Economic Policy for Building Peace: The Lessons of El Salvador 9781685852788

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Economic Policy for Building Peace

Economic Policy for Building Peace The Lessons of El Salvador

edited by

James K. Boyce

LYN NE RIENNER PUBLISHERS

B O U L D E R L O N D O N

Published in the United Stales of America in 1996 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU © 1996 by Lynne Rienner Publishers, Inc. All rights reserved Library of Congress Cataloging-in-Publication Data Economic policy for building peace : the lessons of El Salvador / edited by James K. Boyce. Includes bibliographical references and index. ISBN 1-55587-526-2 (he : alk. paper) 1. El Salvador—Economic policy. 2. El Salvador—Economic conditions—1945- 3. El Salvador—Politics and government—1979-1992. 4. El Salvador—Politics and government—1992- I. Boyce, James K. HC148.E283 1996 338.97284—dc20 96-12269 CIP British Cataloguing-in-Publication Data A Cataloguing-in-Publication record for this book is available from the British Library.

Printed and bound in the United States of America ©

The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1984. 5 4 3 2 1

Contents

List of Tables and Figures Foreword, Anders Kompass Preface, Victor Bulmer-Thomas, Michael E. Conroy, Hector Dada, Keith Griffin, Gabriel Siri, and Lance Taylor Acknowledgments 1 El Salvador's Adjustment Toward Peace: An Introduction James K. Boyce 2 The Historical Background to the Conflict Carlos Acevedo 3 The War Economy of the 1980s Alexander Segovia 4 Macroeconomic Performance and Policies Since 1989 Alexander Segovia 5 The Peace Accords and Postwar Reconstruction Elisabeth J. Wood 6 Domestic Resource Mobilization Alexander Segovia 7 External Resource Mobilization James K. Boyce 8 Distributional Implications of Macroeconomic Policy: Theory and Applications to El Salvador Manuel Pastor, Jr., and Michael E. Conroy 9 The Financial System: Opportunities and Risks Colin Danby 10 Structural Adjustment, the Agricultural Sector, and the Peace Process Carlos Acevedo v

vii xi

xiii xvii 1 19 31 51 73 107 129

155 177

209

vi

11

Contents

Environmental Degradation and Development Options

233

Deborah Barry and Herman Rosa 12

Exports and the Consolidation of Peace

247

Eva Paus 13 Conclusions and R e c o m m e n d a t i o n s

279

James K. Boyce Statistical Appendix Acronyms, Units of Measure, and Spanish Terms Bibliography About the Contributors Index About the Book

285 317 321 345 347 359

Tables and Figures

Tables 2.1 2.2 2.3 2.4 2.5

3.1 3.2 3.3 3.4 3.5

4.1 4.2 4.3 4.4 4.5 4.6 5.1

Heads of State, 1 8 9 8 - 1 9 9 4 Composition of Agricultural Production, 1979 Farm-Size Distribution, 1971 Income of Landless Agricultural Workers in Central America, Early 1960s Average Annual Inflation Rates in Central America, 1950-1979 Businesses Closed Temporarily or Permanently and Jobs Affected, 1 9 7 9 - 1 9 8 5 Economic Assistance Pledged by U S A I D , 1 9 8 0 - 1 9 8 9 Exchange Rates and Inflation, 1 9 7 8 - 1 9 9 0 Costs of Direct and Indirect D a m a g e s Caused by the Armed Conflict and Estimated Reconstruction Costs Occupational Structure, San Salvador Metropolitan Area, 1978 and 1991

22 23 23 24 28

35 38 39 45 46

Operations of the International Financial Institutions, 1989-1993 Composition of Exports, 1 9 8 8 - 1 9 9 3 Macroeconomic Significance of Family Remittances, 1979-1994 Real and Nominal Rates of Protection in 1987 and 1993 Basic Economic Indicators, 1 9 9 0 - 1 9 9 4 Urban Poverty, 1 9 8 8 / 8 9 - 1 9 9 2 / 9 3

56 58 62 64

Financing the Peace Accords: Investment Requirements, 1992-1996

88

vii

52 54

viii

Tables and Figures

5.2

Funding Priorities and Shortfalls, 1 9 9 3 - 1 9 9 6

6.1 6.2

Savings and Investment as a Percentage of GDP, 1 9 7 0 - 1 9 9 4 National and Domestic Savings Rates in 83 Developing Countries, 1 9 7 0 - 1 9 9 2 Tax Coefficient and Composition of Tax Revenues, 1970-1994 Financing of the Peace Process, 1 9 9 2 - 1 9 9 5 Evolution of National D e f e n s e Budget, 1 9 8 9 - 1 9 9 5 Central-Government Budget Outlays in Selected Areas, 1991-1995 C o m m i t m e n t s M a d e by the G o v e r n m e n t of El Salvador to the International Monetary Fund in 1992, and Achievements Planned and Actual Capital Expenditure by the Nonfinancial Public Sector, 1 9 9 2 - 1 9 9 4

6.3 6.4 6.5 6.6 6.7

6.8

7.1 7.2 7.3 7.4

8.1 8.2

9.1 9.2 9.3 9.4 9.5 10.1 10.2 10.3 10.4 10.5 10.6

Official External Assistance to El Salvador, 1 9 9 2 - 1 9 9 5 Funding Requirements and C o m m i t m e n t s for Programs Mandated Under the Peace Accords, 1 9 9 3 - 1 9 9 6 Funding Shortfalls for Higher-Priority Programs as of September 1994 I M F Estimates of Central-Government Expenditures on the Military, Education, and Health, 1 9 8 9 - 1 9 9 3 Topics and Policies in the Stabilization/Adjustment Class/Sector Approach Alternative Policies in the Equity-Enhancing Class/Sector Approach

90 109 112 115 117 118 119

121 122 131 132 134 144

158 170

Absorbing an Inflow Liquidity of the Commercial Banks, 1 9 8 9 - 1 9 9 4 Financial Assets and Liabilities of Salvadoran Households and Firms, 1991 Total Approved Credit f r o m the B a n k i n g System, 1 9 8 5 - 1 9 9 3 Bank and Financiers Branches by Department, 1994

182 185

Value of Agricultural Production, 1980 and 1993 Indices of Implicit Prices of Agricultural Production and GDP, 1 9 8 0 - 1 9 9 3 Value of Agricultural Exports, 1 9 8 6 - 1 9 9 3 C o f f e e Prices and Exports, 1 9 8 0 / 8 1 - 1 9 9 2 / 9 3 Prices of Maize and Beans, 1 9 8 5 / 8 6 - 1 9 9 2 / 9 3 Beneficiaries of Land Reform in the 1980s

211

190 192 193

213 214 216 216 218

Tables and Figures

ix

10.7 10.8 10.9

Farm-Size Distribution, 1971 and 1987 Agrarian Structure, 1 9 6 1 - 1 9 9 1 Agricultural Credit, 1990 and 1993

220 222 224

11.1

Distribution of C o f f e e Lands, 1971 and 1988

243

12.1

Structure of Nontraditional Exports, by Destination and Product, 1992 and 1993 Indicators of Maquila P e r f o r m a n c e , 1 9 8 5 - 1 9 9 3 Structure of Imports, 1 9 8 0 - 1 9 9 3 Daily Real M i n i m u m Wages, 1 9 8 0 - 1 9 9 3

252 253 253 259

12.2 12.3 12.4 A.l A.2a A.2b

Central America: H u m a n Development Indicators, 1992 Gross Domestic Product at Current Prices, 1 9 7 0 - 1 9 9 3 Gross Domestic Product at Constant 1962 Prices, 1970-1993 A.2c National Accounts and G o v e r n m e n t Revenue and Expenditure, 1 9 7 0 - 1 9 9 3 A.3 Balance of Payments, 1 9 7 0 - 1 9 9 3 A.4 External Debt and Net Transfers, 1 9 7 0 - 1 9 9 3 A.5 Structure of G o v e r n m e n t Revenue, 1 9 7 0 - 1 9 9 2 A.6 Structure of G o v e r n m e n t Expenditure, 1 9 7 0 - 1 9 9 2 A.7 Total Approved Credit f r o m Banking System, by Sector, 1985-1993 A.8 Area, Yield, and Output of M a j o r Crops, 1 9 7 0 - 1 9 9 3 A.9 Merchandise Exports, 1 9 7 0 - 1 9 9 3 A . 1 0 Merchandise Imports, 1 9 8 4 - 1 9 9 4 A . l l Consumer Price Index by Major Categories, 1 9 8 0 - 1 9 9 3 A . 1 2 Minimum Real Wages, 1 9 8 9 - 1 9 9 3

285 286 290 296 298 300 304 306 308 309 310 312 314 315

Figures 3.1 3.2 3.3 3.4 3.5 3.6

Terms of Trade, 1 9 7 5 - 1 9 8 9 Growth of G D P and M a j o r Sectors, 1 9 7 8 - 1 9 8 8 Fiscal Deficit, 1 9 7 8 - 1 9 8 9 Inflation, 1 9 7 8 - 1 9 8 9 Composition of G o v e r n m e n t Expenditure, 1 9 7 5 - 1 9 8 7 Real Salaries, 1 9 8 0 - 1 9 8 8

33 36 37 40 43 44

4.1 4.2

Composition of Tax R e v e n u e , 1 9 8 5 - 1 9 9 4 Real Exchange Rate, 1 9 7 0 - 1 9 9 3

59 61

6.1

Private and Public Investment, 1 9 7 0 - 1 9 9 4

111

Tables and Figures

X

6.2

National Versus Foreign Savings, 1 9 8 0 - 1 9 9 4

113

6.3

Tax Coefficient, 1 9 7 0 - 1 9 9 3

116

7.1

Potential Trade-off Between Government Budget Deficit and Social Tensions Due to Inadequate Peace Expenditures

9.1 9.2 9.3 9.4 10.1

11.1 11.2 11.3 11.4 11.5 11.6 12.1 12.2 12.3 12.4 12.5

143

Gross and Net Bank Reserves, 1 9 8 9 - 1 9 9 3 Monetary Aggregates as a Proportion o f GDP, 1 9 6 3 - 1 9 9 3 Formal-Sector Interest Rates, 1 9 9 2 - 1 9 9 3 Domestic Credit as a Proportion of GDP, 1 9 6 3 - 1 9 9 3

181 184 185 188

Relative Prices of Agricultural Goods Compared with Nonagricultural Goods and Services, 1 9 7 0 - 1 9 9 3

212

Population Growth by Selected Zones, 1 9 7 1 - 1 9 9 2 Selected Tributaries of the Lempa River Harvest Employment for Major Export Crops, 1979/80-1988/89 Coffee-Harvest Minimum Wages, 1 9 7 3 - 1 9 9 3 Indices of Real Prices o f Corn and Beans, 1 9 7 8 - 1 9 9 3 Map of Coffee Areas

236 238

Merchandise Exports and Imports, 1 9 8 0 - 1 9 9 3 Nontraditional Exports by Product Type and Destination, 1981-1993 Inflation and Wage-Adjusted Real Exchange Rates, 1980-1993 Net Exports o f C A C M Member Countries to C A C M , 1970-1993 Real Profit Rate and Real Minimum Wage, 1 9 8 0 - 1 9 9 1

248

239 240 240 242

251 257 268 272

Foreword

T h e enormous complexity of p e a c e m a k i n g efforts, particularly in the light of dramatic and seemingly insoluble conflicts around the globe, often diverts attention f r o m the equally difficult issue of the appropriate policies to pursue once peace has emerged. Negotiating an end to devastating conflict can seem nothing short of miraculous; however, once the specter of war recedes, c o n s o l i d a t i n g the peace and m a k i n g it sustainable is an equally daunting task. Unfortunately, there are few blueprints or existing policy f r a m e w o r k s to provide nations e m e r g i n g f r o m war with useful input for e c o n o m i c p o l i c y m a k i n g in the transition f r o m e m e r g e n c y c i r c u m stances to long-term development strategies. This study was undertaken to analyze the experience f r o m one country, El Salvador, presently f a c i n g this challenge, and to explore some of the d i l e m m a s and alternatives with respect to the special needs of nations e m e r g i n g f r o m extended s t r i f e and seeking to consolidate peace. T h e report raises a variety of issues of p a r a m o u n t i m p o r t a n c e to national policymakers, the international d o n o r c o m m u n i t y , international financial institutions, d e v e l o p m e n t practitioners, the UN system, and most important, citizens themselves. Although there is increasing international recognition of the inextricable r e l a t i o n s h i p b e t w e e n peace and d e v e l o p ment, what policies s h o u l d be p u r s u e d to p r o m o t e which d e v e l o p m e n t model still remains a source of intense discussion. In c o m m i s s i o n i n g this study the U N D P ' s underlying objective has been to offer a contribution to this g r o w i n g national and international d e b a t e on postconflict e c o n o m i c policymaking. This study w a s carried out by an i n d e p e n d e n t team of international e c o n o m i s t s w h o s e w o r k w a s r e v i e w e d by an advisory panel of e m i n e n t a c a d e m i c s and d e v e l o p m e n t e c o n o m i s t s . T h e v i e w s e x p r e s s e d in this report are exclusively those of the team that researched and w r o t e it and are not necessarily shared by the UNDP. H o w e v e r , we believe the report provides an initial body of important insight and an analysis to stimulate

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debate on e c o n o m i c policymaking for reconstruction and peace consolidation, a new and challenging area that requires considerable future research and analysis. We look f o r w a r d to f u t u r e contributions f r o m other participants in the development policy debate arena that may f u r t h e r enrich this complex discussion.

Anders

Kompass

Resident Representative United Nations D e v e l o p m e n t Programme San Salvador, El Salvador

Preface

El S a l v a d o r o f f e r s m u c h to g i v e o b s e r v e r s p a u s e . A s m a l l nation on the P a c i f i c c o a s t of Central A m e r i c a , it has l o n g been v i e w e d as e x c e p t i o n a l f o r the e n e r g y a n d e n t r e p r e n e u r s h i p of its p e o p l e , at all social a n d e c o n o m i c levels, as well as for the d e e p social inequality and f e s t e r i n g political tensions that have c h a r a c t e r i z e d most of its history. T w e l v e years of civil war, r e c o g n i z e d by all o b s e r v e r s — f r o m the U.S. Kissinger C o m m i s s i o n to the UN E c o n o m i c C o m m i s s i o n for Latin A m e r i c a and the C a r i b b e a n — a s b r e d of i n e q u a l i t y a n d f e d by i n j u s t i c e , e n d e d in stalemate. T h e peace process that w a s then negotiated, with critical UN mediation, has not been c o m p l e t e d or fully c o n s o l i d a t e d as the bulk of the UN personnel w h o h a v e m o n i t o r e d it are w i t h d r a w n . W h e t h e r the p e a c e will hold d e p e n d s now, more than ever, on the nature of the social and e c o n o m i c p o l i c i e s that the S a l v a d o r a n g o v e r n m e n t i m p l e m e n t s — a c o u r s e of action that could b e n e f i t f r o m p o s i t i v e i n f l u e n c e by the international c o m m u n i t y . Will the s p a c e a f f o r d e d by p e a c e a n d a relative a b u n d a n c e of f o r e i g n e x c h a n g e be used to design p o l i c i e s for r e s o l v i n g the land c l a i m s of f o r m e r c o m b a t a n t s and landholders in the f o r m e r l y c o n t e s t e d a r e a s of the c o u n t r y ? Will the g o v e r n m e n t c h o o s e e c o n o m i c s t r a t e g i e s d e s i g n e d to a m e l i o r a t e the d e e p social inequalities that p r o d u c e d the w a r a n d w o r s e n e d in the last d e c a d e ? Or will it f o l l o w n a r r o w l y d e f i n e d s t a b i l i z a t i o n a n d a d j u s t m e n t policies at the cost of d e e p e n i n g political a n d e c o n o m i c t e n s i o n ? T h i s study a d d r e s s e s these q u e s t i o n s in a p a t h - b r e a k i n g contribution to the d e b a t e o v e r policy d u r i n g p o s t c o n f l i c t u a l t r a n s i t i o n s . T h e study is not a s i m p l e or unbridled critique of the present g o v e r n m e n t policies in El Salvador, nor of the international f i n a n c i a l institutions. It is not a Utopian call f o r social p r o g r a m s w i t h o u t r e c o g n i t i o n of their e c o n o m i c c o s t s a n d c o n s e q u e n c e s . N o r is it a theoretical e x e r c i s e b a s e d on principles that h a v e not b e e n g r o u n d e d a n d tested in c o n t e m p o r a r y S a l v a d o r a n reality. R a t h e r , it

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explores policy alternatives that are realistic and feasible, and that respond directly to the dilemmas of a country e m e r g i n g f r o m civil war. T h e study o f f e r s , first, an overview and interpretation of recent Salvadoran history that provides a carefully s t r u c t u r e d context f o r u n d e r standing the implications of alternative sets of e c o n o m i c policy. T h e early chapters provide a comprehensive background for evaluating the e c o n o m i c policy n e e d s of the nation as it seeks to c o n s o l i d a t e peace. That b a c k g r o u n d e m p h a s i z e s some of the special f e a t u r e s of El S a l v a d o r that may p e r m i t — a n d require—economic policies different f r o m those that have bec o m e most c o m m o n . T h e terrible d a m a g e to i n f r a s t r u c t u r e and the e n v i ronment during 12 years of war, the large-scale internal displacement and the emigration of more than a million people (largely to the United States), and the receipt of nearly a billion dollars per year in remittances f r o m those emigrants are among the most important features covered. T h e s t u d y ' s reflection on alternative sets of m a c r o e c o n o m i c policy recognizes that a newly emerging mainstream perspective on policy can be brought to bear in the Salvadoran case. Conventional e c o n o m i c theory was built, until recently, on the precept that direct a t t e m p t s to alter the distribution of i n c o m e and e c o n o m i c opportunity w e r e likely to inhibit economic growth and reduce the likelihood of f u l f i l l i n g a nation's social and e c o n o m i c goals. C o n t e m p o r a r y policy, strongly i n f l u e n c e d for m a n y nations by the international financial institutions, responded to historical patterns of excessive and inappropriate state intervention in the e c o n o m y by encouraging drastic curtailment of the role of the state. T h e new perspective elaborated here, b a s e d on both c o n t e m p o r a r y growth theory and new empirical studies m a d e w o r l d w i d e , suggests that sustained e c o n o m i c growth is in fact unlikely in c o n d i t i o n s of d e e p and worsening social inequality. Furthermore, the inordinate privatization and liberalization of the economy in reaction to prior state intervention is seen as potentially d a m a g i n g to the well-being of the poor majority, lessening rather than e n h a n c i n g the prospects for long-term growth. T h e alternatives to current policies in El S a l v a d o r proposed and analyzed in this study are drawn from a variety of successful experiences elsewhere in the world. They are adapted to the specific context of El Salvador and c o m p a r e d to the policies recommended by many of the most important international actors. T h e new m a c r o e c o n o m i c perspective, a l o n g with policies r e c o m mended for microeconomic and m e s o e c o n o m i c r e f o r m s , grows out of a direct concern for the design of efficient policies that will promote both equity and the consolidation of peace. T h e redesign and implementation of an agrarian reform of the sort now seen as critical to the success of several of the Asian high-growth countries, the promotion of greater efficiency in the financial sector, and the protection of natural resources for present and future generations are some of the alternative policies the study recommends

Preface

XV

to e n h a n c e El S a l v a d o r ' s prospects for peace, stability, and e c o n o m i c growth. This study was commissioned by the El Salvador o f f i c e of the United Nations Development P r o g r a m m e ( U N D P ) in r e s p o n s e to the critical role it has been asked to play in the Salvadoran peace process. During the negotiations leading to the S a l v a d o r a n peace a c c o r d s of J a n u a r y 1992, the government and the FMLN agreed that reconstruction f i n a n c i n g would require s o m e mediation. T h e U N D P was given the task of d e v e l o p i n g programs for international financial assistance, for coordinating a m o n g international donors, and for m o n i t o r i n g i m p l e m e n t a t i o n of reconstruction, resettlement, and other processes m a n d a t e d in the p e a c e accords. In the face of financial constraints and conventional m a c r o e c o n o m i c policies not directed to the special r e q u i r e m e n t s of a d j u s t m e n t t o w a r d peace, the U N D P has sought to promote dialogue on a p p r o p r i a t e policy in the postconflictual transition. T h e relevance of the issues e x a m i n e d in this study is not confined to El Salvador. T h e analysis will, of course, be particularly g e r m a n e to other countries emerging from civil conflict as they c o n f r o n t very similar dilemmas, but many of its findings are also relevant to the wider range of countries that are at risk of future conflict but still have the chance to avoid it. We c o m m e n d this study to the reader and look f o r w a r d to the vigorous debate w e hope it will provoke.

Victor Bulmer-Thomas, Michael E. Conroy, Hector Dada, Keith Griffin, Gabriel Siri, Lance Taylor

Acknowledgments

This volume is the product of a study commissioned by the United Nations Development Programme in San Salvador. Responsibility for the views expressed herein rests with the authors alone, and should not be attributed to the United Nations or to any of its member agencies. The authors were assisted in the preparation of this volume by an advisory board comprising Victor Bulmer-Thomas, Michael E. Conroy, Hector Dada, Keith Griffin, Gabriel Siri, and Lance Taylor. We are grateful for their many helpful suggestions. We are also grateful to the many individuals in international agencies, in the government of El Salvador, and elsewhere who generously shared time and information with us. We also thank the staff of the San Salvador mission of the United Nations Development Programme, and in particular Anders Kompass and Francesca Jessup, for their unflagging support and encouragement. James K. Boyce

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Economic Policy for Building Peace

1 El Salvador's Adjustment Toward Peace: An Introduction James K. Boyce

The transition from civil war to peace poses formidable challenges for economic policy. During the postconflictual transition the goals of economic policy cannot be limited to macroeconomic stabilization and conventional structural adjustment. Economic policy must also promote the adjustment toward peace. The recent experience of El Salvador offers valuable lessons in a world in which civil conflicts are tragically widespread. The interdependence of peace and development in El Salvador is widely recognized. A failure to achieve broad improvements in living standards would fuel social tensions and heighten the risk of renewed war, and a return to war would shatter hopes for economic revival. Yet there has been little systematic discussion of how economic policy should be reshaped in the special circumstances of a country emerging from civil war. In El Salvador the government and the international financial institutions (IFIs) have pursued essentially the same macroeconomic stabilization and structural adjustment policies they would have followed had the country never been at war. Recognition of the interdependence between peace and development has been translated into the questionable precept that if the peace process were allowed to interfere with economic policy, both would fail. This book is based on the contrary premise that unless the peace process is allowed to reshape economic policy, both will fail. Two broad sets of economic issues arise in the adjustment toward peace. The first concerns the problem of financing the immediate costs of peace, including the establishment of new democratic institutions, the reintegration of ex-combatants into civilian life, and the repair of physical infrastructure. The mobilization of resources for the peace process is a political problem as well as a financial problem. External-assistance actors must deploy appropriate conditionalities if their aid is to support the momentum of the peace process and "crowd in" domestic resources for peace-related needs.

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James K. Boyce

T h e s e c o n d set o f issues c o n c e r n s the longer-term i n t e r r e l a t i o n s h i p s a m o n g e c o n o m i c g r o w t h , i n c o m e distribution, and the c o n s o l i d a t i o n o f peace. I n c o m e inequalities can j e o p a r d i z e both peace and growth. Investments in human capital and natural capital are as critical as investment in physical c a p i t a l . D e m o c r a t i z a t i o n — i n the broad s e n s e o f m o v e m e n t toward a more equitable distribution o f p o w e r — c a n improve the functioning o f both the state and the market. T h e s e issues are not unique to countries e m e r g i n g from c i v i l war, but the p o s t c o n f l i c t u a l setting presents them in exceptionally stark relief. T h e f o l l o w i n g s e c t i o n discusses the short-term issues o f f i n a n c i n g the c o s t s o f p e a c e , the next c o n s i d e r s the longer-term p o l i c y issues, and the final section provides a b r i e f o v e r v i e w o f El S a l v a d o r ' s r e c e n t history as background for the chapters that follow.

Economic Policy and El Salvador's Postconflictual Transition T h e war in El S a l v a d o r had many losers, but no clear v i c t o r s . T h e p e a c e accords brokered by the UN and signed at Chapultepec, M e x i c o , in J a n u ary 1 9 9 2 were b o m o f a military stalemate. T h e 1 2 - y e a r civil war, which c l a i m e d s o m e 7 5 , 0 0 0 lives, had brought neither the g o v e r n m e n t nor the guerrillas o f the F a r a b u n d o M a r t i Front for National L i b e r a t i o n ( F M L N ) the prospect o f a d e c i s i v e victory. Both sides agreed to m a j o r c o n c e s s i o n s to be implemented in phased steps in the ensuing months. T h e government agreed to r e c o g n i z e the F M L N as a legitimate political party, to disband its paramilitary p o l i c e f o r c e s and replace them with a new, politically neutral p o l i c e f o r c e , to purge the armed f o r c e s o f those r e s p o n s i b l e f o r humanrights abuses, to reform the j u d i c i a r y and establish new d e m o c r a t i c institutions, and to transfer land to e x - c o m b a t a n t s and supporters o f the F M L N . In return, the g u e r r i l l a s agreed to lay down their arms and c o n t e n d for power via free e l e c t i o n s . T h e f a r - r e a c h i n g reforms e m b o d i e d in the C h a p u l t e p e c A c c o r d s were hailed as a " n e g o t i a t e d r e v o l u t i o n " by A l v a r o de S o t o , w h o m e d i a t e d the p e a c e talks on b e h a l f o f the S e c r e t a r y - G e n e r a l o f the UN ( G o l d e n 1 9 9 2 ; Karl 1 9 9 2 ) . N e i t h e r the negotiation nor the revolution e n d e d , however, with the signing o f the accords. T h e peace agreement stopped the shooting, but the c o n f l i c t s that rent El S a l v a d o r ' s social fabric continue to b e fought by other m e a n s . T h e p o l i c i e s o f external a c t o r s can e i t h e r strengthen or w e a k e n the p o l i t i c a l r e s o l v e o f both s i d e s to implement the a c c o r d s and consolidate the p e a c e . E c o n o m i s t s and the international f i n a n c i a l institutions they s t a f f are generally ill-prepared to operate in such a context. Contemporary e c o n o m i c theory typically takes for granted, as exogenously given, basic underpinnings

Introduction

3

of the economy that are far from settled in a country torn by civil conflict. These include a well-defined and socially accepted distribution of property or "initial endowments," a legal system to enforce property rights and contracts, and a state able to perform necessary economic tasks not fulfilled by markets, such as the provision of public goods. All of these preconditions are compromised or shattered by civil war, if indeed they existed before it. And they do not spring forth spontaneously upon the signing of a peace agreement. Rather, they must be built gradually in a process regarded as legitimate by all parties to the conflict. Economic theory has little to say about how this crucial process of institutional change is to be accomplished. Indeed, many economists seem oblivious to the need to modify their policy prescriptions in the absence of these fundamentals. International financial institutions such as the World Bank, the International Monetary Fund (IMF), and the Inter-American Development Bank (IDB), cannot so readily ignore these core issues of political economy. Yet these agencies historically have sought to distance themselves from such political issues, straying as little as possible from the familiar economic terrain in which they can claim technocratic expertise. In recent years the IFls have widened their self-proclaimed mandate to encompass such previously off-limits topics as military expenditure and "governance." But although these concerns now feature in the IFIs' public pronouncements and public relations, they remain poorly integrated at the operational level of their country programs. In El Salvador they have been notable by their absence. This lacuna has contributed to a lamentable lack of coordination between economic policy and the peace process. Institutionally this has been manifested in the division of labor between the Bretton Woods institutions (the World Bank and the IMF) and the UN: Economic policy has been the province of the former, the peace process the province of the latter. Writing in the March 1994 issue of Foreign Policy, Alvaro de Soto and Graciana del Castillo (1994a) depict the resulting situation by means of a metaphor: El Salvador is a patient on the operating table "with the left and right sides of his body separated by a curtain and unrelated surgery being performed on each side." Like most metaphors, this image is inexact (see Chapter 5), but it dramatizes a critical issue raised by the Salvadoran experience. 1 Contemporary macroeconomic policy distinguishes between short-run stabilization and medium-to-long-run adjustment. Stabilization involves primarily fiscal and monetary policy; in the division of labor among the IFIs this is mainly the province of the IMF. Adjustment refers to policies designed to alter the structure of the economy, including the relative sizes of the public and private sectors and of the tradeable and nontradeable sectors; this is mainly the province of the World Bank and the regional development banks.

4

James K. Boyce

T h e dominant strand of policymaking at the IFIs maintains that sound e c o n o m i c medicine is basically invariant with respect to time and place. Government budget deficits are assumed to be the root cause o f inflation; hence these deficits must be curtailed, regardless of local c i r c u m s t a n c e s such as the need to fund peace programs. Liberalization of trade and of the financial sector invariably promotes efficiency and growth. Structural adjustment is the key to long-run growth, the benefits o f which will sooner or later percolate to the poor. If, in the meantime, reforms impose shortrun costs on the poor, they should be cushioned by temporary s c h e m e s . Land reform is missing from the policymakers' tool kit because asset redistribution would transgress the minimal role accorded to the state. T h e special features of the postconflictual transition do not imply that sound e c o n o m i c policies are unnecessary, nor that they should be sacrificed to political expediency. But in the aftermath of a civil war the soundness of policies can be ascertained only in light of the political economy o f the peace process. In the short run, economic policy during the postconflictual transition must support political as well as economic stabilization. Political stabilization requires the successful implementation of the measures negotiated in the peace accords. This in turn requires adequate funding for programs mandated by the accords, and a continuing commitment by both sides to the ongoing peace process. Neither of these conditions is an axiomatic feature o f "sound economic policy" prescribed without reference to the peace process. In some cases it could be necessary to ease macroeconomic stabilization targets so as to permit funding o f peace programs through deficit finance. In the case of El Salvador, however, considerably greater domestic resources could be mobilized for the peace process by shifting government expenditure from other uses, notably military spending, and by raising the country's extremely low tax coefficient. T h e I M F reports that "in the Western Hemisphere, El Salvador allocated the largest share of total [government] spending for defense ( 1 6 percent) in 1 9 9 2 , and the smallest share for social security and welfare (3 percent)" (Abdallah 1 9 9 5 , p. 7 7 ) . T h e World Bank ( 1 9 9 4 d , p. 1 8 2 ) reports that total government revenue in 1 9 9 2 was less than 10 percent o f GNP, the lowest o f any middle-income country in the world. In recent years I F I - b a c k e d policies in El Salvador have contributed to some progress in raising tax revenues, though there remains much room for improvement. However, the IFIs have largely neglected military expenditure. T h e failure o f the IFIs to promote vigorously a greater reallocation of domestic resources to peace programs has been compounded by their failure to incorporate the maintenance o f the political will behind the peace process as a policy o b j e c t i v e . Yet large-scale infusions o f external assistance, and the conditions attached—or not attached—to them, can significantly affect the priorities o f political actors and the balance o f power

Introduction

5

a m o n g t h e m . A key l e s s o n of El S a l v a d o r is t h e n e e d f o r " p e a c e c o n d i t i o n a l l y " as an e l e m e n t of s t a b i l i z a t i o n p o l i c i e s d u r i n g p o s t c o n f l i c t u a l transitions.

Growth, Distribution, and the Consolidation of Peace In the long run, e c o n o m i c policy a f t e r a civil w a r must p r o m o t e not only e c o n o m i c a d j u s t m e n t but a l s o a p r o c e s s of political a d j u s t m e n t : the c o n solidation of p e a c e . In such a c o n t e x t d i s t r i b u t i o n a l e q u i t y c a n n o t be releg a t e d to a lower priority than e c o n o m i c g r o w t h — i t m u s t be a policy o b j e c t i v e of the first o r d e r . To p r o m o t e both e q u i t y a n d g r o w t h , e c o n o m i c policy s h o u l d aim not only to s t i m u l a t e o v e r a l l i n v e s t m e n t , but also to a c h i e v e an a p p r o p r i a t e b a l a n c e a m o n g i n v e s t m e n t s in h u m a n , natural, and p h y s i c a l c a p i t a l . R a t h e r than f o c u s i n g n a r r o w l y on d e m a r c a t i n g the res p e c t i v e roles of the m a r k e t a n d the s t a t e , e c o n o m i c p o l i c y d u r i n g p o s t c o n f l i c t u a l t r a n s i t i o n s m u s t a l s o p r o m o t e an e q u i t a b l e d i s t r i b u t i o n of power, without w h i c h neither the m a r k e t nor the state is likely to a d v a n c e s u c c e s s f u l l y the g o a l s of e f f i c i e n c y , e c o n o m i c equity, a n d g r o w t h .

Growth

and Equity

Revisited

Recent years have seen a quiet r e v o l u t i o n in e c o n o m i s t s ' u n d e r s t a n d i n g of the relationship b e t w e e n g r o w t h a n d equity. For m a n y years the d o m i n a n t view was that there w a s a " g r e a t t r a d e - o f f " b e t w e e n these o b j e c t i v e s : Policies to i m p r o v e distributional equity w o u l d exact a price via lower g r o w t h . A r e v i s i o n i s t v i e w p o p u l a r i z e d in t h e 1 9 7 0 s by W o r l d B a n k p r e s i d e n t Robert M c N a m a r a , a m o n g others, held that " g r o w t h with e q u i t y " w a s p o s sible if the i n c o m e i n c r e m e n t s f r o m g r o w t h c o u l d be d i r e c t e d d i s p r o p o r tionately to the poor. In the 1990s f r e s h e m p i r i c a l a n d theoretical w o r k has a d v a n c e d a third a n d s t r i k i n g l y d i f f e r e n t p r o p o s i t i o n : E q u i t y not only is c o m p a t i b l e with g r o w t h , but positively p r o m o t e s it. On the basis of a c r o s s - s e c t i o n a l study of m o r e than 4 0 c o u n t r i e s o v e r the q u a r t e r - c e n t u r y f r o m 1 9 6 0 to 1 9 8 5 , R o d r i k ( 1 9 9 4 ) c o n c l u d e s that the c o u n t r i e s with m o r e e q u a l d i s t r i b u t i o n s of l a n d a n d i n c o m e e x p e r i e n c e d m o r e rapid g r o w t h . P r i m a r y - s c h o o l e n r o l l m e n t — a r o u g h i n d i c a t o r of equity in the allocation of h u m a n - c a p i t a l i n v e s t m e n t — a l s o had s t r o n g positive e f f e c t s on g r o w t h . O n e a v e n u e by w h i c h e q u i t y a p p e a r s to h a v e f o s tered g r o w t h w a s the e n c o u r a g e m e n t of i n v e s t m e n t in p h y s i c a l c a p i t a l : L a n d d i s t r i b u t i o n a n d p r i m a r y - s c h o o l e n r o l l m e n t b o t h w e r e statistically s i g n i f i c a n t d e t e r m i n a n t s of the i n v e s t m e n t / G D P ratio. In an analysis with clear r e l e v a n c e to El S a l v a d o r , A l e s i n a and Perotti ( 1 9 9 3 ) test the proposition that a key link in the causal chain f r o m equity

6

James K. Boyce

to growth is political stability. They first test whether income inequality increases political instability, then whether political instability reduces investment. To both questions the answer is " y e s , " a result they term "not only statistically significant, but also economically significant." A third econometric study, by Birdsall and Sabot (1994), likewise finds that countries with lower income inequality tend to have higher growth. These authors suggest that an important equity-to-growth link is investment in basic education. High income inequality reduces both the demand for primary education and its supply. D e m a n d is limited because poor families cannot afford to send their children to school, and supply is limited because the rich resist paying taxes to subsidize education for the poor. Again, the analysis is quite relevant to El Salvador. Whereas public expenditure on education in "medium human development" countries rose from 2.5 percent of GNP in 1960 to 4.7 percent in 1990, in El Salvador it declined over the same period from 2.3 percent of G N P to 1.8 percent (UNDP 1994d, p. 158). 2 Writing in the American Economic Review, Persson and Tabellini (1994) pose the question, "Is Inequality Harmful for G r o w t h ? " They too answer in the affirmative. They present empirical evidence f r o m a longrun historical panel of nine industrialized countries and from a postwar cross-section of 56 countries; in both, econometric analysis indicates that income inequality significantly lowers growth. Investment is again an important mediating variable: Higher inequality leads to lower investment and hence to lower growth. 3 In a historical study of the Americas since the European conquest, Engerman and Sokoloff (1994) similarly conclude that differences in "the degree of inequality in wealth, human capital, and political power" account for the enormous long-run variation in economic performance. Their analysis highlights the historical link between extreme inequality and the cultivation of certain export crops, including sugar and c o f f e e , a relationship that has featured prominently in El Salvador's history. A further strand in the recent literature focuses on how inequality can impede growth in the presence of financial-market imperfections. In these theoretical models the poor are blocked from undertaking high-growth activities by their inability to afford the initial setup costs, and owing to imperfect financial markets they are unable to borrow for this purpose. Plausible examples include investment not only in physical capital but also in education. Hence policies to redistribute income and wealth, as well as policies to reduce imperfections in credit markets, can enhance growth. 4 It is still early to speak of a new consensus on growth and equity in development economics, but signs of an impending shift are evident. In The East Asian Miracle, the World B a n k ' s ( 1 9 9 3 b ) widely publicized study of the economic performance of the "high-performing Asian economies," great importance is attached to the role of widespread primary

Introduction

7

education in laying the foundation for growth. Other dimensions of distributional equity also feature in the analysis. Equity is recognized as a source of political legitimacy (p. 158); land reform in Taiwan is held to have advanced both land productivity and political stability (p. 161); successful land reform in China, Japan, Korea, and Taiwan "helped to lay the foundation for rapid, shared growth" (p. 169); and the failure of the Philippines to share this success is attributed to the fact that "Philippine policy making has historically been captive to vested interests that have shaped economic policy to protect and enhance their privileged position, often to the detriment of national well-being" (p. 169). Despite these insights, however, The East Asian Miracle for the most part echoes the McNamara-era view that growth with equity is merely possible, stopping short of the recognition that equity actually promotes growth. Indeed, the legacy of the old trade-off mentality is still apparent in that the successful combination of rapid growth with equity is regarded as "the essence of the miracle," 5 rather than as the logical, unmiraculous result of causal links from equity to growth. In November 1994 a delegation from the government of El Salvador visited the World Bank and IMF in Washington, lunched with the principal author of The East Asian Miracle, and carried multiple copies of the book back to El Salvador. It remains to be seen whether Salvadoran policymakers will build on the vital lessons of the East Asian experience regarding the importance of equity—notably in land distribution and education—for economic growth. Investment

in Natural, Human, and Physical

Capital

Investment in physical capital—the plant and equipment with which labor transforms raw materials—has long been recognized as a basic precondition for economic growth. Investment in human capital—the health and education of the labor force—is now widely agreed to be of comparable or perhaps even greater importance. 6 In El Salvador there is considerable scope for greater public and private investment in both physical and human capital. As a share of GDP, El Salvador's gross domestic investment is among the lowest in Latin America. 7 El Salvador also has the lowest primary-school enrollment ratio of any country in the Western Hemisphere, with the exception of Haiti. 8 Investment in natural capital—that is, sources of raw materials, and sinks for the disposal of by-products of economic activity—has yet to receive comparable attention from policymakers, despite much recent talk of "sustainable development." In part this is because some regard natural capital as a fixed endowment, something that cannot be augmented by human activity, while others regard physical and human capital as perfect substitutes for natural capital. The first view gives rise to Malthusian

8

James K. Boyce

p e s s i m i s m : Humanity is on a o n e - w a y road to depletion o f its natura! capital, and the only question is how q u i c k l y we travel it. T h e s e c o n d v i e w g i v e s rise to P a n g l o s s i a n o p t i m i s m : A s natural capital is depleted, price s i g n a l s will induce s m o o t h f a c t o r substitution and t e c h n o l o g i c a l c h a n g e , ensuring that we continue to inhabit the best o f all possible worlds. Neither view r e c o g n i z e s the b a s i c fact that humans can invest

in natural capital, as

well as deplete it. For e x a m p l e , soil erosion and the depletion and degradation o f water supplies are today critical e n v i r o n m e n t a l problems in many c o u n t r i e s . El S a l v a d o r f a c e s them in e x t r e m e f o r m s ( s e e Chapter 11). Yet appropriate human interventions can slow and even reverse these p r o c e s s e s . S o i l c o n servation measures, including terracing, afforestation, and the cultivation o f c o v e r crops and green manures, can restore soils and improve water retention. Integrated pest m a n a g e m e n t can, over time, allow e c o s y s t e m s to r e c o v e r from the t o x i c l e g a c y o f i n d i s c r i m i n a t e pesticide use. Pollution control can allow water quality to r e c o v e r from c o n t a m i n a t i o n by industrial and domestic wastes. T h e problem is that many o f the returns to such investments in natural capital are external, accruing to others in society, rather than internal to the investor. For e x a m p l e , the c a m p e s i n o who protects soil and water may derive s o m e personal benefit from doing so, but much o f the s o c i a l benefit will be reaped by others. No market mechanism exists by which those others can pay the c a m p e s i n o to invest the " r i g h t " amount o f time and money in natural capital. In the absence o f social mechanisms to correct this market failure, there will be systematic underinvestment in soil conservation, water quality protection, and other types o f natural capital. T h e possible corrective mechanisms include state regulation, taxes and subsidies, community management, and informal norms and sanctions, alone or in combination. I n v e s t m e n t s in natural, human, and physical capital are highly c o m plementary; that is, one type o f investment can enhance the s c a l e and productivity o f the others. F o r e x a m p l e , investment in the human capital o f the poor can lead to greater investment in natural capital by several routes: by reducing their need to degrade the environment for immediate survival; by improving their ability to c o m b a t environmental degradation o f which they are victims, not perpetrators; and by diffusing k n o w l e d g e o f the relationships b e t w e e n e c o n o m i c activity and the e n v i r o n m e n t ( S e g u r a and Boyce 1994). I n v e s t m e n t in physical and human capital f o r m s c r i t i c a l links in the newly r e c o g n i z e d causal chain from distributional equity to growth, as noted earlier. Investment in natural capital c o n s t i t u t e s a further link. G r e a t e r equality o f wealth and p o w e r can be e x p e c t e d to result in lower rates o f e n v i r o n m e n t a l degradation by lowering the discount rates o f the poor, and by enhancing the ability o f the less powerful to resist the imposition o f external c o s t s on them by the m o r e powerful ( B o y c e 1 9 9 4 ) . El

Introduction

9

Salvador offers striking examples of the effects of political and economic inequalities on natural capital, ranging from the environmental damages inflicted by the war itself to the current threat to San Salvador's aquifer from attempts to urbanize disputed lands at the adjacent El Espino coffee cooperative (Barraza 1994). Democratization:

Beyond the Market and the State

In El Salvador, as elsewhere, a central element of the structural adjustment programs backed by the IFIs has been the "modernization" of the state. In practice this has primarily meant efforts to trim the size of the state by privatizing state-owned enterprises and eliminating certain agencies and functions, coupled with attempts to increase the efficiency of what remains. Such efforts are often well justified in terms of both growth and equity. What has been generally missing from IFI prescriptions, however, has been democratization, both in the broad sense of promoting a more equitable distribution of power, and in the narrow sense of strengthening democratic institutions such as free elections, the protection of human rights, and the administration of justice. This omission reflects the widespread tendency among economic theorists and policymakers alike to concentrate on defining the appropriate roles of the market and the state, while abstracting from the political economies within which both are embedded. When the problems posed by the distribution of power are broached at all, the favored solution is "technocratic insulation"—defined in The East Asian Miracle as the ability to formulate and implement policy "with a minimum of lobbying for special favors from politicians and interest groups" (World Bank 1993b, p. 167). Successful economic policy in El Salvador will require critical state interventions that have been underemphasized in the adjustment programs implemented to date. These include interventions to promote a more equitable distribution of income, to correct financial-market imperfections, to redress environmental externalities, to implement agrarian reforms, and to promote competitive industries in the tradeable-goods sector. But these interventions—or, for that matter, any other program of state modernization, whatever its mix of market and state—are unlikely to succeed in the absence of political reforms that establish checks on the use and abuse of power. Democratization, not only in the narrow electoral sense but also in the broad sense of establishing an equitable distribution of power, is crucial because it provides the only secure foundation for accountability. Democratic accountability is more desirable than technocratic insulation not only because it is a virtue in itself, but also because in its absence there can be no guarantee that technocrats will in fact pursue the public interest. 9 In El Salvador it is also more viable, because technocratic insulation

10

James K. Boyce

is quite difficult to a c h i e v e in the wake o f a negotiated settlement to a civil war, the e s s e n c e o f which is the creation o f c h e c k s and b a l a n c e s on the e x e r c i s e o f power. 1 " D e m o c r a t i c accountability thus can better serve the function ascribed to t e c h n o c r a t i c insulation in The East Asian

Miracle:

It can foster the for-

mulation and implementation o f policies that advance the long-term interests o f the society as a whole rather than the short-term interests o f a powerful few. D e m o c r a c y in the broad sense provides the n e c e s s a r y political leverage: •

T o protect b a s i c human rights

•

T o safeguard the property rights o f the poor

•

To

foster

the

political

stability

needed

to e n c o u r a g e

private

investment •

T o orient p u b l i c investment toward a d v a n c e m e n t o f the public interest

• •

T o c o m b a t corruption T o prevent the socially injurious e x e r c i s e o f market power, that is, m o n o p o l i s t i c or o l i g o p o l i s t i c control over input and output markets

•

T o secure government action to redress environmental externalities, such as industrial pollution and watershed degradation

•

T o m i n i m i z e the extent to which s e l e c t i v e g o v e r n m e n t interventions, such as s u b s i d i z e d credit or export i n c e n t i v e s , are captured by unproductive rent s e e k e r s instead o f b e i n g e f f e c t i v e l y tied to e c o n o m i c performance

•

T o implement redistributive p o l i c i e s in pursuit o f i n c l u s i v e e c o n o m i c growth

In s u m , m e d i u m - and long-term adjustment toward p e a c e requires more than a c h i e v i n g m a c r o e c o n o m i c b a l a n c e s b e t w e e n e x p o r t s and imports, saving and investment, and government revenue and expenditure. It also r e q u i r e s equity, that is, b a l a n c e in the distribution o f i n c o m e and wealth; b a l a n c e d investment in human, natural, and physical capital; and democratization to a c h i e v e b a l a n c e in the distribution o f power. E c o n o m i c p o l i c y during the p o s t c o n f l i c t u a l transition t h e r e f o r e must aim to s e c u r e not only stabilization and growth but also equity and the consolidation o f peace. P o l i c i e s that fail to build on the powerful c o m p l e m e n t a r i t i e s among these o b j e c t i v e s will ultimately fail to a c h i e v e any o f them.

War and Peace: Learning from El Salvador El S a l v a d o r ' s civil war provided a dramatic illustration o f the potentially d e b i l i t a t i n g e c o n o m i c impact o f great i n e q u a l i t i e s o f wealth and power.

Introduction

11

The economic, political, and social changes wrought by war have created the opportunity to at last redress these inequalities and thereby lay the foundation for a more stable and prosperous future. Inequality

and Organized

Violence

The roots of war in El Salvador can be traced to the latter half of the nineteenth century, when the country became a major producer and exporter of coffee. T h e volcanic slopes of central and western El S a l v a d o r are admirably suited for growing c o f f e e . Most of these lands were held by indigenous communities in the mid-nineteenth century as communal property. In response to the opportunities presented by c o f f e e , c o m m u n a l property was abolished by state decree in 1882. By the turn of the century the indigenous communities had been forcibly evicted and the country's best coffee lands converted into latifundia, large estates o w n e d by the "Fourteen Families" w h o f o r m e d the core of the ruling o l i g a r c h y . " T h e result was among the most inequitable patterns of land distribution in the world. T h e r e is no inherent technological reason that c o f f e e must be grown on large estates; in s o m e countries, including Costa Rica and C o l o m b i a , coffee is widely grown on small family farms. There w a s a strong political logic, however, behind the large-estate m o d e of c o f f e e cultivation that emerged in El Salvador. T h e advent of the international c o f f e e market presented lucrative opportunities for profit, and these opportunities—and the land to realize t h e m — w e r e seized by those with the political and economic power to do so. T h e expropriation and concentration of landholdings " f r e e d " labor to work on the c o f f e e estates. But much of this labor was required only for the harvest. For the remainder of the year, the seasonal laborers survived on minifundia, very small holdings w h e r e they grew s u b s i s t e n c e crops such as maize and beans. A central aim of the c o f f e e oligarchy was to keep this labor available and cheap. T h e deployment of military forces to maintain rural law and order and s u p p r e s s intermittent peasant revolts contributed to this end. El S a l v a d o r ' s agrarian structure thus was f o r g e d by a process that bears little resemblance to the stylized theories of social interaction found in neoclassical e c o n o m i c s textbooks. It did not e m e r g e f r o m f r e e exc h a n g e s a m o n g o p t i m i z i n g individuals, in which the m o r e e f f i c i e n t producers bought land at the prevailing market price f r o m others, w h o then merrily reinvested their capital in alternative lines of production in which they could better c o m p e t e . Rather, the c o u n t r y ' s agrarian structure arose through intimidation, b l o o d s h e d , and hatred, the scars of which remain visible to this day. Organized violence was necessary not only to create El Salvador's oligarchical agroexport structure, but also to maintain it. T h e Great Depression

12

James K. Boyce

and the attendant slump in world coffee prices hit the Salvadoran economy hard. Coffee growers responded by slashing wages and employment. Discontent mounted, and a peasant revolt broke out in 1932. The Salvadoran Communist Party, founded three years earlier and led by Farabundo Marti, helped to lead the uprising, but it was not a carefully organized affair. The military quickly crushed the revolt, and government forces killed 10,000 to 30,000 people in the matanza, the slaughter, an event indelibly imprinted on the country's historical memory. Fifty years later El Salvador was engulfed in a civil war in which the government confronted the Farabundo Marti National Liberation Front, named after the communist leader executed during the matanza.12 No single event marks the beginning of the war; it gathered force in a rising tide of violence. The October 1979 coup by young army officers brought to power a junta that combined reformist policies with severe repression. In January 1980 the largest demonstration in El Salvador's history—one aim of which was "to pay homage to the compañeros who had died in the 1932 uprising"—was fired on by paramilitary forces who killed scores and wounded hundreds (Montgomery 1995, pp. 108-109). In March 1980 the government promulgated an agrarian reform, nationalizing large estates. That same month Archbishop Oscar Romero was assassinated during a mass; a few days later the thousands of people who gathered in central San Salvador for his funeral were attacked with bombs and machine guns by military forces, leaving scores dead. By the end of the year, virtually all avenues for peaceful opposition to the government had been closed. The junta and its successors, including the government of José Napoleon Duarte that was elected in 1984, received strong backing from the U.S. government, which in a 1981 white paper characterized the Salvadoran conflict as "a textbook case of armed aggression by communist powers." 1 3 The global rivalry between the United States and the Soviet Union that was being waged in earnest in the 1980s helped to fuel the civil conflict in El Salvador. But superpower contention was not a sufficient condition for civil war. The central role of economic and political inequalities in the origins of the war was implicitly recognized in the U.S.sponsored doctrine of low-intensity conflict, which coupled military force with economic and political reforms designed to win the "hearts and minds" of the populace. The combination of repression and reform both reflected and reinforced divisions among political actors in El Salvador and the United States. In the United States, reformist measures were necessary for the Reagan administration to win support in the opposition-controlled Congress for stepped-up economic and military aid. In El Salvador the political opening fostered by reforms permitted some open criticism of government policies. Such criticism in turn was often met by further acts of repression. 14

Introduction

13

A l f r e d o Cristiani of the rightist Alianza R e p u b l i c a n a Nacional ( A R E N A ) party was elected president in March 1989. Cristiani represented what has been variously described as the "agro-industrial," " m o d ern," or " m o r e m o d e r a t e " w i n g of El S a l v a d o r ' s ruling elite, and his ascendancy to the presidency marked a shift in the balance of power within the A R E N A party. 1 5 While e m b a r k i n g on a new e c o n o m i c agenda of neoliberal r e f o r m s , the Cristiani g o v e r n m e n t c o n t i n u e d the low-intensity conflict strategy and the intermittent peace talks with the F M L N begun under D u a r t e ' s government. T w o dramatic events in N o v e m b e r 1989 intensified the search f o r peace. The first was an FMLN o f f e n s i v e that brought the war to the capital and dispelled illusions that either side could soon win the war. The second was the murder of six Jesuit priests at the University of Central A m e r ica in San Salvador. 1 6 T h e s e e v e n t s helped to precipitate a shift in U.S. policy in favor of a negotiated settlement. By the end of 1990 the United States had cut military aid to El Salvador and imposed conditions whereby military aid would be eliminated altogether if the government failed to negotiate in good faith, and restored to previous levels if the FMLN did not do the s a m e (Whitfield 1994, p. 188). In a sense, the peace agreement that followed was born of the excesses of violence that had preceded it. A l v a r o de Soto (1994, pp. x i i i - x i v ) expressed this paradox as follows: " T h e Jesuits had to lose their lives to provide the moral outrage that kept the Salvadoran a r m e d f o r c e s on the defensive and forced the concessions at the negotiating table, without which a durable peace could not possibly have been built." El Salvador's

Negotiated

Revolution

The Chapultepec Accords, signed in January 1992, aimed not only to end the civil war but also to resolve the underlying causes of the conflict. T h e potential for organized violence w a s to be reduced through demobilization of armed combatants, a purge of military officers guilty of h u m a n - r i g h t s abuses, the d i s b a n d i n g of paramilitary forces, and the creation of a neutral police force, the National Civilian Police (PNC). A more equitable distribution of power was to be achieved through the strengthening of d e m o cratic institutions, including reform of the judiciary, free elections open to participation by all parties, and the creation of a permanent human-rights o m b u d s m a n ' s office. T h e most pressing economic inequalities were to be redressed through land transfers to ex-combatants and F M L N supporters, microenterprise and housing assistance for e x - c o m b a t a n t s , and e x p a n d e d poverty-alleviation programs. Under the timetable established in the peace accords, each side agreed to implement a series of measures tied to complementary actions by the other. The implementation process was beset by a number of delays, however.

