2. Multi-dimensional analysis of development in El Salvador

Abstract

Development is inherently multi-dimensional. This chapter analyses the development performance of El Salvador across the five pillars of the Sustainable Development Goals: People, Prosperity, Partnerships, Peace and Institutions, and Planet. In each dimension, it compares the country’s performance against that of a group of benchmark countries, and it identifies the main constraints to sustainable and equitable development.

This chapter delivers an overarching assessment of development in El Salvador, benchmarking the country’s development outcomes and identifying the main constraints to sustainable and equitable development. The chapter is organised around the five pillars of the United Nations Sustainable Development Goals (SDGs): People, Prosperity, Partnerships, Peace and Institutions, and Planet. This reflects the ongoing effort to align OECD tools to the SDGs. It is also a reflection of the relevance of the SDGs for El Salvador.

People

The “People” pillar of the 2030 Agenda for Sustainable Development places quality of life in centre stage, focusing on the international community’s commitment to guaranteeing the fulfilment of all human beings’ potential in terms of equality, dignity, and good health.

Even today, the backdrop to El Salvador’s development is a civil war that lasted over a decade (1979-92). The country incurred both direct and indirect economic and social costs from the conflict, leaving it behind the rest of the region in key areas of quality of life such as health and education, and also in the fight against poverty and deprivation. After almost three decades of post-conflict reconstruction, measures of current well-being show signs of considerable progress in terms of infrastructure and employment.

However, important hurdles remain on El Salvador’s path to sustainable, inclusive development. This is the case in multiple areas including multi-dimensional poverty 1, social protection, dropout rates in education, and the quality of healthcare. The prevalence of informal employment also continues to have a cross-cutting impact on people’s well-being in El Salvador.

Table 2.1. People – Four major constraints
1. The social protection system calls for higher coverage and improved targeting.
2. The education system faces low attainment levels and dropout high dropout rates.
3. Reforms have contributed to improvements in healthcare coverage, yet the system lacks quality in the face of new challenges.
4. Positive labour market outcomes are tarnished by informality and sub-employment.

Despite falling income poverty and inequality, deprivations in areas such as education, social protection and employment compromise the capabilities of future generations

Largely due to an increase in real income, the percentage of the Salvadoran population living in income poverty fell steadily between 2008 and 2019 (Figure 2.3). According to national data, income poverty affected 26.8% of households in 2019 – the lowest rate recorded since the household survey began in 2000 – and the poverty headcount ratio has fallen over the past decade 2 (Figure 2.1). Moreover, household expenditure has risen since 2009, and the Gini coefficient has improved considerably, falling from 0.50 in 2005 to 0.35 in 2018 according to El Salvador’s national statistics office, DIGESTYC.

The reduction of inequality in El Salvador since the end of the 2000s stands out among comparator countries. The Gini coefficient fell by 5.3 points between 2000 and 2009, and then by 13 points between 2009 and 2018, according to DIGESTYC. This is one of the largest falls in inequality in Latin America, even though El Salvador already had a more equal distribution of income than that of the region (Figure 2.1). The decrease was driven by falls in inequality among both urban and rural dwellers, with urban/rural differences accounting for about 10% of inequality. Labour incomes were the main driver of falling inequality, growing by 7.1% for the poorest quintile (in nominal terms), compared to 2.2% for the richest. Remittances also played a role in compressing the income distribution, although more households receive remittances among the near-poor than the poor (World Bank, 2015[1]).

The COVID-19 pandemic led to a setback in the fight against poverty and inequality, albeit to a lesser degree than in most countries in the region. According to official data, poverty increased in 2020, rising to 29.7% of households, which is to say back to 2017 levels. According to estimates from the Economic Commission for Latin America (ECLAC), extreme poverty increased from 5.6% in 2019 to 8.3% in 2020, while total poverty increased by only 0.3% (from 30.4% to 30.7%). This contrasts with increases of more than 7% in some countries in the region (Argentina, Colombia or Peru) (ECLAC, 2022[2]). Simulations conducted by the World Bank suggest that the pandemic also generated significant increases in inequality, having led to significant falls in income (more than 10%), and to larger falls in income among the poorest quintiles of the population, despite mitigation measures (World Bank, 2022[3]).

Figure 2.1. Inequality has fallen sharply in El Salvador since the late 2000s

Figure 2.2. The reduction in inequality followed different patterns over time

The decline in income inequality has followed different patterns over time. While inequality fell between 2000 and the early 2010s, this was due in part to a compression of the income distribution. The incomes of the poor rose more quickly than the average, while better-off groups in the middle class saw their real incomes fall as a consequence of tepid growth and wage moderation (Figure 2.2). Since the recovery of the economy from the global financial crisis of 2007-08, however, incomes have grown across the income distribution, but with inequality still falling. In the most recent period up to the COVID-19 crisis, labour incomes have benefitted the poor and the middle classes, and the growth in targeted public transfers and other incomes has also contributed to a progressive reduction in inequality.

While remittances do play an important role in containing income inequality, they have not driven the fall in income inequality. Most remittances concentrate in households at the bottom of the distribution of labour income. In 2018, the bottom 20% received 40% of remittances, compared to 3% of total labour income. This is partly due to the emigration of the main breadwinners in the household. Individuals in households with no labour income generated inside El Salvador are much more likely than other households to receive remittances (45% compared to 19%), and to receive higher levels of remittances per capita (USD 123 per month per person, compared to USD 53). As a result, the Gini coefficient of income inequality is about 6% lower when remittances are taken into account, compared to when only labour income is considered. This figure has remained stable over time.

In 2017, however, 48% of Salvadorans were still economically vulnerable to external shocks, which is higher than in any other Latin American country (for which the average is 37%), and 15 percentage points greater than in 2000. This means that despite a gradual decrease over the past two decades in the share of the population that is considered to be poor, and a slight expansion of the middle class since 2012, almost half of El Salvador’s population is still considered vulnerable and can still easily fall under the poverty line in the event of a shock. At an individual level, those belonging to this socio-economic group are often locked into it: they tend to have informal jobs of low quality, a condition that in turn is associated with low social protection and income, preventing them from investing in their own human capital.3 In 2017, for instance, a large majority of adult women (58%) had low income and no social security, which is just over 10 percentage points higher than the proportion of men who were in the same situation (46%) (PNUD, 2018[6]). Among the poor sectors of the population, the supply of housing doesn’t meet demand. According to the Inter-American Development Bank, 60% of the population receiving levels of income that fall below the four sectoral minimum wages has opted for self-built housing in illegal settlements and marginalised communities (Barrios et al., 2019[7]). These areas are highly vulnerable to natural hazards, and social housing is no longer attractive for investment due, on the demand side, to difficulties in obtaining mortgages, and also to the difficulties that investors face in obtaining construction permits. Such difficulties may stem from environmental or municipal hurdles, or regulations on health and safety.

The multi-dimensional poverty rate decreased from 35% to 29% over the first four years during which it was measured. This rate is calculated as part of the Multidimensional Poverty Index (MPI), which El Salvador’s government officially adopted in 2014. It takes into account household deprivations across 20 indicators of education, housing, work and social protection, food security, health, basic services, and environmental security (DIGESTYC, 2020[8]). Nevertheless, according to the government’s technical secretariat, 28% of households were considered to be “multi-dimensionally poor” in 2019, meaning that they suffered from at least seven of the deprivations that feature in the index. Findings from the EHPM survey revealed that the domains in which the largest number of Salvadorans experience deprivation are education (77.5% of households), social security (69.1%), and employment (61.3% of households suffer from sub-employment and instability) (DIGESTYC, 2020[8]). In 2020, the incidence of multi-dimensional poverty fell to 27%. Low education among adults became more severe (affecting 78.2% of households), but there was a reduction in deprivations due to improvements with regard to social security (for which the rate of deprivation fell to 68%), and underemployment (for which it registered a small decline to 61%) (DIGESTYC, 2021[9]).

These figures not only highlight key areas of need that concern a large portion of the population, but also the fact that they may be coinciding to create a deeper, more complex kind of poverty in the country that goes beyond current income levels and limits the prospects of future generations. Tackling multi-dimensional poverty involves investment in citizens’ capabilities at all stages of their life cycle, as well creating a favourable environment for individuals to live a life in which they feel fulfilled. For instance, almost half (47.4%) of Salvadoran households were restricted due to insecurity, while over one in three lacked access to public areas of leisure (37.5%) in 2019. There are signs of improvement, however. According to the Gallup World Poll, 48% of Salvadorans felt safe when walking home alone at night in 2008, compared to just 28% in 2016. In the last two years, the rate has improved still further, reaching 64% in 2020. This improvement is in line with national strategies implemented by the government and the national civil police force (PNC, 2019[10]).

Figure 2.3. Both the percentage of the population living below USD 3.20 a day, and the poverty headcount ratio at the national poverty lines, have decreased over the past decade

When analysing the geographical distribution of the multi-dimensional poverty rate, there are three departments in El Salvador where over 40% of households are poor from a multi-dimensional perspective. This is to say that they are deprived in seven or more of the dimensions. The three departments are Ahuachapán, where 50.1% of households are poor from a multi-dimensional perspective, La Unión (42.8%), and Morazán (42.1%). Conversely, San Salvador (14.1%), Chalatenango (21.2%), and Santa Ana (27%) are the departments with the country’s lowest rates. Furthermore, the multi-dimensional poverty rate is almost three times higher in rural areas (48.9%) than it is in urban areas (17.1%). The gap between urban and rural areas is also visible in levels of household income. According to the 2018 edition of the EHPM survey, household income stands at USD 683.98 per month in urban areas, whereas in rural areas it only reached USD 411.24, reflecting stark differences in living conditions.

Figure 2.4. The percentage of the population living on less than USD 3.20 a day is relatively low in El Salvador

The demographic distribution of the MPI reveals that certain groups of the population, such as children, are more affected by multi-dimensional poverty than others. According to data from 2018, children are affected disproportionately by multi-dimensional poverty, with 46% of 0-5 year olds and 40% of 6-15 year olds living in poor households from a multi-dimensional perspective. What is more, in 2017, four out of every ten young people aged 0-17 lived without one or both parents, and in 14% of cases this was due to parental abandonment (78% by the father, 8% by the mother). When analysing the potential causes for this, such as migration and deaths, the incidence of these factors is higher among fathers than among mothers (DIGESTYC, 2017[11]). Such great levels of deprivation and vulnerability at an early age represent high risks for the inter-generational transmission of poverty and inequality.

The social protection system needs to achieve higher coverage and better targeting

El Salvador took the first steps in establishing a universal system of social protection (the Sistema de Protección Social Universal, or SPSU) in 2009, focusing mainly on areas such as health, food and income security. The system includes non-contributory mechanisms, destined to ensure minimal cover for the whole population, but also contributory components organised through social insurance via the country’s social security organisation, the Instituto Salvadoreño del Seguro Social (ISSS), and a private pension scheme. The SPSU has three main management tools: the Single Registry of Participants (Registro Único de Paricipantes, or RUP), the Social Programmes Information System, and the Social Policy Monitoring and Evaluation System. A further step was taken in 2014, when Congress adopted the Development and Social Protection Act (the Ley de desarollo y protección social) in order to enhance the operation of the SPSU and to develop a legal framework to ensure its continuity.

Since 2011, the amount of employed contributors to the healthcare system has remained relatively stable, at approximately 28% of the employed population. The percentage of people participating in the non-contributory pension system has doubled over the same period, but at 10% it nevertheless remains relatively low (Figure 2.5).

Figure 2.5. Contributors and beneficiaries of El Salvador’s Social Protection System have remained stable over time

The 2017 household survey shows that households in the two poorest quintiles receive a lower percentage of subsidies compared to the rest of the population. The first quintile receives 13.8% of subsidies, while the second quintile receives 18.7%. This indicates that, when considering the total amount of economic subsidies, the largest portion does not reach the most deprived households (Barrios et al., 2019[7]).

Furthermore, emblematic social programmes such as Ciudad Mujer, Comunidades Solidarias and the Programa de Apoyo Temporal al Ingreso (PATI) have all seen a decrease in their total amount of beneficiaries and participants since 2009 (FUSADES, 2019[12]). In addition to their success in reducing poverty, these programmes have also had a positive impact in other challenging areas for the country. For example, although the focus of PATI was to guarantee minimum levels of income for extremely poor people over 6-month periods, there is evidence that it also contributed to reducing crime in municipalities (Acosta and Monsalve Montiel, 2018[13]).

Increasing the coverage of conditional transfers is key, in light of the overall stagnation or decrease in the beneficiaries of major programmes over the past five years. This has been the case for programmes such as the Bono Educación/Salud Rural, the Pensión Básica Urbana, and the Bono Educación Urbano (FUSADES, 2019[12]). When it comes to ensuring that the beneficiaries are those who need such programmes the most, upgrading information databases could help to target certain sections of the population, making use of management tools such as the RUP. Consolidating the RUP could also contribute to a more efficient use of resources, as well as helping to realign the focus of certain programmes with the country’s evolving human geography. Finally, the informal economy should remain a priority with regard to extending the coverage of social protection and spending to more vulnerable groups of the population. In effect, according to the EHPM survey, 99.5% of workers (aged 15-64) from the lowest income quintile were informally employed in 2017 (Barrios et al., 2019[7]).

The education system faces low attainment levels and high dropout rates

Compared to international standards, the share of the population that completes at least upper-secondary education is relatively low in El Salvador (Figure 2.6). This is the case despite a consistent improvement in the average number of years of schooling of the Salvadoran population over the past decade, both for men and women, and for both urban and rural areas. For instance, in 2005, an individual aged 15-24 living in a rural area would have had 6.5 years of schooling on average, as opposed to 8.2 in 2017 (DIGESTYC, 2019[5]). However, compulsory education in El Salvador lasts for 12 years (Asamblea Legislativa, 1996[14]), and school life expectancy 4 for primary and secondary education has gradually decreased, falling from 11.2 years in 2013 to 10 years in 2017. Official data on the percentage of the population that remains outside of the education system show that enrolment in school improves from ages 4 to 10, but that it then worsens progressively until the age of 17 (Figure 2.7). Moreover, the mean number of years of schooling of the population over the age of 25 is still relatively low (7.15 in 2020) compared to regional peers such as Costa Rica, which has the highest score in the region (8.80), and also to the OECD average (12.14).5 Since the probability of working in the formal sector is closely related to educational attainment, such low levels can lead to a lack of qualified human capital for the economy. In addition, public expenditure on education has been low, averaging 3.7% of GDP between 2000 and 2018. However, it increased to 4% of GDP in 2020, and to almost 5% in 2021. If sustained, increased funding in education can help to narrow the gaps that have been caused by a history of under-funding.

Figure 2.6. Educational attainment is relatively low in El Salvador, despite a slight improvement since 2010

Figure 2.7. The percentage of the population left out of the education system increases considerably between the ages of 10 and 17

In terms of academic performance, results from the PAES (Prueba de Aprendizaje y Aptitudes para Egresados de Educación Media) evaluation, carried out at the end of secondary school show that the strength of the Salvadoran educational system lies in social studies. In this field, the national average score was 6.25 out of 10 in 2018, but students performed less well in mathematics, scoring 5.22 on average (a pass in El Salvador is 6.0). Across all five subjects in the PAES, private schools outperformed those of the public sector by roughly 10% (MINED, n.d.[15]).

The first challenge for the government is to address dropout rates. In 2018, approximately 11 500 students dropped out of school in El Salvador, representing roughly 0.9% of the student population, according to the country’s education ministry (MINED, n.d.[15]). The main reasons for dropouts included changes of residence (38% of all reported dropouts), changes of school (11%), migration (12%), and parents who are no longer supportive of school attendance (6%) (MINED, 2019[16]). Tackling this issue involves supporting the role of communities and families in encouraging children to want to enrol in school.

In 2016, crime represented 32% of the reported reasons for which people dropped out of school, whereas in 2017 and 2018 it had fallen to 4%. However, violence linked to crime is still particularly high in El Salvador, and when it occurs in or around a school, attendance for youths can become untenable. Illicit activity may also offer youths attractive alternatives to staying in school (Adelman and Széleky, 2016[17]). Currently, one in every five students enrolled in basic education attends a non-state school, which are primarily concentrated in urban, areas that are affected by violence. Government schools are seen by many as unsafe, and wealthy households turn to private schools to provide education for their children (USAID/R4D/ECCN, 2018[18]). Nevertheless, according to the school census led by the Ministry of Education, between 2017 and 2018 the declared presence of gangs in both public and private schools fell by a third (from 720 to 507), as did the amount of students who had been threatened by gang members (from 718 to 571) (MINED, n.d.[15]).

Teenage pregnancy is another risk indicator that can affect the financial cost and the opportunity cost of staying in school. Despite recent institutional efforts to prevent unwanted pregnancies in girls and adolescents (e.g. the national policy on sexual and reproductive health in 2012), between 2013 and 2015 one in three pregnancies in El Salvador were adolescent (UNFPA, 2016[19]).6 In the 2018 school census, 702 cases of pregnancy were reported within schools (down from 869 the previous year) (MINED, n.d.[15]). The reality that girls and adolescents face in El Salvador is symptomatic of an overall lack of opportunities. It is also closely linked to a variety of social, economic and cultural pressures, as well as to sexual violence and minimal empowerment. El Salvador is one of only five countries in the world that still prohibits abortion in all circumstances, subjecting both women and their doctors to criminal penalties for undergoing an abortion (Zureick et al., 2018[20]).

Further challenges for the education system in El Salvador include teaching capacity and infrastructure. According to 2019 data, 499 public schools in El Salvador have only one teacher (these are known locally as escuelas unidocentes). Only 28 such schools in El Salvador are in urban areas, meaning that this is mainly a handicap for students in rural areas of the country (MINED, 2019[21]). Beyond increasing the quantity of teachers, improving teacher performance via recruitment, training, and incentive policies could have a positive impact not just on student learning, but also, under the right circumstances, it could reduce dropouts (Adelman and Széleky, 2016[17]). Education in El Salvador also suffers from a lack of the kind of infrastructure that would guarantee optimal conditions for learning. For instance, although access to the Internet was available in 2 167 schools in 2018, up from 1 451 in 2010 (MINED, n.d.[15]), only two in ten schools have a library (Paz, 2018[22]).

Reforms have contributed to improvements in healthcare coverage, yet the system lacks quality in certain areas

Standing at 74 years in 2018, life expectancy at birth in El Salvador is relatively low, particularly among men (69.3). On average, life expectancy in Central America was 75.2 years in general, and 72.1 for men prior to the COVID-19 pandemic (PAHO, 2018[23]). Across El Salvador, the adult survival rate – i.e. the percentage of 15-year olds who live to be 60 – is 83%, which situates the country within the second quartile of a total of 157 countries. Moreover, 14 out of 100 children are stunted, meaning that they are at risk of cognitive and physical limitations that can last a lifetime (World Bank, 2018[24]). According to the EHPM, however, access to healthcare isn’t among the main deprivations of multi-dimensional poverty in El Salvador. In 2014, 16.5% of households living in poverty were affected by this deprivation, compared to the 97.7% of poor households in which adults had suffered from educational deprivation, or the 90.8% that lacked access to social security (MINEC-DIGESTYC/SETEPLAN, 2015[25]). To a certain extent, this situation is reflected in the UHC (Universal Health Coverage) Service Coverage Index (SCI) reported in Figure 2.8, and where El Salvador does perform relatively well compared to other countries. However, the threshold that is used to define deprivation in this area of the MPI index is relatively low 7, and the rate of exclusion from healthcare services still provides cause for significant concern. According to the 2019 EHPM survey, one household in four does not have access to healthcare services (29% in rural areas, and 23% in urban areas) (DIGESTYC, 2019[5]). The same survey reveals that only 2.2% of people belonging to the lowest income quintile have access to medical insurance, compared to 45.7% in the highest quintile, indicating that efforts still need to be made to bridge these gaps within the population (DIGESTYC, 2019[5]).

Figure 2.8. El Salvador performs relatively well on the UHC SCI, a measure of SDG Indicator 3.8.1. (Health service coverage)

Various healthcare reforms were put in place from 2009 to 2014 with the objective of achieving universal healthcare. The main tool for this was the Red Integral e Integrada de Servicios de Salud (RIIIS) network of health services. Specialised teams known as Equipos Comunitarios de Salud (ECOS) were assigned at a primary level of attention within communities, contributing to improvements in healthcare access and costs for the most vulnerable sections of the population (FUSADES, 2019[12]). However, health services in El Salvador are currently still fragmented. Originally designed to manage funds, the Fondo Solidario para la Salud (FOSALUD) has acquired the capacity to provide certain services, in addition to the responsibility of providing care during non-working hours, weekends, and national holidays, which was previously the responsibility of the Ministry of Health. This type of dual role and overlap has caused a certain level of cost-inefficiency within the public healthcare system, as well as inequalities amongst its workers (MINSAL, 2019[27]).

Between 2014 and 2019, projects such as the ECOS stagnated, and new problems have became apparent. These include severe shortages of medicine (which highlight the need for an adjustment of purchasing processes to the fluctuation of national demand), and long waiting lists at medical centres (PNUD, 2014[28]). A review of this period by the Salvadoran Foundation for Economic and Social Development (FUSADES) has also highlighted a lack of investment in hospital infrastructure. Of the four hospitals due to be built as part of El Salvador’s five-year national development plan, only one was approaching completion in 2019, and the other three have yet to see construction plans begin (FUSADES, 2019[12]). Furthermore, the rapid expansion of urban areas of the country must be taken into account in order to adapt the healthcare system in a sustainable way. According to the United Nations Population Division (UNPD), El Salvador’s urban population grew from 50% in 1992 to 72% in 2018. People’s lifestyles are changing, as are the complex risks that they are facing in an urban context, particularly those linked to housing. Hence, urban planning could also have an impact on public health, both in terms of its design and its implementation (MINSAL, 2019[27]).

