The middle class in the crossroad

The Political Balance

This is the beginning of the year and the political parties are getting ready to face the next elections in March. There is no doubt that this is an important issue, and that it is necessary to reflect over the political situation that the year 2002 left behind. Politics is a way to measure how efficient a society is to face a challenge. This article will try to analyze the performance of the most important institutions of the state.

The Legislative Assembly
The last important test for the Congressmen was the approval of the General Budget of the Nation. Despite the reluctance that was shown at the beginning, the parties represented at the Congress, with the exception of the FMLN, approved the Budget without any difficulties. It is necessary to make a couple of considerations about this subject.

1. It is a relief that the uncertain situation about the Budget is over now. The Legislative Assembly leaves it up to the Executive, and this is very important, especially when everyone knows that in 2003 the congressmen will be entirely dedicated to their electoral campaign. Therefore, the diligent approval of the General Budget of the Nation guarantees the performance of the state.

2. Despite the positive agreements that were reached about the Budget, it is not clear if the approval was the result of a transparent discussion about the priorities of the national expenses or a decision leaded by a political calculation. It is evident that there are plenty of aspects to discuss about this issue. The right-wing block of the Congress, willing to avoid any sort of discussion with the opposition about the public affairs, did not betray its traditional style of doing things. There was a press campaign to dissociate politics from the debates about the Budget. This is a curious situation that keeps pointing at the way in which the governmental team administrated the country in 2002.

Another important issue for 2002 was the way the congressmen dealt with the strike of the public system of health. Ever since the first days of the strike at the ISSS, the Congressmen got involved with it. Beyond the “natural” intentions to get a starring role in politics, since the beginning some legislators showed an enormous interest to present a set of solutions for the crisis. This is the context in which the 1024 decree was born and abolished, after a fulminating campaign against it. This campaign came from the groups of pressure that follow the steps of the right-wing parties.

However, the approval of the short-lived decree marked a sort of a rupture in the behavior of some of the congressmen, especially at the PCN. For the first time, after several years, the members of the PCN dared to defy the authority of ARENA. This was an act performed beneath the shadow of the elections; however that fact did not take away the importance of the initiative. This situation reminded ARENA about the need to consider the perspectives of the political opposition and its eternal ally. ARENA had probably forgotten about the needs of the PCN, since this party usually supported ARENA throughout the different decisions of the Executive, and received certain personal benefits (aimed to its most influential members).

On the other hand, there is no doubt that at a certain point, the image of a Congress willing to play a key role in the political life and favor the performance of the institutions, could help them to neutralize the negative image of the members of the Congress. In fact, the opinion polls reveal that eight out of ten Salvadorans thought that the Decree 1024 was a positive measure.

Many Salvadorans were satisfied to see that the solution was coming from the legislators, who worked as the mediators between an intransigent Executive power, the doctors, and the strikers. In the end, the Salvadorans keep longing for a wholesome performance inside the political system. There is no doubt that if the political system worked as such, plenty of problems could be resolved in the country.

However, despite the former considerations, the Legislative Assembly ended the year 2002 without neutralizing the negative perception that most Salvadorans have about this institution. Even if the opinion polls did not examine this issue in a specific way, the conception that the Salvadorans have about the performance of the political parties confirms the former idea. According to an opinion poll made by the end of the year by the IUDOP, the negative image that has affected the political parties is still alive. The last opinion poll revealed that 46.7% of the Salvadorans believe that the political situation has taken a turn for the worst, and that the political institutions are getting weaker.

Considering the performance of 2002, nothing much can be expected from the Legislative Assembly for 2003. It is almost impossible that the results of the next elections, unless something extraordinary happens, help to change the scenery. Such consideration is based on the frustrating situation of the system of parties. No major changes are expected for the 2003 elections, neither at the elite that controls these political institutions nor with the distribution of power between the parties that presently direct the country. Therefore, the only thing that can be predicted about the results of the next elections is that the old antagonisms will re-emerge with a sterile debate and without getting into a formal discussion of the main problems that affect the Salvadoran population.

The Executive Power
To evaluate the political performance of the government, it would be necessary to examine how did it face the main problems of the country during this period or to question its authoritarian attitude. It is also important to take a close look at how the Salvadorans perceive such performance. A typical aspect of the Flores administration is the President’s disregard about the public opinion. Throughout 2002, Flores had an authoritarian attitude when it came to deal with the national policies and certain issues connected with the foreign affairs.

