5. Policies to accelerate El Salvador’s productive transformation
This chapter presents an analysis of sectoral support policies and their institutional set-up in El Salvador and provides analysis and policy recommendations on how to improve them. The chapter examines the institutional and policy framework for productive transformation in El Salvador and goes on to examine the toolbox of policy instruments for productive transformation, and the mechanisms for co-ordination between the public and private sectors. El Salvador’s productive transformation policies would benefit from a better-aligned strategic framework, and from a stronger focus on implementation. In addition, El Salvador requires a broad, comprehensive and institutionalised public-private dialogue, and a body entrusted with the formulation and co-ordination of policies to support productive development. El Salvador would further benefit from rebalancing the mix of instruments for productive transformation in order to better target the companies and sectors where they are most effective.
Industrial policies can support El Salvador’s productive transformation. Well-designed sectoral policies can support the expansion in the country of strategic manufacturing and services industries that have a high level of value added per worker. Sectoral policies can further support capacity building, innovation, and the adoption of new technologies, and can raise productivity within individual manufacturing and services industries. The effectiveness of policies depends on the availability of sufficient resources to implement them, as well as on long-term commitment, implementation capabilities, and a process of monitoring and evaluation to improve the implementation and design of policy, and to reorient policies when goals are not achieved. Dialogue with the private sector is also key for the success of sector-support policies, as is the capacity of co-ordination that is required to align actions across different levels of government. The empowerment of individual institutions, plus performance-based incentives, can help to reduce the risks of capture and decentralisation, thus making industrial policies more successful. Industrial policies are most effective when they are tailor-made for a country and its specific context (OECD, 2013[1]).
El Salvador’s government is equipping itself with public policy instruments in order to achieve rapid and inclusive growth. The adoption of a Trade and Investment Policy (Política de Comercio e Inversiones, or PCI) with a horizon of 2050 (Secretaría de Comercio e Inversiones, 2020[2]) is testament to a willingness to co-ordinate, and to join together different efforts in order to achieve a shared vision for the future. The PCI’s lines of action focus on foreign trade and foreign direct investment (FDI) as drivers of productive transformation. These should be completed by strategies and actions to increase the productivity of the economy, some of which are already foreseen in policy documents with more limited horizons, such as the Business Development Plan (Plan de Desarrollo Empresarial, or PLADE), as well as in some sectoral policies that have recently been adopted or are currently still in the formulation phase.
This chapter presents an analysis of sectoral support policies and their institutional set-up in El Salvador. It analyses the institutional and policy framework for productive transformation, and goes on to examine the toolbox of policy instruments for productive transformation, and the mechanisms for co-ordination between the public and private sectors.
The institutional framework for productive transformation
The key institutions in charge of policy making for productive transformation in El Salvador are the Ministry of Economy (MINEC), the National Commission for Micro and Small Enterprises (the Comisión Nacional de la Micro y Pequeña Empresa, or CONAMYPE), El Salvador’s Export and Investment Promotion Agency (the Organismo Promotor de Exportaciones e Inversiones de El Salvador, or PROESA), and the Secretariat for Trade and Investment (Secretaría de Comercio e Inversiones) of the Presidency of the Republic. The Law for the Promotion of Production (Ley de Fomento a la Producción) establishes the Ministry of Economy as the governing and co-ordinating body for the design of programmes for productive transformation (Asamblea Legislativa, 2011[3]). The Ministry of Economy is co-ordinating the implementation of the Ecosystem for Economic and Inclusive Growth – a set of strategic documents for productive transformation. Its portfolio of sectoral policies includes measures to foster productive innovation, to strengthen domestic firms’ business competitiveness, and to enhance the competitiveness of exporters. Policies are mainly directed at domestic companies – of different sizes – in strategic manufacturing and services industries. The Ministry of Economy also implements a number of programmes, notably through the Fund for the Promotion of Innovation and Competitiveness, which is managed by one of its directorates. The mission of the Fund for the Promotion of Innovation and Competitiveness is to increase the competitiveness of El Salvador's micro, small and medium-sized enterprises (MSMEs) through co-financing grants for strategic projects for the production or commercialisation of Salvadoran goods and services (MINEC, n.d.[4]). The Ministry also implements projects that target productive innovation through the General Directorate for Innovation and Competitiveness. These include specific support for the Information and Communication Technologies (ICT) sector.
The mission of CONAMYPE is to strengthen the competitiveness and productive capacities of micro and small enterprises (MSEs) in El Salvador. It is an autonomous body, but it reports to the Ministry of Economy. It implements a range of programmes that offer technical assistance and capacity building to MSEs in order to render them more productive and competitive, and to improve their access to finance (MINEC, 2020[5]).
The Secretariat for Commerce and Investment is part of the Presidency of El Salvador, and it is in charge of setting the orientations and priorities of the country's trade and investment policies. It has a leading role in defining policy for international economic relations, and also in negotiating treaties for international trade and investment. As part of its investment-promotion support functions, it is also responsible for identifying obstacles to trade and investment, and for proposing solutions to them. It is also responsible for co-ordinating relationships with associations of exporters and importers, and for co-ordinating and promoting Public-Private Partnerships (PPPs). As El Salvador’s investment-promotion agency, meanwhile, PROESA’s mission is to promote investment, exports and public-private partnerships, as well as the national brand of El Salvador (PROESA, n.d.[6]). It reports to the President's Office. As part of its investment-promotion activities, PROESA can prepare policy proposals regarding PPPs. It also approves and supervises the implementation of PPP projects.
The Secretariat for Innovation (Secretaría de Innovación) of the Presidency of the Republic plays an important role in productive transformation through its work with regard to El Salvador’s digital and innovation agendas. It leads the implementation of the country’s digital agenda (the Agenda Digital El Salvador 2020-2030). The main objectives of this agenda are the creation of digital identities for all citizens, e-governance, the modernisation of the state, and the promotion of innovation, education in new technologies, and competitiveness. The Secretariat for Innovation also has a leading role in reforming El Salvador’s legal and institutional framework for innovation (see Chapter 4).
The Ministry of Tourism and the Salvadoran Tourism Corporation (the Corporación Salvadoreña de Turismo) support the development of the tourism sector in El Salvador. The Ministry of Tourism manages a programme to develop tourism in the country’s coastal areas (the Programa de Desarrollo Turístico de la Franja Costero-Marina). This is funded by the Inter-American Development Bank (IDB). The Salvadoran Tourism Corporation promotes tourism – and investment in tourism – at the national, regional and international levels.
The Ministry of Agriculture (Ministerio de Agricultura y Ganadería), and the National Institute for Agriculture and Forest Technology (Centro Nacional de Tecnología Agropecuaria y Forestal), support the development of El Salvador’s agricultural sector. The Ministry of Agriculture implements different programmes that aim to increase agricultural productivity. These include rural-development programmes, programmes to support the development of the fishing industry and aquaculture, and a programme to support innovation in El Salvador’s agricultural sector. The National Institute for Agriculture and Forest Technology promotes the development of the agricultural sector through technical assistance and technology transfers, in order to enhance agricultural productivity.
El Salvador’s development bank (the Banco de Desarrollo de El Salvador, or BANDESAL) aims to improve private firms’ access to finance for investment projects, in line with the goal of productive transformation. In addition, BANDESAL seeks to endow sectoral public policies with the financial resources they need in order to promote the development of MSMEs, exports, and employment. It also provides credit to the private sector – mainly MSMEs – for projects of productive investment. In mid-2020, BANDESAL’s governing law was reformed, allowing it to grant loans directly, as well as through credit lines to private financial institutions. It also manages the Economic Development Fund (Fondo de Desarollo Económico), and the Salvadoran Guarantee Fund (Fondo Salvadoreño de Garantías). These two programmes aim to improve access to credit for MSMEs in El Salvador, through loans and loan guarantees respectively (BANDESAL, n.d.[7]).