Further pressures such as the prevalence of chronic diseases weigh on El Salvador’s healthcare system. Obesity is above the regional average for both men and women (57% and 62% respectively), despite high rates of low birth weight in infants. According to the Center for Disease Control and Prevention, this is mainly due to nutritional habits and increasingly sedentary lifestyles (CDC, 2019[29]). There is also a high incidence of a chronic kidney disease of unknown aetiology, which is shared with neighbouring countries such as Nicaragua, a phenomenon known as Mesoamerican nephropathy (Perez-Gomez et al., 2018[30]). The ways in which the healthcare system deals with these challenges are reflected in subjective measures of its quality, in which El Salvador fares poorly in comparison to international standards (Figure 2.9). Government health schemes prior to the COVID-19 pandemic represented 2.6% of GDP in El Salvador (compared to 3.4% in OECD countries on average), and the compulsory contributory health insurance scheme stands at 2% of GDP (again compared to an OECD average of 3.4%) (WHO, 2019[26]). Both of these levels are significantly below OECD standards, which points to a lack of financial resources, but also to a lack of adequate infrastructure, tools, or trained health workers.

Figure 2.9. Salvadorans were relatively dissatisfied with the healthcare system

Finally, in light of the extreme violence and crime that continues to occur in El Salvador, mental health is of particular concern. The country has witnessed alarming rates of suicide. In 2016, for example, they exceeded the average for Central America, accounting for 13% of deaths among men and 4% for women (age-adjusted per 100 000 population) (PAHO, 2018[23]). Moreover, when analysing specific demographic groups, suicide represents 57% of the cause of deaths among women and girls aged 10-19. This can be linked to various factors, such as sexual and gang violence, as well as a lack of access to safe abortion and support from the healthcare system, which further increase vulnerability in poor and rural areas (Pulitzer Center, 2018[31]). Fear, vulnerability, and insecurity can all have a negative effect on life satisfaction, as highlighted in Chapter 1.

Labour market outcomes are tarnished by informality and under-employment

El Salvador’s employment-to-population ratio is average compared to peer countries, and there is an underlying gender gap that has not yet improved (Figure 2.10). According to the EHPM survey, almost six out of 10 Salvadorans of working age are employed. Still, this overall figure masks a non-negligible gender gap, with 73% of men in employment in 2020, but only 44% of women. The unemployment rate, at 6.9%, is among the lowest in Latin America and the Caribbean. The increase in unemployment in 2020 was only 0.6%, despite the crisis that resulted from the COVID-19 pandemic. There is virtually no difference between rural and urban areas, but unemployment is lower among women in El Salvador than among men (7.1% unemployment among men, against 6.6% for women). The median age of the employed population has increased, and people aged 16-24 are almost three times more likely to be unemployed than those aged 25 to 59, with the rate standing at 14.4% for the former group compared to 5.1% for the latter.

Figure 2.10. El Salvador’s employment-to-population ratio is in line with that of peer countries, but the gender gap remains substantial

The low level of unemployment in El Salvador hides the economy’s difficulties in generating good jobs. The share of salaried workers has stagnated around 54% since the year 2000, with only a small shift towards wage work in 2018. Given the prevalence of informality among the self-employed, this results in the persistence of informal employment. In 2017, for instance, the share of Salvadorans who were looking for a job and who successfully found formal employment stood at only 15%. Moreover, in the same year over 2 million members of the active population failed to find formal employment (FUSADES, 2018[33]). This lack of formal employment opportunities is particularly worrisome for the county’s youth. Just over a quarter of young people (27.2%) are not in employment, education or training, making them highly vulnerable to crime, and tempting them to migrate. According to FUSADES, 50 000 people join the labour force every year, which is more than the total number of formal jobs created in the period 2014-19 (49 972). The relatively low dynamism of the Salvadoran labour market can be attributed to the timid pace of economic growth in the country, and to low levels of education in the labour force. (FUSADES, 2018[34]).

Although the unemployment rate is relatively low, under-employment is widespread across the Salvadoran population, and has risen in recent years (from 55% of all households in 2016, to 66% in 2017). Results from the 2015 MPI index had already revealed that underemployment was a major constraint for El Salvador’s labour market, affecting 84% of the most deprived households (MINEC-DIGESTYC/SETEPLAN, 2015[25]). Two years later, it touched approximately 1.21 million families, and was the indicator of the MPI that saw the largest increase (DIGESTYC, 2017[11]). Underemployment includes workers who are prepared to work 40 hours a week, but who are restricted to working fewer hours against their will, as well as those who do not receive a salary of at least the minimum wage. This phenomenon represents a major risk not only for the labour market, but for society and the economy as a whole. As seen above, if young people entering the labour force are confronted with such poor working conditions, they are more likely to resort to an informal economy that offers low levels of social protection, to illegal activities including gangs, or to migration.

As a direct corollary of the lack of job creation in the formal sector, El Salvador has a large informal sector, entailing low social protection coverage. According to the EHPM, 99% of workers falling within the first income quintile are informal. In urban areas, women have consistently been more affected by informality in their jobs over the past two decades, and although the gender gap has narrowed, almost 50% are still working informally (Figure 2.11). As a result, 57% of the population has no social protection coverage in urban areas (DIGESTYC, 2021[9]). According to ILO data, almost 70% of employment is informal in the Salvadoran economy. This includes 11% of workers working without protection in formal firms, as well as 10% of female workers working informally as domestic workers, factors which explain a large share of the gender gap in informality (ILO, 2018[35]).

Figure 2.11. The rate of workers in the informal sector in urban areas has decreased over time, and remains higher among women

Low investment and job creation, rather than institutional constraints, seem to be the primary cause of the lack of dynamism in the labour market. As measured by the OECD Employment Protection Legislation (EPL) indicators, Salvadoran legislation protects workers less than the average levels for Latin America and the Caribbean (LAC) and for the average OECD country. Specifically, the protection of permanent workers against individual dismissal is less restrictive in El Salvador (1.42) than both the LAC average (1.95) and the OECD average (2.03). Moreover, El Salvador does not have specific requirements or legislation regarding collective dismissals. When it comes to flexible forms of employment, El Salvador’s regulation is more stringent (2.25) than the OECD average (2.07), but less so than the LAC average (2.58). In practice, this reflects restrictions on the use of temporary contracts, while the use of temporary agency work is not confronted with major barriers (OECD/IDB, 2013[36]).

Although average monthly labour income stands at USD 620 in El Salvador, and feelings about household income are generally positive, important disparities persist. In effect, the average number masks considerable differences, hiding disparities in terms of living conditions for Salvadorans. In rural areas, for instance, the average is USD 435, compared to USD 728 in urban areas in general, and USD 820 in the metropolitan area of San Salvador. Two phenomena reflect these disparities in income between different areas. On the one hand, income poverty as defined by the national reference basket of goods is 3% higher in rural areas than it is in urban areas (22% and 25% respectively). On the other hand, despite an overall increase in the average number of years of education across the Salvadoran population over the past decade (from 7.4 in 2008 to 8.7 in 2020), people living in rural areas tend to leave school three years earlier than those living in urban areas (6.6 years compared to 9.9, respectively) (DIGESTYC, 2021[9]).

Figure 2.12. Real labour earnings have picked up, following the revalorisation of minimum wages

After a period of moderation, labour incomes have picked up. Real labour incomes fell until 2012, and did so more markedly in urban areas. Until 2012, over 30% of employed workers were in poverty, despite having a job. This fall in real average labour earnings is linked to the importance of low value-added sectors in job creation. The decline in average income contributed to a narrowing of the urban-rural gap in labour earnings, although sizeable gaps persist. In 2020, average labour income was USD 286 in rural areas, compared to USD 400 in urban areas. On top of price differentials, urban/rural gaps are linked to the fact that, despite an overall increase in the average number years of education across the Salvadoran population in recent times (from 7.4 in 2008 to 8.1 in 2017), people living in rural areas tend to leave school three years earlier than those living in urban areas (six years compared to nine, respectively (DIGESTYC, 2017[11])). After depreciating for years, minimum wages increased gradually, with several of the increases distributed gradually over the period. In 2017, they received a sizeable push (close to 20% in nominal terms for services, commerce and manufacturing, and larger increases for agricultural and maquila workers), followed by a 20% increase in August 2021. Although minimum wages are only relevant for part of the labour market, their increase has coincided with the increase in labour incomes. This is despite the slack in the labour market that is evidenced by under-employment, suggesting that minimum wages may be playing a signalling function.

Prosperity

El Salvador’s economy is characterised by low growth rates and a large informal sector. Over the past 30 years, the economy has been shaped by three important political events. These are the signing of the 1992 peace agreements that supported economic reforms in the 1990s, the adoption of the US dollar as the country’s official currency in 2001 (after a currency peg that began in 1993), and El Salvador’s adherence to international trade agreements, notably the Dominican Republic-Central America-U.S. Free Trade Agreement (CAFTA-DR) in late 2004.

Table 2.2. Prosperity – Three major constraints
1. Low investment has constrained potential growth.
2. Growth in commerce and services has contributed little to overall productivity.
3. Real effective exchange rates have increased in comparison to the region, reducing external competitiveness.

Growth has underperformed vis-à-vis peer countries

Rates of economic growth have varied considerably across the decades in El Salvador (Figure 2.13). Following strong growth rates during most of the 1970s, economic activity collapsed in the 1980s due to the civil war. Real GDP then accelerated in the 1990s with the signing of the peace agreements. It grew at an average annual rate of 3.6% between 1990 and 1999, bolstered by strong exports and private investment. Growth slowed to 1.5% during the 2000s, before picking up again to around 2.5% on average between 2010 and 2019, with exports and investment once again sustaining growth. Real income per capita has grown by 1.6% since the peace agreements.

The economy suffered a sizeable shock with the COVID-19 crisis but has recovered in aggregate terms. GDP contracted by 8.6% in real terms in 2020 but recovered by growing at a rate of 10.8% in 2021 (World Bank, 2022[39]). According to data form El Salvador’s central bank, the economy had recovered fully in 2021, surpassing the pre-pandemic level of GDP (BCR, 2022[40]).

Figure 2.13. Real GDP growth rates in El Salvador (1970-2021)

Natural hazards have added to El Salvador’s economic challenges. Events such as Hurricane Mitch in 1998, major earthquakes in 2001, and Tropical Storm Ida in 2009, have led over the years to significant damage in the country’s infrastructure and capital stock. By some estimates, the cost of the geological events and extreme weather events that affected El Salvador between 1998 and 2011 was equivalent to 22.9% of GDP (Catalán and Cardona, 2013[41]). In coming decades, the country is expected to remain vulnerable to climate change, leading to potential damage in land use and potential losses in key food crops such as corn and rice (Barrios et al., 2019[7]) (See Planet section).

The global financial crisis of 2008-09 reduced both exports and remittances. This resulted in a current account deficit of 8.5% of GDP in 2008, a decline in remittances equivalent to more than 3 percentage points of GDP between 2007 and 2011, an economic recession, and an increase in non-performing loans in the domestic banking sector. To shield against these macroeconomic vulnerabilities, El Salvador requested a precautionary stand-by arrangement of USD 800 million with the International Monetary Fund (IMF) in early 2009. However, no amounts were drawn from that credit line. Nonetheless, growth rates have declined and public debt has increased, and El Salvador’s credit status is currently rated as speculative by all three major credit rating agencies.

El Salvador’s economy has underperformed on a peer comparison. In the past, this had been attributed to a combination of low returns to capital and to education (Hausmann, Rodrik and Velasco, 2008[42]). Still, many years have passed since this analysis was made, and economic growth remains disappointing. In 2015-18, average annual real GDP growth was equal to 2.4%, which, although above the potential growth rate of 2.2% (IMF, 2019[43]), was low in comparison to peer countries, and was below the economic growth objective of 3% adopted for 2014-19 (Government of El Salvador, 2015[44]). The government recently adopted a medium-term growth target of 3.5% a year, which is consistent with trendline and median growth rates in the region. Neighbouring countries with comparable GDP per capita have exhibited average annual growth rates between 3.5% and 4.0% (see Figure 2.14).

Figure 2.14. Real GDP growth has been low in the pre-pandemic period compared to peer countries

Multi-factor productivity has declined steadily. Following the market-oriented reforms of the 1990s, El Salvador ought to have exhibited stronger growth rates (Catalán and Cardona, 2013[41]). The country has been singled out as a star reformer, but not a star performer (Hausman et al., 2005[45]), highlighting the difficulties of reform management. Market-oriented reforms in the 1990s included re-privatising the banking sector, opening up the telecommunication and energy sectors to private investors, overhauling the tax and pension reform systems, and ratifying several multilateral free trade agreements after the country’s accession to the World Trade Organization in 1995. But growth rates, after peaking in the mid-1990s, have since declined. Little has been accomplished in terms of capturing technological progress (Figure 2.15).

Figure 2.15. Total factor productivity (average growth rates per decade)

In the pre-pandemic period, export growth and investment supported economic activity. Still, export growth – which has grown at 2.9% per year since 2014 – remains significantly below the long-term annual export growth of 5.3% that El Salvador has achieved since the end of 1991. This reflects the country’s declining external competitiveness, which has also not allowed for a smaller trade deficit. Investment, on the other hand, has improved, and has recently grown faster than overall GDP (Figure 2.16). Nonetheless, the government estimates that aggregate investment will have to increase by USD 900 million a year over the next five years if it is to achieve its medium-term annual GDP growth target of 3.5%. As a result of the pandemic, all components of GDP contracted in 2020. However, the contribution of investment provided a strong push for recovery in 2021.

Figure 2.16. Real growth rates for components of GDP

Investment remains sub-trend, despite recent strength

Real gross fixed capital formation has intensified, albeit from a low base (Figure 2.17). Investment has been historically low in El Salvador compared both to OECD countries and to Latin America as a whole. Investment has grown at a compound annual rate of 5.5% in real terms since the end of 2014, supported by both private and public sources. Public investment has risen the fastest, increasing at a clip of 7.6% a year since the end of 2014. However, overall gross fixed capital formation represented only 16.5% of GDP in 2018. It was split between private and public investment, which represented 14.1% and 2.3% of GDP respectively. This falls short of the trendline investment levels exhibited among El Salvador’s regional peers. In a country where disasters caused by natural hazards have also contributed to a depreciation in the existing stock of capital, insufficient gross fixed capital formation will hamper potential growth.

Figure 2.18. Investment is still very low despite a recent increase

Public infrastructure remains a key bottleneck. El Salvador ranks number 90 out of 140 countries in infrastructure quality (WEF, 2019[49]). Recently, however, there has been an increased focus on improving logistics and transport infrastructure (IDB, 2019[50]; MOPTVDU, 2017[51]). Large-scale priority investments include the upgrading of the San Salvador metropolitan area’s logistics system and the Comalapa International Airport, as well as improvements at the ports of Acajutla and La Unión. Immediate improvements in existing municipal road infrastructure and in household access to electricity are also required, for which the government estimates a relatively minor cost, of around USD 170 million (Bukele, 2019[52]). The government has also promoted the idea of a transnational train line along the Pacific coast.

Public investment in El Salvador continues to exhibit a pattern of under-execution. Multilateral financial organisations have supported public investment in El Salvador for many years, both through the provision of finance and technical assistance (see Partnerships section in this chapter). However, a persistent lack of funding, as well as a preference in budgetary execution for current over capital spending, have led to a 40-50% under-execution of the budgetary resources that have been allocated to public investment since 2016 (FUSADES, 2019[53]). Budgetary execution of investment projects was 53% in 2020, which was understandably low as funds were diverted to the pandemic. However, execution was also very low in 2021 (55.2%), given the very high increase in the investment budget (MH, n.d.[54]). Moreover, there is evidence that capital expenditure multipliers in El Salvador have been disappointingly low (IMF, 2019[43]), which suggests inefficient spending. This calls for improvements in the prioritisation of public investment projects, as well as in capital budgeting, and in the externality cost-benefit analysis of both small and large-scale projects. While the budget execution of the investment in fixed assets was 36.2% of the accrued budget in 2018, budget execution was 97.1% with regard to that year’s current expenses (MH, 2019[55]).

Foreign direct investment (FDI) has been lacklustre. FDI has not made up for the much-needed increase in private gross capital formation. Net inflows have averaged 2.1% of GDP since 2014, with the largest amounts arriving from Panama, the United States and Spain. These three countries are among El Salvador’s top trading partners. El Salvador has attracted less FDI than other countries in the region due to a challenging business climate, security concerns, and a deficit of skilled workers (see Figure 2.19; Seelke (2017[56])). Moreover, roughly 60% of the current stock of net FDI is still concentrated in sectors that were privatised in the 1990s (i.e. energy, telecommunications and banking), reflecting a lack of profitable business opportunities for foreign investors.

Figure 2.19. El Salvador has lagged in regional FDI attraction

Dollarisation has helped to keep inflation and interest rates low, but credit has not fuelled growth

Consumer price inflation has declined with dollarisation. After seven years of a currency peg between 1993 and 2000, El Salvador adopted the US dollar as its official currency in January 2001. This was meant to protect earners and savers from the risk of currency devaluation (Quispe-Agnoli and Whisler, 2006[57]), after very high inflation rates in the 1980s (Figure 2.20). Over subsequent decades, consumer price inflation has steadily declined. Prices have grown by 2.4% a year since 2001 following the full adoption of the US dollar, and inflation has recently stabilised at around 1%.

Dollarisation has been less successful when it comes to economic integration. Between 2001 and 2009, monetary policy in the United States proved countercyclical with respect to economic activity in El Salvador, contributing to cyclical stability. However, over the past decade the economies of El Salvador and the U.S. have become less correlated. This raises concerns about the suitability of U.S.-led monetary policy in El Salvador. It also raises questions about the effectiveness of dollarisation in promoting closer economic integration between the United States and dollarised countries (de Lourdes Rodríguez-Espinosa and Castillo-Ponce, 2017[58]). Indeed, trade between El Salvador and the United States has weakened in recent years.

Dollarisation contributed to a decline in commercial banking interest rates. Having started at above 15% during the currency peg, interest rates for medium-term business loans (over one year) have remained around 10% since 2001, with little change. Mortgage interest rates have fared better for debtors, averaging 7.5% in 2018. Short-term loans have declined further, levelling at 6.5% in 2018. It has been estimated that between 2001 and 2009, dollarisation reduced overall annual interest expenses for private and public debtors by 0.75 percentage points, after taking into account lost seigniorage revenues (Swiston, 2011[59]).

Bank loans are below the median level in the region. Loans have grown at a rate of 5.7% a year since 2001, having increased from 42.6% of GDP in 2001 to 51.5% in 2018, but they are still below the median 54% credit-to-GDP ratio in the region. Nonetheless, banking leverage has increased. The overall loan-to-deposit ratio increased from 79.4% in 2001 to 103.1% in 2018, indicating slower growth in deposits vis-à-vis loans, but exhibiting still-reasonable levels of leverage. Statutory liquidity reserves were consistently above 20% of deposits in the pre-pandemic period. Reserve requirements were lowered to 9% in 2020 to facilitate access to credit during the COVID-19 pandemic and remain around half of pre-pandemic levels, although deposit institutions have maintained liquidity reserves above the statutory requirement by around 2 percentage points on average during the period. Non-performing loans have remained below 2.5% of all outstanding loans since 2014, resulting in a stable domestic financial sector.

Credit has been directed mostly to non-tradable sectors. Almost 60% of bank lending has gone into construction, consumption and mortgage lending. Consumer credit jumped from 19.0% of total loans in 2005 to 34.8% in 2018. Loans to manufacturing industries, however, have remained around 10% of total, far below these industries’ share of gross value added. This reflects the fact that loans to households have outpaced loans to non-financial private companies, and that economic informality has impeded many businesses from accessing bank credit.

In September 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender. The legal framework (the “Bitcoin law”) mandates the acceptance of Bitcoin by economic agents for payments for goods and services, and allows payments to the state be made in Bitcoin. It establishes that Bitcoin is to be used alongside the US dollar, with the latter remaining the reference currency for accounting purposes. Simultaneously, a state-sponsored electronic wallet called the Chivo wallet was launched, providing a one-time USD 30 endowment for Salvadoran users. This led to widespread adoption of the wallet (3.8 million clients) in the first few months of operation. After the initial launch, the use of Bitcoin has been moderate. According to data from the Central Reserve Bank, 1.7% of remittance flows have been received in cryptocurrency wallets on average since November 2021. Available evidence also suggests that adoption beyond the initial push has been muted: only 20% of firms accept Bitcoin as a means of payment, and only 11% of firms make sales in Bitcoin. Similarly, only about 20% of users continued to use the wallet after spending the initial grant. Moreover, despite the potential of digital currencies for financial inclusion, users tend to be banked, educated, young and male (Alvarez, Argente and Patten, 2022[60]). On the flipside, the adoption of Bitcoin as legal tender, and the specifics of the legislative framework, generate a number of fiscal and financial risks for El Salvador, leading the IMF to call on the country to repeal Bitcoin’s legal-tender status (IMF, 2022[61]).