About the political negotiation of the national affairs, the Flores administration stood out because of its incapacity to establish a dialogue with the opposition. In regard to its relation with the FMLN, the strategy of ARENA was to keep the opposition out from a public discussion about the main problems of the country. For that matter, Flores and his team used all sorts of ruses and an aggressive advertising campaign. When the opposition finally achieved to come out and get involved through their votes in the Legislative Assembly, the right-wing press launched a threat about unleashing a chaos, and the president proclaimed that he had been deceived by his allies in the PCN.

However, all of this rhetoric against the opposition has been nothing but the expression of the incapacity to reach an agreement. ARENA and its president, throughout 2002, paid little attention to this issue, regardless of the importance that it has for many Salvadorans. The control of the public opinion through an aggressive press, willing to denigrate and condemn the opposition, has been the most important weapon of the government. Because of this situation, no difference is made between the political opposition, the professional associations, the unions, the organizations of the civil society or the independent institutions of the state, such as the office for the Defense of the Human Rights.

On the other hand, the international policies are also an important issue for the evaluation of the Flores administration along the last year. The right-wing leaders have highlighted the positive international relations of its government, specially the one with the President of the United States, George W. Bush. No one can deny that Flores has been able to stand in a higher position before the rest of the presidents of the region. That is why the visit of the American President, his announcement about a Free Trade Agreement and the migratory opportunities in favor of the Salvadorans who live illegally in The United States are some of the achievements that stand out in the international policies of the present administration.

However, Flores is still far from becoming the statesman that his followers talk about. It would be enough to remember how shameful it was when Flores gave his public support to the coup d’état in Venezuela. During that time, Flores actually demonstrated that he was a president who was not convinced about the democratic principles, willing to support those who attack the most elemental laws of the political coexistence, which are necessary to implement all over the Latin American region.

The government of ARENA ends the year with a negative image. Almost half of the Salvadorans consider that ARENA is not a qualified administrator. Most of the citizenry is not satisfied with the way ARENA deals with the main issues of the country, specially when it comes to mention the economic issues and delinquency. A 53.4% of the population thinks that their economic situation is taking a turn for the worst. In addition, for 50.6% of the population, delinquency is still an extremely critical problem.

The population does not have a positive perspective for 2003. The population does not expect a radical change in the administration of the country. In this context, it is highly probable that Flores keeps using the confrontation and the discredit as his leading strategies against the opposition. There are no incentives to change the strategies. The opinion polls reveal that ARENA will win the next elections of mayors and congressmen, and probably the presidential elections as well in 2004. In summary, the public discredit of the others seems to bring results to a president who has turned denigration into his most effective weapon against the opposition.


The Political Opposition
To judge by the results of the public opinion polls, the performance of the political opposition has been deficient along 2002. Inside the Legislative Assembly as well as in the other institutions of the state, the opposition has not been able to present itself as a credible political alternative for the citizenry. The Salvadorans keep thinking that ARENA and the opposition are both responsible for the poor performance of the country. That is why before the alternative to vote for the opposition, many Salvadorans prefer not to vote. According to the last opinion poll made by the IUDOP, one fourth of the population would not vote for any of the parties that belong to the present political system. This situation confirms the last pieces of information about the bad image of the opposition: its incapacity to neutralize both the poor economic performance and the unsatisfactory political completion of the official party.

All of these considerations invite us to reflect about the strategies used by the opposition in 2002 to get closer to the Salvadorans. The FMLN kept using the same strategy: denunciation. Its leaders kept talking about the wear and tear of ARENA in order to get the votes of those who were unhappy with the official party. However, that strategy has not been effective enough, and it has become a threat for its own promoters.

That is why it is necessary to examine the traditional actions of the left-wing groups. The opposition has not acted at the height of the reality, most of all during 2002. The population has been talking about this subject and the remedies have been worse than the illness. That is why the FMLN has not gained the sympathy of the population in the opinion polls. The perspectives of the FMLN for 2003 are not flattering at all. According to the last opinion polls, none of the parties that belong to the opposition will be able to become the first political force of the nation. It is evident that this is a poor performance for a group of political forces that constantly criticizes the actions of the official party, aspiring to replace ARENA in the leading positions of power in the country.