The harmonisation of strategic documents, an acceleration with regard to implementation, and rigorous monitoring are needed for productive transformation in El Salvador
El Salvador has a number of strategic documents that set out to foster productive transformation. Notably, these include the Trade and Investment Policy for 2020-50 (the Política de Comercio e Inversiones 2020-50), in addition to the Plan for Business Development (the Plan de Desarrollo Empresarial, 2020-2024, or PLADE). Other strategic documents that either remain under development, or were adopted in 2020-21, include the Trade Facilitation Plan (the Plan de Facilitación de Comercio), the Investment Facilitation Plan (the Plan de Facilitación de Inversiones), different sectoral plans, and the National Energy Policy 2020-2050 (the Política Energética Nacional 2020-2050). Together, these strategic documents – which collectively form El Salvador’s Ecosystem for Inclusive Economic Growth – aim to create a suitable environment for the generation of more and better jobs for Salvadorans, and to turn El Salvador into a prosperous economy that generates quality jobs and well-being for all its citizens through sustained and inclusive economic growth. The Ecosystem for Inclusive Economic Growth is characterised by a plan-based governance structure. Each strategic document has its own governance structure. Until 2020, the strategic framework was based on the National Policy for Development, Diversification and Productive Transformation (Política Nacional de Fomento, Diversificación y Transformación Productiva, or PNFDTP) of 2014, which itself was based on the 2011 Law on the Promotion of Production (the Ley de Fomento de la Producción).
Rather than focusing on the design of strategic documents, however, the institutions that are responsible for economic policy making should concentrate their efforts on implementation. Although the PNFDTP dates back to 2014, El Salvador still faces similar difficulties to those that it was seeking to address at the time. Even so, the PNFDTP has recently been replaced by a different set of strategic documents, including a new selection of priority sectors. A systematic evaluation of its achievements would have helped to instruct the changes made in the new strategic framework. In future, policy makers should aim for a more rapid implementation of the policies and initiatives that are outlined in the strategy documents (strategies and plans), and avoid switching policy priorities too frequently, as some policies will take time to bear fruit, and will require continued support. The long-term horizon in the Trade and Investment Policy can support the achievement of transformative objectives, as long as it is accompanied by regular evidence-based reviews. In order to better align policies and accelerate implementation, co-ordination between the institutions that define productive transformation strategies, plans and policies should be improved.
El Salvador’s Trade and Investment Policy for 2020-50 seeks to increase the country’s exports and levels of investment, and lays out trade and investment policies for this period. El Salvador adopted the policy in January 2021. It aims to improve the integration of the country’s companies in global value chains, to promote a productive transformation and diversification of the economy, to raise levels of FDI in the country, and to improve the fiscal, digital and legal infrastructure that facilitates trade and investment. The government aims to increase the share of exports in gross domestic product (GDP) to 38% by 2050. At the same time, it also aims to limit the share of imports in GDP to 45%. Furthermore, the Trade and Investment Policy sets as targets an FDI stock of 60% of GDP in 2050, and annual FDI flows equivalent to 4% of El Salvador’s GDP. The government wants to achieve these objectives through a more export-oriented economy, and through a productive transformation of the economy. The Trade and Investment Policy lays out 13 priority sectors1, as well as a plan to achieve these targets. The Secretariat for Trade and Investment co-ordinates the implementation of the policy, which also proposes to establish a Productivity and Competitiveness Cabinet - a committee of public and private sector representatives2 that would play a co-ordinating and advisory role in the implementation of the policy. The governance structure for El Salvador’s Trade and Investment Policy also includes PROESA. Furthermore, it envisions the creation of a Business Development and Competitiveness Agency (Agencia de Desarrollo y Competitividad Empresarial) in order to develop and implement initiatives and programmes to enhance domestic companies’ productivity and competitiveness (Secretaría de Comercio e Inversiones, 2020[2]).
Despite its broad and long-term perspective, the scope of the Trade and Investment Policy 2020-50 does not include detailed policies for specific sectors. Even though the policy does identify a number of priority sectors, it does not put forward detailed policies for the development of each individual sector, and nor does it include a detailed framework for monitoring and evaluating sectoral policies.
Although the Secretariat for Commerce and Investment co-ordinates and monitors implementation, the Trade and Investment Policy lacks a comprehensive evaluation and monitoring framework. It does include a set of proposed indicators that are designed to be included in a scorecard in order to monitor progress in policy implementation. However, the policy document does not specify the frequency of the intervals at which evaluation and monitoring should take place. It also does not set out detailed evaluation and monitoring processes or stipulate the institutional setup for evaluation and monitoring. In practice, the Secretariat for Commerce and Investment drives implementation of the policy’s objectives through annual action plans that set out a list of priority projects (45 projects for the year 2022, for example), along with the bodies that will implement them. It also sets observable monitoring indicators in order to track their progress.
The Entrepreneurial Development Plan for 2020-24 (the Plan de Desarrollo Empresarial 2020-2024, or PLADE) aims to promote entrepreneurial activity, and to increase productivity and competitiveness in El Salvador. Dating from 2020, the PLADE is part of El Salvador’s Ecosystem for Inclusive Economic Growth. It includes six priority axes. These are: the formalisation of informal enterprises; industrial innovation and technological development; value-chain development and sectoral specialisation; the improvement of capacities for production and quality; developing entrepreneurship throughout the country’s territory; and the growth and diversification of exports (MINEC, 2020[5]).
Several other strategic documents for the promotion of trade, investment and entrepreneurship in the country have been adopted since 2020 or are currently being designed. A plan by the Ministry of Economy to facilitate strategic investment (the Plan Estratégico de Facilitación de Inversiones) seeks to improve the business environment in El Salvador by easing the process of establishing, operating and expanding private investment in the country. The plan aims to provide investors with information on the processes and regulations for doing business in El Salvador, to accompany investors, to reduce technical barriers to private investment, and to promote the use of new technologies to boost private investment (MINEC, 2020[5]). In 2022, in co-operation with the association of exporters (the Corporación de Exportadores de El Salvador, or COEXPORT), and with the support of the United States Agency for International Development (USAID), the Ministry of Economy designed an export strategy (MINEC, 2020[5]). The export-promoting agency PROESA is in charge of implementing the export strategy. In addition, and in collaboration with the Secretariat for Commerce and Investment, PROESA established a Strategy for Investment Promotion (InvestSV). The first two pillars of the government’s Economic Take-off Plan (Plan de Despegue Económico) aim to stimulate investment and trade through an improved business climate, and to support the productive sector - most importantly MSMEs and strategic sectors3 (Secretaría de Comercio e Inversiones, 2020[8]).
The objective of the National Policy for Productive Development, Diversification and Transformation (the Política Nacional de Fomento, Diversificación y Transformación Productiva de El Salvador, or PNFDTP), which was adopted in 2014, was to create the necessary conditions to improve El Salvador’s economic growth performance, to generate quality jobs, and to transform the country into a diversified economy with high levels of value added. The policy identified 16 strategic sectors in manufacturing and services4 through an analysis of the product space, and by pinpointing sectors in El Salvador’s present economic structure that were performing well in terms of employment, the generation of value added, exports, and productive linkages. The policy catalogued the main horizontal and sector-specific obstacles, as well as the policies to tackle these obstacles, through a detailed action plan consisting of 151 policy actions. It clustered these actions around three main axes: national productive development, the diversification of exports, and productive transformation. The Ministry of Economy had a co-ordinating role in the implementation of the policy document. El Salvador’s Committee of the Integrated System for the Development of Entrepreneurial Production (the Comité del Sistema Integral de Fomento de la Producción Empresarial) had an advisory function, and eight technical commissions were in charge of implementation. The Committee includes representatives from 14 institutions,5 including the public sector, business associations, co-operative associations, and academia, and it is presided by the Ministry of Economy. The Production Promotion Law from 2011 (the Ley de Fomento de la Producción) is the legal basis both of the national policy and of its governance structure, including the Committee of the Integrated System for the Development of Entrepreneurial Production, and the technical commissions (MINEC, 2014[9]).