Economic informality is a critical area of concern

El Salvador needs to prioritise formal employment. Informal labour represented 68.5% of total employment in 2018. Although large, El Salvador’s informal sector is not significantly greater than elsewhere in the region (Figure 2.21). Under a reformist scenario, research suggests that the country could envision a significant increase in the rates of incorporation of informal activity into formal employment (Loayza, 2016[62]). Other studies have concluded that most countries in Latin America are able to increase formal employment by 1-2 percentage points a year (Salazar-Xirinachs and Chacaltana, 2018[63]). This would represent a 10-20 percentage points increase over ten years.

Figure 2.21. Informal employment as a percentage of total employment

Evasion of obligations in terms of social security and contract registration perpetuates informality. Evasion is practiced by micro and small businesses, but also by larger companies in the formal sector. The share of permanent salaried workers has risen from 39.8% to 43.2% of all employed people since 2014, representing a growth rate of 3.6% a year. In comparison, self-employed workers have grown by 1.9% a year, representing 28.4% of all workers in 2018. However – and herein lies the biggest challenge – only 35.3% of micro and small businesses comply with contributory obligations (CONAMYPE, 2018[64]). Thus, workers are subject to protracted informality, without social protection, even if working in the formal sector.

Labour participation is low. Only 57.4% of the working-age population in El Salvador was employed in 2018, which was below the average Latin American participation rate of 62.1% (ECLAC, 2019[65]). Participation has been declining over the past decade due to an undersupply of new jobs relative to new working-age workers (Figure 2.22). This mismatch risks leading new working-age workers into informality, crime, or migration (see People, and Peace and Institutions sections). Furthermore, the median age of the employed population has increased. Workers aged 30 to 59, who had accounted for just over 50% of the workforce two decades ago, now account for 58.1%.

Figure 2.22. The working age population and the employed population

Wages are growing faster than productivity. Both labour compensation and gross mixed income (i.e. earnings from unincorporated enterprises that are owned by households) have grown faster than nominal GDP since 2014. Although indicating a stable-to-higher wage share of GDP, this also implies that wages are growing faster than productivity (Figure 2.23). In El Salvador, minimum wages are updated at least every three years by law. The latest revision resulted in minimum wage growth of 20% to 70% depending on the sector, which is far above inflation and the growth of labour productivity. While this could undermine job creation, it has helped to reduce inequality (see People section).

Figure 2.23. Real wages and labour productivity

Unincorporated household earnings are growing faster than overall GDP. The (small) uptick in gross mixed income growth since 2014 relative to nominal GDP should be followed closely to keep track of the informal sector. A higher level of gross mixed income may reflect higher levels of informality. Previously, and notably between 2005 and 2015, nominal GDP growth had surpassed growth in unincorporated household earnings. This broader macroeconomic picture was consistent with the long-term transformation of El Salvador’s economy, from one in which agriculture – largely informal – once played a strong role, to one in which it has become residual.

Value added and productivity have risen, albeit slowly

Agriculture has lost economic significance in favour of services. A shift to services started in the late 1970s. Losses in agriculture were also the result of declining prices for commodities, especially coffee, in which El Salvador had long specialised. Reinforcing the shift to services, the civil war in the 1980s caused a collapse in investment, leading to difficulties in the industrial sector. Following the peace agreements of 1992, renewed economic impetus ensued, mostly in industry and services. During that period, and especially up to 2005, agriculture’s relevance dipped further (Figure 2.24). By contrast, the gross value added of construction has grown, albeit from a low base, reflecting accompanying trends in investment and bank lending.

Figure 2.24. Gross value added as a percentage of GDP

The maquila industry has suffered. El Salvador’s maquila is mostly concentrated in garments. Starting in the mid-1970s, the sector had originally been driven by low salaries and tax incentives. Exports and gross value added grew exponentially during the 1990s, at annual rates of close to 40%, led by U.S.-owned companies (Quintana, Robles and Torres, 2002[66]). Eventually though, dollarisation and China’s accession to the World Trade Organization (WTO) weakened local competitiveness (Martínez, 2017[67]). Today, maquila exports still represent a large share of total exported value in merchandise goods (about 20% of the total as of 2019, and 18.8% in 2021). However, that share is less than half what it was in 2005. Industry’s share in overall gross value added has grown, but not in manufacturing.

Productivity has fallen in agriculture and grown in industrial sectors. Nominal gross value added per employed worker in agriculture, at constant 2014 prices, fell 1.5% a year between 2005 and 2018 (Figure 2.25). Productivity levels in agriculture remained significantly below the average national level, at only 35.1% of the overall level. In the industrial sector, which as a sector exhibits the largest level of value added per worker, productivity increased sharply in construction, by 2.1% a year. This is hardly surprising, given that half of all gross fixed capital formation over the period has been related to construction. Manufacturing and services activities, on the other hand, while enjoying greater than average levels of productivity, have not shown significant productivity gains over the years.

Figure 2.25. Gross value added per employed worker (USD, 2014 prices)

Services can contribute more to overall productivity. The economy would gain from the reallocation of labour into sectors with higher productivity. In the services sector, those services that relate to business, social and personal services have exhibited greater gross value added per worker compared to trade and hospitality activities (Figure 2.26). The same applies to transport, communications and utilities. There is evidence that sectors with higher productivity are also sectors in which FDI is present. Financial and insurance services, which concentrate one third of the entire stock of FDI in El Salvador, exhibit productivity levels that are six times greater than the overall average. Utilities provide another example of higher productivity and concentration of FDI. By contrast, workers in accommodation and food services are less than half as productive compared to the general economy.

Figure 2.26. Productivity and distribution of labour in El Salvador

Beware high employment elasticity of growth in services. In general, employment elasticity of growth should be positive, and lower than one. This would mean that both employment and productivity would be rising, with productivity rising faster than employment. Such has been the case in El Salvador across the economy, where both elements of elasticity rose in the pre-pandemic period between 2005 and 2016 (Figure 2.27). A shift of labour into services has taken place, confirming the long-term trend of a transition to tertiary activities. However, granular analysis indicates that a large part of this transition since 2005 has occurred towards accommodation and food services. Dislocations of labour into activities with higher productivity should be emphasised by policy makers.

Figure 2.27. Employment elasticity of growth across the economy (based on 2014 prices)

The real economy is constrained by framework conditions

The economic cost of violence is significant, but other problems lurk in the background. Crime and violence have often been cited as significant limitations to growth in El Salvador (see Peace and Institutions section). A 2014 official report estimated those specific costs at 16.0% of GDP, including direct costs equivalent to 11.2% of GDP, and opportunity costs of 4.8% (Guerra et al., 2014[69]). Rather surprisingly, however, companies do not indicate the cost of violence as the main constraint to doing business. The most problematic factors for small businesses are the lack of financial resources (specifically, working capital), low returns to capital, and the small size of the domestic market (CONAMYPE, 2018[64]). Crime does feature as the main obstacle, or at least one of the main obstacles, to doing business in the 2016 Enterprise Survey, and also in more recent business sentiment surveys (World Bank, 2016[70]; ILO, 2019[71]; FECAMCO, 2021[72]).

Digital inclusion, especially among micro and small businesses, is very low. This stems from poor education skills and a lack of infrastructure. The case for digital infrastructure in developing nations is said to be strong (Cirera and Maloney, 2017[73]). However, in 2016, a large majority (78%) of small businesses in El Salvador did not use any kind of internet connection, and an even larger segment (93%) did not innovate (CONAMYPE, 2018[64]). As El Salvador’s government works to set the stage for a legal framework for e-commerce in the near term, low digital inclusion of small businesses is an impediment to development. A new legal framework for e-commerce is in force since February 2021. Electronic signatures are already available in El Salvador, and the legal framework for e-invoicing was approved in August 2022, with implementation being piloted as of mid-2022. Still, legislative reforms alone will not solve infrastructural or educational constraints.

There are not enough medium-sized companies in El Salvador. Micro and small firms represented 91.4% of all businesses in 2016. Interestingly, the share of large companies (4.7%) was greater than that of medium-sized firms (3.9%). The missing middle suggests that local entrepreneurship is skewed towards either very small or very large businesses – either subsistence activities or subsidiaries of large foreign companies. A divide of this nature constitutes a significant hurdle in El Salvador’s incorporation into global value chains. A lack of medium-sized businesses limits the benefits that are conferred by foreign direct investment, while also holding back domestic savings that could be channelled into investment through capital markets.

Product-market competitiveness in El Salvador lags behind levels in other non-OECD countries. 2013 PMR (Product Market Regulation) assessment in El Salvador rated the country close to average levels for the non-OECD countries that were analysed (Koske et al., 2015[74]). he economy-wide indicator scored slightly below average, although scores for barriers to entrepreneurship, as well as for trade and investment, were slightly above average. Applying the methodology of the World Economic Forum's Global Competitiveness Report (WEF, 2019[49]) to the same set of countries that were used previously in the OECD’s PMR assessment, it seems that El Salvador’s relative competitiveness may have deteriorated since 2013. Although the methodologies are different, El Salvador appears as per the measurements in the Global Competitiveness Report’s framework to be significantly behind median rankings in the overall index, as well as in the sub-indexes for product markets and business dynamism 8 (Figure 2.28).

Figure 2.28. El Salvador in the Global Competitiveness Report (2019)

The cost of starting up a business amounts to about 40% of annual per capita income in El Salvador. This hampers micro and small businesses, imposing a high opportunity cost to formalisation. A vicious cycle of evasion, informality, and growth constraints ensues. In 2016, 74% of all micro and small businesses in El Salvador were not registered for value-added tax (VAT), while only 22.3% had access to bank credit, and a mere 0.8% had obtained mandatory, formal certification attesting to their status as a micro or small business (CONAMYPE, 2018[64]). El Salvador ranked 85th out of 190 countries in the World Bank’s overall ranking for doing business, 147^th for starting a business, and 168^th for dealing with permit constructions in 2019 (World Bank, 2019[75]). The low ranking in the latter category is largely driven by lengthy delays in obtaining feasibility decisions on connections to drinking water and sewage networks. These scores are consistent with those of the 2019 Global Competitiveness Report, in which El Salvador ranked 103^rd out of 141 countries.

Increased market oversight of utilities is needed. Policy makers could consider ways to improve access to utilities (Pisani, 2019[76]). This should involve market oversight with a view to achieving efficient provisioning of electricity and water supplies. Data from the energy regulator indicate a particularly adverse situation in electricity supply. Whilst per capita electricity consumption has risen in recent years, albeit at a lower rate than real GDP growth (contrary to what could be expected from a country with a large informal sector), per capita production has declined. Furthermore, the prices that households pay for shelter, water, energy, gas and other fuels grew by 3.7% a year since the end of 2010 until 2020, compared to annual average consumer price inflation of 1.3% (Figure 2.29).

Figure 2.29. Prices for shelter, water and energy have grown rapidly in the recent past

The concentration of economic growth in the greater San Salvador area and a few other urban centres points to unmet needs in the provision of local public goods. Data captured by satellite on the intensity of lights at night can be used to examine economic development at a more granular level than national accounts allow, and there is typically a constant elasticity between nightlight intensity and economic activity (Henderson, Storeygard and Weil, 2012[77]; Elvidge et al., 1997[78]). Using the global calibrated data on night-light radiance produced by the United States National Oceanic and Atmospheric Administration, it is possible to examine growth over a decade in El Salvador at the local level. The results show a strong concentration of growth around metropolitan San Salvador. Secondary poles of growth appear in the east (San Miguel) and west (Santa Ana) of the country (Figure 2.30). Conversely, the north and far east of El Salvador lack any major growth poles. These areas are also the most deprived from a multi-dimensional perspective (see People section).

Figure 2.30. Growth is concentrated in a few areas

External competitiveness is under pressure

El Salvador has a persistent current account deficit. Over the past thirty years, deficits have intensified between dollarisation and the onset of the 2008-09 financial crisis. Between 2003 and 2008, the current account deficit averaged 5.8% of GDP, peaking at 8.5% in 2008. Following the financial crisis, deficits widened once again, leading to an average deficit of 5.9% between 2011 and 2014. Strikingly, there has been a very strong negative correlation between the current account balance and crude oil prices since the early 1990s. This cautions against reliance on foreign oil and calls for a diversification of El Salvador’s energy production matrix (see Planet section).

Foreign investors have repatriated increasing amounts of investment income. A particularly distinctive feature of El Salvador’s economy is that its gross national product is smaller than its gross domestic product. This is due to a persistent deficit in the country’s primary income, which increased from 4.6% of GDP in 2014 to 5.6% in 2018. This increased deficit in primary income indicates that foreign investors have repatriated a large share of direct investment income from El Salvador back to their home countries, instead of keeping and reinvesting proceeds entirely in the country. In part, this may reflect a lack of profitable investment opportunities in the Salvadoran economy.

New areas of international specialisation are required. El Salvador’s most recent governmental assessment of revealed comparative advantages (RCAs) dates back a few years. In a 2014 strategy document, the government identified 16 areas of interest (República de El Salvador, 2014[80]). These were: agroindustry, food and beverages, textiles, chemicals, plastics, electronics, shoemaking, export crafts, paper products, corporate services, logistics, research and development, medical services, creative industries, aeronautics, and tourism. While the country enjoys RCAs in some of those sectors, it is unclear if and how industrial policy has been successful. A policy reappraisal of revealed comparative advantages is currently under government review.

It is important for El Salvador to focus on sectors where both its exports and world imports have both grown. In merchandise trade, El Salvador ranked number 114 in the world in 2018 (ITC, 2019[81]). The country should focus on areas in which its export performance has been better than average, and in which world imports have also grown above average. Given the size of the economy, policy makers should emphasise niches in markets with those favourable conditions. An obvious choice would be to expand the country’s know-how in textiles into higher value-added niches. Beverages could also fit the criteria, depending on the economies of scale that would be required and the amount of investment that would be available. The pharmaceutical sector, in which Salvadoran exports have grown and international market conditions are favourable, could also be a good fit.

El Salvador should also focus on services with higher value added and whose exports have expanded. The transition to tertiary activities has been under way for some time. Productivity levels in the sector are higher than average, but productivity gains have been uneven. Moreover, labour dislocations have trended towards accommodation and food services, which are only half as productive as the general economy. Business services, including areas as diverse as financial services, maintenance and repair activities, and information technologies, in which there is already significant activity in the country, offer new areas of international specialisation (Figure 2.31). These activities would also contribute significantly to elevating overall gross value added in El Salvador’s economy.

Figure 2.31. Potential comparative advantages in services

Trade dynamics have nevertheless favoured low value-added activities. El Salvador’s medium and high-tech exports have declined steadily since the 1990s, whereas exports to low and middle-income economies in the region have increased (Figure 2.32). The resilience of intra-regional trade reflects larger volumes of trade with neighbouring countries. In fact, some high-tech exports to Latin America and the Caribbean have increased in recent years. However, these trends also suggest the country has become less competitive in global markets for higher value-added products. If they persist, such trends will compete between themselves, netting out productivity gains or, even worse, positioning the country in areas of specialisation in which levels of value added are low. In addition, relying excessively on exports of travel services would accentuate the risks that stem from tourism’s characteristic cyclicality.

Figure 2.32. Technological content of Salvadoran exports

Trade is sensitive to petroleum imports and manufacturing exports. In 2018, fuels and mining products represented roughly 15% of El Salvador’s merchandise imports. Agricultural products and manufactures represented 19% and 66% of the total respectively (WTO, n.d.[83]). Manufactured goods made by far the largest contribution to total exports of merchandise, accounting for 76% of the total. El Salvador’s apparel sector exhibits revealed large comparative advantages, but competition in the region is high, and margins are low. In agricultural products, the country used to be a major player in international coffee markets, but this is no longer the case, as other countries in the region now have higher revealed comparative advantages in that specific trade.

Trade openness has widened significantly. El Salvador is a small, but very open, market-oriented economy. The country participates in a host of bilateral and multilateral trade agreements, including the Central American Common Market, CAFT-DR, and the Colombia-Northern Triangle free trade agreement. Cumulative imports and exports of goods and services increased from 47.8% of GDP in 1991 to 77.5% in 2018. Nonetheless, El Salvador has a very large trade deficit, which has averaged 21.2% of GDP since 2014. This is entirely due to the trade deficit in goods. Nominal exports as a percentage of GDP have remained stagnant in recent years, although exports of services have increased significantly (Figure 2.33).

Figure 2.33. Exports of goods and services (1991-2020)

El Salvador’s largest trading partner is the United States. Trade with the United States accounted for 44.1% of exported value of goods in 2018. However, the United States also accounted for 20.1% of El Salvador’s deficit in merchandise trade in 2018. Strikingly, exported value to the United States has grown significantly below nominal GDP growth in recent years, at only 1.7% a year since 2014. El Salvador’s exports to the United States cover a rather smaller number of exportable goods, than is the case in its trade with Central American countries (Vázquez López and Morales López, 2018[84]). Indeed, the growth of exports to Guatemala, Honduras and Nicaragua, which together accounted for 36.6% of goods exports in 2018, has been stellar, growing at more than 4% a year since 2014. Mexico is also becoming a top export destination, and exports to China are expected to increase significantly as well, following the recent establishment of diplomatic ties (Figure 2.34).

Figure 2.34. Top destination markets and export value (annual growth rates)

The terms of trade are sensitive to petroleum prices. While export prices have increased steadily since 2005, import prices, and therefore terms of trade, have followed oil and energy prices, improving sharply along with international dips in oil prices in 2009 and 2016, and deteriorating when oil prices have increased. Since 2016, El Salvador’s terms of trade have worsened due to a sharp increase in import prices and a deterioration in trade with the United States. This is attributable to rising prices for crude oil, underscoring the economy’s sensitivity to prices of petroleum-related imports. These arrive mostly from the United States, which has accounted for 75% of El Salvador’s petroleum-related imports since 2014. The correlation between the general import price index and the import price index of petroleum products from the United States has been equal to 80% since then.

El Salvador’s real effective exchange rate (REER) has diverged from the Latin American average. Although the country’s real effective exchange rate has remained unchanged since 2005, the median level in Latin America and the Caribbean has fallen by 15% since then (ECLAC, 2019[65]). Such a trend in real effective exchange rates implies a depreciation in El Salvador’s relative external competitiveness on a regional comparison, and a rise in domestic non-tradable prices relative to externally tradable prices (Figure 2.35). By some estimates, the real effective exchange rate is overvalued by 4% to 6% relative to fundamentals (IMF, 2019[43]). Without a currency of its own, internal devaluation and export growth are the policy tools that are available to El Salvador for external realignment.

Figure 2.35. Real effective exchange rates

The role of remittances

Remittances have financed El Salvador’s trade deficit. Since 2014, the country’s net borrowing needs have averaged 3.1% of GDP. Within the current account, a very large deficit in trade of goods and services, of 17.8% of GDP on average, has been counterbalanced by an even larger surplus in secondary income, of 19.4% of GDP. This massive surplus in secondary income is due to remittances. Salvadorans outside the country, mostly located in the United States, have consistently increased their personal transfers back to the country. These transfers rose from 18.2% of El Salvador’s GDP in 2014 to 23.4% in 2020, reversing the long-term negative current account deficit in 2020 (Figure 2.36).

Figure 2.36. Remittances have been significant, but not enough

Termination of the temporary protected status that many Salvadorans have had in the United States would be both an opportunity and a risk. In the US alone, there are 1.4 million Salvadoran immigrants, equivalent to a fifth of El Salvador’s resident population. Among these 1.4 million people, 195 000 have temporary protected status (TPS), and their employment authorisation is therefore subject to time limits (set to expire in June 2024 as of early 2023), raising the spectre of a significant population inflow into El Salvador in the near term, as well as the implications that this could have for remittances. However, termination of TPS would also represent a significant opportunity for a rise in domestic investment if national savings outside El Salvador were to be repatriated.

One in every five Salvadoran households benefit directly from remittances. In 2015, about 20% of Salvadoran households received remittances. However, 86% of these were spent on current consumption such as food and clothing, with 6% being spent on education, 4% on miscellaneous expenses, and 2% on medical bills. Only 2% of average monthly remittances represented effective savings. The median monthly remittance per household at the time was in the bracket of USD 114-170 (Defensoría del Consumidor, 2017[86]). By comparison, the minimum wage in agriculture at the time was USD 118. Such large inflows may cause Dutch-disease effects in an economy in which poverty is large, and opportunities are not abundant.

Partnerships

The Partnerships pillar of the UN’s 2030 Agenda for Sustainable Development cuts across all of its goals, focusing on the mobilisation of the resources that are needed for its implementation. It is underpinned by the Addis Ababa Action Agenda, which provides a global framework for aligning all financing flows and policies with economic, social and environmental priorities. It also contemplates the enhancement of co-operation in areas such as technology, capacity-building and trade, which may need to take on different forms as countries transition to higher levels of development.

El Salvador lacks sufficient financing for development. The country’s development confronts three inter-related constraints: weak revenue generation, declining fiscal space, and low public investment. These reflect, or are compounded by, structural factors such as low tax compliance, high (and rising) debt levels, a large (and growing) wage bill, an unsustainable pension system, and the weakness of financial management at local government level. High rates of informality and poverty constrain revenues, while the costs of insecurity absorb a growing proportion of expenditure.

Rapid increases in financing are possible. The inter-related nature of El Salvador’s fiscal challenges means that progress with regard to one of them yields gains with regard to another. The country’s Fiscal Responsibility Law (the Ley de la Responsabilidad Fiscal para la Sostenibilidad de las Finanzas Públicas y el Desarrollo Social) requires the government to bring debt under control 9, and to tackle imbalances in the pension system. Meanwhile, the administration’s commitment to increasing investment will necessarily involve a broader restructuring of public spending. Reducing tax evasion, aligning the tax system to recent international trends in tax reform, and introducing a recurrent tax on immovable property would unlock significant revenue flows at a national and local level.

