intellectual
property, anddumping andcountervailing measures.
ElSalvador, together withGuatemala andHonduras, isnegotiating afreetradeagreement with
Mexico; itisalsoparticipating inthenegotiations toestablish aFreeTrade AreafortheAmericas,
andhasalsosigned bilateral investment agreements withseveral countries.
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Institutional Framework
Principal responsibility fortrade policy lieswiththeMinistry ofEconomy, which absorbed
theprevious Ministry ofTrade in1989. Within theMinistry, theTrade Policy Directorate, created
in1994, hasresponsibility forformulating, implementing andreviewing trade policy, aswellas
negotiatingtradeagreements.Initiativesinspecificareasaffectingtrademaybeproposedbyanyrelevant
ministry butmustbeapproved bytheEconomic Committee, formed bythePresident, Vice-President,
various Ministers andthePresident oftheCentral Reserve Bank.
There isnoindependent bodytoprovide theGovernment withformal advice regarding trade
policies. Nevertheless, theprivate sector, through producer groups andresearch institutions, provides
advice totheGovernment onaninformal basis.
Evolution ofTrade Policies andInstruments
Since 1989, ElSalvador hasprogressively rationalized andreduced itstariffs. Whereas, prior
to1989, applied m.f.n. ratesranged from 5to290percent, theynowrange from 1to30percent,
withanunweighted average of10.1percentin1995. Fewduties arehigher than25percent. Itis
planned toreduce therange ofapplied tariffs to0to15percentby1999; thisseems feasible since,
asnoted above, ElSalvador doesnotrelyontrade taxes tofinance itsfiscal deficit. Infact,inspite
ofthereduction intariffs, dutycollection hasincreased because ofthewhole process ofliberalization
andadecrease insmuggling. Despite thereduction intariffs, escalation persists, providing certain
Salvadorian industries withhigher effective protection thanisevident fromthemoderate nominal rates.
ElSalvador bound mostofitstariffs onaccession totheGATT in1990andextended itsbinding
coverage to100percentintheUruguay Round, albeit at"ceiling" rates, generally at40percent,
which aresubstantially higher thanthose currently being applied.
Most non-tariff barriers havebeeneliminated. Authorization isrequired fortheimportation
ofsugar, import licences remain onlyforjutesacks andsalt,andimport controls remain fortheduty-free
entry ofsome sensitive products fromother members oftheCACM. These procedures havenotbeen
notified totheWTO Secretariat andappear tolacktransparency. Licence procedures haveyettobe
developed fortheimplementation oftariffquotas under ElSalvador 'sWTO tariffication commitments
foragriculture.
Anti-dumping,countervailingandsafeguardproceduresderivefromCentralAmericanlegislation,
which theauthorities believe tobeWTO-consistent. Onlyonecountervailing action hasbeenreported
inthelastfiveyears.
Customs procedures areatpresent being modernized, but,while normal processing timeseems
moderate, delays atcustoms arereportedly aconcern toimports.
ElSalvadorcurrentlyappliesinternationalstandards,butnationalstandards,basedoninternational
standards, arenowbeing developed.
Topromote production ofnon-traditional exports formarkets outside Central America, aduty
drawback system hasbeenestablished andthefree-zone andtax-free arearégimes havebeenreformed.
Thedutydrawback scheme isbased onafixed re-imbursement equivalent to6percentofthef.o.b.
value. There arenoexplicit export subsidies.
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Export procedures havebeensubstantially streamlined bytheopening-up ofaone-stop window
where alldocuments areprocessed. Export taxes havebeeneliminated. Export controls remain only
forsubsidized diesel andgasfordomestic consumption. Aspecial export document showing aquota
entitlement isrequired forpreferential sugar exports totheUnited States andtextiles andclothing exports
subject toquotas inimporting countries. Export permits arerequired forcertain products, including
Portland cement, clinker andsugar canetoensure domestic availability. Coffee exports arecovered
bytheretention planoftheAssociation ofCoffee Producing Countries.
Most domestic pricecontrols wereabolished in1989, and,inpractice, onlycertain petroleum
products arenowsubject toprice controls.
Other thantheconstitutional prohibition onmonopolies andregulatory provisions incertain
servicesareas,thereisnoexplicitlegislationtoregulatecompetitionconditionsintheSalvadorianmarket
andthere isnocompetition authority.
In1993alawregarding intellectual property rights came intoforce. Enforcement ofthislaw
hasbeendifficult because ofinsufficient resources andalackofawareness thatthelawisbeing infringed.
However, theGovernment hasbeenmaking efforts toenforce thelaw,and,when cases havebeen
brought totheirattention, theauthorities havetaken action.
Sectoral developments
Theagricultural, industrial andservices sector havebeenundergoing aprocess ofadjustment
inElSalvador asthepastprotectionist, state-controlled régime hasbeendismantled andmarket forces
havebecome more relevant. Theagricultural sector, traditionally important, suffered badly inthe
1980s asaresult ofthearmed conflict, anill-advised landreform andthecreation ofmarketing boards.