The PNFDTP launched a number of processes and practices that survived the change in administrations in 2019. Among the innovations of the policy programme were the identification of priority sectors, plus a proposal in the policy’s productive-transformation axis to implement a “vertical” industrial policy as a complement to the “horizontal” interventions also included in the policy. This sectoral approach has led to the creation of technological extension centres for priority sectors. For example, El Salvador’s current Policy for Trade and Investment picks up on the identification of priority sectors. However, and as will be analysed in the next section, it is also necessary to modernise and widen the scope of vertical policy instruments.
The previous PNFDTP did not prioritise between policy actions, nor create a comprehensive framework of monitoring and evaluation, or a governance structure that would have enabled quick results. Only a short section of the policy document is dedicated to monitoring and evaluation, and it lacks an institutional setup for monitoring and evaluation. It also lacks instructions stipulating either the frequency of evaluations or the process of monitoring and evaluation. Although the PNFDTP also includes a long list of 151 policy actions, it lacks a prioritisation of these actions, which would be key for an effective implementation of the large number of policy actions that are laid out in the document. The governance structure proposed in the PNFDTP was not very successful in driving implementation, as can be inferred from the fact that the activities of the Ministry of Economy, or indeed its responsibilities vis-à-vis the Committee of the Integrated System for the Development of Entrepreneurial Production, are barely mentioned in the internal organisation of the Ministry of Economy, or in its annual report (MINEC, 2020[10]; MINEC, 2020[5]). The sectoral committees that were created in the framework of the PNFDTP are no longer active, as their work was based on the policy document, rather than on legislation.
Going forward, it is important to align policies on productive transformation, trade, investment, and entrepreneurial activity with each other, and to complement strategic documents with a comprehensive framework for evaluation and monitoring. The policies that are laid out in the different strategic documents, and that seek to promote productive transformation, trade, investment and entrepreneurship, will be more effective when they are harmonised and aligned with each other, and when they combine long-term vision with concrete actions for the short and medium term. At present, there is a lack of alignment between policy documents, and new documents are not aligned with older ones. For example, the strategic sectors in the PNFDTP and the Trade and Investment Policy 2020-50 are not aligned with each other. Furthermore, neither the PNFDTP, nor the Trade and Investment Policy 2020-50, includes a comprehensive monitoring and evaluation framework. The institutional strategic plans of key institutions for productive transformation should also be better aligned with strategic documents such as the Trade and Investment Policy, and the PLADE. For example, neither the Ministry of Economy’s institutional strategic plan, nor that of CONAMYPE, refer to the strategic sectors identified in the Trade and Investment Policy 2020-50. In addition, the objectives and the strategic axis of the institutional plan are not well aligned with either the Trade and Investment Policy 2020-50 or the PLADE, especially in the case of CONAMYPE (CONAMYPE, 2019[11]; MINEC, 2019[12]). Institutional plans are a key channel for the operationalisation of broad strategic orientations, as they then translate into operational targets for organisational units. In this sense, the lack of alignment is a missed opportunity to translate cross-cutting objectives into concrete action in a co-ordinated manner.
Establishing institutional support for policies of productive transformation remains an important challenge for El Salvador. The institutional framework, which was created by the strategic framework that was used in 2014-20, is no longer active. The Committee of the Integrated System for the Development of Entrepreneurial Production has not been convened for several years, despite having been created by law. The mandate of sectoral sub-committees is deemed to have expired at the end of the PNFDTP’s implementation period. The new strategic framework proposes a fragmented institutional setup. On the one hand, the Trade and Investment Policy proposes the establishment of a Productivity and Competitiveness Council, and of an Agency for Competitiveness and Business Development. Meanwhile, PLADE puts forward a strategy-level governance structure, with a PLADE Committee located in the Ministry of Economy, plus decentralised leadership inside implementing institutions. These two different approaches originate in part from the different horizons of the PLADE (2024) and the Trade and Investment Policy (2050). Nevertheless, they can lead to overlaps in functions, and a lack of coherence in implementation.
Programmes for productive development focus heavily on micro and small enterprises (MSEs)
A large share of the budget for the implementation of productive transformation policies in El Salvador is directed at fiscal incentives, MSEs and the agricultural and tourism sectors. 65.3% of El Salvador’s productive transformation budget is allocated to fiscal incentives and only 34.7% to other productive transformation policies (2017). CONAMYPE, which is in charge of supporting MSEs, receives 33% of the budget for other productive transformation policies (2021) (Figure 5.1). CONAMYPE’s budget increased from USD 6.5 million in 2020 to USD 16.6 million in 2021. A significant amount of resources is also dedicated to policies to support the agricultural sector through the Ministry of Agriculture and the National Institute for Agriculture and Forest Technology (USD 11.6 million), and to supporting the development of the tourism sector through the Ministry of Tourism and the Salvadoran Tourism Corporation (USD 12.1 million). The Ministry of Economy’s budget for innovation, competitiveness and export support, which includes many components that are directed at manufacturing companies, and some that are directed at international services companies, amounts to only USD 5.9 million.
Note: The budget allocated to fiscal incentives corresponds to tax expenditure as a result of fiscal incentives. The productive transformation budget of the Ministry of Economy (MINEC) includes funding for productive innovation and business competitiveness policies, exporter competitiveness policies, and the Productive Corridors Programme. The Ministry of Tourism’s productive transformation budget consists of the budget for the Tourism Development Programme in Coastal Areas. The Ministry of Agriculture’s productive transformation budget comprises funding for agricultural production and agricultural innovation policies.
Source: Authors’ compilation, based on Portal de Transparencia Fiscal (2021[13]), Ley del Presupuesto, Gobierno de El Salvador, San Salvador, https://www.transparenciafiscal.gob.sv/ptf/es/PTF2-Gastos.html#spy_PTFPG3 and on Ministerio de Hacienda (2018[14]), Marco Fiscal de Mediano y Largo Plazo 2019 – 2029, Ministerio de Hacienda, San Salvador, https://www.mh.gob.sv/downloads/pdf/700-DPEF-IF-2019-21641.pdf.
Policy instruments to support private companies in El Salvador are mainly targeted at domestic MSEs. About a third of the programmes that provide support to private companies offer financial incentives to firms, and the other two-thirds offer non-financial, intellectual support (Figure 5.2). Half of the policy instruments are targeted at MSEs, and 90% of programmes are targeted at domestic companies. There are also programmes that target large companies, exporters, female entrepreneurs, farmers, youths, and artisans. El Salvador also has four laws that offer fiscal incentives to private investors in specific sectors.