14

James K. Boyce

These were sometimes b l a m e d on financial constraints, but the basic reasons for the delays were generally political: T h e process of negotiation did not end with the signing of the accords. For e x a m p l e , the purge of the army o f f i c e r corps o c c u r r e d only after substantial d e l a y s and required strong international pressure. A particularly serious threat to the p e a c e process c a m e in October 1992, w h e n the F M L N halted its p h a s e d disarmament in response to a lack of progress in the land-transfer program; this dispute culminated in a further UN-brokered agreement designed to expedite the transfer of lands. T h e establishment of the P N C was also subject to n u m e r o u s delays. T h e d i s m a n t l i n g of the National Police, originally slated for the end of 1993, in the end was not c o m p l e t e d until J a n u a r y 1995. The March 1994 elections represented a landmark in the i m p l e m e n t a tion of the peace accords. T h e A R E N A party won the presidency, the largest share of seats in the Legislative Assembly, and the vast majority of municipal elections, while the F M L N , participating in elections for the first time, finished second in the presidential race and won a number of assembly seats. Although the elections were marred by incomplete voter registration and polling irregularities, they w e r e peaceful and the o u t c o m e was regarded as reasonably fair by most observers. 1 7 The land-transfer program established by the accords and the October 1992 supplemental agreement provided for voluntary land transfers to exc o m b a t a n t s on both sides and to peasant s u p p o r t e r s of the F M L N in the f o r m e r c o n f l i c t i v e zones. L a n d o w n e r s w h o agreed to give up their lands were to be compensated at "market prices." T h e program was described by many as a land-for-arms exchange. De Soto and del Castillo (1994b, p. 11) observe: T h e land transfer program w a s certainly not an attempt at land r e f o r m or a m e c h a n i s m for i n c o m e redistribution as such, but rather the main v e n u e in the A g r e e m e n t through w h i c h e x - c o m b a t a n t s and s u p p o r t e r s of the F M L N w o u l d be reintegrated into the productive life of the country.

The fulfillment of even this limited aim has proven problematic, however: T h e transfer program is now far behind schedule; agricultural credit and technical assistance have not been readily available; the current m a c r o e c o n o m i c environment is very unfavorable to agriculture; and the recipients are saddled with debts for land acquisition they are unlikely to be able to repay. Failures to fulfill the expectations of demobilized ex-combatants have had serious implications for p u b l i c security. E x - c o m b a t a n t s are widely cited as a factor in the c o u n t r y ' s recent crime wave. Moreover, protests by ex-combatants periodically threaten to rekindle organized violence. In January 1995, for example, former soldiers occupied the Legislative Assembly

Introduction

15

and other government buildings in San Salvador for two days, taking hundreds of hostages and blocking key highways. The weekly journal Proceso. commented: "The actions taken by the demobilized soldiers demonstrate the extremes to which desperate people, without jobs or a future, can resort" (Center for Information, Documentation and Research Support 1995). The Chapultepec Accords represent only initial steps toward peace in El Salvador. Further progress will require a deepening of economic reforms to achieve a more equitable distribution of wealth and income, and continued strengthening of democratic institutions to ensure the rule of law. In their absence, the roots of organized violence in El Salvador will remain intact. Generalizing

from the Salvadoran

Experience

El Salvador's peace process has been facilitated by two favorable circumstances: the end of the Cold War and an abundance of foreign exchange thanks to external assistance and remittances from Salvadorans overseas. The superpower rivalry between the United States and the Soviet Union was not the prime mover of the Salvadoran conflict. As President Alfredo Cristiani remarked at the signing of the peace accords, the war in El Salvador had "profound social, political, economic and cultural roots . . . in synthesis, the absence of a truly democratic form of life" (quoted by Whitfield 1994, p. 380). But as noted above, the U.S.-Soviet conflict added fuel to the fire. The end of the Cold War unquestionably created an external environment more conducive to peace in El Salvador. Remittances and external assistance have cushioned the country's postconflictual transition in three ways. First, ample foreign exchange has prevented shortages of imports. 1 8 Second, the erosion of the living standards of the poor has been moderated, and for some reversed, by transfers from relatives abroad. Third, external resources have provided a "cushion of governability," easing political pressures and conflicts. Although the volume of these inflows in El Salvador is remarkable, the phenomenon is not exceptional in postconflictual settings: The end of a war often triggers both substantial aid and an influx of private capital. 1 9 Apart from these somewhat special circumstances, many aspects of the Salvadoran experience are of general relevance to the formulation of economic policy in postconflictual transitions. A negotiated conclusion to a civil war inevitably poses the short-run problems of securing the financial and political preconditions for implementing the peace accords. In such a context there is a critical need for "peace c o n d i t i o n a l l y " in the policies of the major external-assistance actors, including the international financial institutions. Over the long run, the consolidation of peace in countries emerging from civil war often hinges, as in El Salvador, on the forging of a more equitable distribution of wealth and power. If El

16

James K. Boyce

S a l v a d o r s u c c e e d s in its a d j u s t m e n t t o w a r d p e a c e , and if the international c o m m u n i t y a b s o r b s t h e l e s s o n s o f that e x p e r i e n c e , then t h e terrible w a r will not h a v e b e e n e n t i r e l y in v a i n .

Notes 1. For a more general analysis of coordination problems between the UN and Bretton Woods institutions, see Childers and Urquhart (1994, pp. 7 7 - 8 7 ) . 2. The composition of public expenditure on education is also important. Birdsail and Sabot (1994, p. 4) observe that in Latin America as a w h o l e the ratio of total public expenditure on education to G D P has been similar to that in East Asia, but that the share allocated to basic (as opposed to higher) education has been notably lower. They attribute this to pressure from high-income families "to channel subsidies to higher education where their children will be the beneficiaries." 3. Persson and Tabellini's theoretical analysis hypothesizes that the reason that greater inequality leads to lower investment is that in d e m o c r a c i e s the distributional conflicts generated by inequality lead to redistributive policies that tax or otherwise deter investment. They find empirical support for this in the history of Organization for E c o n o m i c Cooperation and Development ( O E C D ) countries; their postwar cross-sectional analysis also indicates that the negative relation between inequality and growth holds only in d e m o c r a c i e s . This hypothesis can be questioned. Much of the new growth and equity literature ( i n c l u d i n g Persson and Tabellini's own main empirical results) suggest the opposite c o n c l u s i o n : that redistributive policies can enhance growth. For evidence of a positive association between democracy and private investment in Latin America, see Pastor and Hilt (1993). 4. See, for example, Galor and Zeira (1993). Danby (in this volume) discusses credit-market imperfections in El Salvador. 5. World Bank (1993b, p. 8). " T h e striking characteristics of the East Asian miracle are rapid and persistent growth in a context of high income equality," the v o l u m e ' s principal author remarked at an I M F Economic F o r u m . " T h i s unusual combination indeed suggests a miracle" {IMF Survey 1995, p. 78). 6. The East Asian Miracle (World Bank 1993b, p. 52), for example, concludes that "primary education is by far the largest single contributor to the HPAEs' [highperforming Asian e c o n o m i e s ' ] predicted growth rates." See also Rodrik (1994, pp. 15-22). 7. In 1992, according to the World Bank (1994d, p. 178) gross d o m e s t i c investment in El Salvador stood at 16 percent of GDP; the only country in Latin America for which a lower ratio was reported was Argentina, at 15 percent. 8. T h e ratio for El Salvador, according to the U N D P ' s (1994d, pp. 1 5 6 - 1 5 7 ) Human Development Report, was 71 percent in 1990. For c o m p a r i s o n , in Nicaragua the reported ratio was 76 percent, in Honduras it was 9 3 percent, and in Mexico it was 100 percent. 9. One can contrast the voluntarism of The East Asian Miracle—in which economic technocrats left to their own devices choose to advance the public interest— to Alice A m s d e n ' s ( 1 9 8 9 ) characterization of the South Korean model as one in

Introduction

17

w h i c h t h e g o v e r n m e n t d i s c i p l i n e d t h e c a p i t a l i s t s , a n d t h e s t u d e n t m o v e m e n t in t u r n " d i s c i p l i n e d " the g o v e r n m e n t . 10. T h i s c a n b e c o n t r a s t e d t o t h e s i t u a t i o n f a c i n g a n o c c u p a t i o n

government

i n s t a l l e d b y e x t e r n a l p o w e r s a f t e r a n i n t e r n a t i o n a l c o n f l i c t , a s in p o s t w a r K o r e a a n d Japan. 11. A s B u l m e r - T h o m a s ( 1 9 8 7 , p . 3 4 0 ) n o t e s , in f a c t s o m e 6 0 f a m i l i e s , r a t h e r t h a n 14, c a m e t o d o m i n a t e t h e c o u n t r y ' s e c o n o m i c , s o c i a l , a n d p o l i t i c a l l i f e . 12. T h e F M L N w a s f o r m e d in 1 9 8 0 b y a n a l l i a n c e o f f i v e p a r t i e s ; f o r d e t a i l s , see M o n t g o m e r y (1995, Chapter 4). 1 3 . C i t e d b y W h i t f i e l d ( 1 9 9 4 , p. 4 0 5 ) . 14. " B e t w e e n

1983 and

1986," Whitfield

(1994,

pp. 2 4 2 - 2 4 3 )

remarks,

" u n i o n s , p o p u l a r o r g a n i z a t i o n s , and social f o r c e s t e n t a t i v e l y r e - e m e r g e d f r o m the s i l e n c e a n d f e a r of the early y e a r s of the w a r a n d first f i l l e d a n d then p u s h e d bey o n d the n a r r o w m a r g i n of legality g r a n t e d t h e m by a U . S . - d r i v e n policy c o m m i t t e d t o ' d e m o c r a t i z a t i o n ' in t h e m i d s t o f w a r . " 15. F o r d i s c u s s i o n , s e e W o l f ( 1 9 9 2 ) , P a i g e ( 1 9 9 3 ) , a n d J o h n s o n ( 1 9 9 3 ) . 16. T h e six priests, and a h o u s e k e e p e r and her d a u g h t e r , w e r e slain on the n i g h t o f 15 N o v e m b e r 1 9 8 9 . S u s p i c i o n s i m m e d i a t e l y f o c u s e d o n t h e m i l i t a r y . A f t e r the w a r t h e s e s u s p i c i o n s w e r e c o n f i r m e d by the f i n d i n g s of the T r u t h C o m m i s s i o n f o r El S a l v a d o r ( 1 9 9 3 ) . F o r a t h o r o u g h a c c o u n t , s e e W h i t f i e l d ( 1 9 9 4 ) . 1 7 . T h e S e c r e t a r y - G e n e r a l of t h e U n i t e d N a t i o n s r e p o r t e d t h a t " t h e e l e c t i o n s w e r e held u n d e r generally a c c e p t a b l e c o n d i t i o n s , w i t h o u t any m a j o r acts of violence, although serious flaws regarding organization and transparency were detected" (United Nations Security Council 1994b, pp. 2 - 3 ) . 18. T h i s h a s not b e e n an u n m i x e d b l e s s i n g : I n f l o w s of e x t e r n a l r e s o u r c e s h a v e p r o p e l l e d e x c h a n g e - r a t e o v e r v a l u a t i o n , w i t h a d v e r s e e f f e c t s on p r o d u c e r s of tradeable goods. 1 9 . W i t h i n t h r e e y e a r s o f its 1 9 7 1 i n d e p e n d e n c e w a r , f o r e x a m p l e , B a n g l a d e s h r e c e i v e d m o r e e x t e r n a l a s s i s t a n c e t h a n in i t s p r e v i o u s 2 4 y e a r s a s E a s t P a k i s t a n ( H a r t m a n n and B o y c e 1983, p. 2 6 8 ) .

2 The Historical Background to the Conflict Carlos Acevedo

In the 1 9 8 0 s El S a l v a d o r underwent o n e o f the m o s t i n t e n s e civil wars in the c o n t e m p o r a r y history o f Latin A m e r i c a . T h e p e a c e a g r e e m e n t b e t w e e n the S a l v a d o r a n g o v e r n m e n t and the F a r a b u n d o M a r t i National L i b e r a t i o n Front ( F M L N ) , s i g n e d in C h a p u l t e p e c , M e x i c o , on 15 J a n u a r y 1 9 9 2 , laid the c r u c i a l g r o u n d w o r k f o r the r e c o n s t r u c t i o n o f S a l v a d o r a n s o c i e t y and for the e s t a b l i s h m e n t o f a d e m o c r a t i c political s y s t e m u n p r e c e d e n t e d in the c o u n t r y ' s history. B u t the p r o s p e c t s f o r a p e r m a n e n t p e a c e in El S a l v a d o r remain uncertain. M a c r o e c o n o m i c stability and growth are n e c e s s a r y c o n d i t i o n s for c o n s o l i d a t i o n o f the p e a c e p r o c e s s , but they are not s u f f i c i e n t . In the t w o d e c a d e s b e f o r e the war, the S a l v a d o r a n e c o n o m y e x p e r i e n c e d rapid growth rates with low inflation, but this did not prevent the s o c i a l c r i s i s that c u l minated in the a r m e d c o n f l i c t . A s P r e s i d e n t A l f r e d o Cristiani has said, the war in El S a l v a d o r had " p r o f o u n d s o c i a l , p o l i t i c a l , e c o n o m i c and cultural roots . . .

in s y n t h e s i s , the a b s e n c e o f a truly d e m o c r a t i c f o r m o f l i f e "

(quoted by W h i t f i e l d 1 9 9 4 , p. 3 8 0 ) . I f El S a l v a d o r ' s history during the first t h r e e - q u a r t e r s o f the t w e n t i e t h c e n t u r y o f f e r s any l e s s o n f o r the c u r r e n t p o s t w a r period, it is that the s u c c e s s o f the p e a c e p r o c e s s in the long run will h i n g e on the c o u n t r y ' s a b i l i t y to r e d r e s s t h e g r e a t i n e q u a l i t i e s o f wealth and p o w e r that imperil both e c o n o m i c and p o l i t i c a l stability.

The Economic Roots of Social Conflict in El Salvador El S a l v a d o r has long had o n e o f the most i n e q u i t a b l e s o c i a l orders in Latin A m e r i c a . T h e o r i g i n s o f this o r d e r lie in the c o u n t r y ' s a g r o e x p o r t - b a s e d e c o n o m i c m o d e l , w h i c h has c e n t e r e d on c o f f e e p r o d u c t i o n s i n c e the last quarter o f the nineteenth century. T h e S a l v a d o r a n state p l a y e d a key role in the d e v e l o p m e n t o f this m o d e l . T h e d e c r e e s o f 1 8 8 1 - 1 8 8 2 expropriated the

19

20

Carlos Acevedo

ejidos, or c o m m u n i t y farm lands—ostensibly for the purpose of fostering " m o d e r n i z a t i o n " of the c o u n t r y ' s e c o n o m y through private land o w n e r s h i p and incentives for c o f f e e g r o w i n g . T h i s process laid the f o u n d a t i o n s f o r the large plantation-small farm ( l a t i f u n d i o - m i n i f u n d i o ) system that formed the b a c k b o n e of the agricultural-export model in subsequent decades. T h e principal beneficiaries were the large landowners and merchants w h o had previously been e n g a g e d in indigo production ( L i n d o 1990), as well as certain urban d w e l l e r s w h o had access to sufficient capital and/or credit to m a k e the initial i n v e s t m e n t s needed to grow c o f f e e ( B u l m e r - T h o m a s 1987, p. 22). D u r i n g this large-scale process of " c o m p e t i t i v e e x c l u s i o n " (Durham 1979), the e m e r g i n g c o f f e e oligarchy gained control over no less than 4 0 percent of the c o u n t r y ' s total land area (Menjivar 1980, p. 23); at the s a m e time, thousands of small f a r m e r s were driven off the lands they had tilled for years. Because coffee profits depended heavily on control of labor costs, the state also imposed m e a s u r e s to g u a r a n t e e the availability of c h e a p labor. T h e decrees expropriating and restricting access to land were followed by laws governing agricultural day labor and appointing rural j u d g e s , w h o s e primary function was to recruit and control the supply of workers needed to expand c o f f e e production. These laws were complemented by the creation of a rural police force for the coffee-producing departments in 1889 and by the formation of the National Guard in 1912 (Menjivar 1980, pp. 1 5 0 - 1 5 1 ) . At the same time, agricultural workers were prohibited from organizing. As a result of this process, the Salvadoran e c o n o m y c a m e to be centered almost entirely around the exportation of coffee. From 56 percent of the total value of the country's exports in 1890, c o f f e e ' s share increased to 96 percent in 1931 (Wilson 1978, p. 209). T h e country's ties to the international economy, the organization of the financial system, the superstructure of the political regime, and economic-growth and social-development patterns were all largely conditioned by the nature and p e r f o r m a n c e of the c o f f e e industry. T h e e c o n o m i c p o w e r and political influence of the coffee oligarchy grew accordingly. T h e world e c o n o m i c crisis of 1929 further intensified the concentration of land ownership as falling c o f f e e prices forced the most vulnerable producers to sell their lands to larger c o f f e e growers (Wilson 1978; White 1973). This p h e n o m e n o n , coupled with the unrest engendered by electoral fraud in 1931 and rising u n e m p l o y m e n t , set the stage for the insurrection of 1932. That event was a sequel to earlier peasant uprisings in the coffeeproducing regions in 1872, 1875, 1880, 1885, and 1898 (Menjivar 1980, p. 69; Durham 1979, p. 43). T h e matanza of 1932, in which it is estimated that between 10,000 and 30,000 people lost their lives ( A n d e r s o n 1971; Wilson 1978, p. 237), was a w a t e r s h e d event in the political history of El Salvador. Until 1931 the

The Historical Background

21

c o f f e e oligarchy had exercised direct control over the state apparatus. T h e a r m y ' s swift action in quelling the rebellion, however, signaled a c h a n g e in the system of oligarchical domination as the military took direct control of political power in e x c h a n g e for d e f e n d i n g the interests of the agricultural elite. In subsequent years, as can be seen in Table 2.1, military o f f i cers led the g o v e r n m e n t . A f t e r s u p p r e s s i n g the peasant rebellion, the Martinez government banned all f o r m s of organized political opposition. The Communist Party, which had played a role in organizing the uprising, 1 was banned in the Constitution of 1939. T h e type of authoritarian regime that emerged in the Martinez era conditioned relations between the military and civil society throughout the next 50 years.

The Bimodal Agricultural Sector The evolution of world c o m m o d i t y prices after World War II made diversification of the country's agricultural exports increasingly attractive. Cotton and sugar cane j o i n e d c o f f e e as m a j o r export crops. In the 1950s the country experienced a cotton b o o m , made possible by the development of more effective pesticides, success in controlling the blights that occurred in the coastal areas where most of the cotton was grown, and state investment in c o m m u n i c a t i o n s and physical infrastructure. Production of cotton increased by more than 12 times between 1950 and 1963 (Browning 1971, p. 235). By 1960 cotton a c c o u n t e d for 15 percent of the total value of El S a l v a d o r ' s exports (Dada S á n c h e z 1978, p. 31). Production of sugar cane also increased substantially, f u e l e d first by domestic demand and then by increased access to the U.S. market when El Salvador received a portion of the sugar quota previously allotted to Cuba. Whereas export crops were produced mainly on large estates (latifundios), the bulk of the subsistence crops were grown on small farms (minif u n d i o s ) , as shown in Table 2.2. As had occurred earlier with the e x p a n sion of c o f f e e p r o d u c t i o n , the d e v e l o p m e n t of sugar cane and cotton plantations exacerbated the concentration of land ownership, forcing small subsistence f a r m e r s to m o v e to mountain slopes and to more eroded and less fertile lands. By the 1970s the Gini coefficient of land concentration in El Salvador had reached 0.83, the highest in Central America (Gordon 1989, p. 29) and o n e of the f i v e highest in the world (Taylor and J o d i c e 1983, pp. 140-141). T h e 1971 agricultural census found that 1.5 percent of f a r m s operated 49 percent of agricultural lands, while at the other extreme 8 7 percent of f a r m s o p e r a t e d less than 20 percent of total acreage (see Table 2.3). The steady appropriation of the available arable land by the latifundios provides a better explanation than undifferentiated "population p r e s s u r e "

22

Carlos

Table 2.1 1898-1903 1903-1907 1907-1911 1911-1913 1913-1918 1918-1922 1922-1927 1927-1931 1931 1931-1934 1934-1935 1935-1944 1944 1945 1945-1948 1948-1950 1950-1956 1956-1960 1960-1961 1961-1962 1962 1962-1967 1967-1972 1972-1977 1977-1979 1979-1982 1982-1984 1984-1989 1989-1994 1994-

Acevedo

Heads of State, 1898-1994 Tomás Regalado Pedro José Escalón General Fernando Figueroa Manuel Enrique Araujo Carlos Meléndez Jorge Meléndez Alfonso Quiñónez Pío Romero Bosque Arturo Araujo General Maximiliano Hernández Martínez General Andrés Ignacio Menéndez General Maximiliano Hernández Martínez General Andrés Ignacio Menéndez Colonel Osmín Aguirre Salinas General Salvador Castañeda Castro Military Government Council Colonel Oscar Osorio Colonel José María Lemus Civilian junta Civilian-military directorate Rodolfo Cordón Colonel Julio A. Rivera General Fidel Sánchez Hernández Colonel Arturo Armando Molina General Carlos Humberto Romero Revolutionary juntas 3 Alvaro Magaña José Napoleón Duarte Alfredo Cristiani Armando Calderón Sol

Note: a. Following the coup against Romero on 15 October 1979, a series of three militarydominated juntas held power.

f o r the g r o w i n g social t e n s i o n s a s s o c i a t e d w i t h the a g r o e x p o r t m o d e l . In the 8 0 years f r o m 1 8 9 2 to 1971, a c c o r d i n g to D u r h a m ( 1 9 7 9 , p. 4 8 ) , the availability of land to p o o r rural h o u s e h o l d s in El S a l v a d o r d r o p p e d f r o m 7.4 to 0 . 4 hectares per family. Of that d e c l i n e , 85 p e r c e n t can be a t t r i b u t e d to the i n c r e a s e d c o n c e n t r a t i o n of l a n d , w h e r e a s p o p u l a t i o n g r o w t h acc o u n t e d for only 15 percent. In the p e r i o d i m m e d i a t e l y p r e c e d i n g the outb r e a k of the a r m e d c o n f l i c t , the rural l a n d l e s s or n e a r - l a n d l e s s p o p u l a t i o n a m o u n t e d to 3 0 - 3 7 p e r c e n t of t h e c o u n t r y ' s total w o r k f o r c e , o n e of the highest p r o p o r t i o n s in the w o r l d ( P r o s t e r m a n a n d R i e d i n g e r 1987, p. 143). T h e e c o n o m i c g r o w t h m o d e l c o u p l e d d e v e l o p m e n t of the agricultural e x p o r t sector with the u n d e r d e v e l o p m e n t of the s u b s i s t e n c e sector. A seasonal e m p l o y m e n t s y s t e m linked the t w o sectors. T h e agroexport sector required h u n d r e d s of t h o u s a n d s of m i g r a t o r y w o r k e r s during the harvest, but it w a s u n a b l e to g u a r a n t e e t h e m a y e a r - r o u n d salary. T o m a i n t a i n a ready supply of seasonal labor, the agricultural export sector relied on subsistence a g r i c u l t u r e . D u r i n g the m o n t h s of u n e m p l o y m e n t b e t w e e n h a r v e s t s , these s e m i p r o l e t a r i a n w o r k e r s f a r m e d their s m a l l plots of land ( m i n i f u n d i o s ) ,

The Historical Background

Table 2.2

Composition of Agricultural Production, 1979 Percentage of total agricultural value

Maize Beans Sorghum Coffee Cotton Sugar Total

Percentage of value on 0 - 1 0 ha. farms

5.9 1.7 2.5 68.5 10.9 4.2 93.7

Percentage of value on 10+ ha. farms

77.9 78.3 82.3 17.4 6.3 n.a. 23.0 a

22.1 21.7 17.7 82.5 93.7 n.a. 77.0 a

Source: El Salvador. Ministry of the Economy. Indicadores Económicos, Note: a. Excludes sugar and other crops not included in table, n.a. = data not available

Table 2.3

23

1979.

Farm-Size Distribution, 1971 1971 agricultural census Farms

Area (hectares)

Size of farm (hectares)

Number

Percentage of all farms

Total 0.7-3.5 3.5-14 14-35 35-70 >70

270,868 234,941 24,762 6,986 2,238 1,941

100.0 86.7 9.1 2.6 0.8 0.7

Total 1,451,895 283,311 237,446 215,456 154,164 561,518

Percentage of total area

Average area per farm (hectares)

100.0 19.5 16.4 14.8 10.6 38.7

5.4 1.2 9.6 30.8 68.9 289.3

Source: CEPAL 1993c, Table 14, p. 48.

c u l t i v a t i n g c o r n , b e a n s , rice, s o r g h u m , a n d o t h e r s u b s i s t e n c e c r o p s . B e c a u s e m o s t of the cost of r e p r o d u c i n g this m i g r a t o r y labor f o r c e w a s c o v ered t h r o u g h the u n p a i d labor of w o r k e r s ' f a m i l y m e m b e r s , the a g r o e x p o r t s e c t o r c o u l d o f f e r w a g e s that w e r e m u c h l o w e r than t h o s e it w o u l d h a v e had to pay to m a i n t a i n s a l a r i e d w o r k e r s f o r t h e e n t i r e year. D e s p i t e the high productivity a c h i e v e d by the a g r o e x p o r t e c o n o m y , 2 the w a g e s of f a r m w o r k e r s in El S a l v a d o r r e m a i n e d low e v e n by T h i r d W o r l d s t a n d a r d s . 3 In the early 1970s landless a g r i c u l t u r a l w o r k e r s in El S a l v a d o r had the lowest i n c o m e levels in Central A m e r i c a ( s e e Table 2.4). T h e b i m o d a l agrarian s t r u c t u r e resulted in the u n d e r u t i l i z a t i o n of both labor a n d land. 4 By the m i d - 1 9 7 0 s the rate of u n d e r u t i l i z a t i o n of the agric u l t u r a l l a b o r f o r c e in El S a l v a d o r w a s 4 7 p e r c e n t , the h i g h e s t in Latin A m e r i c a ( U S A I D 1977, p. 4 2 ) . At the s a m e t i m e , l a n d on the l a t i f u n d i o s also s h o w e d a high rate of u n d e r u t i l i z a t i o n . In 1961, f a r m s larger than 5 0 hectares a c c o u n t e d f o r a l m o s t 6 0 p e r c e n t of the total a r a b l e land. Less than 35 percent of this area w a s classified as being under cultivation; 45.8 percent

24

Carlos Acevedo

Table 2.4

Income of Landless Agricultural Workers in Central America, Early 1960s Annual i n c o m e per family in U.S. dollars Guatemala 340 El Salvador 229 Honduras n.a. Nicaragua 370 Costa Rica 727

Source: B u l m e r - T h o m a s 1987, p. 162. n.a. = data not available

of the land on these f a r m s w a s b e i n g used as pasture. 5 In 1971, on the large estates of more than 2 0 0 hectares, only 25 percent of the land w a s being used to grow grain or permanent crops; the rest was being used for pasture or forestland. On f a r m s of f e w e r than 10 hectares, on the other hand, 72 percent of the land was cultivated ( P R E A L C 1977, Vol. I, p. 316). T h e living conditions of the poor majority under this e c o n o m i c growth model were abysmal. In the mid-1970s more than 83 percent of the country's rural population was living below the poverty line ( U S A I D 1977, p. 45). More than 80 percent of rural families had substandard housing; most d w e l l i n g s had no s e w a g e - d i s p o s a l system nor electricity ( U S A I D 1977, pp. 2 0 - 2 1 ) . Of the children under five years of age, 73.4 percent s h o w e d s y m p t o m s of malnutrition ( I N C A P 1976). T h e 1971 c e n s u s revealed that 115 of every 1,000 live-born children died before reaching the age of one year ( P R E A L C 1977, Vol. II, pp. 7 7 - 7 8 ) . T h e most prevalent diseases in the country were closely related to low i n c o m e levels—nutritional d e f i ciencies, and infections due to the lack of timely medical care (ibid., p. 85). Illiteracy in the rural population was 50 percent a m o n g those aged 15 to 19, and 74 percent a m o n g those aged 45 and over (ibid., pp. 3 7 - 3 8 ) . Faced with the land s h o r t a g e and unrelenting poverty, h u n d r e d s of t h o u s a n d s of rural S a l v a d o r a n s e m i g r a t e d to H o n d u r a s in the 1950s and 1960s. In 1969, when the so-called Soccer War broke out between the two countries, an estimated 150,000 to 3 0 0 , 0 0 0 S a l v a d o r a n s w e r e f a r m i n g Honduran land ( B u l m e r - T h o m a s 1987, p. 195). In that year S a l v a d o r a n s made up an estimated 1 5 - 2 0 percent of the total work force in H o n d u r a s and s o m e 30 percent of the work f o r c e on Honduran b a n a n a p l a n t a t i o n s (North 1985, p. 63). A f t e r the war, most of these émigrés were forced back to El Salvador.

The Rise and Fall of the Import-Substitution Industrialization Model In the 1950s a process of industrialization was instituted, with the aim of replacing imports with domestically produced goods. This import-substitution

The Historical Background

25

industrialization (ISI) model did not fundamentally alter the concentration of wealth. A large proportion of the initial financing for the industrialization process came f r o m capital amassed by the agricultural-export sector, 6 which received a substantial boost f r o m the increase in prices for raw materials during the decade f o l l o w i n g World War II (Dada S á n c h e z 1978, pp. 4 0 - 4 1 ) . As had happened during the initial phase of the agroexport model, the ISI model received active support from the state, which adopted an intensely protectionist policy that provided for tax breaks and discretionary application of tariffs, along with considerable investment in infrastructure works aimed at reducing industrial operating costs. Despite these inducements, in the early stages the process of industrial d e v e l o p m e n t was hindered by a m a j o r obstacle: S i g n i f i c a n t limitations were placed on the growth of the domestic market by the unequal distribution of income and the w a g e structure associated with the agroexport model. As a result the majority of the population lacked the p u r c h a s i n g p o w e r necessary to generate s u f f i c i e n t d e m a n d for industrial goods. T h e General Treaty of Economic Integration signed in 1960 by Guatemala, El Salvador, Honduras, and N i c a r a g u a — a sequel to the various bilateral freetrade a g r e e m e n t s entered into by the countries of the region during the 1 9 5 0 s — o f f e r e d a way to ease this constraint by e x p a n d i n g the potential market for Salvadoran industrial g o o d s to the entire region, through the creation of the Central American C o m m o n Market ( C A C M ) . With the advent of the C A C M the Salvadoran m a n u f a c t u r i n g sector grew at an annual average rate of 8.1 percent b e t w e e n 1960 and 1970 ( C E P A L 1980, p. 70). During the s a m e period the share of m a n u f a c t u r e d goods in total value of exports increased from 5.6 percent to 28.7 percent (ibid., p. 94). By the mid-1960s, 64 percent of the c o u n t r y ' s industrial exports, mainly textiles, shoes, and p h a r m a c e u t i c a l s , w e r e g o i n g to other Central A m e r i c a n countries. T h e majority of the r e m a i n i n g 36 percent were exported almost entirely to the United States. Of the latter products, a significant proportion were g a r m e n t s and electronic items assembled in El Salvador in plants owned by U.S. f i r m s using imported inputs and parts. In theory, the ISI model was intended to help the country to maintain its foreign-currency reserves and reduce its vulnerability to external fluctuations through the substitution of locally produced products for imported g o o d s . In practice, however, c o s t s for imported i n t e r m e d i a t e and capital g o o d s (machinery, e q u i p m e n t , s e m i f i n i s h e d materials, etc.) added to the pressures on the balance of p a y m e n t s , while f o s t e r i n g a new type of dependency on imported technology needed to keep the c o u n t r y ' s industries r u n n i n g . 7 This w a s reinforced by a tariff policy that d i s c o u r a g e d the dom e s t i c production of i n t e r m e d i a t e and capital g o o d s ( B u l m e r - T h o m a s 1987, p. 192). T h e industrialization strategy further exacerbated the concentration of wealth by favoring the establishment of relatively capital-intensive industry. In 1962, firms with more than 5 0 employees—which made up 8 percent

26

Carlos

Acevedo

of all f i r m s with more than five e m p l o y e e s — h e l d 82 percent of total fixed capital (O. M e n j i v a r n.d., p. 7). In the early 1970s, 12 percent of the f i r m s generated more than 60 percent of total industrial output and absorbed 6 0 percent of the labor force in the sector (Colindres 1977, p. 129). T h e result was a distorted form of industrialization that was extremely capital intensive, slanted toward the production of c o n s u m e r goods, highly dependent on imported products, and lacking in intersectoral links to the rest of the economy. T h e ISI model proved incapable of absorbing much of the excess labor force generated under the agricultural-export model. T h e total n u m b e r of workers e m p l o y e d in industry and agroindustry increased f r o m 5 2 , 0 0 0 in 1951 to 2 4 8 , 0 0 0 in 1971 (North 1985, p. 53), but the m a n u f a c t u r i n g s e c tor itself generated relatively little e m p l o y m e n t . In the early 1970s almost half the labor force classified as "industrial" was still engaged in processing c o f f e e , cotton, and sugar ( W h i t e 1973, p. 228). B e t w e e n 1960 and 1970, the proportion of industrial workers in the total labor force actually declined f r o m 13.1 percent to 11.1 percent ( C E P A L 1980, p. 18). Services and c o m m e r c e absorbed the largest proportion of growth in the e c o n o m i cally active p o p u l a t i o n , and by the 1970s two-thirds of the urban w o r k force was engaged in these two areas (World Bank 1980, p. 9). T h e ISI model also fostered a spatially c o n c e n t r a t e d urbanization process. Most of the industrial growth took place in the San Salvador metropolitan area, where 75 percent of the country's industrial apparatus and an even higher percentage of the service sector were c o n c e n t r a t e d in the early 1970s (World Bank 1979, p. 16). T h e concentration of industry in and around San Salvador provided an additional impetus for the migration from rural to urban areas that had accelerated in the 1950s as a by-product of the intensification of export-oriented agriculture. T h e living conditions of much of the urban population were extremely poor. In the late 1970s, 56 percent of urban f a m i l i e s resided in overc r o w d e d d w e l l i n g s ( M u r i l l o Salinas 1974a, pp. 4 3 1 - 4 3 2 ) , 4 0 percent of which did not meet the minimum basic standards for habitability set by the Urban H o u s i n g Institute of El Salvador. More than 15 percent of the available h o u s i n g units did not have a reliable water supply, and 25 percent lacked any kind of sanitary service. Inequality in the o w n e r s h i p of urban land, although less acute than in the agricultural sector, was also marked. Whereas the wealthiest 3 percent of the population held 19 percent of the residential land, with a density of seven or fewer dwellings per hectare, the poorest 29 percent of the population was crowded into an area equal to 14 percent of the total residential land, with a density of 5 7 to 80 dwellings per hectare (Murillo Salinas 1974b). Wage levels, although higher than in rural areas, were not sufficient to enable most urban workers to adequately meet their basic needs. In the late 1970s, 42 percent of urban workers were

The Historical Background

27

e a r n i n g an i n c o m e that p l a c e d t h e m b e l o w the o f f i c i a l p o v e r t y line of 100 c o l o n e s per m o n t h ( W o r l d B a n k 1980, p. 8). B e c a u s e the ISI m o d e l failed to a d d r e s s directly the i n c o m e - d i s t r i b u t i o n p r o b l e m s u n d e r l y i n g t h e p r o c e s s of a c c u m u l a t i o n p r o m o t e d b y the e x p o r t o r i e n t e d a g r i c u l t u r e , it r e p r o d u c e d at t h e u r b a n level t h e i n e q u a l i t i e s p r e v a i l i n g in the a g r i c u l t u r a l sector. I n d e e d , the m o d e l in m a n y w a y s e x a c e r b a t e d the t r e m e n d o u s s o c i a l d i s p a r i t i e s in the c o u n t r y . By 1 9 7 4 t h e p o o r e s t 2 0 p e r c e n t of the p o p u l a t i o n w a s r e c e i v i n g o n l y 2 . 8 p e r c e n t o f total inc o m e , w h i l e t h e s h a r e of t h e r i c h e s t 2 0 p e r c e n t h a d r i s e n to 6 6 . 4 p e r c e n t ( R o s e n t h a l 1982, p. 3 3 ) .

The Failure of the Economic Model and Weakening of Authoritarian Rule B e t w e e n 1 9 6 0 a n d 1 9 7 8 the S a l v a d o r a n e c o n o m y g r e w at an a v e r a g e a n nual r a t e of 5 . 4 p e r c e n t . G r o s s a g r i c u l t u r a l o u t p u t i n c r e a s e d b y 4 . 1 p e r c e n t p e r y e a r d u r i n g t h e s a m e p e r i o d , o n e of t h e m o s t d y n a m i c s e c t o r g r o w t h r a t e s in all of L a t i n A m e r i c a ( L o p e z C o r d o v e z 1 9 9 4 , p. 2 5 ) . N o t w i t h s t a n d i n g this v i g o r o u s g r o w t h , s o c i o e c o n o m i c d i s p a r i t i e s f u e l e d political s t r i f e . T h e ISI strategy set in m o t i o n — a l b e i t u n i n t e n t i o n a l l y — a s e r i e s of social c h a n g e s that w o u l d later h a v e a s i g n i f i c a n t i m p a c t in t e r m s of t h e res t r u c t u r i n g of S a l v a d o r a n s o c i e t y . O n e s u c h c h a n g e w a s the e m e r g e n c e of an u r b a n m i d d l e c l a s s , w h i c h d e v e l o p e d in the c o u r s e of t h e e x p a n s i o n of c o m m e r c e a n d s e r v i c e s a s s o c i a t e d w i t h the i n d u s t r i a l i z a t i o n p r o c e s s . A s this m i d d l e c l a s s g a i n e d r e l a t i v e w e i g h t w i t h i n t h e s o c i o e c o n o m i c s y s t e m , a c e r t a i n b r o a d e n i n g of t h e p o l i t i c a l s p e c t r u m took p l a c e . M e a n w h i l e , b e g i n n i n g in t h e m i d - 1 9 6 0 s El S a l v a d o r e x p e r i e n c e d s i g n i f i c a n t g r o w t h in t h e n u m b e r of l a b o r o r g a n i z a t i o n s ( a l m o s t all of w h i c h w e r e u r b a n ) , a l t h o u g h by the e n d of t h e d e c a d e o n l y a m o d e s t 5 p e r c e n t of t h e total l a b o r f o r c e b e l o n g e d to t h e s e o r g a n i z a t i o n s ( M e n j i v a r 1982, p. 1 3 7 ) . T h e i n f l a t i o n a r y p r e s s u r e s i n d u c e d b y t h e r a p i d i n c r e a s e in w o r l d p r i c e s at t h e b e g i n n i n g of t h e 1 9 7 0 s c o m p l i c a t e d this s i t u a t i o n . F o l l o w i n g t h e first o i l - p r i c e s h o c k of 1 9 7 3 - 1 9 7 4 El S a l v a d o r , like t h e rest of C e n t r a l A m e r i c a , w a s f a c e d w i t h d o u b l e - d i g i t i n f l a t i o n a f t e r d e c a d e s of r e m a r k a b l e p r i c e s t a b i l i t y ( s e e T a b l e 2 . 5 ) . In r e s p o n s e , S a l v a d o r a n i n d u s t r i a l g r o u p s i n t e n s i f i e d t h e t r e n d t o w a r d c o n s o l i d a t i o n w i t h the a i m o f r e a l i z i n g e c o n o m i e s of s c a l e t h a t w o u l d r e d u c e t h e i r o p e r a t i n g c o s t s . S m a l l a n d m e d i u m - s i z e f i r m s , w h i c h w e r e m o r e v u l n e r a b l e to the e f f e c t s of i n f l a t i o n , w e r e d r i v e n o u t of b u s i n e s s . T h e s e d y n a m i c s s w e l l e d t h e r a n k s of t h e une m p l o y e d in the i n d u s t r i a l sector. At t h e s a m e t i m e , d e s p i t e t h e s t i r r i n g s of o r g a n i z e d labor, w o r k e r s had c o n s i d e r a b l y less p o w e r to p r o t e c t t h e m s e l v e s

28

Carlos Acevedo

Table 2.5 Years 1950-1960 1960-1970 1970-1971 1971-1972 1972-1973 1973-1974 1974-1975 1975-1976 1976-1977 1977-1978 1978-1979

Average Annual Inflation Rates in Central America, 1950-1979 (%) Guatemala

El Salvador

Honduras

Nicaragua

Costa Rica

0.9 0.7 -0.5 0.6 13.6 16.6 13.1 10.7 12.6 7.9 11.5

3.0 0.8 0.5 1.5 6.4 16.9 19.2 7.0 11.9 13.2 15.9

2.0 2.2 2.3 5.3 4.5 13.4 6.4 4.8 8.4 6.2 12.5

4.9 1.9 1.6 1.1 20.1 23.3 2.7 2.8 11.4 4.6 48.1

1.8 2.0 3.0 4.6 15.3 30.1 17.4 3.5 4.2 6.0 9.2

Source: Bulmer-Thomas 1987, p. 202.

f r o m inflation than did business o w n e r s . This translated into a rapid decline in real wages. Unlike the industrial sector, the agroexport sector profited from the increase in world prices, which provided an additional stimulus for exportoriented agriculture. T h e intensification of export agriculture exerted a d ditional pressure on the land and capital markets, and led to a drop in subsistence agriculture in per capita terms and an even more regressive distribution of agricultural income ( B u l m e r - T h o m a s 1987, pp. 150, 200). This phenomenon was not unique to El Salvador; it occurred throughout the region. However, the other Central American countries had used the Alliance for Progress to undertake at least some restructuring of their landtenure systems in preceding years. In El Salvador agrarian reform had been considered taboo since the peasant uprising of 1932, 8 and the only escape for the dispossessed peasant population had been migration to Honduras. Under these c i r c u m s t a n c e s , the 1969 war with H o n d u r a s had catastrophic c o n s e q u e n c e s . El S a l v a d o r s i m u l t a n e o u s l y lost its principal intraregional export market, access to the land route for transporting its goods to the southern part of the Central American isthmus, and the outlet for its landless peasant farmers. T h e return of Salvadorans w h o had been living in Honduras compelled the government to broach the issue of agrarian r e f o r m . 9 T h e Plan for Economic and Social Development for the fiveyear period 1 9 7 3 - 1 9 7 7 , f o r m u l a t e d at the start of Colonel M o l i n a ' s presidency, incorporated agrarian reform as one of its strategic policy lines. But opposition led by associations tied to the agricultural-export sector was so strong that the g o v e r n m e n t was f o r c e d to retreat. At the same time, the new g o v e r n m e n t ' s partiality toward business owners in their conflicts with labor propelled the labor movement toward more radical positions. T h e S a l v a d o r a n political s y s t e m was ill-equipped to mediate e f f e c tively a m o n g c o n t e n d i n g interests a n d address d e m a n d s f o r greater economic and social democracy. Since 1932 the military had ruled through a

The Historical Background

29

series of " o f f i c i a l " p a r t i e s — t h e Pro-Patria Party, f o u n d e d in 1934; the R e v o l u t i o n a r y Party of D e m o c r a t i c Unity ( P R U D ) , f o r m e d in 1949; and the Party of National Conciliation (PCN), established in 1961. T h e latter party served as an instrument of political control for the regimes of Molina ( 1 9 7 2 - 1 9 7 7 ) and R o m e r o ( 1 9 7 7 - 1 9 7 9 ) . Electoral fraud in both 1972 and 1977 u n d e r m i n e d the legitimacy of the political system, which led to greater radicalization of the middle and w o r k i n g classes. In this context, leftist political-military organizations began to emerge. T h e first of t h e m , the Popular Liberation Forces (FPL), was f o u n d e d in 1970 by Salvador Cayetano Carpio f r o m a faction that split from the Communist Party. In 1972 the People's Revolutionary Army ( E R P ) was established. In 1975, following the assassination of Roque Dalton, the ERP split and the A r m e d Forces of National Resistance (FARN) were formed. At the same time, the so-called mass organizations of workers and peasants appeared on the sociopolitical scene. T h e United Front for Popular Action (FAPU) c a m e into being in 1974, followed the next year by the P e o p l e ' s Revolutionary Bloc (BPR). Both groups played a crucial role in organizing large demonstrations against the R o m e r o regime beginning in 1 9 7 7 . ' " T h e state's increasingly hostile response to its political opponents accelerated polarization and broadened the social base of support for the left. Government repression escalated with the promulgation in December 1977 of the Law on the Protection and Assurance of Public Order, which gave the armed forces carte blanche to seize land, dissolve strikes, suppress demonstrations, and carry out arbitrary detentions (Gordon 1989, p. 246). Romero was ousted in a c o u p d'état staged by a relatively progressive segment of the military on 15 October 1979. T h e new government proved unable to curb the process of polarization, however. In 1980 the leftist forces coalesced in the F M L N . Under a state of siege declared in March 1980, the state security apparatus, together with rightist paramilitary organizations, escalated repression of opposition social and political organizations, regardless of their ideological orientation. By the end of the year virtually all legal avenues of social and party organization, mobilization, and protest had been closed. T h e military o f f e n s i v e launched by the F M L N on 10 January 1981 marked the formal start of the armed conflict. But this was merely the culmination of the great s o c i o e c o n o m i c and political pressures that had been mounting for d e c a d e s in Salvadoran society, which successive authoritarian regimes were incapable of d e f u s i n g .

Notes 1. In the course of the insurrection, the military captured and executed Agustin Farabundo Marti, who had helped to found the Communist Party of El Salvador in 1929.

30

Carlos Acevedo

2 . In t h e e a r l y 1 9 5 0 s S a l v a d o r a n c o f f e e y i e l d s w e r e t h e h i g h e s t in the w o r l d ( B u l m e r - T h o m a s 1 9 8 7 , p . 1 5 4 ) . B y 1 9 5 7 - 1 9 5 8 , c o t t o n y i e l d s w e r e a l s o the h i g h e s t in the world ( i b i d . , p. 1 5 6 ) . 3 . In t h e 1 9 5 0 s , I v o r y C o a s t c o f f e e w o r k e r s , f o r e x a m p l e , w e r e e a r n i n g 2 0 p e r c e n t m o r e in r e a l t e r m s than t h e i r c o u n t e r p a r t s in E l S a l v a d o r ( W h i t e 1 9 7 3 , p. 123). 4 . T h e u n d e r u t i l i z a t i o n o f land and l a b o r — k e y inputs in any a g r i c u l t u r a l p r o d u c t i o n f u n c t i o n — i s an o f t e n - o b s e r v e d m a n i f e s t a t i o n o f the e c o n o m i c i n e f f i c i e n c y d e r i v i n g f r o m the d i c h o t o m y b e t w e e n l a n d o w n e r s h i p and the l a b o r f o r c e ( s e e S e n 1 9 7 5 , pp. 6 0 - 7 1 ) . 5 . M o r e o v e r , 3 2 p e r c e n t o f the l a t i f u n d i o land c l a s s i f i e d a s " u n d e r c u l t i v a t i o n " in the e a r l y 1 9 7 0 s in fact w a s not b e i n g f a r m e d ( D u r h a m 1 9 7 9 , p. 5 1 ) . 6 . O f t h e 4 2 m a j o r industrial v e n t u r e s l a u n c h e d prior to 1 9 6 0 , 2 5 w e r e held by g r o u p s o f c o f f e e g r o w e r s ( M e n a

1976).

7 . In 1 9 7 0 , 4 4 . 3 p e r c e n t o f El S a l v a d o r ' s i n d u s t r i e s w e r e o p e r a t i n g with i m ported raw m a t e r i a l s and i n t e r m e d i a t e g o o d s ( P R E A L C 1 9 7 7 , V o l . II, T a b l e 5 9 ) . 8 . In 1 9 6 7 m e r e s u p p o r t for an a g r a r i a n r e f o r m i n i t i a t i v e b y the R e f o r m A c tion Party ( P A R ) w a s e n o u g h to h a v e it d e c l a r e d i l l e g a l . 9 . T h e c l o s u r e o f the H o n d u r a n b o r d e r c h a n g e d the d i r e c t i o n o f S a l v a d o r a n m i g r a t i o n . A f t e r 1 9 7 0 the f l o w o f S a l v a d o r a n e m i g r a n t s s h i f t e d t o w a r d the U n i t e d S t a t e s , B e l i z e , M e x i c o , N i c a r a g u a , and C o s t a R i c a . B y 1 9 7 6 the n u m b e r o f S a l v a d o r a n s r e s i d i n g i l l e g a l l y in the U n i t e d S t a t e s w a s e s t i m a t e d at 2 2 5 , 0 0 0 ( G o r d o n 1 9 8 9 , p. 1 2 3 ) . 1 0 . A s m i n i s t e r o f d e f e n s e d u r i n g the M o l i n a a d m i n i s t r a t i o n , G e n e r a l R o m e r o had o v e r s e e n n u m e r o u s r e p r e s s i v e m e a s u r e s , i n c l u d i n g t h e m a s s a c r e o f s t u d e n t protesters in 1 9 7 5 and the military s i e g e o f s e v e r a l rural c o m m u n i t i e s in 1 9 7 4 - 1 9 7 5 .