Table 2.3. Partnerships – Three major constraints
1. Low tax compliance is a major drain on domestic resource mobilisation.
2. Local government is unable to promote development due to low revenue generation and ineffective spending.
3. The pension system achieves low coverage and low benefits, but generates higher debts.

A step change in revenue generation needs a revolution in tax culture

El Salvador needs to generate higher tax revenues. Government revenues were equivalent to 23.0% of GDP in 2017, up from 20.6% in 2009 (MH, n.d.[87]). Tax revenues accounted for 79% of government revenues on average over this period, with non-tax revenues accounting for 16% on average. According to the OECD’s Revenue Statistics in Latin America and the Caribbean 2020, which provides harmonised tax data for the region, El Salvador’s tax-to-GDP ratio was 20.8% before the COVID-19 pandemic in 2019, which is lower than the regional average of 22.9% (OECD et al., 2021[88]). This puts El Salvador near the middle of the reference group, above Ecuador, Panama, Dominican Republic and Guatemala (Figure 2.37). Unlike in the rest of the region, the tax-to-GDP ratio increased in El Salvador in 2020, reaching 21.9% (OECD et al., 2022[89]). This was due to the significant fall in GDP that year (tax income fell 4.2%) and does not necessarily reflect structural change.

Figure 2.37. El Salvador’s tax-to-GDP ratio versus benchmark countries and regional average

The structure of tax revenues is changing. El Salvador relies on consumption taxes for the bulk of its revenues, but direct taxes account for a higher proportion of the total than a decade ago. Taxes on goods and services accounted for 50.6% of tax revenues in 2019, while 33.5% came from taxes on income and profits, and 12.8% came from social security contributions. In 2008, 56.5% of total tax revenues were from taxes on goods and services, 30.4% from direct taxes, and 10.8% from social security contributions (OECD et al., 2021[88]).

New tax measures are under discussion. A number of tax reforms have been implemented in recent years, and further changes to the tax system are currently under consideration. These new measures include the establishment of a so-called monotributo – a tax designed to increase tax and social security coverage in the informal sector – as well as a tax on wealth. In addition, plans to introduce electronic invoicing to facilitate tax payments and enhance compliance are at an advanced stage. As discussed below, reintroducing a recurrent tax on immovable property would be an important source of revenue for municipal governments.

Tax expenditure is high and rising in El Salvador. As part of its commitment to fiscal transparency, the country’s treasury department tracks tax expenditure – revenue lost to tax exemptions and incentives – on both value-added taxes and income taxes. Between 2009 and 2016, tax expenditure rose from 2.7% to 3.8% of GDP, averaging 3.4% of GDP against an average tax take of 17.3% of GDP (MH, 2018[92]). In 2016, tax expenditure through VAT was equivalent to 1.9% of GDP, 73% of which related to consumption of local goods and services. Tax expenditure through income taxes was equivalent to 1.8% of GDP, with incentives for free trade and inward processing accounting for just over a quarter of this amount. El Salvador’s tax expenditure is above the regional average of 3.5% of GDP calculated by Peláez Longinotti (2018[93]), a study which also finds that, unlike in El Salvador, tax expenditure is declining in most countries in Latin America.

A reduction in tax evasion would herald the prospect of major revenue gains for the Salvadoran state. Tax evasion is widespread in El Salvador. In the absence of official figures on tax evasion, independent estimates show that significant revenue is foregone (although these should be treated with a degree of caution 10). For example, the FESPAD foundation calculates that 35% of potential tax revenue is lost (FESPAD, 2013[94]). Tax evasion reduces revenues from corporate income tax by some 50%, while 33.5% of potential revenue from VAT was lost in 2015 (Iniciativa Social para la Democracia, 2016[95]). Low compliance with tax requirements is not confined to the informal sector. Rather, it is considered to be widespread amongst those with the greatest capacity to pay (Iniciativa Social para la Democracia, 2016[95]). Nonetheless, Salvadorans have been shown to be more likely to pay taxes than citizens across Latin America on average (OECD, 2019[96]).

A new fiscal pact is required. Addressing tax evasion on this scale requires co-ordinated action across government, as well as a revision of the tax code and other legislation that is relevant to the tax system, and also improvements to the administration. It also requires policies to inform and engage citizens. The practice of tax evasion has an important international dimension, and it is an area in which El Salvador can benefit from ongoing international initiatives. In 2015, El Salvador signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, but it has not yet joined the Inclusive Framework on Base Erosion and Profit Shifting, nor has it started automatically exchanging information on financial accounts between tax administrations.

Fiscal space is constrained by debt-servicing costs and the wage bill

Public spending in El Salvador has a limited developmental impact. The country’s low level of revenue generation means that public spending is lower than its level of development would suggest (IDB, 2018[97]). Moreover, the composition of spending constrains the government’s ability to promote development. In 2018, debt payments and the public-sector wage bill accounted for a combined 57.4% of public spending, with only 13.2% allocated to public investment (gross investment and capital transfers combined). Goods and services accounted for 17.5% of total spending in 2018, and transfers represented 11.9% (MH, n.d.[87]).

Debt-servicing costs and the wage bill are eroding fiscal space. Between 2008 and 2018, spending on the wage bill and interest payments increased at an average annual rate of 5.4% and 6.7% respectively in nominal terms. This growth was much faster than that of public investment, which increased by 2.9% per year on average. The proportion of the consolidated budget that was allocated to debt-servicing costs (excluding those related to public enterprises) increased from 13.0% in 2015 to 14.5% in 2018, with the 2019 budget allocating 23.1% of spending to these costs (MH, n.d.[87]).

Rising debt costs are changing the structure of spending. In 2018, debt-servicing costs became the second largest category of spending by function after social development. The proportion of spending allocated to administrative services, social development and economic services declined between 2015 and 2018, while the allocation to justice and security increased (Figure 2.38). In 2019, 12.7% of the budget was allocated to justice and security, while economic development received 8.6%, and administrative services got 7.2%.

Figure 2.38. Functional classification of public spending, 2015-21

In the years before the COVID-19 pandemic, social spending’s share of the budget dropped sharply. By 2020, the allocation to social development (which includes health, education and pensions) stood at 43% of total spending in the consolidated non-financial public sector (excluding public enterprises), 8 percentage points below its level of 51% in 2015 (MH, n.d.[87]). At 9.1% of GDP in 2016, social spending by El Salvador’s central government (which excludes pensions) was in line with that of the Latin American countries within a benchmark sample, for which social spending averaged 9.4% of GDP (ECLAC, 2019[98]).

The cost of insecurity is rising. Between 2015 and 2020, justice and security registered the strongest spending growth among the main function groups, reaching 7.8% of GDP in 2020. Between 2015 and 2019, economic development expenditures in the non-financial public sector increased by 0.8% per year on average, social development by 1.8% and administrative services by 2.7%. (MH, n.d.[87]).

There was a large increase in public expenditure in 2020, both in nominal terms and as a share of GDP. Central government expenditure as a share of GDP increased by seven percentage points, with large increases in the areas of justice and security (whose allocation doubled with respect to 2019), economic development (an increase of 98%), and social development (12%). In terms of expenditure in the broader non-financial public sector, expenditure grew to 37.2% (excluding production by public enterprises).

The Salvadoran state’s wage bill is high by regional standards. El Salvador’s expenditure on the public-sector wage bill exceeds average levels both for Latin America and the Caribbean (29% of total public spending), and the OECD (24% of public spending) (IDB, 2018[97]). Between 2008 and 2018, spending on public sector wages increased from 8.8% of GDP to 10.5% of GDP (Alas de Franco and Serpas de Portillo, 2019[99]). Bringing the wage bill under control will be an important means of shoring up public finances. A proposed public service law (Ley de Servicio Público) would provide a legal framework for public sector recruitment, retention, remuneration, and training, and it would standardise salaries across the public sector. However, this legislation is proving politically contentious (see Chapter 8).

El Salvador’s public sector is growing fast. According to the Inter-American Development Bank , public employment as a percentage of total employment is low by regional standards, but this situation is changing (IDB, 2018[97]). Using data from the Instituto Salvadoreño del Seguro Social, Alas de Franco and Serpas de Portillo (2019[99]) find that the number of public-sector workers increased by 50 039 to 167 000 between 2007 and 2018, with central government posting the strongest growth. The establishment of new public institutions was an important factor in this phenomenon. The IDB (2018[97]) notes that El Salvador’s public-sector wage premium is one of the highest in the region, and is particularly prominent amongst low-skilled workers.

Government salaries are outpacing inflation. On average, salaries in central government increased by 40.2% in nominal terms between 2007 and 2018, more than twice the rate of inflation over this period (Alas de Franco and Serpas de Portillo, 2019[99]). Although decentralised institutions and municipalities followed a similar trend overall, there is significant variation between different types of workers in the three different spheres of government. Workers in public education and health, which are the two largest employers in the public sector, benefit from a step system, whereby salaries grow by 8% per year. Between 2008 and 2017, the wage bill in many ministries more than doubled in nominal terms due to the combination of headcount growth and salary costs (Alas de Franco and Serpas de Portillo, 2019[99]).

Fiscal policy appears to have little impact on inequality. According to an analysis based on data from 2011, El Salvador’s taxes and transfers were progressive, but they either had a neutral effect on poverty on a yearly basis or even served to increase it (Beneke, Lustig and Oliva, 2017[100]). This suggests that the decline in inequality since the early 2000s identified in the People section is driven either by the incidence of economic growth or by the longer-term impact of education or health spending amongst lower income groups. Although Beneke, Lustig and Oliva (2017[100]) found that direct transfers were reasonably well targeted at low-income households, they also found that they did not operate at sufficient scale to have a significant impact either on the Gini inequality coefficient, or on the poverty rate. Basic education was found to be the most progressive item of social spending. The same methodology has been applied for 2017, and results indicate that the redistributive impact of taxes and transfers remains small (Oliva, 2020[101]).

Higher and better infrastructure spending is needed. Combined infrastructure investment by the public and private sectors in El Salvador was low in years preceding the COVID-19 pandemic by regional standards, averaging around 2% of GDP per year between 2008 and 2015, most of which went towards transport and telecommunications (Lardé, 2016[102]). According to the IDB (2018[97]), El Salvador performs poorly by regional standards in the planning, selection and management of infrastructure projects, although its procurement processes are more favourably regarded.

Public-private partnerships (PPPs) are poised for take-off in El Salvador. Notwithstanding the implications for debt levels, PPPs are perceived as a critical means of scaling up infrastructure investment. El Salvador launched its first PPP in September 2019 to expand the cargo terminal at the International Airport, using a legal framework – the Ley Especial de Asocios Público Privados – that took effect in 2013. The terminal began operating under a PPP concession in May 2022.

Debt reduction needs to be carefully managed

Public debt rose rapidly even before the COVID-19 pandemic. By the end of 2019, it stood at 97.3% of GDP, up from 58.7% in 2009 (BCR, 2022[37]). The pension system has been an important factor in this increase: between 2009 and 2018, non-pension debt declined from 52.7% to 50.5% of GDP. Over the same period, pension debt increased from 6% to 18.9% of GDP. El Salvador has the second-highest debt level amongst the benchmark countries exhibiting the second-fastest rate of growth in this respect since 2001, after the Dominican Republic (Figure 2.39).

The particular composition of El Salvador’s debt partly mitigates its high level. At the end of 2018, the implicit interest rate on public debt was 4.9%, running higher than the nominal GDP growth rate of 3.5% since 2014 (BCR, 2022[37]). Close to 50% (43% as of December 2022) of El Salvador’s debt has an interest rate below 6%, and more than 50% (58% as of December 2022) has a maturity beyond 11 years. This partly reflects the important role of official flows in financing El Salvador’s development: multilateral debt accounted for around 30% of total debt in 2018 and 36% in 2022 (MH, 2022[103]). Domestic pension funds represent an important proportion of the investors who hold around 60% of debt (BCR, 2022[37]) (BCR, 2022[37]).

Figure 2.39. General government gross debt, El Salvador and benchmark countries, 2002, 2019 and 2020

The fiscal effort that El Salvador made due to the COVID-19 pandemic resulted in a significant increase in its public debt. Debt increased by almost 18 percentage points to reach 89% of GDP. According to estimates from the IMF and the Banco Central de Reserva (BCR), El Salvador’s central bank, the 2021 recovery helped to situate debt at 85% of GDP by the end of 2021. The share of debt that corresponds to the pension system has continued to grow. Public debt excluding pension debt had stabilised prior to the pandemic, but it increased by 10 percentage points between 2019 and 2021.

El Salvador is committed to fiscal discipline. In 2016, El Salvador passed the Fiscal Responsibility Law. Not only did this law establish thresholds for debt and other fiscal indicators, but it also established mechanisms to increase the transparency of the government’s fiscal policy over the medium term, such as the annual publication of a medium-term expenditure framework for the subsequent four years. In the context of the declaration of a national emergency due to the COVID-19 pandemic, El Salvador’s legislative assembly suspended the law. The suspension decree stipulated that the finance ministry would prepare a regularisation plan once the effects of the pandemic had passed. By the end of 2022, no such plan had been presented for approval.

Prior to the COVID-19 pandemic, fiscal consolidation was under way. The Fiscal Responsibility Law mandated a five-year period of fiscal consolidation between 2017 and 2022. In 2018, El Salvador posted a primary fiscal surplus equivalent to 0.9% of GDP. This performance maintained a trend of fiscal discipline, thanks to which the overall fiscal deficit fell steadily, from 4.5% of GDP in 2013 to 2.7% of GDP in 2018. Further fiscal consolidation will be necessary for El Salvador to reduce its non-pension debt to below 50% of GDP, as required by the Fiscal Responsibility Law. Prior to the COVID-19 pandemic and the suspension of the Fiscal Responsibility Law, the government was planning to reduce the fiscal deficit to 1.6% of GDP by 2024 (MH, 2019[105]).

The pension system is an obstacle to fiscal consolidation. The Fiscal Responsibility Law requires total public debt, including pensions, to fall below 60% of GDP by 2030 (Asamblea Legislativa, 2016[106]). El Salvador’s rapidly growing pension debt is a legacy of the major reform in 1998, under which the unfunded defined-benefit system was closed to new entrants, and a system of individual accounts was established. The current level of pension debt attests to the prolonged, complex and costly transition between these two systems. It reflects not only the long-term liabilities generated by moving from an unfunded to a funded system, but also additional reforms implemented in 2003 and 2006 to protect benefit levels for individuals who moved from the old to the new system (World Bank, 2010[107]).

A solidarity fund has been introduced to protect minimum benefits. A financing crisis in 2017 prompted a wide-ranging package of reforms to the pension system (SSF, 2018[108]). The most notable feature was the creation of a new solidarity fund to finance minimum benefits for members of the new system, which operates on an unfunded defined-benefit basis, and whose deficits will be covered by general government, up to a maximum of 2.5% of spending per year from 2020 onwards. To finance the solidarity fund, the contribution rate was increased from 13% to 15% of salary, with 5% of salary allocated to the solidarity fund. The reform also reduced benefit levels across the system.

The reform was partly a reversion to a defined benefit system. The financing arrangements of the solidarity fund mean that the contributions of present workers are financing the benefits of retirees, as was the case in the unfunded defined-benefit system. The vestiges of the old system were already evident in the use of contributions from present workers to purchase special bonds to capitalise the accounts of workers who switched from the old arrangement to ensure that they would receive the same level of benefits in retirement as they would have done if they had stayed in the old system.

The 2017 reforms did not make the system sustainable. An actuarial report by the Superintendencia del Sistema Financiero found that the solidarity fund had an actuarial deficit of USD 8.9.8 billion at the end of 2018, while the actuarial deficit on the government’s side of the system was USD 8.6 billion. This equated to a total deficit of USD 17.5 billion, or 67.3% of GDP in that year. Payments by the solidarity fund will exceed income from 2026 onwards, requiring the government to contribute (SSF, 2019[109]).

Low levels of benefits threaten the system’s political viability. The pension system has not been generating the expected level of investment returns since the 1998 reform, resulting in pensioners receiving one of the lowest replacement rates in the region (World Bank, 2010[107]). Moreover, a significant proportion of the workforce does not contribute for long enough to meet the 25-year mandatory contribution period due to time spent out of work or in informal employment. Increasing El Salvador’s retirement age, which at 60 for men and 55 for women is very low by regional standards, would reduce pressure on minimum pensions by allowing individuals to contribute for longer and thus to build up larger accumulations.

A reform of the pension system was enacted in December 2022, capping maximum pensions and increasing minimum pensions. The reform includes a number of parametric changes: it will lead to a 30% increase in the benefits of current pensioners, including minimum pensions, a 1 percentage point increase in the employer contribution rate, the removal of the ceiling on contribution bases and the imposition of a pension ceiling. The possibility of advance withdrawals of 25% of their pension account, deemed a source of unsustainability, was also removed. The reform also leads to changes in the institutional framework, with the creation of a Salvadoran Pension Institute to oversee the operations of pension administrators. The reformed system remains a mixed system with the use of the solidarity fund and a public guarantee for pension-related claims. The reform also maintains the use of debt emissions by the newly created pension institute which pension administrators will be obliged to purchase, as well as a debt exchange between pension bonds issued in the previous and the new system.

The pension system covers just over half the population. As El Salvador’s demographics become less favourable, financial pressure on the pension system will increase (although the legacy costs related to individuals who remained in the old system will mostly disappear by the end of the next decade). According to the Superintendencia del Sistema Financiero (2022[110]), 62% of the population in December 2022 was inside the pension system, of which only 21.6% were contributing and 5% were pensioners. This report reveals that 3.4% of those covered were in the old defined-benefit pension system, and 58.4% in the new defined-contribution scheme. Only 9% of members in the new scheme were aged 60 or over in December 2022, while 33% were aged 35 or younger. Increased coverage is not addressed directly in the recent pension reform and is nevertheless a key ingredient to ensure the sustainability of the pension system.

Measures are needed to close the gap in social protection coverage among the elderly. El Salvador currently provides a very limited basic pension, the Pensión Básica Universal. It does not operate nationwide, and it is only available for individuals aged 70 or over without alternative sources of income, although it is proving effective at reducing poverty (Martínez, Pérez and Tejerina, 2015[111]). Although it is expected to scale up, the programme is currently unable to cover the coverage gap in the social insurance system. Closing this gap will require reforms to contributory and non-contributory arrangements alike, as well as calling for policies to promote formalisation.

Local government has a larger role to play in El Salvador’s development

El Salvador has the most fragmented municipal system in Central America. Of El Salvador’s 262 municipalities, almost half have fewer than 10 000 residents, and there are 25 000 individuals per municipality on average (Porto, Equino and Rosales, 2017[112]). Consequently, economies of scale are absent in many municipalities, and fixed costs are extremely high for the smaller ones. Although there has been a gradual decentralisation since 2005, revenues generated at a local level (mostly from user fees for local amenities) were modest in 2017, equating to about 1.2% of GDP.

Municipalities are over-reliant on transfers from the central government. Low capacity for revenue generation renders municipalities highly dependent on the Fondo para el Desarrollo Económico y Social de los Municipios (FODES), a transfer from central government. Nationally, the FODES was responsible for 43.1% of municipal income in 2016, down from 47.5% in 2012. However, in municipalities outside the departments of San Salvador and Libertad, the transfer accounted for a much higher proportion of income in 2016, exceeding 90% in Cuscatlán and Chalatenango, for example.

Municipalities are not investing sufficiently in infrastructure. In 2016, capital spending accounted for 20.9% of municipal spending, continuing a steady decline from 29.8% in 2012 (Pérez Trejo, 2019[113]). Over the same period, spending on salaries as a proportion of municipal spending increased from 29.9% to 37.8%, while expenditure on goods and services declined from 30.7% to 29.6%. Debt costs increased from 5.1% to 8.6%. Overall, capital spending by municipalities fell from 0.9% to 0.5% of GDP between 2012 and 2016, while current spending remained steady at 1.9% of GDP. The low level of capital spending is notable given that, by law, 75% of the FODES transfer must be used to invest in local infrastructure. The situation is further exacerbated by significant (and worsening) under-spending on capital budgets (Pérez Trejo, 2019[113]).

Reforms to FODES seek to increase local investment, but they run the risk of weakening municipal finances. Two key reforms were approved at the end of 2021. On the one hand, the reform of FODES (Legislative Decree 204, 2021) reduces the transfer to municipalities through FODES to 1.5% of the budget. On the other hand, a national directorate of municipal works, the Dirección de Obras Municipales (DOM), was created to manage resources dedicated to physical investment in municipalities, and its budget allocation was set at no less than 3% of total budgetary expenditure (Legislative Decree 210, 2021). A reform in March 2019 had increased the share of FODES resources to 10%. These reforms imply a significant cut in the funds allocated to municipalities. On the other hand, it is expected that the centralisation of resources and their management may boost both real investment in municipal infrastructure and the quality of projects. However, it is not clear that this will improve the quality of spending. The formula for the allocation of transfers was not substantively modified and would need to be revised. The transfer is allocated according to a formula that takes into account municipalities’ size, population and poverty, as well as an equity component. The formula tends to strongly favour small municipalities, which are where financial capacity tends to be weakest (IDB, 2019[114]).