Source: Authors’ elaboration based on Asamblea Legislativa (1998[15]), “Ley de zonas francas industriales y de comercialización”, Decreto No. 405, 3 September 1998, Asamblea Legislativa de El Salvador, San Salvador, https://www.asamblea.gob.sv/sites/default/files/documents/decretos/5721963E-FA7D-447E-AD92-E11E848FF024.pdf; Asamblea Legislativa (2007[16]), “Ley de Servicios Internacionales”, Decreto No. 431, 11 October 2007, Asamblea Legislativa of El Salvador, San Salvador, https://www.asamblea.gob.sv/sites/default/files/documents/decretos/EA2E067D-F3C5-4206-BFA7-F2ECF544FADD.pdf; Asamblea Legislativa (2013[17]),”Refórmase la ley de servicios internacionales”, Decreto No. 277, 24 January 2013, Asamblea Legislativa de El Salvador, San Salvador, https://www.asamblea.gob.sv/sites/default/files/documents/decretos/171117_073316132_archivo_documento_legislativo.pdf; Asamblea Legislativa (2005[18]), “Ley de Turismo”, Decreto No. 899, 10 December 2005, Asamblea Legislativa de El Salvador, San Salvador, https://www.asamblea.gob.sv/sites/default/files/documents/decretos/F9AD0D04-096E-4342-8E7B-397B9D8BD12A.pdf; Asamblea Legislativa (2007[19]), “Ley de incentivos fiscales para el fomento de las energías renovables en la generación de electricidad”, Decreto No. 462, 8 November 2007, Asamblea Legislativa de El Salvador, San Salvador, https://www.asamblea.gob.sv/sites/default/files/documents/decretos/171117_072950093_archivo_documento_legislativo.pdf; Asamblea Legislativa (2015[20]), “Reformas a la ley de incentivos fiscales para el fomento de las energías renovables en la generación de electricidad”, Decreto No. 148, 15 October 2015, Asamblea Legislativa de El Salvador, San Salvador, https://www.asamblea.gob.sv/sites/default/files/documents/decretos/171117_073628316_archivo_documento_legislativo.pdf; Asamblea Legislativa (2014[21]), “Ley de fomento, protección y desarrollo para la micro y pequeña empresa”, Decreto No. 667, 25 April 2014, Asamblea Legislativa of El Salvador, San Salvador, https://www.asamblea.gob.sv/sites/default/files/documents/decretos/B913BF6D-5023-4AE6-A028-B9C1789D2127.pdf; Asamblea Legislativa (1986[22]), “Ley general de asociaciones cooperativas”, Decreto No. 339, 6 May 1986, Asamblea Legislativa of El Salvador, San Salvador, https://www.asamblea.gob.sv/sites/default/files/documents/decretos/1ED7EC07-1729-436E-8D08-24E5ED21BAF5.pdf; Asamblea Legislativa (Asamblea Legislativa, 2016[23]), “Ley de fomento, protección y desarrollo del sector artesanal”, Decreto No. 509, 12 October 2016, Asamblea Legislativa of El Salvador, San Salvador, https://www.asamblea.gob.sv/sites/default/files/documents/decretos/171117_073716549_archivo_documento_legislativo.pdf; MINEC (2020[5]), Memoria de Labores Junio 2019 – Mayo 2020, Ministerio de Economia, San Salvador, https://www.economia.gob.sv/logros-y-memorias/#; ; CONAMYPE (2020[24]), Memoria de Labores 2019 – 2020, Comisión Nacional de la Micro y Pequeña Empresa, San Salvador; https://www.conamype.gob.sv/download/memoria-de-labores-conamype-2019-2020/; CONAMYPE (2019[11]), Plan Estratégico Institucional 2020 – 2024, Comisión Nacional de la Micro y Pequeña Empresa, San Salvador; https://www.conamype.gob.sv/consulta_ciudadana/web/consulta/descargar-adjunto?id=23.
Rather than focusing so strongly on MSEs, El Salvador should, in future, focus more policy instruments and a larger share of the budget for productive-transformation policies on medium-sized companies, and also on policies that help MSMEs to grow larger. Large productivity gaps exist between companies of different sizes in El Salvador. According to the latest economic census data, which is from 2005, larger medium-sized companies (with between 100 and 249 employees) in El Salvador were 180% more productive than small companies (with 10 to 19 employees). Smaller medium-sized companies (with 20 to 99 employees) were 100-130% more productive than small companies. Furthermore, the marginal product of labour and capital in El Salvador tends to be larger for medium-sized and large companies than for small companies. Larger medium-sized companies (100 to 249 employees) have the largest marginal product of labour and capital (Agosin et al., 2010[25]). Thus, it is important to ensure that policy instruments directed at MSMEs support these companies’ growth, and that policy support is focused not only on MSEs, but also considers medium-sized firms.
El Salvador could increase support to medium-sized firms in several ways. The legal framework allows CONAMYPE to continue supporting enterprises for two years after have they have outgrown the official definition of a small firm (a maximum of 50 employees, or USD 1.2 million in gross sales). Moreover, medium-sized enterprises have access to other programmes and funding instruments, such as those granted by the Ministry of Economy through the Fund for Innovation and Competitiveness. In future, El Salvador could modify the mandate of CONAMYPE so that it could provide much more support to medium-sized firms, in addition to working with MSEs. It is also possible to ensure continuity of support through an implementation body with broader scope. Moreover, to support the growth of MSMEs it is necessary to implement mutually reinforcing policies in a co-ordinated manner. The importance of each obstacle to growth can be sector-specific. For this reason, several governments around the world have put in place initiatives that bring together the services that are available to support robust growth. For example, Denmark started the “Scale up Denmark” programme in 2016, creating 12 hubs for company expansion, specialised by sector (OECD, 2019[26]).
To provide more support to strategic sectors for its productive transformation, El Salvador could establish more sector-specific support programmes and incentives, and could better balance the distribution of resources across strategic sectors. Only 35% of policy instruments that support private firms are sector-specific. In addition to the four laws that offer fiscal incentives to specific sectors (industry, international services, tourism, renewable energy), there are policy instruments that target industry, agriculture, arts and crafts and strategic sectors. Furthermore, large shares of the productive-transformation budget are targeted at agriculture and tourism, but few resources are directed at policies that support other strategic sectors.
Going forward, El Salvador could also find ways to better link policy instruments that support MSMEs with the goal of formalisation. In so doing, it should make sure that they are accompanied by measures to reduce the cost of formalisation, especially for MSMEs. Technical support with formalisation processes could be extended to informal MSMEs. In addition, public policies and programmes that support informal enterprises should include measures to support the formalisation process. CONAMYPE already has a number of programmes that offer technical assistance to MSMEs that are seeking formalisation. At the same time, participation in certain support programmes for MSMEs could be conditioned on the level of formalisation. This could be achieved through specific measures, for example, by requiring commercial registration, tax registration, up-to-date tax payments, or the payment of social security contributions for employees, where appropriate (e.g. in the case of financial support, or when a firm hires employees), in order to encourage firms to formalise (World Bank, 2007[27]; OECD, 2007[28]). Any such conditionality should be accompanied by reductions in the cost of formalisation, which is particularly high in El Salvador. Some key elements that contribute to this objective, such as a review of legislation and the creation of a special tax regime for MSEs, are already included in PLADE.
To increase efficiency and maximise the impact of sector-specific policies, El Salvador should reduce the number of policy instruments that support private companies, and should concentrate financial, human and material resources on the most effective ones, as identified by a rigorous evaluation. Currently, there are at least 37 sector-specific policy instruments, 18 of which are targeted at micro- and small enterprises (see Annex 5.A). Most of these policy instruments are relatively small in scale, and many of them are similar, consisting either of guidance and technical assistance, training, or financial support for companies, and in the most part for MSMEs. These policy instruments should be rigorously evaluated in order to determine which ones are most effective in supporting El Salvador’s productive transformation. The most effective policy instruments could then be scaled up, while the least effective ones would be phased out.
Fiscal incentives have a positive impact on job creation, but are expensive and do not encourage linkages between foreign and domestic firms
Generous tax incentives exist in El Salvador for export-oriented manufacturing industries through a number of free zones, for international services exporters through services parks, for the tourism sector and for electricity generation from renewable energies (Table 5.1). Since 1998, El Salvador has had a law on free zones (the Ley de Zonas Francas Industriales y de Comercialización), which promotes export-oriented manufacturing industries (Asamblea Legislativa, 1998[15]). Since 2007, the country has also had a law on international services (the Ley de Servicios Internacionales), to support international exporters of services (Asamblea Legislativa, 2013[17]). There are currently 17 free zones in El Salvador (AZFA, 2017[29]). Companies that operate inside the free zones and service parks benefit from a number of services, and from generous tax incentives, which include exemptions from municipal and income taxes, as well as duty-free imports of machinery, equipment, and raw materials (Asamblea Legislativa, 1998[15]; Asamblea Legislativa, 2007[16]; Asamblea Legislativa, 2013[17]). Since 2005, in the context of El Salvador’s tourism law (the Ley de Turismo), investment projects in the tourism sector of over USD 25 000 benefit from exemptions from income tax, municipal taxes, real-estate transfer taxes, and import duties (Asamblea Legislativa, 2005[18]). Dating from 2007, the Law on tax incentives for the promotion of renewable energy in the generation of electricity (the Ley de incentivos fiscales para el fomento de las energías renovables en la generación de electricidad) stipulates tax exemptions for electricity generation from renewable sources of energy, in order to reduce El Salvador’s dependency on the purchase of fossil fuels, and to reduce the country’s emissions of greenhouse gases (Asamblea Legislativa, 2007[19]).