3 The War Economy of the 1980s Alexander Segovia

In the late 1 9 7 0 s a s e r i e s o f a d v e r s e f a c t o r s o f both e x t e r n a l and internal origin precipitated the most profound e c o n o m i c and s o c i a l c r i s i s in El S a l v a d o r ' s history. T h e c r i s i s w a s s u b s e q u e n t l y e x a c e r b a t e d by the d e v a s t a t ing e f f e c t s o f an a r m e d c o n f l i c t that r a g e d t h r o u g h o u t the 1 9 8 0 s , c o s t i n g s o m e 7 5 , 0 0 0 l i v e s , l e a v i n g t h o u s a n d s o f p e o p l e w o u n d e d , o r p h a n e d , and d i s a b l e d , and p r o v o k i n g a m a s s m i g r a t i o n out o f the c o u n t r y that eventually i n v o l v e d s o m e 2 0 percent o f the S a l v a d o r a n population. T h e w a r a l s o c a u s e d h u g e m a t e r i a l l o s s e s : W a r - r e l a t e d d a m a g e s are e s t i m a t e d to h a v e t o t a l e d s o m e U . S . $ 1 . 5 b i l l i o n in i n f r a s t r u c t u r e a l o n e , with r e p l a c e m e n t c o s t s c a l c u l a t e d at $ 1 . 6 3 b i l l i o n ( M I P L A N 1 9 9 2 b , p. 4 ) . A d d i n g fuel to this s o c i a l f i r e w a s a s e r i e s o f natural c a t a s t r o p h e s in the 1 9 8 0 s , i n c l u d i n g s e v e r a l droughts and a m a j o r e a r t h q u a k e . T h e latter s t r u c k the S a n S a l v a d o r m e t r o p o l i t a n area on 1 0 O c t o b e r 1 9 8 6 , k i l l i n g 1 , 2 0 0 , injuring 3 0 0 , 0 0 0 , and l e a v i n g 3 0 0 , 0 0 0 p e o p l e h o m e l e s s . T h e q u a k e a l s o c a u s e d e n o r m o u s material d a m a g e , with r e p l a c e m e n t c o s t s e s t i m a t e d in late 1 9 8 6 at $ 1 . 2 b i l l i o n ( I D B 1 9 8 7 , p. 8 ) . T h e d a m a g e w r o u g h t by t h e s e s o c i a l and natural d i s a s t e r s w a s e x a c erbated by the policy response o f the g o v e r n m e n t . F a l l i n g output, rising inf l a t i o n , and p o l i t i c a l

instability

n e c e s s i t a t e d a t t e n t i o n to t h e i s s u e

of

m a c r o e c o n o m i c s t a b i l i z a t i o n . T h e g o v e r n m e n t a t t e m p t e d to apply the typical m e d i c i n e o f g o v e r n m e n t - d e f i c i t c u t t i n g and c u r r e n c y

devaluation

throughout the d e c a d e , a strategy that w a s p r o b l e m a t i c in a w a r t i m e setting and i m p o s e d its own set o f e c o n o m i c and s o c i a l c o s t s . T h i s c h a p t e r p r e s e n t s an o v e r v i e w o f E l S a l v a d o r ' s

macroeconomy

during the 1 9 8 0 s , e m p h a s i z i n g the nature and m a g n i t u d e o f the e c o n o m i c and social crisis and describing the logic and e f f e c t i v e n e s s o f the e c o n o m i c p o l i c y r e s p o n s e to that c r i s i s . T h e c h a p t e r c o n t a i n s f o u r m a j o r s e c t i o n s . T h e first a n a l y z e s the d o m i n a n t f e a t u r e s o f the S a l v a d o r a n e c o n o m y , the c h a r a c t e r i s t i c s and s c o p e o f the c r i s i s o f the 1 9 8 0 s , and the i m p a c t o f that crisis on the primary m a c r o e c o n o m i c variables. T h e second section examines

31

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Alexander

Segovia

the implications for the Salvadoran economy of a phenomenon that grew increasingly important in the 1980s, namely, the influx of foreign capital, mainly f r o m the U.S. government and, to a lesser extent, f r o m Salvadoran emigrants living in the United States. T h e third section looks at the principal characteristics, as well as the e c o n o m i c and social costs, of the adjustment that took place in the country during most of the last decade. The fourth section of the chapter explores the economic, social, and political implications of the changes of the 1980s, particularly with regard to the s h i f t i n g political basis for adjustment and reform. T h e c h a p t e r ' s coverage extends to 1989, when a new government took the reins of power and began to implement another strategy for macroeconomic stabilization and restructuring.

The Nature of the Economic Crisis of the 1980s Basic Features

of the Salvadoran

Economy1

In order to c o m p r e h e n d the u n d e r l y i n g c a u s e s and the s p e c i f i c characteristics of the crisis in El Salvador, as well as the results a c h i e v e d through the e c o n o m i c policy applied during the last decade, it is important both to review the basic features of the Salvadoran e c o n o m y in the late 1970s, and to u n d e r s t a n d the w a y in which s h o r t - t e r m m a c r o e c o n o m i c b a l a n c e is achieved in this sort of economy. T h e most p r o m i n e n t feature of the S a l v a d o r a n e c o n o m y is its reliance on external r e s o u r c e s , a c h a r a c t e r i s t i c it s h a r e s with m a n y o t h e r Central A m e r i c a n countries. T h e productive apparatus, particularly in m a n u f a c t u r ing, d e p e n d s heavily on imports of i n t e r m e d i a t e and capital g o o d s , and limitations on the g r o w t h of output in the short term are t h e r e f o r e determined by the level of reserves the country has at its disposal at any given moment. 2 Unfortunately, El S a l v a d o r ' s e c o n o m y has traditionally relied on a h a n d f u l of p r i m a r y export p r o d u c t s to g e n e r a t e f o r e i g n e x c h a n g e . With international m a r k e t s for these products volatile, f o r e i g n - c u r r e n c y receipts vary f r o m year to year and g r o w t h is t h e r e f o r e also volatile, unless the country b o r r o w s f r o m foreign sources or d r a w s d o w n reserves in periods of reduced export earnings. Foreign e x c h a n g e , moreover, plays a key role in the inflation p r o c e s s . A l t h o u g h m o n e t a r y v a r i a b l e s and d o m e s t i c f o o d prices also matter, 3 most pricing is via m a r k u p ; increases in the cost of imported i n t e r m e d i a t e s , p e r h a p s d u e to a f o r e i g n e x c h a n g e s h o r t a g e , will raise both costs and inflationary expectations. 4 T h u s , foreign e x c h a n g e is important to both growth and inflation. On the o n e hand, foreign e x c h a n g e shortfalls are likely to induce stagflation; on the other, the g r e a t e r the availability of f o r e i g n c u r r e n c y (through reserves, loans, or transfers), the greater the possibility that a d j u s t m e n t measures to any particular external or internal shock can be introduced

The War Economy

of the 1980s

33

gradually, t h u s s i g n i f i c a n t l y r e d u c i n g their c o s t s . K e e p i n g f o r e i g n e x c h a n g e available is particularly important b e c a u s e in an e c o n o m y like El S a l v a d o r ' s , traditional stabilization policies are not likely to b r i n g a q u i c k r e c u p e r a t i o n in p r i v a t e i n v e s t m e n t ; i n d e e d , s u c h p o l i c i e s a r e likely to n e g a t i v e l y a f f e c t t h o s e v a r i a b l e s — t h e real interest rate, e f f e c t i v e d e m a n d , the availability of credit, a n d the level of public i n v e s t m e n t — t h a t d e t e r m i n e private investment in the short run. A s a result, m u c h of o u r u n d e r s t a n d i n g of t h e internal behavior of the S a l v a d o r a n e c o n o m y m u s t b e built on an a n a l y s i s of the external sector, a p r o c e d u r e w e f o l l o w in the next s u b s e c t i o n .

The Magnitude of the Economic and Social Crisis, and the Economic-Policy Response T h e o n s e t of El S a l v a d o r ' s e c o n o m i c c r i s i s in the late 1 9 7 0 s w a s d i r e c t l y r e l a t e d to a s e r i e s of a d v e r s e e x t e r n a l p h e n o m e n a . T h e d e c l i n e of international a n d r e g i o n a l d e m a n d a n d a r e d u c t i o n in prices f o r the c o u n t r y ' s principal e x p o r t p r o d u c t s w e r e a c c o m p a n i e d by a s t e e p rise in p e t r o l e u m p r i c e s a n d h i g h e r w o r l d i n f l a t i o n ( a n d h e n c e h i g h e r i m p o r t p r i c e s ) . H e n c e the c o u n t r y ' s t e r m s of t r a d e d e t e r i o r a t e d s h a r p l y (see F i g u r e 3 . 1 ) . T h e r e s u l t ing s h o r t a g e of f o r e i g n e x c h a n g e w a s e x a c e r b a t e d by t h e d r o p in p r i v a t e f o r e i g n f i n a n c i a l f l o w s , t h e i n c r e a s e in s e r v i c e o n the e x t e r n a l d e b t t h a t h a d b e e n a m a s s e d in e a r l i e r y e a r s ( B C R 1 9 8 0 , p. 1), a n d m a s s i v e c a p i t a l f l i g h t . 5 T h e latter p h e n o m e n o n w a s t r i g g e r e d p a r t l y by d e c l i n e s in t h e v a l u e of c o f f e e e x p o r t s , w h i c h led p r o d u c e r s to s h i f t t h e i r c a p i t a l a s s e t s ,

Figure 3.1

Source: BCR.

Terms of Trade, 1975-1989 (1975 = 100)

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Alexander

Segovia

and partly by the negative reaction to the g o v e r n m e n t ' s nationalization of the trade in c o f f e e exports. T h e foreign e x c h a n g e shortage came to a head in 1980. Given the extreme d e p e n d e n c e of the productive apparatus on imports of intermediate and capital goods, this resulted in a sharp drop in production and e m p l o y ment. Moreover, the scarcity of foreign currency brought an end to the financial and e x c h a n g e stability the country had e n j o y e d for more than 5 0 years and led to the creation of a large black market in dollars, which w a s partly fed by f u n d s sent back by Salvadoran emigrants. T h e black market also b e c a m e an important vehicle for capital flight, f u r t h e r f u e l i n g the cycle of slowing growth and accelerating inflation. T h e c o u n t r y ' s e c o n o m i c plight was aggravated by internal political strife, which manifested itself in takeovers of factories and farmlands, sabotage of production facilities, and abductions and murders of business exe c u t i v e s . This situation e n g e n d e r e d a climate of w i d e s p r e a d anxiety and uncertainty, which grew worse with the institution of structural reforms in 1980, including agrarian reform and nationalization of the banking system and of the export trade in c o f f e e and s u g a r — m e a s u r e s that were interpreted in business sectors as the start of a process of socialization of the economy/' Table 3.1 reveals the impact of these e c o n o m i c and political pressures on the Salvadoran e c o n o m y . B e t w e e n 1979 and 1985, 2 4 8 b u s i n e s s e s closed temporarily or permanently, a f f e c t i n g a total of 2 7 , 4 1 3 j o b s . T h e sharpest negative impacts were felt in 1 9 7 9 - 1 9 8 1 , the period in which the political-military conflict escalated in urban areas, especially in the country's industrial center of San Salvador. 7 Real G D P s u f f e r e d a c u m u l a t i v e drop of 24.3 percent over the period 1 9 7 9 - 1 9 8 2 , with the industrial, agricultural, and construction sectors experiencing declines of 34 percent, 12.7 percent, and 44.3 percent, respectively (see Figure 3.2). Reduced output, lower import levels, and the climate of political insecurity c o m b i n e d to p r o d u c e a nearly 90 percent decline in private investment during the period 1 9 7 9 - 1 9 8 1 , further worsening the economic scenario. T h e g o v e r n m e n t ' s response during the first years of e c o n o m i c crisis ( 1 9 7 9 - 1 9 8 0 ) was expansion oriented and relied on administrative (rather than m a r k e t ) m e c h a n i s m s . T h e government attempted to prop up d e m a n d by increasing foreign borrowing, hoping to cover the deficit in the current account and relieve the foreign e x c h a n g e - i n d u c e d pressures on growth and inflation ( B C R 1980, p. 21). To do this, the g o v e r n m e n t sought support f r o m international lending agencies, in particular the International Monetary Fund (IMF). 8 T h e authorities also implemented an anti-cyclical policy based on public investment projects in order to c o m p e n s a t e for the enorm o u s decline in private investment ( B C R 1980, p. 29). This a p p r o a c h , e m b o d i e d in the Emergency Plan instituted in 1980, w a s financed with external resources and internal credit f r o m the Central Reserve Bank (Banco

The War Economy of the 1980s

Table 3.1

35

Businesses Closed Temporarily or Permanently and Jobs Affected, 1979-1985

Year

Businesses closed

Jobs affected

1979 1980 1981 1982 1983 1984 1985

29 108 84 16 2 3 6

6,981 9,964 5,779 2,070 917 28 1,674

Total

248»

27,413

Source: Ministry of Labor and Social Security. Note: a. Of this total, 69 subsequently reopened.

Central de R e s e r v a , or B C R ) , w h i c h a l s o d e v o t e d c o n s i d e r a b l e r e s o u r c e s to f i n a n c i n g an o n g o i n g agrarian r e f o r m . In 1980 the B C R thus b e c a m e the principal supplier of credit f o r the e c o n o m y as its overall f i n a n c i n g reached u n p r e c e d e n t e d l e v e l s ( B C R 1980, p. 29). A s a result of this a n t i - c y c l i c a l policy, c o n s u m p t i o n and p u b l i c investment w e r e virtually the only variables that s h o w e d any d y n a m i s m d u r i n g the first f e w years of the crisis. On the a d m i n i s t r a t i v e side, the g o v e r n m e n t s o u g h t to relieve the press u r e of f o r e i g n e x c h a n g e by s u b j e c t i n g i m p o r t s to a s y s t e m of p e r m i t s , p r o h i b i t i o n s , a n d p r i o r - d e p o s i t r e q u i r e m e n t s . T h e g o v e r n m e n t also att e m p t e d to t a m e i n f l a t i o n by s t i m u l a t i n g f o o d p r o d u c t i o n , e s t a b l i s h i n g m a x i m u m p r i c e s f o r a s e r i e s of s t r a t e g i c p r o d u c t s , and f r e e z i n g s a l a r i e s , w a g e s , and social b e n e f i t s f o r w o r k e r s . 9 Finally, the g o v e r n m e n t s o u g h t to i m p l e m e n t s t r u c t u r a l r e f o r m s , i n c l u d i n g a g r a r i a n r e f o r m . F r o m an e c o n o m i c and social s t a n d p o i n t , this r e f o r m p r o g r a m w a s i n t e n d e d to a d d r e s s long-standing p r o b l e m s relating to the c o n c e n t r a t i o n of i n c o m e and w e a l t h ; politically the r e f o r m s w e r e a i m e d at isolating radical g r o u p s on both the left and the right. R e g r e t t a b l y , but p r e d i c t a b l y , the e x p a n s i o n - o r i e n t e d p u b l i c - s p e n d i n g policy and the g r o w i n g c o s t s of the a r m e d c o n f l i c t b r o u g h t an u n p r e c e d e n t e d i n c r e a s e in the f i s c a l d e f i c i t ( s e e F i g u r e 3 . 3 a n d A p p e n d i x T a b l e A . 2 c ) . T h i s o c c u r r e d , in part, b e c a u s e p u b l i c r e v e n u e s d e c l i n e d d u r i n g this p e r i o d as a result of the e c o n o m i c s t a g n a t i o n , i n c r e a s e d tax e v a s i o n , a n d lower prices f o r the principal e x p o r t p r o d u c t s . With p r o d u c t i o n f a l l i n g a n d f o r e i g n c u r r e n c y s c a r c e , s h o r t - t e r m s u p p l y w a s f i x e d a n d the w i d e n i n g deficit a d d e d to the i n f l a t i o n a r y p r e s s u r e s on the c o s t s i d e . 1 0 B y 1981 the e x p a n s i o n - o r i e n t e d e c o n o m i c s t r a t e g y w a s a b a n d o n e d . With the a r m e d c o n f l i c t h e a t i n g u p a n d p u b l i c f i n a n c e u n d e r pressure, the g o v e r n m e n t l a u n c h e d an austerity p r o g r a m that called f o r r e d u c i n g a g g r e gate demand through tighter monetary controls; curtailing nonmilitary

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Alexander

Figure 3.2

Segovia

Growth of GDP and Major Sectors, 1978-1988

15

• GDP « Agriculture A Industry B Construction ^ Commerce

Source: BCR.

government spending, especially public investment; freezing wages, s a l a r i e s , a n d the p r i c e s of s o m e b a s i c g o o d s a n d s e r v i c e s ; i n c r e a s i n g c h a r g e s for s o m e p u b l i c services; a n d a d o p t i n g stricter e x c h a n g e c o n t r o l s . T h i s shift t o w a r d austerity w a s c o n s o l i d a t e d in 1 9 8 2 w h e n a new G o v e r n m e n t of N a t i o n a l U n i t y c a m e to p o w e r . In July 1 9 8 2 the new g o v e r n ment signed an a g r e e m e n t with the I M F for a standby credit in the a m o u n t of $ 5 0 million and c o m p e n s a t o r y f i n a n c i n g f o r $ 3 7 m i l l i o n . In return, the g o v e r n m e n t a g r e e d to a o n e - y e a r s t a b i l i z a t i o n p r o g r a m w h o s e p r i n c i p a l f e a t u r e s i n c l u d e d the c r e a t i o n of a p a r a l l e l f o r e i g n e x c h a n g e m a r k e t (designed as a w a y to m o v e t o w a r d a liberalized e x c h a n g e policy by s h i f t i n g t r a n s a c t i o n s to the " f r e e " m a r k e t ) ; 1 1 d i f f e r e n t i a l a d j u s t m e n t of interest rates; r e d u c t i o n of the p u b l i c - s e c t o r d e f i c i t , e s p e c i a l l y that of the central g o v e r n m e n t ; and an increase in the price of r e v e n u e s t a m p s . 1 2

The War Economy of the 1980s

37

Figure 3.3 Fiscal Deficit, 1978-1989 (As a percentage of GDP)

Source: BCR.

T h e signing of the agreement with the I M F enabled the government to gain access to external financial resources, especially f r o m the United States. U.S. aid began to increase substantially in 1982, reaching its peak level in 1987. T h a n k s to this influx of foreign aid, the country was able to surmount its foreign exchange crisis, reverse the recessionary trend of earlier years, and even obtain positive growth rates for the remainder of the decade. Unfortunately, the e c o n o m y ' s g r o w i n g d e p e n d e n c e on politically determined foreign aid meant that certain underlying m a c r o imbalances— which w o u l d b e c o m e evident if aid w a s ever to be w i t h d r a w n — n e v e r really corrected. Thus, the Salvadoran m a c r o e c o n o m y gave a positive, but fragile, image of successful " a d j u s t m e n t . " T h e c o u n t r y ' s e c o n o m i c policy u n d e r w e n t a n o t h e r c h a n g e w h e n the Christian D e m o c r a t i c Party ( P D C ) c a m e to p o w e r in 1984. R e c o g n i z i n g the new f l o w of U.S. aid, the P D C initially s h i f t e d f r o m austerity to expansion, a d o p t i n g policies designed to increase salaries f o r public-sector e m p l o y e e s and m i n i m u m w a g e s f o r urban w o r k e r s , to selectively reduce interest rates and increase the availability of credit f o r the public and private sectors, and to control the resulting inflationary pressure via a temporary law regulating prices for a set of basic g o o d s and services. With regard to f o r e i g n e x c h a n g e , the policy of gradually s h i f t i n g c o m m e r c i a l transactions f r o m the official market to the parallel m a r k e t w a s continu e d — b y J u n e 1985 more than half of all imports and exports of goods and services were being channeled through the parallel market ( G T Z 1989, p. 36). This p r o m p t e d an effective depreciation of the e x c h a n g e rate, triggering a rise in inflation. B u d g e t a r y pressures intensified through 1985, partly b e c a u s e of increasing p u b l i c e m p l o y m e n t as well as larger o u t l a y s f o r d e f e n s e and

38

Alexander Segovia

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The War Economy of the 1980s

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Performance and Policies Since 1989

63

financial institutions, this structural change has generally reinforced the confidence of the private sector, with favorable effects reflected in the modest but sustained recovery of private investment. The process of "modernizing" the market economy has not, however, been free from difficulties and problems. Some of these have clearly contradicted the overall goal of a competitive economy. For example, irregularities in the privatization of banking have produced oligopolization in the financial sector, hindering fair competition and raising real interest rates (including commissions) to borrowers. In this context, the banks have become the de facto financial arms of major economic groups, reflecting and reinforcing the concentration of wealth. 1 6 This, in turn, has negative effects on the prospects for sustainable economic growth and the strengthening of new economic actors. Perhaps the biggest conflict, however, is the aforementioned contradiction between the use of the exchange rate as an inflation-fighting tool and the objective of creating a strong and diversified export sector. There have been some advances in terms of creating an institutional network of support for the export sector, fostering greater "export consciousness," and decreasing effective protection, but the performance of nontraditional exports to the rest of the world has remained weak. As can be seen in Table 4.2, the only nontraditional exports that have shown dynamic growth in recent years are: (1) those goods directed to the CACM, and (2) assembly services, a category that was assigned an important role in the strategy from the start, in which gross exports rose from $80 million in 1989 to $278 million in 1993. The assembly industry generated 41,152 jobs in the period 1985-1993 (see Chapter 12). According to USAID (1993b, p. 35), 17 free-trade zones are now under development in El Salvador that could generate more than 100,000 new jobs in the current decade. Impressive performance in the assembly industry is not, however, likely to make up for generally slack growth. Not only is such a strategy limited in its capacity to bring in foreign exchange, given that local value added represents only about 30 percent of gross value (compare the gross values reported in Table 4.2 with net earnings reported in Table 12.2), but also the possibilities for future growth have been reduced since the U.S. Congress has blocked financing for free-trade zones (GAO 1993). Although a key barrier to generating a new export axis is the appreciated colon, Hinds (1994) and ANEP (1993) have also stressed the lack of productive investment. Hinds (1994) attributes this to high interest rates, high operating costs (due to deficient infrastructure, taxes on inputs and capital goods, etc.), the low national savings rate, and the mentality of many business entrepreneurs, who expect high returns without large risks. 17 ANEP (1992, 1993) has repeatedly argued that the weak showing of exports is due not only to exchange-rate overvaluation but also to economic incentives that encourage speculative investment and investment in

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the c o m m e r c i a l and s e r v i c e sectors, r a t h e r than in the p r o d u c t i o n of tradeable g o o d s . T h e r e i n d e e d has b e e n an i n c r e a s i n g o r i e n t a t i o n of the e c o n o m y t o w a r d the tertiary or s e r v i c e sector: T h e s h a r e of a g r i c u l t u r e in G D P has d e clined dramatically in recent years, w h i l e the share of c o m m e r c e and s e r v i c e s has i n c r e a s e d c o n s i d e r a b l y . 1 8 T h i s s h i f t to n o n t r a d e a b l e s e r v i c e s is not surprising, h o w e v e r , in light of the real e x c h a n g e - r a t e appreciation a n d the direct boost to c o n s u m p t i o n due to remittances. 1 9 In short, the e x c h a n g e rate p o l i c y a n d the lack of p r o d u c t i v e p r i v a t e i n v e s t m e n t are c l o s e l y linked. A s u c c e s s f u l m a c r o e c o n o m i c a l t e r n a t i v e w o u l d have to both d e p r e ciate the c u r r e n c y in real t e r m s and i n c r e a s e i n v e s t m e n t . Finally, the a d j u s t m e n t of 1 9 8 9 - 1 9 9 4 was not able to d e c r e a s e poverty s i g n i f i c a n t l y ( n o r did this goal f i g u r e p r o m i n e n t l y in its i n t e n t i o n s ) . I n deed, the n u m b e r of p e o p l e living in w h a t the Ministry of P l a n n i n g classif i e s as " e x t r e m e p o v e r t y " in u r b a n a r e a s r o s e f r o m 2 3 . 3 p e r c e n t of the urban p o p u l a t i o n to 29.6 percent in 1 9 9 2 / 9 3 (see Table 4.6). Such p r o g r e s s as has b e e n a c h i e v e d h a s been d u e to g o v e r n m e n t c o m p e n s a t o r y p r o g r a m s — m o s t l y f i n a n c e d with e x t e r n a l r e s o u r c e s (see C h a p t e r 6 ) — a s well as e c o n o m i c g r o w t h and the r e d i s t r i b u t i v e e f f e c t of r e m i t t a n c e s . T h e positive i m p a c t of r e m i t t a n c e s , p r o b a b l y the m a i n f a c t o r in l i m i t i n g p o v e r t y a n d a m e l i o r a t i n g d i s t r i b u t i o n a l i n e q u i t i e s , can hardly be v i e w e d as a d e liberate result of g o v e r n m e n t policy, e x c e p t to the extent that the S a l v a d o ran g o v e r n m e n t h e l p e d to p e r s u a d e the U.S. g o v e r n m e n t to allow é m i g r é s to stay in that c o u n t r y past the d a t e of the n e g o t i a t e d c o n c l u s i o n to the a r m e d c o n f l i c t . In any case, poverty in El S a l v a d o r c o n t i n u e s to be far t o o high and is w i d e l y r e c o g n i z e d as the m o s t s e r i o u s threat to the c o n s o l i d a tion of peace (see, for e x a m p l e , U S A I D 1 9 9 4 b ; World B a n k 1994b). T h e lack of m a j o r p r o g r e s s in the social s e c t o r — n o t w i t h s t a n d i n g the p o s i t i v e i m p a c t s of the large i n f l o w s of r e m i t t a n c e s — i s r e l a t e d to t w o

Table 4.6

Urban Poverty, 1988/89-1992/93 (number of people and percentages 1989-1993) 1988/89

Number of people Relative poverty Extreme poverty Total Percentages of total Relative poverty Extreme poverty Total

1990/91

1991/92

1992/93

707,356 517,570 1,224,926

782,407 550,606 1,333,289

751,730 573,211 1,324,942

516,567 734,552 1,251,367

31.9 23.3 55.2

32.2 21.9 54.1

30.4 20.8 51.2

20.8 29.6 50.4

Source: MIPLAN, Multipurpose Household Survey, various years.

Performance

and Policies Since 1989

65

factors. First, the g o v e r n m e n t placed a much higher priority on structural adjustment than on social policy (Belt and Lardé de P a l o m o 1994a). T h e trickle-down vision underlying the program accepted the old premise that the o b j e c t i v e s of g r o w t h and distribution are i n c o m p a t i b l e in the short term, and therefore its proponents argued f o r growth first and redistribution of the fruits of growth later. 2 0 This is hardly an auspicious f r a m e w o r k for making significant dents in poverty rates. Our own vision of the compatibility of equity a n d growth, elaborated in C h a p t e r s 1 and 8, squares with current research in d e v e l o p m e n t e c o n o m i c s and p e r m i t s policy that accords top priority to poverty reduction. A second reason for slow progress on poverty and inequality was the institutional and f i n a n c i a l w e a k e n i n g of the state as a result of the war, e c o n o m i c crisis, and fiscal a d j u s t m e n t . On the administrative side, many of the policies d e s i g n e d to improve social w e l f a r e w e r e i m p e d e d by the lack of qualified personnel and institutional resources; those policies that were implemented o f t e n lacked adequate control m e c h a n i s m s . This institutional weakness has been exacerbated by the thrusts toward privatization and decentralization, which accorded with the U.S.-supported strategy of building up institutions that were parallel to the state. On the fiscal side, revenues have increased only moderately (see Chapter 6). As a result, social programs often have relied heavily on external funding, a phenomenon that suggests the lack of a deep governmental c o m m i t m e n t to building and maintaining appropriate social safety nets. In sum, the S a l v a d o r a n e c o n o m y has been substantially restructured: T h e market plays a larger role, the state has less power, and the private sector has more property. But progress toward a diversified export strategy and sustainable growth has been frustrated by an overvalued e x c h a n g e rate and the lack of productive investment. Progress on the social front meanwhile has been very slow and largely inadequate to meet the d e m a n d s of a deeply frustrated society. These policy shortcomings point to the need for a new s t r a t e g y — o n e that would consciously depreciate the real exchange rate to foster the shift to tradeables, encourage more productive private investment (in part through e n h a n c i n g public i n v e s t m e n t ) , a n d pay far greater attention to the lot of the poor.

The Reform Program Announced by the Calderón Sol Government In early 1995 the C a l d e r ó n Sol g o v e r n m e n t that had taken o f f i c e in June 1994 a n n o u n c e d its intention to carry out a new e c o n o m i c - r e f o r m program. T h e centerpiece of the program is the proposal to fix the e x c h a n g e rate at a level of 8.75 colones to one dollar, with total convertibility. This would entail the creation of a currency board, which would eventually take

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the place o f the central b a n k , b e c a u s e in such a c o n t e x t e x c h a n g e - r a t e p o l icy would disappear, and credit p o l i c y w o u l d e f f e c t i v e l y be c e d e d to W a s h ington. T h e underlying goal appears to be a total dollarization o f the S a l vadoran e c o n o m y . T h e d e s i g n e r s o f the program anticipate that this p o l i c y would have a s e r i e s o f short-term b e n e f i t s for the country. In the first p l a c e it would i n c r e a s e the c o n f i d e n c e o f n a t i o n a l and foreign i n v e s t o r s due to the final e l i m i n a t i o n o f the e x c h a n g e - r a t e risks a s s o c i a t e d with d e v a l u a tion. In the s e c o n d p l a c e , f i x i n g the e x c h a n g e rate and f o r c i n g the d o l l a r ization o f the e c o n o m y w o u l d h o l d i n f l a t i o n to l e v e l s p r e v a i l i n g in the U n i t e d S t a t e s . T h i s , it is a r g u e d , w o u l d i n c r e a s e El S a l v a d o r ' s c o m p e t i tiveness, p r o m o t e s a v i n g , and c o n t r i b u t e to raising real w a g e levels. T h i r d , the new e x c h a n g e - r a t e p o l i c y w o u l d c a u s e interest rates to drop s u b s t a n tially, preferably c l o s e to international rates; this w o u l d aid in i n c r e a s i n g l e v e l s o f p r o d u c t i v e i n v e s t m e n t . F i n a l l y , f i x i n g the e x c h a n g e rate w o u l d reduce the q u a s i - f i s c a l deficit that a r i s e s due to the e x c h a n g e - r a t e l o s s e s o f the central b a n k ( s e e C h a p t e r 9 ) . A c c o m p a n y i n g this f i x e d e x c h a n g e - r a t e p o l i c y w o u l d be a d r a m a t i c reduction ( o v e r five y e a r s ) in tariff rates, such that the new c e i l i n g w o u l d b e 6 percent and the new f l o o r 1 p e r c e n t (the r e s p e c t i v e f i g u r e s are currently 2 0 and 5 p e r c e n t ) . With the goal o f giving b u s i n e s s e s time to adjust, the g o v e r n m e n t is c o n s i d e r i n g r e d u c i n g tariffs by s t a g e s (rather than a full and i m m e d i a t e c u t ) and a l l o w i n g the p a c e o f tariff r e d u c t i o n to d i f f e r by sector; agricultural and a n i m a l - h u s b a n d r y s e c t o r s , for e x a m p l e , would rec e i v e special treatment. It is argued that this m o v e toward m o r e c o m p l e t e trade liberalization w o u l d help m o d e r n i z e the b u s i n e s s s e c t o r , resulting in g r e a t e r e f f i c i e n c y and g r e a t e r p r o d u c t i v i t y . M o r e o v e r , it w o u l d p r o m o t e productive i n v e s t m e n t b e c a u s e the virtual e l i m i n a t i o n o f tariffs on inputs and capital g o o d s w o u l d r e d u c e c o s t s o f production. Finally, it would enc o u r a g e foreign i n v e s t m e n t , b e c a u s e the w h o l e country in e f f e c t would b e transformed into a f r e e - t r a d e z o n e o p e n to the world. B e c a u s e t a r i f f r e d u c t i o n w o u l d d e c r e a s e f i s c a l r e v e n u e s , the g o v e r n ment p r o p o s e s both to i n c r e a s e the v a l u e - a d d e d tax and to step up m e a sures to c o m b a t tax e v a s i o n . In a d d i t i o n , privatization w o u l d b e a c c e l e r ated, with any r e s u l t i n g r e v e n u e

improvement

to b e d i r e c t e d

toward

investment in human capital and the i m p r o v e m e n t o f infrastructure. On the expenditure side, the program p r e s c r i b e s austerity in the p u b l i c sector, inc l u d i n g a p r o g r a m o f r e d u c t i o n in p u b l i c e m p l o y m e n t and r e f o r m o f the pension s y s t e m . T h e i m m e d i a t e i m p a c t on i n c o m e distribution, particularly on the tax side, is likely to b e r e g r e s s i v e . O n e o b j e c t i v e o f the program is to transform El S a l v a d o r into a f i n a n c i a l c e n t e r , a g o a l s e e m i n g l y b a s e d o n the P a n a m a n i a n e x p e r i e n c e with d o l l a r i z a t i o n . T o this e n d , the r e f o r m w o u l d include the s t r e n g t h e n i n g o f m e c h a n i s m s f o r f i n a n c i a l - s y s t e m o v e r s i g h t , as well as b r e a k i n g the b a n k

Performance and Policies Since 1989

67

oligopoly by e x p o s i n g the system to foreign competition. A l o n g the same lines, the p r o g r a m calls for s t r e n g t h e n i n g market m e c h a n i s m s through eliminating the restraints and conditions that negatively affect competition. A m o n g the measures proposed to accomplish this are the creation of a Law of Free Competition and the preparation of a new c o m m e r c i a l code. T h e a n n o u n c e m e n t of the p r o g r a m set off intense d e b a t e in El Salvador and in Central America. As of this writing, the principal business organizations have given it conditional support ( e x p r e s s i n g concerns about higher taxes and worries about the fixed e x c h a n g e rate), while the opposition parties and the trade unions have declared t h e m s e l v e s opposed to it. The other Central American countries have reacted cautiously, particularly because one thrust of the plan is to reorient El Salvador f r o m the Central American market to the larger world e c o n o m y and b e c a u s e the proposed tariff changes would violate current subregional a g r e e m e n t s . El Salvador has formal c o m m i t m e n t s to the C A C M that it cannot abandon lightly. Nor should it do so, for intraregional trade is currently the most d y n a m i c c o m ponent of the c o u n t r y ' s export sector (see Chapter 12). In light of these reactions, the specifics of the plan remain highly tentative. R e g a r d l e s s of its final content, the proposal r e p r e s e n t s a unique opportunity to begin a serious debate about what kind of e c o n o m y will be most desirable in the future for El Salvador. T h e program does seek to respond honestly to three fundamental problems of the Salvadoran economy. First, it attempts to respond to the notable deficiency of productive investment, and hopes that dollarization will reduce risk and attract foreign, as well as domestic, investment. Second, it attempts to discipline a domestic business class accustomed to extraordinarily high rates of profit by tightening competition and financial oversight. Finally, it r e c o g n i z e s the need for the Salvadoran economy to be incorporated within the world economy in a new way, suggesting that the demand originating in the internal and regional markets is insufficient to sustain high growth rates (particularly for the assembly industries) and that therefore the country should pursue a reorientation toward the world market, particularly the North American market. Although the new program is a w e l c o m e opening for debate, however, it offers the w r o n g policies at the w r o n g time. One key premise of the program is that r e c e i v i n g remittances f r o m S a l v a d o r a n labor is akin to having an assembly zone located in the United States; these earnings are structural in nature and will continue in the m e d i u m term. T h i s view suggests that it is useless to try to alter the real exchange rate by m e a n s of devaluations; central-bank attempts to depreciate by intervening in the currency market will only generate exchange losses and reduce the real credit available to the private sector. But declaring defeat in the f a c e of the "Dutch d i s e a s e " may prove to be a recipe for long-run disaster if and when remittances eventually decline,

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particularly if this were to occur quickly, as in the "hard-landing" scenario. 21 Sooner or later, El Salvador will have to fall back on exports—and the export infrastructure will only be there if the government combines the right policies (i.e., public investment) with the right prices (i.e., a less highly valued colon). Freezing the exchange rate now against the dollar would instead lay the groundwork for a financial explosion a la Chile in 1982 or Mexico in 1994: Bad news or external shocks could trigger an economic meltdown. The notion of El Salvador as a financial center is quite unrealistic, particularly in light of the presence of well-established and sophisticated financial centers elsewhere in Latin America. The new proposals also seem to assume that the Salvadoran economy is already in shape to compete with other countries for foreign direct investment (FDI), and that there is sufficient mobility of resources and factors of production inside the economy that those negatively affected by shifting incentives will be able to move rapidly to sectors and activities that show higher profit rates. In our view FDI is likely to be hesitant and the adjustment process slower and more painful. The rush toward complete economic liberalization proposed by the government ignores the lessons of successful developing countries, including Korea and Taiwan, where pragmatic market-supporting interventions did much to make private-sector-oriented models work. The elements of an alternative strategy are discussed in more detail in Chapters 8 through 12. The key shortcoming of this new program is the failure to incorporate a serious effort to reduce poverty directly and to redistribute assets, opportunities, and income. Poverty reduction is crucial as an end in itself. But the evidence clearly shows also that market economies work best when they start from the precondition of relative equality, for the reasons reviewed in Chapters 1 and 8. Among other benefits, greater equality reduces rent seeking and induces a willingness to share burdens, both of which make it easier to achieve stabilization and adjustment. For El Salvador's new market-oriented strategy to work, the government must now launch a committed redistributional and antipoverty program. The need for such a program is particularly great in a country trying to fulfill the obligations of a peace accord. The success of any economic program depends on creating a climate of political and social stability that can give confidence to national and foreign investors. This in turn presumes the consolidation of democracy and the full implementation of the Chapultepec Accords. It is clear that the country cannot subordinate peace to economic restructuring: Moving ahead with both processes simultaneously is the only viable option for attaining the goals of development and democracy. The best way to ensure such compatibility is to make the more general guarantor of social peace—distributional improvement and the elimination of poverty—the centerpiece of a new economic strategy.

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Conclusions El S a l v a d o r ' s r e c e n t e c o n o m i c h i s t o r y o f f e r s s e v e r a l l e s s o n s f o r u n d e r s t a n d i n g the f u t u r e . T h e first is s i m p l y that the s u c c e s s of t h e a d j u s t m e n t p r o g r a m b e g u n in 1 9 8 9 m a y b e o v e r s t a t e d . It w a s u n d e r t a k e n in a h i g h l y f a v o r a b l e c o n t e x t — t h e b e g i n n i n g s of p e a c e , t h e g r o w i n g c l o s e n e s s of b u s i n e s s a n d g o v e r n m e n t , a n d the i n c r e a s e in r e m i t t a n c e s — t h a t b o t h c u s h ioned s o c i a l c o s t s a n d d a m p e n e d i n f l a t i o n a r y p r e s s u r e s . S u c h a f a v o r a b l e c o n t e x t m a y n o t , h o w e v e r , b e r e p e a t e d in t h e c o m i n g y e a r s . T h e c o s t s of i m p l e m e n t i n g t h e p e a c e are g r o w i n g , b u s i n e s s m a y b e less e n t h u s i a s t i c as the g o v e r n m e n t a t t e m p t s to i m p r o v e t h e p r i v a t e s e c t o r ' s t e p i d r e s p o n s e to m a r k e t i n c e n t i v e s , a n d , m o s t i m p o r t a n t , t h e f l o w of r e m i t t a n c e s m a y t a p e r o f f . In this s e n s e , t h e a d j u s t m e n t p r o c e s s is e n t e r i n g a n e w a n d m o r e d i f f i cult s t a g e . A s e c o n d i n s i g h t f r o m this r e c e n t h i s t o r y is that the e x i s t e n c e of international aid a n d r e m i t t a n c e s a l l o w e d the g o v e r n m e n t to c o n c e n t r a t e its e f forts on installing a more market-based e c o n o m i c model rather than simply s t a b i l i z i n g t h e m a c r o e c o n o m y . A l t h o u g h t h e p o l i c y a c h i e v e m e n t s on this f r o n t h a v e b e e n i m p r e s s i v e — l i b e r a l i z a t i o n , p r i v a t i z a t i o n , a n d t h e rela t i v e s h r i n k i n g of t h e s t a t e h a v e c l e a r l y g o n e f o r w a r d — a m o r e f u n d a m e n tal s h i f t t o w a r d e x p o r t d i v e r s i f i c a t i o n a n d s u s t a i n a b l e g r o w t h h a s b e e n f r u s t r a t e d by an o v e r v a l u e d e x c h a n g e r a t e , an o l i g o p o l i s t i c b a n k i n g sector, a n d i n s u f f i c i e n t p r o d u c t i v e i n v e s t m e n t . T h e n e o l i b e r a l m o d e l is "all d r e s s e d u p w i t h n o w h e r e to g o " ; u n l e s s t h e real e x c h a n g e r a t e c a n b e dep r e c i a t e d a n d i n v e s t m e n t e n h a n c e d , El S a l v a d o r will r e m a i n h i g h l y d e p e n dent on t r a n s f e r s a n d r e m i t t a n c e s . A f i n a l l e s s o n r e l a t e s to t h e s o c i a l s i t u a t i o n . P r o g r e s s in t h e f i g h t a g a i n s t e x t r e m e p o v e r t y in r e c e n t y e a r s h a s b e e n m i n i m a l ; t h i s p h e n o m e n o n is all t h e m o r e d i s t u r b i n g in light of t h e p o l i c y s p a c e a n d the d i r e c t p o s i t i v e d i s t r i b u t i o n a l c o n s e q u e n c e s of t h e r e m i t t a n c e f l o w . T h i s lack of p r o g r e s s is p a r t l y d u e to a n o w d a t e d s t a g i s t notion that g r o w t h m u s t c o m e first a n d d i s t r i b u t i o n o n l y later. T h e s c a l e a n d t h e b r e a d t h of e x t r e m e p o v e r t y in El S a l v a d o r r e q u i r e that w e m o v e b e y o n d t h i s v i s i o n a n d ins t e a d r e c o g n i z e that g r o w t h a n d d i s t r i b u t i o n are not n e c e s s a r i l y c o n t r a d i c tory g o a l s . W h a t is n e e d e d is the s i m u l t a n e o u s p u r s u i t of e c o n o m i c g r o w t h and equity, particularly because a more equitable underlying distribution of a s s e t s a n d p o w e r is t h e key to m a k i n g m a r k e t s w o r k to p r o d u c e g r o w t h . B u i l d i n g on this e q u i t y - g r o w t h l i n k a g e , s u b s e q u e n t c h a p t e r s s p e c i f y vario u s i n s t i t u t i o n a l a n d f i s c a l r e f o r m s that w o u l d fit i n t o s u c h an i n c l u s i v e model. A l t h o u g h the t e n t a t i v e p r o g r a m of r e f o r m s r e c e n t l y f l o a t e d by t h e g o v e r n m e n t d o e s not p o i n t in this d i r e c t i o n , t h e g o v e r n m e n t d o e s s e e m to h a v e r e c o g n i z e d s e v e r a l f u n d a m e n t a l w e a k n e s s e s in the c u r r e n t e c o n o m y . T h e

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n e w program o f f e r s a u s e f u l o p p o r t u n i t y to d e b a t e both interpretations o f the past and p r o j e c t i o n s of the future. S u c h a d e b a t e o p e n s up the real p o s sibility o f a c h i e v i n g , for the first t i m e in the c o u n t r y ' s history, a b a s i c c o n s e n s u s on e c o n o m i c and s o c i a l q u e s t i o n s . T h i s will be an i n d i s p e n s a b l e req u i r e m e n t for a s s u r i n g the c o n t i n u i t y a n d the viability o f any d e v e l o p m e n t s t r a t e g y — a n d for e n s u r i n g that a n y s u c h s t r a t e g y r e i n f o r c e s , rather than u n d e r m i n e s , the d e m o c r a t i z a t i o n o f S a l v a d o r a n s o c i e t y .

Notes 1. As Rosa ( 1 9 9 3 b ) has pointed out, the institutionalization of this role of guidance and supervision of the structural adjustment process by the World Bank was formalized with the approval of the first structural a d j u s t m e n t loan in 1991 (see Table 4.1). 2. The National Reconstruction Program (PRN) covers approximately 40 percent of the country, including 20 percent of the population most affected by the war. Investments and current expenditures within the scope of the plan vary between $1.2 and $1.6 billion over a five-year period. The average expenditure in each of these years is equivalent to between 4 and 5 percent of G D P (IDB 1993a, pp. 3 - 4 ) . 3. Orellana Merlos (1992, pp. 5 - 7 ) r e v i e w s official estimates for the years 1979-1991 and their problems. He estimates the remittance inflow in 1987 at $504 million, compared to the official estimate of $169 million and Montes's (1987) estimate of $1.3 billion. Table 4.3 reports the official estimates that seem to be relatively accurate in the most recent years. 4. Moreover, the g o v e r n m e n t ' s latitude for defining policies was augmented considerably once it had access to these remittances precisely because they were autonomous—and as such not subject to the usual conditionalities attached to foreign aid and international assistance. For example, the government did not have to rely on funds from the IMF, despite having signed four standby agreements (which were considered precautionary). 5. On the World Bank's concept of structural a d j u s t m e n t , see World Bank (1988) and Williamson (1990). 6. Although appreciation of the real exchange rate does not have any strong adverse impacts on traditional exports or on exports to the C A C M , it is of m a j o r importance to the competitiveness of nontraditional exports outside the region (see Chapter 12). 7. A national household survey, c o n d u c t e d by the Ministry of Planning in 1 9 9 1 - 1 9 9 2 , found that 7.1 percent of " e x t r e m e l y poor" and 12.4 percent of poor households received remittances, on average $36 per month and $61 per month, respectively. Remittance income is greatly understated in the survey, however: Total remittances extrapolated from the survey were only $149 million per year, compared to the officially registered inflow of $690 million for 1992. Siri and Abelardo Delgado (1995, p. 6) note that understatement is likely to be especially significant for poor households. 8. On the other hand, emigration that has produced remittances has also had some negative distributional c o n s e q u e n c e s . Survey data indicate that emigrants

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tend to h a v e " a b o v e - a v e r a g e labor force c h a r a c t e r i s t i c s " ( F u n k h o u s e r 1990, p. 2 3 ) and the c o u n t r y is n o w d e p r i v e d of their h u m a n c a p i t a l . T h e positive i n c o m e e f fects of e m i g r a t i o n must also be w e i g h e d against the social costs of the disruption of f a m i l i e s and c o m m u n i t i e s . And, perhaps most troubling, El S a l v a d o r ' s heavy dep e n d e n c e on r e m i t t a n c e s renders the e c o n o m y in g e n e r a l , and the poor in particular, v u l n e r a b l e to an a d v e r s e s h o c k f r o m their s u d d e n c o n t r a c t i o n , a topic that is discussed later. 9. T h e r e w a s m u c h " w a t e r " in the earlier tariffs, thanks in part to competition within the C A C M ; hence the l o w e r i n g of t a r i f f s did not result in a w a v e of b a n k ruptcies (see Chapter 12). 10. For a detailed analysis of the p r o c e s s of privatization in El Salvador, see Segovia ( 1 9 9 4 c ) . 11. In fact, the only times that the g o v e r n m e n t had p r o b l e m s in controlling inflation w e r e precisely those at w h i c h the e x c h a n g e rate u n d e r w e n t strong f l u c t u a tions (as h a p p e n e d at the end of 1989 and the b e g i n n i n g of 1 9 9 0 due to the N o v e m b e r guerrilla o f f e n s i v e ) or w h e n m e a s u r e s were applied that directly a f f e c t e d costs and inflationary e x p e c t a t i o n s . T h e latter w a s the c a s e in 1992, w h e n the introduction of VAT and other fiscal m e a s u r e s led to s i g n i f i c a n t price increases. T h e inflationary spiral of 1992 w a s particularly serious b e c a u s e the introduction of the VAT c o i n c i d e d with a s e r i o u s shortage of basic g r a i n s ( b e a n s ) due to the d r o u g h t that a f f l i c t e d the country that year. 12. Similarly, Harberger ( 1 9 9 3 b , p. 17) predicts that the influx of r e m i t t a n c e s will c o n t i n u e " a s long as m o r e than a million S a l v a d o r a n s live a b r o a d , " and that they will probably g r o w over time, "particularly if those S a l v a d o r a n s share in the e c o n o m i c g r o w t h which is occurring in the United S t a t e s . " 13. T h e D E D p r o g r a m w a s established to provide t e m p o r a r y protected status in 1990, and w a s extended on three o c c a s i o n s " b a s e d largely on S a l v a d o r a n g o v e r n m e n t c o n t e n t i o n s that the country w a s not able to a s s i m i l a t e large n u m b e r s of its citizens now living in the United States." In d e c i d i n g to terminate the program, the C l i n t o n administration ignored " s t r e n u o u s a p p e a l s by S a l v a d o r a n a u t h o r i t i e s " (Associated Press 1994). 14. For e x a m p l e , C a l i f o r n i a ' s Proposition 187, passed by voters in N o v e m b e r 1994, s e e k s to deny public education and health care to illegal immigrants, and requires t e a c h e r s and health-care providers to report illegal i m m i g r a n t s to immigration authorities. 15. T h e s e a d v a n c e s have been highlighted by international institutions as o n e of the m o s t important a c h i e v e m e n t s of the a d j u s t m e n t p r o g r a m . USA1D (1994b, p. 3), for e x a m p l e , m a i n t a i n s that the p r o g r a m has been highly s u c c e s s f u l in redirecting the e c o n o m y t o w a r d greater d e p e n d e n c e on m a r k e t f o r c e s and a c o m p e t i t i v e private sector. T h e World B a n k ( 1 9 9 3 b , p. 2) similarly s a y s that r e f o r m has been s u c c e s s f u l in establishing the bases for a m o d e r n m a r k e t e c o n o m y . 16. For a critical analysis of the process of privatization in b a n k i n g , see Sorto and S e g o v i a ( 1 9 9 2 ) and Sorto (1995). 17. H a r b e r g e r ( 1 9 9 3 b , p. 16) r e p o r t s that, w i t h the i m p o r t a n t e x c e p t i o n of agriculture, real profit rates in El S a l v a d o r are very high, in the n e i g h b o r h o o d of 2 0 - 3 0 percent per a n n u m . 18. C h a n g e s in relative prices have played the m a j o r role in this shift, as can be s e e n by c o m p a r i n g the p e r c e n t a g e c o m p o s i t i o n of G D P at c u r r e n t p r i c e s

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(reported in A p p e n d i x Table A . 2 a ) to its c o m p o s i t i o n when valued at 1962 prices ( A p p e n d i x Table A.2b). For discussion, see Chapter 10. 19. T h i s i n v e s t m e n t b i a s t o w a r d the service sector also r e f l e c t s the o l i g o p o listic s t r u c t u r e of the f i n a n c i a l s y s t e m c o u p l e d with the e x i s t e n c e of s t r o n g e c o n o m i c g r o u p s tied to this sector. 20. For e x a m p l e , F U S A D E S ( 1 9 9 3 ) suggests that: " E x p e r i e n c e shows that the s e q u e n c e w h i c h e v e n t u a l l y m a k e s it p o s s i b l e for a country to e l i m i n a t e e x t r e m e poverty, while at the s a m e time attaining a condition of solvency (i.e., without significant m a c r o e c o n o m i c disequilibrium), consists of sustained growth first in order to distribute the fruits of growth later" [emphasis in the original]. See also C E N I T E C (1993). 21. T h e " D u t c h d i s e a s e " r e f e r s to the a d v e r s e impact of a foreign e x c h a n g e b o n a n z a on the c o m p e t i t i v e n e s s of other industries in the t r a d e a b l e - g o o d s sector (Corden 1984).

