Sectors of the Economy
Figure 5. Estimated Gross Domestic Product by Sector, 1986
Source: Based on information from Economist Intelligence Unit,
Country Report: Guatemala, El Salvador, Honduras, No. 3,
London, 1988, 3.
An examination of GDP by sector confirmed that, despite a
modest recovery in 1987, El Salvador's economy was still
vulnerable. Even though most sectors showed some growth in 1987,
all registered below their 1978 or 1979 peaks.
Thanks to improved weather conditions, the agricultural
sector recovered in 1987 from its 1986 decline, rising 3.1
percent, which merely erased the sector's 3.1 percent loss in
1986. The importance of the agricultural sector, particularly
coffee, in the economy cannot be overemphasized. In 1987, for
example, despite a decrease in coffee production value
attributable to lower international coffee prices, coffee still
represented approximately 7 percent of GDP, 30 percent of
agricultural output, and 60 percent of total exports. Coffee
production recovered substantially, about 6 percent, in 1987 as a
result of improved weather conditions and increased use of
fertilizers. Fortunately, because most coffee was grown in the
western part of the country, away from the civil conflict,
production was unaffected
Analysts believed that in the future the fate of El
Salvador's coffee earnings would depend on both producer prices
and government-imposed price or exchange controls. According to
some estimates, producer prices might eventually decline to
levels at or below the average cost of production. Such a decline
in prices could have catastrophic consequences for the country in
both the short term and the long term. A decline in coffee prices
would limit the country's ability to earn foreign exchange,
resulting in foreign exchange allocation problems. Foreign
currency shortages would then exert upward pressure on prices.
Unprofitable production could impede further investment in coffee
production and eventually reduce the coffee industry's capacity
to generate export surpluses.
Government policies had a major impact on the profitability
of coffee production. Price controls and exchange rate policies
pursued by the government of Jose Napoleon Duarte Fuentes during
the early 1980s led many coffee growers to claim that coffee
growing was unprofitable. Even in years of strong world prices,
coffee growers were adversely affected by the exchange rate
manipulation and price controls effected by the National Coffee
Institute (Instituto Nacional de Cafe--Incafe). It was unclear,
however, whether Incafe would continue to operate under a more
Sugar and cotton, once important agricultural crops,
accounted for less than 10 percent of agricultural value added in
1987 and less than 5 percent of total Salvadoran export earnings.
Low world prices adversely affected sugar production and
inhibited investments. Cotton production declined because of the
armed conflict and low international prices. For example, in 1986
average production costs of cotton exceeded international prices.
During 1987 manufacturing accounted for about 15 percent of
total value added and continued its consistent recovery.
Nevertheless, the sector's estimated 2.7 percent growth left
value added in manufacturing almost 10 percent below the 1980
level. The gradual recovery in manufacturing could be attributed
to increased demand for food products, beverages, and nonmetallic
products. In 1987 food processing and beverages represented more
than half of the value added in the manufacturing sector.
The construction industry proved to be the economy's only
bright spot in 1987, registering growth for the third consecutive
year with 14 percent growth above 1986. Compared with 1979,
however, activity remained low. Moreover, rapid growth in 1987
reflected efforts to replace the structures and units damaged in
the 1986 earthquake rather than a general revival of the
Services represented almost half of GDP in 1986. Like
construction and manufacturing, service activity continued on an
upward trend in 1987 after falling by almost 25 percent between
1978 and 1982. As in other areas, however, 1986 value added by
services remained approximately 17 percent below its 1978 peak.
Between 1970 and 1978, service output grew by 54 percent. With
the slowdown in economic activity after 1978, services declined
by 17 percent between 1978 and 1987.
Service activity was tied closely to prevailing trends in the
economy and therefore didn't have the dynamism of agriculture and
industry. Service activity was also oriented exclusively toward
domestic markets and thus did not affect the country's external
economic position. Services included transportation, commerce,
insurance, health care, utilities, and other services provided by
Data as of November 1988