An evaluation of El Salvador’s sector-specific tax incentives from 2017 found that the incentives had a positive impact on job creation, but that they also contributed to higher levels of tax expenditure. The evaluation found a net positive impact of the Free Zones Law, the International Services Law, and the Tourism Law on El Salvador’s economy.6 It was found that the Free Zones Law had a net positive impact of USD 547.2 million on El Salvador’s economy, that the International Services Law had a net positive impact of USD 24.9 million in 2016, and that the Tourism Law had a net positive impact of USD 7.1 million. The tax incentives in free zones were found to have had the most significant positive impact on employment (creating 152 692 additional jobs as compared to the business-as-usual scenario between 2004 and 2016), while the tax incentives for international services and tourism had only a relatively small impact on job creation. At the same time, however, tax incentives were found to reduce taxable income, and to increase tax expenditure. In 2016, the government had to pay USD 88 in lost tax revenues for each job created by the Free Zones Law, and USD 49 for each job created through the International Services Law (Asesores y consultores internacionales S.A. de C.V., 2017[30]).
Tax expenditure due to fiscal incentives is moderate as compared to total tax expenditure, but it is significant when compared to other uses of public funds, and is increasing. In 2017, tax expenditure due to fiscal incentives in the context of the four sector-specific laws (free zones, international services, tourism, and renewable energies) amounted to USD 132.5 million. This represents only 15.5% of El Salvador’s total tax expenditure, but 0.53% of the country’s GDP (Ministerio de Hacienda, 2018[14]). This is much more than government expenditure on other productive-transformation policies, which came to USD 50.4 million in 2021, and USD 70.3 million in 20177 (Portal de Transparencia Fiscal, 2021[13]). It is also more than government spending on upper-secondary education (0.4% of GDP in 2018), tertiary education (0.3% of GDP in 2018), or pre-primary education (0.4% of GDP in 2018) (World Bank, 2022[31]). Tax expenditure for value added tax (VAT) due to sector-specific fiscal incentives remains moderate, but income-tax expenditure is large, most significantly for free-zone tax incentives. Free Zones, and companies outside of Free Zones benefiting from free-zone tax incentives, accounted for 74% of income-tax expenditure in the category of fiscal incentives (0.42% of GDP). VAT tax expenditure due to all fiscal incentives (including tax incentives in the context of the four sector-specific laws, and tax incentives for co-operative associations) increased from 0.19% of GDP in 2014 to 0.22% of GDP in 2017. Income-tax expenditure due to all fiscal incentives increased from 0.48% of GDP in 2014 to 0.57% of GDP in 2017 (Ministerio de Hacienda, 2018[14]).
El Salvador should reduce the overall burden of tax incentives whilst at the same time targeting incentives better and spending more resources on other public goods. There is evidence that a good investment climate, and the provision of sufficient levels of public goods such as infrastructure, education, and security, are more important for attracting foreign investment than tax incentives. Tax incentives can even have an indirect negative effect on the attraction of foreign investment, by reducing countries’ revenue bases, thereby limiting the resources that are available for investment in other public goods (OECD, 2015[32]). Furthermore, evidence shows that tax incentives are only effective at increasing levels of FDI in sectors where investors waver between similar locations, and that FDI is mainly efficiency-seeking rather than motivated by access to domestic markets or natural resources. Examples of sectors where FDI is mainly efficiency-seeking are the manufacturing of sophisticated goods such as information technology and electronics, machinery and equipment, automotive, air and spacecraft, biotechnology and pharmaceuticals, and tradable services, including business services. Thus, tax incentives should be used strategically, and should be targeted at sectors with high shares of efficiency-seeking FDI, for which locational competition is intense. In order to minimise unnecessary tax expenditure, tax incentives targeted at firms that would have invested anyway should be avoided (World Bank, 2017[33]).
Systematically, and on a regular basis, El Salvador should evaluate the costs and benefits of its different tax incentive schemes. Where the cost of tax incentives exceeds their benefits, they should be reduced or removed. The evaluation of the economic benefits of tax incentives should take into account their direct impact in terms of the amount of investment that they encourage, their indirect and induced impact due to inter-industry transactions and changes in income and consumption, positive externalities such as transfers of technology and know-how by incentives-induced FDI, and the environmental benefits of tax incentives for renewable energy. A range of costs should be considered when conducting a cost-benefit analysis of tax incentives. These include the tax revenue that is forgone due to tax incentives. They also include revenue leakages due to unintended and unforeseen tax-planning opportunities, and the costs incurred by taxpayers in order to comply with a given regime of tax incentives. The costs that should be taken into account also include administrative costs from running the tax-incentive programmes (OECD, 2015[34]). When evaluating the costs and benefits of tax incentives, it is important only to take into consideration investments that have been motivated by tax incentives, and that would not have been made without these incentives.
El Salvador should also consider reducing exemptions to import taxes in order to encourage more linkages between free zones and international service parks, and the local economy. The current approach to free zones and international services parks, which includes tax exemptions on imported inputs and equipment, does not encourage firms to source inputs locally. Sourcing inputs locally could result in technology transfers, innovation, and the increased competitiveness of local firms (OECD, 2015[34]). Exemptions to import duties remain important for the business model of the maquila sector, which relies on duty-free imports and exports. However, in order to attract more investment projects that do not rely on the maquila business model, and to build stronger linkages with the local economy, the government should consider gradually phasing out import-duty exemptions, or slimming them down for sectors other than maquila.
At the same time, El Salvador should develop policies to foster linkages between international firms and domestic suppliers. It could create programmes to match international investors with local suppliers, and to support local suppliers in building the right skills and competencies, as has been done in Costa Rica and Malaysia. These countries not only have programmes to match domestic suppliers with foreign companies in order to create FDI linkages with the domestic economy, but they also reach out proactively to potential domestic suppliers and support domestic firms in building up the capacities that they need in order to become suppliers to foreign firms. The process of linking foreign firms with domestic suppliers in Costa Rica has further been improved through reforms to its investment-promotion and trade-promotion agencies, which have significantly improved the institutions’ performance (OECD, 2020[35]; Cornick and Trejos, 2018[36]) (Box 5.1 and Box 5.2). A similar approach could help El Salvador to create more linkages between foreign firms and the local economy. It could also help the country to close its skills gap, attract more quality FDI, and raise the productivity of domestic MSEs.
The Promotora de Comercio Exterior de Costa Rica (PROCOMER), and the development of the tradable services sector in Costa Rica
The evolution of Costa Rica’s investment-promotion strategy: From quantity to quality
In the 1980s, Costa Rica switched from an inward-looking economic strategy to an outward-looking one, in order to address the consequences of a severe debt crisis and to boost growth. Costa Rica’s main priority was to attract FDI that would create as many jobs as possible. For most of the 1990s and the 2000s, low value-added linkages between local companies and multinational companies developed spontaneously, and irrespective of policy effort. To this day, multinational companies still purchase local non-tradable services such as cleaning services, food, security, and some logistics services, as well as the supplies that are required to provide such services.
For 20 years, there was no spontaneous development of significant quality linkages in sectors such as tradable goods and services. These emerged gradually as a state priority, alongside Costa Rica’s growing ambition to play a more significant role in Global Value Chains (GVCs). Between 2001 and 2010, PROCOMER – the country’s trade promotion agency – launched programmes aimed at matching foreign investors with local providers of increasingly complex, knowledge-intensive inputs, parts, finished products, and services. However, such providers were scarce, and the agency focused on the volume of linkages, not on their types or on the value of the ensuing transactions. Moreover, there was no investment-promotion framework or related goals.