Restoring the property tax is critical for generating municipal revenues. For municipalities to be an engine for development, they need to generate higher revenues. This will require the re-introduction of a property tax. This tax was eliminated in 1994, making El Salvador one of the few countries in the region not to levy one. While this is not a measure that can be introduced overnight – it will require a new legal framework as well as mechanisms for the creation and maintenance of a cadastre for property values – it would alleviate concerns regarding municipal debt levels, which have increased significantly in recent years and now exceed 2% of GDP (IDB, 2019[114]).

Migrant workers and official flows are key sources of finance

Remittances drive the economy and offset low public spending. Remittances from El Salvador’s emigrants are a critical source of income for the country and keep many households out of poverty. Around 24% of households received remittances in 2019 (DIGESTYC, 2020[8]).11 Of these, 17% were considered poor (compared to 22.8% of the overall population), and 48% were headed by women. Recipient households tend to be rural, with female heads of households who have low levels of education and relatively low levels of labour force participation (Keller and Rouse, 2016[115]). While remittances overwhelmingly finance consumption rather than investment, they have also been found to promote financial inclusion (Anzoategui, Demirgüç-Kunt and Martínez Pería, 2014[116]).

The increase in remittances has continued and even accelerated, although it might not be sustained. Remittances increased from 18% of GDP in 2015 to 21% of GDP in 2018, and to 24.1% in 2020, despite a temporary fall during the confinement period 12 (BCR, 2022[37]). However, this increase has been attributed to migrant workers in the United States (who provide the majority of remittances) increasing remittances in anticipation of a return to El Salvador. If changes to the residency status of Salvadorans proposed by the United States administration result in repatriation, the composition and flow of remittances could change.

Donor support is mostly in the form of concessional loans. El Salvador is eligible for official development assistance (ODA), but has not been eligible for highly concessional International Development Association (IDA) finance since 1977. As a result, official flows of support come predominantly from three development banks: the International Bank of Reconstruction and Development (IBRD), the IDB, and the Central American Bank for Economic Integration. Nowadays, lending from the IBRD takes place on highly concessional terms: since 2000, its loans have carried an interest rate of less than 1% (World Bank, 2019[117]). In 2022, El Salvador also became a member of CAF – Development Bank of Latin America.

Inflows of ODA fell over the decade before the COVID-19 pandemic. According to the OECD Development Assistance Committee, ODA to El Salvador fell from 1.9% of GDP in 2008 to 0.8% in 2017, albeit with ups and downs over this period. It also declined overall in absolute terms. The priority sector for ODA over this period was social infrastructure and services, which accounted for 65.5% of the allocation in 2017, up from 44% in 2008 (OECD, 2019[118]).

Peace and institutions

The Peace and Institutions pillar of the 2030 Agenda for Sustainable Development encompasses peace, stability and trust, as well as effective governance and the performance of the public sector more broadly.

El Salvador has a complex institutional and cultural legacy that is the product of decades of military regimes in the 20^th century, more than a decade of civil war, and a remarkable peace agreement that set out to tackle the institutional roots of violence in the country. Indeed, the peace agreements signed in 1992 triggered a series of reforms that considerably strengthened the country's institutional framework, allowing a peaceful transition towards the full consolidation of a liberal democracy. However, most of the conflict’s socio-economic roots remained virtually intact. Today, the road ahead to achieve the primacy of the rule of law in El Salvador is still long and demanding. Peace building in post-conflict countries requires a series of institutional, personnel-related and cultural changes that El Salvador has not yet concluded.

Citizens’ lack of confidence in the institutions of the Salvadoran state weakens the social contract and limits the state’s ability to operate effectively and efficiently. Weak application of justice due to institutional flaws has resulted in unresolved conflicts between citizens that trigger new cycles and types of violence. Past efforts have not been sufficient to re-establish a peaceful environment by breaking the old cycles of violence and impunity. Peace will ultimately enable the consolidation of sound and sustainable social development. Strengthening the country’s institutions also calls for improvements to practices of governance and the state’s ability to comply with citizens’ expectations of public service delivery, both of which leave room for improvement. Establishing better governance practices would make possible a more efficient use of El Salvador’s limited public resources.

Table 2.4. Peace and institutions: Four major constraints
	Peace and institutions
1	Violence imposes high costs for Salvadoran society and has a significant negative impact on all dimensions of development.
2	The security sector’s lack of legitimacy and limited capacity lead to a lesser willingness to resolve disputes through formal means, which has contributed to maintaining cycles of violence over time.
3	Government’s lack of legitimacy leads citizens to disengage from their civic duties, such as paying taxes or participating in the country’s democratic institutions.
4	The Salvadoran state operates under obsolete laws and cumbersome mechanisms that negatively impact a more efficient use of public resources for development.

The peace accords triggered a series of unprecedented reforms, but achieving the primacy of the rule of law requires further efforts

After years of confrontation, El Salvador restored peace with an exemplary three-year negotiation process. El Salvador’s military held the power of state administration and government for almost five decades during the twentieth century. In the 1970s, protests and mobilisations against the political and military elite intensified until the outbreak of war in the early 1980s. Leftist guerrilla groups forming the Farabundo Martí National Liberation Front, the FMLN, clashed with the state and paramilitary groups for almost 12 years. The signature of the Chapultepec Peace Accords enabled a ceasefire, and finally brought peace to the country in 1992. The peace process, which was carried out between 1989 and 1992, was one of the earliest to involve the UN at critical stages of the negotiations, and to create a monitoring agency, the United Nations Observer Mission in El Salvador (ONUSAL), to ensure compliance with the peace accords.

After the war, two opposite parties consolidated through electoral mechanisms as the two main political forces and went on to control the Salvadoran political system for decades. In early 1981, a coalition of conservative civilians created a right-wing party, the Alianza Republicana Nacionalista (ARENA). The rise of ARENA through electoral mechanisms made it possible to break the military’s dominion over the political system for the first time since the 1930s. The party controlled the presidency from 1989 until 2009. After the end of the civil war, the organisation of demobilised guerrilla combatants became a legal left-wing political party. The FMLN party was created as a result of the Chapultepec Peace Accords in 1992, and rapidly consolidated as the second most influential political force in the country. The FMLN party controlled the presidency from 2009 to 2019. Strong political polarisation has limited many attempts at institutional reform since the end of El Salvador’s civil war (Stanley, 2006[119]). Although these two parties maintained a strong degree of leadership among citizens in recent decades, legislative elections operate under a largest remainder method that rewards plurality. This mechanism has made it possible to maintain a more politically diverse legislature.

The electoral cycle of 2019 and 2021 upset the balance of power in the country. In presidential elections in 2019, Nayib Bukele, a candidate detached from the two major traditional parties, was elected with an absolute majority in the first round. Then, in the legislative elections of February 2021, a new party linked to President Bukele won a qualified majority in the Legislative Assembly, the country’s unicameral legislature. These changes have brought an end to parliamentary deadlocks that had limited legislative activity. They have also heralded a renewal of judicial-branch bodies driven through the Legislative Assembly, generating a new balance of power in Salvadoran institutions.

El Salvador has succeeded in maintaining universal suffrage, but has failed to restore confidence in democratic institutions. Since 1994, all elections and handovers in El Salvador have been peaceful and uncontested. Pacific and democratic transitions are in marked contrast with the country’s authoritarian past, and with the political instability of the region. However, confidence in political parties is very low. In 2018, around 93% of Salvadorans had little or no confidence in political parties (Latinobarómetro, 2018[120]). Participation in the presidential election of 2019 was average (51.88%) compared to the region,13 but participation among young people remains very low. Confidence of citizens in the honesty of elections remains relatively low (46%), but has increased recently after deteriorating significantly over the past decade (falling by 7 percentage points). In this regard, El Salvador ranked below the OECD average of 56% in 2021 (see Figure 2.40, Panel A).

The Salvadoran social contract has remained weak, driven by declining trust in public institutions, although trust in government has increased in recent years. The social contract is understood as a tacit pact between the state and citizens.14 When citizens perceive that public institutions are unable to respond to their demands, they have lower incentives to fulfil their obligations. Following a regional trend, there are significant levels of disenchantment with the operation of government institutions in El Salvador. Over the last decade, Latin America and the Caribbean have been experiencing a growing disconnect between citizens and public institutions (OECD/CAF/ECLAC, 2018[121]). Similar to other Latin American countries, El Salvador needs to implement policies to overcome the “institutional trap” by which failing to respond to citizens’ increasing demands leads to lower degree of institutional legitimacy, undermining the ability of the state to respond to social demands in the first place (OECD et al., 2019[122]). In 2018, only a third of the Salvadoran population (32.4%) expressed confidence in the national government, ranking below the OECD (39.1%) and the benchmark (45.4%) averages, but above the LAC average (25.8%). By 2021, a much higher proportion of respondents put confidence in the national government (70%), well above the OECD (43%) and LAC (36%) averages (see Figure 2.40 Panel B). This regained trust is key as without trust, citizens disengage from their civic duties and find few incentives to participate in politics or to fulfil civic duties such as paying taxes.

Figure 2.40. Strengthening the legitimacy of institutions remains a challenge in El Salvador

Beyond universal suffrage, the consolidation of liberal democracy requires the primacy of the rule of law. The consolidation of liberal democracy has two fundamental dimensions. The first of these is the principle of majority rule operating in a political system that guarantees universal suffrage. The second, which is perhaps more complex and less widely acknowledged, is the primacy of the rule of law (Dodson and Jackson, 1997[123]). Strengthening the rule of law after a civil war involves a series of inter-connected institutional, personnel-related, and cultural changes that are necessary to achieve genuine peacebuilding (Bowen, 2019[124]).

The peace accords triggered a series of significant yet insufficient institutional changes

The Chapultepec Peace Accords envisioned a comprehensive reform of the security sector. Breaking the cycles of violence after a civil war requires a comprehensive approach that goes beyond security concerns such as increasing the security workforce in order to reduce crime rates. The main objectives of institutional reforms in post-conflict settings are to change institutional practices within the security sector and, in the long term, to increase judicial independence (Bowen, 2019[124]). A security sector reform (SSR)15 includes a coherent set of reforms in the military, police and judiciary to promote sustainable peace and security (OECD, 2008[125]). The peace accords envisioned a comprehensive SSR that included: i) creating a new police force to replace the old police forces controlled by the military; ii) reducing the size of the armed forces and implementing a new mandate to limit their role to securing external borders; and iii) strengthening the independence and professionalisation of the judiciary.

The reforms that were triggered by the peace accords had an unprecedented positive impact on the functioning of El Salvador’s institutions, and on the construction of the rule of law. The peace agreements managed to break much of the control that the legislative branch had over the Supreme Court of Justice (SCJ), and consequently also over lower courts, through new mechanisms for appointments to the judiciary. The reforms created an independent National Council of the Judiciary (NCJ) to generate nominations for judicial office.16 In line with these reforms, a majority of two-thirds in the Legislative Assembly must approve nominations by the NCJ. This change made courts more ideologically diverse and professionally competent. In addition, the length of appointments to the SCJ was extended to nine years, so that one legislative assembly would not be able to elect all of its members. In order to decentralise decisions in the judiciary, the reforms transferred the power to select and discipline the lower courts from the SCJ to the NCJ. Finally, the peace accords secured an allocation of 6% of the national budget for the judicial branch in order to strengthen its independence from the executive and legislative branches (Stanley, 2006[119]).

The judicial branch gained some independence following the civil war, but its limited resources and capacity are insufficient to respond to the country's demands for justice. In terms of judiciary personnel, the country has a relatively limited capacity, with only 10.7 judges or magistrates per 100 000 people in 2017. This figure has remained stagnant over the past decade (10.67 per 100 000 in 2007). Benchmark countries such as Serbia or Estonia had 38.3 and 17.4 judges or magistrates per 100 000 people in 2017 respectively (UNODC, 2019[126]). Additionally, access to judicial services in rural areas, the distribution of courts in the territory, and the allocation of workload by court, remain among the greatest challenges that the system faces. Thanks to the reforms of the judiciary that were triggered by the peace accords, it gained some independence from the political cycles in the executive and the legislative branches. Although past reforms raised the requirements for the appointment of judges, they did not necessarily improve judges’ qualifications (Bertelsmann Stiftung, 2018[127]). Until 2021, the majority of judges and magistrates (85.2%) had been in a judicial career for more than ten years (see Figure 2.41 Panel B). The reform of the legal framework of the judicial career, approved in August 2021, established ceilings of 60 years of age or 30 years seniority in the judicial career for judges in magistrates, which potentially affected 220 judges (about a third of judgeships). It also increased the latitude of the SCJ to reallocate judges. The reform has resulted in significant turnover among judges and magistrates – 96 judges resigned whilst a further 121 were put on an availability regime allowing them to continue serving without security of tenure.

Despite having achieved significant reforms, implementation of the peace accords failed to change many institutional practices or to consolidate full independence of the judiciary. Almost three decades after the peace accords, and despite the profound changes that were contemplated initially, only technical and procedural aspects have changed regarding the operation of the institutions of security and justice. Currently, the entities that are responsible for horizontal responsibility (i.e. the courts or the Human Rights Ombudsman 17) are not involved in the definition of the government’s security policies. This has allowed repressive security strategies for addressing public safety to continue, leading to new abuses of force, the recurrent use of the military for internal security purposes, and new extra-judicial executions (Kurtenbach, 2019[128]). The judicial system still needs to be strengthened sufficiently by protecting judges, prosecutors and other actors from political and social interference (Bowen, 2019[124]). Over the past decade, there have been public denouncements of strong political interference in the judiciary, and of how this has affected the role of judges and magistrates in the fight against impunity and human-rights violations. The current mechanism for appointing magistrates to the SCJ has demonstrated that it does not effectively guarantee the independence of the judiciary from other branches of power, in particular from the legislature, or the non-interference of political parties and economic interests in its decisions (UN, 2013[129]).

Figure 2.41. Despite having significantly improved operational aspects of the judiciary, achieving greater independence and legitimacy remains a challenge

The peace accords created a specialised body to look after the protection of human rights, although it does not have any enforcing power to punish human rights violations. In order to address low levels of confidence in the judicial branch’s capacity to protect human rights, the peace accords included the creation of a procurator’s office for human rights law, the Procuraduría para la Defensa de los Derechos Humanos (PDDH). Although the PDDH is not formally part of the judicial system, its function includes addressing, investigating and reporting complaints about human rights related to the inefficiency of the judiciary (Jackson, Dodson and Nuzzi O’Shaughnessy, 1999[132]). However, the PDDH only has the legal authority to make recommendations, and it lacks any enforcing power as a punishing authority. For this reason, the effectiveness of its role depends on the moral authority that it is able to generate among political actors and civil society (Dodson and Jackson, 1997[123]).

The creation of the PDDH has helped to increase the visibility of human rights violations, but its restricted resources hinder its ability to operate. The creation of the PDDH has had a positive impact on reducing impunity by increasing the visibility and legitimacy of denouncements of human rights violations. However, the PDDH has expressed the significant limitations that are caused by its constrained budget assignations (PDDH, 2018[133]). A budget that is insufficient for the PDDH to operate prevents it from complying in full with the responsibilities that are assigned to it by law. Still, the PDDH plays an important role with regard to denouncements of public institutions for violating human rights. According to the PDDH, the National Civil Police (NCP) continues to be the institution receiving the most complaints due to alleged human rights violations. Most of the complaints are related to personal integrity, personal safety and privacy. After the NCP, it is local governments, the General Prosecutor of the Republic, and the Ministry of Defence that receive the most such complaints (see Figure 2.42 Panel A, PDDH (2018[133])).

Although most human rights are constitutionally protected, vulnerable groups have few guarantees for the protection of their rights. Numerous cases of extra-judicial executions and excessive use of force by the police and the military have been documented, investigated and reported, with few resulting legal proceedings in recent years. Complaints have been linked primarily to the application of anti-gang measures, with abuses in this regard frequently taking place in areas with high prevalence of poverty and amongst young people (OHCHR, 2018[134]; Aguilar, 2019[135]). Gender and sexual violence remains an endemic problem in the country: in 2018, every 19 hours a woman was killed, and every three hours someone was sexually assaulted. In more than 70% of cases, victims were minors (OHCHR, 2018[134]). While feminicides have fallen along with the general fall in the homicide rate, instances of sexual violence against women have remained high, with 6 421 instances in 2019, 5 995 in 2021 and 3 299 in the first semester of 2022 (MJSP, 2021[136]; MJSP, 2022[137]). The total ban on abortion has given rise to the imprisonment of women and girls who are accused of homicide after a miscarriage. Overall, women, children, the LGBTI community and convicts are among the most vulnerable groups when it comes to human rights violations (see Figure 2.42 Panel B) (Human Rights Watch, 2019[138]; Amnesty International, 2018[139]; PDDH, 2018[133]).

Figure 2.42. Human rights violations are strongly associated with the excessive use of force, and are more common among certain vulnerable groups

Personnel-related changes have been limited in scope

The peace accords established a series of transitional justice measures and envisioned a lustration process to improve legitimacy. All parties commit human rights violations in a civil war, including the state itself. After reaching a peace accord, personnel changes in state institutions aim to improve the legitimacy of the reformed institutions by removing offending state officials and dismantling criminal networks that had infiltrated in public institutions (Bowen, 2019[124]). El Salvador’s peace accords included the creation of a Truth Commission to investigate extra-judicial crimes, and a vetting process (commonly known as lustration) to expel offending officials from state institutions. The creation of a new national civilian police force, the NCP, was perhaps the most significant lustration effort in El Salvador. The NCP was formed with quotas from the former members of the civilian police (20%), former members of the FMLN (20%), and civilians who had not participated in the confrontation (60%).

Changes to personnel in the judiciary focused on removing negligence, incompetence or incapacity, rather than on corruption or inappropriate political influence. The partial lustration process in the Salvadoran judiciary was conducted under the aegis of the National Council of the Judiciary (NCJ). The NCJ was responsible for recommending to the Supreme Court of Justice the removal or suspension of personnel in the judicial branch. Magistrates, judges of the first instance, and judges of the peace were individually evaluated by the NCJ according to a list of criteria to determine their aptitude to continue in post after the peace accords. However, out of the seven criteria that were evaluated, only two points assessed potential for corruption or for political influence being exercised over the judges or magistrates. The evaluating criteria centred on assessing competency and capacity. Although the NCJ managed to remove incompetent judges, personnel change scarcely contributed to increasing the independence of the judiciary (Dodson, Jackson and O’Shaughnessy, 1997[140]). In order to strengthen the independence of the judiciary, the system must ensure judges’ detachment with regard to litigants, their individual autonomy, and their political insularity 18 (Fiss, 1993[141]).

The limited reach of the lustration process, plus an amnesty law, weakened the state’s power for accountability, therefore also undermining its legitimacy.19 The lustration process that was initially contemplated in the peace accords had a limited reach in practice, for two main reasons. First, effective vetting measures to filter out offending personnel left aside several institutions of the justice sector, such as the courts, the prosecution service, and the prison system. Second, two subsequent amnesty laws passed in 1992 and 1993 limited the scope for removing offending personnel from state institutions (Bowen, 2019[124]). Therefore, several institutions in the security sector remained intact, and even in those where there was a lustration process, such as the police, some offending agents were able to keep their positions thanks to the amnesties. Recent changes have yet to interrupt the long-time patterns of impunity. In July 2016, El Salvador’s supreme court overturned the 1993 amnesty law, and several cases have been reopened since then (Bowen, 2019[124]).

Citizens' trust in El Salvador’s security system (i.e. police, military and judiciary) is low, especially with regard to the judiciary and its effectiveness. To be sure, nearly half of Salvadorans expressed confidence in the military (48%) and the local police (58%) in 2018. In particular, however, confidence in the local police has been declining over the last decade. Complaints about the excessive use of force, the use of the army for internal security purposes, and repeated allegations of extra-judicial executions, all serve to undermine citizens’ confidence in security-sector institutions. Citizens’ trust in the judicial system is very low (36%) and has remained stagnant over the past decade. In this regard, El Salvador ranks below the averages for the OECD (52%) and the set of benchmark countries (45%) (see Figure 2.41 Panel A).

The momentum of the process was not sufficient to consolidate the cultural changes required to build peace

El Salvador has not managed to consolidate the cultural changes among citizens that are necessary to break cycles of violence. In a peace-building process, cultural changes are preceded by an increased perception of legitimacy and, therefore, by an increased willingness to resolve disputes through formal means, which in turn contributes to breaking cycles of violence over time (Bowen, 2019[124]). So far, El Salvador has failed to consolidate enough legitimacy and to build trust among citizens in order to break long-lasting cycles of violence. Evidence has shown that being a former combatant increased the probability of committing a homicide after the civil war was over, and that this probability increased with the availability of weapons and the consumption of alcohol (Richani, 2010[142]).

Just at the time that crime was beginning to rise, a failure to make changes to personnel in some public bodies frustrated efforts to control corruption in the security sector. In the 1990s, and as reforms failed to purge corruption networks in the judicial and prison system, the emerging gangs encountered an environment in El Salvador that was conducive to them consolidating and operating with impunity. The same old networks of corruption in the judicial branch allowed the wealthy and the violent to negotiate their freedom through bribery or brutality after the end of the civil war (Bowen, 2019[124]). Evidence has shown that high homicide rates in post-civil war El Salvador are attributed to the formation and subsequent consolidation of a system of violence, which was a result of the interplay among weak state capacities, the low opportunity costs of crime, and agency (Richani, 2010[142]).