The Organizations of the Civil Society
About the performance of the organizations of the civil society, it is necessary to mention the key role that they have played in the national political life. In this sense, 2002 has not been the exception. These organizations have worked as pressure groups, as institutions where the political actors are confronted to force the decisions connected with the interests of its followers. It would be convenient to establish a difference between the organizations according to its affiliation and its perspective about the governmental decisions.

In a first group there are those organizations gathered around the powerful National Association of the Private Business Companies (ANEP, in Spanish). This non-governmental organization has played a key role in the decisions of the Executive power. It works as a satellite of the official party, and its decisions are defended no matter what happens. On the other hand, the officials of ARENA try to adjust their political decisions to the interests and the aspirations of the main sectors of the business organizations. This has worked as a rule for 2002. The business elite received more benefits from the governmental policies, and they became the supporters of the cause of ARENA.

There are also those organizations from the civil society that criticize the governmental development. They also played an important role during 2002. The strike of the National Institute of Social Security (ISSS, in Spanish), and the large demonstrations organized to support those workers on strike give us an idea of its activities. In addition, they managed to gather the forces of some political parties for the approval of the Decree 1024, which prohibited the privatization of the health services.

In that sense, it is highly probable that the organizations of the civil society will keep playing an important role in the national political life in 2003. And this can be explained with the following reasons:

1. ARENA has not been able to find a state of equilibrium between the interests of the business elite and the rest of the sectors of the society.
2. The opposition has not been able to gain the necessary credibility to receive a political support from the voters during the next elections.

The Economic Balance

The governmental observations about the alleged success of the national administration present a positive –and a partial- balance of the economic performance. The year 2002, however, ended without reaching the economic growth level that the government presented as its goal, and the indicators of both the external and the public sectors practically show the same uneven situation, as always.

It is alarming to see that the government is not taking any corrective measures to improve this situation. Far from doing that, the government seems to keep holding on to a development strategy centered basically on the negotiation of the free trade agreements. The agreements with Chile, the Dominican Republic, and Mexico were signed –a strategy that did not improve the situation of the trade of balance with Mexico and caused a small increase in the exportations to the Dominican Republic-. Now the new goal is to sign a free trade agreement with the United States.

The year 2002 also brought a positive tendency in terms of the increase of the economic growth rates and the reduction of the fiscal deficit. There was a slight improvement on the economic growth rate, which, even if it did not reach the goal, was higher than the one obtained in 2001. However, it must be said that this improvement obeys, in part, to the enormous flows of public investment paid out by the government to finance the post-earthquake reconstruction projects. Most of these resources have been financed essentially through donations and loans, that is why it can be said that this kind of growth is not sustainable, since the government cannot finance, with its own income, the volume of such investments. If the earthquakes and the disasters of 2001 had not taken place, the growth rates would have been much lower without a doubt, and the GNP could have been much lower also.

Another positive sign is a slight reduction of the fiscal deficit in relation to the GNP. However, this has been the result of a policy of contraction of the regular expense and the result of the layoffs of the public employees. This has reduced the size of the state and its capacity to regulate these events.

An examination of the behavior of the Salvadoran economy during 2002 reveals more negative aspects than positive ones. This is especially true in reference to the activity and the composition of the macroeconomic indicators related with production, prices and salaries, the external sector, the public sector, and the monetary and the financial sector.

Production
The initial projection of the government about the economic growth established the growth rate of the GNP by 3%, to readjust it later by 2.5%. Despite the modest projection, that percentage was not reached, and according to the opinion of the officials of the Banco Central de Reserva (The Central Bank of Reserve, BCR, in Spanish), for 2002 they expected an increase of approximately 2.3% in the GNP.

At least this figure breaks the decreasing tendency of the growth rates; however, it is no guarantee of a sustainable recuperation process of those rates. That is because the main impulse for the growth came from the additional resources that the government receives for the post-earthquake reconstruction. As a reflection of this situation, we can see the unusual growth rates of the construction sector, which reached a 10% for 2001 and 2002. Unfortunately, this incentive will not last for long, and, in fact, the authorities of the economy estimate that, for 2003, the public investment in reconstruction will drop significantly.