In 2010, the strategy, methods and organisation of PROCOMER started to change. The newly elected government appointed a businessman, Jorge Sequeira, from the private sector, as CEO. Unlike his predecessors, he had no previous experience of policy making, politics, or policy studies. Shortly after his appointment, PROCOMER produced its first strategic plan to attract public investments, with updates planned for every two years. The institution was re-organised, with a strong emphasis on monitoring and accountability, and on the development of key performance indicators for every department, programme and person within the institution. There was also a strong emphasis on the extensive use of information technology to modernise management, including a management system for customer relationships, enterprise resource planning for management and financial purposes, and web-based training tools for PROCOMER’s personnel and customers.
PROCOMER’s mission shifted from a generic promotion of linkages to a focused one, and from matchmaking to business development. Prior to 2010, the number of linkages that the agency achieved each year was the only indicator of success. The new strategy was explicitly demand-driven. Previously, PROCOMER had simply identified local capabilities and then tried to match them to the demands of multinationals. Under the new strategy, PROCOMER would first identify multinationals’ needs, and then survey local capabilities. If such capabilities were lacking but their development was feasible, PROCOMER worked with potential suppliers and other public agencies to make it happen.
Conditions for PROCOMER’s success
Three conditions were necessary to facilitate PROCOMER’s transition from matchmaking to business development.
First, the agency had to gain enough administrative, political and financial independence to employ staff with the right skills. In particular, mastery of English and formal training in project management were established as requirements.
Second, the metric for the evaluation of job performance changed. A set of nine different indicators are now used to evaluate the success of a project and the performance of the staff involved. These include customer satisfaction, the volume of transactions, the development of suppliers, and fundraising for new projects.
Third, the capacity for co-operation with a large set of public institutions has been enhanced. As the tasks that are involved in the development of suppliers extend beyond PROCOMER’s capabilities, universities and technical colleges have been mobilised to develop specific technical skills for domestic suppliers, as required by their potential foreign clients. Similarly, reaching out to other agencies, and to public or private stakeholders, is essential to completing business development. A major step towards better inter-institutional co-ordination consisted of the creation of an Inter-Ministerial Linkages Commission, with the participation of PROCOMER, the Ministry of Foreign Trade, the Ministry of Science, Technology and Communication, the Chamber of Commerce, and numerous tertiary-education institutions and scientific councils.
Results and limitations
PROCOMER remains small, but it is part of a system that aims to attract more quality FDI and to create better linkages. In 2017, PROCOMER reportedly managed 44 projects that created linkages worth around USD 17 million, and that involved 70 exporting industries, 114 local suppliers, and 166 supply chains. These figures are encouraging but are still on the small side. However, PROCOMER has provided Costa Rica with a clear map of multinationals’ needs and local suppliers’ capabilities. Moreover, the agency is part of a broader system that relies on an efficient network of agencies and universities that addresses both the demand and supply sides of local tradable goods and services. Because of this system, the value added of domestic services that are embodied in manufacturing exports increased significantly between 2005 and 2015, second only to China.
Source: OECD (2020[35]), Multi-dimensional Review of Viet Nam: Towards an Integrated, Transparent and Sustainable Economy, OECD Development Pathways, https://dx.doi.org/10.1787/367b585c-en based on Cornick et al. (2018[36]), Costa Rica: Building on Successes to Address New Productive Development Policy Challenges.
The Global Supplier Programme and the development of SMEs in Malaysia
Since the 1980s, Malaysia has developed policies to support the development of small and medium enterprises (SMEs), including the capacities of firms to supply multi-national enterprises (MNEs), and SME-MNE linkages. In the context of the Vendor Development Programme (VDP) in the 1980s, Malaysian SMEs were provided with incentives and support to become suppliers of industrial components, machinery, and equipment. However, the success of the programme was limited due to weaknesses of the selected local SMEs in terms of their capacity.
Since 1996, the Industrial Linkages Programme (ILP) has built on the VDP to create better linkages, and to improve capacity. The ILP involves MNEs in the selection of suitable SMEs and helps local suppliers to develop the skills that MNEs need. Selected SMEs and MNEs benefit from reductions in income and investment taxes. In addition, SMEs benefit from access to financing schemes.
The Global Supplier Programme (GSP) was created in 2000 and trains employees of domestic suppliers, in collaboration with MNEs. In order to avoid skills mismatches, the MNEs define the selection criteria for SMEs, and take part in the development of training curricula at different regional training centres and institutes. In order to pay for the training programmes, SMEs receive subsidies.
Source: OECD (2020[35]), Multi-dimensional Review of Viet Nam: Towards an Integrated, Transparent and Sustainable Economy, OECD Development Pathways, https://dx.doi.org/10.1787/367b585c-en based on OECD/UNIDO (2019[37]), Integrating Southeast Asian SMEs in Global Value Chains: Enabling Linkages with Foreign Investors, https://www.oecd.org/investment/Integrating-Southeast-Asian-SMEs-in-global-value-chains.pdf.
Completing the toolbox for production-development policies: clusters and value chains
So-called “New industrial policy” involves the use for productive development of policy instruments or sector-specific policies8 that differ from the traditional ones. In OECD countries, the fundamentals for the renewal of sector-specific policy rest on the recognition of the market failures and failures of co-ordination, that state intervention can help to address. They also build on an awareness that firms do not operate solely in the market, but weave multiple relationships with their economic environment, including agglomeration economies – the benefits of clustering (Warwick, 2013[38]; Criscuolo et al., 2022[39]). This shift in thinking has led, on the one hand, to a rehabilitation in developed countries of sector-specific policies (also often referred to as industrial policies), including selective policies (targeting specific firms or sectors). In addition, it has led to a broadening of the scope of industrial policy (Warwick, 2013[38]). The framework proposed by the OECD (Criscuolo et al., 2022[39]) classifies industrial policy instruments into: i) supply-side instruments, which affect production decisions; ii) demand-side instruments, which affect consumption decisions; and iii) governance instruments, which enhance co-ordination between public, private, and academic actors.
Cluster-development strategies are an important element of new industrial policy. They focus on the exploitation of agglomeration economies, and the provision of public goods that improve the productivity and competitiveness of a set of firms in a specific sector or geographical area. Within this class of policies, a distinction can be made between: i) policies to articulate clusters and cluster development, which tend to focus on specific territories in sub-national areas; and ii) policies for productive linkages or value chains, which focus on companies that are linked by horizontal and vertical relationships of production, which are often marked by significant asymmetries of governance and power (Crespi, Fernández-Arias and Stein, 2014[40]). Cluster-development strategies based on the exploitation of local comparative advantages in innovative sectors are a key element of productive-development policies in countries such as Canada (Innovation Superclusters Initiative), the United States (Manufacturing USA), Germany (Spitezencluster, and Zukunftcluster) and France (Pôles de compétitivité) (Criscuolo et al., 2022[39]).
El Salvador could expand its industrial policy toolbox with interventions that specifically target the creation and support of productive clusters. Most of the policy instruments for productive development that are currently implemented in El Salvador are centred on individual firms that produce goods or services (see Annex 5.A). However, governance tools are a central element in the implementation of successful strategies of productive development (Criscuolo et al., 2022[39]). They include interventions to support the formation, organisation and operation of bodies that can facilitate clusters of firms. For example, this can take place through non-refundable competitive funds directed at collective groups of businesses, through the provision of financing for technological development or for adaptation studies, or via preparatory studies for investment in local public goods (such as infrastructure, or the development of structures of vocational training). They also include the governance structures of the cluster-development strategies themselves, which should ensure their inclusiveness, as well as their monitoring and evaluation. Establishing mechanisms for the withdrawal of targeted support when it is inefficient, or when it has served the purpose that it set out to achieve, is important, as this can be politically challenging.
The development of instruments of public policy that focus on the governance of productive linkages can also help to improve local-development policies, and to support value chains. Local business networks are a tool to develop productive capacities and linkages at the local level. The PLATO initiative is an example of such networks. Created in the Belgian region of Flanders in 1988, it brings together SMEs and large local companies in a defined territory to carry out business-management support, exchanges of information, and networking activities, and it has yielded positive results for the productivity of the companies that participate in it (Cauwenberge, Bauwhede and Schoonjans, 2013[41]). El Salvador already has a number of valuable, well-documented experiences in implementing measures to support and accompany value chains, especially in value chains that are based on primary products such as shrimp, tomato, chilli peppers, or dried fruits (ECLAC, 2017[42]; Padilla Pérez, 2014[43]).
