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El Salvador Direct Foreign Investment and External Debt
Foreign capital, especially from the United States, played a
crucial historic role in El Salvador's economic development. In
the early decades of the twentieth century, foreign capital
(primarily British, American, and Canadian) contributed to the
development of a mining sector that produced gold and silver for
external markets. Investment from these countries also spurred
the development of the Salvadoran railroad and electrical
systems. Between 1930 and 1950, direct investment increased for
the processing of agricultural commodities and for the service
sector.
The amount of foreign capital flowing into the Salvadoran
economy during the 1960s and 1970s paralleled the rise and
decline of the CACM. During the 1960s, foreign capital supported
the development of import substitution industries, such as
Alcoa's 1963 joint venture to produce semi-finished products from
imported industrial extrusion ingot and Lenox's 1964 investment
to produce plastic products. The strong performance of the CACM
during the 1960s attracted direct foreign investment. Between
1963 and 1968, the stock of direct foreign investment increased
from US$43 million to US$110 million. Between 1968 and 1978,
however--the period of the CACM's decline--direct foreign
investment increased to only US$124 million. In the 1970s, a
larger share of direct foreign investment went to industries with
low value added, like those in the industrial free zone, rather
than toward import substitution industries. Until 1979 foreign
capital played an important role in El Salvador's most dynamic
industries, with the exception of brewing and cement. During the
1980s, capital inflows slowed in response to the country's
political and economic instability. Between 1980 and 1984,
foreign direct capital flowed in at a rate of about US$7 million
per year.
Increased foreign investment, particularly in export-oriented
industries, was an economic goal of the Duarte administration.
Although the instability engendered by the civil conflict
militated against it, the export promotion law of 1986 sought to
attract more foreign capital by granting a ten-year (renewable
for an additional ten-year period) exemption from most import
duties on inputs for industries that exported at least 25 percent
of their production. These industries were also exempted from all
revenue and net worth taxes. In an effort to simplify the often
frustrating procedure of registering foreign firms with the
government, a central documentation center was established to
address the needs of export-oriented firms.
Salvadoran external debt was mostly a result of extensive
government borrowing after 1979, which increased the government's
indebtedness from US$88 million in 1970 to US$1.5 billion in
1987. The private sector owed US$120 million to foreign creditors
in 1987. El Salvador's total external debt of approximately
US$1.7 billion represented less than half of the country's
estimated 1987 GDP. As a share of exports, debt service rose to
37 percent from 33 percent in 1986, slightly below the debt
service of other large debtor countries such as Brazil, Mexico,
and Argentina. On a per capita basis, El Salvador's debt was well
below that of Costa Rica, Mexico, Argentina, and Brazil.
Of the country's total 1987 debt service of US$182 million,
about US$113 million went toward principal, while only US$64
million went toward interest payments. Low interest payments
reflected the favorable terms associated with El Salvador's
external debt. The average interest rate on the debt in 1987 was
3.1 percent, and the average maturity was thirty-nine years, with
an average 8.6-year interest-free grace period. Thus, relative to
other heavily indebted countries, El Salvador's external debt
represented less of an obstacle to economic development. Over 90
percent of the Salvadoran debt was held by nonprivate lenders and
was publicly guaranteed. Almost half of the public debt was
bilateral, most of it held by the United States government. Other
factors, such as the civil conflict, deteriorating terms of
trade, and an antagonistic relationship between the private
sector and the Duarte administration, have more adversely
affected the country's economy than has the government's
indebtedness.
In addition to multilateral aid from the
World Bank (see Glossary)
and bilateral aid, El Salvador made use of US$43
million of its IMF credit in 1987. To qualify for this credit,
the government initiated a short-term structural adjustment
program with limitations on credit and public sector spending and
the adoption of monetary targets, unification of the exchange
rate regime, the creation of new export promotion incentives, and
the formation of an external debt management committee to ensure
that autonomous and semiautonomous institutions did not
accumulate external debt too rapidly.
Future economic development in El Salvador seemed in the late
1980s to be highly dependent on political factors. The lingering
instability caused by the civil conflict inhibited investment,
damaged the infrastructure, denied secure access to certain parts
of the country, and forced the government to allocate an
abnormally high percentage of its budget to the military. Even a
complete cessation of hostilities, however, would be unlikely to
lead to complete recovery in the short term, given the structural
shortcomings of the economy.
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The lack of broad, accurate, and up-to-date government
statistics from El Salvador is compensated for to some extent by
the working relationships established in the late 1980s between
the Salvadoran government and the IMF and the United States
Department of State, particularly AID. Several Department of
State reports compiled by the embassy staff in San Salvador
provide an overview of the economy. Because Salvadoran
statistical reporting to the IMF was required by the
stabilization packages implemented in the mid-1980s, the IMF has
reliable statistics for the country. A good source for both
economic and political reporting is the quarterly Country
Profile: Guatemala, El Salvador, Honduras produced in London
by the Economist Intelligence Unit. A more historical perspective
on the economy is provided by Marc W. Herold's article
"Finanzekapital in El Salvador, 1900-80," as well as by David
Browings's El Salvador: Landscape and Society. (For
further information and complete citations,
see
Bibliography.)
Data as of November 1988
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