5 The Peace Accords and Postwar Reconstruction Elisabeth J. Wood

In their influential c o n t r i b u t i o n to the d e b a t e about p o s t w a r r e c o n s t r u c t i o n and m a c r o e c o n o m i c p o l i c y in El S a l v a d o r , A l v a r o de S o t o and G r a c i a n a del C a s t i l l o d e c r i e d the l a c k o f c o o r d i n a t i o n b e t w e e n the U N on the o n e hand and the I n t e r n a t i o n a l M o n e t a r y F u n d ( I M F ) and the W o r l d B a n k on the other. T h e y l i k e n e d El S a l v a d o r to a p a t i e n t l y i n g " o n the o p e r a t i n g table with the left and right s i d e s o f his b o d y s e p a r a t e d by a curtain and unrelated surgery b e i n g p e r f o r m e d on e a c h s i d e " (de S o t o and del C a s t i l l o 1 9 9 4 a , p. 7 4 ) . i T h e m e t a p h o r is a d r a m a t i c d e p i c t i o n o f t h e d i f f i c u l t c h a l l e n g e o f a c h i e v i n g both the c o n s o l i d a t i o n o f p e a c e and e c o n o m i c g r o w t h f o l l o w i n g c i v i l war. I f e f f o r t s at p o l i c y r e f o r m — e c o n o m i c and p o l i t i c a l a l i k e — a r e not c o o r d i n a t e d , either " o p e r a t i o n " may u n d e r m i n e the other. Yet the c o n solidation o f p e a c e s e e m s essential to s u s t a i n e d e c o n o m i c growth, and e c o n o m i c growth m a y s t a b i l i z e the p e a c e . T h e surgical i m a g e with its e m p h a s i s on the role o f the international a g e n c i e s does not, however, capture important a s p e c t s o f the political dyn a m i c o f p e a c e building in El S a l v a d o r and the p o s s i b l e c o n f l i c t s b e t w e e n peace-building and stabilization processes more generally. Far from a passive and unitary patient undergoing twin surgeries to remedy an underlying illness (presumably the civil war, its c a u s e s and c o n s e q u e n c e s ) , El S a l v a d o r is made up o f divergent groups whose conflicting interests not only fueled the war but continue actively to shape the p e a c e . M o r e o v e r , S a l v a d o r a n society has undergone a period o f profound c h a n g e that reshaped the o b j e c t i v e s , c o n straints, and alliances o f many groups. B e l y i n g the illness metaphor, as a result o f these c h a n g e s — m a n y o f which are p o s i t i v e — t h e country may be able to consolidate a historic breakthrough in its political and e c o n o m i c organization and build a society sharply different from the Salvadoran past in its democratic order and progress toward e c o n o m i c j u s t i c e . T h e n e g o t i a t i o n , i m p l i c a t i o n s , and uneven i m p l e m e n t a t i o n o f the C h a pultepec A c c o r d s and their relation to p o s t w a r r e c o n s t r u c t i o n is the s u b j e c t

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of this chapter. T h e a n a l y s i s f o c u s e s on the political b a r g a i n i n g b e t w e e n representatives of d o m e s t i c organizations and institutions that s h a p e d both the agreement itself and its subsequent implementation. T h e active support and timely intervention of international organizations, particularly the UN and the United States, w e r e critical both to the s u c c e s s f u l n e g o t i a t i o n of the agreement and to its implementation to date. But without sustained reference to the d o m e s t i c political actors we will not understand the political d y n a m i c s of the p e a c e process and their political and e c o n o m i c implications. T h e political b a r g a i n i n g did not e n d with the s i g n i n g of the agreement but continued to shape its implementation and reconstruction generally as the various d o m e s t i c actors f a c e d new challenges, constraints, and opportunities, attempting to maintain their own organizational cohesion and to extend their political p o w e r on the new post-accords political terrain. For the g o v e r n i n g party, Alianza R e p u b l i c a n a Nacional ( A R E N A ) , the principal c h a l l e n g e w a s to negotiate and i m p l e m e n t the p e a c e a g r e e m e n t without alienating a d h e r e n t s ( w h i c h include m a n y landlords and military officers), c o m p r o m i s i n g its position as the d o m i n a n t right-of-center party, or w e a k e n i n g its n e o l i b e r a l e c o n o m i c a g e n d a . Stability in the transition would depend in part on ARENA'S ability to deliver on the terms of the accords lest r e n e w e d unrest, armed or not, u n d e r m i n e the p a r t y ' s ability to raise reconstruction f u n d s f r o m international donors and to portray itself in the 1994 election c a m p a i g n as the deliverer of the peace. For the F a r a b u n d o M a r t i Front f o r N a t i o n a l L i b e r a t i o n ( F M L N ) the c o n s o l i d a t i o n of a d e m o c r a t i c political p r o c e s s w a s a n e c e s s a r y but not s u f f i c i e n t c o n d i t i o n f o r s u c c e s s in their transition f r o m insurgent m o v e ment to political party. T h e construction of a p o s t w a r o r g a n i z a t i o n a l and e c o n o m i c base d e p e n d e d in part on d e l i v e r i n g an a c c e p t a b l e set of resources to e x - c o m b a t a n t s and civilian supporters. M a x i m i z i n g the transfer of l a n d — i n area a n d e c o n o m i c p o t e n t i a l — a s well as d e l i v e r i n g training and credit p r o g r a m s w a s t h e r e f o r e a key interest for F M L N n e g o t i a t o r s . T h e F M L N ' s b a r g a i n i n g p o w e r d e p e n d e d in important m e a s u r e on its option to slow or halt the d e m o b i l i z a t i o n of the guerrilla f o r c e s . O n c e the guns were turned in, the F M L N w o u l d lose its special stature as an armed f o r c e of the civil w a r a n d signatory to the p e a c e a g r e e m e n t , a n d b e c o m e another o u t - o f - p o w e r political party ( a l t h o u g h o n e with special relations with international actors). For the armed forces the principal challenge was to retain as much control of its institutional base as possible, given the extraordinary process of civilian and international intervention in matters hitherto strictly internal that were initiated by the accords. Whether the officer corps would in fact acquiesce to that process w a s uncertain as the cease-fire began in February 1992. For p e a s a n t s in c o n f l i c t e d areas, the a g r e e m e n t p r o v i d e d a clear incentive to establish a claim to de f a c t o t e n a n c y as soon as p o s s i b l e . This sense of an u n p r e c e d e n t e d historical o p p o r t u n i t y w a s r e i n f o r c e d by the

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very visible presence of the UN monitors as they patrolled the countryside. Peasant organizations experienced increasing success in mobilizing campesinos for land takeovers. For landlords throughout El Salvador, and particularly for those owning properties within or near conflicted zones, the agreement occasioned a great deal of uncertainty. Despite the clause reasserting their property rights, many landlords were burdened by debts accumulated during the war and intimidated by the FMLN and the prospect of an organized workforce, and decided to sell. These political interests and agendas were central to the peace process in El Salvador. There are two central themes emphasized here. First, the agenda of the peace agreement—if fully implemented and consolidated— will lay the institutional foundations of political democracy in the postwar period. However, the agreement does not directly address the profound economic and social inequalities that fueled the civil war. The consolidation of the political reforms is both necessary and urgent if a future process of political bargaining is to define a more equitable model of economic development. Second, the principal impediments to consolidation of a durable peace in El Salvador have been domestic political obstacles, not economic constraints imposed by macroeconomic policy. To the extent that a lack of economic resources constrained some aspects of the peace process, the shortfall itself reflected a lack of political will. International actors, although they contributed significant financial resources and political pressure at key moments, did not compensate for inadequate political commitment by Salvadoran actors, particularly the Salvadoran government. This chapter is the first of three that address the short-run problems of the implementation of the peace accords. Chapters 6 and 7 analyze the mobilization of domestic and external resources in more detail.

Bargaining Over the Terms of Peace By the end of the 1980s the Salvadoran civil war was a military stalemate as neither side achieved—nor, in the judgment of many observers, could achieve—a military victory under the prevailing political conditions. The situation in the late 1980s was by no means static, however: The quickly changing geopolitical context brought a set of problems and opportunities to the contending Salvadoran parties whose social, political, and economic worlds were also being reshaped by the civil war (Gibb and Smyth 1990; Segovia 1994a; Rosa 1993a; Johnson 1993). By mid-1989 three elements essential to the negotiation process that eventually led to the peace agreement were in place. First, the FMLN made an unprecedented peace proposal in early 1989 that indicated their acceptance in principle of elections and their willingness

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Elisabeth).

Wood

to p a r t i c i p a t e in t h e u p c o m i n g e l e c t i o n s if t h e y w e r e p o s t p o n e d by six m o n t h s . T h e i n i t i a t i v e f o l l o w e d an internal political d e b a t e that r e d e f i n e d t h e s t a t e d g o a l of the i n s u r g e n c y f r o m s o c i a l i s t r e v o l u t i o n to the c o n s t r u c tion of a p l u r a l i s t d e m o c r a c y . A c c o r d i n g to t h e F M L N , a l t h o u g h the n e w objective implied s o m e structural reforms (including further agrarian ref o r m ) , it did not e n t a i l a s i n g l e - p a r t y p o l i t i c a l s y s t e m o r t h e a b o l i t i o n of p r i v a t e p r o p e r t y ( F M L N 1 9 8 9 ; s e e a l s o B y r n e 1 9 9 4 ) . T h a t the o f f e r w a s s e r i o u s w a s e v i d e n t in their a b a n d o n i n g a p r e v i o u s i n s i s t e n c e on an i n t e r i m p o w e r - s h a r i n g a r r a n g e m e n t , a n d w a s r e i t e r a t e d in t h e i r later d r o p p i n g a p r e v i o u s i n s i s t e n c e o n t h e i n t e g r a t i o n of the t w o a r m e d f o r c e s as w e l l . D e s p i t e s o m e d e g r e e of i n t e r n a l d i s s e n s i o n , s u b s e q u e n t n e g o t i a t i n g p o s i t i o n s c l e a r l y i n d i c a t e d that i s s u e s of m i l i t a r y , p o l i c e , e l e c t o r a l , a n d j u d i c i a l reform would take precedence over socioeconomic issues (Overseas Develo p m e n t C o u n c i l 1 9 9 4 ; G i b b a n d S m y t h 1 9 9 0 ; F M L N 1 9 9 0 ; M u r r a y et al. 1994). W h i l e a s s e r t i n g t h e F M L N ' s r e a d i n e s s to l a u n c h a m a j o r o f f e n s i v e , g u e r r i l l a s p o k e s p e r s o n s r e i t e r a t e d their p r e f e r e n c e f o r a n e g o t i a t e d r e s o l u tion of the w a r ( K a r l 1 9 8 9 ; B e r e t t a 1 9 8 9 ) . S e c o n d , t h e e l e c t i o n of A l f r e d o C r i s t i a n i as p r e s i d e n t put the A R E N A party in the s e a t of p o l i t i c a l p o w e r . A l t h o u g h t h e p a r t y r e m a i n e d d i v i d e d between modernizers w h o favored negotiations and hard-liners who opp o s e d t h e m , as the g o v e r n i n g p a r t y it w a s n o w m o r e v u l n e r a b l e to political pressure for negotiations and m o r e accountable for their failure; indeed C r i s t i a n i h a d r u n f o r o f f i c e o n a p l a t f o r m that i n c l u d e d a c o m m i t m e n t to s o m e kind of n e g o t i a t i o n s ( G i b b a n d S m y t h 1 9 9 0 ) . In t h e j u d g m e n t of the F M L N , A R E N A , as t h e r e p r e s e n t a t i v e of t h e p o l i t i c a l i n t e r e s t s of t h e l a n d e d and b u s i n e s s elite, w a s m o r e likely to s u p p o r t a n e g o t i a t e d r e s o l u tion if A R E N A p a r t i c i p a t e d d i r e c t l y in n e g o t i a t i n g its t e r m s ( B e r e t t a 1989). T h i r d , t h e B u s h a d m i n i s t r a t i o n , in r e s p o n s e to t h e F M L N ' s initiative, s i g n a l e d its t e n t a t i v e i n t e r e s t in a n e g o t i a t e d r e s o l u t i o n to the war. T h i s ind i c a t e d that t h e d e g r e e of U . S . military a n d e c o n o m i c s u p p o r t that the g o v ernment enjoyed under the Reagan administration was no longer a given ( G i b b and S m y t h 1 9 9 0 ; Karl 1 9 8 9 ) . A l t h o u g h a f e w initial m e e t i n g s b e t w e e n t h e F M L N a n d g o v e r n m e n t r e p r e s e n t a t i v e s o c c u r r e d in m i d - 1 9 8 9 , the p r o c e s s g r o u n d to a halt by early N o v e m b e r in a c o n t e x t of i n c r e a s i n g p o l i t i c a l v i o l e n c e . T h e F M L N l a u n c h e d a m a j o r o f f e n s i v e in S a n S a l v a d o r in N o v e m b e r 1989. T h e i r initial s u c c e s s e r a s e d a n y l i n g e r i n g i l l u s i o n that t h e c h a n g e s in E a s t e r n E u r o p e a n d in N i c a r a g u a w o u l d m e a n a d i s s o l u t i o n of t h e i n s u r g e n t s ' military c a p a b i l i t y . A l t h o u g h t h e g u e r r i l l a s d i d not h o l d a n y c i t y f o r m o r e than t h r e e w e e k s , t h e y b r o u g h t t h e w a r h o m e to t h e w e a l t h y n e i g h b o r h o o d s , w h i c h u n d e r s c o r e d t h e m i l i t a r y ' s inability to c o n t a i n t h e w a r . But the p o p ulace did not j o i n in an i n s u r r e c t i o n ; this s t r e n g t h e n e d the p o s i t i o n within the F M L N of t h o s e w h o s a w n e g o t i a t i o n s as the o n l y r e s o l u t i o n of the c o n flict. T h e a s s a s s i n a t i o n of t h e six J e s u i t s a n d their t w o w o m e n e m p l o y e e s

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by the Atlacatl Battalion, an elite unit of the S a l v a d o r a n a r m e d forces, made untenable further U.S. congressional support not conditioned on negotiations. 2 T h e o f f e n s i v e and its a f t e r m a t h thus dramatically illustrated the inability of either side to prevail militarily, as well as the ongoing costs of continuing the war (Gibb and Smyth 1990; Byrne 1994). In the aftermath of these events, the F M L N and the g r o u p of Central American presidents separately approached the UN for assistance in reaching a negotiated resolution to the civil war. A series of subsequent agreements, hammered out over a period of more than two years, laid the procedural, constitutional, and institutional g r o u n d w o r k for the final peace accords (signed on 16 January 1992). T h e F M L N ' s decision to pursue political and military reform rather than extensive economic reform as a clear priority was consistently demonstrated throughout the process, despite ongoing internal tension over the issue. For example, at the May 1990 meeting in Caracas, Venezuela, the F M L N proposed the elimination of both armies and the establishment of a new civilian police force, as well as the investigation and prosecution of a range of political crimes; the only socioeconomic proposal addressed the needs of demobilized ex-combatants (FMLN 1990). T h e first accord of more than procedural s i g n i f i c a n c e w a s signed in San Jose in July 1990, when both parties agreed to the establishment of the UN mission in El Salvador ( O N U S A L ) to verify c o m p l i a n c e with provisions m a n d a t i n g respect for human rights. T h i s role for the UN w a s unprecedented: Not only w a s the o r g a n i z a t i o n to enter into the internal a f fairs of a m e m b e r nation, but it w o u l d do so on terms that e x t e n d e d f a r beyond its traditional peacekeeping role of monitoring military compliance between states. 3 In April 1991 the parties agreed on a series of constitutional changes; this w a s a clear signal that the F M L N w a s prepared to accept the 1983 Constitution (if suitably amended). Despite some opposition by hard-line A R E N A party members, the a g r e e m e n t s were subsequently ratified by the A R E N A - c o n t r o l l e d National A s s e m b l y . This w a s an indication of Cristiani's ability to deliver party c o m p l i a n c e on at least some of the r e f o r m s despite opposition f r o m party hard-liners. T h e most important constitutional c h a n g e s c o n c e r n e d the institutional m a n d a t e of the a r m e d forces: Civilian control over the military was m a d e explicit, its mission was limited to defense, and a new civilian police force was to be established. T h e a g r e e m e n t s also provided for a Truth C o m m i s s i o n under UN auspices to investigate past human-rights violations. Despite this progress, n e g o t i a t i o n s s u b s e q u e n t l y b e c a m e mired over what UN o f f i c i a l s called the G o r d i a n knot: What w o u l d be the f u t u r e of the two armed parties to the war? In part the issue was o n e of guarantees: What guaranteed the security of f o r m e r guerrillas and the implementation of reforms once the F M L N turned in its arms? Negotiations stalemated in

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m i d - 1 9 9 1 , and f i g h t i n g intensified as both sides a t t e m p t e d to e x p a n d their p u t a t i v e c l a i m s t o c o n t r o l of g e o g r a p h i c a l a r e a s . B y m i d - S e p t e m b e r 1991 b o t h t h e U n i t e d S t a t e s a n d t h e S o v i e t U n i o n h a d e x p r e s s e d t h e i r s u p p o r t f o r the n e g o t i a t i o n s , t h u s c o n t r i b u t i n g p r e s s u r e t o r e a c h an a g r e e m e n t . T h e N e w Y o r k A c c o r d , s i g n e d o n 2 5 S e p t e m b e r 1 9 9 1 , u n t i e d t h e G o r d i a n k n o t . S o m e of t h e F M L N m e m b e r s w o u l d j o i n the new National Civilian P o l i c e ( P N C ) . ( A c c o r d i n g to a secret but s o o n w i d e l y c i r c u l a t e d a n n e x , u p t o 2 0 p e r c e n t o f the n e w f o r c e w o u l d b e f o r mer F M L N guerrillas.) T h e a r m e d f o r c e s w o u l d be r e d u c e d , the T r e a s u r y Police and N a t i o n a l G u a r d e l i m i n a t e d , and the military o f f i c e r c o r p s p u r g e d by an A d H o c C o m m i s s i o n . In a d d i t i o n , the N a t i o n a l C o m m i s s i o n f o r t h e C o n s o l i d a t i o n of P e a c e ( C O P A Z ) , a g r o u p c o m p o s e d of r e p r e s e n t a t i v e s of t h e p o l i t i c a l p a r t i e s , t h e F M L N , a n d t h e g o v e r n m e n t , w o u l d s u p e r v i s e the i m p l e m e n t a t i o n of t h e a g r e e m e n t s , v e r i f y c o m p l i a n c e , a n d d r a f t necessary legislation. For the F M L N , the g u a r a n t e e that the a g r e e m e n t s w o u l d b e i m p l e m e n t e d o n c e its f o r c e s w e r e d e m o b i l i z e d w a s t w o f o l d . It i n c l u d e d the s u p p o r t o f t h e i n t e r n a t i o n a l c o m m u n i t y ( p a r t i c u l a r l y t h e v e r i f i c a t i o n r o l e of t h e U N ) a n d t h e s u p e r v i s o r y r o l e o f C O P A Z , w h i c h w a s g i v e n t h e p o w e r of a c c e s s to all s i t e s of i m p l e m e n t a t i o n . T h e N e w Y o r k A c c o r d a l s o i n c l u d e d t h e f i r s t o u t l i n e of t h e s o c i o e c o n o m i c a g r e e m e n t s to c o m e . A c c o r d i n g to a s e n i o r U N o f f i c i a l c l o s e to t h e n e g o t i a t i o n s , t h e g o v e r n m e n t w o u l d n o t c o n s i d e r c h a n g e s in its e c o n o m i c m o d e l ; t h i s p o s i t i o n w a s a c c e p t e d i m p l i c i t l y b y t h e F M L N in A p r i l 1 9 9 1 . 4 T h e F M L N t h e n p r o p o s e d t h e m i n i m u m c o n d i t i o n s t o r e a c h an a g r e e m e n t , p r i n c i p a l l y r e s o u r c e s f o r t h e r e i n t e g r a t i o n of e x - c o m b a t a n t s a n d c i v i l i a n s u p p o r t e r s , a f o r u m f o r d i s c u s s i o n of i s s u e s i m p o r t a n t to t h e o p p o s i t i o n s o c i a l m o v e m e n t , a n d a c o m m i t m e n t to e x i s t i n g a g r a r i a n r e form laws. T h e N e w York A c c o r d therefore reiterated the constitutional ceiling on l a n d h o l d i n g , while stating that the existing c e i l i n g w o u l d be e f fectively implemented. T h e a c c o r d also o u t l i n e d the " d e f i n i t i v e " a g e n d a of s t i l l - o u t s t a n d i n g i s s u e s f o r n e g o t i a t i o n . In a d d i t i o n t o t h e o u t s t a n d i n g s o c i o e c o n o m i c i s s u e s ( m e a s u r e s t o a l l e v i a t e t h e s o c i a l c o s t s of s t r u c t u r a l a d j u s t m e n t p r o g r a m s , c h a n n e l s f o r direct external f u n d i n g to c o m m u n i t y d e v e l o p m e n t , and the c r e a t i o n of t h e f o r u m f o r n e g o t i a t i o n o f s o c i o e c o n o m i c i s s u e s ) , t h e m o s t d i f f i c u l t i s s u e s w e r e t h e t e r m s of t h e c e a s e - f i r e a n d t h e t e r m s of t h e r e i n c o r p o r a t i o n o f t h e F M L N . T h e a c c o r d s t a t e d t h a t t h e e x i s t i n g s t a t e of t e n a n c y in t h e c o n f l i c t e d a r e a s w o u l d b e r e s p e c t e d as an i n t e r i m m e a s u r e . B u t it d i d n o t ( a n d at t h a t t i m e c o u l d n o t ) s p e c i f y w h o w o u l d get w h a t l a n d ; n o r w a s it c l e a r in w h a t a r e a s ( t h e " c o n f l i c t e d z o n e s " ) t e n u r e c l a i m s b a s e d on current occupancy would be respected. In t h e m o n t h s a f t e r t h e a c c o r d w a s s i g n e d , p o l i t i c a l t e n s i o n s in t h e c o u n t r y s i d e r o s e s t e e p l y as p e a s a n t o r g a n i z a t i o n s a t t e m p t e d to c o n s o l i d a t e t h e i r c l a i m s t o d e f a c t o t e n u r e b e f o r e t h e w a r ' s e n d . F o r e x a m p l e , in t h e

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municipality of Jiquilisco, Usulutan, m e m b e r s of c o o p e r a t i v e s w o r k i n g a b a n d o n e d land f e n c e d off the most promising parcels, f o r m a l l y notified landlords of the occupation of their property, and instigated armed border patrols against any attempt by the landlords to return (Wood 1995). In late 1991, as it became clear that Perez de Cuellar w o u l d not accept another term of o f f i c e as UN Secretary-General b e y o n d the end of 1991, pressure on the negotiating parties to reach an a g r e e m e n t w a s increased, particularly by the United States. Four days b e f o r e the y e a r ' s end, it was clear to UN officials that the only remaining obstacle to an agreement was the issue of land; only then did the negotiators convened in New York return to the a g e n d a of s o c i o e c o n o m i c issues. A f e w m i n u t e s b e f o r e midnight on 31 D e c e m b e r 1991, agreement was reached, with President Cristiani accepting what b e c a m e the final draft of the s o c i o e c o n o m i c chapter. 5

The Peace Accords The extraordinary process of negotiations between the Salvadoran government and the F M L N culminated in the signing of the peace accords at the C h a p u l t e p e c Palace in M e x i c o City on 16 January 1992. In e s s e n c e , the agreement laid out a political c o m p r o m i s e in which the left agreed to a democratic political regime and a capitalist e c o n o m y with only limited socioeconomic r e f o r m , and the right agreed to participation by the left in a d e m o c r a t i c political r e g i m e with s o m e s o c i o e c o n o m i c r e f o r m . T h e C h a pultepec Accords enshrine a democratic bargain: T h e t w o sides agreed to resolve their f u t u r e d i f f e r e n c e s through a d e m o c r a t i c political process (Karl 1992; Vickers 1992; Munck 1993). T h e principal achievement of the agreement w a s an agenda of reforms that would institutionalize the n e w — d e m o c r a t i c — r u l e s of the political game. T h e main provisions, many of them carried over f r o m the New York Accord, were r e f o r m s of the armed forces, accountability for past humanrights violations, the f o u n d i n g of a new police f o r c e , and restrictions on the arbitrary e x e r c i s e of state power. In sharp contrast, negotiators made little effort to finalize the details of the socioeconomic a g r e e m e n t that had been sketched in the New York A c c o r d until the very e n d of the negotiation process; as a result, it was one of the weakest sections of the Chapultepec A c c o r d s . As described earlier, there were t w o principal reasons for this: First, the F M L N made an explicit decision to p u r s u e as their strong priority the political c o n d i t i o n s and institutions that w o u l d m a k e d e m o cratic politics p o s s i b l e ; second, the g o v e r n m e n t r e f u s e d to discuss any modification of its general e c o n o m i c policy. 6 T h e accords also provided a set of guarantees for the transition period. A detailed c a l e n d a r d e f i n e d the schedule f o r the dissolution of the security f o r c e s and i m m e d i a t e - r e a c t i o n battalions as well as the gradual

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demobilization of the F M L N by October 1992. Although the accords did not explicitly state that each step d e p e n d e d on the c o m p l e t i o n of o t h e r s earlier in the calendar, key actions by the two parties were staggered. For example, the National Guard and Treasury Police were to be abolished before the first 20 percent of the F M L N guerrillas were to d e m o b i l i z e . T h e transition period was to culminate in the general elections of March 1994, with the F M L N c o m p e t i n g for executive, legislative, and municipal seats alongside other political parties. This linkage thus provided some degree of security to both sides: Each was required to take a sequence of significant and costly steps that, if implemented, w o u l d signal c o n t i n u i n g c o m p l i a n c e with the t e r m s of the peace agreement. T h e calendar did not require definitive and irreversible steps early in the cease-fire period that would have necessitated an unreasonable degree of early c o n f i d e n c e in the other p a r t y ' s c o m p l i a n c e . T h e implicit conditionality of the calendar also pertained to p r o g r a m s of economic reintegration: Land transfer and training p r o g r a m s were to be underway as c o m b a t a n t s were d e m o b i l i z e d . COPAZ, the interparty c o m mission that was to verify compliance with the peace accords, would designate a commission with wide representation by political parties to follow up on the legal issues involved in the mandated reforms. Political

and Public-Security

Reforms

T h e core of the peace a g r e e m e n t — t h e axis around which its d e m o c r a t i c promise r e v o l v e d — w a s the agenda of e x t e n s i v e r e f o r m s of the coercive apparatus of the state, including c h a n g e s in the structure, size, ideology, and personnel of the armed forces. In addition to the f o r m a l assertion of civilian control and the n a r r o w i n g of the military's m a n d a t e to d e f e n s e achieved in the constitutional r e f o r m s of April 1991, the a c c o r d s also included the dissolution of the civil-defense patrols, the regulation of private security forces, the institutional separation of intelligence services f r o m the Ministry of D e f e n s e , the suspension of forced conscription, and the restructuring of the reserve service. T h e Treasury Police and National Guard were to be abolished as public security forces and r e a b s o r b e d into the army. The counterinsurgency battalions, including the Atlacatl, were to be absorbed into the regular forces. T h e s e were key c o n c e s s i o n s because these institutions had been essential to the military's control over rural areas (Stanley 1995). 7 On the issue of past human-rights violations, the peace agreement established an A d H o c C o m m i s s i o n c o m p r i s i n g three S a l v a d o r a n civilians e m p o w e r e d to investigate the human-rights record of the o f f i c e r corps of the armed forces and to m a k e binding recommendations that could include their dismissal. Given the military's long-standing i m p u n i t y f o r humanrights violations, the review of armed-forces personnel by civilians was an

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unprecedented breach of its institutional autonomy. The accords also reiterated the commitment of both the FMLN and the government to the Truth Commission established earlier. This second commission, composed of three non-Saivadoran experts in international law supported by a staff of UN personnel, was to investigate past abuses by both sides, issue a public report, and recommend measures to prevent f u t u r e abuses (Buergenthal 1994). T h e commission had no authority of prosecution; however, cases that might result from its investigation were specifically exempted f r o m the amnesties declared as the cease-fire began and its r e c o m m e n d a t i o n s were binding on the parties to the negotiations. The peace accords mandated the founding of the new National Civilian Police under the Ministry of the Interior, completely separate from the armed-forces chain of c o m m a n d . The accords also established a new National Academy of Public Security ( A N S P ) for the training of the new force. In the secret annex to the New York Accord mentioned earlier, a quota of 20 percent each was established for former guerrillas and former National Police (PN) officers (in the latter case, after an evaluation of their record; both had to go through the ANSP course). The provisions included a special "transitory regime" during which the PN would gradually relinquish control of successive geographical areas to the PNC until the P N C was fully deployed. The peace accords also reaffirmed earlier agreements on judicial and electoral reforms contained in the April 1991 agreement. Most important of these was the founding of a new investigative and prosecutorial body, the National Counsel for the Defense of Human Rights. Constitutional reform also transformed the selection of Supreme Court magistrates as a step toward breaking the traditional dominance of the judicial system by the ruling political party. x The accords included provisions to strengthen the independence of the National Judicial Council in order to promote judicial reform, including the founding of an institution for the training of judges and other judicial personnel. A new Supreme Electoral Tribunal (TSE) was established with broad political-party representation to supervise voter registration and elections. The accords also mandated the legalization of the FMLN as a political party, recognizing the right to meet, to mobilize, to publish, and to hold licenses for communication (necessary for the legalization of the F M L N ' s two hitherto clandestine radio stations). In addition, the accords proclaimed the right of return for exiles and promised special security measures for FMLN leaders.

Socioeconomic

Reform

The section of the peace accords concerning socioeconomic reform was in places vague and ambiguous, in sharp contrast to the detailed agreements on military reform and public security. Whereas the accords explicitly

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declared any consideration of the " p h i l o s o p h y and general o r i e n t a t i o n " of the g o v e r n m e n t ' s e c o n o m i c policy as b e y o n d the s c o p e of the a g r e e m e n t , the g o v e r n m e n t agreed that stability in the postwar period d e p e n d e d on the transfer of s o m e resources to f o r m e r guerrillas and their s u p p o r t e r s . 9 P r i n c i p a l e l e m e n t s of the a g r e e m e n t ' s limited a g e n d a of s o c i o e c o n o m i c r e f o r m w e r e (1) limited land t r a n s f e r to e x - c o m b a t a n t s and civilian s u p p o r t e r s of the F M L N , (2) the e x t e n s i o n of credit f o r agriculture and for small business, (3) m e a s u r e s to alleviate the costs of structural a d j u s t m e n t , (4) " m o d a l i t i e s " f o r e x t e r n a l aid to c o m m u n i t i e s , (5) the f o u n d i n g of a f o r u m of labor, business, and g o v e r n m e n t for f u r t h e r negotiation, and (6) a National Reconstruction Plan ( P R N ) , w h i c h w a s to target the f o r m e r c o n flicted z o n e s and included p r o g r a m s to facilitate the reincorporation of the m e m b e r s of the F M L N into civilian life. T h e peace agreement thus did not i n c l u d e a redistributive a g e n d a ; this w a s a t r o u b l i n g o m i s s i o n in view of the s u s t a i n e d fall in real w a g e s during the civil war and the contribution of social and e c o n o m i c inequality to its e m e r g e n c e . N o a g r e e m e n t s on w a g e i n c r e a s e s or even the right of u n i o n s to organize were included. N o t a b l y absent w a s any significant e x tension of e x i s t i n g a g r a r i a n - r e f o r m l e g i s l a t i o n ; indeed, the a g r e e m e n t indirectly a f f i r m e d the e x i s t i n g c o n s t i t u t i o n a l c e i l i n g on l a n d h o l d i n g ( 2 4 5 hectares). Nor was poverty directly a d d r e s s e d outside the areas targeted by the P R N e x c e p t in the v a g u e s t of t e r m s ( V i c k e r s 1992). D e s p i t e s o m e d o n o r rhetoric to the contrary, neither the g o v e r n m e n t nor the F M L N ever s a w the land transfer as a m e a s u r e to redress distributive c o n c e r n s that had f u e l e d the civil war. Rather, the land transfer w a s intended to facilitate the r e i n t e g r a t i o n of e x - c o m b a t a n t s and F M L N s u p p o r t e r s into the e c o n o m i c and social life of the country. R e d i s t r i b u t i o n w a s thus limited to the t r a n s f e r — m o r e precisely, the s a l e — o f land to e x - c o m b a t a n t s and s u p p o r t e r s of the F M L N as part of the reincorporation m e a s u r e s . T h e r e are p e r h a p s t w o principal r e a s o n s f o r this ( W o o d 1995). First, the A R E N A g o v e r n m e n t ' s e c o n o m i c policy e m p h a sized diversification away f r o m a n a r r o w d e p e n d e n c e on agricultural production, and integration into regional and international m a r k e t s — a policy that w o u l d b e m o r e t h r e a t e n e d by w a g e a n d labor p o l i c i e s f a v o r a b l e to w o r k e r s than by the limited transfer of land. T h a t is, for the modernizers in the A R E N A party, the p r i c e to be paid in land f o r p e a c e did not look s t e e p — i f it c o u l d b e limited to the c o n f l i c t e d z o n e s and did not threaten the political and e c o n o m i c base of the party in the w e s t e r n c o f f e e areas and in b u s i n e s s circles. S e c o n d , land t r a n s f e r w a s critical for the F M L N ' s internal political c o h e s i o n : Given the p e a s a n t o r i g i n s of most of its c o m batants, to negotiate an end to the w a r without s o m e transfer of land would h a v e led to t r a u m a t i c internal d i f f i c u l t i e s . 1 0 G i v e n t h e i m p o r t a n c e of the land i s s u e b o t h in the civil w a r and in the political d y n a m i c s of the i m m e d i a t e p o s t w a r p e r i o d , a m o r e detailed

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understanding of its treatment in the accords is essential. The peace accords identified various categories of properties for potential distribution: properties exceeding the 1983 constitutional limit of 245 hectares, properties belonging to the state, land offered voluntarily for sale to the state, and properties occupied in the conflicted zones by residents and workers. There was no attempt to determine how much land would fall into any category, and initial estimates varied widely. The transfer of private properties in the conflicted zones was one of the most politically sensitive parts of the agreement. In one controversial passage, the accords stated that "in conformity with the New York Accord, the present state of tenancy within the conflicted zones will be respected until a satisfactory legal solution of definitive tenancy is found" (Government of El Salvador 1992, p. 28). Given the reference to the New York Accord, the relevant date of the "present state of tenancy" was subject to intense debate: Was it therefore 25 September 1991 (when the New York Accord was signed) or 16 January 1992 (when the final agreement was signed)? 11 Moreover, as discussed earlier, the accords did not define the boundaries of the conflicted zones, despite several references to programs particular to those areas. According to the agreement, within 30 days of the signing the FMLN was to present an inventory of properties it claimed in the conflicted zones; the government was to legalize tenure definitively within six months. The agreement stated explicitly that the current landholders would not be evicted, and defined tenedores as present residents and/or workers of the conflicted zones. 1 2 The peace accords did little more than sketch the terms of transfer for each category; in general, credit for purchase was to be extended under the terms of the 1980 agrarian reform. In the conflicted zones, the transfer of private property would depend on the voluntary selling of the property by the titleholder; if the landlord chose not to sell, the government was to relocate the occupying tenedores to unoccupied land within the same area whose owners did want to sell. Landlords were to be paid market prices, but what that would mean in areas where the civil war had raged was not spelled out. Nor did the agreement adequately define the process by which these issues would be resolved and the transfer implemented. COPAZ was to be the "guarantor" of the land agreements, but was not given any specific authority. 13 COPAZ was to appoint a Special Agrarian Commission (CEA-COPAZ) to supervise the land-transfer issue, and in particular to "verify" the status of properties and tenedores in the conflicted zones. The accords stated that the government would present a draft of the National Reconstruction Plan to the FMLN within a month of the signing of the agreement. Although the FMLN's recommendations and requests would be "taken into account," its role was clearly secondary: There was no provision for its participation or for that of program beneficiaries in the

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development of the P R N (except in the case of credit policy). T h e principal goals of the plan were the integrated development of "areas affected by the w a r " (note the a b s e n c e in this section of any reference to c o n f l i c t e d zones, a legacy of the struggle over the issue), attention to the basic needs of the population most affected by the war and of the e x - c o m b a t a n t s of both sides, and the reconstruction of d a m a g e d infrastructure. Policies facilitating the reincorporation of d e m o b i l i z e d e x - c o m b a t a n t s w e r e to include programs such as scholarships, jobs and pensions, housing projects, and business p r o m o t i o n . A p p e a l i n g to the international c o m m u n i t y f o r support, the accords assigned to the U N D P the role of consultant in f u n d raising, project design, and coordination with nongovernmental organizations ( N G O s ) . T h e a c c o r d s also included brief sections on a few ancillary issues. They decreed that credit should be widely available to f a r m e r s and small b u s i n e s s p e o p l e and that target p o p u l a t i o n s should actively participate in policy design. T h e government agreed to adopt measures to effectively defend c o n s u m e r s and strengthen p r o g r a m s to alleviate the social costs of structural adjustment. T h e government also agreed that external aid could be c h a n n e l e d directly to c o m m u n i t i e s and popular organizations in conflicted zones. H o w e v e r , details were sorely lacking for each of these issues. As in the New York Accord, remaining issues—including, importantly though implicitly, negotiations over wages and working c o n d i t i o n s — w e r e consigned to the s o c i o e c o n o m i c f o r u m . T h e agenda for further negotiation ranged from r e d r e s s i n g the social costs of structural a d j u s t m e n t to " e c o nomic and social problems that will arise due to the end of the conflict." In addition, the government agreed to submit revisions to the laws to promote a "climate of harmony in labor relations." However, the resources that the f o r u m would c o m m a n d were quite small. In summary, the s o c i o e c o n o m i c agenda consisted primarily of initiatives that would facilitate the reintegration of ex-combatants and the tenedores into civilian life. Notably absent f r o m the socioeconomic agenda of the accords was any significant extension of existing agrarian-reform legislation. Nor w a s poverty directly addressed outside the areas targeted by the PRN except in the vaguest of terms (Vickers 1992), a troubling omission in view of the sustained fall in real w a g e s during the war and the widespread conviction that e c o n o m i c deprivation had c o n t r i b u t e d to the e m e r g e n c e of the c o n f l i c t . Moreover, the calendar for i m p l e m e n t i n g the s o c i o e c o n o m i c a g e n d a w a s d e f i n e d by the political logic of the peace process, not by an analysis of its feasibility. Although the balance of political forces in the country had been sufficient for reaching the c o m m i t m e n t s enshrined in the peace accords, at the w a r ' s end it r e m a i n e d an open question whether the e v o l v i n g balance of power in the postwar period would be sufficient for their realization.

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Bargaining over Reconstruction As the two armies separated to their designated " p o i n t s of concentration" after the signing of the peace accords on 16 January 1992, both domestic and political actors b e c a m e increasingly a w a r e of the difficult challenges of peace building after more than a d e c a d e of civil war. B e y o n d the immediate issue of the effectiveness of the U N ' s monitoring of the cease-fire, two key issues loomed. First, would the calendar of staggered implementation of the accords, together with the attention of the international c o m munity, provide mutual c o n f i d e n c e sufficient to engender o n g o i n g compliance? Second, w h o w o u l d pay the costs of peace, given the s i g n i f i c a n t resources required for the implementation of the peace agreement? T h e s e two issues were inextricably related: T h e political implications of the amount and modalities of f u n d i n g could either reinforce or undermine the political will and capacity of one or both parties to carry out the terms of the peace agreement. T h e fundamental challenge w a s to translate the political c o m m i t m e n t s of the peace a c c o r d s into adequately f u n d e d p r o g r a m s and policies that would institutionalize the democratic bargain that resolved the war. As argued earlier, a c o m p l e x conditionality a m o n g various e l e m e n t s of the agreement was central to its political logic; their successful implementation would be similarly interlinked. For both A R E N A and the F M L N , the challenge was further complicated by internal divisions that would have to be m a n a g e d if the peace process w a s to go f o r w a r d . As the o n g o i n g violence by disillusioned ex-combatants in Nicaragua demonstrated, successful reintegration involved much more than the laying down of arms: S t r a t e g i e s for the r e i n t e g r a t i o n o f c o m b a t a n t s into the p o l i t i c a l , s o c i a l , and p r o d u c t i v e s p h e r e are far m o r e than the n e e d to insure s i m p l e e c o n o m i c survival, it is a l s o a m u c h d e e p e r and c o m p l e x p r o c e s s of sustaining faith a m o n g e x - c o m b a t a n t s in the c o n t e n t o f the p e a c e p r o c e s s and s t r e n g t h e n i n g the c o n v i c t i o n that the n e g o t i a t e d s e t t l e m e n t brought with it g e n u i n e a l t e r n a t i v e s to a p r e v i o u s grim h i s t o r y o f e x c l u s i o n ( U N D P 1 9 9 3 , p. 9).

Contributing to the prospects f o r s u c c e s s f u l implementation was the c o m m i t m e n t of international actors to the p e a c e f u l resolution of the war. T h e l o n g - s t a n d i n g special r e l a t i o n s h i p b e t w e e n the U.S. and S a l v a d o r a n g o v e r n m e n t s — c o m b i n e d with the m u c h m o r e recent c o m m i t m e n t of the United States to the n e g o t i a t e d resolution of the w a r — m e a n t that the United States might m a k e timely contributions (Segovia 1994a). According to a senior UN o f f i c i a l close to the n e g o t i a t i o n s , the United States made explicit assurances to both parties that substantial f u n d i n g would be f o r t h c o m i n g (interview, see note 4). A s i g n i f i c a n t d e g r e e of European interest was also expected.

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M a n y international d o n o r s w e r e reluctant to underwrite the p e a c e agreement, however, without assurances that both parties to the war w e r e c o m m i t t e d to the a g r e e m e n t — a n d , in particular, that the government was prepared to finance o n g o i n g costs of r e f o r m s once donor f u n d i n g was e x hausted. In addition, substantial f u n d s would be f o r t h c o m i n g only if a d e quate financial procedures were in place, including detailed proposals and b u d g e t s and standard a c c o u n t i n g p r o c e d u r e s . Yet at the time of the s i g n ing of the accords, there existed no overall a s s e s s m e n t of the cost of i m p l e m e n t i n g the a g r e e m e n t , but only initial e s t i m a t e s for r e c o n s t r u c t i o n based on a preliminary version of the P R N . D u r i n g the negotiation of the accords, no attempt had been m a d e to estimate its financial i m p l i c a t i o n s (interview, see note 4); such a process probably w o u l d have impeded the reaching of an agreement by the end of 1991. P l a n n i n g for p o s t w a r reconstruction began in m i d - 1 9 9 1 , half a y e a r b e f o r e the signing of the peace a g r e e m e n t , with an initial C o n s u l t a t i v e G r o u p meeting of d o n o r s ( M I P L A N 1991d). U S A I D contributed significantly to initial aspects of the g o v e r n m e n t ' s reconstruction planning. T w o teams of consultants to U S A I D carried out assessments of two aspects of the reconstruction, defining possible priorities and estimated costs for programs of physical infrastructure (Jones and Taylor 1991a, 1991b) and reintegration of ex-combatants (Creative Associates International 1991). Between August 1991 and the second donor meeting in March 1992, a special group in the Ministry of P l a n n i n g and C o o r d i n a t i o n of E c o n o m i c and Social D e v e l o p m e n t ( M I P L A N ) issued a series of increasingly d e tailed documents describing what w a s to b e c o m e the National Reconstruction Plan ( M I P L A N 1991a, 1991b, 1991c). T h e d o c u m e n t s were presented as preliminary e f f o r t s that could be m o d i f i e d a f t e r a process of c o n s u l t a tion. T h e purpose of the p r o g r a m , reiterated t h r o u g h o u t the various v e r sions, was to support national reconciliation through the reintegration of the FMLN and its civilian supporters into the political and e c o n o m i c life of the country. This reintegration w a s to take place in the context of t h e g o v e r n m e n t ' s policies of m a c r o e c o n o m i c stabilization and adjustment that were seen as necessary for e c o n o m i c recovery. T h e reduction of absolute poverty and the promotion of h u m a n w e l f a r e w e r e also objectives of the P R N , understood as c o m p l e m e n t a r y to the g o v e r n m e n t ' s overall e c o n o m i c policy. T h e political viability of the P R N , a c c o r d i n g to o n e preliminary g o v e r n m e n t d o c u m e n t , h i n g e d on the p a r t i c i p a t i o n of the local p o p u l a t i o n , which was seen as c o m p l e m e n t a r y to the g o v e r n m e n t ' s policy of d e c e n tralization ( M I P L A N 1991a). T h e pattern of b e n e f i c i a r y participation w o u l d be m o d e l e d on the M u n i c i p a l i t i e s in A c t i o n ( M E A ) p r o g r a m , a model of community development previously f i n a n c e d by U S A I D through the C o m m i s s i o n f o r the Restoration of A r e a s ( C O N A R A ) . C O N A R A would be superseded by the Secretariat of National Reconstruction ( S R N ) ,

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which would i m p l e m e n t the P R N in two phases: a c o n t i n g e n c y phase o f urgent short-term programs and a s e c o n d phase o f p r o j e c t s lasting up to five years. T h e F M L N and allied N G O s strongly c r i t i c i z e d the M I P L A N documents on three c o u n t s , reflecting the o p p o s i t i o n ' s quite different c o n c e p tion o f r e c o n s t r u c t i o n ( M u r r a y et al. 1 9 9 4 ) . First, the a v e n u e s o f participation were i n a d e q u a t e and would further m a r g i n a l i z e the b e n e f i c i a r i e s and their representative organizations b e c a u s e the key roles o f project development and prioritization were left to the government. T h e explicit role o f the b e n e f i c i a r y population s e e m e d to be limited to a d v i s i n g the mayor in town meetings. T h e opposition's reaction was perhaps particularly sharp given the linkage o f the government's proposed participation procedures to the M E A p r o g r a m , which had been long d e n o u n c e d for its c o u n t e r i n s u r gency aims in the civil war. S e c o n d , the left argued that the building and repair o f infrastructure was overemphasized at the e x p e n s e o f other development needs in the former c o n f l i c t e d zones. For e x a m p l e , in the N o v e m ber version o f the P R N , 6 8 percent o f the budget was targeted for infrastructure and only 1 0 percent for e m p l o y m e n t - g e n e r a t i o n and agricultural programs ( M I P L A N 1 9 9 1 c ) . T h i r d , the F M L N argued that the proposed target area was too limited geographically and should b e extended. T h e s e criticisms were advanced in two short documents, e s s e n t i a l l y position papers rather than counterproposals, that were circulated in early 1 9 9 2 by the F M L N and the opposition N G O s . In February 1 9 9 2 the U N D P c o n v e n e d an i n t e r a g e n c y m e e t i n g o f 6 0 high-level experts from 14 UN a g e n c i e s to assess the reconstruction needs o f the country. T h e final report o f that meeting argued that the government should take a d v a n t a g e o f the e x p e r i e n c e o f opposition N G O s in the c o n flicted zones and, after evaluation, incorporate s o m e o f their innovations into the new reconstruction program ( U N D P 1 9 9 2 ) . As part o f its mandate under the a c c o r d s to provide t e c h n i c a l a s s i s t a n c e to the r e c o n s t r u c t i o n process, the U N D P sponsored a series o f meetings between representatives o f the g o v e r n m e n t , the opposition N G O s , and the F M L N . T h e m e e t i n g s led to a t e c h n i c a l - a s s i s t a n c e proposal for the donor m e e t i n g and initiated a limited pattern o f U N D P - c o o r d i n a t e d concertacion

that w o u l d s u b s e -

quently address various reintegration issues. T h e U N D P subsequently developed m a j o r portions o f the reinsertion programs, m o b i l i z e d a significant fraction o f international contributions, and coordinated the development o f various reconstruction programs. T h e government made a number o f limited c h a n g e s to the P R N in response to opposition c r i t i c i s m s and the U N D P r e c o m m e n d a t i o n s . First, the channels o f N G O participation were clarified: N G O s c o u l d apply directly to the S R N f o r funding, for e x a m p l e , without the approval o f the local mayor. H o w e v e r , the principal a v e n u e for local p r o j e c t s c o n t i n u e d to b e M E A projects, and the role o f the m a y o r and municipal c o u n c i l continued

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to dominate. S e c o n d , the geographical c o v e r a g e was gradually increased f r o m 84 to 115 municipalities. 1 4 T h i r d , the p r o g r a m s w e r e r e d e f i n e d to give a greater emphasis to human-capital d e v e l o p m e n t — a l t h o u g h the proposed budgets under the new programs continued to emphasize infrastructure. 1 5 Although still dissatisfied, the F M L N decided to attend the second donor m e e t i n g , fearing that it would be b l a m e d for s h o r t f a l l s in external f u n d i n g if they did not (Murray et al. 1994). At the March 1992 Consultative G r o u p meeting, the government presented three d o c u m e n t s outlining p r o g r a m s and budgets for the P R N , the strengthening of democratic institutions, and technical assistance (respectively, M I P L A N 1992b, 1992a, and 1992c). T h e g o v e r n m e n t argued that it faced very serious fiscal constraints, e m p h a s i z i n g both the need to increase social spending in general (not just in PRN areas) and the absence of a peace dividend given the degree of external financing of the war and the merely gradual reduction of the armed forces ( M I P L A N 1992b). Table 5.1 s u m m a r i z e s the proposed budgets.

Table 5.1

Financing the Peace Accords: Investment Requirements, 1992-1996 (in m i l l i o n s of U.S. dollars)

Program

Total National Reconstruction

Social sector and human capital Basic infrastructure Infrastructure Productive sector Land acquisition Environment Strengthening Democratic National Civilian Police Public Security Academy Judicial reform General Attorney's Office for the Protection of Human Rights Supreme Electoral Tribune Other institutional reform to strengthen democracy Indemnization of armed forces Technical assistance Total

Priority

Plan 416.9 200.0 354.9 277.6 50.0 52.0

324.5 200.0 268.1 137.5 33.0 15.6

Institutions 223.1 50.0 29.9 8.7 6.3 74.8 40.0 33.9 1,528.0

745.7

Sources: MIPLAN 1992a, 1992e, 1992f. Note: The figures for strengthening democratic institutions and for technical assistance, drawn from MIPLAN 1992e and 1992f, respectively, do not correspond to the figures for these categories presented in MIPLAN 1992a. The data presented here are based on the former as the more detailed of the source documents.