The weakened institutional framework failed to prevent the spread of new forms of violence after the civil war

Since the end of the civil war, El Salvador has gone through a combined series of social and economic trends that have enabled the transformation and continuation of past cycles of violence. The massive migration flows, initially of people emigrating but then of people flowing in due to mass deportations from the United States, have marked the country's development path. The emergence of gangs in Central America, and their rapid consolidation as powerful criminal networks, has played a decisive role in the transformation of violence. In the meantime, Salvadoran security sector institutions were not strong enough to prevent the gangs from escalating their activities (see Box 2.1). Common crime, and the emergence of drug trafficking, have also been key determinants of El Salvador’s high levels of violence.

Box 2.1. Street gangs and their role in the persistent violence in El Salvador

El Salvador’s gangs have their origins in impoverished immigrant neighbourhoods in Los Angeles. Large communities of Central Americans who had fled the violence and harsh economic conditions of their home countries settled in these areas. Gangs of young Central Americans gained strength there, and adopted the United States model of street gangs, which is characterised by strict memberships, loyalty tests, disputes for territory, and extortions targeting businesses and people.

Mass deportations from the United States led to the appearance of gangs in Central America. Between 1993 and 2015, the United States deported nearly 95 000 Salvadorans, which is equivalent to almost 1.5% of the population in El Salvador (United States Department of Homeland Security, 2015[143]). Many of the deported Salvadorans were former convicts and gang members. This massive migratory inflow led to gangs appearing in Central America (OHCHR, 2018[134]) along with the modus operandi that they had developed abroad. The intensification of gang violence in some areas of El Salvador was proved to be driven by the influx of convicts from regions with high levels of crime in the US (Ambrosius, 2018[144]; Kalsi, 2018[145]). Currently, the two most prominent gangs, or maras, as they are commonly known, are Mara Salvatrucha (MS-13) and Calle Dieciocho (18^th Street).

Deported Salvadorans found few opportunities to thrive in their home country, and an environment that has been conducive to consolidating criminal networks. The emergence of street gangs must be understood within a broader political and economic context. Broadly speaking, the emergence and strengthening of gangs are associated with social contradictions and problems, as well as with power gaps at the local level (Stephenson, 2011[146]). On the one hand, the lack of adequate education and employment opportunities for youths contributed to the formation of gangs. In the past ten years, the rate of young people who do not study or work (NEET) has remained high, affecting more than a quarter of the young population. El Salvador’s NEET rate is one of the highest in LAC and exceeds the regional average (OECD/CAF/ECLAC, 2016[147]; OECD, 2017[148]). On the other hand, deficiencies in the security sector, and incomplete reforms after the civil war, were critical factors that favoured the rapid expansion of gangs (Borgh, 2019[149]). The weakened state capacities in the post-conflict period also contributed to creating dynamics between agents of the state and criminal organisations that perpetuated violence (Richani, 2010[142]).

The gangs managed to consolidate powerful criminal networks that operate across borders, and inside El Salvador’s prisons. Over time, the maras gained strength by extorting residents and local businesses in specific areas of San Salvador and other large cities. However, the gang phenomenon also spread in several rural areas of the country. Recent estimates suggest that there are about 60 000 gang members, of which 10 000 were in prison by 2019 (Borgh, 2019[149]). Currently, gangs have a presence in several countries in Central America, and they carry out increasingly sophisticated criminal actions (Sullivan, 2006[150]). Although the gangs do not make political demands, they play an increasingly decisive role in Salvadoran politics. Security policy, and the attitude of governments towards gangs, have been strongly influenced by punitive populism, which favours purely repressive approaches to pursue electoral advantages (Martinez Barahona and Linares Lejarraga, 2011[151]).

A temporary truce between the government and the gangs showed a large share of homicides in El Salvador to be associated with the operation of the street gangs. In March 2012, the government managed to negotiate the conditions for a truce between the maras and the state, which led to a significant reduction in the homicide rate. Homicides fell from 70.6 per 100 000 inhabitants in 2011 to 40.2 in 2013 (UNODC, 2019[152]). Although the homicide rate fell, various sectors strongly criticised the truce by questioning its effectiveness, and by claiming that it would allow gangs to strengthen themselves. As a result of intense social and political pressure, the truce ended in 2014, giving rise to new waves of repressive policies by the government (Borgh, 2019[149]). After the end of the truce, the homicide rate increased again to 62.4 per 100 000 inhabitants in 2014, hitting a soaring peak in 2015 when it reached 105.4 homicides per 100 000 inhabitants (UNODC, 2019[152]).

Although the control of violence has been a central policy issue since the civil war, El Salvador has failed to move towards sound peace building. Since 2003, security policies have been among the central themes of election campaigns in El Salvador (Aguilar, 2019[135]). However, high violence rates have been one of the most significant obstacles to the country's development. In a 2018 survey, more than half of Salvadorans (55.4%) considered that crime and delinquency were the most severe problems in the country, followed by unemployment (11.6%), inequality (6.4%), and gangs (6.3%) (MJSP, 2018[153]). Between 2016 and 2018, El Salvador ranked in consecutive years as having the highest homicide rate in the world (UNODC, 2019[152]). The homicide rate has maintained a declining trend since 2016, reaching a rate of 51 per 100 000 people in 2018. Despite this progress, the homicide rate was still relatively high by 2018 compared to the rates of ten years ago (57.5 [2007] versus 61.7 [2017] homicides per 100 000 people), or to rates in the benchmark countries (see Figure 2.43 Panel A). Although violence concentrates around El Salvador’s main urban hubs (i.e. San Salvador, San Miguel, and Santa Ana), some rural areas are also vulnerable to high rates of violence (Figure 2.43 Panel B).

Figure 2.43. High levels of violence in El Salvador have different roots, and concentrate in specific areas

Violence has decreased dramatically in the past few years, which could herald an important change for the country. Although internationally comparable data are not available, homicide rates in El Salvador fell in 2020 and 2021 to historically low levels (18.1 per 100 000 inhabitants in 2021), which are comparable with the Latin American average (21.20 in 2020) (UNODC, 2023[155]). These rates are even lower than in the 2012-13 period, when a truce was reached between the main gangs. In March 2022 a spike in homicides led to a strong reaction from the Salvadoran government, which declared a state of emergency and, by early 2023, had made more than 62 000 arrests (PNC, 2023[157]). Homicide rates for 2022 were even lower, reaching 7.8 per 100 000 population, putting the country on the bottom 20% in Latin America by this metric. The fall in the homicide rate has been accompanied by the reduction in other crimes, like extortion (reports of extortion fell by 22% when comparing the period June 2020 to May 2021 with the previous year). However, no recent victimisation data are available that would allow an assessment of the significance of the reduction in other crimes over the past two years.

Figure 2.44. The homicide rate has fallen to historically low levels in the past few years

Security policy, and efforts to reduce violence, have sought to go beyond repression, but they have failed to incorporate sufficient actions on prevention and re-integration. Although leaders have proposed a comprehensive and more humane approach to violence, measures have in practice continued to be repressive (Wolf, 2017[159]). Preventive actions have been marginal over recent decades, and governments have systematically prioritised effective short-term strategies with a recurrent urgency and emergency nature in their formulation. The participation of the army in the fight against crime and gangs has been another common characteristic in the strategies that different governments have pursued. The incidental and short-term nature of security policies are related to the lack of a long-term state security policy (which is defined only by the government). Some of the consequences that this approach has brought are the overflow of judicial capacity (Aguilar, 2019[135]), as well as human rights violations on account of abuses of the use of force (Human Rights Watch, 2019[138]). Recently, the security policy of the administration of President Bukele (namely the Territorial Control Plan) introduced a territorial approach both for targeting its actions, and for co-ordinating at the local level. By introducing a territorial approach, the administration expects to respond better to the needs of each area, and to achieve more results than past strategies, which have been applied in a uniform manner across the country, and have been co-ordinated centrally.

The cost of violence

Violence imposes high additional costs on the functioning of Salvadoran society. First, violence generates additional costs for governments through the operational costs of the judicial system, the police, the army, and the administration of prisons. Second, there are additional costs for the private sector, which are paid mainly by households and businesses, and which relate to the acquisition of private security to protect them against crime. In El Salvador, costs of this kind incurred by the private sector are estimated to range between 1.6% and 2.7% of GDP 20 (Jaitman and Torre, 2017[160]). Third, the social costs of crime include costs suffered by victims (i.e. the loss of the quality of life due to violence), and the non-generation of income by the prison population. Losses due to the incarceration of a significant proportion of Salvadorans of productive age are estimated to be around 0.41% of GDP (see Figure 2.45 Panel A).

High incarceration rates lead to substantial costs, both socially and in terms of public expenditure. Even before the arrests that were made in 2022 in the context of a state of exception, El Salvador already had the world's second-highest population rate in prison, with 615 inmates per 100 000 people. Attempts to combat gangs through a predominantly repressive approach have led to high levels of imprisonment of young gang members. Salvadoran prisons were occupied at 215% of their official capacity in 2018 according to the Institute for Criminal Policy Research (2019[161]) (see Figure 2.45 Panel A). Public spending on prison administration in El Salvador was approximately 0.2% of GDP on average between 2010 and 2014 (see Figure 2.45 Panel B) and (Jaitman and Torre, 2017[160]). Moreover, people who have been deprived of their liberty constitute one of the groups that are most susceptible to human rights violations (PDDH, 2018[133]).

Figure 2.45. High incarceration rates generate high social and economic costs

Obsolete legal frameworks in certain key areas, and cumbersome mechanisms, limit the efficiency of the Salvadoran state

El Salvador’s political leaders have faced tough structural problems that make policy making exceptionally challenging. In El Salvador, the government collects around a fifth of GDP in tax revenues (21.9% in 2020), at par with the LAC average in this regard (21.9%) (OECD et al., 2022[89]). In terms of general government expenditure as a percentage of GDP, in 2019 El Salvador (27.2%) ranked below the averages for LAC (31.1%) and the OECD (42.45%) (IMF, 2022[104]). Institutional capacities aside, El Salvador’s leadership has faced extremely adverse structural trends and challenging political and social conditions that limit the capacity and effectiveness of its governance. Among other factors, high rates of violence, internal displacement, massive migratory flows, the aftermath of a civil war, and some adverse natural conditions have amplified the challenges that political leaders have faced.

Political polarisation and constant electoral confrontation have hindered El Salvador’s capacity and effectiveness in making policy and law. The country has a presidential system of executive power, with a term limit of five years. In the legislative branch, it has a unicameral legislature, whose 84 seats come up for election every three years. Municipal elections take place simultaneously with the legislative elections. From 2009 to 2019, the left-leaning FMLN obtained the control of the executive branch but did not have a majority in the legislature. During this period, the FMLN resorted to seeking the support of other parties, since right-leaning parties kept a combined majority of seats in the Legislative Assembly.21 As a result, political gridlock was recurrent in the past decade, and has considerably hindered policy making on the part of the executive, and the capacity of the legislature to make law. The lack of more harmonised electoral periods between the executive, the legislature and the municipalities have contributed to this blockage, plunging the country into constant pre-electoral and electoral seasons that discourage policy makers from undertaking crucial reforms with high political costs, such as raising the pension age. The presidency of Salvador Sánchez vetoed a total of 18 legislative decrees,22 and during the first part of the mandate of Nayib Bukele, prior to legislative elections, 66 legislative decrees had been vetoed by the presidency by July 2021 (Presidencia de la República, 2021[162]; 2019[163]).

El Salvador lacks effective legislation on the management of human resources in the public sector

Past governments of El Salvador have implemented programmes to improve practices of human resources management, but their scope has been very limited. The previous administration undertook some efforts to improve systems of human resources management through the Sistema Technical and Planning Secretariat (SETEPLAN). However, the regulations that were implemented were not to be enforced in all public institutions, nor were they mandatory. As part of changes to the administration of the executive branch in 2019, SETEPLAN was eliminated, thwarting continuity of implementation with regard to these efforts (Morales Carbonell, 2019[164]). Still, El Salvador has made some progress in its score in the HR Planning Index,23 improving from 7/100 to 40/100 between 2004 and 2012, but it remains under the LAC average. The public sector still has to ensure real strategic thinking in human resources planning by focusing on forecasting the right mix of employee skills that will be needed to respond to citizens’ demands (OECD/IDB, 2016[165]). In 2018, employment in El Salvador’s public sector represented around 6% of total employment in the country,24 which is lower than the averages for the OECD and LAC (see Figure 2.46 Panel A).

Discretionary decisions and political patronage continue to influence the selection of public servants in El Salvador. During the past decade, El Salvador has shown progress in some indexes that measure aspects of human resources management such as guarantees of professionalism in the civil service system and the role of merit (see Figure 2.46 Panel B). Such improvements were driven by some concrete actions, such as building a co-ordination unit, standardising job descriptions, gradually implementing hiring competitions, designing a new pay scale, and strengthening leadership (Iacoviello and Strazza, 2014[166]). However, some of these initiatives did not continue after the last change of administration. Currently, the Salvadoran civil service operates under outdated legislation that falls short of guaranteeing adequacy and neutrality in the selection of personnel. The country’s Civil Service Law (the Ley de Servicio Civil) is the general regulatory framework that regulates the administrative career in El Salvador. The Civil Service Law that is in force does not cover the entire set of public servants across all state institutions. It also lacks mechanisms for evaluating performance and is not mandatory. In practice, few hiring processes in the public administration follow a transparent process of public tender and operate according to pure merit.

There has not been enough political will to undertake a structural reform of El Salvador’s civil service. Currently, a draft public service bill has been under discussion. The initiative for a new law of this kind came from civil society,25 and it provides a good basis for discussion and for gaining relevance in the future political agenda. Still, the current draft has substantial room for improvement. Advancing this agenda will require a true political commitment leading to the approval of a new legal framework. This has to create the right incentives to trigger a cultural change within the public administration (Equipo Impulsor de la Reforma a la Función Pública, 2018[167]).

Figure 2.46. The efficiency and effectiveness of governance are significantly influenced by the capacity and quality of the state’s human resources

El Salvador has implemented initiatives to improve integrity, prevent and combat corruption, and increase transparency, but these efforts lack co-ordination

El Salvador has several institutions that promote integrity and prevent and combat corruption. Integrity is essential for building strong institutions, and it assures citizens that the government is working in their interest, not just for the select few. In El Salvador, a government ethics tribunal, the Tribunal de Ética Gubernamental (TEG), is responsible for regulating and promoting ethical conduct in the public sector, as well as preventing, detecting and punishing corrupt practices. However, the TEG has not had sufficient independence to fulfil its role of ensuring public ethics, and consequently its operation has been quite ineffective, with few referred cases resulting in penalties (Consorcio por la Transparencia y Lucha contra la Corrupción, 2016[169]). The supreme audit institution, the Corte de Cuentas de la República (CCR) is responsible for ensuring the proper use of public funds. Its operation and effectiveness, like that of the TEG, has been quite limited in practice. A lack of independence from political power has significantly hindered its effectiveness. In 2019, the government subscribed to a co-operation agreement with the Organization of American States (OAS) to create the International Commission against Impunity in El Salvador (CICIES). The purpose of CICIES was to prevent, investigate and punish acts of corruption and other related crimes 26 (OAS/Republic of El Salvador, 2019[170]). However, the CICIES was short-lived, as its framework agreement was repealed less than two years after it began its work.

El Salvador has made significant progress over the past decade on improving the state’s mechanisms for transparency and access to information. Strengthening open government initiatives is an essential part of rebuilding the weakened social contract. A special institute for access to public information, the Instituto de Acceso a la Información Pública (IAIP), started its operations in 2013 to ensure compliance with a new Law on Access to Public Information (Decree 534/2010). Currently, there is a growing number of people exercising the right of access to public information, with significant levels of women and young people participating by petitioning information. El Salvador’s open government portal,27 the Portal de Transparencia, is a useful technological platform that contributes to the exercise of the right of access to information. However, it is fed mostly with information from the institutions of the executive branch, as well as others that have voluntarily adhered. In terms of operating efficiency, the IAIP has shown some difficulties in guaranteeing a timely response to citizens (FUNDE, 2018[171]). Other initiatives include El Salvador’s incorporation of Transparency International’s integrity pacts into an action plan for an open government partnership (OGP) in 2012. This plan has served as a foundation for increased collaboration between government, civil society, and the private sector in this regard (Gainer, 2015[172]). However, given the lack of implementation of the fifth OGP plan for 2018-20, the country is, since March 2022, an inactive member of the OGP.

El Salvador lacks a national strategy for integrity, transparency and the fight against corruption, which would be essential to co-ordinate actions in this regard, and to ensure their effectiveness. The scope of the different initiatives on integrity, transparency, and the prevention and fight against corruption has been limited due to the lack of co-ordination at the national level. Many of the institutions have very similar and/or complementary powers, which in some cases overlap and enable duplicated penalties for the same actions. Nevertheless, in other cases there are power gaps. Current legislation has not created any mechanism or body to co-ordinate the institutions that are involved in the fight against corruption (FUSADES, 2017[173]). The United Nations Convention Against Corruption recommends a comprehensive, multi-disciplinary and co-ordinated approach to prevent and combat corruption effectively, given the complexity of the problem (UNODC, 2004[174]).

Despite efforts to achieve improvements in this regard, high-level corruption scandals have continued to affect the government’s legitimacy. Recent investigations have provided evidence of the misuse of public resources in recent administrations through the reserved expenses of the Presidency. Reports on these cases indicate that the Court of Accounts carried out vitiated and negligent examinations into such expenses. This has resulted in formal investigations of former presidents of El Salvador (López, Rodríguez Trejo and Estada, 2018[175]). The lack of transparency in the funding sources of political parties has also shown itself to be a key enabler of the misuse of public resources. Despite numerous strategies in recent years to improve the situation, 77% of Salvadorans perceived corruption as widespread in the government in 2018 (Gallup, 2020[130]), although that number fell to 51% in 2019, and to 39% in 2020. Also in 2020, however, El Salvador ranked 104^th out of 180 countries assessed according to their perceived levels of public sector-corruption according to experts and businesspeople, with the evaluation of the country’s performance remaining stagnant since 2012 (Transparency International, 2020[176]).

The Salvadoran State faces great challenges in modernising and streamlining the administrative processes

El Salvador has implemented several e-government initiatives, which despite making some progress, have failed to modernise the obsolete foundations of the state. Electronic government is a means of bringing citizens closer to the state, of improving the efficiency of the government’s operations, and of creating a competitive environment in which citizens and businesses can manage their relationship with the public sector in the most convenient way (OECD, 2016[177]). Furthermore, a more digitalised government can boost the quality of public services and tailor their provision. Past Salvadoran governments have advanced numerous digitalisation initiatives 28 over the past two decades, and these have achieved some important results. The current government has prioritised technology and innovation, and made progress on several e-government initiatives, including the implementation of the e-signature and e-invoicing. In spite of past efforts, however, El Salvador ranks 117^th out of 193 countries in the development of e-government (UN, 2022[178]). Regarding the modernisation and streamlining of mechanisms and processes, the Legislative Assembly approved a law on administrative procedures in 2018 (Decree 856), which promotes the streamlining of the procedures of public institutions. A key obstacle to modernisation ambitions is that the Salvadoran government still lacks an operational data centre.

Digitalisation policies have lacked a long-term strategy and strong political leadership to promote a stable agenda for the country. Although governments have implemented plenty of initiatives over the past two decades, each of them has started from zero, creating its own agenda for a five-year period. In El Salvador, there has been no long-term digitalisation strategy. Furthermore, the lack of leadership to co-ordinate efforts has enabled the coexistence of several public institutions working on different projects with very similar purposes 29. El Salvador’s e-government strategy in the past has lacked a long-term national digitalisation framework, with a legislative roadmap, connectivity platforms, training for public employees, and a sufficient budget. A long-term national strategy has to be preceded by a process of dialogue that includes all relevant actors, and in which the participation of the private sector is particularly crucial (FUSADES, 2019[179]). The recently created Secretariat of Technology and Innovation of the Presidency opens an opportunity to effectively co-ordinate diverse efforts from across government, and to design a roadmap for the digitalisation of the country. The current administration is implementing a National Digital Agenda 2020-30, with a strong focus on the digitalisation of administrative processes.

El Salvador has taken important steps in consolidating a better regulatory policy. In 2015, the country’s agency for regulatory improvement, the Organismo de Mejora Regulatoria (OMR) was set up to be in charge of developing a system of regulatory improvement for the executive branch. It was created with the objective of helping to improve the country’s investment climate. The OMR has implemented a first package of recommendations for regulatory improvement in terms of business opening and construction permits, and has also initiated a project for the simplification and registration of executive procedures. Since 2018, the OECD has provided technical support and advice to the OMR. At the beginning of 2019, the Regulatory Improvement Law (Decree 202/2019) was approved. It creates three tools for regulatory improvement: the regulatory agenda, the evaluation of regulatory impact, and the national registration of procedures. In particular, the Regulatory Impact Assessment (RIA)30 is a key policy tool that provides detailed information on the possible effects of regulatory measures on the economy, the environment, and social agreements. However, although the objective of the OMR is to contribute to the improvement of the investment climate, bureaucracy continues to be one of the biggest obstacles to doing business and to formalisation.

