El Salvador is shaping up to be a worthy example of economic development for Central America, thanks to the implementation of public policies that promote economic liberty. In spite of its turbulent past, a bloody civil war and recent natural disasters, this small nation has taken important steps to combat poverty—and other countries in the region can learn important lessons from El Salvador.

Since the 1990s, El Salvador has adopted a development model characterized by the privatization of state industries, deregulation, commercial and financial liberalization, reform of the pension system, and the adoption of the US dollar as the official currency. It is no coincidence that in the Economic Freedom of the World Report published annually by the Fraser Institute, El Salvador has risen from 84th in 1990 to 27th in 2002 in terms of its economic freedoms when compared with 123 other nations.

The results of these market reforms - carried out by recent administrations - are visible to everyone. In only 11 years:

• Poverty in El Salvador fell from 63 percent to 48 percent.
  
  
• The infant mortality rate reduced by 40 percent.
  
  
• Illiteracy decreased from 23 to 14 percent.

The support of the Salvadoran people for this liberal agenda was evident at the ballot box during the 2004 elections. The incumbent party candidate, Tony Saca, won with 57 percent of the vote. Meanwhile Shafik Handal, the candidate of the leftist FMLN party, barely obtained 35 percent of the electorate. During his campaign, Handal promised “to end the neoliberal model.” The electorate’s rejection of his promise was revealing.

In recent months, the mass media has highlighted the benefits of these liberalization policies for Salvadorans. For example, just weeks ago it was reported that “for the second week in a row, as a result of changes occurring in the international market, the price of gasoline and diesel fuel will register… a reduction in prices.” All this while the price of fuel continues to increase in the rest of Central America.

El Salvador’s path to economic liberalization deserves to be imitated by other Central American countries.

The difference lies in the fact that El Salvador liberalized its hydrocarbons market and counts on several businesses to import refined gasoline into the country. Additionally, the consumer price no longer bound. The government’s role is limited to monitoring prices on a weekly basis in order to inform consumers of price changes. The result? Salvadorans enjoy the lowest fuel prices in the region.

A similar situation is occurring in El Salvador’s telecommunication industry. It was recently reported that the country will have to add a digit to telephone numbers due to the high demand for cellular phones. Currently, there are 1.5 million cell phones. With the additional digit, this number will increase to 10 million available lines —- 3.5 million more than the population of the country. In 1996, El Salvador opened its market to telecommunication competition and since then five telephone companies, five mobile phone companies, twenty international phone service providers and five internet service providers have started offering services. Many developing countries are currently experiencing a boom in the telecommunications industry. While this attracts foreign firms, local entrepreneurs are also able to capitalize on this burgeoning market.

In monetary policies, Salvadorans have also improved matters. Ever since the dollarization of the economy in 2001, average annual inflation has fallen to less than 3 percent and mortgage interest rates have fallen from 18 percent to six percent.

The approval of a free trade agreement between Central America and the United States (CAFTA) promises to strengthen El Salvador’s reforms, as it assures the permanence of less restricted trade that the country currently enjoys under the Caribbean Basin Initiative. It will also increase commercial development through foreign direct investment (FDI) in this Central American nation. Indeed, El Salvador is the first country in the region to ratify CAFTA, which, according to some estimates, could boost the country’s economic growth to 8 per cent annually.

El Salvador still has work to do before it can be classified as a developed nation; nevertheless, El Salvador’s path to economic liberalization deserves to be imitated by other Central American countries. It is showing the rest of the region that economic freedom can pave the way to economic development.






Contributed by Juan Carlos Hidalgo, an independent policy analyst in Costa Rica. Reprinted with permission from A World Connected.

To read another Global Envision article about Latin America, see A Partnership for Prosperity in Latin America.