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and Reconstruction

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The international community pledged some $600 million in response ($800 million if previous commitments are included). By June 1992 more than $200 million in commitments were in process (SRN 1992a), almost all of it from the United States. In addition to other funding, USAID provided the 116 million colones needed for the contingency phase of the program to the newly founded Secretariat of National Reconstruction (SRN). In the months after the meeting, two issues of particular importance continued to dominate the reconstruction debate: the reintegration of excombatants in general and the transfer of land in particular. As described earlier, neither the scope nor the terms of the land transfer were clearly spelled out in the agreement. Negotiations collapsed in mid-1992 over the amount of land to be transferred, the number of beneficiaries, and the applicability of "special conditions" versus "market prices." Nor were the promised training and credit programs—the necessary complements to land transfer—in place. The impasse threatened the peace process itself as the FMLN suspended its demobilization process and political tensions increased. In an extraordinary instance of its "good offices" mandate, the UN sent a team of agrarian specialists to evaluate the situation and subsequently offered the two parties a take-it-or-leave-it settlement. The proposal, later considered by the UN as an addendum to the peace accords, defined the scope of the transfer: the number of beneficiaries (47,500 comprising 7,500 excombatants of the FMLN, 15,000 ex-combatants of the armed forces, and 25,000 tenedores) and the amount of land per beneficiary (depending on soil quality). If the agreement had been fully funded and fully implemented, the transfer of land would have amounted to 12 percent of Salvadoran farmland (a bit over half of the amount distributed under the 1980 agrarian reform). However, subsequent agreements pared down the amount to be transferred, as will be discussed further. Development of the reinsertion programs trailed the negotiations over land. Representatives of the FMLN and the government began negotiations to define the reinsertion programs for ex-combatants by mid-1992, with the UNDP acting as an observer. While discussion continued, the UNDP coordinated an emergency appeal to international donors to address the pressing needs of the FMLN combatants, ranging from shelter to medical assistance. These were later expanded to include a package of household goods and, in the case of those turning to agriculture as their postwar employment, farming tools as well (Weiss Fagen 1995). The FMLN's initial reintegration proposal included training programs for thousands of people that ranged in duration from one to five years, employment guarantees for two years, as well as housing for 12,000 households, for a total cost of $258 million. By May 1992 the proposal had been scaled down to little over $200 million, but this did not yet include figures for land purchase. In September 1992 the government offered a counterproposal that

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defined

two

tracks

available

for

lower-ranking

ex-combatants

1992c). T h e proposal distinguished b e t w e e n short-run and

(SRN

medium-run

p r o j e c t s f o r t h e t w o t r a c k s , o n t h e g r o u n d s that r e s o u r c e s a n d p r o g r a m s f o r immediate needs ( i n c l u d i n g d o c u m e n t a t i o n , h o u s e h o l d g o o d s , and living e x p e n s e s during initial training) s h o u l d b e u n d e r w a y w h i l e r e m a i n i n g prog r a m s w e r e b e i n g d e s i g n e d . T h e proposal listed s o m e e s t i m a t e d c o s t s but g a v e n o e s t i m a t e o f t h e total c o s t ( b u t s e e T a b l e 5 . 2 f o r t h e g o v e r n m e n t ' s e s t i m a t e d c o s t s a s p r e s e n t e d at t h e 1 9 9 3 C o n s u l t a t i v e G r o u p m e e t i n g ) . 1 6 A f t e r a s e r i e s of d i s c u s s i o n s facilitated and c o o r d i n a t e d b y the U N D P , t h e t w o p a r t i e s a g r e e d o n t h r e e r e i n s e r t i o n t r a c k s ( i n a d d i t i o n t o the P N C track f o r t h o s e e x - c o m b a t a n t s w h o j o i n e d t h e n e w p o l i c e f o r c e ) . For t h o s e p u r s u i n g a g r i c u l t u r e , training p r o g r a m s b y N G O s w e r e t o b e g i n i m m e d i a t e l y ; o n c e t h e y h a d r e c e i v e d land t h r o u g h t h e l a n d - t r a n s f e r p r o g r a m , a g r i c u l t u r a l

Table 5.2

Funding Priorities and Shortfalls, 1993-1996 (in m i l l i o n s of U.S. dollars)

Programs

Requirements, GOES CG commitment budget 1993 (April 1993) Priority

National Civilian Police 173.0 Public Security Academy 104.7 Judicial reform 219.8 Counsel for Human Rights 16.8 Elections tribunal 20.0 Reintegration (PRN) 316.8 Pensions for disabled 8.2 Land transfer 142.5 Housing 77.1 Agricultural credit 62.0 Microenterprise credit 27.0 Poverty alleviation (PRN) 310.2 Subtotal 1,161.3

Total

Shortfall (April 1993 est.)

Shortfall (January 1994 est.]

Programs

35.4 28.0 162.3 6.4 0.6 26.6 0.7 23.3 2.6 0.0 0.0 57.2 316.5 Other Programs

Social and productive sector Infrastructure Environmental sector

Expected int'l contribution (April 1993)

6.0 9.9 15.0 1.1 4.0 80.0 0.0 47.5 12.5 10.0 10.0 147.4 263.4

131.6 66.8 42.5 9.3 15.4 210.2 7.5 71.7 62.0 52.0 17.0 105.3 581.1

> r tfi') loZ.Un "1 > J

66.6 177.8 —

62.7 — — —

93.7 520.1

(PRN)

120.0 530.1 17.5

-14.6 161.0 15.4

1,828.9

681.9

Sources: MIPLAN 1993a; GAO 1994; January 1995 UNDP figures. Note: For further details see Table 7.2. A negative shortfall indicates a surplus. The report to the 1993 CG meeting also included a priority request for poverty-alleviation funds for non-PRN areas ($372.2 million). Because these figures are not included in other documents, they are ignored here as well. In addition, a separate document requesting S20.4 million for technical assistance (MIPLAN 1993b) accompanied the principal document; this request is treated in the text but is not included in the table.

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c r e d i t , i n c l u d i n g a f i v e - y e a r l o a n t o c a p i t a l i z e t h e f a r m s , w a s to f o l l o w ( U N D P 1 9 9 3 ) . T h o s e ex-combatants preferring a nonagricultural

future

w o u l d h a v e a c c e s s to c r e d i t f o r t h e f o u n d i n g o f " m i c r o e n t e r p r i s e s " a f t e r t e c h n i c a l - v o c a t i o n a l training; university scholarships were a l s o available if appropriate. T h e third t r a c k w a s f o r t h e a p p r o x i m a t e l y 6 0 0 m i d l e v e l c o m m a n d e r s a n d l e a d e r s o f t h e F M L N . T h e t r a c k c o n s i s t e d o f c r e d i t a n d t r a i n i n g in t e c h n i c a l a n d a d m i n i s t r a t i v e s k i l l s , to e n a b l e the p a r t i c i p a n t s to start t h e i r o w n b u s i n e s s e s o r to j o i n e x i s t i n g o n e s . I n i t i a l

academic-equivalency

c o u r s e s c o n t r i b u t e d to the f u r t h e r r e f i n i n g o f the t r a c k ; in t h e i r a f t e r m a t h , the U N D P c o o r d i n a t e d a set o f N G O s in t h e d e s i g n a n d i m p l e m e n t a t i o n o f three s u b t r a c k s : t e c h n i c a l - v o c a t i o n a l training ( 3 3 percent o f the participants), b u s i n e s s administration ( 5 8 percent), and e x e c u t i v e training ( 9 percent) ( U N D P

1994b).

T h r o u g h o u t t h e n e g o t i a t i o n s , t h e g o v e r n m e n t m a i n t a i n e d that r e i n t e g r a t i o n b e n e f i t s s h o u l d b e e q u a l l y a v a i l a b l e to b o t h s i d e s . P a r a l l e l

pro-

g r a m s ( e x c e p t f o r the m i d l e v e l c o m m a n d e r s ' p r o g r a m , f o r w h i c h t h e r e w a s no parallel g r o u p ) for e x - c o m b a t a n t s o f the armed f o r c e s w e r e d e v e l o p e d b o t h f o r a g r i c u l t u r a l a n d t e c h n i c a l - v o c a t i o n a l t r a i n i n g . In t h e p r o c e s s o f p r o j e c t d e v e l o p m e n t a n d i m p l e m e n t a t i o n the p r o g r a m s w e r e q u i t e s e p a r a t e although the opportunities w e r e roughly similar. In A p r i l

1 9 9 3 a third C o n s u l t a t i v e G r o u p m e e t i n g o f

international

d o n o r s w a s c o n v e n e d b y the W o r l d B a n k . T h e g o v e r n m e n t p r e s e n t e d a r e v i s e d p r o p o s a l that e m p h a s i z e d the r e i n s e r t i o n p r o g r a m s a n d p o v e r t y a l l e viation, with updated figures o f e s t i m a t e d needs, and e x i s t i n g g o v e r n m e n t and donor c o m m i t m e n t s . A funding g a p o f s t i l l - u n f i n a n c e d programs w a s s u b s t a n t i a l ( s u m m a r i z e d in T a b l e 5 . 2 ) . 1 7 In a d d i t i o n to the o v e r a l l s h o r t a g e o f f u n d s , t h e i n a d e q u a t e f u n d i n g o f m a n y p r i o r i t y p r o g r a m s j u d g e d e s s e n t i a l to t h e c o n s o l i d a t i o n o f t h e p e a c e p r o c e s s — p a r t i c u l a r l y the new p u b l i c - s e c u r i t y institutions and the reintegration p r o g r a m s — t r o u b l e d many o b s e r v e r s and intensified the debate about the relationship b e t w e e n e c o n o m i c and political reform (de S o t o and del C a s t i l l o 1 9 9 4 a ; S e g o v i a 1 9 9 4 b ) . M o r e o v e r , p r o g r e s s i v e l a c k o f c o n f i d e n c e in t h e N a t i o n a l R e c o n s t r u c t i o n S e c r e t a r i a t b y d o n o r s r e s u l t e d in its p r o g r a m s b e i n g almost e x c l u s i v e l y funded by U S A I D , with other d o n o r s o p t i n g to c h a n n e l b i l a t e r a l a s s i s t a n c e t h r o u g h o t h e r m i n i s t r i e s a n d t h r o u g h t h e U N D P . W e return to this d e b a t e in t h e f o l l o w i n g t w o c h a p t e r s .

The Uneven Implementation of the Peace Accords In t h e t h r e e y e a r s s i n c e t h e s i g n i n g in M e x i c o C i t y , r e m a r k a b l e p r o g r e s s has b e e n m a d e in s o m e a s p e c t s o f t h e a g r e e m e n t . T h e F M L N

participated

in t h e g e n e r a l e l e c t i o n s o f M a r c h 1 9 9 4 , m a k i n g a r e s p e c t a b l e s h o w i n g at

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the presidential and legislative levels. T h e military was restructured, purged, and reduced in size; the new civilian police force is d e p l o y e d throughout the country. However, implementation of the peace agreement has been incomplete and uneven in several areas, including a number essential to the consolidation of peace in El Salvador. T h e implementation of the cease-fire itself was remarkably successful; both sides withdrew without e x c h a n g i n g a shot. T h e dissolution of the Treasury Police and the National Guard did not occur without substantial resistance, but they were formally abolished by mid-1992. The absorption of the irregular battalions into the regular army occurred with little deviation f r o m the p r o g r a m m e d dates. T h e reduction by half in the size of the army was achieved well before the deadline. Although some critics report that the initial number of soldiers had been inflated (Weiss Fagen 1995), the current size of the armed forces is well below the level mandated in the peace accords, according to a U.S. Department of D e f e n s e official (interview, D e c e m b e r 1994). T h e demobilization of the F M L N was c o m p l e t e d two months behind schedule, on 15 December 1992. T h e reasons for the delay were twofold. Not until late 1992 was it clear that Cristiani w o u l d implement the purge of the officer corps recommended by the Ad Hoc Commission. In addition, the F M L N conditioned their demobilization on progress in land and reintegration programs that suffered long delays throughout 1992. T h e explosion of an arms locker in M a n a g u a in June 1993 c o n f i r m e d the existence of substantial clandestine arms caches, one of the most serious violations of the peace accords, according to the UN. The deposit inc l u d e d anti-aircraft missiles and s u f f i c i e n t a r m s to re-arm the P o p u l a r Forces of Liberation (FPL), the g r o u p responsible for the cache, to its full strength at the end of the war. 1 8 T h e incident d e e p e n e d doubts on the part of the many right-wing elements about the adequacy of O N U S A L ' s verification of the F M L N ' s demobilization, as well as the F M L N ' s c o m m i t m e n t to the peace process. S u b s e q u e n t l y a n u m b e r of additional arms caches were identified and destroyed. T h e purge of the o f f i c e r corps f o l l o w i n g the report of the Ad Hoc C o m m i s s i o n occurred only a f t e r substantial d e l a y s and required extraordinary international pressure. T h e United States played a key role; highlevel military officers visited El Salvador to reiterate the U.S. position that the c o m m i s s i o n ' s r e c o m m e n d a t i o n s be i m p l e m e n t e d . T h e 103 o f f i c e r s n a m e d in the c o m m i s s i o n ' s report were finally dismissed by the end of 1993. This w a s a step toward the abolition of impunity unprecedented in the history of El Salvador. T h e reform of the judicial system was by many accounts one of the weakest aspects of the peace accords (Popkin, Vickers, and Spence 1993). However, the agenda of reform was expanded as a result of the investigations of the Truth C o m m i s s i o n . In March 1993 the Truth C o m m i s s i o n released its report e x a m i n i n g the history of human-rights

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violations during the civil war. 1 9 T h e report named those deemed responsible f o r those cases f o r which adequate e v i d e n c e had been amassed and recommended their exclusion from political o f f i c e for 10 years. T h e c o m mission made a series of binding r e c o m m e n d a t i o n s for judicial r e f o r m — i n addition to those r e f o r m s mandated by the peace accords t h e m s e l v e s — t o break the institutionalized impunity for human-rights violations. Few of the Truth C o m m i s s i o n ' s r e c o m m e n d a t i o n s were acted on in the months that f o l l o w e d as controversy swirled over the report, particularly its recommendation that the entire S u p r e m e Court resign. Nonetheless, by mid-1995 progress on several issues had been made. Despite long delays, a new Supreme Court was inaugurated in m i d - 1 9 9 4 whose breadth of political representation is unprecedented in El Salvador; this may m a k e possible serious reform (UN Security Council 1994f; Popkin 1994). O n e key recommendation of the Truth C o m m i s s i o n was that a further investigation be m a d e of the existence (both past and present) and f u n d ing of armed networks for the purpose of political violence (death squads). In the wake of a rising tide of political assassinations, the UN sent UnderSecretary General Marrack Goulding to El Salvador in November 1993. As a result of his visit, a Joint G r o u p w a s c o n v e n e d to investigate the death s q u a d s ' continued existence (Economist Intelligence Unit 1994). In the report issued in July 1994, the Joint G r o u p reported the evolution of death squads into organized crime with some political overtones (Spence, Vickers, and Dye 1995, p. 9). Although the g r o u p ' s r e c o m m e n d a t i o n s have had little impact, the violence did subside after the 1994 elections. Despite initially inadequate f u n d i n g and support, both the National C o u n s e l for the D e f e n s e of H u m a n Rights and the National Judiciary Council have s h o w e d recent signs of increasing institutional capacity, t h a n k s in part to increased international tutelage as the departure of O N U S A L (with the exception of a f e w staff m e m b e r s ) in April 1994 bec a m e more imminent (Popkin 1994). In addition, a process of judicial review and training began under the new S u p r e m e Court. T h e f o u n d i n g of the Civilian Police Force has been o n e of the most troubled aspects of the peace process. As one expert observes, B e c a u s e the a c c o r d s p r o v i d e d for a c o m p l e t e l y n e w institution, it w a s m o r e likely that a n e w organizational culture and adequate guarantees for c i v i l i a n rights can take hold. Yet the very features o f the P N C project that m a d e it s o p r o m i s i n g a l s o created s e r i o u s o b s t a c l e s to s u c c e s s ( S t a n l e y 1 9 9 5 , p. 8).

A m o n g those obstacles were the financial challenge of building a new institution from scratch, the repeated reluctance on the part of the National P o l i c e to cooperate with the P N C in the transition period, and the crime w a v e fueled in part by delays in the reinsertion programs. As a result, the

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training and deployment of the PNC was subject to extraordinary delays and problems (Stanley 1993; Stanley 1995; UN Security Council 1994a, 1994f). A lack of initial funding impeded adequate training and deployment of the new force on the original schedule. 2 0 After the New York Accord was signed, initial steps to begin the founding of the National Academy of Public Security and the PNC itself should have been taken, but President Cristiani did not name the responsible interim officials until the end of 1991. Moreover, facilities and equipment belonging to the former security forces were retained by the armed forces and the PN, forcing costly delays as the PNC was built from scratch. Although the UN, the UNDP, Spain, and the United States participated in the development of curriculum and organizational plans, adequate international funding was not forthcoming. One analyst suggests two reasons for the reluctance to fund an institution so obviously key to the peace process: the general lack of programs and interest in funding police, and the reluctance to fund an institution to which the government seemed inadequately committed (Stanley 1995). One reason for donor skepticism about the government's commitment to the new force was its reluctance or inability to end the continuing efforts on the part of the PN and elements of the former security forces to undermine the autonomy and capacity of the PNC. The penetration of the new force by more members of the PN than was allowed for in various agreements outlasted frequent ONUSAL attempts to enforce those agreements. The issue was complicated by high and rising levels of crime that were attributed by many to demobilized combatants of both sides. In December 1992 the FMLN and the government agreed to expand the number of PN agents admitted to the PNC, provided they were evaluated and attended the academy (UN Security Council 1994e; Spence, Vickers, and Dye 1995, p. 7). The number of former PN agents to have joined the new force exceeded those levels; the government's long-standing refusal to supply ONUSAL with lists of former combatants made enforcement of the agreements extremely difficult. Two entire units of the PN were transferred into the PNC in 1993 with neither the evaluation nor retraining agreed to in the December 1992 agreement. Nor were they integrated into the new civilian line of command; rather they began exercising command control outside their divisions (Washington Office on Latin America 1994). The close working relationship between the ONUSAL police division and the PNC was disrupted for several months by a new deputy director of the PNC, who was eventually dismissed (see Chapter 7; see also Washington Office on Latin America 1994; Weiss Fagen 1995). Moreover, the training center for the PN continued to produce new recruits well after the opening of the ANSP, in clear violation of the spirit if not the letter of the accords. The new PNC director's attempt to implement ONUSAL's recommendation that all those transferred in excess of the December 1992

The Peace Accords

and Reconstruction

95

agreement be dismissed led to a m o n t h - l o n g strike by o n e of the units in early 1995. T h e situation w a s eventually resolved: Over 150 m e m b e r s of the unit retired with a y e a r ' s s e v e r a n c e pay ( S p e n c e , Vickers, and D y e 1995, p. 7; El Salvador Information Project 1995). In late 1994 the government of the newly elected president Calderón Sol decided to dissolve the PN by the end of the year. S o m e observers attributed this willingness to accelerate the process to evidence of involvement of high-level PN o f f i c e r s in organized crime. 2 1 T h e PN w a s disbanded on 31 D e c e m b e r 1994 and its facilities turned over to the P N C in mid-January 1995. Moreover, the government recently increased its f u n d ing of the P N C by a substantial fraction. O n g o i n g and unresolvable delays in the transfer of l a n d — a n essential aspect of the rural reintegration—continue to present serious threats to the consolidation of the peace process. Despite an agreement to scale back the number of b e n e f i c i a r i e s f r o m 4 7 , 5 0 0 to a p p r o x i m a t e l y 4 0 , 0 0 0 , as of 16 March 1995 more than 50 percent of the reduced n u m b e r of beneficiaries had yet to receive land. According to Ken Ellis, a senior U S A I D official, the problem was not one of f u n d i n g for the implementing agency, the Land Bank, but rather one of political will (interview, D e c e m b e r 1994). T h e Land Bank had adequate interim f u n d i n g from U S A I D ; the bottleneck from month to month in the transfer of land was not due to a shortage of cash. Rather, the recurrent delays were due principally to two factors. First, the titling process remained remarkably c u m b e r s o m e , despite repeated a g r e e m e n t s to streamline it (which could have been done by presidential decree). T h e g o v e r n m e n t consistently took a bureaucratic approach to the process, insisting until recently that only originally verified tenedores would receive land, and refusing to extend credit until legal title was demonstrated. S e c o n d , the F M L N and its allied peasant o r g a n i z a t i o n s f o u n d it extremely difficult to construct a stable list of beneficiaries f o r each property to be transferred. In part this reflects the substantial mobility in the countryside in the aftermath of the war and in part the F M L N ' s inadequate organizational resources. T h e instability in the lists of beneficiaries was reinforced by the delays in titling, leading to a v i c i o u s circle f u e l e d by insecurity as s o m e b e n e f i c i a r i e s decided the delays and terms of transfer were too hard a bargain. As a result of the ongoing d e l a y s and problems, representatives of the g o v e r n m e n t and the F M L N a g r e e d in m i d - 1 9 9 4 to scale back the number of ex-combatants and tenedores to benefit f r o m the land transfer f r o m 4 7 , 5 0 0 to 40,648. In May 1994 the f o r m e r administration agreed to accept nonverified beneficiaries and to extend the duration of the land certificates past the deadline, but as yet little acceleration of titling has resulted. T h e government announced in May 1994 that adequate f u n d i n g for the scaled-down version of the land-transfer program had been secured (UN Security Council 1994e).

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T h e Calderon Sol administration took a n u m b e r of p o s i t i v e steps to accelerate the land transfer, but progress remained slow despite extended deadlines. The replacement of the president of the Land Bank and the hiring of more than 100 m e m b e r s of the FMLN as Land Bank staff may assist the transfer. In mid-March 1995 the government, the F M L N , and the splinter party from the F M L N agreed to close the list of b e n e f i c i a r i e s at under 4 0 , 0 0 0 persons. As of that date, 52 percent of the 2 9 , 2 6 6 f o r m e r F M L N tenedores had received land, as well as 35 percent of the f o r m e r soldiers. T h e delays in the transfer of land continue to u n d e r m i n e the reinsertion process, as b e n e f i c i a r i e s of the rural reintegration p r o g r a m e n d u r e continuing uncertainty. Nonetheless, despite the delays, the training programs of the v a r i o u s reinsertion p r o g r a m s were c o m p l e t e d in 1994 (UN General Assembly 1994). Between August 1993 and May 1994, 5,280 excombatants of the F M L N , 5,031 former soldiers, and 1,220 tenedores participated in agricultural training; through 1 July 1994, 1,685 F M L N excombatants and 6,239 former soldiers completed training as part of urban reinsertion programs. T h e training for the midlevel c o m m a n d e r s was completed in March 1994, with 190 receiving technical training, 3 5 0 training in business administration, and 60 training in executive-level business administration. In addition, some 1,200 ex-combatants, of which about 7 0 0 are f o r m e r m e m b e r s of the F M L N , c o n t i n u e to receive s c h o l a r s h i p s , almost 80 percent for university studies. However, delays and problems in the extension of credit f o r reinsertion continue. B e n e f i c i a r i e s of the urban program are presently in the process of a p p l y i n g f o r supplementary credits. T h e process has been delayed by the c u m b e r s o m e application f o r m s and the lack of feasibility studies to help b e n e f i c i a r i e s identify potential p r o j e c t s ( U N D P 1994). Funding for some programs remains inadequate, perhaps due to donor reluctance to c o m m i t f u n d s without clear signals that the necessary commitment to land transfer is in place (Table 5.2; UN Security Council 1994c). Although t h r e e - q u a r t e r s of the b e n e f i c i a r i e s of the rural reinsertion program had r e c e i v e d five-year credits to capitalize their f a r m s by mid1994 (UN General A s s e m b l y 1994), the program to extend annual production credit did not receive adequate financial and organizational resources. According to G A O estimates, the need for agricultural credit on the part of potential beneficiaries of the land-transfer program was at least double that available in 1993. An o n g o i n g problem has been bank r e q u i r e m e n t s that applicants have clear title or landlord's permission and records clear of any accumulated debt. T h e s e requirements have been difficult for many beneficiaries to meet and have recently been weakened (UN Security Council 1994b; interview with U S A I D official, D e c e m b e r 1994). A l t h o u g h s o m e distribution of e m e r g e n c y housing has occurred, p r o j e c t s to d e v e l o p permanent housing s u f f e r delays due both to the problems with land transfer and to a lack of f u n d i n g (UN General Assembly 1994).

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In mid-1994 the parties to the agreement negotiated a rescheduling of the implementation of the accords (UN Security Council 1994c). T h e agreement addressed several of the reinsertion issues: O N U S A L w a s given more explicit authority to oversee the P N C , the government w a s to guarantee access to credit by beneficiaries of the land-transfer program, and a timetable for the reinsertion programs w a s defined. However, delays continue, particularly in the transfer of land. Reinsertion b e n e f i t s remained a hotly contested issue; d e m o b i l i z e d members of the National Police, security forces, and civil-defense patrols paralyzed the government on a number of occasions, most recently in January and February 1995, when t h o u s a n d s of protestors o c c u p i e d the National Assembly and other government buildings d e m a n d i n g land and indemnity payments. Many of the d e m a n d s clearly exceed the c o m m i t m e n t s of the peace accords (in particular, c i v i l - d e f e n s e patrol m e m b e r s w e r e never considered in any of the negotiations to be eligible for the reinsertion benefits). Under the mediation of O N U S A L , the government agreed to a c o m p r o m i s e set of p r o g r a m s to be i m p l e m e n t e d in the s u b s e q u e n t t w o months. 2 2 T h e specter of o n g o i n g unrest by e x - c o m b a t a n t s of both sides in neighboring N i c a r a g u a o f f e r s a cautionary lesson to S a l v a d o r a n o b servers, many of w h o m associate the increasing crime rate with the d e m o bilization of combatants of both armies and the inadequacy of the reinsertion programs. 2 3 T h e debate over beneficiary participation at the local level c o n t i n u e s as s o m e opposition N G O s report their marginalization f r o m the t o w n meeting process (Murray et al. 1994). 2 4 Many N G O s had little success in direct application to the S R N ; most of the opposition organizations that received SRN resources participated in agricultural credit programs coordinated by Catholic Relief Services or technical-assistance programs coordinated by the U N D P ( S R N 1994). Particularly troubling was the experience of Suchitoto, where an innovative e x p e r i m e n t in local c o n c e r t a c i o n w a s subsequently s q u a s h e d by S R N and A R E N A o f f i c i a l s (Yariv and Curtis 1992; Murray et al. 1994). Recent efforts by the new administration may indicate a greater o p e n n e s s toward o p p o s i t i o n - N G O participation. H o w ever, the cancellation of a meeting of mayors of various parties to explore the potential for a r e g i o n a l - d e v e l o p m e n t plan f o r their areas of San Vicente, due to death threats by the apparent resurgence of a notorious death squad, indicates the continuing political tensions surrounding local reconstruction initiatives (El Salvador Information Project 1995). A global evaluation of reconstruction e f f o r t s in El Salvador, and the National Reconstruction Plan in particular, has yet to be c o n d u c t e d (but see Murray et al. 1994 f o r the most thorough attempt to date). A l t h o u g h the S R N has issued periodic a s s e s s m e n t s of its p r o g r a m s (for e x a m p l e , S R N 1993b), a significant amount of reconstruction f u n d i n g does not pass through the SRN (for example, some $ 2 0 0 million in Japanese f u n d i n g for

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major reconstruction), nor are institutional seif-evaluations as illuminating as an overall assessment might be. T h e task is difficult: The categories of f u n d i n g and the assigning of particular f u n d i n g to particular categories have undergone continuous redefinition in the various reconstruction documents, with the consequence that tracing program design and f u n d i n g is complicated in most cases. In addition, available government reports often do not a d e q u a t e l y clarify the s t a n d i n g of financial c o m m i t m e n t s (how much has been committed, how much disbursed, how much assigned to the executing agencies, how much e x p e n d e d ; see Murray et al. 1994). A c o m prehensive evaluation of the r e c o n s t r u c t i o n process to date should be based in part on case studies of a representative group of municipalities in order to assess the incidence of various programs and the adequacy of coordination a m o n g them, as in Murray et al.'s study (1994). T h e f u n d a m e n tal issue is w h e t h e r or not the efforts will impel a new distinct pattern of economic and human development in the postwar period. Finally, although the s o c i o e c o n o m i c f o r u m did not b e c o m e an arena for wide-ranging negotiations over broader social and e c o n o m i c issues, as some of its supporters had hoped it would, some revisions to existing labor law were made after labor organizations succeeded in making credible the possibility that the United States w o u l d revoke Generalized System of P r e f e r e n c e s ( G S P ) status to S a l v a d o r a n exports (Economist Intelligence Unit 1993, 1994). Although provisions for the founding of a labor council as a consultative body to the Ministry of Labor were included, the revisions concerning the right of free association were not (UN Security Council 1994b). T h e r e have been no a g r e e m e n t s on wages to date.

The Outstanding Agenda of the Peace Accords Although much of the agenda mandated by the peace accords has been accomplished, s o m e aspects of the agreement essential to the consolidation of peace in El Salvador are not as yet adequately implemented. T h e further consolidation of the National Civilian Police and the reintegration of excombatants and tenedores are the most pressing of the outstanding agenda, all the more urgent after O N U S A L departed at the end of April 1995. 2 5 A small team of specialists ( M I N I S A L ) r e m a i n s in the country to continue the verification of the r e m a i n i n g a g e n d a ' s implementation, c o o r d i n a t i n g with the U N D P in ongoing reinsertion programs. T h e P N C f a c e s f o r m i d a b l e challenges to the consolidation of its role in the postwar period. T h e o n g o i n g c r i m e wave, f u e l e d in part by the demobilized ex-combatants, has led to a trend toward remilitarization of public security, such as military troops patrolling the streets as a deterrent under Operation Guardian in early 1995 (Spence, Vickers, and D y e 1995, p. 9; F u n d a c i ó n Flor de Izote 1995). T h e organized and at times violent

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protests of former members of the armed forces, the security forces, and the civil-defense organizations would intimidate even an experienced police force. Despite efforts by the UN and a number of donor countries, including Spain and the United States, to fortify the judiciary and the PNC, investigation and prosecution of serious crimes remains largely a goal, not a reality (Popkin 1994; Spence, Vickers, and Dye 1995). According to a 1994 UN report, not one of the 75 most serious violations of the right to life after July 1992 resulted in a trial (UN Security Council 1994d, pp. 11-13). Indeed, in over half of the cases there was no police investigation at all; this indicates the inability of the new PNC to adequately enforce the rule of law as yet. In some cases in which investigations did lead to the identification of suspects, judicial authorities did not act promptly to issue warrants and on occasion released suspects despite evidence. Although serious deficiencies continue, the present process of judicial review and training under the new Supreme Court should result in a strengthened judiciary. Ongoing technical assistance to the National Counsel for the Judiciary and other judicial bodies is essential for the consolidation of an impartial judicial system to eradicate impunity. The PNC has a range of resources upon which to draw to meet this challenge. According to one expert, the law and doctrine of the PNC, as well as the curriculum of the National Public Security Academy, conform to modern standards for police conduct, accountability, and civilian control (Stanley 1995, p. 7). The training in police methods in the academy exceeds the training previously available in El Salvador; accumulating field experience will also help. Although training and retraining of PNC members by international instructors at the academy may continue in the short run, the training of Salvadoran instructors would contribute to the longterm viability of the force. The recent retirement of a number of former members of the PN from overly autonomous units of the PNC may contribute to the consolidation of the civilian nature of the new force. A range of legislation addressing the various institutional reforms mandated by the peace agreement and the Truth Commission has yet to be passed. The constitutional reforms have yet to be ratified by the new Legislative Assembly as required by law. In addition, the government has not yet ratified various international human-rights agreements (including a recognition of the compulsory jurisdiction of the Inter-American Court of Human Rights), a binding recommendation of the Truth Commission (UN Security Council 1994f). Finally, the nomination of a new National Counsel for the Defense of Human Rights met stiff resistance in the Legislative Assembly (Proceso 1995b). The adequate reintegration of ex-combatants is essential for the consolidation of peace and democracy. According to the UN, approximately half of the demobilized members of the armed forces were not attended to

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by any reinsertion p r o g r a m (UN General A s s e m b l y 1994, p. 10). M o r e than 50 percent of the reduced number of beneficiaries of the land-transfer program have yet to receive title to properties. T h o s e b e n e f i c i a r i e s w h o have received title need o n g o i n g p r o g r a m s of training and credit if their reinsertion is not to reproduce long-standing patterns of rural poverty. T h e r e m a i n i n g properties are myriad s m a l l h o l d i n g s in the northern departments; their t r a n s f e r poses particularly c h a l l e n g i n g p r o b l e m s ( S p e n c e , Vickers, and Dye 1995, p. 13). In addition, the transfer of the n u m e r o u s small properties underlying c o m m u n i t i e s of repatriated r e f u g e e s , such as S e g u n d o M o n t e s and San José Las Flores, remains an urgent and challenging issue. T h e " h u m a n settlements" pose special problems because the social and productive infrastructure d e v e l o p e d during the civil war would be u n d e r m i n e d if only a piecemeal fraction of the underlying properties was transferred. In the judgment of the UN, the resolution of the issue requires special treatment and the transfer of property rights en bloc (UN Security Council 1994e, p. 8). Although the completion of the presently d e f i n e d p r o g r a m s is necessary, it is not s u f f i c i e n t for s u c c e s s f u l reintegration. Additional training, and the extension of credit and o n g o i n g technical assistance f o r the participants in the urban reinsertion programs, including the midlevel c o m m a n d e r s of the F M L N , would also contribute to r e c o n s t r u c t i o n and the consolidation of peace. As the UN Secretary General stated: T h e d e v e l o p m e n t o f p r o g r a m s e s t a b l i s h e d in the a c c o r d s that attend to e x - c o m b a t a n t s , d e m o b i l i z e d soldiers, and t e n e d o r e s b e t w e e n d e t e r m i n e d dates d o e s not in itself guarantee the sustainability of their reinsertion. It is necessary to support these actions with d e v e l o p m e n t projects that guarantee the g e n e r a t i o n o f permanent j o b s , the s e c u r i n g of s u f f i c i e n t i n c o m e to provide for m i n i m a l n e c e s s i t i e s and to support the reknitting o f the s o cial fabric. T h e sustainability in the m e d i u m and l o n g run o f the p r o c e s s requires s u b s t a n t i a l c h a n g e s in the p r o g r a m s p r o v i d i n g a t t e n t i o n to the e x - c o m b a t a n t s o f the F M L N , the d e m o b i l i z e d s o l d i e r s o f the armed f o r c e s , and the c i v i l i a n p o p u l a t i o n r e s i d e n t in the f o r m e r l y c o n f l i c t i v e areas. It is n e c e s s a r y to c o m p l e m e n t the i n i t i a t i v e s p r e s e n t l y u n d e r w a y with n e w projects o f e c o n o m i c , s o c i a l , and political reinsertion and reintegration that w i l l a l l o w a c h a n g e in e m p h a s i s f r o m an e m e r g e n c y to s u s tainable d e v e l o p m e n t . There e x i s t s a high risk o f s o c i a l d e c o m p o s i t i o n if the b a s i c n e e d s o f the p o p u l a t i o n o f the e x - c o n f l i c t i v e areas d o not rec e i v e integral attention ( U N General A s s e m b l y , 1 9 9 4 , p. 6; author's translation from the S p a n i s h ) .

T h e provision of housing for ex-combatants remains an outstanding part of the reinsertion programs. The documentation of voters and the construction of an accurate electoral roster remain key issues for the transparency and legitimacy of future

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elections. The newly constituted Electoral Tribunal is presently considering a range of reform to electoral procedures, including the issuance of a single-identity electoral and social-security document, the construction of a new roster, voting by residence, and procedures for broader representation on municipal councils (UN Security Council 1994e). Increasing unrest by workers protesting labor conditions and wages in the maquilas of the free-trade zones underlines the need to reconstitute the socioeconomic forum to address labor issues (Fundación Flor de Izote 1995; Proceso 1995b). Although the recent inauguration of the Labor Council provides one venue for discussion, some observers doubt that it will address many of the forum's outstanding issues. In the long run the financial burden of the various programs and institutions established as part of the peace process will be increasingly assumed by the Salvadoran government. Prospects for funding the 1995 shortfall of approximately $138 million to finance the remaining costs of the peace process are uncertain at present (Government of El Salvador 1995; reproduced in Table 6.2). These issues are addressed in Chapters 6 and 7. Domestic political support for the consolidation of the outstanding agenda of the peace accords is complicated by the present decomposition and realignment within and between the political parties. Two parties, the FMLN and the Christian Democrats, split in the aftermath of the 1994 elections. Nor has ARENA been immune to the present tendency toward internal division: the Calderón Sol administration mustered only lukewarm support for its economic policy of radically opening up the economy, and allegations of corruption by members of the former and present administrations continue to be made by a splinter party of ARENA.

Conclusions The peace accords hold out the prospect not only of ending the war but of achieving a transition to political democracy. The importance of the agreements on political reform for the relation between the consolidation of peace and economic policy go well beyond the obvious issues of the implied fiscal burden imposed on the postwar state and the desirability of democratic objectives per se. The consolidation of democratic politics is necessary if stable patterns of investment and economic growth are to be achieved. The consolidation of democratic politics is also crucial if bargaining over the results of economic growth is to lead to the emergence of a more inclusive economic model. The course of the implementation of the accords was determined by a process of political bargaining that overlapped with the negotiation of the accords themselves. In that bargaining, domestic political actors hammered

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o u t a g r e e m e n t s a n d c o n c e s s i o n s o n t h e v a r i o u s i s s u e s that r e f l e c t e d the e v o l v i n g b a l a n c e of p o w e r a m o n g t h e c o n t e n d i n g i n t e r e s t s . I n t e r n a t i o n a l a c t o r s — p a r t i c u l a r l y the UN and U S A I D — c o n t r i b u t e d resources, mediation, a n d g e n e r a l a c c o u n t a b i l i t y that s h a p e d the e v o l v i n g b a l a n c e of p o w e r in w a y s r a n g i n g f r o m e n s u r i n g that s o m e r e s o u r c e s w e n t to o p p o s i t i o n org a n i z a t i o n s , to c o n d i t i o n i n g f u n d s on c o m p l i a n c e w i t h t h e a c c o r d s , to prov i d i n g v a r i o u s f o r u m s f o r o n g o i n g n e g o t i a t i o n s . Yet i n t e r n a t i o n a l p r e s s u r e w a s not itself s u f f i c i e n t to e n s u r e t i m e l y a n d a d e q u a t e i m p l e m e n t a t i o n of t h r e e of t h e m o s t d i f f i c u l t i s s u e s : d e p l o y m e n t of t h e P N C , l a n d t r a n s f e r , a n d the p u r g i n g of the m i l i t a r y . 2 6 P r o g r e s s o n t h o s e i s s u e s r e q u i r e d e x t r a o r d i n a r y i n t e r n a t i o n a l p r e s s u r e , w i t h l i m i t e d r e s u l t s ( e x c e p t in the c a s e of the p u r g e , w h i c h w a s e v e n t u a l l y c o m p l e t e d , t h o u g h f a r b e h i n d s c h e d u l e ) . A l t h o u g h s i g n i f i c a n t c h a n g e in key i n s t i t u t i o n s has b e e n a c h i e v e d , the i m p l e m e n t a t i o n of o t h e r c o m m i t m e n t s r e m a i n s u n e v e n and p r e c a r i o u s . C o n t r i b u t i n g i s s u e s i n c l u d e the d a u n t i n g c o m p l e x i t y of the p r o b l e m s t h e m s e l v e s , l a c u n a e in t h e p e a c e a c c o r d s ( e s p e c i a l l y o n j u d i c i a l a n d l a n d iss u e s ) , the d i f f e r e n c e b e t w e e n the political l o g i c of the n e g o t i a t i o n p r o c e s s a n d t h e e c o n o m i c l o g i c of s o m e of t h e m a n d a t e d r e f o r m s , the d e c l i n i n g b a r g a i n i n g p o w e r of t h e F M L N , the i n s u f f i c i e n t i n s t i t u t i o n a l c a p a c i t y of o r g a n i z a t i o n s key t o t h e p r o c e s s , a n d e n d u r i n g , p r o f o u n d social a n d e c o n o m i c i n e q u a l i t i e s ( d e S o t o a n d del C a s t i l l o 1 9 9 4 b ; S e g o v i a 1 9 9 4 b ; W e i s s F a g e n 1 9 9 5 ) . In a d d i t i o n , the p a c e of i m p l e m e n t a t i o n w a s f r e q u e n t l y s u b o r d i n a t e d to the e c o n o m i c g o a l s and p o l i c i e s of t h e g o v e r n m e n t ( U N G e n eral A s s e m b l y 1994, p. 5). H o w e v e r , c o n t r a r y to s o m e a n a l y s e s , it h a s b e e n a r g u e d h e r e that f u n d i n g c o n s t r a i n t s h a v e not been the p r i n c i p a l o b s t a c l e to the t i m e l y imp l e m e n t a t i o n of the p e a c e a g r e e m e n t . 2 7 O n l y t h e d e v e l o p m e n t of the P N C a n d t h e e x t e n s i o n of a g r i c u l t u r a l credit s u f f e r e d s i g n i f i c a n t l y f o r this r e a s o n ; e v e n in the first c a s e , t h e lack of an initial p u b l i c c o m m i t m e n t by t h e g o v e r n m e n t c o n t r i b u t e d to the initial lack of i n t e r n a t i o n a l f u n d i n g ( S t a n l e y 1 9 9 5 ) , a n d the e x t e n s i o n of credit s u f f e r e d as m u c h f o r t h e lack of a d m i n istrative c a p a c i t y o n the part of the i m p l e m e n t i n g a g e n c i e s . T h e d e l a y s in t h e l a n d - t r a n s f e r p r o g r a m — a n d h e n c e in o t h e r r e i n s e r t i o n p r o g r a m s as w e l l — w e r e not d u e to b u d g e t a r y p r o b l e m s . T h e p a t t e r n of o n g o i n g d e l a y s and i n a d e q u a t e m e a s u r e s f o r the police a n d r e i n s e r t i o n p r o g r a m s p o i n t s to a m o r e f u n d a m e n t a l p r o b l e m : a lack of p o l i t i c a l will o n t h e p a r t of t h e g o v e r n m e n t at c r u c i a l s t a g e s of the r e c o n s t r u c t i o n p r o c e s s . T h a t the d e l a y a f f e c t e d the n e w p o l i c e f o r c e a n d the l a n d - t r a n s f e r p r o g r a m is p a r t i c u l a r l y t r o u b l i n g : A c c o r d i n g to d e S o t o and del C a s t i l l o ( 1 9 9 4 b ) , " o n their s u c c e s s r e s t s the e n t i r e p e a c e p r o c e s s " — a n d its s u s t a i n a b i l i t y in the l o n g r u n . 2 8 In the first y e a r of t h e C a l d e r o n S o l a d m i n i s t r a t i o n s o m e p r o g r e s s w a s m a d e . 2 9 T h e d u r a b i l i t y of t h e r e f o r m s to d a t e , as well as the f u r t h e r i m p l e m e n t a t i o n of o u t s t a n d i n g r e f o r m s , will d e p e n d o n t h e g o v e r n m e n t ' s c o m m i t m e n t as w e l l as its a b i l i t y to m o b i l i z e a d e q u a t e d o m e s t i c r e s o u r c e s to

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f i n a n c e the n e w i n s t i t u t i o n s , d e v e l o p a d e q u a t e credit c h a n n e l s , and c o n s o l i d a t e the i n v e s t m e n t s in the f o r m e r c o n f l i c t e d z o n e s o f the country. A l t h o u g h m u c h h a s b e e n a c h i e v e d , n e i t h e r the p e a c e a c c o r d s — e v e n if f u l l y i m p l e m e n t e d — n o r the g o v e r n m e n t ' s e c o n o m i c p o l i c i e s c o n t a i n ade q u a t e d i s t r i b u t i v e m e a s u r e s to a l l e v i a t e p o v e r t y e f f e c t i v e l y and p r o m o t e human d e v e l o p m e n t . A n a g e n d a o f broader e c o n o m i c participation through w e l l - d e s i g n e d redistributive m e a s u r e s is l i k e l y to b e a c o n d i t i o n for i n c l u s i v e e c o n o m i c g r o w t h as w e l l as the c o n s o l i d a t i o n o f the p e a c e . In the l o n g run, the s u c c e s s o f El S a l v a d o r ' s p e a c e p r o c e s s w i l l h i n g e o n the f o l l o w i n g q u e s t i o n : T o w h a t e x t e n t , and on w h o s e terms, w i l l distributional i s s u e s be addressed on the p o s t w a r political terrain? Future political b a r g a i n i n g o v e r both further i m p l e m e n t a t i o n o f the p e a c e a c c o r d s and e c o n o m i c p o l i c y w i l l d e t e r m i n e the o u t c o m e .

Notes 1. The author would like to express her gratitude for c o m m e n t s on earlier versions to James Boyce, Hector Dada, Richard Fagen, Francesca Jessup, Terry Karl, Anders Kompass, Kevin Murray, Eva Paus, Alexander Segovia, and William Stanley, and her appreciation for financial support to the San Salvador o f f i c e of the United Nations D e v e l o p m e n t P r o g r a m m e and the Harvard A c a d e m y of International and Area Studies. Remaining errors are of course solely hers. 2. See Whitfield (1994) for a definitive account of the Jesuit case and its consequences for U.S. relations with El Salvador. U.S. support was further undermined by subsequent detailed allegations of human-rights violations and corruption on the part of high-level military and government officials (U.S. House of Representatives, Arms Control and Foreign Policy Caucus, 1990). 3. See Holiday and Stanley (1993) and Weiss Fagen (1995) for analysis of the U N ' s role in the implementation of the peace accords. 4. Interview with senior UN official, November 1994. 5. Interview with senior UN official, N o v e m b e r 1994. A s the deadline approached in late December, the difficult issue of the definition of "conflicted z o n e s , " which had been a stumbling block throughout the negotiations, surfaced once again. In relation to the cease-fire negotiations, the question was one of geography: Which forces would be concentrated where? In addition, the issue concerned the transfer of land to ex-combatants and their supporters in the conflicted zones. While negotiators never reached agreement on the conflicted-area boundaries, enough confidence was marshaled that the parties agreed not to delay signing the agreement on that basis. This as well as other ambiguities in the socioeconomic accord proved to be very difficult issues in the implementation of the agreement. 6. Despite the limitations of the socioeconomic chapter, the Salvadoran peace agreement was more detailed than many other a g r e e m e n t s ending civil w a r s (Segovia 1994b). 7. The accords also provided for civilian participation in curriculum development in the military academy.

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8. Magistrates are now selected by a t w o - t h i r d s majority of the National Assembly and serve staggered nine-year terms (Popkin 1994). 9. S a l v a d o r a n elites w e r e well a w a r e of the d i f f i c u l t i e s in n e i g h b o r i n g Nicaragua posed by disgruntled e x - c o m b a t a n t s on both sides, w h i c h without doubt contributed to the inclusion of reintegration programs. 10. One indication of the depth of conviction on this issue: F M L N field c o m m a n d e r s in U s u l u t a n — m a n y of t h e m of p e a s a n t o r i g i n s — r e p e a t e d l y c o n d i t i o n e d the concentration and d e m o b i l i z a t i o n of their forces on progress in the transfer of land, at times without authorization f r o m their central c o m m a n d (Wood 1995). 11. T h e issue w a s f u r t h e r c o n f u s e d by a clause in w h i c h the g o v e r n m e n t reserved the right to apply the law (i.e., carry out evictions) on land o c c u p i e d after 3 July 1991, the date of the agreement b e t w e e n the g o v e r n m e n t and the D e m o c r a t i c Peasant Association ( A D C ) . 12. B e c a u s e t e n e d o r e s did not n e c e s s a r i l y o c c u p y property, 1 will use the Spanish term rather than the literal translation " h o l d e r s . " 13. T h e a g r e e m e n t specifically mentioned two g o v e r n m e n t agencies, the Land Bank and the S a l v a d o r a n Institute for Agrarian T r a n s f o r m a t i o n (ISTA), but did not clarify their role in its implementation; nor did it d e f i n e the overall line of authority among the various g o v e r n m e n t a l organizations. 14. The eventual target population consisted of 3 5 , 4 0 0 former soldiers, 11,000 former guerrillas (including war veterans), 6 0 , 0 0 0 displaced persons, 2 6 , 0 0 0 repatriates, and 8 0 0 , 0 0 0 residents of the P R N municipalities ( S R N 1992a). 15. C o m b i n i n g t h e c a t e g o r i e s of ( m a j o r ) " i n f r a s t r u c t u r e " and " b a s i c i n f r a structure" (under the rubric of "social s e c t o r " and " h u m a n capital"), infrastructure accounted for 6 3 percent of the proposed budget of priority n e e d s (see Table 5.1). 16. With the help of hindsight to a p p r o x i m a t e the m i s s i n g e s t i m a t e s , a c o m parison of the two proposals s h o w s t h a t — e x c l u d i n g l a n d — t h e g o v e r n m e n t ' s proposal was roughly half that of the F M L N ( a u t h o r ' s rough estimate). 17. For a m o r e detailed b r e a k d o w n of f u n d i n g r e c o m m e n d a t i o n s by program and c o m m i t m e n t s by donors, see Table 7.2. For less detailed but m o r e recent estimates, see Tables 6.4 and 7.3. 18. William Stanley, personal c o m m u n i c a t i o n , February 1995. 19. See B u e r g e n t h a l ( 1 9 9 4 ) for a detailed account by a c o m m i s s i o n e r of the investigative process and internal d e b a t e s that informed the report. 20. A U.S. State D e p a r t m e n t official argues that the d e p l o y m e n t of the P N C as early as it did occur w a s important, despite inadequate training and e q u i p m e n t , because it w a s important to capitalize on the e u p h o r i a of the s i g n i n g of the a c c o r d s (interview with U.S. State D e p a r t m e n t official, D e c e m b e r 1994). 21. In June 1994, the lieutenant in charge of the c r i m i n a l - i n v e s t i g a t i o n s division of the PN w a s identified on a v i d e o t a p e of a b a n k r o b b e r y in San S a l v a d o r (Popkin 1994). 22. Proceso 1995a. 23. See Collier ( 1 9 9 4 ) for evidence linking rising crime rates in s o m e districts of p o s t - c i v i l war U g a n d a with landlessness of e x - c o m b a t a n t s . 24. T h e w i n n e r - t a k e - a l l nature of m u n i c i p a l e l e c t i o n s i m p e d e s local c o n certacion; there are recent reports that the Elections Tribunal is c o n s i d e r i n g r e f o r m on this issue. In addition, the tribunal may initiate a new electoral roll (voter list) b e f o r e the next e l e c t i o n s , in a n s w e r to a f r e q u e n t c o m p l a i n t as to t h e inaccuracy

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of t h e e x i s t i n g r o l l in t h e M a r c h 1 9 9 4 e l e c t i o n s ( S p e n c e , D y e , a n d V i c k e r s 1 9 9 4 ; Spence and Vickers 1994). 2 5 . B e g i n n i n g in O c t o b e r 1 9 9 4 , an i n t e r a g e n c y c o m m i s s i o n c o n s t i t u t e d by t h e U N D P and O N U S A L b e g a n d e v e l o p i n g p l a n s f o r c o n t i n u e d t e c h n i c a l a s s i s t a n c e f o r p r i o r i t y a r e a s , i n c l u d i n g t h e s t r e n g t h e n i n g of t h e n e w d e m o c r a t i c

institutions,

the r e i n s e r t i o n p r o g r a m s , e l e c t o r a l r e f o r m , a n d t h e f u n d f o r w a r v e t e r a n s a n d t h e i r families. 26. See Holiday and Stanley ( 1 9 9 3 ) and Weiss Fagen ( 1 9 9 5 ) for detailed a n a l y s i s of t h e r o l e of t h e i n t e r n a t i o n a l o r g a n i z a t i o n s , p a r t i c u l a r l y t h e U N . 2 7 . T h i s a r g u m e n t t h e r e f o r e d i f f e r s f r o m the e m p h a s i s g i v e n b y o t h e r a n a l y s t s to m a c r o e c o n o m i c p o l i c y in d e l a y i n g i m p l e m e n t a t i o n of t h e a g r e e m e n t (e.g., O v e r seas D e v e l o p m e n t Council 1994). 2 8 . W h e t h e r i n t e r n a t i o n a l a c t o r s c o u l d h a v e c o n t r i b u t e d to t h e c o n s t r u c t i o n of a d e e p e r c o m m i t m e n t to t h e i m p l e m e n t a t i o n of t h e p e a c e a g r e e m e n t , e i t h e r t h r o u g h m o r e f u n d i n g or d i f f e r e n t c o n d i t i o n s o n its d o n a t i o n , is e x p l o r e d in C h a p t e r 7. T h e c o n s t r a i n t s a n d o p p o r t u n i t i e s f o r d o m e s t i c - r e s o u r c e m o b i l i z a t i o n a r e e x p l o r e d in C h a p t e r 6. 2 9 . O n this p o i n t , a f t e r n o t i n g t h e e n c o u r a g i n g e v i d e n c e of s u s t a i n e d p o l i t i c a l w i l l by g o v e r n m e n t o f f i c i a l s to c o m p l y f u l l y w i t h t h e r e m a i n i n g e l e m e n t s of t h e p e a c e a c c o r d s , a r e c e n t U N S e c u r i t y C o u n c i l d o c u m e n t w e n t o n to s t a t e : H o w e v e r , it m u s t b e m a t c h e d b y c o n c r e t e a c t i o n a n d t h e c a p a c i t y to a c t i v a t e still r e c a l c i t r a n t s e c t o r s w i t h i n t h e a d m i n i s t r a t i o n . D e l a y in i m p l e m e n t a t i o n of t h e o u t s t a n d i n g c o m m i t m e n t s h a s a l s o b e e n d u e to a lack of o r g a n i z a t i o n a n d e x p e r t i s e — a c o m m o n p h e n o m e n o n in d e v e l o p i n g c o u n t r i e s — a n d in s o m e i n s t a n c e s , a l a c k of f i n a n c i n g ( U N S e c u r i t y C o u n c i l 1994e).