El Salvador’s policy making needs to become more internally coherent and respond better to the particular needs of citizens across the country

The lack of policy co-ordination leads to the duplication of social programmes and policies, and to an inefficient use of resources. In El Salvador, the misuse of resources, and the multiplication of policies due to a lack of co-ordination mechanisms, are significant obstacles to effective and efficient governance. Currently, the main mechanism 31 for horizontal co-ordination is the council of ministers, which meets under the leadership of the president, and decides on policy matters (Bertelsmann Stiftung, 2018[127]). This is completed by thematic high-level co-ordination teams. Strategic and effective policy co-ordination is one of the essential functions of the Centre of Government – the group of bodies that provide direct support to the president and the council of ministers. This kind of co-ordination is critical to ensure whole-of-government responses to cross-cutting issues, and to minimise unintended duplications or contradictions in government policy (OECD, 2016[177]). Likewise, it is important to come up with vertical co-ordination mechanisms between the central and municipal administrations.

The design and implementation of a national development strategy is an opportunity to specify El Salvador’s policy priorities, and to enhance strategic co-ordination. The country does not have a strong planning tradition. A national planning system was established during the two preceding administrations as of 2009, but the key planning document was in effect a strategic government document covering the duration of each individual administration. The planning system was abandoned with the reshaping of the Presidency in 2019, with policy co-ordination attributed to secretariats within the Presidency. Development planning has experienced a significant evolution in the developing world in recent years. National development strategies have been adopted in as many as 18 countries in Latin America, in some cases with long-term horizons (Dominican Republic, Guatemala, Haiti, Honduras, Jamaica, Paraguay, Peru). Although they differ in form and scope, they provide a platform for co-ordinating policy responses to cross-cutting policy issues. They are also a key tool to engage with the Sustainable Development Goals, and to facilitate co-ordination between government and international co-operation (OECD et al., 2019[122]).

Excessively centralised planning and policy making have hindered the delivery of adequate responses to the particular needs of each region of El Salvador. Currently, most planning and policy design occurs at the central level of government. In El Salvador, differentiated policy responses are rarely designed and implemented according to the particularities of each territory. A differentiated approach is essential in order to alleviate different needs effectively, and to enhance the opportunities that each territory offers in a strategic manner. El Salvador does have in its toolkit a comprehensive public policies territorialisation guide (SETEPLAN, n.d.[180]) that can set the foundations to outline future territorialisation strategies. Furthermore, the recently created Ministry of Local Development (MDL) aims to ensure progress towards the territorialisation of public policies in the country, and to make the state more responsive to the local needs of the regions. The MDL is the only ministry that has a presence and personnel in every department of El Salvador’s administration, which opens up new opportunities for this purpose.

El Salvador has defined a comprehensive territorial planning strategy, but it now needs to implement it. In 2004, the Ministry of Housing and the Ministry of Environment and Natural Resources prepared a comprehensive national land management and development plan (MV/MMARN, 2004[181]). However, subsequent governments have not used the existing plan for decision making. This plan is a key tool to advancing the territorialisation agenda of public policies. The Ministry of Local Development is now trying to strengthen El Salvador’s territorial planning, resuming work based on the existing plan and promoting its effective implementation.

The statistical system of El Salvador has improved, but it faces institutional and capacity challenges

El Salvador’s production of statistics has improved substantially. The quality and accessibility of reliable and timely statistics is a key prerequisite for evidence-based policy making. El Salvador’s national statistics office until 2022 was the Dirección General de Estadísticas y Censos (DIGESTYC). This office, which was officially the responsibility of the country’s Minister of the Economy was dissolved and its functions taken on by the Central Reserve Bank’s Oficina Nacional de Estadística y Censos as of August 2022. With a rating of 82.22 out of 100, the World Bank assessed El Salvador’s statistical capacity to be above the Latin American average, and even above that of most comparator countries (World Bank, 2022[182]). The country’s score for statistical capacity has fallen since 2018, due to delays between key source-data exercises, in particular the census, last implemented in 2007. Improvements in statistical capacity are grounded in a national strategy for the development of statistics, the Estrategia Nacional de Desarrollo Estadístico, (ENDE), which delineated statistical processes in the country. However, the ENDE, which was typically updated every presidential term, lapsed in 2015. El Salvador is one of the few countries in the region whose national statistics office uses a data dissemination policy to promote the use of official statistics.

Data provision in El Salvador is comprehensive in economic statistics, but social and environmental statistics need improvement. The reporting system for national accounts is adequate. El Salvador’s central bank has followed the System of National Accounts 2008 (EU et al., 2009[183]) since 2018, when the last update and publication were completed. Price statistics and the consumer price index (CPI) are reported on a monthly basis, with CPI weights based on the 2005-06 Household Income and Expenditure Survey (IMF, 2022[184]) The coverage and periodicity of government finance statistics is adequate. However, one area of improvement is the omission of local government debt in the definition of public debt, as reported by the Ministry of Finance. The coverage of statistics on the financial sector is adequate, while detailed data on household and corporate balance sheets, or real estate, are not currently available. External sector statistics are reported regularly, the availability of detailed information on international trade and remittances has improved considerably, and the country recently completed the requirements for participating in the IMF’s Co-ordinated Portfolio Investment Survey.32 Further work is needed on improving the coverage of non-financial external transactions by the private sector, especially in the service account of the current account, as well as coverage of direct investment abroad. Since 1998, El Salvador has subscribed to the IMF’s Special Data Dissemination Standard.

While the quality of El Salvador’s economic statistics is comparable to other countries in the region, other statistical operations are less developed. There is a significant gap regarding censuses, since no population or agriculture census has been conducted over the past ten years.33 Given the patterns of migration in El Salvador, the 2007 National Census resulted in significant revisions to key economic indicators. Long delays between census rounds can, therefore, have important consequences, for example in the attribution of parliamentary seats to districts, or in the design of targeting methods for social policy. Poverty is estimated on the basis of annual surveys, and a Multiple Indicator Cluster Survey (MICS) was completed in 2014. The last health and labour surveys were conducted in 2021 and 2022 respectively. The construction of longer statistical series in these areas, extending back before the turn of the millennium, has proven to be difficult when it comes to social and demographic statistics. Moreover, there is scope to include the environmental dimension in future statistical operations.

There are increasing demands in El Salvador to develop new indicators, in particular to build sub-national and municipal statistics for targeted policies and relevant labour market indicators, and for monitoring the SDGs. Incorporating data production for the SDG agenda will constitute a major statistical challenge over the next decade, as well as an opportunity. El Salvador is already making efforts to assess existing national priorities and SDG reporting. The national information and statistics system, the Sistema Nacional de Información y Estadísticas (SNIE), through the national statistical system and the spatial data system, the Sistema Nacional de Datos Espaciales (SINADE), will provide statistical and geo-spatial information to measure progress towards the SDGs (Government of El Salvador, 2017[185]).

El Salvador’s statistics office, DIGESTYC, has recently been transferred to the central bank, a move that may not resolve long-standing issues related to the institutional framework. The legislative assembly approved the dissolution of DIGESTYC and the transfer of all its operations, obligations and assets to the central bank, the BCR (Asamblea Legislativa, 2022[186]). The BCR is due also to assume co-ordination functions with respect to the production of economic statistics. The dissolution law repealed the outdated Statistical Act of 1955 (Ley Orgánica del Servicio Estadístico Nacional), creating a void in the legal framework for the governance of statistics in the country. A historical lack of political support has undermined El Salvador’s ability to strengthen its national statistics system. Under the responsibility of the economy ministry, DIGESTYC faced challenges with regard to its level of independence, a limited budget, constraints in terms of professional development, and insufficient co-ordination, and previous administrations failed adequately to address these (IDB, 2018[187]). The law providing for DIGESTYC’s dissolution earmarks a fixed annual budget of USD 4 million for statistical operations. Subordination of the national statistics office to the central bank may not resolve independence issues, as it removes clear reporting lines to the executive. The legal framework therefore requires a new statistics law, as well as a reform of the Organic Law of the Central Bank in view of its added responsibilities.

Lack of staff capacity in the national statistics system impedes further progress. The national statistics office (NSO) has faced challenges in terms of staff capacity and capability management.34 As of 2019, out of 290 staff members, only 40% had graduate qualifications (PARIS21, 2019[188]). There is no explicit policy for retaining staff, and as a result, staff turnover is high. The NSO has core staff specialised in established statistical areas (e.g. census, survey design, social and demographic statistics), but it lacks staff support on emerging key areas (e.g. environmental statistics, evaluation). While the NSO has staff trained in geographic information systems, no datasets are disseminated in this area. A small training centre provides limited support to other line ministries in statistical training. Staff capacity at the central bank is more adequate, with a team receiving technical support from the IMF, the World Bank, and other international agencies.

The co-ordination of the national statistical system, and the need for a user-oriented focus, still present challenges. As part of its mandate, the NSO works with other statistical agencies to develop, review, promote and develop statistical standards. Co-ordination between the NSO and line ministries differs by sector. National information systems have been established in the areas of agriculture, health, education, labour, gender and justice, allowing for closer collaboration with the NSO. In addition to making progress in co-ordination, El Salvador’s national statistical system could further emphasise its relevance to end users. While users’ requests are registered, there are currently no surveys to monitor user satisfaction. The NSO could also benefit from dialogues between users and producers in order to better understand emerging needs (PARIS21, 2019[188]). This is particularly important since data from the Statistical Capacity Monitor35 of the Partnership in Statistics for Development in the 21^st Century (PARIS21) show a high level of statistical literacy in the country.

Financial support to El Salvador for its work in the area of statistics is relatively small. According to the PARIS21’s Partner Report on Support to Statistics in 2019 (PARIS21, 2019[189]), El Salvador received just USD 3 million for statistical development in 2015-17, ranking it fifth among the nine countries in Central America in terms of external statistical support. El Salvador also received the least support among all of the lower-middle-income countries in the region. Financial support to El Salvador for its statistical work became even more relevant with the upcoming 2020 census round. In December 2021, the Inter-American Development Bank approved a USD 44 million loan to support the modernisation of the statistics system in the country including carrying out census operations (IDB, 2022[190]).

Planet

The Planet pillar of the 2030 Agenda for Sustainable Development reflects the need to find the right balance between socio-economic progress and the capacity to sustain the planet’s resources and ecosystems, and to combat climate change.

With a surface area of 21 041 square kilometres, El Salvador is the smallest country in Central America,and one of the most densely populated in Latin America. Due to its geography, El Salvador is also one of the countries in the world that is most affected by natural hazards. The country’s high degree of vulnerability in this regard has contributed to numerous human and material losses, resulting in serious social, economic and environmental impacts (e.g. in social investments and sources of employment, etc.), and limiting El Salvador’s sustainable development. The average annual losses from disasters since 2001 represent almost 60% of the annual average for public investment during the same period (MARN, 2017[191]). In 2001, two earthquakes seriously affected El Salvador within just one month. It is estimated that around 1 259 people died, and the economic losses represented more than 12% of GDP (MARN, 2017[191]). Moreover, the economic cost of climate change is estimated at around 3.6% of GDP (DARA, 2012[192]). As the impact of climate change is expected to increase the severity of natural hazards, El Salvador urgently needs to put environmental concerns at the forefront of its development agenda, defining these issues adequately for the long term.

The Planet section identifies the three major environmental constraints that the country is facing in its development path. Firstly, El Salvador is highly vulnerable to natural hazards. Secondly, the institutional capacities that El Salvador has to fight efficiently against pollution are weak. The country is exposed to the continuous degradation of its natural forests, as well to the pollution of soil, air and water. Strengthening the environment ministry’s incentivising and sanctioning capacities will be essential to the operationalisation of El Salvador’s environmental legislation. Thirdly, the management of water resources hinders the country’s development path. Scarcity and insecurity are the main threats, and the lack of regulation and political consensus in the water sector aggravate the situation. Overall, El Salvador needs to better connect its environmental objectives to its economic and social ones as it defines its development path. The following table summarises the main constraints for El Salvador that concern the Planet section (see Table 2.5).

Table 2.5. Planet: Three major constraints
	Planet
1	Vulnerability to natural hazards and increased exposure to extreme hydro-meteorological phenomena.
2	Weak institutional capacities to fight efficiently against pollution and the degradation of forests.
3	The management of water resources is the main brake to economic and social development.

El Salvador is highly vulnerable to natural hazards

El Salvador is one of the countries in the world that is most affected by natural hazards. Demographic pressure and the unplanned nature of territorial organisation in the country exacerbate the severity of these events. The structures that it has in place for disaster response and risk management do seem to be improving and strengthening at the national level. However, they remain weak at the local level. Moreover, El Salvador needs to operationalise the incorporation of elements of disaster and risk management into its strategies and plans.

The country is threatened by the severity of natural hazards

Located with Guatemala, Nicaragua and Honduras in the Central American Dry Corridor (corredor seco) that runs along the Pacific,36 El Salvador has an erratic rainfall pattern, and is regularly subject to pronounced dry periods. In 2018, for example, San Miguel, La Unión and Cuscatlán went between 21 and 40 days without rainfall (MARN, 2019[193]). Rural communities are particularly affected. Due to irregular rainfall in 2015, 60% of the maize crop, for a total of 85 858 hectares, was destroyed (MAG, n.d.[194]). The impact of drought on the economy was estimated at USD 100 million in 2015, and around 192 000 people are considered to be moderately to severely at risk of food insecurity (FAO, 2016[195]). The impact of climate change is expected to increase El Salvador’s potential losses in key food crops such as corn (a loss of around 18% in 2050), beans (around 24% in 2050), and rice (around 24% in 2050) (Barrios et al., 2019[7]).

El Salvador ranks among the top 20 countries in the world that are most affected by extreme weather events (Germanwatch, 2019[196]). According to the EU’s Index for Risk Management (INFORM), El Salvador ranks as the 12^th most at-risk country out of the 191 nations that feature in the classification (EC, 2020[197]). The country also has a history of destructive tropical storms and droughts (Table 2.6). By some estimates, the cost of natural hazards affecting El Salvador between 2000 and 2012 was equivalent to 22.9% of GDP (in terms of GDP for 2012) (Catalán and Cardona, 2013[41]) (IMF, 2013[198]). El Salvador is exposed to a large number of disasters, and it faces considerable economic losses each time that one strikes. This also undermines the resilience of the country’s communities as they face multiple risks (MARN, 2017[191]). However, the progressively declining number of deaths caused by natural hazards reflects the country’s gradual integration of better standards and practices in construction.

Table 2.6. Losses and damages caused by natural hazards in El Salvador
Selection of meteorological natural hazards that have affected El Salvador in the past decade
Losses and damages	Hurricane Mitch (1998)	Storm Ida (2009)	Tropical cyclone Tropical Depression Twelve-E (2011)
Number of deaths	475	275	35
Number of people directly affected	84 000	90 000	300 000
Economic losses and damages (USD million)	388.1	314.8	840.4
Economic losses (% of GDP)	2.30%	1.44%	4%
Source: ECLAC – CEPALSTAT (2017) Databases and Statistical Publications: https://estadisticas.cepal.org/cepalstat/WEB_CEPALSTAT/estadisticasIndicadores.asp?idioma=i.

El Salvador has established capacity at the national level for disaster prevention and response, and for early recovery. The country’s legal framework regarding its system for disaster prevention, mitigation and response, the Sistema Nacional de Protección Civil, Prevención y Mitigación de Desastres (SNPCPMD), was established in 2005 with the Ley de Protección Civil, Prevención y Mitigación de Desastres (Asamblea Legislativa, 2005[199]). El Salvador made various improvements in the monitoring of natural hazards by consolidating its monitoring centre, the Centro de Monitoreo Integrado de Amenazas, which is directly linked to the SNPCPMD. This centre is in charge of analysing the information that is provided by more than 350 stations (98 in 2009), in close collaboration with a network of more than 600 local observers across the country (MARN, 2017[191]). This monitoring system allows the ministry to provide residents, farmers and key sectors with real-time and regularly updated information via the observatory’s website, bulletin, text messages and social network, in order to reduce the risks associated with natural hazards. The civic protection authority, the Dirección general de protección civil, prevención y mitigación de desastres, co-ordinates disaster-relief efforts. Since 2001, in the wake of two major earthquakes, which had a high cost in terms of human life, it has tried to raise public awareness, and to make operational the emergency and evacuation plans that exist at the national level. However, many municipalities still lack adequate local emergency plans (especially those that are situated in rural areas), and do not have the corresponding financial resources. Only a few municipalities have elaborated viable disaster plans, even though it is a legal prerequisite. Only larger cities have planning capacities in place. Moreover, the last territorial development plan was elaborated in 2001 and it is outdated.

El Salvador needs to operationalise its disaster-risk management strategy, and adopt a financial strategy to manage climate-related risks. The country has reinforced its capacity to react by improving monitoring capacities, and by developing sectoral emergency plans. However, it needs to incorporate this information into an integrated strategy. Moreover, the country does not possess a financial strategy 37 to manage natural-hazard risks, and it consequently lacks the adequate tools to evaluate damages and losses, as well as the fiscal impact that natural hazards may exert, and other effects that these may have on its economy and planning (OECD/The World Bank, 2019[200]). Moreover, the Ministry of Finance has only a small fund of around USD 4 million to manage natural hazards.38

Demographic pressure and unplanned land use exacerbate the country’s fragility with regard to natural hazards

Demographic pressure and unplanned land use exacerbate El Salvador’s vulnerability to natural hazards. With 300 inhabitants per square kilometre, El Salvador is highly densified, and is one of the most densely populated countries both in Latin America as a whole, and also among the benchmark countries (Figure 2.47). The exposure of a country with a high population density to natural hazards contributes to a number of acute environmental challenges. Today, 4.6 million Salvadorans live in urban areas, with 1.79 million living in rural areas. In 1960, only a million Salvadorans were living in urban areas (Figure 2.48). The degree of urbanisation is below the Latin America average (79%), but the urban population has been growing at an annual rate of 1.4% (World Bank, 2015[1]). Almost half of the Salvadoran population is concentrated in three departments around the most populous cities: San Salvador, Santa Ana and San Miguel.

Figure 2.47. High population density of El Salvador

Due to the lack of land use planning, the housing of Salvadorans is highly vulnerable, and is exposed to natural hazards. It is estimated that 84% of all constructions in urban areas in El Salvador are highly vulnerable to natural hazards (Barrios et al., 2019[7]). Moreover, 80% of the country’s population lives in areas that are exposed to the risk of at least three different types of natural hazards (World Bank, 2015[202]). Municipalities do not have adequate instruments, and they possess outdated information regarding land management. The enforcement of the territorial law, the Ley de Ordenamiento y Desarrollo Territorial de El Salvador, and the operationalisation by the municipalities of the urban development plans known as the Planes de Desarrollo Urbano and Esquemas de Desarrollo Urbano, will be crucial for improving land planning and management (see Peace and Institutions section), and for reducing the economic losses and damage that occur due natural hazards. The enforcement of construction and building codes should be a priority to limit the proliferation of vulnerable constructions.

Figure 2.48. Rapid urbanisation in El Salvador

El Salvador possesses weak institutional capacities to fight efficiently against pollution and the degradation of forests

El Salvador is affected by the continuous degradation of its natural forests

El Salvador is one of the most deforested countries in Latin America. Almost 85% of the country’s forest cover has disappeared since the 1960s (FAO, 2015[204]). The country’s total forest cover is estimated by the Food and Agriculture Organisation of the United Nations (FAO) to be 14.2% of its total land area (FAO, 2015[204]). However, trees in agricultural production systems and agro-forestry systems in which crops are grown under tree cover (e.g. shade-grown coffee) are not included in the FAO’s assessment (FAO, 2015[205]). That is why there is a difference between the FAO’s data and the estimation provided by El Salvador’s national forest inventory, which was established in 2018. Based on this inventory, the country’s total forest cover represents around 37.05% of total land area (MARN, 2018[206]) On average, forest area in El Salvador declined by 1.45% per year between 2000 and 2010, and by 1.58% per year between 2010 and 2015. For the same period, this compared to 0.4% and 0.24% for South America, and 1.09% and 0.73% for Central America (Figure 2.49). Only about 2% of El Salvador’s remaining forests (approximately 6 000 hectares) are classified as primary forests (FAO, 2015[204]). This percentage does not include around 39 000 hectares of mangrove (MARN, 2018[206]), which are classified separately.

Figure 2.49. Forest loss remains high in El Salvador compared to benchmark countries

El Salvador is exposed to a high degree of soil and air pollution

Land degradation remains a challenge in El Salvador, and current agricultural activities continue to accelerate the process. Soil erosion constitutes one of the main agro-environmental constraints that the country faces. More than a quarter of El Salvador’s land is affected by degradation, and 16% of the country’s population is concerned by this (World Bank, 2015[202]). The expansion of sugar cane comes at the expense of previously agro-export oriented crops like cotton and coffee. In some cases, it also comes at the expense of subsistence farming: maize, rice, beans and sorghum (Figure 2.50). The use of pesticides was quite high in El Salvador (World Bank, 2015[1]) until 2014. In 2013, a bill as passed that would have banned 53 products, but was never enacted by the president, and has stayed dormant ever since (PDDH, 2016[207]). In 2012, 109 different types of insecticides and 68 various types of herbicides were sold in the country (MAG, 2012[208]), including some that are banned by the Rotterdam Convention (Mejia, 2014[209]), which El Salvador signed in 2004.