It is also important to consider that the economic growth does not include the agricultural and the cattle-raising sector. This sector faces a terrible turning point because it lacks structural profitability, and because of the additional crisis caused by the abrupt reduction of both the prices of the coffee and the economic activity of this branch. For the third trimester of 2002, the available figures revealed a reduction of the volume of the economic activity at the agricultural sector and its quarterly GNP, which was smaller than the one experimented during 2001. The sectors that have promoted the growth (based on the volume of its production and the quarterly GNP until September of 2002) would be the reconstruction, the electricity and the industrial sectors.

Prices and Salaries
The control of the inflation is one of the most evident achievements of the government. Since 1996 we have been getting inflation rates of a single digit. The highest rate has been 7.4%, obtained in that same year; and the lowest one was reached during 1999 with –1% (this means that during this year the prices decreased). For 2002, it is estimated that the inflation rate will close by 2.5%, a considerably low rate that hides the reality of the endlessly increasing prices of food. These prices are actually subjected to higher inflation rates (higher than those reflected by the average growth figures of the prices made public by the governmental sources -see Proceso 1028-). For those living under the line of extreme poverty, the inflation phenomenon is much more severe than the official figures suggest.

During 2002, no adjustments were made to the minimum nominal wage, which remains at $144; this shows that the deterioration of the purchasing power has been a continuos problem along the year. The report about the year 2000 revealed a moderate deterioration of the purchasing power in a proportion of 5.12% between 1990 and 2000, (See Proceso 982). This is something that can be explained by the low inflation rates of the second half of the nineties, and by the policy of increases in the minimum wage, which came after the first administration of ARENA. The last increase on the minimum salary took place in 1998, when the urban minimum wage increased from $131 to $144.

The frozen minimum salary and the effect of the inflation in the last couple of years indicate that the real minimum salary has been deteriorated since 2000. If the inflation rates are added (1.8% for 2001 and 2.5% for 2002), the deterioration of the real minimum salary could be around 9%.
About the behavior of the minimum wage, it is important to notice that this one has eventually turned into the principle that regulates the way in which the salaries are established at the textile maquila. The minimum salary has also turned into a mechanism of competition for the country. As long as the minimum salary remains stable and in a low level, it will guarantee the existence and the arrival of international investors who operate this kind of industry, not only in El Salvador, but also in all of the countries that receive the benefits of the Caribbean Basin.

In this context, the proliferation of the textile maquilas turns itself into a source of diverse effects. At the same time that it generates a considerable amount of jobs, it also leads the governments to believe that to freeze the minimum wage is a desirable measure to retain and attract those investors interested in getting an inexpensive source of workers. President Flores has said this before (using different words, of course).

The External Sector
Throughout the nineties, the main problem that the external sector revealed was the balance of trade’s tendency to increase. This increase went from $726.7 million to $2,162 million between 1991 and 2001, which is an increase of 197%. For November of 2002, it was estimated that the balance of trade was around $2,007 million, that is why it would not look strange if the present year would end with a figure slightly higher than the one reached in 2001.

By November, the exportation of coffee fell drastically. The percentage of this exportation hardly reached $102 million. By the end of the year, the exportations will represent only one third of what they usually represented between 1998 and 2000, when the situation was already critical. By 2002, a considerable reduction in the rest of the traditional exports (sugar and shrimps) took place. The former reached an amount of $70 million in 2001, but by November, only $33 million were registered and this amount is not expected to increase by the end of the year. The shrimp exportations fell from $18 million in 2001 to $8 million by November of 2002, and that amount will hardly go beyond $10 million by December. This behavior fundamentally reflects the unfavorable conditions of the international market in relation to the basic products, characterized by the constant fall of the prices, which, in the case of the coffee, acquired a dramatic connotation.

The non-traditional exportation and the maquila exportations are the most important elements in the formation of the total gross exportations. The number of non-traditional exportations reached $991 million by November of 2002, this is equivalent to 35.9% of the total number of exportations. On the other hand, the maquila generated $1,627 million in exportations, an amount equivalent to 58.9% of the total number of exportations. However, if the amount of exportations made by the maquila is subtracted, the actual contribution of this sector is reduced to $440 million. This would be the gross amount of exportations made by the maquila, which represent less than half of the value of the gross non-traditional exportations and a 16% of the total number of exportations. It is important to mention that during the last years, the exportations of the maquila did not grow as much (3-8%) as they did before 2000, when the exportations grew up to a rate of 20%.