6 Domestic Resource Mobilization Alexander Segovia

A s p e a c e has c o m e to El S a l v a d o r the need to m o b i l i z e d o m e s t i c r e s o u r c e s has g r o w n . A l t h o u g h international a g e n c i e s and f o r e i g n g o v e r n m e n t s have w e l c o m e d the e n d o f the a r m e d c o n f l i c t , e x t e r n a l aid has

nonetheless

f a l l e n . D o m e s t i c s a v i n g s r e m a i n low, as d o e s g o v e r n m e n t r e v e n u e . T h e foreign e x c h a n g e g a p has been f i l l e d by r e m i t t a n c e s f r o m S a l v a d o r a n e m igrants, as noted in C h a p t e r 4 , but it c a n n o t be a s s u m e d that this windfall will b e p e r m a n e n t . In this c o n t e x t , a c r u c i a l task f o r S a l v a d o r a n p o l i c y makers is to d e v i s e m e c h a n i s m s that will allow the e c o n o m y i n c r e a s i n g l y to use d o m e s t i c r e s o u r c e s to f i n a n c e the c o s t s o f p e a c e and to a c h i e v e e c o n o m i c g r o w t h with s o c i a l j u s t i c e . D o m e s t i c r e s o u r c e s consist o f public and private s a v i n g s . T h e public, or fiscal, side has b e e n a m a j o r f o c u s o f a t t e n t i o n — a n d c o n d i t i o n a l i t y — f o r international f i n a n c i n g a g e n c i e s in recent years. T h i s has b e e n due, on the o n e hand, to the need to redress fiscal i m b a l a n c e s in order to e n s u r e m a c r o e c o n o m i c stability and, on the other hand, to the r e c o g n i t i o n that i n c r e a s e s in public savings are needed in order to m a k e m o r e d o m e s t i c r e s o u r c e s available for social spending and infrastructure i m p r o v e m e n t s , as well as to satisfy s p e c i f i c c o m m i t m e n t s under the Chapultepec A c c o r d s o f January 1 9 9 2 . T o help on the f i s c a l side, the g o v e r n m e n t instituted a s w e e p i n g taxr e f o r m i n i t i a t i v e ( G a l l a g h e r 1 9 9 3 ) . A l t h o u g h the r e f o r m h a s p r o d u c e d s o m e f a v o r a b l e results in terms o f s i m p l i f i c a t i o n and i m p r o v e d e f f i c i e n c y o f the tax s y s t e m , it has not fully yielded the e x p e c t e d i n c r e a s e in fiscal rec e i p t s . G i v e n the rigidity o f p u b l i c s p e n d i n g , there has b e e n a c o n s t a n t potential c o n f l i c t b e t w e e n the n e e d to fulfill the c o m m i t m e n t s c o n t a i n e d in the p e a c e a g r e e m e n t s and the need to maintain and s t r e n g t h e n m a c r o e c o n o m i c s t a b i l i t y . T h e threat that in this t r a d e - o f f t h e " a d j u s t i n g v a r i a b l e " w o u l d b e p e a c e e x p e n d i t u r e s has b e e n r a i s e d in r e q u e s t s f o r e x t e r n a l a s s i s t a n c e . Yet it is by no m e a n s c l e a r that the potential f o r the m o b i l i z a t i o n o f d o m e s t i c r e s o u r c e s for p e a c e through expenditure s h i f t i n g and i n c r e a s e d tax r e v e n u e s has b e e n e x h a u s t e d .

107

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T h e g o v e r n m e n t ' s role would perhaps be less important if the country e n j o y e d a relatively high level of private savings and an e f f i c i e n t financial system to intermediate these savings into private investment. T h e resulting private investment could, in turn, prompt the sort of growth that provides for greater social stability and improved tax revenues. U n f o r t u nately, d o m e s t i c savings are extraordinarily low, at 1.8 percent of GDP, and private investment is both well below historical standards and heavily reliant on external transfers and r e m i t t a n c e s by Salvadorans abroad. T h e savings-investment structure in the country is weak and fragile. T h i s chapter e x a m i n e s the issues of domestic-resource mobilization. Although we d e v o t e s o m e attention to private savings and i n v e s t m e n t — partly b e c a u s e we believe that a healthy uptick of private investment is critical to the goal of sustainable growth in El Salvador—we focus here on the fiscal side. We specifically look at the g o v e r n m e n t ' s efforts since 1992 to mobilize sufficient domestic resources to enable it to live up to the c o m mitments m a d e in the peace a g r e e m e n t s , and explore the effect that the conditions i m p o s e d by international f i n a n c i n g agencies have had on this process. We assess the tension between the fiscal requirements associated with the peace a c c o r d s and the fiscal imperatives associated with economic stabilization policies. T h e chapter is divided into five parts. T h e first section analyzes historical trends in savings and investment in El Salvador. T h e second section provides an overview of the basic features of the tax-reform initiative and its principal results. T h e g o v e r n m e n t ' s e f f o r t s to mobilize d o m e s t i c resources following the signing of the peace agreements are discussed in the third section. T h e fourth section examines the tensions that have developed as the g o v e r n m e n t has endeavored to meet the requirements of the peace accords while s i m u l t a n e o u s l y trying to stabilize the e c o n o m y . T h e final section presents s o m e conclusions r e g a r d i n g the need and potential f o r mobilizing a greater v o l u m e of resources in the coming years in order to meet the obligations and challenges of a lasting peace.

Historical Trends in Savings and Investment During the 1970s total investment (excluding inventory changes) in El Salvador averaged 18 percent of GDP, with private investment equaling 12.5 percent, and public investment 5.4 percent of GDP. With the crisis of the 1980s, the total investment rate fell dramatically, with the decline led by a pronounced drop in private investment (see Table 6.1). T h e 1990s have seen a recovery of private investment. Public investment has shown s o m e d y n a m i s m with the implementation of the National Reconstruction Program (PRN), but it remains well below past levels. T h e relationship between private and public investment in developing countries has been the focus of much research. There is a growing consensus

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that t h e t w o are c o m p l e m e n t a r y rather t h a n c o n t r a d i c t o r y . A l t h o u g h s o m e still a r g u e that public investment " c r o w d s o u t " the p r i v a t e - s e c t o r c o u n t e r p a r t (either b e c a u s e it diverts m a t e r i a l or f i n a n c i a l r e s o u r c e s or b e c a u s e it chall e n g e s the d o m i n a n t position of private c a p i t a l a n d h e n c e r e d u c e s i n v e s t o r c o n f i d e n c e ) , o t h e r s s u g g e s t that p u b l i c i n v e s t m e n t actually e n h a n c e s private i n v e s t o r s ' e x p e c t a t i o n s by p r o v i d i n g i n f r a s t r u c t u r e a n d a m o r e b u o y a n t a g g r e g a t e m a r k e t (Taylor 1988, 1989; G r e e n e a n d V i l l a n u e v a 1991). E c o n o m e t r i c r e s u l t s on t h e i s s u e a r e g e n e r a l l y s u p p o r t i v e of t h e latter " c r o w d i n g i n " p o s i t i o n . T u n Wai a n d W o n g ( 1 9 8 2 ) s e p a r a t e l y e s t i m a t e d private-investment functions for five d e v e l o p i n g countries f r o m the early 1 9 6 0 s to t h e m i d - 1 9 7 0 s ; their r e s u l t s s u g g e s t an i m p o r t a n t r o l e f o r g o v e r n m e n t i n v e s t m e n t . B l e j e r a n d K h a n ( 1 9 8 4 ) u s e d a p o o l e d a p p r o a c h to e x a m i n e the e f f e c t s of g o v e r n m e n t i n v e s t m e n t a n d o t h e r v a r i a b l e s o n p r i v a t e i n v e s t m e n t in 2 4 d e v e l o p i n g c o u n t r i e s o v e r 1 9 7 1 - 1 9 7 9 ; the r e s u l t s s u g g e s t p o s i t i v e e f f e c t s of p u b l i c - s e c t o r i n v e s t m e n t , albeit w i t h e v i d e n c e of c r o w d ing o u t in s o m e c a s e s . S u b s e q u e n t a n a l y s e s by G r e e n e a n d V i l l a n u e v a ( 1 9 9 1 ) , P a s t o r ( 1 9 9 2 b ) , P a s t o r a n d Hilt ( 1 9 9 3 ) , a n d S e r v e n a n d S o l i m a n o ( 1 9 9 3 ) , all of w h i c h u s e p o o l e d c r o s s - s e c t i o n a l a n d t i m e - s e r i e s d a t a , likewise find a positive impact f r o m public investment. T h e i m p a c t of p u b l i c i n v e s t m e n t o n p r i v a t e i n v e s t m e n t is likely, of c o u r s e , to v a r y f r o m p l a c e to p l a c e . E v e n if the r e l a t i o n s h i p is p o s i t i v e in m o s t s e t t i n g s , t h e r e c o u l d be c a s e s in w h i c h an i l l - p l a n n e d or p o o r l y e x e c u t e d p r o g r a m of p u b l i c i n v e s t m e n t f a i l s to s t i m u l a t e o r e v e n d e t e r s p r i vate investment. A n e x a m i n a t i o n of the i n v e s t m e n t data f o r t h e past 2 5 y e a r s s u g g e s t s that the r e l a t i o n s h i p b e t w e e n p u b l i c and private i n v e s t m e n t in El S a l v a d o r is c o m p l e x a n d has v a r i e d o v e r t i m e ( s e e F i g u r e 6 . 1 ) . In t h e 1 9 7 0 s the t w o v a r i a b l e s w e r e p o s i t i v e l y c o r r e l a t e d (r = 0 . 8 ) ; a n d t h o u g h c o r r e l a t i o n d o e s not p r o v e c a u s a t i o n , this o b s e r v a t i o n is c o n s i s t e n t w i t h the l o g i c of c r o w d ing in. Private investment d r o p p e d sharply with the onset of the political crisis at the e n d of the d e c a d e , s u g g e s t i n g that instability is indeed an important d e t e r r e n t to i n v e s t m e n t . D u r i n g the 1 9 8 0 s p r i v a t e i n v e s t m e n t r e c o v e r e d s o m e w h a t w h i l e p u b l i c i n v e s t m e n t fell, with the latter itself b e i n g in e f f e c t c r o w d e d out by military e x p e n d i t u r e . 1 T h e c h a l l e n g e in c o m i n g y e a r s will b e to e n s u r e that p u b l i c i n v e s t m e n t e f f e c t i v e l y s t i m u l a t e s private i n v e s t m e n t . D u r i n g t h e 1 9 8 0 s a s i g n i f i c a n t c h a n g e o c c u r r e d w i t h r e g a r d to t h e s o u r c e s of f i n a n c i n g f o r i n v e s t m e n t . In t h e 1 9 7 0 s i n v e s t m e n t w a s f i n a n c e d p r i m a r i l y o u t of n a t i o n a l s a v i n g s , of w h i c h d o m e s t i c s a v i n g s w e r e t h e major component. This situation changed radically during the 1980s. On t h e o n e h a n d , f o r e i g n s a v i n g s ( m o s t l y o f f i c i a l l o a n s ) b e c a m e an i m p o r t a n t s o u r c e o f i n v e s t m e n t f i n a n c i n g . On the o t h e r h a n d , r e m i t t a n c e s f r o m S a l v a d o r a n s l i v i n g a b r o a d b e c a m e t h e p r i n c i p a l c o m p o n e n t of n a t i o n a l s a v i n g s , w i t h d o m e s t i c s a v i n g s f a l l i n g f r o m 1 6 . 4 p e r c e n t in t h e 1 9 7 0 s to 6 . 9 p e r c e n t in the 1 9 8 0 s a n d o n l y 1.1 p e r c e n t in t h e 1 9 9 0 s . 2

Domestic

Resource Mobilization

111

Figure 6.1 Private and Public Investment, 1970-1994 (As a percentage of GDP)

Source: USAID, from BCR.

— Private Investment — Public Investment

El Salvador's situation has differed strikingly from that of most other developing countries (see Table 6.2). In almost all other regions of the developing world (including Latin America), domestic savings exceed national savings, mainly due to the need to finance foreign transfers related to debt and foreign direct investment. Moreover, El S a l v a d o r ' s national savings (which includes the influx of remittances) actually rose in the course of the 1980s, thanks to the export of earners to higher-income economies, primarily the United States. The Salvadoran economy has thus deepened its external dependence; external resources have b e c o m e the principal way to finance both the foreign exchange gap and the other "gap" with regard to domestic investment. The relationship between foreign savings and national (or domestic) savings in developing countries has also been a topic of considerable research. The earlier view that foreign savings, in the form of external loans or foreign direct investment, are simply additional to domestic savings was challenged by Griffin (1970) and others, w h o argued that foreign-capital inflows could discourage both private and public domestic savings. Publicsector savings, in particular, could be deterred if external loans provide a "soft option" for governments, compared to the harder options of raising tax revenues or cutting public-consumption expenditures. Econometric analyses have confirmed that in many cases foreign savings do, in effect, crowd out domestic savings, although the direction of causality as well as the magnitude of the effect varies a m o n g countries

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Table 6.2

National and Domestic Savings Rates in 83 Developing Countries, 1970-1992

Indicator/Region

1970-1980

1981-1984

Gross national

savings/GDP

Africa Asia Europe/Middle East/Northern Africa Latin America and the Caribbean El Salvador Total

0.11 0.18 0.15 0.17 0.17 0.14

Gross domestic Africa Asia Europe/Middle East/Northern Africa Latin America and the Caribbean El Salvador Total

0.11 0.19 0.15 0.20 0.18 0.15

0.06 0.18 0.14 0.12 0.10 0.10

1985-1988

1989-1992

0.06 0.19 0.12

n.a. n.a. n.a. n.a. 0.12 n.a.

0.11 0.14 0.10

savings/GDP 0.06 0.19 0.16 0.17 0.04 0.12

0.08 0.21 0.15 0.17 0.03 0.13

n.a. n.a. n.a. n.a.

0.01 n.a.

Source: Rivera Campos 1994. n.a. = data not available

(see, f o r e x a m p l e , B o w l e s 1987). In the c a s e of El S a l v a d o r , as F i g u r e 6 . 2 s h o w s , the c o r r e l a t i o n b e t w e e n foreign s a v i n g s and national s a v i n g s in the p e r i o d 1 9 8 0 - 1 9 9 4 is q u i t e s t r o n g l y n e g a t i v e (r = - 0 . 8 ) . A l t h o u g h o n e s h o u l d not regard this s i m p l e statistical r e l a t i o n s h i p as c o n c l u s i v e , 3 it d o e s s u g g e s t that f o r e i g n s a v i n g s have t e n d e d to r e d u c e n a t i o n a l s a v i n g s ( i n c l u d i n g s a v i n g s out of r e m i t t a n c e s as well as d o m e s t i c i n c o m e ) . 4 W h e n national savings are broken d o w n into private and public savings, it b e c o m e s a p p a r e n t that o v e r the years p u b l i c s a v i n g s h a v e p l a y e d o n l y a minor role in f i n a n c i n g investment in El Salvador (see Table 6.1). T h e public s e c t o r ' s meager participation in national savings can largely be attributed to the low tax ratio, w h i c h historically has been below world s t a n d a r d s and is now m a k i n g only m e a g e r progress u p w a r d . It is critically important that the state be able to raise r e v e n u e s f o r f o u r reasons: first, to f i n a n c e p e a c e related expenditures; s e c o n d , to prepare for the eventual diminution of foreign transfers and f o r e i g n savings; third, to permit the e x p a n s i o n of p u b l i c i n v e s t m e n t that c o m p l e m e n t s private i n v e s t m e n t ; and f o u r t h , to be a b l e to selectively f i n a n c e private investments through official credit m e c h a n i s m s . It is to this issue of r e v e n u e p e r f o r m a n c e that w e n o w turn.

The Principal Features and Results of the Tax Reform R e c o g n i z i n g the n e e d to b o t h e n h a n c e a n d s t a b i l i z e tax r e v e n u e , the adj u s t m e n t p r o g r a m i m p l e m e n t e d in 1 9 8 9 a t t e m p t e d to e s t a b l i s h a m o r e

Domestic Resource Mobilization

113

Figure 6.2 National Versus Foreign Savings, 1980-1994 (As a percentage of GDP)

m o d e r n and equitable tax system and to reduce the state's reliance on volatile export income. 5 A m o n g the most important measures implemented were: (1) a total overhaul of the tax system, including the elimination of all taxes on exports, elimination of the tax on net worth, simplification of personal and corporate income taxes, reduction of the top income-tax rate f r o m 60 percent to 25 percent, and replacement of revenue stamps by a value-added tax (VAT); (2) creation of a unit f o c u s i n g on collecting f r o m large taxpayers; (3) enactment of a law on tax fraud; (4) improvement of the computer, auditing, and control systems; (5) simplification and reduction of taxes on imports; and (6) elimination of the majority of tax exemptions. This reform in the structure and composition of tax revenues has had a p r o f o u n d impact. First, the elimination of export t a x e s — w h i c h had traditionally been the most significant source of g o v e r n m e n t r e v e n u e s — a n d the introduction of the VAT has indeed m a d e the tax system more stable (see Table 6.3 and Figure 4.1). Second, the reform simplified the tax system so that the bulk of state revenues now c o m e f r o m three taxes: the VAT, the income tax, and the tax on imports. This change has made the tax system

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much easier to administer and has permitted greater administrative control, particularly because of the tremendous enhancement in computer, auditing, and control systems. 6 Despite the merits and achievements of the reform there are problems. First, the new system, by reducing direct taxes and increasing reliance on indirect taxes, has m a d e the overall taxation structure more regressive, worsening the already s e v e r e inequality of incomes and m a k i n g the achievement of social j u s t i c e more difficult. S e c o n d , the reform has not had the expected results in terms of increasing revenues, partly because of an extraordinarily high degree of tax evasion. 7 Although the tax ratio (ratio of tax revenues to G D P ) did increase by two percentage points during the period 1 9 8 9 - 1 9 9 3 , rising f r o m 7.6 percent of G D P in 1989 to 9.7 percent in 1994, it continues to be very low in comparison to that of other underdeveloped countries, x and remains low even by the standards of recent Salvadoran history (see Figure 6.3). Rivera C a m p o s (1994, p. 11) suggests that "official transfers [of foreign savings] are allowing a lower tax burden." In other words, while the formal conditionalities and less-formal policy dialogue of the international donors have sought to encourage an increased tax effort, the financial resources they provide may in themselves have had the opposite e f f e c t . In such a context, the strength with which conditionality is e x e r c i s e d becomes critical. 9 T h e low level of tax r e v e n u e s has been largely responsible f o r the g o v e r n m e n t ' s failure to achieve its original goal of eliminating the fiscal deficit by 1994 ( B C R 1989, p. 20). In fact, the deficit during the period 1 9 8 9 - 1 9 9 4 w a s higher on average than during the preceding f i v e years (see A p p e n d i x Table A.2c). Such modest results illustrate why the fiscal area continues to be called the Achilles' heel of the Salvadoran e c o n o m y ( U S A I D 1994a, p. 14). It also helps to explain why the state has b e c o m e increasingly reliant on external resources to f i n a n c e social s p e n d i n g , especially for p r o g r a m s related to poverty alleviation and investment in human resources. T h i s is particularly w o r r i s o m e because external assistance is expected to decline in coming years.

The Peace Accords and Domestic Resource Mobilization Bringing a formal cease-fire and peace to conflict-torn El Salvador w a s a process that required courage and vision on the part of both sides. Consolidating the peace likewise requires courage, as wary e x - c o m b a t a n t s learn to struggle not with arms, but within an agreed-upon political process. It also requires money, d e v o t e d both directly to implementing the terms of the peace accords and to the social and human capital-building p r o g r a m s that can yield social harmony. T h e cost of peace is indeed high, but as the 1980s showed, the cost of war is even higher.

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Alexander Segovia

Domestic Resource Mobilization

117

A s noted in Chapter 5, the U n i t e d States General A c c o u n t i n g O f f i c e ( G A O 1 9 9 4 ) estimated that it w o u l d cost U . S . $ 1 . 8 billion to fulfill all the c o m m i t m e n t s m a d e under the peace agreements through the year 1 9 9 6 . Of this total, the S a l v a d o r a n g o v e r n m e n t had c o m m i t t e d itself to contribute $ 4 0 8 million (or 2 2 percent), a figure the G A O v i e w e d as f e a s i b l e in light of the September 1 9 9 2 introduction o f a VAT and the reduction in debt serv i c e resulting from the U n i t e d S t a t e s ' f o r g i v i n g $ 4 6 4 m i l l i o n o f El Salvador's foreign debt. In January 1 9 9 5 the g o v e r n m e n t of El Salvador reported that f i n a n c ing to date for e x e c u t i n g the p e a c e agreements totaled nearly $ 1 . 4 billion, of w h i c h the Salvadoran government had provided $ 4 7 6 million ( s e e Table 6.4). T h e vast majority of the f u n d s contributed by the Salvadoran g o v ernment have been used to pay direct costs, especially those related to the strengthening of democratic institutions and population-réintégration programs; in contrast, o v e r half of foreign funds have been used for indirect costs such as infrastructure rehabilitation and social programs. 1 "

Table 6.4

Financing of the Peace Process, 1992-1995 (millions of U.S. dollars) Foreign financing

Total available financing

Loans

Grants

Subtotal

Domestic financing

44.9 1.1 38.6 5.1

362.4 57.2 193.9 111.2

407.3 58.4 232.5 116.4

456.0 343.4 95.8 16.9

863.3 401.8 328.3 133.2

Indirect costs 0 Rehabilitation and replacement of infrastructure damaged in the conflict Social and productive support program for population groups most affected by the conflict Debt service

352.2

155.4

507.6

20.1

527.8

339.3

64.8

404.1

12.9

90.6

103.5

14.3 5.9

117.8 5.9

Total

397.2

517.8

914.9

476.2

1,391.1

Direct costs 3 Democratic institutions b Reintegration programs Other projects

404.1

Sources: Calculations made on the basis of information in the publication: Government of El Salvador. Acuerdos de paz: costo y déficit financiero. January 1995. Exchange rate used: C8.75 = U.S.$1. Notes: a. Includes the cost of activities scheduled for execution under the peace agreements. b. Does not include recurrent expenses of democratic institutions that are to be financed by the Salvadoran government under the regular budget. c. Includes rehabilitation of the infrastructure of basic services and programs designed to boost production, aimed at the people most affected by the conflict.

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T h e p e a c e h a s , of c o u r s e , b r o u g h t d i v i d e n d s as w e l l a s c o s t s . I n d e e d , o n e of t h e k e y f a c t o r s t h a t e x p l a i n s t h e s u c c e s s e s of t h e p o s t - 1 9 8 9 s t r u c t u r a l a d j u s t m e n t p r o g r a m is t h e p e a c e p r o c e s s i t s e l f . R e c a l l that t h e g u e r rilla o f f e n s i v e of 1 9 8 9 w a s f o l l o w e d t h e n e x t y e a r b y t h e i n i t i a t i o n of t h e n e g o t i a t i o n s that e v e n t u a l l y c u l m i n a t e d in t h e J a n u a r y 1 9 9 2 p e a c e a c c o r d s . T h e l o n g n e g o t i a t i o n p r o c e s s — w h i c h m a d e it p o s s i b l e to f i r s t d e - e s c a l a t e a n d t h e n p u t a n e n d to t h e a r m e d c o n f l i c t — f o s t e r e d a c l i m a t e of g r e a t e r s t a b i l i t y , w h i c h in turn e n g e n d e r e d a s l o w r e v i v a l of p r i v a t e i n v e s t m e n t a n d e v e n t u a l l y f a c i l i t a t e d a s h i f t of p u b l i c f u n d s a w a y f r o m m i l i t a r y s p e n d i n g . T a b l e 6.5 s h o w s that since 1991 the d e f e n s e b u d g e t has d e c l i n e d by a r o u n d 5 0 p e r c e n t in real t e r m s a n d as a p r o p o r t i o n of G D P ; s i n c e 1 9 9 3 t h e b u d g e t h a s b e e n f r o z e n in n o m i n a l t e r m s at 8 6 6 . 5 m i l l i o n c o l o n e s ( r o u g h l y $ 1 0 0 million).11 T h e d e c l i n e in d e f e n s e s p e n d i n g h a s b e e n a c c o m p a n i e d by a n i n c r e a s e in b u d g e t a l l o c a t i o n s f o r t h e s o c i a l s e c t o r s a n d f o r a c t i v i t i e s r e l a t e d to t h e s t r e n g t h e n i n g of d e m o c r a t i c i n s t i t u t i o n s . A s c a n b e s e e n f r o m T a b l e 6 . 6 , all o c a t i o n s f o r e d u c a t i o n a n d h e a l t h h a v e i n c r e a s e d s i n c e 1991 b o t h in real t e r m s a n d a s a p e r c e n t a g e of G D P . T h e s a m e h a s o c c u r r e d in t h e c a s e of t h e b u d g e t a l l o c a t e d f o r t h e a d m i n i s t r a t i o n of j u s t i c e a n d f o r p u b l i c s a f e t y , w h i c h i n c l u d e s t h e b u d g e t of t h e n e w l y c r e a t e d N a t i o n a l C i v i l i a n P o l i c e . W h e r e a s the peace has raised new d e m a n d s for resource use, particul a r l y t o i m p l e m e n t p r o g r a m s m a n d a t e d b y t h e a c c o r d s , it h a s a l s o m a d e p o s s i b l e e c o n o m i c r e v i v a l a n d a r e a l i g n m e n t of b u d g e t p r i o r i t i e s . T h e n e e d s a n d d e m a n d s h a v e e x c e e d e d t h e d o m e s t i c r e s o u r c e s c o m m i t t e d by t h e g o v e r n m e n t , h o w e v e r , a n d h e n c e it h a s b e e n h e a v i l y r e l i a n t o n f o r e i g n h e l p . S e c u r i n g f u r t h e r e x t e r n a l s u p p o r t a n d i m p r o v i n g t h e m o b i l i z a t i o n of domestic resources for the peace both remain critical tasks for guaranteei n g t h e s u s t a i n a b i l i t y of t h e S a l v a d o r a n p o l i t y a n d e c o n o m y .

Tabic 6.5

Evolution of National Defense Budget, 1989-1995

Year

Millions of current colones

Millions of constant colones3

1989 1990 1991 1992 1993 1994 1995

947.0 997.0 1,020.3 1,183.4 866.5 866.5 866.5

947.0 807.1 712.8 660.9 432.1 388.9 357.8

Nominal change

Real change

Percentage of GDP

5.0 2.3 13.8 -36.6 0.0 0.0

-14.8 -11.7 -7.3 -34.6 -10.0 -8.0

2.9 2.4 2.1 2.2 1.3 1.1 1.0

Sources: National budgets and author's own calculations. Note: a. CPI used deflator, 1989 = 100.

Domestic Resource Mobilization

Table 6.6

119

Central-Government Budget Outlays in Selected Areas, 1991-1995 1991

Nominal (millions of colones) Health Education Administration of justice 3 Public safety b Defense Real (millions of 1991 colones) Health Education Administration of justice 3 Public safety b Defense /U a percentage of total spending Health Education Administration of justice 3 Public safety b Defense As a percentage of GDP Health Education Administration of justice 3 Public safety b Defense

404.8 755.9 174.7 —

1,020.3

404.8 755.9 174.7 —

1,020.3

8.1 15.2 3.5 —

20.5

0.8 1.6 0.3 —

2.1

1992

1993

1994

1995

530.0 928.5 271.8 254.7 1,183.4

730.0 1,106.3 376.1 448.4 866.5

881.9 1,405.6 499.2 572.5 866.5

1,204.5 1,740.9 752.5 1,068.0 866.5

441.8 774.0 226.6 212.3 986.4

542.8 882.6 279.6 333.4 644.3

596.2 950.2 337.5 387.0 585.8

740.2 1,069.8 462.4 656.3 532.5

7.8 13.7 4.0 3.7 17.5

9.6 14.5 4.9 5.9 11.3

9.2 14.7 5.2 6.0 9.0

10.2 14.8 6.4 9.0 7.4

1.0 1.7 0.5 0.5 2.2

1.1 1.7 0.6 0.7 1.3

1.1 1.8 0.6 0.7 1.1

1.4 2.1 0.9 1.3 1.0

Sources: Ministry of the Treasury and author's own calculations. Notes: a. Includes the court system, the offices of the inspector general and attorney general, the office of the public prosecutor for human rights, and the judiciary, b. Includes the National Civilian Police force and the national corps of fire fighters.

Fiscal Targets, the Peace Process, and Economic Adjustment Planning

for Peace:

Fiscal

Targets and Financing

the

Accords

Public finances were in a precarious state in 1992, w h e n the peace agreements were finalized and s i g n e d . 1 2 The fiscal deficit of the nonfinancial public sector ( N F P S ) had climbed to 4 . 4 percent of G D P in 1 9 9 1 — m u c h higher than the figure for 1990 (2.5 percent) and the 1991 target of 2.6 percent. The central government's fiscal deficit had risen from 3 . 2 percent in 1 9 9 0 to 5.1 percent in 1991, again above the targeted goal of 2.5 percent. 1 3 Alarmed by the fiscal imbalances, the IMF insisted on a greater fiscal stringency, including a reduction in the general N F P S deficit by over 2 percent of GDP. 1 4 T h e central g o v e r n m e n t itself was s u p p o s e d to adjust

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Segovia

revenue and expenditure by close to 1 percent of the GDP, with expenditure reductions leading the way. 1 5 T h e s p e n d i n g p r o j e c t i o n s w e r e discussed by the I M F ' s E x e c u t i v e Board on 6 January 1 9 9 2 — t w o w e e k s b e f o r e the f o r m a l signing of the Chapultepec Accords. However, the projections made no allowance for the financial implications of peace. T h e I M F did r e c o g n i z e the problem this might cause: . . . a c c o r d i n g to h i g h l y t e n t a t i v e c a l c u l a t i o n s f r o m the o u t l i n e o f a N a t i o n a l R e c o n s t r u c t i o n P l a n . . . e x p e n s e s f o r the d e m i l i t a r i z a t i o n o f the o p p o s i n g f o r c e s , r e h a b i l i t a t i o n o f r e f u g e e s and d i s p l a c e d p e r s o n s , e m p l o y m e n t and t r a i n i n g p r o g r a m s , a n d i n f r a s t r u c t u r e i n v e s t m e n t w o u l d far e x c e e d any a m o u n t that c o u l d b e r e a s s i g n e d f r o m the 1 9 9 2 b u d g e t ( I M F 1 9 9 1 b , pp. 1 8 - 1 9 ) .

A f t e r noting that the 1992 g o v e r n m e n t budget contained " n o provisions for new s p e n d i n g p r o g r a m s that will be necessitated by the end of the armed conflict," the I M F ' s M e m o r a n d u m on Economic Policies stated: In p r i n c i p l e , the G o v e r n m e n t w i l l b e p r e p a r e d t o r e a s s e s s and p o s s i b l y redirect budgeted e x p e n d i t u r e s ( i n c l u d i n g military o u t l a y s ) to m e e t n e w p r i o r i t i e s . A d d i t i o n a l o u t l a y s that c o u l d n o t b e a c c o m m o d a t e d b y the 1 9 9 2 b u d g e t as c u r r e n t l y p r e s e n t e d w o u l d n e e d to b e f i n a n c e d e n t i r e l y b y f o r e i g n r e s o u r c e s , p r e f e r a b l y in the f o r m o f g r a n t s , in o r d e r to p r e s e r v e the p r i c e a n d b a l a n c e o f p a y m e n t s o b j e c t i v e s o f the p r o g r a m f o r 1 9 9 2 ( I M F 1 9 9 1 a , A t t a c h m e n t III, pp. 5 9 - 6 0 ) .

Evidently the assumption w a s that the e x p e n s e s associated with the peace agreements and national reconstruction would be financed primarily or entirely through f o r e i g n r e s o u r c e s , in addition to s o m e transitory financing f r o m the central bank (see also US AID 1993b, p. 25). 1 6 When peace did come, the failure to account fully for its financial implications produced a w o r s e n i n g of the c o u n t r y ' s fiscal situation. T h e NFPS fiscal deficit rose f r o m 4 . 4 percent of G D P in 1991 to 5.9 percent in 1992 (as contrasted with the target of 2.3 percent). Although the central g o v e r n m e n t ' s fiscal deficit declined somewhat in 1992 ( f r o m 5.1 percent to 4.7 percent), it r e m a i n e d c o n s i d e r a b l y higher than the 2.8 percent objective. T h e central g o v e r n m e n t also failed to meet its targets f o r current savings and expenditures (see Table 6.7). In m i d - 1 9 9 2 a World Bank mission visited the country and concluded that: D e s p i t e the G o v e r n m e n t ' s c o n t i n u e d c o m m i t m e n t to tight m o n e t a r y and c r e d i t p o l i c i e s , the s i t u a t i o n r e m a i n s f r a g i l e , p a r t i c u l a r l y o n t h e f i s c a l s i d e . T h i s is e v e n m o r e p r o b l e m a t i c a s the f i s c a l i m p l i c a t i o n s o f the p e a c e

Domestic Resource Mobilization

Table 6.7

121

Commitments Made by the Government of El Salvador to the International Monetary Fund in 1992, and Achievements Target level

Actual level

Percentages of GDP Overall deficit (excluding grants) of the nonfinancial public sector Central government deficit (3.75% of GDP in 1991) Current savings Total central-government revenues Current expenditure Percentages of government

2.25 2.25 1.5 10.0 10.0

5.9 3.0 0.4 11.7 11.4

20.0 25.0

15.0 19.0

expenditure

Military spending (22% in 1991) Spending on health and education (22% in 1991)

Sources: IMF 1991b, Attachment III, pp. 57-59, and government budget data.

h a v e not, to d a t e , b e e n f u l l y q u a n t i f i e d . . . . A s t h e 1 9 9 2 B u d g e t did not i n c o r p o r a t e p e a c e e x p e n d i t u r e s , the m a c r o e c o n o m i c p r o j e c t i o n s f o r 1 9 9 2 . . . will n e e d to be r e v i s e d in the u p c o m i n g m o n t h s . The authorities should formally incorporate the "peace" impact into [the] monetary program without further delay ( W o r l d B a n k 1 9 9 2 a , p p . I, 1; e m p h a s i s added).

T h e IMF, h o w e v e r , c o n t i n u e d to insist that tight f i s c a l a n d m o n e t a r y targets w e r e still a c h i e v a b l e . Visiting El S a l v a d o r in July, an I M F mission o f f e r e d a p o s i t i v e a s s e s s m e n t of the m a c r o e c o n o m y , a r g u i n g that " e c o n o m i c activity s t r e n g t h e n e d in the first s e m e s t e r of 1992, i n f l a t i o n c o n t i n ued to e a s e a n d [the] net i n t e r n a t i o n a l r e s e r v e p o s i t i o n s t r e n g t h e n e d , n o t w i t h s t a n d i n g the s l u m p in international c o f f e e p r i c e s " ( I M F 1992). T h e I M F did note s h o r t f a l l s on the fiscal side but a t t r i b u t e d t h e s e to the g o v e r n m e n t ' s delay in i m p l e m e n t i n g p l a n n e d m e a s u r e s (the VAT, an i n c r e a s e in electricity rates, a n d the e s t a b l i s h m e n t of the l a r g e - t a x p a y e r s unit), as w e l l as to the e f f e c t of the d r o u g h t on the e l e c t r i c c o m p a n y ' s d e f i c i t a n d the i m p a c t of t h e d r o p in c o f f e e p r i c e s on f i s c a l r e v e n u e s . T h e m i s s i o n h e l d to the o r i g i n a l o b j e c t i v e s f o r the overall p u b l i c - s e c t o r a n d c e n t r a l g o v e r n m e n t d e f i c i t s — e v e n t h o u g h the m i s s i o n f o r e s a w a s i g n i f i c a n t inc r e a s e in p e a c e - r e l a t e d e x p e n d i t u r e s d u r i n g the s e c o n d half of the year, 4 5 p e r c e n t of w h i c h c o u l d not be c o v e r e d by f o r e i g n r e s o u r c e s — a n d s u g gested that the g o v e r n m e n t adopt a series of fiscal m e a s u r e s a i m e d at raising an a d d i t i o n a l 1 p e r c e n t of the GDP. M a n y of the I M F ' s s u g g e s t e d reve n u e e n h a n c e m e n t s w e r e never, h o w e v e r , i m p l e m e n t e d a n d o t h e r s w e r e not put into e f f e c t until S e p t e m b e r 1 9 9 2 ( i n t r o d u c t i o n of the VAT and inc r e a s e in e l e c t r i c i t y rates). A s a r e s u l t , the f i s c a l g o a l s f o r the y e a r w e r e not attained.

122

Alexander Segovia

T h u s the S a l v a d o r a n g o v e r n m e n t a n d the international f i n a n c i a l instit u t i o n s did not really " p l a n f o r p e a c e . " E v e n as r i s i n g p e a c e - r e l a t e d e x p e n d i t u r e s d e r a i l e d f i s c a l targets, the I M F ' s m a c r o e c o n o m i c p r i o r i t i e s remained firm. Although e c o n o m i c stability and inflation reduction were worthy and shared goals, unrealistic assessments that failed to incorporate the costs of peace threatened to m a k e peace the a d j u s t i n g variable. At the s a m e time, as d o c u m e n t e d in the next c h a p t e r , the international financial institutions did not themselves f u n d high-priority p r o g r a m s mandated by the peace accords, nor did they e x e r c i s e w h a t w e term " p e a c e c o n d i t i o n a l l y " to e n c o u r a g e the g o v e r n m e n t to i n c r e a s e f u r t h e r its d o m e s t i c r e s o u r c e m o b i lization for p e a c e - r e l a t e d n e e d s . T h e p e a c e p r o c e s s thus r e m a i n e d largely tangential to fiscal policy, rather than b e c o m i n g integral to it.

Planning

for the Future:

Fiscal

Targets

and Public

Investment

T h e failure to m a k e fulfillment of the accords a primary e c o n o m i c as well as social o b j e c t i v e has been c o m p o u n d e d by a t e n d e n c y to a c h i e v e fiscal balance through short-sighted reductions in public investment. In 1993 the Salvadoran g o v e r n m e n t a c h i e v e d the majority of fiscal targets s p e c i f i e d in yet another standby a r r a n g e m e n t with the IMF, this o n e also s u p p o r t e d by the World Bank and U S A I D . T h e t a x - t o - G D P ratio, for example, rose to 9.3 percent, the highest achieved during the g o v e r n m e n t ' s term in office. T h e N F P S and central-government deficits w e r e reduced to 3.9 percent and 1.4 percent of GDP, respectively, and N F P S current s a v i n g s improved c o m p a r e d to 1992. This success, however, was largely achieved because capital spendi n g — p a r t i c u l a r l y that a s s o c i a t e d w i t h the N a t i o n a l R e c o n s t r u c t i o n P r o g r a m — w a s lower than planned. As can be seen from Table 6.8, publicsector i n v e s t m e n t w a s substantially b e l o w p r o j e c t e d levels in 1993, a trend that c o n t i n u e d in 1 9 9 4 . T h e p r i n c i p a l m e c h a n i s m s f o r p u b l i c i n v e s t m e n t c u t b a c k s w e r e : (1) e x e c u t i o n of p r o g r a m s on a s m a l l e r scale than p l a n n e d , a n d ( 2 ) d e f e r r a l of p r o g r a m e x e c u t i o n until s u f f i c i e n t f u n d s f r o m the international c o m m u n i t y w e r e a v a i l a b l e .

Table 6.8

Planned and Actual Capital Expenditure by the Nonfinancial Public Sector, 1992-1994 Planned Expenditure

1992 1993 1994 Source: BCR.

Actual Expenditure

Billions of colones

Percentage of GDP

Billions of colones

Percentage of GDP

Percent of planned expenditure realized

2.214 4.145 4.013

4.1 6.2 5.3

2.856 2.767 2.844

5.7 4.6 4.0

129 67 71

Domestic Resource Mobilization

123

Conditioning capital spending on the availability of foreign funds has been accepted by international financing agencies, in the interest of maintaining macroeconomic stability. Yet even the IMF's Executive Board has recognized that although cutbacks in public investment contributed to the attainment of fiscal targets, they may also have jeopardized the achievement of long-term development objectives at a time when the country is in the midst of rebuilding (IMF 1994a, 1994b). As with the failure to take account of peace-related current expenditures, this acceptance of delays in public investment may ultimately harm macroeconomic stability itself, by undermining growth, improved income distribution, and the consolidation of peace. Why the Gap Between Economic

Stabilization

and

Peace?

The macroeconomic strategy has thus conflicted with the peace process in El Salvador in several ways. There have been broad contradictions: Cuts in social spending, slowdowns in agrarian reform, and reductions in public investment have impeded progress on distributional concerns and dampened future growth prospects, eroding the basic conditions for prosperous and peaceful development. But there have also been more specific problems stemming from the failure of the international financial community to apply peace conditionality much as it has applied the usual economic conditionality. T h i s failure has been of two types. On the one hand, international agencies did not initially relax fiscal discipline despite the clear awareness that implementing the peace accords would be expensive. On the other hand, when foreign resources were subsequently forthcoming, the international agencies did not sufficiently pressure the domestic authorities to increase their mobilization of domestic resources, and to shift public spending in the direction of short-run programs mandated by the peace accords and long-run investment needed for the consolidation of peace. The de facto subordination of the peace agreements to economic stabilization can in part be attributed to the fact that the peace process and the e c o n o m i c - r e f o r m process have largely been carried out independently of o n e another. 1 7 The Salvadoran government itself has not wanted to delay the achievement of economic reform and the refashioning of a new exportoriented model; linking the peace process to economic policy could have produced such a delay. With the exception of some UN agencies—which maintain that fulfillment of the peace agreements should take precedence o v e r the fulfillment of other c o m m i t m e n t s 1 8 — i n t e r n a t i o n a l institutions h a v e at least tacitly encouraged the g o v e r n m e n t ' s subordination of the p e a c e process to economic reform by making progress in stabilization and structural reform the key prerequisite for external financing. 1 9 It is true that viability of the peace process in the medium term dep e n d s on the achievement of economic stability and the consolidation of

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structural r e f o r m s . At the same time, however, there are finite and politically critical time f r a m e s for implementing the peace accords, and if these time f r a m e s are not respected serious problems of social and political instability and loss of the g o v e r n m e n t ' s ability to g o v e r n c o u l d result. A m o n g other things, this would hamper structural-reform efforts. One way to respect both m a c r o e c o n o m i c and peace imperatives is to apply peace conditionality, which would e n c o u r a g e s h i f t s in g o v e r n m e n t expenditures and enhancements in the revenues via a more progressive tax system (see Chapter 7). Such conditionality would be entirely consistent with a longer-term m a c r o e c o n o m i c strategy that p u r s u e s a c o n s c i o u s depreciation of the exchange rate (to e n c o u r a g e tradeables p r o d u c t i o n and long-run self-sufficiency), enhanced public investment, and real improvement in the lot of El S a l v a d o r ' s poorest citizens. U n f o r t u n a t e l y , this has not been the general thrust of either international lenders or the Salvadoran government; in economic policymaking, peace and public investment have instead been eclipsed by, and at times s u b o r d i n a t e d to, m a c r o e c o nomic stabilization. Peace and p u b l i c investment, however, can actually lead the way to e c o n o m i c recovery by g u a r a n t e e i n g social stability, p r o v i d i n g necessary infrastructure, and stimulating productive private investment. Moreover, the Salvadoran economy, for the moment, faces little danger of inflation as long as the flow of remittances continues. T h e real issue is how to prepare for the possibility of an eventual slowdown in such external f l o w s — t h a t is, how to take advantage of the current policy " s p a c e " provided by the abundance of foreign exchange to consolidate the peace and to build the infrastructure for sustainable growth.

Conclusions In g u a r a n t e e i n g El S a l v a d o r ' s f u t u r e , the mobilization of d o m e s t i c resources is key. Current savings and investment levels are clearly insufficient to ensure high and sustainable e c o n o m i c growth rates. On the saving side, it is important to encourage the continuing flow of remittances f r o m Salvadorans living abroad because these f u n d s have b e c o m e a significant c o m p o n e n t of national savings. At the s a m e time, the g o v e r n m e n t needs to prepare f o r any fall-off in such remittances by b o o s t i n g s a v i n g s f r o m domestic residents and laying the g r o u n d w o r k for increases in public savings. Increased savings are necessary for the crucial task of raising private and complementary public investment. T h e Salvadoran government naturally has had to start in this area of resource mobilization with its own fiscal house. With the support of international financial agencies the g o v e r n m e n t has e n d e a v o r e d to m o b i l i z e greater d o m e s t i c resources. Tax r e f o r m has p r o d u c e d rising and m o r e

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125

stable revenues, and advances have been m a d e in improving the auditing and control capabilities of the Treasury Ministry. Nonetheless, the tax-toG D P ratio remains very low by both historical and comparative standards, the tax structure is quite regressive, and the government faces a significant problem of tax evasion. Most domestic actors recognize the latter problem, and there is a broad consensus in the country on the need to raise revenue. Indeed, during the electoral c a m p a i g n all the presidential c a n d i d a t e s — including A r m a n d o Calderon Sol, w h o won the e l e c t i o n — s i g n e d a document drawn up by U N I C E F in which they agreed to raise the tax ratio to around 15 percent during the period 1 9 9 4 - 1 9 9 9 in order to be able to increase social spending. Various studies have concluded that given the prospects for economic growth over the next f e w years and the modernization of the tax, auditing, and fiscal control systems, it is feasible to raise tax revenues by between 0.5 percent and 1 percent each year for the remainder of the century. This would mean a tax ratio of 14 percent by the year 1999, m a k i n g electoral promises not unreasonable. Yet the government and F U S A D E S have projected a tax ratio of only 10 to 11 percent. In addition to vigorous implementation of existing tax reforms, the tax ratio could be raised by further taxes on the n o n p r o d u c t i v e transactions of luxury g o o d s and high-value property transfers. T h e s e would also improve the distributional incidence of the tax system. A s s u m i n g that tax revenues can indeed be raised to levels closer to international norms, there will be a need to insure that much of this projected increase actually finds its way into social spending. This implies the need to hold the line on military expenditures, and a need for active peace conditionality on the part of international lenders. W h e r e a s the g o v e r n ment has reduced military s p e n d i n g below civil-war levels, f u r t h e r substantial reductions are possible. O n e reasonable goal w o u l d be to reduce military spending to the preconflict level—i.e., well below 1 percent of the current GDP. Such a level would allow both social spending and public inv e s t m e n t to rise, even if tax revenues lag, thus contributing to both the c o u n t r y ' s peace and its e c o n o m i c future. W h y should international financial institutions, usually f o c u s e d on m a c r o e c o n o m i c issues, place an emphasis on ensuring that the Salvadoran government fulfill its peace-related obligations? Even if macro stability remains the paramount goal, research (reviewed in Chapter 8) suggests that such stability is short-lived in the p r e s e n c e of significant inequality and political turmoil. T h i s implies, in turn, that the peace a c c o r d s should no longer be treated as an a f t e r t h o u g h t or a " r e m a i n d e r " ; m a c r o e c o n o m i c strategy must be designed to be consistent with and supportive of the goal of consolidating peace. P u r s u i n g peace will require the further mobilization of both external and d o m e s t i c resources, raising taxes in a m o r e progressive f a s h i o n , and

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shifting expenditures toward social policies. S u c h an alternative program could also make productive use of public investment and existing stocks of f o r e i g n r e s e r v e s , p r e p a r i n g El S a l v a d o r f o r t h e d a y w h e n it w i l l h a v e t o rely primarily on e x p o r t s and not r e m i t t a n c e s as the m a i n source o f f o r e i g n e x c h a n g e . W e o u t l i n e s u c h a f u t u r e - o r i e n t e d p r o g r a m in t h e

following

c h a p t e r s , s t r e s s i n g the n e e d to e l e v a t e p u b l i c infrastructure and

social

s p e n d i n g , and to redistribute assets, opportunities, and i n c o m e . T h e m o s t p r e s s i n g i m m e d i a t e o b j e c t i v e , h o w e v e r , is to i m p l e m e n t f u l l y the p r o g r a m s m a n d a t e d b y the p e a c e a c c o r d s . T h e current e c o n o m i c strategy a d o p t e d b y the g o v e r n m e n t and the international a g e n c i e s r e m a i n s inadequate to t h e s e tasks.