The cluster approach can also support new productive linkages through digital supplier linkage instruments. Advances in digitalisation during the COVID-19 pandemic have led many countries to build up digital trading platforms. A cluster-oriented approach can add value to such platforms, for example by qualifying or categorising suppliers in a given sector. The participation of organised groups of businesses allows for the identification of relevant information in order to generate linkages between potential suppliers and value chains or exporting companies in free trade zones.
Several forums for public-private dialogue already exist in El Salvador. The Ministry of Economy has organised round tables with investors in order to identify the main obstacles to private investment in the country, and how to tackle them (MINEC, 2020[5]). Furthermore, both the Committee of the Integrated System for the Development of Entrepreneurial Production, and the Productivity and Competitiveness Cabinet (proposed by the Trade and Investment Policy), include representatives from the public and private sectors. However, the Committee of the Integrated System for the Development of Entrepreneurial Production does not have a good track record of decision making and implementation, and there is no record of recent meetings. In 2019, the Ministry of Economy reactivated the National Trade Facilitation Committee (the Comité Nacional de Facilitación del Comercio de El Salvador). This forum for public-private dialogue to facilitate trade had been inactive since 2017. It deals with trade-related issues such as customs, health, and agriculture. In 2020, it approved the first Public-Private Action Plan to remove obstacles to trade, and to improve the business climate.9 This plan is updated every year. One of its achievements has been the production of a draft National Public-Private Trade Facilitation Strategy (Estrategia Nacional de Facilitación del Comercio Público Privada) for the next five years. In addition, the Productive Innovation System (Sistema de Innovación Productiva) project aims to create a shared vision for innovation in El Salvador, through dialogue between the public and private sectors, academia, and civil society (MINEC, 2020[5]). The Trade and Investment Policy foresees the creation of a consultative Productivity and Competitiveness Cabinet. It will be composed of public and private entities, with the aim of promoting and co-ordinating their participation in the development of El Salvador (Secretaría de Comercio e Inversiones, 2020[2]). As of 2022, however, the Productivity and Competitiveness Cabinet does not yet appear to be active (Secretaria de Comercio e Inversiones, 2022[44]).
The design of the aforementioned PNFDTP had also built on a broad public-private dialogue, and an inclusive process. In 2013, during the policy’s drafting phase, co-ordination round-table meetings were organised to facilitate dialogue between private and public bodies in order to instruct the design of the PNFDTP, and to establish a common vision for implementing the policy. A high-level political working group was created, along with technical working groups in six strategic sectors: chemicals and pharmaceuticals, remote business services, aeronautics, electronics, textiles and apparel, and plastics. These working groups included company managers representing each sector, plus representatives from the public sector. In 2014, with the support of the International Labour Organization (ILO), dialogues were initiated with workers' unions in the six sectors to inform them about the consultation and dissemination process, and to identify lines of action that could contribute to overcoming underemployment and unemployment in El Salvador. In addition, consultations were organised with academics and business associations, in which the sectors of agro-industry, footwear, handicrafts, and paper and cardboard all participated. The detailed action plan of the PNFDTP was established in this process of dialogue with businesses, business associations, workers, trade unions, and universities (Cabrera Melgar, 2021[45]). However, these consultations with the private sector, and with other actors that were relevant to the process of designing the PNFDTP, have not translated into long-term sustainability for the policy, which has recently been replaced by other strategic documents.
A broader, more comprehensive, and institutionalised public-private dialogue is required in El Salvador. The process of generating key policy documents, such as the Investment and Trade Policy, has relied on intensive consultations with business organisations. However, El Salvador does not have an institutionalised body in which such a dialogue can take place. This means that the priorities of certain sectors may receive more attention than others, and makes future refinements or reviews of strategic decisions more cumbersome. It is important to organise a broad public-private dialogue that not only covers isolated issues such as trade and innovation, but also a variety of other topics – and on a regular basis. It is also important to establish clear targets and areas of work. In addition, it is essential to make sure that all recommendations that emanate from this dialogue are taken into account and implemented.
Panama’s National Competitiveness Centre (CNC)
Panama’s National Competitiveness Centre is a non-profit organisation that brings together high-level representatives from the public and private sectors in order to develop policies that make the country’s companies more productive. In addition, the CNC conducts studies and surveys, disseminates information, and executes different activities and projects, with the aim of fostering Panama’s international competitiveness.
Peru’s National Competitiveness and Formalisation Council (CNCF)
Peru’s National Competitiveness and Formalisation Council was created in 2002 and is attached to the country’s Ministry of Economy and Finance. The CNCF brings together the public and private sectors and academia. It supports Peru’s public-private technical committees in the implementation of the National Competitiveness and Productivity Plan, in order to improve the country’s international competitiveness. The public-private technical committees aim to implement one or several measures of the National Competitiveness and Productivity Plan, and are composed of public officials, private-sector representatives, international consultants, and representatives of the academic sector.
The Dominican Republic’s National Council for Competitiveness (CNC)
The institution in charge of facilitating public-private dialogue in the Dominican Republic is the National Council for Competitiveness. It is chaired by the President of Republic and is composed of eight ministries and eight representatives of the private sector. It was created in 2001 to manage the Competitiveness Fund (FONDEC). Financed by the Inter-American Development Bank (IDB), FONDEC provided resources to set up industrial clusters, which required private matching funds. From its inception until 2012, the fund co-financed the creation of 45 clusters for a total of USD 13.5 million (16 clusters in agro-food, 15 in tourism, and 14 in manufacturing). The co-financing from the private sector was 14% of the total investment, which was lower than expected. The IDB’s evaluation stressed that the most successful clusters (mangos, organic coffee) were those that emerged in response to private-sector demand, and were supported by the international technical assistance of the United States Agency for International Development (USDA).
Once its mission of managing the FONDEC came to an end, the CNC remained in place, evolving into a strategic body. In 2018, it formulated the Competitive Dominican Republic agenda (Dominicana Competitiva), which pointed the way to the specific reforms that would be needed to diversify domestic production and to increase local value added. The agenda identified five priority areas and industries for the country, and includes 37 priority actions with an estimated budget of USD 542 million (0.7% of GDP), of which 63% is devoted to implementing actions in agro-food, 28% in tourism, and 8% in manufacturing.
Chile’s National Productivity Commission (CNP)
Chile’s National Productivity Commission was set up by national decree in 2015, aiming to facilitate strategic co-ordination and a better prioritisation of policy actions. The CNP is a consultative body for production-development and pro-productivity reforms. It is composed of representatives from the business community, academia and government, along with some well-known national experts.
Source: OECD/UN/UNIDO (2019[46]), Production Transformation Policy Review of Colombia: Unleashing Productivity, OECD Development Pathways, https://dx.doi.org/10.1787/9789264312289-en; OECD/UNCTAD/ECLAC (2020[47]), Production Transformation Policy Review of the Dominican Republic: Preserving Growth, Achieving Resilience, OECD Development Pathways, https://dx.doi.org/10.1787/1201cfea-en; CNC (n.d.[48]), CNC Panamá, Centro Nacional de Competitividad, https://cncpanama.org/cnc/; CNCF (n.d.[49]), CNCF, Consejo Nacional de Competitividad y Formalización, https://www.cnc.gob.pe/.
