Peeling Away a Banana Republic: Lessons from Latin America

Image: Flickr, Peg Hunter
Image: Flickr, Peg Hunter

The embroidered slogan on the polo-shirt of El Salvador's minister of tourism said much about the prevalent attitude:

‘A government with you’. Minister José Rubin Rochi, with other ministers, had been sent out into the regions by the president in the wake of the destructive Hurricane Stan in October 2005 to show that the government did care.

El Salvador might be considered the original banana republic, the region of pliable, bendable governments. Not only was the fruit once the principal export from El Salvador and many of its neighbours, but they in turn were the target of manipulative external influences, from the American filibuster William Walker – who tried to gain control of all six Central American states in the 1870s – to Soviet and Cuban support of various guerrilla groups in the 1980s. Yet this image is being slowly peeled away.

El Salvador is showing that it is possible to deal with a violent history, skewed wealth distribution, high crime rates, a dependency on agriculture and the threat of catastrophic environmental degradation and natural disasters. Two earthquakes in 2001 cost 800 lives and left more than 100,000 of El Salvador’s six million people homeless.

On the recovery path

Its civil war left 75,000 dead and cost $5 billion. Within two years from its start in 1980, GDP shrunk by 25%.

But the war also precipitated political and economic reforms after the 1992 peace agreement. Now the government is rebuilding the country and putting themselves on the map economically.

Government showed its commitment to democracy and political reform by allowing ex-guerrillas to participate in elections, disbanding security forces implicated in human rights abuses and redistributing land to peasant families.

The government also pushed ahead with a range of market reforms, including streamlining the tax and social security systems, privatization of state-owned industries and liberalizing trade. External tariffs went down from a peak of 360% to an average of 8% today. The banking system is the region’s most liberal, with deposits now equal to 48% of GDP.

Salvador also aims to better employ the $2.8 billion in remittances from workers in the US, which amount to 15% of GDP, and to reduce its brain drain. One-third of Salvadoreans live in the US, and 70% want to live there.

Lastly, the government has realised that ensuring macro-economic stability is not enough to deal with the backlog of social and economic problems. It has set about a number of short- and longer-term initiatives including building a tourism industry and a new airport virtually from scratch. The effect: Salvador has quickly become an air transport hub for the region.

To take advantage of its labour force, Salvador’s investment promotion agency has successfully targeted high-tech industries bringing in $1 billion in 2004.

For the longer term, education is seen as crucial to economic competitiveness and social harmony. President Elias Antonio Saca’s government has focused on education reform, including the introduction of English in public schools.

Nowadays, El Salvador has a more deregulated and diversified economy, is less dependent on agriculture and is developing strong service and manufacturing sectors. But the government recognises this is not enough, a fact illustrated by anaemic growth locked around 1.5%, high crime rates and mounting debt. ‘Although we are proud of what we have accomplished up to now, in no way can we say that what we have now is what we want, or even what we aspire to,’ said Saca. Moreover, the region’s ability to promote export-led growth is under serious strain given the threat posed by cheap imports from China.

Lessons to emulate

  • Salvador, like Africa, has little option in making its own plans for a more positive future, but its recent development path offers guidelines:
  • Leadership quickly runs out of new ideas. Rigorous reform requires a political system that regularly empowers new generations of leaders to bring fresh ideas
  • Government should work closely with foreign governments and business in encouraging foreign direct investment, which is both targeted and assiduously courted.
  • Ruling parties must seek consensus not only within their own ranks but also among political adversaries to reduce suspicions of a radical change in strategy should the other take over.
  • Providing the right economic fundamentals will not necessarily lead to growth.
  • There is no substitute for education, skills and hard work in realising success.

El Salvador’s progress shows that salvation has to come from within, that external partnerships offer some rewards and possibilities through aid and market access, but an economy has to be constructed to take advantage of them.