The importation, on the other hand, keeps growing; however, during the last couple of years, that tendency became weaker. Except for the year 2000 –when there was an increase of almost $900 million-, during the last four years the importation has increased moderately if it is compared with the ones observed during the first half of the nineties. The available information for 2002 reveals that, by November, the importation would have reached a $4,768 million, a much smaller amount than the total obtained for 2001, when it was added up to $5,027 million. By the end of the year the importation will increase, and although it will not be a considerable increase, it will be enough to cause a significant instability in the balance of trade.

This situation has been controlled thanks to the remittances and the loans. For 2002, it is estimated that the remittances will reach $1,968 million, an amount equivalent to 91% of the total deficit of the balance of trade. Despite this respectable level, in 2001 the remittances showed an inclination to a slow growth, and they only grew by 3% in 2002.

The remaining 9% of the trade’s deficit will be financed with the profits, since every year the country accumulates approximately $300 million of international gross reserves. By 2002 the capital that comes from the external sector increased because of the donations and the loans for the reconstruction. In fact, in the trimester between July and September, the surplus of the capital and the financial account increased by 18% if compared with the same months of 2001.

With these numbers, the surplus of the balance of payments could grow by the end of 2002, considering that, according to the officials of the chancellery, throughout the year approximately $355 million would have been received as donations. To put this piece of information into perspective, it should be considered that the surplus of the balance of payment for 2001 reached $344.3 million.

The Public Sector
The year 2002 will close with a deficit of 3.3% of the GNP in the public finances, which, even if it is not too bad, is lower than the one obtained in 2001 when it reached a 3.7%. This is mostly the result of the special emphasis that the government has placed on the containment of the fiscal deficit. For the Budget of 2002 and 2003, the government contemplated a reduction of 5% and 3%, respectively, for the ordinary expenses of the institutions that belong to the central government –except for the health and the education sectors-. Because of this Budget cut, the 2003 Budget contemplates a reduction of $17.1 million in relation to the 2002 Budget, something unusual in our recent history. However, that does not mean that it will be an acceptable measure, since it will bring along a reduction of the state’s potential to support the economic growth and the social development. At the same time, a campaign has been launched to reduce the fiscal evasion and the smuggling, in order to improve the tax collecting system; however, the revenue is not enough to cover the public expense.

By 2002, the revenue would be $1,629.7 million; this amount is superior to the one obtained in 2001 by 6.6% ($1,528.8). As always, the taxes that brought more money where those that come from the Value Added Tax (IVA, in Spanish) and the Income taxes, which brought $912.6 and $482.5 million, respectively, for a total of 85% of the collected taxes. According to the officials of the Ministry of Hacienda (Internal Revenue Service), by 2002 the amount of taxes would have been increased from 11.3% to 11.9% of the GNP.

About the expense, it is important to notice that, in addition to the deficit that it generated, it also contemplated the expenditure of approximately 4.3% of the GNP for the public investment. This is the reflection of the availability of the international resources for the reconstruction, and it explains the notable growth of the economic activity and the production of the construction sector. Nevertheless, the taxes will not cover the requirements of the public expense. The 2002 income only represents a 65% from the total of the Budget of the nation. For 2003, the bonds will be issued and the total value will be $348 million, to finance a part of the deficit.

It is not a coincidence if the government’s public debt keeps increasing. For 2002, it represents a 37.7% of the GNP and its service absorbed close to 21% of the General Budget of the Nation. During that year, the short-term debt changed –acquired through the Treasure Bonds in the local market- into a mid-term debt in the international market, something that will reduce the annual amount of taxes of the debt service, but it will be extended for a longer period of time.