Notes 1. T h e W o r l d B a n k ( 1 9 9 3 c , p . 1) o b s e r v e s t h a t a f t e r 1 9 7 9 t h e c o n f l i c t " d i v e r t e d p u b l i c r e s o u r c e s f r o m i n f r a s t r u c t u r e a n d t h e s o c i a l s e c t o r s to m i l i t a r y e x penditures." 2 . N a t i o n a l s a v i n g s are c o m p o s e d of d o m e s t i c s a v i n g s p l u s f o r e i g n t r a n s f e r s , w h i c h in t h i s c a s e a r e m a i n l y r e m i t t a n c e s f r o m S a l v a d o r a n n a t i o n a l s . D o m e s t i c s a v i n g s are t h e r e f o r e c a l c u l a t e d as n a t i o n a l s a v i n g s m i n u s f o r e i g n t r a n s f e r s . S i n c e m u c h r e m i t t a n c e i n c o m e is in f a c t c o n s u m e d , t h e a p p a r e n t l y p r e c i p i t o u s d e c l i n e in d o m e s t i c s a v i n g s is p a r t l y t h e r e s u l t of t h i s a c c o u n t i n g c o n v e n t i o n . U s i n g a l t e r n a tive data, Rivera C a m p o s ( 1 9 9 4 ) reports that d o m e s t i c s a v i n g s have actually been n e g a t i v e in r e c e n t y e a r s . 3 . T h e r e a r e t w o m a i n r e a s o n s f o r c a u t i o n in i n t e r p r e t i n g the n e g a t i v e c o r r e l a t i o n b e t w e e n f o r e i g n a n d n a t i o n a l s a v i n g s in El S a l v a d o r . F i r s t , t h e q u a l i t y of the s a v i n g s d a t a is u n c e r t a i n . S e c o n d , b o t h n a t i o n a l s a v i n g s a n d f o r e i g n s a v i n g s c o u l d h a v e b e e n i n f l u e n c e d (in o p p o s i t e d i r e c t i o n s ) b y o t h e r v a r i a b l e s , s u c h as t h e w a r . 4 . In a m u l t i v a r i a t e a n a l y s i s of t h e d e t e r m i n a n t s of p r i v a t e s a v i n g s in El S a l v a d o r , R i v e r a C a m p o s ( 1 9 9 4 , p. 9 ) e s t i m a t e d t h a t e v e r y d o l l a r of f o r e i g n s a v i n g s r e d u c e d private national s a v i n g s by 27 cents. 5. T h e most i m p o r t a n t m e a s u r e s i n c l u d e d u n d e r this r e f o r m w e r e instituted o v e r a p e r i o d of s l i g h t l y m o r e t h a n t w o y e a r s , m a k i n g El S a l v a d o r o n e of f e w c o u n t r i e s in the w o r l d t o h a v e e x e c u t e d s u c h e x t e n s i v e tax r e f o r m s o q u i c k l y ( G a l lagher 1993). 6 . U n d e r the j o i n t s p o n s o r s h i p of U S A I D , t h e I M F , a n d t h e I D B , a t a x - s y s t e m m o d e r n i z a t i o n p r o j e c t , k n o w n a s M O S T , w a s i m p l e m e n t e d in 1 9 9 1 . A c c o r d i n g t o U S A I D ( 1 9 9 4 b ) , t h e M i n i s t r y of t h e T r e a s u r y n o w h a s " a s t a t e - o f - t h e - a r t tax information system and e n h a n c e d administrative capabilities." 7. C E N I T E C ( 1 9 9 3 ) and M e n d e z and A b r e g o ( 1 9 9 4 ) report that tax e v a s i o n m a y b e as h i g h as 5 0 p e r c e n t , w i t h e v a s i o n of t h e V A T r u n n i n g n e a r 5 7 p e r c e n t . 8 . T h e W o r l d B a n k ( 1 9 9 4 b , p . 3 9 ) o b s e r v e s t h a t El S a l v a d o r ' s t a x - t o - G D P r a t i o " r e m a i n s o n e of t h e l o w e s t in t h e w o r l d . " 9 . A n a l o g o u s i s s u e s a r i s e w i t h r e s p e c t to " p e a c e c o n d i t i o n a l l y " ( s e e C h a p t e r 7).

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10. The data in Table 6.4 omit government commitments toward financing infrastructure projects. For an earlier estimate of such c o m m i t m e n t s , see Table 7.2; for a discussion of the reasons for differences in priorities a m o n g donors and the government, see Chapter 7. 11. The defense budget allocations reported in Table 6.5 are based on national budgetary data. These differ somewhat from expenditure data reported by the I M F (see Table 7.4 and Appendix Table A.6); the reasons for the discrepancies are unclear. Detailed data on Salvadoran military expenditures are not available. Under a special article attached to the National Budget Law in 1983, national defense expenditures approved directly by the president were exempted f r o m investigation and verification (Dalton 1994). 12. During 1991 the country experienced a drought, as a result of which the Rio Lempa Hydroelectricity C o m m i s s i o n ( C E L ) experienced severe losses when the thermal power station was put into operation and the government was obliged to effect larger-than-expected transfers to the commission. In addition, consolidation of the internal public debt in 1989 and 1990 provoked a substantial increase in interest payments in 1991. The situation was further aggravated by the increase in interest p a y m e n t s on the external debt that resulted from the finalization of the debt-restructuring period provided for under the Paris Agreement of 1990. 13. In September the government, in conjunction with the IMF, revised the original goals, raising the target fiscal deficit for the n o n f i n a n c i a l public sector from 2.6 percent to 3.4 percent and that of the central government from 2.5 percent to 3.8 percent. The final results proved that these targets w e r e too ambitious ( U S A I D 1992). 14. The government was also supposed to reduce the total public-sector deficit (including BCR losses) from 4.3 percent of G D P in 1991 to 3.0 percent in 1992, and generate positive savings of 1.5 percent of G D P in the current account of the NFPS. For details see Memorandum on the Economic Policies of El Salvador ( I M F 1991b, Attachment III). 15. The program also envisioned a shift in the composition of spending, with military spending declining and spending on education and health rising. 16. T h e e c o n o m i c program of 1992 assumed that the country would receive U . S . $ 1 6 0 million in gross loan d i s b u r s e m e n t s from multilateral institutions and $320 million in loans and grants from bilateral sources ( I M F 1991b, p. 42, Appendix VI). 17. Alvaro de Soto and Graciana del Castillo (1994a, p. 72) have remarked: "The adjustment program and the stabilization plan, on the one hand, and the peace process, on the other, were born and reared as if they were children of d i f f e r e n t families. They lived under separate roofs. They had little in c o m m o n other than belonging roughly to the same generation." 18. See, for example, CEPAL (1993a). 19. " T h e r e is also a heightened a w a r e n e s s that the various elements of the Peace Accords would be impossible to implement without the full support of the donor c o m m u n i t y and that continued progress in stabilization and structural ref o r m s is a precondition for this support" (World Bank 1993c, p. 21).

7 External Resource Mobilization James K. Boyce

External assistance has played a critical role in El S a l v a d o r ' s p e a c e process. Grants and loans f r o m bilateral and multilateral a g e n c i e s have been the main source of finance for many programs mandated by the peace accords, including the land-transfer program, the reintegration of excombatants, poverty-alleviation programs, and infrastructure projects. External-assistance actors have also influenced the political m o m e n t u m of the peace process. Aid has affected not only the balance of payments, but also the balance of power. Aid can be an important complement to limited domestic resources. It can, however, also b e c o m e a substitute for them. In a t t e m p t i n g to e n s u r e that their assistance "crowds in" domestic government spending, rather than supplanting it, donors often seek to make their aid conditional on policy actions by the recipient government, including expenditure c o m m i t m e n t s . At the same time, the donors know that some programs will not succeed in the absence of external finance. Hence they must strike a delicate balance. This d i l e m m a has been quite apparent in El Salvador. External assistance unquestionably has contributed greatly to postwar reconstruction and to the consolidation of peace. But external-assistance actors have been less s u c c e s s f u l in p r o m p t i n g the government to mobilize greater d o m e s t i c resources to f i n a n c e peace programs. Indeed, virtually no internal fiscal ref o r m s were undertaken specifically with a view to f i n a n c i n g the peace. T h i s chapter a n a l y z e s the mobilization of external r e s o u r c e s f o r the S a l v a d o r a n peace p r o c e s s in both financial and political terms. T h e first section reviews data on external assistance: How much has been provided, by w h o m , and f o r what purposes. These data reveal striking discrepancies b e t w e e n the priorities e s t a b l i s h e d under the p e a c e a c c o r d s and those of many d o n o r s . Several possible e x p l a n a t i o n s f o r these d i s c r e p a n c i e s are considered. T h e second section e x a m i n e s aid conditionality, including f o r m a l perf o r m a n c e criteria and informal policy dialogue. T h e absence of conditions

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can be as critical as their presence. If access to external resources is conditional on the f u l f i l l m e n t of c o m m i t m e n t s under the peace accords, the political resolve of internal actors to maintain the m o m e n t u m of the peace process can be strengthened. If, on the other hand, external resources are provided without such conditions, the political will to implement difficult but necessary measures may be w e a k e n e d . Aid can ease internal pressures for action, fortify the capacity of reluctant parties to resist those pressures, or divert attention and resources to other issues. In this respect, the record of the external-assistance actors in El Salvador has been mixed. T h e final section o f f e r s r e c o m m e n d a t i o n s for e c o n o m i c policy in El Salvador specifically and during postconflictual transitions more generally.

Official External Assistance Resource

Commitments

In March 1992, t w o months after the signing of the Chapultepec Accords, the Consultative G r o u p (CG) for El Salvador met in Washington, D.C. The government of El S a l v a d o r ' s team w a s led by the planning minister, w h o made it clear that the government e x p e c t e d the external-assistance actors to finance the costs of peace: Minister L i e v a n o de M a r q u e s e m p h a s i z e d that the r e c o n s t r u c t i o n effort w o u l d not be used as a pretext for a b a n d o n i n g disciplined m a c r o e c o n o m i c policy. S h e stressed that the G o v e r n m e n t s e e k s to f i n a n c e the effort with f o r e i g n a s s i s t a n c e and noted that s h e h o p e d the f u n d i n g w o u l d be additional, thus a l l o w i n g the G o v e r n m e n t to c o n t i n u e its important efforts in redressing other social and e c o n o m i c n e e d s (World Bank 1 9 9 2 b , p. 5).

In the words of a U.S. official, the g o v e r n m e n t ' s stance was, "If you want it to happen, you pay for it." 1 T h e donor response was substantial. Since the signing of the accords, El Salvador has received about $400 million per year in external assistance from bilateral and multilateral agencies. Table 7.1 presents a breakdown of total c o m m i t m e n t s f o r the years 1 9 9 2 - 1 9 9 5 by donor, as reported by the UNDP. 2 T h e s e data include aid not s p e c i f i c a l l y related to the peace accords. A m o n g the bilaterals, the largest d o n o r w a s the United States, acc o u n t i n g for more than t h r e e - q u a r t e r s of bilateral aid in 1 9 9 2 - 1 9 9 5 . A m o n g the m u l t i l a t e r a l , the Inter-American Development Bank (IDB) has been the largest single donor. Table 7.2 presents data on the f i n a n c i n g of s p e c i f i c p r o g r a m s mandated by the peace accords for 1 9 9 3 - 1 9 9 6 . Estimated f u n d i n g needs, and the categorization of p r o g r a m s into higher and lower priority, are drawn

External Resource Mobilization

Table 7.1

Official External Assistance to El Salvador, 1992-1995 (Completed, ongoing, and planned projects)

Source of funds

Millions of dollars

United States Germany 3 Japan Italy 3 Spain Canada Sweden Norway Netherlands Others

535.9 75.4 19.7 17.0 16.7 14.1 11.0 5.1 1.5 2.5

Bilateral subtotal

698.9

IDB CABEI World Bank EEC 3 WFP UNDP PAHO/WHO IFAD UNICEF Others

558.8 119.8 100.3 82.7 39.4 7.4 6.1 5.0 3.3 6.5

Multilateral subtotal

929.4

Total

131

1628.3

Source: UNDP 1994a, pp. 3 - 4 . Note: a. Imputed from data on total project costs (see end note 2).

f r o m the G o v e r n m e n t of El S a l v a d o r ' s report to the April 1 9 9 3 C G m e e t ing. In the c a s e of p o v e r t y - a l l e v i a t i o n p r o g r a m s , the d a t a r e f e r to the National R e c o n s t r u c t i o n Plan ( P R N ) z o n e s only. In the c a s e of i n f r a s t r u c t u r e , no a t t e m p t w a s m a d e to s e p a r a t e out that c o m p o n e n t d i r e c t e d to P R N areas; the data t h u s r e f e r to i n f r a s t r u c t u r e p r o j e c t s in the c o u n t r y as a whole. Estimated f u n d i n g needs totaled $1.8 billion. T h e government's c o m m i t m e n t of d o m e s t i c r e s o u r c e s to t h e s e p r o g r a m s w a s $ 4 0 8 m i l l i o n . T w o sets of data on external f u n d i n g are r e p o r t e d : T h e first is d r a w n f r o m the s a m e report to the C G m e e t i n g ; the s e c o n d , d r a w n f r o m a J a n u a r y 1 9 9 4 report by the U . S . G e n e r a l A c c o u n t i n g O f f i c e ( G A O ) , i n c l u d e s s o m e a d ditional s u b s e q u e n t c o m m i t m e n t s but p r o v i d e s a less d e t a i l e d p r o g r a m m a t i c b r e a k d o w n . D o n o r c o m m i t m e n t s r e p o r t e d by the G A O totaled $ 7 3 9 million, l e a v i n g a f u n d i n g g a p of $ 6 8 2 m i l l i o n . S p e a k i n g in S e p t e m b e r 1 9 9 4 b e f o r e the U N G e n e r a l A s s e m b l y , S a l v a d o r a n p r e s i d e n t C a l d e r o n Sol stated:

132

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Colin

Danby

d e f i n i t i o n of " c a p i t a l " that b a n k s m u s t h o l d . I n c r e a s e d p r o v i s i o n i n g or need to s u p p l e m e n t capital w o u l d q u i c k l y r e d u c e p r o f i t s . A recent d e v e l o p m e n t that raises s o m e c o n c e r n o v e r r e g u l a t o r y v i g i l a n c e is that c e n t r a l b a n k o f f i c i a l s a p p a r e n t l y lost track of a spurt in c o m m e r c i a l b a n k l e n d i n g in the first half of 1994, e s p e c i a l l y f o r c o n s t r u c t i o n , and only b e l a t e d l y s o u g h t to r e d u c e it ( I M F 1 9 9 4 a ) . B a n k a n d f i n a n c i e r a o f f i c e s are heavily c o n c e n t r a t e d in San S a l v a d o r and other large t o w n s , with little p r e s e n c e in rural areas, especially in the north. R e s t r i c t i n g attention to c o m m e r c i a l b a n k b r a n c h e s , El S a l v a d o r has a n a t i o n a l a v e r a g e of 3 9 , 7 4 7 p e o p l e per b r a n c h ( 6 0 , 5 1 1 o u t s i d e S a n S a l v a d o r ) . C o m p a r a b l e f i g u r e s are r o u g h l y 1 8 , 0 0 0 for M e x i c o a n d 4 , 0 0 0 for the United States. Of 2 1 8 b a n k a n d f i n a n c i e r a b r a n c h e s in the country, 5 8 percent are in the d e p a r t m e n t of S a n Salvador, and a f u r t h e r 2 6 p e r c e n t are in the f i v e largest t o w n s o u t s i d e San S a l v a d o r . Table 9.5 p r o v i d e s d e p a r t m e n t a l b r e a k d o w n s . M a i n l y rural M o r a z á n , C a b a ñ a s , and C h a l a t e n a n g o are particularly ill-provided with b a n k b r a n c h e s , t h o u g h that may be partly a result of the war. T h e s c a n t accessibility of c o m m e r c i a l bank b r a n c h e s to rural s a v e r s is r e f l e c t e d in the very low n u m b e r of rural h o u s e h o l d s holding f i n a n c i a l s a v i n g s , r e p o r t e d in T a b l e 9.3. The two most pressing problems affecting Salvadoran commercial b a n k s — t h e quality of their loans and the extent of their d o l l a r - d e n o m i n a t e d l i a b i l i t i e s — w e r e d i s c u s s e d in the p r e v i o u s section and will be revisited in the next section. R e f o r m s that m i g h t i m p r o v e a c c e s s to c o m m e r c i a l b a n k ing services are i m p o r t a n t , t h o u g h less urgent, and s h o u l d be c o n s i d e r e d in c o n j u n c t i o n with the f u t u r e role of d e v e l o p m e n t b a n k i n g and s m a l l e r - s c a l e financial institutions.

Table 9.4

Total Approved Credit from the Banking System, 1985-1993 (millions of colones) 1985

1986

1987

1988

1989

1990

1991

1992

1993

Agriculture Mining Manufacturing Construction Utilities Commerce Transport Services Refinancing Other

976 5 667 239 13 3606 33 143 717 7

908 3 864 257 7 4078 53 128 775 1

1070 5 1034 229 2 3233 46 143 758 2

938 13 1256 283 3 4588 51 208 864 8

1303 7 1163 252 2 6780 51 195 1000 2

1434 0 1762 180 15 5810 48 150 977 14

2001 5 2685 440 5 5731 161 206 980 9

3007 2 4964 1639 4 7419 254 525 1210 78

3539 11 4766 2600 7 6199 478 589 1003 20

Total

6407

7074

6520

8212

10756

10390

12223

19102

19212

Source: BCR.

The Financial System

Table 9.5 Department

193

Bank and Financiera Branches by Department, 1994 Population per bank or financiera branch

Branches of banks

Branches of financieras

68 11 6 9 4 6 5 7 2 4 2 1 1 1

58 6 4 5 4 4 2 5 1 1 1 0 0 0

11,728 22,379 31,708 32,259 32,570 35,464 35,878 43,506 45,157 49,229 55,763 136,293 166,772 180,627

127

91

23,156

San Salvador San Miguel Usulatän Santa Ana Ahuachapän Sonsonate La Union La Libertad San Vicente La Paz Cuscatlän Cabanas Morazan Chalatenango Total Source: BCR 1994b.

Development

Banking

T h e t h r e e m a i n s t a t e - r u n f i n a n c i a l institutions are, in d e s c e n d i n g o r d e r of importance, the BFA, the Federación de C a j a s de Crédito ( F E D E C R E D I T O ) , and the F o n d o de F i n a n c i a m i e n t o y G a r a n t í a para la P e q u e ñ a E m p r e s a ( F I G A P E ) . All e m e r g e d f r o m the 1980s technically b a n k r u p t . T h e g o v e r n ment has been able to p r o v i d e e n o u g h new r e s o u r c e s to the B F A and F E D E C R E D I T O , by m e a n s of capital c o n t r i b u t i o n s and a s s u m i n g b a d l o a n s , to restore t h e m to f i n a n c i a l h e a l t h , but it h a s not d e c i d e d c l e a r l y w h a t to d o with t h e m next ( D i m a s Q u i n t a n i l l a 1994). O n e f o r m e r d e v e l o p m e n t b a n k , the B a n c o Hipotecario, has been privatized, and there is discussion of d o i n g the s a m e with the r e m a i n i n g three. F I G A P E m a y simply be liquidated. T h e B F A is the o l d e s t a n d largest d e v e l o p m e n t - b a n k i n g i n s t i t u t i o n , with a loan p o r t f o l i o of j u s t o v e r a billion c o l o n e s in 1 9 9 3 ( m o r e than 2 0 p e r c e n t of w h i c h is n o n p e r f o r m i n g ) . Its b a l a n c e s h e e t w a s c l e a n e d u p in 1991. It c o n t i n u e s to lend m a i n l y to large-scale export a g r i c u l t u r e , but it is also the g o v e r n m e n t ' s f a v o r e d intermediary institution f o r c h a n n e l i n g credit for o t h e r agricultural p u r p o s e s , a n d it is h a n d l i n g the credit to b e n e f i c i a r i e s of the l a n d - t r a n s f e r p r o g r a m . T h e BFA has t w o institutional a d v a n t a g e s : It can accept d e p o s i t s , t h o u g h it has been s l o w in d o i n g so, a n d it has a netw o r k of rural o f f i c e s , g i v i n g it the most s u b s t a n t i a l rural p r e s e n c e of any S a l v a d o r a n financial institution. H o w e v e r , N G O s and others w h o h a v e dealt with the B F A f i n d it b u r e a u c r a t i c , o v e r s t a f f e d (current staff e x c e e d s 1,500), i n e f f i c i e n t , a n d g i v e n to l o n g d e l a y s in a p p r o v i n g l o a n s ( W e n n e r a n d U m a ñ a 1993, pp. 1 6 3 - 1 6 4 ; L a d m a n et al. 1986, p. 97; i n t e r v i e w s ) .

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F E D E C R E D I T O was restored to a measure of financial health in 1993, but it suffers f r o m problems similar to those that afflict the BFA. It consists of a national o f f i c e and 42 agricultural credit u n i o n s around the country, and it had a loan portfolio of just over 200 million colones at the end of 1993. Total staff exceeds 800. Bad loans appear to be an enduring problem, although no estimate of the n o n p e r f o r m i n g portfolio is available. F E D E C R E D I T O does not take deposits f r o m the public; it can accept deposits from its members and has begun to do so, but mainly in the f o r m of required deposits (compensating balances) f r o m loan recipients. Both the BFA and F E D E C R E D I T O are c h a n n e l i n g p r o g r a m s par excellence, f u n d i n g themselves in recent d e c a d e s mainly f r o m g o v e r n m e n t contributions and foreign aid or borrowing. For this reason they have had little incentive to try to f u n d t h e m s e l v e s via deposits. Although the BFA is allowed to take deposits, it did not set up the administrative machinery to do so until the mid-1980s, and even then only in a few offices ( L a d m a n et al. 1986, p. xxiv). A series of US A I D consultant reports r e c o m m e n d i n g greater deposit taking have had little apparent effect on policy. T h e current government may also not be a n x i o u s to have a state institution c o m p e t e with the newly private c o m m e r c i a l b a n k s for deposits. T h e BFA is presently overcapitalized in the sense that it could legally more than double lending (assuming it could f u n d it) without having to e x p a n d its current capital base. T h e r e may be a m o r e basic p r o b l e m , which is that administrators are afraid that greater l e n d i n g would bring greater d e f a u l t s : Like the c o m m e r c i a l banks, they may now see insufficient d e m a n d f o r credit f r o m borrowers they consider qualified. While the development banks are still recovering from wartime problems, it is unclear what their future is or should be. T h e national networks and regulatory advantages of the BFA and F E D E C R E D I T O remain attractive. Nonetheless, given our critique of the credit-channeling model, which we will elaborate, these institutions will require, at m i n i m u m , extensive reform. If a clear public-policy purpose cannot be defined for retaining them as state institutions, then greater autonomy, decentralization, or privatization may be appropriate. In August 1994 the central b a n k ' s rediscounting f u n c t i o n s were spun off into a separate B a n c o Multisectorial de Inversiones ( B M I ) , initially capitalized with 300 million c o l o n e s . A l t h o u g h o p e r a t i n g as a " s e c o n d f l o o r " institution (rediscounting loans m a d e by "first f l o o r " c o m m e r c i a l banks), it should be considered in the same broad category as development banking. T h e BMI operates a set of about 20 rediscount lines for specified purposes, most of them at nonconcessional interest rates. T h e s e include a 1.1 billion colón line of credit to f i n a n c e industrial investment, opened in 1990. This is a model of development banking that has b e c o m e popular in recent years ( M e x i c o ' s f a m o u s N a c i o n a l Financiera has m a d e a similar conversion to s e c o n d - f l o o r status), b e c a u s e it d o e s not c o m p e t e directly

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with c o m m e r c i a l banks and indeed benefits them, but it should be underlined that it d o e s a s s u m e that the market does not a l l o c a t e credit adequately w i t h o u t state-added i n d u c e m e n t s , s p e c i f i c a l l y the r e d i s c o u n t e r ' s willingness to provide the bank with additional liquidity in e x c h a n g e for lending to certain kinds of borrowers. Given the n e w n e s s of the BMI little can be said about its m a n a g e m e n t or activities, but it is to be hoped that it will work transparently. Informal

Finance

To some degree informal finance is like a photographic negative of the formal financial sector, filling in areas that legally recognized institutions do not reach. T h u s informal f i n a n c e f l o u r i s h e d in El S a l v a d o r during the 1980s, as f o r m a l - s e c t o r credit to the private sector d e c l i n e d . But this is also a highly h e t e r o g e n e o u s category, much of w h i c h in fact operates in close complementarity with formal finance and c o m m e r c e . Informal institutions help us better understand the w o r k i n g of the entire system, and show us w h e r e , and in what ways, the g a p s left by f o r m a l - s e c t o r institutions have been filled. In terms of the v o l u m e of resources mobilized, the most important informal channel is through nonfinancial firms. Large f i r m s , which have access to bank lending (and perhaps even credits f r o m f o r e i g n customers or suppliers), lend to smaller f i r m s , mainly in the f o r m of trade credit. Although statistics are lacking, a survey suggests that total lending by firms is roughly half the amount of c o m m e r c i a l lending ( C u e v a s , Graham, and Paxton 1991). T h e chain of credit f r o m b a n k s to larger f i r m s to smaller firms is clearly visible in Table 9.3. 2 1 This chain actually o v e r c o m e s some of the effects of the segmentation created by bank lending policies, but at a price: T r a d e credit is usually significantly m o r e e x p e n s i v e than bank lending. Firms also often m a k e small loans to e m p l o y e e s . D u r i n g the 1980s, as bank credit grew scarce, the larger f i r m s at the top of this chain opened an informal money market in which they accepted interest-bearing deposits (though only in large amounts). T h e end of this chain is the main channel of credit to small producers in rural areas, other than intrafamily transfers. 2 2 A f u r t h e r e x a m p l e of the principle that f i n a n c e f o l l o w s c o m m e r c e is that there exist vigorous markets in short-term lending to urban vendors. Indeed, both g o v e r n m e n t and N G O microenterprise credit p r o g r a m s have had some success in luring this category of borrower a w a y f r o m informal lenders. T h e r e is also an active urban market in l o n g e r - t e r m loans, segmented by maturity. A recent report finds one-month loans of the equivalent of $ 1 0 0 - $ 3 0 0 costing 2 1 - 2 8 percent per month a n d secured by a bill of e x c h a n g e ; 2- to 12-month loans f o r the e q u i v a l e n t of $ l , 0 0 0 - $ 3 , 0 0 0 with a bill of e x c h a n g e or chattel m o r t g a g e security with interest rates in

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excess of 100 percent on an annualized basis; and loans of $3,000 and over a year, usually guaranteed by a mortgage, with interest of about 60 percent per year (IDB 1993b). These data suggest that profitable opportunities for informal-sector lending exist in urban areas at least, albeit at very high interest rates. But such opportunities are clearly not ubiquitous. One study of small businesses that received remittance income suggested that rather than helping to build up profitable microenterprises, this income was being used to sustain unprofitable businesses (Lopez and Seligson 1989). Recipients of remittances want to diversify income sources so as to avoid depending on remittance inflows to cover future consumption. For them, an unprofitable business, which might become profitable in the future, may well be better than no business plus higher current consumption. The study suggests, however, that on the whole the return to investment on capital (albeit working capital) in this sector may really be quite low. This has implications for microenterprise credit programs: Although a small-scale institution might be able to imitate the moneylender's local knowledge and allocate efficiently, efforts to simply channel credit to poor people, without other policy reforms affecting the terms of their access to product and factor markets, may be of little benefit. The picture in rural areas is bleaker. Whereas informal credit is always difficult to pick up in surveys, what is striking is the apparent weakness of both formal and informal financial links in the countryside. Cuevas, Graham, and Paxton (1991) do not stratify their rural-household sample by income, as they do their urban sample, but a comparison of the entire rural sample with the urban low-income sample is nonetheless instructive: Forty-five percent of the urban low-income households reported holding some kind of deposit in a formal-sector financial institution, versus 8 percent for rural households. Informal deposits were insignificant in rural areas (Cuevas, Graham, and Paxton 1991, p. 68). 2 3 In the samples surveyed, average levels of financial assets and liabilities for rural households were less than a quarter of those of urban low-income households. This phenomenon is understandable given the recent strains to which rural society has been subjected, as well as the absolute poverty of most rural Salvadorans. A centuries-old pattern of forcing indigenous agriculturalists off good land, and policies that tended to make people flee villages for isolated and scattered settlements, have provided poor conditions for the development of formal or informal financial institutions in the countryside (Deere and Diskin 1984; Browning 1971). This pattern was compounded by the accelerated pauperization of the rural population in the 1970s, and war during the 1980s, which displaced more than a million people from their homes (Pearce 1986). What we know about informal financial institutions, from research in a great many countries, is that stable social networks are essential for the functioning of various kinds of savings

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197

clubs as well as the work of small-scale moneylenders, because it is the closeness of social ties that enforces repayment. The rural poor use kin networks as a survival strategy. Transfers made within these networks are often called "loans" but frequently are not repaid (Kaufman and Lindauer 1984). Although informal institutions should certainly not be suppressed, there appear to be scant opportunities to advance Salvadoran financial development by aiding informal financial networks and linking them to formal finance, as has been advocated in some countries with stronger informal institutions. The strength of commercial credit flows from larger to smaller firms suggests that financial liberalization may have some positive effects for smaller firms even if they do not receive credit directly. But most generally, examination of informal finance points up the weaknesses of the economic activities undertaken by much of the urban and rural poor, and suggests that availability of finance, however important, is only a necessary, but by far not sufficient, condition for equitable and sustainable development.

Opportunities Investment

and

Savings

We conclude with a discussion of four areas of policy concern. The broadest argument is that if there is some rough correspondence between opportunities for investment (in working or fixed capital) on the one hand, and savings capacity on the other hand, then the development of different financial institutions appropriate to different segments of the real sector should have important benefits. But what we see in El Salvador is, on the one hand, an excessive flow of (foreign and domestic) savings into the formal sector, encouraged by a premature liberalization of the banks, which seems to be exceeding the capacities of the commercial banks and financieras to allocate credit wisely (to the segment of the market they deal with). On the other hand, the counterpart of this spurious deepening is a relatively shallow financial market for smaller firms. This reflects both their difficult real conditions and the effects of a credit-channeling model in the operation of development banks and most NGO projects that has discouraged the growth of small-scale institutions that could fund themselves from local resources, and has limited the ability of small producers to accumulate any financial savings of their own. At both the large-scale and small-scale levels, then, simply increasing an institution's capacity to lend, absent other changes, can do more harm than good. In the formal sector such efforts risk financial crisis; at the development-bank and NGO level they risk becoming mere transfer programs, palliatives, and substitutes for genuine reform. 2 4

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Thus we begin by underlining the point made earlier that, on the whole, El Salvador suffers more from a lack of profitable investment opportunities than from a lack of financing for them. Formal-sector institutions have an excess of loanable funds. In the informal sector there may be profitable opportunities, and an expansion of smaller-scale financial institutions may help to locate them, but it cannot be denied that on the whole the country's poor face crippling obstacles in terms of access to land and problems in buying inputs and selling output. Thus measures are urgently needed to improve the profitability of both formal- and informal-sector investment, rural and urban. With that context established, we can turn to efforts to encourage financial saving, particularly in rural areas. There are two reasons to do this. First, for savers there are advantages to having access to secure financialsavings instruments that pay a rate of interest that is positive in real terms. Although the poor do not save large amounts, they do have the capacity to save. 25 Financial savings mitigate insecurity and ease access to credit. These benefits are important both to households and to small firms. Providing a better range of asset choices to a broader range of individuals may also somewhat reduce demand for nontradeables, which tends to push up their prices. Second, as will be argued, sustainable small-scale financial institutions should be able to fund themselves from local savings. To the extent that such institutions cannot expand quickly enough, there are a variety of other methodologies for making savings instruments from large institutions more accessible, including (1) encouraging or compelling commercial banks to establish more branches in rural areas, and to offer accounts for small savers with relatively low fees, and (2) establishing a government-run savings scheme on the model of Japan's postal savings systems or Indonesia's rural development banks. The BFA's deposit-taking capacities might be expanded. In the context of deposit taking and increasing savings, the large influx of remittances provides a unique opportunity and a particular challenge. The private transfers of close to $1 billion annually have to be targeted more directly as a source of domestic savings. Siri and Abelardo Delgado (1995) provide excellent suggestions for mechanisms that could be institutionalized to that effect. Stability of the Formal Financial

System

Effective prudential regulation of banks is important under any circumstances, but particularly when banks are only recently independent and rapidly expanding. This has been recognized by Salvadoran policymakers to the extent that they have taken legal steps in the right direction. The Superintendencia de Servicios Financieros (SSF) has been separated from the

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central bank, and there are hopes that appointing board m e m b e r s f r o m professional associations will limit political interference, though the S S F ' s director remains a presidential appointee. T h e r e are efforts underway, some supported by foreign donors, to train bank examiners, to buy them computers, and so forth. T h e new b a n k i n g law tightens formal r e q u i r e m e n t s on commercial banks, requiring provisioning against bad loans and larger capital requirements. Nonetheless there is cause for concern, for two reasons. First, the S S F lacks the power to mandate provisioning by banks and, most important, to liquidate or take over m a n a g e m e n t of banks threatened with insolvency. E f f e c t i v e prudential regulation requires the ability and political muscle to close down b a n k s that are b e c o m i n g insolvent, and to do so quickly (see C h o and K h a t k h a t e 1989; and especially Morris et al. 1990, pp. 5 3 - 7 0 ) . Delay usually means that losses mount, because owners with an insolvent bank may be t e m p t e d either to loot it or to m a k e very risky loans. But bank owners can be counted on to oppose such takeovers, because they involve c l a i m i n g s o m e or all of s h a r e h o l d e r s ' equity. T h u s even when bank regulators have the f o r m a l ability to liquidate, measures to insulate them f r o m political interference and to foster an ethos of independence and professionalism are essential. In the absence of even the formal power to intervene in banks, Salvadoran bank regulators may b e c o m e good at heading off and c o p i n g with small problems, but u n a b l e to confront large ones. At a minimum, therefore, the S S F needs the power to take over or liquidate banks, plus better insulation f r o m political interference. Second, even if prudential regulation is highly e f f e c t i v e , it is usually not good at h e a d i n g off p r o b l e m s arising f r o m m a c r o s h o c k s . Given the macro strains described in the first section, there is considerable cause for worry about the health of the c o m m e r c i a l b a n k s over the next f e w years. T h e consequences of bank failures, especially if regulators are slow to step in, would be substantial misallocation of l o a n a b l e f u n d s . M e a s u r e s that might be useful in reducing those macro strains, and coping with their effects, were discussed at the end of the first section; the importance of high reserve requirements and other measures to discourage the rapid accumulation of foreign-currency liabilities bears repeating here.

Expansion

of a Second

Tier of Financial

Institutions

Commercial banks prefer to lend to large customers, and there are limits to what can be done to make them behave differently. Recent e f f o r t s to provide loan g u a r a n t e e s to small b o r r o w e r s in El Salvador, f o r e x a m p l e , which tried to o v e r c o m e the traditional problem that such b o r r o w e r s usually lack the kinds of securities that banks want, have proven to be costly and difficult to administer. Without g i v i n g up on e f f o r t s to e x t e n d the reach of commercial banks, it should be a policy priority to foster a tier of smaller-scale, locally based financial institutions that can both o f f e r local

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savings instruments and provide credit based on knowledge of local conditions and borrowers. El Salvador already has an impressive level of N G O level institutional experience in this area (Fuentes Meléndez and Cuéllar Aguilar 1993a, 1993b; Dimas Quintanilla 1994). But there are three main difficulties: (1) the genuine regulatory problems that arise when institutions begin to offer deposits, (2) the government's enduring lack of sympathy for cooperative organizations, and (3) foreign donors' enduring predilection for credit-channeling programs (discussed in the next subsection). The BCR, like any conscientious central bank, places capital and regulatory requirements on any institution that accepts deposits. This prevents small institutions f r o m f u n d i n g t h e m s e l v e s based on deposits f r o m the general public, though s o m e larger N G O s are m o v i n g in the direction of " f o r m a l i z i n g " t h e m s e l v e s in order to be able to take deposits. T h e concerns are well f o u n d e d because of the danger that f r a u d u l e n t or ill-managed institutions will steal or lose d e p o s i t o r s ' money. At the m o m e n t , smaller institutions that want to draw on local resources, and remain legal, need to set t h e m s e l v e s up as c o o p e r a t i v e s of s o m e variety. C o o p e r a t i v e m e m b e r s contribute to the o r g a n i z a t i o n ' s capital and can then m a k e deposits; because of their capital stake they presumably have some incentive to ensure that the institution is well m a n a g e d . But f o r m i n g a g r o u p of people, each willing to contribute to an institution's capital, is a d m i n i s t r a tively burdensome, and such institutions cannot mobilize large quantities of f u n d s quickly. D o n o r s with f u n d s to disburse have generally preferred to concentrate energies on the lending side. This is one reason that lending has tended to far outstrip deposit taking as a feature of N G O initiatives. T h e most prominent institutions of the cooperative variety are credit unions, of which El Salvador has roughly 100; 44 are m e m b e r s of the Federación de Asociaciones Cooperativas de Ahorro y Crédito de El Salvador ( F E D E C A C E S ) , which receives fees f r o m and provides administrative services to its m e m b e r s . 2 6 Although most of its affiliates are urban, it has a better presence in rural areas than do the commercial banks; for example, it has three affiliates in Chalatenango. F E D E C A C E S is now trying to ass u m e s o m e of the f u n c t i o n s of a national bank, through i n n o v a t i o n s that would allow a m e m b e r of one affiliated cooperative to carry out transactions at another. Its operational e f f i c i e n c y and loan-recovery record are c o m m e n d a b l e , and the model of a national association linked to local cooperatives has o b v i o u s advantages in c o m b i n i n g a national organization's ability to mobilize administrative expertise and training and m a n a g e m e n t services, with a local unit's closeness to its area's conditions. T h e Servicio Crediticio de la Asociación de Medianos y Pequeños Empresarios Salvadoreños ( C R E D I A M P E S ) has focused mainly on petty c o m merce. It has achieved good repayment rates and returns based on meticulous observation of its clients' needs, and by adopting a credit-granting procedure—reducing paperwork, coming to the client's place of business,

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m a k i n g many short-term loans—that imitates the financial technology of traditional moneylenders. It is now extending its reach to rural lending, and is seeking to formalize itself as a financiera, which would allow it to attract time deposits, and to reduce its dependence on donor financing. D i m a s ' s suggestion of a special regulatory unit for smaller institutions s h o u l d be pursued and might provide an a p p r o p r i a t e f r a m e w o r k f o r exp a n d i n g their ability to accept deposits. 2 7 F o r e i g n aid can o f f e r support through guarantees and capital requirements, but providing training might be o n e of the most useful contributions, because human capital is clearly an important constraint. But direct c h a n n e l i n g of credit through these institutions should be avoided or at least sharply limited, for reasons that will be explained. Avoiding

Transfers Disguised

as

Credit

T h e practice of using local institutions as c h a n n e l s for foreign lending to local recipients has on the whole worked against making them sustainable and able to a b s o r b local resources. O n e reason is simply that foreign resources tend to arrive in l u m p s u m s and at concessional interest rates, so that they are, f o r a d e v e l o p m e n t bank or an N G O , a much easier way to f u n d lending. T h e r e has been little incentive to try to c h a n g e regulations on deposit taking, and even development banks that were allowed to take d e p o s i t s have shown little interest in d o i n g so. Interviews s h o w e d that a m o n g g o v e r n m e n t p o l i c y m a k e r s the myth e n d u r e s that the poor c a n n o t save. A related but more subtle reason has to do with the political e c o n o m y of aid. Aid is seen by donors as a tool of influence, whether the object is to shape a g o v e r n m e n t ' s foreign policy or an individual f a r m e r ' s soil-conservation practices. It is the transfer of the d o n o r ' s resources, as opposed to using locally mobilized resources, that provides policy leverage. It f r e q u e n t l y h a p p e n s , however, that such t r a n s f e r s are disguised as loans. Foreign-aid d o n o r s may wish to a p p e a r h a r d - h e a d e d to their o w n constituencies back home. Or governments may want to cloak a transfer to s o m e favored domestic group, and find using concessional credit or credit g u a r a n t e e s simpler than g o i n g through the m o r e transparent b u d g e t p r o c e s s . In s o m e cases, recipients may be w e a k enough to accept f o r m a l indebtedness in exchange for resources, giving the donor bargaining power over them in the future. T h i s is not to suggest that every instance of development-related lending is encumbered by these issues. But w h e n credit is granted in exchange f o r something beside a credible future c o m m i t m e n t to repay, it ceases to be credit, and institutionalizing this kind of quasi-credit works against establishing locally sustainable credit channels. This b e c o m e s especially salient in El Salvador b e c a u s e of the broad range of N G O antipoverty e f f o r t s . A

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frequent complaint among Salvadoran NGOs is that when credit is handed out without efforts to affect productive technologies, it is wasted, but that when it is associated with technical assistance and training, recipients do not repay with the excuse that the technical assistance was faulty. These complaints illustrate a more basic problem with the idea of channeling funds from outside donors to local recipients in the form of credit. Two examples follow. In 1990 the Food and Agriculture Organization (FAO) commissioned a study on the effects of agricultural credit-granting programs aimed at Salvadoran small farmers (Salinas, Ceren Duenas, and Cardoza Lopez 1993). The authors reported that many credits were not being repaid, and that, after defaulting on a loan from one NGO, a farmer could often borrow from another. In addition, the effects of small-farmer lending had frequently been to encourage planting on steep hillsides, which contributed to soil erosion. The loan programs also encouraged overuse of agricultural chemicals. The main policy conclusion of the FAO study was that future credit programs should have strict conditions for environmentally sustainable production attached to them, and that credit should not be provided on a concessional basis but at "market" rates so as to instill "discipline" among recipients. With due respect to the excellent analytical work done by the FAO team, this is an inadequate policy response. First, the phenomena reported suggest that beneficiaries correctly understood credit-granting programs as palliative transfers, and saw no reason to repay. Second, deprived of access to good land and secure ownership of even bad land, the impoverished recipients of loans had no reason to farm in environmentally sustainable ways. Even if credit is now provided in exchange for a change in productive technology, it is still, if effective, going to be an exchange of resources for better agricultural practices—a complex and difficult-toenforce exchange. Raising the interest rate may simply make the credit less attractive, or make recipients even less likely to repay. 28 Implicit in the FAO recommendations is the notion that small farmers are rationed out of the credit market, and that they are willing to pay a rent—using a more expensive agricultural technology—to be rationed in. This is a slender basis on which to build policy, given that there may be good reasons as well as bad for the existing rationing out, and that the point of a credit policy aimed at enhancing equity should be precisely to reduce rationing out, and hence the value of those rents. It would be far better, if the aim is environmentally sustainable production, to use a combination of direct subsidies to reduce the costs of environmentally sustainable technologies, plus regulation to prevent irresponsible practices. If pro: duction, thus assisted, is genuinely profitable, then informal or local credit should be forthcoming. If necessary, recipients could be started out with a direct transfer of working capital. If production is still unprofitable, it is

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likely so because of commercialization and land-tenure problems, and efforts to sustain marginal small-scale production under these circumstances may be only expensive palliatives. Rather more disturbing is the use of credit in the current land-transfer and microenterprise programs for ex-combatants. Beneficiaries can choose between careers in farming and microenterprise. Those opting for agriculture are eligible to receive land and the accompanying debt to the government to pay for it. They are further eligible for a loan of 15,000 colones, at a mildly subsidized rate. (Those choosing microenterprise take a series of classes in business and are eligible for a 20,000 colon loan.) The problem with this program is that there is a political necessity to make payments to ex-combatants, who have experience in using organized force to resolve their problems. Thus, with the land titling program proceeding slowly, agricultural loans are being made to people who do not yet have land and who therefore cannot be expected to use the loans for agricultural improvements. Even for those who can get title, it is far from clear that under existing conditions they are likely to be able to farm successfully enough to pay off their loans. This may explain some of the difficulty in finding enough people willing to claim these benefits: By any rational calculation they may not be benefits at all (Spence and Vickers 1994). It may also produce an "adverse selection" effect, in which only those who do not intend to repay are willing to accept the lending package at the terms offered. Similarly, people with experience in the field report that many of the recipients of microenterprise loans are simply consuming their capital. In this case, then, pressures have vitiated measures that were intended to improve the likelihood that loans would go to productive investment. The land transfer should be recognized as a cost of ending the war; especially given the fact that the f u n d s backing it are grants from outside donors, land should be given unmortgaged. As matters stand, recipients will not only have difficulty paying off the debt they assume, but the overhang of debt in future years will make it more difficult for them to qualify for any credit available locally. Final

Notes

It is a mistake to look at the contribution of finance to development simply as a matter of "access" to credit, as one would speak of access to clean water. Finance means exchanges—of money now for money later—requiring willing participants on both sides of the bargain, and an institutional f r a m e w o r k that links the two and provides lenders (or savers) with some c o n f i d e n c e that they will be repaid. Far from being a simple input, credit and debt are essential coordinating mechanisms of any economy, especially when real resources are scarce. Finance is integral to the real economy, and it entails interlocking relationships that cannot easily be unlinked.

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Adjustment

toward peace requires

that f i n a n c i a l - s e c t o r

policy

be

tightly c o o r d i n a t e d w i t h r e a l - s e c t o r p o l i c y . S i m p l y p u s h i n g c r e d i t , w h e t h e r to l a r g e f i r m s t h r o u g h p r i v a t e c o m m e r c i a l b a n k s , o r to p o o r p e o p l e t h r o u g h N G O s , is u n l i k e l y to p r o m o t e s u s t a i n a b l e , e q u i t a b l e d e v e l o p m e n t . El S a l v a d o r ' s p a t t e r n o f f i n a n c i a l l i b e r a l i z a t i o n , a n d m a n y o f its c r e d i t - c h a n n e l ing p r o g r a m s , h a v e b e e n g u i d e d b y an o r t h o d o x p o l i c y m o d e l that is i n a p p r o p r i a t e f o r a c o u n t r y f a c i n g El S a l v a d o r ' s g r a v e d i f f i c u l t i e s . T h e pattern is c h a r a c t e r i z e d b y partial e q u i l i b r i u m t h i n k i n g — a n u n w i l l i n g n e s s to t r a c e t h r o u g h t h e c h a n g e s that r e f o r m s in o n e a r e a h a v e o n a n o t h e r . H e n c e f i n a n c i a l l i b e r a l i z a t i o n , w h i c h m i g h t b e w e l l a d v i s e d in s o m e s i t u a t i o n s , turns out to b e p o t e n t i a l l y d a n g e r o u s g i v e n l a r g e d o l l a r i n f l o w s a n d an e x c h a n g e - r a t e p o l i c y that a v o i d s n o m i n a l a p p r e c i a t i o n f o r r e a s o n s o f p r o m o t i n g e x p o r t s . C r e d i t to s m a l l f a r m e r s , in the a b s e n c e o f o t h e r c o n d i t i o n s f o r s u c c e s s f u l a g r i c u l t u r e , c r e a t e s o n l y b a d d e b t a n d ill w i l l . T o r e c a p i t u late the m a i n p o i n t s : 1. B e c a u s e f i s c a l , m o n e t a r y , a n d e x c h a n g e - r a t e p o l i c i e s s h a p e the e n v i r o n m e n t in w h i c h c o m m e r c i a l b a n k s o p e r a t e , b a n k i n g r e g u l a t i o n m u s t k e e p p a c e w i t h t h o s e c h a n g e s to h e a d o f f s p e c u l a t i v e o v e r l e n d i n g a s w e l l as e x c e s s i v e d o l l a r b o r r o w i n g . 2. D i f f e r e n t kinds o f financial institutions are n e e d e d for different s e g m e n t s o f the real s e c t o r . S u p p o r t a n d a p p r o p r i a t e r e g u l a t i o n a r e n e e d e d f o r a s e c o n d t i e r o f i n s t i t u t i o n s that c a n s e r v e s m a l l f i r m s a n d rural c o m m u n i t i e s . 3 . A v a i l a b i l i t y o f f i n a n c i a l s a v i n g s i n s t r u m e n t s t o t h e p o o r is a s i m portant as availability o f credit. 4 . P o i n t s 2 a n d 3 are b e s t a c h i e v e d by p r o m o t i n g l o c a l i n s t i t u t i o n s that fund themselves largely from local sources. A l t h o u g h the f i n a n c i a l - s e c t o r p o l i c i e s r e c o m m e n d e d here are n e c e s s a r y c o m p l e m e n t s t o r e a l - s e c t o r p o l i c y r e f o r m s , t h e y a r e not s u b s t i t u t e s

for

them.

