Chronicle of a Crisis Foretold

El Salvador ended 2004 with a series of grim economic records, including a significant rise in the cost of living that is straining the already tight pocketbooks of working and middle class Salvadorans. The statistics around inflation in the cost of basic food staples and transportation were so significant that they made headline news in January. However, for all but El Salvador’s wealthiest, these statistics only corroborate the economic squeeze they’ve already been struggling to live with for the past few years.

Aracely Lopez works as a secretary at a local NGO here in San Salvador; her husband works as an accountant for Pepsi distribution in El Salvador. As the mother of two, Lopez continues to cut more and more corners to make her and her husband’s paychecks cover all her families needs. “Just four years ago I could take 100 colones ($11.40 U.S.) to the market and buy most of the foods we needed for the week,” says Lopez. “Now, though, I have to take 25 or 30 dollars, and it is still a stretch to buy the basics.” In a country where $154 a month is the minimum wage, and where a secretary might earn between $150-300 dollars a month, thirty dollars a week is a significant amount.

Carmen Martinez, another mother working in San Salvador complains about the ever increasing cost of transportation to the discussion. Martinez commutes to and from a rural community three times a week to work in San Salvador. A year ago she paid $1.14 round-trip, but because of a government-approved increase in bus fare in mid-2004, her trip now costs her $1.50. “Each year, our paychecks cover less and less,” says Lopez. “But when you have children, you learn how to prioritize and make money stretch. Our children’s education is our priority, so we pay for that instead of buying clothes or new shoes,” she explains.

Lopez and Martinez’s situations, in many ways, are better than that of most Salvadorans. Both women and their husbands have “real” jobs, something far from usual in a country with only 30-35 percent of the population having employment in the formal sector, and all of their jobs pay above the minimum wage. They live far above the dollar a day with which more than half the Salvadoran population must survive on.(1) Yet even under these relatively favorable conditions, they, like the vast majority of Salvadorans, are now struggling every month to make ends meet. This reality for working class Salvadoran is a sharp contrast to the idyllic portrait of a healthy economy that El Salvador’s leaders paint in their speeches to the international community. In visits to the U.N. and press conferences with George Bush, El Salvador’s rightwing presidents and their economic ministers wax eloquent about reducing poverty and increasing democracy, padding the numbers to back up their claims.

This façade of economic prosperity that the business and government elite have worked so hard to create is now threatening to come crumbling down. After sixteen years of ARENA (National Republican Alliance) led governments loyally implementing the International Monetary Fund-model of privatizations and opening of markets, El Salvador’s economy shows many signs of being on the brink of collapse. And if one scratches the surface, it becomes clear that the recent numbers about the rising cost of living are not new news, but rather increasingly bad symptoms of an economy that has shown signs of decay for years.

2004 was a record year for inflation, with the average cost of basic foods calculated to have gone up as much as 7.6% (2) and with beans and some other basic staples of the Salvadoran diet calculated to have gone up as much as 50%. This current rise in the cost of living actually began rising dramatically in 2001, when then-President Francisco Flores took advantage of the chaos following the major earthquakes to implement the IMF-backed dollarization plan. (There had been organized, national resistance to dollarization, so it was only when activists were out digging people’s homes out of the ruins that Flores risked pushing through the unpopular legislation.) When pressed to estimate the increase in grocery and school supply costs from 2004 to 2005, Lopez echoed Martinez’s and other mothers’ comments about the real hike having started in 2001, not 2004. “Even though they’re talking about a rise in the cost of living like it’s something new, it was in 2001, when they forced the dollar on us, things got expensive over night. That was when we’d go to the market and find that things that used to cost five colones (57 cents) suddenly cost a dollar.”

The International Loan Trap While individual families are tightening the purse strings to make it through hard times, the national government is also in an economic crisis, coming up far short of bringing in enough revenue to cover the scant national budget. Again following the IMF and World Bank neoliberal recipes, the government has privatized income-earning state companies like telecommunications and granted major tax breaks to large corporations. The result of these policies is an extremely regressive tax system in El Salvador, one that relies mostly on sales taxes and in much smaller part on income taxes, while generally not taxing property. Although it is not new that El Salvador’s richest protect themselves from paying taxes, over the past 10 years even more of the tax burden has shifted to the poor. The most recent ARENA-sponsored fiscal reform law increased the taxes paid by the poor by going after “micro-business people” and making them pay income tax. In El Salvador, anyone who sells anything on the street is classified as a “micro-business,” the majority of whom government statistics report as living in extreme poverty. Thus, the supposed tax reform goes after those selling mangos or candy on the street while major corporations move millions of dollars through El Salvador without paying any taxes.

Any real reform to this model would mean taxing El Salvador’s rich, something ARENA is unwilling to do because it would mean taxing themselves and the interests they represent. Thus, instead of making reforms that might alleviate the problem, ARENA recently led the way to legislatorial approval for El Salvador’s biggest foreign loan package ever – $541 million in foreign bonds. This new set of high-interest loans puts El Salvador’s total foreign public debt up to a new precarious high, representing about 46.5% of El Salvador’s GDP.(3) Ironically, El Salvador has had to go into debt passed the limit (40% of GDP) recommended by the very international financial institutions whose politics got El Salvador into this predicament. Thus, the new loans the government takes out are higher risk, and therefore at higher interest rates, further driving El Salvador into debt.

El Salvador’s leftist political party, the FMLN, has been calling for profound changes in the state’s economic policies. They point out that this past month’s approval of the record high foreign loan package is not a way out of the economic crisis, but rather a move that will only make the crisis worse. Zoila Quijada, FMLN national deputy, explains that “from the beginning of this year’s debate over state budget and fiscal policy, we proposed a series of integral reforms. One important part of our proposal was for a fiscal reform that would begin to change the shape of the tax-payer pyramid, taxing more those who have more.”