For 2003, the projections of the Minister of Hacienda, Juan José Daboub, are more optimistic than usual and they establish a 1.6% of the GNP for the amount of the fiscal deficit, which would reduce it in almost half, if compared with the year 2002. According to the Minister, this is a realistic perspective, because the Internal Revenue Service will start with a total of 16,000 less public employees and with fewer needs to reconstruct. If this information is true, we would be facing a new case of massive layoffs in the public sector, which would be added to those that took place at the beginning of 2002, when approximately 8,000 public employees were ceased. A piece of information that supports these ideas is that almost 1,200 jobs will be removed from the Governance Ministry, and from the Ministry of the Environment and the Natural Resources.

The Financial Sector
The dollarization remained as the leading news in this sector, and by the end of 2002, the BCR considers that close to a 87.7% of the money has been replaced for dollars, and in the year 2003 the Colón will be finally and totally replaced by dollars. Oddly enough, the law of the Monetary Integration made public that the Colón as well as the dollar would be part of the legal currency. The bank accounts would be registered in dollars, and the BCR would not have the authority to issue the national currency.

After this, and together with the financial system, the government went ahead and removed the colones from circulation. The colones were replaced by dollars with the excuse that the national currency was unavailable. The dollarization has affected the reduction of the international reserves in dollars, the amount of taxes that has to be paid in order to use that currency, and the elimination of the monetary policy. The banks that had debts in dollars were the ones that received more benefits from the dollarization, it was a way to “balance” the value of their debt.

According to the official reports from ABANSA –the association of the Salvadoran bankers-, the interest rates have been steadily reduced as a result of the dollarization process. For 2002 the active rates for the terms of one year would have reached a 6.06%, a percentage that could represent an important reduction if it is compared with the levels of 2000, when the same rates were higher by a 16%.

According to the same source, the credit for the private sector grew by 5.9% in 2001; however, for 2002 the perspectives were that the growth would have reached a 7% in order to arrive to a level equivalent to a 58.5% of the GNP of the same year. The industrial and the commerce sectors received more benefits with the credits they received (25% each); the construction and housing sectors received 14%; utilities received 9%; and the rest of the sectors received 12%. The agricultural sector would have received only 8% from the total credit.

The active interest rates dropped, while the GNP’s growth rates remained relatively low. Both of these facts suggest that the credit and the investment are not growing enough as to improve the economic growth. The credit’s growth rate is 7% and it has been compared with a growth rate of only 2.3%, which has been propelled mostly by public investments that have not been financed with the resources of the domestic financial system.

During the high economic growth periods, which took place along the first half of the nineties, the credit granted to the financial system reached a level close to a 30%, producing a GNP with a growth rate of approximately 6%. Unfortunately, the credit was inclined towards consumption and several unproductive activities, which lead to a rapid indebtedness process, a reduction of the available income and the consumption, and a slow growth that has been extended for over six years.

Perspectives
The Salvadoran economy has different symptoms. While the control of the inflation is evident, as well as the surplus of the balance of payments and the accumulation of the gross international reserves, the unsteadiness inside the external and the public sector reveal the long-termed steadiness of the present economic model. The bet for the maquila and the free trade still raise some serious doubts about its contribution for the reduction of poverty and the promotion of a sustainable development. The maquila is based on low wages and does not pay taxes. The Free Trade involves a set of serious competitive challenges for an inefficient productive apparatus. On the other hand, it would not be clever to continue intensifying the dependency on the remittances, especially if we realize that they tend to grow slowly.

One of the most crucial challenges that those who formulate and implement the economic policies have to face, in this context, is how to generate a synergy between the flows of remittances, the encouragement of the domestic production, and the need to re-adjust the economy towards globalization. The financial system appears here as the key element of the process; however, it has to be guided by a development policy with pre-established goals and priorities for the sector. Here is where we can find the narrow stream, since the financial system has eventually turned into one of the most influential sectors when it comes to formulate the economic policy. The profitability of this sector seems to be beyond any other objective.

The end of 2002 reveals that the way the economic model is operating, it will not generate the necessary conditions to increase the growth rates and the employment levels, or to eliminate the external and the fiscal unbalance. This is because the economic model depends on external factors in order to work, and it only works when a considerable amount of people emigrates and sends the remittances. The slow growth of the production, the remittances, and the exportations of the maquila show the need to value the importance of the encouragement programs addressed to the domestic productive sectors, in order to guarantee the economic welfare in the long term. This objective will not be achieved, with a touch of magic, by signing Free Trade Agreements.