Notes 1. C o m m e r c i a l b a n k s are usually the m o s t important institutions in any c o u n t r y ' s f i n a n c i a l s e c t o r , but they h a v e i m p o r t a n t l i m i t a t i o n s . E v a l u a t i n g loan a p p l i c a t i o n s is c o s t l y , and for small f i r m s the profit the bank c o u l d m a k e on the loan is u n l i k e l y to e x c e e d t h e s e c o s t s . S m a l l e r f i r m s are a l s o l e s s l i k e l y to b e a b l e to pledge assets

as g u a r a n t e e s o f r e p a y m e n t . T h u s s m a l l e r

firms

are

generally

s c r e e n e d out o f the m a r k e t for c o m m e r c i a l l o a n s . T h e r e is a broad p o l i c y literature on w a y s e i t h e r to e n c o u r a g e c o m m e r c i a l b a n k s to lend to s m a l l e r f i r m s , or to dev e l o p o t h e r k i n d s o f i n s t i t u t i o n s , p u b l i c or private, that c a n p r o v i d e t h e m c r e d i t . S o m e o f this l i t e r a t u r e has l o o k e d to the i n f o r m a l f i n a n c e that d o e s s e r v e t h e s e

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f i r m s for i n s t i t u t i o n a l m o d e l s and p r a c t i c e s to e m u l a t e ; f o r e x a m p l e , B o u m a n a n d H o s p e s ( 1 9 9 4 ) and A d a m s ( 1 9 9 2 ) . 2. In a s i m i l a r v e i n , S a l i n a s , C e r é n D u e ñ a s , a n d C a r d o z a L ó p e z ( 1 9 9 3 , p. 13) e m p h a s i z e " d e v e l o p m e n t of a s t r u c t u r e of p r o f i t a b i l i t y " ; C r u z L e t o n a ( 1 9 9 1 , p. 11), w r i t i n g o n a g r i c u l t u r a l - d e v e l o p m e n t b a n k i n g , is p a r t i c u l a r l y c l e a r on t h e i m p o r t a n c e of i n t e g r a t i n g c r e d i t p o l i c y w i t h o t h e r a g r i c u l t u r a l p o l i c i e s , c r i t i c i z i n g t h e t e n d e n c y of d e v e l o p m e n t b a n k s to e m p h a s i z e credit at t h e e x p e n s e of " c o h e r e n c e [of c r e d i t p o l i c y ] w i t h p o l i c i e s a f f e c t i n g p r o d u c e r p r i c e s , c o m m e r c i a l i z a t i o n , land t e n u r e , a n d m a c r o e c o n o m i c p o l i c i e s s u c h as tax, e x c h a n g e r a t e , t r a d e a n d w a g e p o l i c y . E x p e r i e n c e h a s s h o w n that this l e v e l of c o o r d i n a t i o n is a p r e r e q u i s i t e f o r the s u c c e s s a n d e f f e c t i v e n e s s of d e v e l o p m e n t b a n k i n g . In o t h e r w o r d s , w h e r e t h e c o m b i n e d e f f e c t of m a c r o e c o n o m i c p o l i c i e s is u n f a v o r a b l e f o r a g r i c u l t u r e , t h e o p p o r t u n i t i e s f o r the s u c c e s s of c r e d i t and f i n a n c i a l policy w i l l b e r e d u c e d . " 3. M c K i n n o n ( 1 9 7 3 ) w a r n e d of the d a m a g e that f o r e i g n c a p i t a l c o u l d d o to a p r o g r a m of l i b e r a l i z a t i o n . H i s w o r k o v e r the last 10 y e a r s , in the c o n t e x t of the s e q u e n c i n g l i t e r a t u r e , h a s b e e n c o n s i s t e n t w i t h that w a r n i n g : T h e m y o p i a of f o r eign l e n d e r s a n d i m p l i c i t or explicit g o v e r n m e n t g u a r a n t e e s c a n f o s t e r o v e r l e n d i n g ; a r b i t r a g e b e t w e e n f o r e i g n and d o m e s t i c l e n d i n g m a y fuel f i n a n c i a l c r i s i s . T h u s in M c K i n n o n ' s o p t i m a l s e q u e n c e of l i b e r a l i z a t i o n , o p e n i n g t h e c a p i t a l a c c o u n t c o m e s last ( M c K i n n o n 1 9 9 1 ) . W h e r e a s the b a s i c p r o b l e m of the d u a l r o l e of the interest rate is c o m m o n p l a c e a n d a f f e c t s w e a l t h y c o u n t r i e s as w e l l , its e f f e c t s are m u c h m o r e d i s r u p t i v e in t r a d e - d e p e n d e n t c o u n t r i e s with s h a l l o w f i n a n c i a l m a r k e t s . 4. M c K i n n o n ( 1 9 9 1 ) a n d M o r r i s et al. ( 1 9 9 0 ) ; see a l s o d i s c u s s i o n in W o r l d B a n k ( 1 9 8 9 b ) a n d a critical v i e w in A r e s t i s and D e m e t r i a d e s ( 1 9 9 3 ) . 5. T h i s e f f e c t will b e m i t i g a t e d by any i n c r e a s e d i m p o r t d e m a n d , w h i c h will e x t i n g u i s h c o l o n e s as t h e y are t r a d e d b a c k to the c e n t r a l b a n k f o r d o l l a r s . 6 . G o o d r e c e n t d i s c u s s i o n s of t h e p r o b l e m s a s s o c i a t e d w i t h s t e r i l i z a t i o n in Latin A m e r i c a c a n b e f o u n d in L e i d e r m a n and R e i n h a r t ( 1 9 9 4 ) and Larrain ( 1 9 9 4 ) ; see a l s o C a l v o ( 1 9 9 1 ) . 7. T h e I M F ( 1 9 9 4 a ) has a l r e a d y i n d i c a t e d u n h a p p i n e s s w i t h t h e level of req u i r e d r e s e r v e , a n d w a r n e d the S a l v a d o r a n a u t h o r i t i e s a g a i n s t p u s h i n g t h e m higher. 8. T h e s e a r e m o s t l y 9 1 - d a y n o t e s , but the c e n t r a l b a n k s e l l s s o m e w i t h m a turities as l o n g as 3 6 0 d a y s , and it is t r y i n g to l e n g t h e n the a v e r a g e m a t u r i t y . 9. T h e h i g h e r f i g u r e in T a b l e 9.1 i n c l u d e s n o n p r i v a t e h o l d i n g s . It is not c l e a r in this set of f i g u r e s h o w m u c h of the C E M h o l d i n g s by b a n k s and n o n m o n e t a r y fin a n c i a l i n s t i t u t i o n s a r e actually v o l u n t a r y p r i v a t e - s e c t o r h o l d i n g s . I n d i v i d u a l s m a y be p u r c h a s i n g s e c u r i t i e s t h r o u g h r e p u r c h a s e a g r e e m e n t s or o t h e r m e a n s by w h i c h o w n e r s h i p r e m a i n s formally with a financial institution. 10. N e v e r t h e l e s s , t h e f u n d s in t i m e / s a v i n g s a c c o u n t s c a n be c o n v e r t e d into liquid m o n e y w i t h r e l a t i v e l y little d i f f i c u l t y . M o r e o v e r , the C E M s a r e , p r o b a b l y , in p r a c t i c e h i g h l y liquid as w e l l . If p r e v i o u s history in o t h e r L a t i n A m e r i c a n c o u n t r i e s is a n y g u i d e , t h e r e is an implicit a g r e e m e n t that the B C R , in o r d e r to k e e p the m a r ket r e l a t i v e l y l i q u i d , will b u y t h e m b a c k if the need a r i s e s . O t h e r w i s e , a large selloff w o u l d b o t h r a i s e the interest r a t e s s h a r p l y and d a m a g e c o n f i d e n c e in an instrum e n t the c e n t r a l b a n k h a s tried h a r d to p r o m o t e . 11. A s m a l l s e c u r i t i e s e x c h a n g e h a s b e e n c r e a t e d in r e c e n t y e a r s w h o s e m a i n f u n c t i o n h a s b e e n to p r o v i d e the c e n t r a l b a n k with a p l a c e to sell t h e s e i n s t r u m e n t s . But the e x c h a n g e is not really b i g e n o u g h to m a k e t h e m h i g h l y liquid, so the c e n t r a l

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b a n k h a s to o f f e r a p r e m i u m of o n e o r t w o p e r c e n t a g e p o i n t s o v e r d e p o s i t i n t e r e s t r a t e s to a t t r a c t b u y e r s . In m i d - 1 9 9 4 t h e s e b o n d s w e r e p a y i n g 1 7 . 2 5 p e r c e n t w h i l e t i m e d e p o s i t s p a i d a b o u t 15 p e r c e n t ( D i m a s Q u i n t a n i l l a 1 9 9 4 , p . 4 ) . 12. O f a r o u g h l y 7 . 5 b i l l i o n c o l ó n i n c r e a s e in p r i v a t e - s e c t o r l i a b i l i t i e s o v e r t h e 18 m o n t h s f r o m D e c e m b e r 1 9 9 2 to J u n e 1 9 9 4 , 3 b i l l i o n w a s a b s o r b e d b y t h e B C R t h r o u g h r e s e r v e s a n d b o n d s a l e s . C r e d i t f r o m t h e s e i n s t i t u t i o n s , h o w e v e r , g r e w by a l m o s t 5 . 4 b i l l i o n c o l o n e s , f u n d e d b o t h b y t h e r e m a i n i n g 4 . 5 b i l l i o n c o l o n e s in l o a n a b l e f u n d s a n d b y a s o m e w h a t a l a r m i n g rise of o v e r 6 0 0 m i l l i o n c o l o n e s in f o r e i g n l i a b i l i t i e s . T h e r e m a i n i n g 3 0 0 m i l l i o n c o l ó n i n c r e a s e in c r e d i t is f u n d e d m a i n l y b y a 2 0 0 c o l ó n r i s e in B C R r e d i s c o u n t i n g to t h e b a n k s . E a r l i e r s u c h r e d i s c o u n t i n g h a d f a l l e n ( b e t w e e n 1 9 8 9 a n d 1 9 9 2 c e n t r a l - b a n k c r e d i t to t h e c o m m e r cial b a n k s fell b y o v e r 5 0 p e r c e n t ) f r o m r o u g h l y 2 . 6 b i l l i o n c o l o n e s to 1 . 2 b i l l i o n , b e f o r e r i s i n g t o a b o u t 1.4 b i l l i o n by m i d - 1 9 9 4 . 13. H i g h i n t e r e s t r a t e s m a y a l s o m a k e s p e c u l a t i v e r e a l - e s t a t e

development

m o r e a t t r a c t i v e f o r l e n d i n g , b e c a u s e the r e t u r n s a r e h i g h as l o n g as p r o p e r t y p r i c e s c o n t i n u e to rise ( a s h a p p e n e d w i t h U . S . s a v i n g s a n d l o a n s ) . S i m i l a r r e m i t t a n c e - f u c l e d c o n s t r u c t i o n b o o m s h a v e o c c u r r e d in P a k i s t a n a n d the I n d i a n s t a t e of K e r a l a . T h e p r o b l e m s of c u r r e n c y a p p r e c i a t i o n a n d s p e c u l a t i v e l e n d i n g a r e s u r e l y i m p o r tant p a r t s of the e x p l a n a t i o n f o r the m i n i m a l , if not a d v e r s e , i m p a c t r e c e n t c a p i t a l i n f l o w s to Latin A m e r i c a h a v e had o n c a p i t a l a c c u m u l a t i o n . I n d e e d , a r e c e n t G r o u p of T h i r t y s t u d y n o t e s that " f o r the L a t i n A m e r i c a n r e g i o n [ c a p i t a l ] i n f l o w s d u r i n g 1 9 9 0 - 9 3 a r e p r i m a r i l y a s s o c i a t e d w i t h a d e c l i n e in s a v i n g and h i g h e r c o n s u m p t i o n " ( L e i d e r m a n and R e i n h a r t 1 9 9 4 , p. A 1 0 ) . 14. L o w e r i n f l a t i o n w o u l d r e d u c e t h e d i f f e r e n c e b e t w e e n U . S . a n d S a l v a d o r a n r a t e s , but t h a t is d i f f i c u l t t o a c h i e v e q u i c k l y , a n d t h e r e a l - s e c t o r e f f e c t s of t h e rem i t t a n c e a n d aid i n f l o w a r e i n f l a t i o n a r y . T h e i n f l o w of s p e n d i n g p o w e r r a i s e s d e m a n d for g o o d s within the country. T h e increased d e m a n d for locally p r o d u c e d g o o d s m a y be e x p e c t e d t o b e g i n p u s h i n g u p t h e i r p r i c e s . T o t h e e x t e n t t h a t l o c a l p r o d u c t i o n r e s p o n d s q u i c k l y to t h e s e r i s i n g p r i c e s , it w i l l t e n d t o p u l l f a c t o r s of production (land, labor, capital) away f r o m export industries. To the extent that p r o d u c t i o n of l o c a l g o o d s d o e s not k e e p p a c e w i t h h i g h e r d e m a n d ( a n d s o m e l o c a l g o o d s , like real e s t a t e , a r e c l e a r l y in f i x e d s u p p l y ) t h e n a g e n e r a l r i s e in p r i c e s , o r i n f l a t i o n , m a y e n s u e . S u c h i n f l a t i o n w i l l t e n d to r a i s e t h e p r i c e of d o m e s t i c f a c t o r s ( e s p e c i a l l y l a b o r ) a n d a l s o to u n d e r m i n e t h e c o m p e t i t i v e n e s s of e x p o r t s . T h e c o n sequences for both inflation and export promotion are unfavorable. 15. H a r b e r g e r ( 1 9 9 3 b ) e x p l o r e s t h i s p o s s i b i l i t y . H e and H i n d s ( 1 9 9 4 ) call f o r t h e c e n t r a l b a n k to a l l o w a p p r e c i a t i o n ; t h i s p o s i t i o n is a l s o i m p l i e d in an i n t e r n a l I M F d o c u m e n t r e p o r t i n g o n a s t a f f visit to El S a l v a d o r in m i d - 1 9 9 4 ( I M F 1 9 9 4 a ) . A l t h o u g h it is n o v e l to s e e t h e I M F u r g i n g a p p r e c i a t i o n r a t h e r t h a n d e v a l u a t i o n , it is a c t u a l l y c o n s i s t e n t w i t h t h e o r g a n i z a t i o n ' s b a s i c o p p o s i t i o n t o g o v e r n m e n t e f f o r t s to m a n i p u l a t e e x c h a n g e r a t e s , a n d i n d e e d its o r i g i n a l e f f o r t s t o d i s c o u r a g e competitive devaluations. 16. It h a s b e e n s u g g e s t e d in s o m e c i r c l e s t h a t a " c u r r e n c y b o a r d " s y s t e m w o u l d p r o v i d e El S a l v a d o r w i t h a d e v a l u a t i o n - p r o o f c u r r e n c y . T h e r e a s o n i n g is s p e c i o u s . A true c u r r e n c y b o a r d r e q u i r e s ( 1 ) a f i x e d e x c h a n g e r a t e , p l u s ( 2 ) a c o m m i t m e n t that b a s e m o n e y will never e x c e e d f o r e i g n r e s e r v e s . T h e latter r e q u i r e m e n t e l i m i n a t e s t h e c e n t r a l b a n k ' s " l e n d e r of last r e s o r t " c a p a c i t i e s t o lend f r e e l y to m e e t l i q u i d i t y d e m a n d s in t i m e s o f f i n a n c i a l u n e a s e . In o t h e r w o r d s , m o n e t a r y

The Financial System

207

a u t h o r i t i e s w o u l d a l l o w c o m m e r c i a l b a n k s to fail a n d asset v a l u e s to c o l l a p s e in the f a c e of r i s i n g l i q u i d i t y d e m a n d , r a t h e r t h a n i n c r e a s e b a s e m o n e y . T r u e c u r r e n c y b o a r d s a r e o f t e n c o n f u s e d w i t h f a i r - w e a t h e r c u r r e n c y b o a r d s , of t h e s o r t that A r g e n t i n a has a d o p t e d in r e c e n t y e a r s , in w h i c h b a s e m o n e y is l i m i t e d to d o l l a r res e r v e s except w h e n b a n k s a r e in t r o u b l e . T h i s w a s d e m o n s t r a t e d c l e a r l y in e a r l y 1995 w h e n , in t h e f a c e of s c a r c e liquidity and s h o r t - t e r m interest r a t e s r e a c h i n g 9 0 p e r c e n t , A r g e n t i n e m o n e t a r y a u t h o r i t i e s u s e d o v e r n i g h t l e n d i n g to s h o r e u p c o m m e r c i a l b a n k s , c i r c u m v e n t i n g f o r m a l c u r r e n c y - b o a r d r u l e s . T h i s b i m o d a l p o l i c y is really j u s t a n o t h e r r e s t r i c t i v e m o n e t a r y rule, h a r d l y an i m p r e g n a b l e d e f e n s e a g a i n s t s p e c u l a t i v e r u n s o n the c u r r e n c y . 17. A p o l i c y d e f e n d e d in S t i g l i t z ( 1 9 9 3 ) a n d , f o r at least s o m e c i r c u m s t a n c e s , by M c K i n n o n ( 1 9 8 8 , p. 4 0 8 ) . 18. N a t i o n a l i z a t i o n of t h e b a n k s w a s d e c r e e d b y t h e O c t o b e r 1 9 7 9 c i v i l i a n m i l i t a r y j u n t a a n d t o o k e f f e c t in M a r c h 1 9 8 0 . It w a s p r e s e n t e d as a w a y to " d e m o c r a t i z e " t h e p r e v i o u s l y i n e q u i t a b l e d i s t r i b u t i o n of c r e d i t a n d c a m e at t h e s a m e t i m e as m e a s u r e s to n a t i o n a l i z e the f o r e i g n m a r k e t i n g of c o f f e e . C l e a r l y t h e O c t o ber j u n t a w a s s e e k i n g to g a i n c o n t r o l o v e r the i n s t i t u t i o n s m o s t a s s o c i a t e d w i t h the c o n c e n t r a t i o n of w e a l t h a n d e c o n o m i c p o w e r in the c o u n t r y . E q u a l l y c l e a r l y , as the juventud militar lost i n f l u e n c e , a n d c i v i l i a n s i n c l i n e d to m o r e r a d i c a l r e f o r m left the j u n t a , control over the b a n k s was, once obtained, not used for redistributive e n d s . B a n k l e n d i n g in f a c t f o l l o w e d m u c h t h e s a m e p a t t e r n s as b e f o r e , t h e m a i n d i f f e r e n c e b e i n g h i g h e r r e s e r v e r e q u i r e m e n t s a n d p u r c h a s e s of g o v e r n m e n t s e c u r i ties, u s e d to f i n a n c e f i s c a l d e f i c i t s . 19. In t h e e a r l y 1 9 8 0 s the r e f o r m e d sector got 18 p e r c e n t of a g r i c u l t u r a l credit and 3 2 p e r c e n t of B F A l e n d i n g ( L a d m a n et al. 1 9 8 6 , p p . 71 a n d 9 7 ) . 2 0 . L a d m a n et al. ( 1 9 8 6 , pp. 1 8 - 3 9 , 5 4 - 6 1 ) ; this s o u r c e a l s o c o v e r s t h e role of rediscounting. 2 1 . T h e p a t t e r n is a l s o e v i d e n t in M I P L A N f i g u r e s c i t e d b y D a d a S a n c h e z (1994). 2 2 . S e e a d d i t i o n a l d i s c u s s i o n in L a d m a n et al. ( 1 9 8 6 , p p . 6 4 a n d 1 7 5 - 1 7 7 ) , and W e n n e r and U m a n a ( 1 9 9 3 , p. 5 2 ) . 2 3 . T h i s fits w i t h the p a t t e r n o b s e r v e d in m o s t c o u n t r i e s , that i n f o r m a l s a v i n g s instruments are rare. Christensen (1993) provides a theoretical explanation. 2 4 . D i s c u s s e d f u r t h e r in t h e f i n a l s u b s e c t i o n ; A d a m s ( 1 9 9 2 ) a n d A d a m s a n d Von P i s c h k e ( 1 9 9 2 ) p r o v i d e a s i m i l a r c r i t i q u e . 2 5 . T h e r e is a s u b s t a n t i a l l i t e r a t u r e on this; s e e A d a m s ( 1 9 9 2 ) . 2 6 . F E D E C A C E S h a s also s e r v e d as an a d m i n i s t r a t o r a n d c h a n n e l of c r e d i t for f o r e i g n d o n o r s , t h o u g h not w i t h o u t d i f f i c u l t y . T h e a b r u p t 1 9 8 6 d e v a l u a t i o n of the c o l o n c r e a t e d s e v e r e d i f f i c u l t i e s in r e p a y i n g a d o l l a r - d e n o m i n a t e d USAID.

loan f r o m

2 7 . D i m a s Q u i n t a n i l l a ( 1 9 9 4 ) ; F u e n t e s M e l e n d e z and C u e l l a r A g u i l a r ( 1 9 9 3 b ) also p r o v i d e v e r y u s e f u l d i s c u s s i o n o n this sort of r e f o r m . 2 8 . T h i s is c h a r a c t e r i s t i c of c o n f u s i o n in m u c h r e c e n t

development-policy

w r i t i n g a b o u t " m a r k e t " i n t e r e s t r a t e s , as t h o u g h f i n a n c i a l m a r k e t s w e r e like the m a r k e t in, say, e g g s — c l e a r i n g at o n e p r i c e that s h o u l d o b t a i n a c r o s s t h e e c o n o m y — a n d a p r o g r a m that c h a r g e d this " m a r k e t " interest rate i n v o l v e d no d i s t o r t i o n of a l l o c a t i o n , w h i l e a d i f f e r e n t interest rate w o u l d c a u s e ill e f f e c t s . T h e " m a r k e t " rate r e f e r r e d to in, f o r e x a m p l e , t h e F A O s t u d y is a r a t e r e p o r t e d b y t h e c e n t r a l

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Colin Danby

bank based on a survey of c o m m e r c i a l banks and financieras. It is representative o f dealings between a small group o f large financial institutions and a small group o f large, w e l l - e s t a b l i s h e d c u s t o m e r s . It d o e s not indicate anything about the c o n d i tions faced by an urban microenterprise or a peasant farmer seeking credit. Indeed the very fact o f government or N G O lending to these groups suggest that the " m a r k e t " is not meeting their needs. M o s t likely the rate o f interest at which these borrowers could obtain loans from a private and competitive entrepreneur—a m o n e y l e n d e r — i s either much higher than the f o r m a l - s e c t o r rate, or in fact nonexistent. In the latter case, transaction costs and default premiums can drive up the interest rate that a lender would charge, to a point at which the " a d v e r s e s e l e c t i o n " e f f e c t — b y which higher interest rates screen out safer b o r r o w e r s and leave those who have highly risky projects or no intention o f r e p a y i n g — m a k e s lenders unwilling to lend at all.

10 Structural Adjustment, the Agricultural Sector, and the Peace Process Carlos Acevedo

D i s c u s s i o n s o f agricultural p o l i c y in d e v e l o p i n g c o u n t r i e s have long been c h a r a c t e r i z e d by two f u n d a m e n t a l l y d i f f e r e n t a p p r o a c h e s . O n e v i e w s e e s f a r m i n g as a b u s i n e s s like any other, and land s i m p l y as o n e input or f a c tor o f p r o d u c t i o n . It n o t e s that a g r i c u l t u r e ' s s h a r e o f n a t i o n a l production and o f the labor f o r c e d e c l i n e s as e c o n o m i e s d e v e l o p , and is g e n e r a l l y agn o s t i c about the appropriate a r r a n g e m e n t s f o r land tenure. T h e other view r e g a r d s land o w n e r s h i p as s o m e t h i n g o f m o r e t r a n s c e n d e n t i m p o r t a n c e . S o m e variants o f this v i e w c e l e b r a t e the status q u o o f land o w n e r s h i p , o t h ers urge the return to s o m e past a l l o c a t i o n , or d e m a n d e g a l i t a r i a n redistribution o f land a m o n g s o m e s u b s e t o f the population. T h i s study adopts a m i d d l e p o s i t i o n . W e argue that f a r m i n g is indeed a b u s i n e s s , but that there are c o m p e l l i n g s o c i a l , p o l i t i c a l , and e n v i r o n m e n tal r e a s o n s to aim for a large s e c t o r o f r e l a t i v e l y s m a l l but e c o n o m i c a l l y v i a b l e f a r m s . In pursuing this g o a l it is i m p o r t a n t to a v o i d a s i m p l i s t i c f o c u s on land tenure e x c l u s i v e l y , f o r t w o r e a s o n s . First, farmers participate in c o m m e r c i a l and credit networks. T h e i r e c o n o m i c v i a b i l i t y is d e t e r m i n e d not o n l y by the quantity and quality o f the c a p i t a l ( a b o v e all, land) they p o s s e s s , but a l s o b y the o p p o r t u n i t i e s presented to buy, sell, borrow, and lend. A s this chapter d o c u m e n t s , world market c o n d i t i o n s and current m a c r o e c o n o m i c p o l i c i e s have c r e a t e d a situation in w h i c h f a r m i n g in El S a l v a d o r is n o w a highly tenuous enterprise. Indeed, it m i g h t b e c o n c l u d e d that in El S a l v a d o r today a small f a r m (particularly o n e e n c u m b e r e d by debt for its a c q u i s i t i o n ) and a c c e s s to agricultural credit is an e c o n o m i c curse to b e w i s h e d o n l y on o n e ' s worst e n e m y . N e v e r t h e less, h i s t o r i c ties to agricultural land in El S a l v a d o r are s u c h that land redistribution is bitterly o p p o s e d by m a n y o w n e r s , and f e r v e n t l y desired by m a n y a m o n g the poor. In the current m a c r o e c o n o m i c s e t t i n g , h o w e v e r , to f o c u s only on land-tenure reform w o u l d p r o v e a barren e x e r c i s e . S e c o n d , a g r i c u l t u r e in El S a l v a d o r , p a r t i c u l a r l y on t h e h i l l s i d e s that f o r m the w a t e r s h e d s f o r the S a n S a l v a d o r m e t r o p o l i t a n a r e a and o t h e r

209

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Carlos Acevedo

cities, has enormous environmental impacts that must be fully incorporated into agricultural policy. Chapter 11 documents these impacts and analyzes their policy implications. A central conclusion of that analysis is that there is an urgent need for social governance of land use in El Salvador; that is, for the design and implementation of policies to establish a framework of rules and incentives whereby individual economic decisions take into account social benefits and costs. To focus only on land tenure in this environmental setting would prove barren in another, more literal sense. The agricultural-sector policies advocated in this study aim to advance three principal goals: 1. Macroeconomic growth and stability: Agriculture provides products, including wage goods, to the domestic market. Agricultural exports are and will remain a major source of foreign exchange earnings. And the agricultural sector provides a market for nonagricultural goods and services. Prosperous farming is thus linked to a variety of other economic activities, while profitless farming depresses them. Furthermore, the capacity to meet food-consumption requirements through domestic production minimizes the risk of imported inflation during periodic episodes of tight supplies and high prices in international markets. 2. Sustainable livelihood security: For a large number of people agriculture remains the main source of livelihood. Many of these people are among the poorest strata of the population. We do not believe that migration to San Salvador or to Los Angeles offers a feasible or desirable alternative to the strengthening of rural livelihoods in El Salvador. 3. Environmental sustainability: Agriculture involves the joint production of crops and environmental services. The latter profoundly affect the long-run viability not only of agriculture, but of the economy as a whole. Policy must be grounded on appreciation of the sector's dual role. This chapter will argue that current agricultural policy in El Salvador cannot be judged a success by any of the above criteria, and that what growth there has been in agricultural output in recent years has come largely despite government macroeconomic policy, not because of it. In particular, as discussed in the following section, macroeconomic policy has turned relative prices sharply to the disadvantage of the agricultural sector as a whole. Changes in the composition of output toward nontraditional agricultural exports cannot be expected to redress fully the adverse effects of the macroeconomic environment. The plight of the rural poor is further exacerbated by continuing inequities in the agrarian structure, described in the second section. The final section discusses alternative policies to address the first two goals identified above; Chapter 11 discusses policies to address the third.

Structural

Adjustment,

Agriculture,

and Peace

211

Macroeconomic Policy and Agricultural Profitability A g r i c u l t u r e h i s t o r i c a l l y has b e e n the m o s t i m p o r t a n t s e c t o r in the S a l v a d o r a n e c o n o m y , in t e r m s of its s h a r e s of n a t i o n a l i n c o m e , f o r e i g n e x c h a n g e e a r n i n g s , and the labor f o r c e . T h o u g h this b e g a n to c h a n g e in the 1 9 6 0 s w i t h e c o n o m i c d i v e r s i f i c a t i o n ( s e e C h a p t e r 2), the 1 9 8 0 s b r o u g h t the m o s t d r a m a t i c d e c l i n e in the r e l a t i v e i m p o r t a n c e of the a g r i c u l t u r a l sector, c o u p l e d with c o n s i d e r a b l e g r o w t h in c o m m e r c e and s e r v i c e s . T h i s d e c l i n e w a s d u e in part to the w a r , a n d in part to a s h a r p s h i f t in relative prices against a g r i c u l t u r e . T h e s h a r e of a g r i c u l t u r e in the G D P n e v e r t h e l e s s r e m a i n s s i g n i f i c a n t , particularly w h e n v a l u e a d d e d in a n i m a l h u s b a n d r y and a g r o p r o c e s s i n g industries is included. In 1993 a g r i c u l t u r e a n d a n i m a l h u s b a n d r y a c c o u n t e d f o r r o u g h l y 9 percent of G D P and a g r o p r o c e s s i n g f o r 11 p e r c e n t , b r i n g i n g the c o m b i n e d total to 2 0 percent of G D P (see Table 10.1). T h i s r e p r e s e n t s

Table 10.1

Value of Agricultural Production, 1980 and 1993 (percentage of GDP) At current prices

At constant 1962 prices

1980

1993

1980

1993

35.2

19.6

36.5

35.9

23.3 19.1 16.4 1.8 0.9

5.9 3.1 2.4 0.1 0.6

17.6 11.6 8.9 2.0 0.7

14.9 7.9 6.8 0.1 1.0

Basic grains Maize Beans Rice Sorghum

2.6 1.4 0.4 0.3 0.5

2.0 1.0 0.5 0.1 0.3

3.9 2.5 0.4 0.5 0.5

4.8 2.9 0.7 0.5 0.6

Other crops

1.7

0.8

2.2

2.2

4.5 2.6 0.4 0.5 0.1 1.0

3.0 1.8 0.1 0.4 0.0 0.6

7.9 3.4 0.8 0.4 0.1 3.3

8.6 3.1 0.8 0.3 0.1 4.3

7.4 4.8 1.9 0.7

10.8 7.2 2.8 0.8

10.9 7.1 2.9 0.9

12.5 9.1 2.7 0.7

Agriculture

and

agroindustry

Crops Principal export products Coffee Cotton Sugar cane

Animal husbandry and Livestock raising Forestry Fishing Apiculture Poultry Agroindustrial Food products Beverages Tobacco Source: BCR.

miscellaneous

212

Carlos

Accvedo

a m a r k e d d e c l i n e f r o m a g r i c u l t u r e ' s s h a r e of G D P in 1980, w h e n (including a g r o p r o c e s s i n g ) the total stood at 3 5 p e r c e n t .

The Deterioration

of Real Prices

in

Agriculture

A m a r k e d d e t e r i o r a t i o n in a g r i c u l t u r e ' s i n t e r s e c t o r a l t e r m s of trade, propelled by d e c l i n e s in the relative prices of c o f f e e and b a s i c grains, played the key role in this d e c l i n e . In fact, w h e n o u t p u t is v a l u e d at constant 1962 prices (the year used as a b a s e for Central R e s e r v e B a n k [ B C R ] e s t i m a t e s of " r e a l " i n c o m e ) , the r e p o r t e d share of the agricultural sector as a w h o l e r e m a i n e d r e m a r k a b l y s t a b l e , at a p p r o x i m a t e l y 3 6 p e r c e n t of G D P (see Table 10.1). By 1 9 9 3 the price index for the agricultural sector relative to that of G D P had s l i p p e d to 75 percent of its 1989 level, and to only 35 percent of its 1 9 8 0 level (see Figure 10.1 and Table 10.2). In t e r m s of f o r e i g n e x c h a n g e , too, a g r i c u l t u r e ' s r e l a t i v e s i g n i f i c a n c e d i m i n i s h e d in the 1980s and early 1990s, p a r t i c u l a r l y due to the increase in r e m i t t a n c e s f r o m S a l v a d o r a n s resident o v e r s e a s . N e v e r t h e l e s s , e x p o r t s

Figure 10.1 Relative Prices of Agricultural Goods Compared with Nonagricultural Goods and Services, 1970-1993 (1962 = 1)

Source: USAIO, from BCR.

Structural

Table 10.2

Adjustment,

Agriculture,

and Peace

213

Indices of Implicit Prices of Agricultural Production and GDP, 1980-1993 (1962 = 100) Indices of implicit prices

Year

Agriculture

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

294.9 267.4 276.5 297.3 308.9 351.5 551.5 435.3 522.3 515.3 585.5 621.7 603.7 668.8

GDP 271.1 286.6 314.9 351.6 397.1 478.7 656.0 748.0 870.5 1,014.5 1,249.8 1,405.2 1,534.0 1,764.5

Ratio of agriculture to GDP 1.09 0.93 0.88 0.85 0.78 0.73 0.84 0.58 0.60 0.51 0.47 0.44 0.39 0.38

Source: Central Reserve Bank, Revista Trimestral, various issues.

g e n e r a t e d by a g r i c u l t u r e , a n i m a l h u s b a n d r y , a n d a g r o p r o c e s s i n g still acc o u n t f o r m o r e than 5 0 p e r c e n t of El S a l v a d o r ' s total export e a r n i n g s (see T a b l e 10.3). A m o n g the c o u n t r y ' s e x p o r t s , c o f f e e c o n t i n u e s to o c c u p y first p l a c e : In 1 9 8 9 - 1 9 9 3 it a c c o u n t e d for 3 7 p e r c e n t of total e x p o r t s . A g r i c u l t u r e , animal h u s b a n d r y , and a g r o p r o c e s s i n g e m p l o y m o r e than 5 0 p e r c e n t of El S a l v a d o r ' s e c o n o m i c a l l y a c t i v e p o p u l a t i o n ( F U S A D E S 1994). T h e agricultural and a n i m a l h u s b a n d r y sector a l o n e a b s o r b s 3 4 percent of the labor f o r c e . El S a l v a d o r ' s a g r i c u l t u r a l s e c t o r w a s s e v e r e l y a f f e c t e d by the political and e c o n o m i c crisis that g r i p p e d the c o u n t r y in the 1980s. T h e Ministry of P l a n n i n g a n d C o o r d i n a t i o n of E c o n o m i c a n d Social D e v e l o p m e n t ( M I P L A N 1 9 9 2 b ) e s t i m a t e d the total direct d a m a g e s in the s e c t o r at 4 6 5 million c o l o n e s , a n d the o p p o r t u n i t y c o s t d u e to the r e d u c t i o n in c u l t i v a t e d area and yields at 4 . 3 8 billion c o l o n e s . At the e n d of the d e c a d e the s e c t o r b e g a n a p r o c e s s of r e c o v e r y to p r e w a r o u t p u t l e v e l s . D u r i n g the p e r i o d 1 9 9 0 - 1 9 9 3 , the v a l u e a d d e d g e n e r a t e d by a g r i c u l t u r e , a n i m a l h u s b a n d r y , a n d a g r o p r o c e s s i n g g r e w at 4 . 6 p e r c e n t p e r y e a r in real t e r m s . T h e a r e a , y i e l d , a n d o u t p u t of b a s i c g r a i n s s h a r e d in this g r o w t h . With the e x c e p t i o n of c o t t o n , the p r o d u c t i o n of e x p o r t c r o p s a l s o r e b o u n d e d ( s e e A p p e n d i x Table A.9). T h i s r e c o v e r y of p r o d u c t i o n has not b e e n s u f f i c i e n t , h o w e v e r , to arrest the s l i d e in the s h a r e of the agricultural s e c t o r in n o m i n a l G D P , d u e to the c o n t i n u i n g deterioration of relative prices. In a n a l y z i n g this deterioration, the literature on El S a l v a d o r has tended to e m p h a s i z e the n e g a t i v e e f f e c t s of c u r r e n c y o v e r v a l u a t i o n on the

214

Carlos

Table 10.3

Acevedo

Value of Agricultural Exports, 1986-1993 (percentage of total exports) 1986

1987

1988

1989

1990

1991

1992

1993

84.4

73.9

73.4

61.3

63.1

61.5

53.7

53.7

Traditional 77.6 Coffee (various forms) 73.2 Unrefined sugar 3.4 Cotton 1.1

64.2 59.9 2.0 2.3

63.5 59.3 3.1 1.1

49.3 46.4 2.7 0.2

49.3 45.4 3.6 0.4

43.4 37.8 5.5 0.2

33.4 25.7 7.5 0.3

35.6 31.1 4.3 0.2

6.8

9.8

9.9

12.0

13.8

18.1

20.2

18.1

0.0 2.3 0.3 0.2

0.3 3.5 0.3 0.3

0.4 2.6 0.1 0.3

0.7 2.0 0.2 0.4

0.4 2.5 0.2 0.5

—

—

3.5 0.3 1.0

3.4 0.5 1.2

0.1 3.6 0.3 1.1

Vegetable products Fruit, fresh or dried Sesame seed Natural balsam Other

0.2 0.2 0.2 1.2

0.4 0.1 0.3 1.7

0.2 0.7 0.3 1.1

0.3 1.0 0.3 0.9

0.4 1.9 0.3 1.2

0.4 3.1 0.2 1.1

0.3 1.7 0.2 1.5

0.4 1.0 0.1 1.1

Processed foods Bakery products Other

0.1 1.1

0.1 1.5

0.1 2.1

0.2 2.7

0.2 2.7

0.3 4.5

0.6 7.1

0.5 7.5

Textiles Cotton thread Cotton cloth

0.9 0.1

1.0 0.2

1.5 0.3

2.6 0.6

3.1 0.5

3.0 0.6

3.1 0.6

1.9 0.5

Total agriculture and agroindustry (millions of U.S. dollars)

637

437

447

305

367

362

321

393

Total exports (millions of U.S. dollars)

755

591

609

498

582

588

598

732

Total agriculture agroindustry

and

Nontraditional Animal products Beef Shrimp Honey Other

Source:

BCR.

c o m p e t i t i v e n e s s o f p r o d u c e r s of tradeable g o o d s in general. With e x change-rate overvaluation, agricultural products must c o m p e t e on the dom e s t i c market with i m p o r t e d products that are artificially c h e a p , w h i l e agricultural exports b e c o m e less remunerative. T h e impact o f o v e r v a l u a tion is greatest for t h o s e p r o d u c t i v e a c t i v i t i e s that have the h i g h e s t perc e n t a g e o f national v a l u e a d d e d in their c o s t c o m p o s i t i o n . 1 A c c o r d i n g to estimates by Norton ( 1 9 9 0 ) , more than half o f the decline in real prices in El S a l v a d o r ' s agricultural s e c t o r b e t w e e n 1 9 7 8 and 1 9 8 6 w a s c a u s e d by exchange-rate overvaluation. T h e adjustment program begun in 1 9 8 9 ( M I P L A N 1 9 8 9 ) i m p l e m e n t e d e x c h a n g e - r a t e liberalization, w h i c h w a s e x p e c t e d to result in d e v a l u a t i o n of the real e x c h a n g e rate. It w a s assumed that devaluation w o u l d increase

Structural

Adjustment,

Agriculture,

and Peace

215

the profitability of agricultural production and thereby stimulate growth in the value of agricultural production (Norton 1990; Norton and L i é v a n o 1988). In practice, however, the real exchange rate appreciated, driven by inflows of foreign exchange f r o m remittances and external assistance (see Chapter 4). A s e c o n d e l e m e n t o f t e n cited as a factor in the deterioration of agricultural real prices is the asymmetrical tariff treatment given to agriculture and industry. A c c o r d i n g to calculations by Norton and Llort (1989), in the mid-1980s Salvadoran industry e n j o y e d effective protection of 27 percent, while agriculture faced a negative effective protection of 25 percent. This situation has improved as a result of the tariff reductions carried out since 1989 in the context of adjustment. Despite these efforts, the tariff structure maintains some discrimination against the agricultural sector in f a v o r of industrial production. Although many industrial outputs enjoy the m a x i m u m tariff protection levels, tariffs on industrial inputs are pegged at the m i n i m u m . This disadvantages agriculture, both by raising industrial output prices and by lowering the prices of imported inputs, some of which are substitutes for domestically produced agricultural goods. But the fact that the extent of tariff discrimination against agriculture has lessened in recent years means that this cannot be blamed for the further decline in relative prices. A third factor that helps to explain the deterioration of real agricultural prices is the price liberalization undertaken as part of the adjustment program. Until 1989, agricultural price policy in El Salvador included a number of c o m m o n interventionist measures: guaranteed prices for producers, consumer price controls, credit and input subsidies, and state marketing of agricultural products. After 1989 such interventions were abandoned, and price policy was revised so as to peg internal prices to international prices plus importation costs. A system of price categories implemented for imports of some basic grains cushioned the impact of international price fluctuations and facilitated the anti-inflationary m a n a g e m e n t of local prices (Binswanger 1991). T h e world m a r k e t context, however, w a s a d o w n w a r d tendency of prices for primary c o m m o d i t i e s ( C E P A L 1992, 1993c; FAO 1992, 1993). Hence, the n a r r o w i n g of the differential b e t w e e n internal and external prices has s i g n i f i c a n t l y e x a c e r b a t e d the deterioration of real agricultural prices. T h e decline w a s especially dramatic in the case of coffee, the country's principal export crop. As international market prices sank to their lowest level since World War II, p r o d u c e r prices collapsed. By 1991/92, the real price ( d e f l a t e d by the C P I ) received by Salvadoran g r o w e r s was only 28 percent of its 1980/81 level, and only 20 percent of its peak level in 1985/86 (see Table 10.4). Real prices for basic grains also tumbled after 1989. By 1992/93, the real producer price for maize stood at 75 percent of

216

Carlos

Acevedo

its 1 9 8 5 / 8 6 l e v e l , and the real producer price for b e a n s s t o o d at 7 0 p e r c e n t o f its 1 9 8 5 / 8 6 level ( s e e T a b l e 1 0 . 5 ) . 2 T h e r e is n o c o n v i n c i n g r e a s o n , e v e n in theory, to adopt a l a i s s e z - f a i r e agricultural price p o l i c y in a w o r l d o f market i m p e r f e c t i o n s and instability. In p r a c t i c e , to d o s o is e x t r e m e l y risky. N o i n d u s t r i a l i z e d c o u n t r y in the w o r l d surrenders its d o m e s t i c agricultural p r i c e s to the d i c t a t e s o f the international market. O n t h e contrary, the g o v e r n m e n t s o f i n d u s t r i a l i z e d

Table 10.4

Coffee Prices and Exports, 1980/81-1992/93 Price to producers

Harvest year

Nominal (colones/quintal)

Real 3

1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93

148.7 167.0 161.6 182.7 202.4 405.0 278.5 349.5 370.6 390.3 382.5 267.4

148.7 145.4 125.9 125.8 124.8 204.2 106.5 106.9 94.7 84.1 67.0 40.9

Exports Volume Export price Value (millions of quintals) (dollars/quintal) (millions of dollars) 84.3 105.2 116.7 126.4 132.9 162.9 109.4 130.9 128.2 77.4 80.6 58.6 60.0

3.65 3.53 3.44 3.73 3.13 3.45 3.28 2.46 2.21 3.38 2.63 2.84 3.77

308.1 371.0 401.0 471.0 416.0 562.3 359.4 321.9 283.0 261.5 212.2 166.7 226.3

Source: Consejo Salvadoreño del Café. Note: a. Nominal price deflated by CPI (1980/81 = 100).

Table 10.5

Prices of Maize and Beans, 1985/86-1992/93 Prices to producers (colones/quintal)

Harvest year

International price of maize 3 (dollars/quintal)

Maize

Beans

Nominal

Real

1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93

4.63 3.26 4.07 5.28 5.00 4.76 4.96 4.36

26.0 35.9 37.1 44.7 59.4 64.0 71.1 63.8

26.0 27.2 22.5 22.7 25.4 22.2 21.6

b

Nominal 84.7 96.5 207.3 177.1 195.0 269.0 188.5 195.3

Realb 84.7 73.2 125.8 89.7 83.3 93.5 57.3

Sources: Dirección General de Economía Agropecuaria; BCR. Notes: a. International price corresponds to U.S. yellow maize no. 2, FOB Gulf of Mexico ports. b. Nominal price deflated by CPI (1985/86 = 100).

Structural

Adjustment,

Agriculture,

and Peace

217

countries deploy a wide array of interventions to support producer prices and restrain domestic price fluctuations. T h e case f o r such policies in El Salvador is at least as compelling as it is in France, the United States, or Japan. Nontraditional

Agricultural

Exports

Any policy for agricultural d e v e l o p m e n t in El Salvador is c o n d e m n e d to fail unless it results in significant increases in"profitability in this sector. This r e q u i r e s not only a more f a v o r a b l e structure of prices, but also increased productivity. T h e latter can c o m e about not only through increases in crop yields, but also through changes in the crop mix. T h e higher-value crops toward which production could be reoriented include nontraditional agricultural exports. This has considerable appeal in theory, but the practical risks involved should not be minimized. T h e first risk is that of an adverse international context. 3 As noted earlier, the global e c o n o m i c context for a g r i c u l t u r e has been characterized since the 1980s by a marked decline in relative prices. In the specific case of El Salvador, the fall in value of c o f f e e exports despite increased export v o l u m e (see Table 10.4) provides a particularly dramatic illustration. But adverse price trends also help explain why e f f o r t s to diversify agricultural exports under the Caribbean Basin Initiative—including such nontraditional agricultural products as sesame, honey, melons, okra, broccoli, lemons, watermelons, cashew nuts, hog plums, myrtle, a n d natural b a l s a m — d i d not significantly alter the composition of agroexports (see Table 10.3). S e c o n d , technological and institutional d i f f i c u l t i e s hinder e f f o r t s to shift to production of more valuable crops, particularly in the case of small f a r m e r s w h o now cultivate basic grains. Sixty-eight percent of the maize, 73 percent of the beans, and 50 percent of the rice produced in 1989 were g r o w n on f a r m s 0.5 to 2 hectares in size ( L o p e z C o r d o v e z 1994, p. 32). T h e majority of the farmers growing basic grains have limited or no access to credit, little technical assistance, soils of marginal quality, and little storage capacity. In the absence of more e x t e n s i v e s y s t e m s of credit and technical support, further efforts to reorient agriculture toward international trade are likely to benefit only those f a r m e r s w h o have a comparative advantage in terms of access to productive resources. This would reinforce the bimodal structure that has so long characterized Salvadoran agriculture, and that constitutes one of the country's fundamental weaknesses. Third, intrasectoral restructuring toward nontraditional agricultural exports at the expense of staple grains could negatively a f f e c t the internal f o o d supply, increasing the c o u n t r y ' s vulnerability to international supply fluctuations. T h e steep rise in imports of powdered milk and meat in 1992 and the shortage of beans in 1993 illustrate the risks in such a strategy. T h e a b o v e concerns d o not imply that s o m e s h i f t of agricultural resources toward nontraditional crops is not warranted, particularly in cases

218

Carlos Acevedo

w h e r e there is s c o p e for the creation of a d d i t i o n a l v a l u e a d d e d in a g r o p r o c e s s i n g . But they d o imply a need f o r c a u t i o n , a n d s u g g e s t that n o n t r a d i tional e x p o r t s s h o u l d not be r e g a r d e d as a p a n a c e a f o r the e c o n o m i c crisis of the agricultural sector.

The Agrarian Structure and the Case for Further Reform T h e " a g r a r i a n q u e s t i o n " historically h a s b e e n a root c a u s e of social c o n flict in El S a l v a d o r . To a large extent this c o n t i n u e s to be true, d e s p i t e partial e s c a p e v a l v e s in the f o r m of o u t - m i g r a t i o n , e x p a n s i o n of the i n f o r m a l sector of the e c o n o m y , a n d the ^ d i s t r i b u t i v e e f f e c t s of the limited agrarian r e f o r m s u n d e r t a k e n in the 1980s. T h e f o c a l point of the agrarian q u e s t i o n has b e e n land, but it a l s o e m b r a c e s a c c e s s to o t h e r p r o d u c t i v e r e s o u r c e s , i n c l u d i n g credit and technical assistance.

Land T h e availability of arable land in El S a l v a d o r is a p p r o x i m a t e l y 0.7 h e c t a r e per rural i n h a b i t a n t , or 2.1 h e c t a r e s per p e r s o n a c t i v e l y e n g a g e d in agric u l t u r e ( C E P A L 1 9 9 3 a , p. 57). U n d e r the a g r a r i a n r e f o r m p r o c e s s that b e g a n in 1980, a p p r o x i m a t e l y 2 9 5 , 0 0 0 h e c t a r e s of land w e r e r e d i s t r i b u t e d , e q u a l to a l m o s t o n e - f i f t h of the arable land. P h a s e I of the r e f o r m e x p r o p r i a t e d f a r m s of m o r e than 5 0 0 h e c t a r e s . T h e 2 4 4 l a n d o w n e r s a f f e c t e d w e r e c o m p e n s a t e d with 3 0 - y e a r b o n d s . P h a s e II, w h i c h w o u l d h a v e e x t e n d e d the r e f o r m to h o l d i n g s of 1 0 0 - 5 0 0 h e c t a r e s , i n c l u d i n g m u c h of the c o u n t r y ' s c o f f e e e s t a t e s , w a s n e v e r i m p l e m e n t e d . P h a s e III a t t e m p t e d to t r a n s f e r land titles to t e n a n t s on r e n t e d l a n d s . D i r e c t b e n e f i c i a r i e s n u m bered slightly m o r e than 8 5 , 0 0 0 peasant f a m i l i e s , c o m p r i s i n g 10 percent of the c o u n t r y ' s p o p u l a t i o n ( s e e Table 10.6). R o u g h l y 7 0 p e r c e n t of the red i s t r i b u t e d land w a s o r g a n i z e d into c o o p e r a t i v e s . B e c a u s e the last agricultural c e n s u s w a s p u b l i s h e d in 1971, it is d i f f i cult to d o c u m e n t the e f f e c t s of the agrarian r e f o r m a n d the civil w a r on El

Table 10.6

Beneficiaries of Land Reform in the 1980s

Families benefited People benefited Hectares Hectares/family

Phase 1

Phase III

Voluntary transfers3

Total

36,697 194,494 215,167

42,289 259,183 69,605

6,041 36,850 10,922

85,227 490,527 295,694

5.86

1.63

1.81

3.47

Sources: OSPA-MAG (1992, Cuadro 7, p. 12, and Cuadro 107, p. 135); FINATA (1993, Cuadro 3-1, p. 8). Note: a. Decree 839.

Structural

Adjustment,

Agriculture,

and Peace

219

Salvador's agrarian structure. There have been two major attempts to gather the relevant data since the mid-1980s—one based on a survey of farmers, the other based on a survey of rural households—with somewhat conflicting results. The results of the first study, carried out by the Ministry of Agriculture in 1987, are summarized in Table 10.7. According to this study, as a result of the reform the average size of large agricultural holdings was reduced from 289 to 133 hectares (CEPAL 1993a, p. 62). Based on these results, some observers (for example, Seligson 1994, p. 22; Grindle 1986, pp. 134-136) have rated the Salvadoran experience as the most extensive "nonsocialist" agrarian reform in Latin America with the exception of Mexico. Be that as it may, the success of the agrarian reform should not be exaggerated. Such changes as did occur in the 1980s were due not only to the reform, but also to the displacement of large numbers of families w h o migrated to provincial capitals, San Salvador, or abroad. S e l i g s o n ' s analysis of the second s o u r c e of d a t a — a 1 9 9 1 - 1 9 9 2 M I P L A N survey of rural h o u s e h o l d s — i n d i c a t e s that the n u m b e r s of the land-poor, landless, and permanent w a g e w o r k e r s have fallen since the 1971 c e n s u s , both in absolute terms and as a fraction of the economically active agricultural population (see Table 10.8). D u r i n g the s a m e period, h o w e v e r , u n e m p l o y e d agricultural labor grew significantly in absolute and relative terms. Seligson estimates that in 1991/92, 34 percent of the economically active population were entirely landless and working as temporary day laborers, and 13 percent were landless and working as permanent w a g e workers. 4 A further 17 percent w e r e land-poor, with access to less than one manzana (0.7 hectare). 5 In total, more than 370,000 adults, constituting 64 percent of the economically active agricultural population, had little or no land. 6 Viewed in this c o n t e x t , the land-transfer p r o g r a m c o n t a i n e d in the peace a c c o r d s — w h i c h , if fully implemented, would provide land to some 47,500 b e n e f i c i a r i e s — i s clearly insufficient to solve the p r o b l e m of rural landlessness. At most it could resolve the problem of lack of land for about 75,000 adults. T h i s w o u l d still leave roughly 3 0 0 , 0 0 0 a d u l t s — m o r e than half of the agricultural labor f o r c e — w i t h little or no land, only one-quarter (77,000) of w h o m have p e r m a n e n t e m p l o y m e n t . T h i s d o e s not differ dramatically f r o m the agrarian situation at the beginning of the war. T h e picture is even less e n c o u r a g i n g w h e n one notes that the landtransfer program envisaged in the peace accords has been considerably delayed and is ultimately likely to reach a smaller number of beneficiaries. A lack of f u n d s to finance land acquisition is often blamed for the delays, but in reality a d m i n i s t r a t i v e bottlenecks, t h e m s e l v e s a s y m p t o m of a lack of political resolve, have been the major impediments (see Chapter 5).

Agricultural

Credit and Technical

Assistance

Access to agricultural credit also has been a long-standing problem for the rural poor in El Salvador. Prior to 1989, rural credit policy was characterized

220

Carlos

Acevedo

• E 8 IH oov

CQ o e e —

E £

ci rj- o ^ roo o in oo «ri oo in io oo CJ fñT (N

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