Another of the FMLN’s proposed reforms is to re-prioritize social spending in the national budget. Currently about half of the national budget is spent on paying interest on the debt as well as some of the debt principle. Another large portion of the budget goes to public salaries and pensions. Thus, the slice of the budget remaining for things like public health, education, crime prevention is minimal. The FMLN proposes that social spending take a higher priority and that the government search for ways out of the debt trap. For example, both Honduras and Nicaragua have successfully negotiated with international lenders to get part of their debts forgiven. Although El Salvador is in no less desperate a situation, its leaders have been unwilling to lose face (and thus, foreign investment) by accepting that the economy is sinking.

The profitable emigration escape valve Foreign loans are only a piece of the life preserver momentarily keeping El Salvador’s economy afloat. The real mainstay of the Salvadoran economy – remittances from Salvadorans living and working abroad – has nothing to do with macro-solutions, but rather from individual decisions resulting from widespread poverty. As Salvadorans face an ever shrinking labor market, more and more see emigration to the United States as the only option for their family’s survival. Current estimates are of between 2.5 and 3 million Salvadorans living abroad, primarily in the U.S., while six million Salvadoran remain at home. Approximately 600-700 Salvadorans leave each day for the United States. Salvadorans working abroad are constantly sending more and more money back to their families in El Salvador, most of which is spent right away on basic things like food, education, and clothing. In 2004 Salvadorans sent 2.5 billion dollars to El Salvador, significantly more than in 2003.(4) Instead of being concerned about the dependence on this large quantity of money – remittances as a percentage of the gross domestic product in El Salvador is one of the highest in the world – conservative Salvadoran politicians and their backers in the financial sector support emigration. They see it not only as an economic escape valve, but also as a source of profits; banks skim off large percentages in service charges for wiring money from the U.S. to El Salvador. Remittances are so much a part of the economic reality for Salvadorans that the effects are visible – walking by a bank around the first of the month, one sees hundreds of people lined up, sometimes for hours at a time, to withdraw the money their families have sent from the U.S.

Of course, with the dramatic rise in the cost of living, remittances also don’t cover as much as they used to. Thus, the strain of the economic crisis is felt not only by those living in El Salvador, but also by Salvadorans working in the U.S., who now must send back more money to cover their families’ needs.

A possible repeat of the Argentinean collapse While the cost of living and remittances continue rising in El Salvador, economic growth is basically stagnant. The country’s economic growth in 2004 – estimated between 1.3 and 1.8 percent – was the lowest in Central America and the second lowest in all of Latin America, higher only than Haiti. As all economic indicators point toward further economic crisis in El Salvador, and possibility an economic collapse, people are making alarming predictions. FMLN Deputy Salvador Arias, El Salvador’s 2001 Economist of the Year, has been warning about the coming economic crisis for years. Yet as the situation gets worse and ARENA shows no willingness to discuss proposals for changing course, he and others are comparing El Salvador’s current situation to the months leading up Argentina’s economic collapse in December of 2001. Arias predict, “if the state does not reverse this trend of ever increasing indebtedness, El Salvador will quickly be in a worse economic crisis than what Argentineans experienced with their financial ‘corralito,’” referring to December 2001 when banks were going bankrupt and people were in the streets rioting in protest.

FMLN leaders point out that the economic crisis is not coincidental, nor is it the result of poorly-implemented free market reforms, as institutions like the World Bank argue. The economic difficulties facing El Salvador right now are the result of 16 years of loyal implementation of a U.S.-backed neoliberal model that has resulted in increased wealth for the wealthy – for multinational corporations that can buy off privatized telecommunications, or for El Salvador’s economic oligarchs who own the financial sector – and increased poverty for the rest of the nation. Jose Valencia, a national social movement leader, explains that, “the challenge to the FMLN and all the social organizations working to build a more equitable society is to help bridge the gap between people’s understanding of their own difficult economic situation and the role the government has played in creating those problems.”

In order to begin to connect the issues, the FMLN has organized an outreach campaign called the “Truth Mission,” with leaflets, songs on the radio, and house visits talking to people about the practical implications of the national fiscal crisis and national debt. As the legislature was debating this most recent loan package, FMLN collaborators put together the “debt reggaeton,” a song putting lyrics about debt, corruption, and social spending to rhythms from popular dance music. FMLN activists handed out CDs of the song in bus terminals, and it ran for weeks on progressive radio stations.

The social movement’s work to change the course and move El Salvador out of this foretold economic crisis must come soon if the predictions of economists like Arias are accurate. Salvador Arias says that “everything points toward economic growth in 2005 not passing 1%, and that is being optimistic… Furthermore, CAFTA [the Central America Free Trade Agreement] will only accelerate the economic damage to the agriculture, the maquiladora, and the micro, small, and mid-sized business sectors.” With the Bush administration pushing hard in the U.S. for CAFTA this spring or early summer, the future of this failing economic model remains not only in the hands of Salvadorans, but with activists throughout Central America and the United States who are working to stop CAFTA and any other further imposition of economic strangleholds on El Salvador.


(1) “Mas de la Mitad con un dólar al dia,” Desarrollo XXI,   

(2) “La canasta básica subió hasta un 7.6% en 2004,” January 2004, La Prensa Grafica,  

(3) Based on IMF projections, as cited in “FMI recomienda fortalecer finanzas de El Salvador,” La Prensa Grafica,  

(4) Each year remittances go up. In 2003 Salvadorans sent $2.1 billion in remittances. Source: Banco Central de Reservas, “El Salvador recibe 2,547.6 millones de dólares de remesas familiares en 2004,”

For more information, contact the Committee in Solidarity with the People of El Salvador, CISPES, at .

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