CAFTA ACTS AS CATALYST FOR U.S. INTEREST
Promoting the country under the slogan ’El Salvador Works’ has stimulated foreign investment

The launch of CAFTA looks set to provide a further stimulus to El Salvador’s already dynamic economy. Government estimates show that the agreement could boost annual growth by 4 or 5%.

The Salvadorean economy is in good shape to benefit from an expansion in free trade thanks to the importance already given to direct foreign investment as a generator of economic growth. In 2002, the Heritage Foundation rated El Salvador as the Central American country with the highest level of economic freedom, and the second highest in all Latin America and the Caribbean.

Even so, says Vice President Carlos Quintanilla Schmidt, “the free trade agreement is not a panacea. We must do a lot of work as well.” Mr. Quintanilla Schmidt is President of Proesa, El Salvador’s Investment Promotion Agency. In the three years that Proesa has been working, it has brought 95 new investors into the country.

The organization’s support has also enabled many businesses already in the country to increase their
production.

The free trade agreement “is also an opportunity for businessmen in the U.S. to have a factory here to produce with less cost and to compete with Chinese products,” says the Vice President. “We have been doing everything to attract their investment, based on the slogan ‘El Salvador Works’,” he adds.

PATRICIA FIGUEROA Executive Director of Proesa

Everyone at the investment agency sees the inauguration of CAFTA as a crucial moment for the economic future of the country. “When CAFTA happens, many other things are going to happen at the same time. You are going to see U.S. companies looking to distribute their products in the region. You are going to see an increase in trade of all sorts,” says Patricia Figueroa, Proesa’s Executive Director.

“CAFTA is going to ensure that all the work that has been done in El Salvador since the beginning of the 1990s will be consolidated, such as the democratic progress, the macro-economic reforms, the labor competitiveness and position of Central America as the best place to invest,” she says.

The government has met with considerable success in stimulating new export industries through fiscal incentives for Free Trade Zones. There are currently 16 zones in the country. The free zone legislation allows companies to benefit from incentives, not only when they manufacture but also when they distribute their goods. “Many U.S. companies are interested in this prospect because El Salvador has one of the best airports in the region,” confirms Mrs. Figueroa. “In terms of manufacturing, just about every sector is going to benefit from CAFTA. In terms of tourism we are already negotiating with several groups to increase tourism,” she adds.

The U.S. is by far El Salvador’s most important economic partner. Its support for the privatization of the electrical and telecommunications markets expanded opportunities for U.S. investment in the country. More than 250 American companies have established either a permanent commercial presence or work through representative offices.

MIGUEL E. LACAYO Minister of Economy

“We have been very successful in opening up to the private sector in those areas where the private sector can do a better job than we can,” says Miguel E. Lacayo, Minister of Economy . Other free market policies enacted by the government include the privatization of the banking system and the public pensions system. Import duties have been reduced and price controls eliminated. Measures such as the stricter enforcement of intellectual property rights have also improved the investment climate.

With the private sector now firmly established the government’s priority has become the continued diversification of the economy away from the production of coffee and sugar. World prices for these two commodities are currently the lowest in history. The country has been able to maintain some growth through exports, but not to its traditional markets. In 1988 coffee exports accounted for more than half of export earnings. In 2002 they were 3.5%. An agro-industrial re-conversion program has been set up to manage the diversification out of coffee production. It has already productively re-converted 500,000 hectares of coffee preserve.

The most successful sector is the maquila industry, which cuts and assembles clothes for export to America. The Caribbean Basin Trade Partnership Act allows goods from the apparel industry to enter the U.S. duty-free under certain conditions. Growth in the maquila sector has already generated 90,000 jobs or 2% of the productive labor force.

The traditional dependency on coffee production has given way to new areas of industrial growth such as manufacturing

Other growth areas include call centers, distribution centers, energy production, processed food, manufacturing, and various agricultural products for which the country is climatologically and logistically well located. The government hopes that tourism will also generate significant growth in the future.

“Manufacturing is something that most people find very attractive once they come and set up shop here. The labor force is very productive, very easy to train, very stable. You have good infrastructure in terms of what you need to set up a business,” says the Minister of Economy.

“You can set up a company with this Ministry in two hours. You come here in the morning and two hours later you leave with your social security number, your tax number, working permits, everything. It is a place where it is very easy to do business,” he says.

Vice President Quintanilla Schmidt agrees. “We must build here not the American dream but the Salvadorean dream. The only way is to create jobs and opportunities.”