Certaincropssuchascotton,formerlyanimportantexport,seemstohavetotallydisappeared.However,
agricultural production isnowbeing re-activated asaresult ofreforms undertaken since 1992, such
astheguaranteeing oflandproperty rights, theprivatization ofmarketing boards andtheelimination
ofexporttaxes.ElSalvadorhasalsopromotedtheproductionofnon-traditionalexportcropsformarkets
outside Central America.
Salvadorian industry, developed under animport-substitution strategy toserve theCentral
American market, hasfaced difficulties inadjusting tothenewtrading environment. Those industries,
including textiles andclothing, thathavebeenabletodevelop andcompete inmarkets outside theCentral
American region, continue toreceive higheffective tariff protection inthehome market. Industries
thathaveavailed themselves ofthebenefits provided bythefree-zone andtax-free arearégimes have
beensuccessful, andthenumber ofindustries under these tworégimes hasbeenincreasing. Exports
from thefree-zones andtax-free areas haverisen tosome 40percentofthetotalin1995, andthey
continue toincrease.
Theservices sector isthelargest sector inElSalvador, anditsimportance hasincreased since
thebeginning ofthe1990because ofthegrowth inconstruction. Today, theGovernment isengaged
inaprocess ofreconstructing andrenovating infrastructure suchasroads, ports andairports, which
areessential fortrade. TherôleoftheState inother services sectors hasbecome secondary because
oftheprivatization programme.
Conclusion
Since 1989, theobjective oftheSalvadorian authorities hasbeentocreate anefficient and
diversified economy, driven byexport-led growth. Thesolid growth since thereform istestimony
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tothesuccess ofthemacroeconomic stabilization, theextensive tradeliberalization andthederegulation
policies pursued. However, therealappreciation oftheexchange rateinthefaceofsubstantial financial
inflows (mainly remittances) creates difficulties forexport development anddiversification.
Providing astable macroeconomic environment isasinequanonforsustaining oreven
accelerating growth anddevelopment, astheauthorities would wish, butthisneeds tobesupported
bycontinuing theliberalization oftheeconomy. Inthisregard, efforts arebeing made toupdate the
legalframework, speed upcustoms operations, facilitate tradeandinvestment andenforce theintellectual
property rights law. Consideration should alsobegiven tothemore active promotion ofcompetition
inthedomestic market. Efforts needtocontinue inrebuilding andfurther developing thephysical
andservices infrastructure oftheeconomy, aswellasdeepening thehuman capital base, toeliminate
theconstraints thatweaknesses inthese areas impose ondevelopment efforts.
TRADE POLICY REVIEW BODY
ELSALVADOR
Report BytheGovernment
Executive Summary
ElSalvador hasprogressed dramatically sincetheendofthe1980s. In1989, thecountry wasimmersed
inanarmed conflict, percapita income was15percentlower thanin1978, andtheeconomy was
depressed, plagued byserious macroeconomic imbalances anddistortions.
Thanks toanumber offar-reaching economic reforms initiated inJune1989withaviewtoliberalizing
theeconomy, andapolicy ofpeace anddemocratization, theGovernment putanendtothearmed
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 bymacroeconomic
stability.
Inorder tosustain thehigheconomic growth rate,efforts weremade 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.
Major Economic andSocial Reforms (1989-1994)
Thestabilizationandstructuraladjustmentprogrammeimplementedduringtheperiod1989-1994provided
theimpetus foratrade reform involving areduction oftariffs from arange of5to290percentto
arange of5to20percent, andareduction inthenumber oftariff levels from 25toonly4.The
vastmajority oftariffexemptions, non-tariff barriers andpricecontrols wereeliminated, together with
allexport taxes, exchange controls andimport deposits. Statemonopolies onforeign trade andState
enterprises controlling themarketing ofagricultural products were alsoabolished.
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Inthefieldoftaxes, steps were taken toadjust toataxstructure based onfewtaxes, lowratesand
abroad 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.
Duringthisperiod,ElSalvadorcompleteditsaccessiontoGATTandparticipatedactivelyintheUruguay
Round, thereby providing itstrade regime withgreater reliability andtransparency, andhelping to
ensure 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.
Anumber ofsocial welfare programmes, essentially implemented through theSocial Investment
Fundandother 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.
NewDevelopment Strategy andOutlook
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
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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 and
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
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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 byaloanfrom theWorld 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.
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.
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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 withgood prospects
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" tobeadministered
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.
Multilateral, Regional, Subregional andBilateral 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
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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.
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;
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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 infullandon
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
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thecompletion ofthedeep-seated economic andsocial reforms introduced byElSalvador withaview
toimproving itscapacity totakeadvantage ofthenewopportunities offered byeconomic globalization
andliberalization.
END