EL SALVADOR
Rank: 29 Regional Rank: 7 of 29
l Salvador’s economy is 70.3 percent free, according to our 2007 assessment, which makes it the world’s 29th freest economy. Its overall score is 0.7 percentage point lower than last year, partially reflecting new methodological detail. El Salvador is ranked 7th out of 29 countries in the Americas, and its overall score is notably higher than the regional average.
E
The economy is 70.3% free
100
80
@ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @
@ @ @ @ @ @
@ @ @ @ @ @
@ @ @ @ @ @
@ @@
El Salvador receives high scores for fiscal freedom, freedom from government, labor freedom, and monetary freedom. Personal and corporate tax rates are low, and overall tax revenue is not high as a percentage of GDP. Government expenditures are less than 15 percent of GDP, and stateowned businesses account for less than 1 percent of total revenues. The labor market is fairly flexible, though firing an employee can be costly. Inflation is also low thanks to a currency pegged to the U.S. dollar, but the government does distort prices on certain staples through price controls. Other freedoms are merely average, including business freedom, property rights, and freedom from corruption. Excessive regulation hampers business operations. The country’s inefficient judiciary is a major deterrent to foreign investors, as it can often neither enforce its rulings nor rule in a consistently impartial manner. Corruption is also prevalent. BACKGROUND: Since the signing of a 1992 peace accord between the government and guerrillas, El Salvador’s political parties have moderated their positions to cooperate on political and economic reforms. President Elias “Tony” Saca, with three years left in his five-year term, continues to pursue the free-market policies of his National Republican Alliance party, though with slightly less vigor. Reform will be aided by El Salvador’s participation in the Dominican Republic–Central America Free Trade Agreement (DR–CAFTA) with the United States. However, the country still suffers from a weak justice system, poor education, and rising violence associated with transnational youth gangs. How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
60
40
Americas Average = 62.3 World Average = 60.6
20
0
1995
2007
QUICK FACTS
Population: 6.8 million GDP (PPP): $34.1 billion 1.5% growth in 2004 1.9% 5-yr. comp. ann. growth $5,041 per capita Unemployment: 6.5% (2005 estimate) Inflation (CPI): 4.5% FDI (net inflow): $458.5 million Official Development Assistance: Multilateral: $38 million Bilateral: $228 million (55% from the U.S.) External Debt: $7.3 billion Exports: $4.3 billion Primarily offshore assembly exports, coffee, sugar, shrimp, textiles, chemicals, electricity Imports: $7.0 billion Primarily raw materials, consumer goods, capital goods, fuels, food, petroleum, electricity
167
EL SALVADOR’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 62.6 66.6 90.9 95.1 76.7 70 70 50 42 79.2
0
INVESTMENT FREEDOM — 70%
El Salvador maintains an open foreign investment climate, and foreign investors receive equal treatment. Foreign investors may obtain credit in the local financial market under the same conditions as local investors. The government limits foreign direct investment in commerce, industry, certain services, and fishing. Investments in railroads, piers, and canals require government approval. There are no controls or requirements on current transfers, access to foreign exchange, or most capital transactions. There are some restrictions on land ownership; foreign persons may purchase land, up to 245 hectares, only if there is a reciprocal arrangement with their home country.
L
L L L L L L L L L
50 100
100 = most free,
= world average
BUSINESS FREEDOM — 62.6%
Starting a business takes an average of 26 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Although El Salvador has made significant progress in reducing onerous regulations in recent years, both obtaining a business license and closing a business can be difficult. The overall freedom to start, operate, and close a business is restricted by the national regulatory environment.
FINANCIAL FREEDOM — 70%
The Salvadoran financial sector has experienced significant liberalization since the 1990s and is home to some of the region’s largest banks. In 2005, there were nine private commercial banks, two state-owned banks, and two foreign bank branches. Private banks controlled nearly 96 percent of bank assets in August 2005. Banks are allowed to offer a wide range of financial services. Interest rates are set by the market. Regulations on banks are open and transparent. Non-bank financial institutions are limited. There were 18 insurance companies in 2004, two of which were foreignowned. Foreign banks and insurance companies receive national treatment. The stock exchange participates in a regional association of stock exchanges.
TRADE FREEDOM — 66.6%
El Salvador’s weighted average tariff rate was 6.7 percent in 2005. Non-tariff barriers include import quota systems on rice and pork, discriminatory sanitary practices on poultry, export subsidies, and a few other discriminatory applications of standards. Consequently, an additional 20 percent is deducted from El Salvador’s trade freedom score to account for these non-tariff barriers.
PROPERTY RIGHTS — 50%
Property rights are moderately well protected in El Salvador. Lawsuits move very slowly and can be costly and unproductive. The course of some cases has shown that the legal system is subject to manipulation by private interests, and final rulings are sometimes not enforced. The inefficiency of the judiciary, along with crime, is cited as one of the main constraints on doing business.
FISCAL FREEDOM — 90.9%
El Salvador has relatively low tax rates. Both the top income tax rate and the top corporate tax rate are 25 percent. Other taxes include a value-added tax (VAT) and a tax on insurance contracts. In the most recent year, overall tax revenue as a percentage of GDP was 11 percent.
FREEDOM FROM CORRUPTION — 42% FREEDOM FROM GOVERNMENT — 95.1%
Total government expenditures in El Salvador, including consumption and transfer payments, are low. In the most recent year, government spending equaled 14.3 percent of GDP, and the government received 0.5 percent of its total revenues from state-owned enterprises and government ownership of property. Corruption is perceived as significant. El Salvador ranks 51st out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — 79.2%
The labor market operates under relatively flexible employment regulations that could be improved to enhance employment and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee is relatively costly. There are rigid restrictions on increasing or contracting the number of working hours.
MONETARY FREEDOM — 76.7%
Inflation in El Salvador is moderate, averaging 4.4 percent between 2003 and 2005. Relatively moderate prices explain most of the monetary freedom score. The government controls the prices of some goods, including electricity, and implements subsidies for diesel, petroleum, and liquid propane gas. Consequently, an additional 10 percent is deducted from El Salvador’s monetary freedom score to adjust for measures that distort domestic prices.
168
2007 Index of Economic Freedom