The definition of concrete goals for reducing carbon dioxide (CO₂)emissions is beneficial for El Salvador’s future climate policies. Growth in greenhouse gas (GHGs) emissions has been particularly high compared to the country’s economic performance (OECD et al., 2019[122]). Agriculture, forestry and other land-use sectors are the biggest producers of GHGs (kilotonnnes (kt) of CO₂ equivalent), accounting for 57.8%, followed by the energy sector, with 30.7%, the waste sector, with 9.2%, and the industrial processes and product-use sector, with 2.3% in 2014 (MARN, 2018[210]). In 2016, 58.1% of El Salvador’s total production of electricity came from renewable energy, which is slightly higher than the average for Latin America and Caribbean, which stood at 56.3%. The share of renewable electricity has remained unchanged over the last decade (OECD, 2017[201]). In its Nationally Determined Contribution (NDC), which it submitted in 2015, El Salvador committed to contribute to the mitigation of climate change (MARN, 2015[211]). In agriculture, the country’s NDC refers to the restoration of a million hectares of agricultural land by 2030. In its declaration at the 22^nd Conference of the Parties (COP) in Marrakech in 2016, El Salvador also committed to reducing its energy emissions by 42% by 2025 from 2015 levels (MARN, 2016[212]). In its updated NDC, El Salvador maintained its target in terms of land restoration, but also added land-use changes for 800 00 hectares of agricultural land with the potential to mitigate 50.9 kt of CO₂-equivalent emissions. The country has also committed to reducing GHG emissions from energy production by 39% to 61% relative to the business-as-usual scenario, and by 39% to 5% by 2025 (MARN, 2021[213]). In 2013, 95 % of El Salvador’s households had access to electricity: 98% in urban areas, and 90% in rural areas (World Bank, 2019[4]).

Figure 2.50. Evolution of the main agricultural products in El Salvador between 1992 and 2017

Air pollution in El Salvador is becoming an issue, and the pressure on air quality is growing rapidly, especially in urban areas. The country’s annual exposure to PM2.5 air pollution is 24.9 microgrammes per cubic metre (µg/m³), more than twice the level of 2007 and the OECD average, and higher than the LAC average (Figure 2.51). The health costs of air pollution were estimated at 0.9% of GDP (ECLAC, 2018[215]). The exposure of the Salvadoran population to levels of pollution that exceed the standard level of air quality of 10 µg/m³ also increased significantly in recent years, rising from 34.92% in 2007 to 99.7% in 2017 (see Chapter 1) (OECD, 2017[201]).

The management of MHsolid waste remains limited in El Salvador, and the coverage of municipal waste collection, especially in rural areas, will be key for reducing people’s exposure to pollution. Each person in the country produces an average of 1.1 kilogrammes of waste per day (Purpose+, 2015[216]), which is relatively low to benchmarking countries.39 Only half of Salvadorans are served by municipal waste collection, which is much lower than other countries in Latin America. Municipal waste collection is low, especially in rural areas. Consequently, many Salvadorans in rural villages burn their garbage. The share of waste that is recycled remains very low. According to estimations provided by non-governmental organisations (NGOs), it is is around 5% (no official data are available). Untreated human waste has an impact not only on air pollution and the pollution of soils, but also on the degradation of El Salvador’s scarce water resources. The country recently adopted a legal framework for waste management, which also seeks to promote recycling (the Ley de gestión integral de residuos y fomento al reciclaje). It was approved by the legislative assembly in February 2020.

Figure 2.51. El Salvador’s exposure to PM 2.5 air pollution is higher than the averages for the OECD and Latin America

El Salvador faces various institutional weaknesses in reducing pollution

The promulgation of the Environmental Law (the Ley de Medio Ambiente of 1998), and the establishment of the Ministry of the Environment and Natural Resources 40 in 1997, paved the way for the development of a body of legislation on environmental protection in El Salvador. The country’s institutional framework contains some more specific complementary laws that are linked to the environment, including a forestry law (the Ley Forestal of 2002), a law on protected areas (the Ley de Areas Naturales Protegidas of 2005), a law on conservation (the Ley de Conservación de Vida Silvestre), and also a law on mining (the Ley de Mineria of 1995 and 2017). The Environmental Law also created a system of co-ordination of public policies (the Sistema Nacional de Gestión de Medio Ambiental, or SINAMA).

The restoration of the system’s capacities to sanction infractions, and the reduction of incompatibilities between existing pieces of environmental legislation, will be crucial for creating a comprehensive environmental framework in El Salvador. The Forest Law, and the Environmental Law of 1998 have some incompatibilities, in particular when it comes to fighting against illegal logging and accelerating reforestation. The country’s environmental legislation also needs to be more specific in its control measures in cases of non-compliance. Moreover, the Ministry of Environment and Natural Resources – El Salvador’s sole environmental regulatory institution – has, since 2015, not been allowed to impose administrative penalties.41 Consequently, individuals and companies that are operating in El Salvador without environmental permits (e.g. in the construction sector) cannot be efficiently penalised.42 El Salvador’s environment ministry currently remains “un-armed” in front of any environmental infractions in the country.

Finally, a lack of adequate financial resources, and low political priority in the national agenda, undermines the country’s institutional environmental framework. Academics and actors from civil society have noted that the Ministry of Environment and Natural Resources is a well-established institution in El Salvador, praising the quality of its staff and its openness to dialogue.43 However, the secondary role that environmental policies continue to play in the political agenda, and the low allocation of financial resources (of which international donors provide almost half), make the development of a sustainable path for El Salvador complex. For example, the environment ministry’s general budget in 2016 was around USD 22.1 million, consisting of a state budget allocation of USD 11.4 million, plus USD 10.7 million of loans and donations from the international community. Between 2014 and 2016, the state budget allocation from the general budget was slowly decreasing. This tendency seems to be continuing, with a state budget allocation in 2020 of around USD 12.4 million, a level that is very low compared to other Latin American countries (OECD/ECLAC, 2017[217]).

The management of water resources hinders the economic and social development of El Salvador

Scarcity, pollution and insecure access constitute the major threats to water resources

El Salvador has made progress in expanding access to water and sanitation, but coverage is still not universal. As of 2015, 93.8% of Salvadorans had access to safe drinking water, much more than in 2005 (87.7%). The unequal access between rural (86.5%) and urban areas (97.5%) remains relevant (FAO, n.d.[218]). However, statistics from different sources paint a different picture, and representatives from the Administración nacional de acueductos y alcantarillados (ANDA), El Salvador’s dominant water service provider, have expressed some scepticism regarding the country’s water statistics (see Chapter 6 for a more in-depth analysis of water and sanitation coverage). Measures of the population that did not have access to improved sanitation services decreased from 25% in 1990, to 13% in 2010, but increased again to 19% in 2017 (WHO/UNICEF, 2017[219]).

El Salvador needs more investment in water infrastructure and better water services for all Salvadorans. Financial investments in infrastructure remain low and insufficient compared to the country’s demographic situation. Moreover, Salvadorans are unsatisfied with the current quality of water services that they receive. Half of the population reports deficiencies in the provision of drinking water. Moreover, waste is significant in the country’s current system of water infrastructure, standing at around 55.6% in 2017.44 This generates substantial losses for the main provider, ANDA, and adds to the complexity of any potential investments in the country’s water infrastructure. Additionally, even where a supply of drinking water exists, almost half of it is qualified as intermittent (World Bank, 2015[1]). The level of efficiency is also questionable. Water services are subsidised, with 90% of consumers served by ANDA benefiting from subsidies (Oliva, 2018[220]; World Bank, 2010[107]) . It is estimated that the consumption of almost a third of users is not metered.

In contrast with other countries in Central America, El Salvador runs the risk of being more affected by the scarcity of water resources if the country’s authorities do not address the water issue sufficiently. El Salvador is affected by water scarcity. With 4 144 cubic metres (m³) of water per person per year in 2017, the country is closer than other countries in the region to stress levels (Figure 2.52), which are when annual water supplies drop below 1 700 m3 per person per year (WWAP, 2012[221]). Additionally, El Salvador has a high dependency ratio on extra-territorial water resources, which, at 41% (FAO, n.d.[218]), is much higher than in other Central American countries (Figure 2.53). The situation of El Salvador contrasts with the rest of Central America, which is considered a water-rich region, with 723 billion m³ per year of fresh surface water, and an average of water availability per capita of approximately 28 000 m³ per year (FAO, n.d.[218]). Based on projections for 2022 in the context of the 2017 National Plan for Integrated Water Resource Management, agriculture will account for the main increase in water demand in El Salvador, rising from 1.15 billion m³ a year in 2012 to 1.32 billion m³ a year in 2022 (MARN, 2017[222]). However, and although it accounts for a low share of the country’s overall needs, demand for water from hotel services will increase more rapidly still, rising from 2.34 million m³ a year in 2012, to 4.54 million m³ a year in 2022), (MARN, 2017[222]). Moreover, the situation is aggravated by the continuous deterioration in water quality that results mainly from an institutional framework of water-sector regulation that has historically not been sufficiently adapted to the challenges that El Salvador faces (FUSADES, 2011[223]; Dimas, 2010[224]).

Figure 2.52. El Salvador is closer to water stress than other countries in Central America

There is a high level of water contamination in El Salvador due to lack of water treatment and the historical absence of a comprehensive framework of regulation for water resources. According to the Salvadoran authorities, at least 90% of the country’s surface water is contaminated by agricultural and industrial waste, as well as by untreated sewage (MARN, 2017[225]). The low coverage of municipal waste-collection services contributes to the contamination of water resources in El Salvador. At the national level, weak institutional capacities thwart the establishment of an adequate level of control of waste management in the country’s departments. At the local level, municipalities do not possess well-adapted local plans for waste management. Moreover, the country’s monitoring mechanisms for water resources are not sufficient.

Figure 2.53. El Salvador has a high dependency ratio on extra-territorial water resources compared to other countries in Central America

The lack of regulation and consensus in the management of water has long been a severe development constraint that is also affecting El Salvador’s economy and productivity

Until 2022, El Salvador did not have comprehensive legislation on water. Compared to neighbouring countries, it suffered from this absence. At this stage, El Salvador’s water framework consisted mainly of specific national plans elaborated by the Ministry of the Environment and Natural Resources.45 The adoption of a General Law on Water Resources, in January 2022, and its implementation, will help to conciliate different uses of water, and to reduce water pollution by defining roles and responsibilities in water management.

The absence of a regulatory institution in the management of water resources has produced administrative overlaps between institutions at the national and sub-national levels. In the normative framework prior the adoption of the General Law on Water Resources, no institution was identified as being responsible for guaranteeing the sustainable management of water resources, or for controlling its distribution to users and consumers in El Salvador. Depending on the purpose for which water is being used, various institutions that are involved in the water sector are in competition at the national level. These include ANDA, the environment and agriculture ministries, and El Salvador’s Consejo Nacional de Energía. The definition and clarification of responsibilities in the water sector is essential. The creation of a national water authority (the Autoridad Salvadoreña del Agua) in the General Law on Water Resources seeks to resolve this issue.

The lack of management and institutional regulation of water constitutes a severe development constraint that is also affecting the Salvadoran economy and the level of productivity in the country. Access to water, and the quality of service with regard to its provision, constitute one of the main constraints to investment. It takes 210 days to request and obtain analysis on the feasibility of connecting to potable water and sewage services in El Salvador (World Bank, 2019[75]). By comparison, this takes ten days in Costa Rica. The considerable impact of mining activities on water (notably the demand for large quantities of water, and the threat to water quality) was not sufficiently anticipated by the Salvadoran authorities. Examples of this impact include the contamination with cyanide and iron of the San Sebastian river, and the impact of activities by the Pacific Rim Mining Corporation on the Lempa river basin. Mining’s environmental impact led to the imposition of a nationwide ban on metal mining in 2017, after strong public pressure. Moreover, the lack of water in the country could slow down the development of current and new economic activities, such as tourism. Unreliable water infrastructure could also affect the country’s firms and their potential development. Frequent disruptions to water infrastructure often mean that firms are unable to utilise their full production capacity. El Salvador is in the top 15 low and middle-income economies with the greatest losses in capacity utilisation rates for firms due to water disruptions (Reutschler, 2019[226]).

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Notes

← 1. Evidence that the government recognises how poverty affects various dimensions of people’s lives beyond the monetary aspect can be seen in legislation. In 2014, El Salvador’s government introduced a law on social development and protection (Ley de Desarrollo y Protección Social de El Salvador – LDPS), which redefined the measurement of poverty in the country to include various dimensions of human development in the national household survey (Encuesta de Hogares de Propósitos Mulitples – EHPM).

← 2. The national poverty line is sensitive to the composition of the reference basket of goods (Canasta Alimentaria Básica – CBA). According to El Salvador’s statistics office, DIGESTYC, it has increased by USD 29.57 over the past decade (DIGESTYC, 2019[5]).

← 3. Socio-economic classes are defined using the world classification: “Poor” = individuals with a daily per capita income of USD 5.50 or lower. “Vulnerable” = individuals with a daily per capita income of between USD 5.50 and USD 13. “Middle class” = individuals with a daily per capita income of between USD 13 and USD 70. Poverty lines and incomes are expressed in 2011 USD PPP per day (PPP = purchasing power parity). Calculations are based on the LAC Equity Lab tabulations of the Socio-Economic Database for Latin America and the Caribbean (SEDLAC) (CEDLAS/World Bank, 2019[227]).

← 4. School life expectancy refers to the number of years of schooling that a person can expect to receive assuming that the probability of their being enrolled at a particular age is equal to current enrolment rates.

← 5. This is a simple average of the latest available data across 34 OECD countries, accessed at: http://data.uis.unesco.org/.

← 6. According to the 2015 EHPM, women and girls aged 10-19 represented approximately 19% of the female population in El Salvador in 2015 (DIGESTYC, 2015[228]).

← 7. According to (MINEC-DIGESTYC/SETEPLAN, 2015[25]), in the case of healthcare: “a household is deprived if at least one person who required medical care did not have access to care in the public system; or if the household, having not required medical attention in case of need, did not make use of the public system under the assumption that they did not have access to it”.

← 8. The Global Competitiveness Report Index is a composite of 12 sub-indices, including the two that are presented in Figure 2.28.

← 9. The Fiscal Responsibility Law was suspended at the start of the COVID-19 pandemic, and no path to consolidation has been set by the Government as of mid-2022.

← 10. Available studies quantifying tax evasion predate the revision of nominal GDP brought about by the change in base year and System of National Accounts (SNA) manual, which resulted in a downward revision of almost 10% in nominal GDP for 2014.

← 11. EHPM data for 2020 could be biased given that data was collected during the confinement period, corresponding to a temporary fall in remittances.

← 12. Remittances reached 26.2% of GDP in 2021 (according to GDP estimates from the BCR).

← 13. Considering that the highest participation in elections is in countries where there are laws making the vote mandatory (e.g. Uruguay or Ecuador). Participation is significantly lower in countries where the vote is voluntary (e.g. Chile or Colombia).

← 14. Social contracts are generally characterised by explicit and implicit agreements that determine what each socio-economic group gives to the state and receives in return. Citizens engage firmly in these agreements with three conditions. First, they must believe the agreements are reliable (i.e. they trust state institutions). Second, they must see these agreements as beneficial (i.e. their satisfaction with what they receive leads to social engagement). Third, they must perceive the pact as fair (no one is favoured over others or benefits at their expense). The decline of trust in public institutions and the rising dissatisfaction with public services suggest these foundations of the social contract are weakening. As incentives are lacking to engage in the social contract, citizens find it increasingly justifiable, for instance, to avoid paying taxes and to opt out of public services (OECD/CAF/ECLAC, 2018[121]).

← 15. Security sector reform has three major overarching objectives: i) the improvement of basic security and justice service delivery; ii) the establishment of an effective system of governance, oversight and accountability; and iii) the development of local leadership and ownership of a reform process to review the capacity and technical needs of the security system (OECD, 2008[125]).

← 16. The lawyers' union also generates nominations to be considered.

← 17. Procuraduría para la Defensa de Derechos Humanos (PDDH).

← 18. Detachment with regard to litigants means that judges are not vulnerable to influence or control on the part of litigants who come before the courts. Bribery is perhaps one of the most common mechanisms used by litigants to change judges’ decisions in court. Individual autonomy is related to the inappropriate influence that some judges exercise over other judges. Political insularity refers to the power of judges to make decisions that are free of undue influence or control by other branches of the state (i.e. executive and legislative) (Dodson, Jackson and O’Shaughnessy (1997[140]).

← 19. In the historical context of the Salvadoran armed conflict and subsequent peace process.

← 20. “The direct and indirect costs of crime for companies resulting from criminal activities are not taken into account for two reasons. First, the value of stolen goods are not included in the analysis. Secondly, there is no satisfactory way to estimate the loss of productivity or efficiency, for private companies caused by robberies, extortion and other crimes. This estimation would require accurate information about the activities of each company” (Jaitman and Torre, 2017[160]).

← 21. However, during the first presidency of the FMLN, and even the second, the Gran Alianza por la Unidad Nacional party (GANA) was an ally of the FMLN, forming a legislative majority.

← 22. The legislative assembly assigns the correlatives of legislative decrees, and the president does not necessarily receive (or observe or veto) all of them. Therefore, this figure encompasses only those legislative decrees that were vetoed.

← 23. Among other things, the index measures an organisation’s priorities and strategic orientation as a way to determine staffing needs, personnel information systems, the degree of over/understaffing per institution, personnel technical skills, etc.

← 24. According to administrative data from the Social Security Institute on the total number of public sector employees, and population data from DIGESTYC on the total number employees.

← 25. Promotion team for the reform of public service (Equipo Impulsor de la Reforma a la Función Pública).

← 26. Including crimes related to public finances, illicit enrichment, money laundering, and national and transnational organised crime.

← 27. The IAIP recently incorporated the operation of this portal, which used to be run by the government itself.

← 28. Some of these initiatives included Connecting to the Future of El Salvador (1999); the creation of the National Commission for the Information Society (2003) and its comprehensive Plan ePaís (2005); the El Salvador Efficient Presidential Program (2006); the Strategic and Action Plan for Electronic Government (2011); and the Agenda of Good Digital Living (2016). Furthermore, there have even been efforts at the regional level, such as the Regional Strategy for the Development of the Information and Knowledge Society (SG-SICA, 2014).

← 29. Prior to the current government, there were more than ten institutions with some initiative on digitalisation, each of which were, in a certain way, isolated. In this sense, the creation of an innovation secretariat to lead the process of digitalisation in the country is key.

← 30. The RIA is a systematic process of identification and quantification of benefits and costs that may derive from regulatory or non-regulatory options for a policy that is under consideration.

← 31. Until 2018, El Salvador had a Technical Planning Secretariat designated for such a purpose.

← 32. With the fulfilment of this requirement, the country met all the standards of the external sector to enter the IMF’s Special Data Dissemination Standard (SDDS) Plus.

← 33. The last National Population (6^th) and Housing (5^th) Census were conducted simultaneously in 2007, while the last Agricultural Census (the 4^th) was conducted between 2007-08.

← 34. A Statistical Evaluation and Progress Questionnaire (STEP) for El Salvador was carried out as part of this review in 2019. Despite changes to the institutional framework, and given that all resources of DIGESTYC are to be absorbed by the BCR, the results are presented and expected to remain relevant.

← 35. http://statisticalcapacitymonitor.org/indicator/115/.

← 36. The “Dry Corridor” stretches from Southern Mexico to western parts of Costa Rica and to the so-called “Dry Arch” in Panama. However, the countries that are more prone to drought or extreme precipitation are Guatemala, El Salvador, Honduras and Nicaragua (http://www.fao.org/in-action/agronoticias/detail/en/c/1024539/).

← 37. El Salvador’s Ministry of Finance (Ministerio de Hacienda) is currently working with the World Bank to materialise the country’s financial strategy to manage natural hazards .

← 38. Based on information collected in an interview with the Ministry of Finance in September 2019.

← 39. It is an estimation of municipal waste collection (86% in urban areas), based on reports from 2017.

← 40. The creation of the Ministry of Environment and Natural Resources resulted from the transformation of the Executive Secretary for Environment (the Secretaria Ejecutiva del Medio Ambiente, or SEMA) created in 1994, and hosted by the Ministry of Planning and Co-ordination for Economic and Social Development (the Ministerio de Planificación y Coordinación del Desarrollo Económico y Social, or MIPLAN).

← 41. Based on the Environment Law (the Ley de Medio Ambiente), and in particular on Article 89 thereof, the Ministry of Environment and Natural Resources is allowed to impose economic sanctions for violations of environment legislation established as multiples of the prevailing urban minimum wages for the city of San Salvador (“salario mínimo diario urbano, vigente para la ciudad de San Salvador”). In August 2015, the Sala de lo Constitucional of the country’s supreme court, the Corte Suprema de Justicia (CSJ), decided to declare unconstitutional the above-mentioned article. According to the CSJ, “economic penalties were calculated based on an inexistent category of minimum wage”. See: http://www.csj.gob.sv/constitu/consult.htm. However, the country’s penal code (código penal) allows the imposition of penalties decided by the environmental tribunals (la Cámara y Juzgados Ambientales).

← 42. The only exception in terms of administrative sanctions is based on El Salvador’s law on protected areas (Ley de Áreas Naturales Protegidas).

← 43. Based on interviews with representatives from academia and civil society. The interviews were organised in July 2019, in San Salvador.

← 44. Measuring the difference between the water produced and the water consumed within the sub-system of drinking water provided by ANDA.

← 45. These are: the national strategy on water resources, the Estrategia Nacional de Recursos Hidricos of 2013 (MARN, 2013[229]); a national plan for the integrated management of water resources – the Plan Nacional de Gestion Integrada del Recurso Hídrico de El Salvador (PNGIRH) – of 2017, with an emphasis on priority zones (MARN, 2017[222]),; and also a water information system, the Sistema de Información Hídrica (SIHI) (MARN, n.d.[230]).

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