El Salvador also needs an institutional mechanism for the design, co-ordination and governance of production-development policies that includes an institutionalised process of public-private dialogue. In the short run, establishing the Productivity and Competitiveness Cabinet that was proposed by the Trade and Investment Policy could provide an important consultative space. However, its weak normative foundations, and the definition of its functions within a specific policy rather than a mission-based mandate, may limit the scope of its actions. An alternative would be the reform and re-instatement of the Committee of the Integrated System for the Development of Entrepreneurial Production. In future, El Salvador should consider creating an institution to play this role that would be governed jointly by the public and the private sectors. This institution would ensure that recommendations from public-private dialogue were being implemented, and would co-ordinate and align productive transformation policies with each other. El Salvador could follow the models of other Latin American countries. Institutions in other countries in the region that could serve as examples for El Salvador are Peru’s National Competitiveness Council (the Consejo Nacional de Competitividad y Formalización), Panama’s National Competitiveness Centre (the Centro Nacional de Competitividad), the Dominican Republic’s National Council for Competitiveness (the Consejo Nacional de Competitividad), and Chile’s National Productivity Commission (the Comisión Nacional de Productividad – CNP) (Box 5.3).
The creation of an implementation agency for policies of productive transformation would help El Salvador to capitalise on existing capabilities, while also opening up new possibilities in this area of policy making. El Salvador is already considering the creation of an implementation agency for productive transformation policies, as part of the Trade and Investment Policy 2020-50. The current institutional framework suffers from imbalances. Policies towards MSEs are implemented through CONAMYPE, an institution that has a solid legal basis, but that lacks its own sources of funding. This implies that its interventions are sometimes rather scattered, and relatively small in scale. On the other hand, broader policies of productive transformation are implemented directly within the Ministry of Economy, which is also in charge of designing these policies, and determining their strategic orientation. Some of the broader policies of productive transformation are also implemented within sectoral ministries and agencies. The work that is carried out by the Directorate-General for Innovation and Competitiveness through its various departments in their respective areas, including the Operations Department of the Fund (which manages the Fund for the Promotion of Innovation and Competitiveness), gives the Ministry of Economy the capacity to provide direct support to companies. However, despite having effective processes in place, some observers indicate that the instruments of the Fund for the Promotion of Innovation and Competitiveness have barely evolved over time (De Groote, 2016[50]). A consolidated implementing agency would be better placed to develop place-based or cluster-based programmes. It would also be better equipped to design more sophisticated instruments, which could be tailored to the needs of different sectors, or to different stages of the business lifecycle. These are two of the characteristics of successful experiences of productive transformation agencies in Latin America and the Caribbean, as demonstrated by Chile’s Corporación de Fomento de la Producción (CORFO) (Box 5.4). The Agency for Enterprise Development and Competitiveness, which was proposed in the Trade and Investment Policy 2020-50, could play this implementing role. However, it is important to ensure the long-term sustainability of this agency, which would mean providing it with the necessary operational and financial autonomy, and endowing it with a stable governance structure – preferably one that would be set out in law.
A consolidated implementing agency for productive transformation policies could also benefit from field presence for the development of programmes via a process of entrepreneurial self-discovery. The kind of analytical exercises that have been carried out in the preparation of strategic policy documents such as the now-superseded PNFDTP, or the current Trade and Investment Policy, constitute a good starting point. However, they tend to identify current comparative or competitive advantages, and therefore to target support to sectors that are performing well at the present moment, to the detriment of opportunities for diversification. Facilitating a process of entrepreneurial self-discovery can lead to further diversification and growth (Rodrik, 2004[51]). Activating territorial development through productive transformation is a key element of the European Union's smart specialisation strategy, which is one of the most relevant public-policy experiments for diversification and productive development. The EU's smart specialisation strategy aims to enable each region to identify and develop its own competitive advantages through a process of entrepreneurial self-discovery (European Commission, n.d.[52]) (Box 5.5). A key factor for implementation that is also relevant in developing countries is the importance of refocusing the development of policy documents towards action, through constructive processes of dialogue at the sub-national level between local authorities, the private sector, academia, and civil society (OECD/UN, 2018[53]).
The Corporación de Fomento de la Producción (CORFO), Chile's economic development agency, is often held up as an example of promoting innovation in developing countries. The agency has undergone many changes since its creation in 1939, notably a shift towards a more independent and technocratic approach to development since the 1990s. In order to promote economic diversification and to increase productivity growth, it implements a number of programmes. These include:
Integrated Territorial Programmes (ITP). These are temporary regional programmes (generally lasting about five years), which focus on a value chain, and include a series of policy instruments such as support for MSMEs, support for innovation, investment attraction, and project-specific competitions for funds.
Focused support for innovation. This includes finance for innovation and technology transfer, which is concentrated in five priority areas that impact the economy as a whole: biotechnologies; information and computer technology (ICT); quality; clean production; and technological foresight.
Support for dynamic investments. In order to foster the creation of high-risk, fast-growth ventures, CORFO established a series of instruments including start-up incubators, seed-capital facilities for companies with technical sponsors, networks of so-called business angels, and international co-operation.
A programme to attract high-tech investment (InvestChile): through an independent investment-promotion agency, and despite its relatively limited budget, Chile has developed a network of strategic partnerships, connecting with key institutions to attract FDI into more complex sectors.
Source: Ministerio de la Economía, Fomento y Turismo, (2018[54]), Agenda de productividad, innovación y crecimiento 2014-2018, https://www.economia.gob.cl/wp-content/uploads/2018/02/Ministerio-de-Economia_DIGITAL-1.pdf; Rivas, G. (2012[55]), “La experiencia de CORFO y la transformación productiva de Chile. Evolución, aprendizaje y lecciones de desarrollo”, Serie Políticas Públicas y Transformación Productiva, No. 3/2012, Corporación Andina de Fomento, Banco de Desarrollo de América Latina, Caracas, https://scioteca.caf.com/bitstream/handle/123456789/373/caf_libro_corfo_web.pdf?sequence=1&isAllowed=y; Nelson, R. (2007[56]), “Transnational strategic networks and policymaking in Chile: CORFO's high technology investment promotion program”, Latin American Politics and Society, Vol. 49/2, pp.149-181, https://doi.org/10.1111/j.1548-2456.2007.tb00410.x.
Smart specialisation is an innovative approach that aims to boost economic growth and job creation in the European Union (EU). It aims to enable each region to identify and develop its own competitive advantages through a process of entrepreneurial self-discovery. Through its bottom-up, co-operative approach, smart specialisation brings together local authorities, academia, the private sector, and civil society.
Since 2011, the European Commission has provided active advice to regional and national authorities on the development and implementation of their smart specialisation strategies, through a mechanism called the Smart Specialisation Platform. This platform facilitates mutual learning, data collection, analysis, and networking opportunities for around 170 EU regions and 18 national governments.
Thematic platforms for smart specialisation have also been created. Regions join forces and resources on the basis of similar priorities for smart specialisation in sectors with high levels of added value. For example, collaborations have been developed in the fields of three-dimensional (3D) printing, medical technology, smart grids, solar energy, sustainable buildings, high technology, agriculture, etc.
Harnessing local potential (Centre-Val de Loire, France)
The smart specialisation approach in the Centre-Val de Loire region of France helped to clearly identify local competitive assets. These included energy storage, biopharmaceuticals, cosmetics, environmental engineering, and tourism. This has made possible a better targeting of support to projects with high potential, such as the LAVOISIER Programme, which specialises in the development and industrialisation of materials and systems for new and renewable sources of energy.
Tapping the untapped potential of rural areas (Extremadura, Spain)
In Extremadura, Spain, the local production of the distinctive cheese La Torta del Casar, with the active participation of farmers, shepherds, and other local actors, has become a real specialisation asset. As a result of this alliance, the Tajo-Salor-Almonte Local Action Group for Rural Development has been able to identify weaknesses in the production system, and to design solutions to overcome them. These exchanges have also resulted in the creation of the XXI Farmers’ School and the Shepherds’ School (Escuela de Agricultores del XXI and Escuela de Pastores). These schools aim to become partners and training institutions for farmers and herders in the use of ICT, as well as other technological advances in this field.
Linking education and industry (Podkarpackie, Poland)
Poland’s province Podkarpackie is famous for its Aviation Valley, a cluster that brings together most of Poland's aviation industry. In order to better link the academic sector with this regional industry, the Aeronautical Training Centre of the Rzeszow University of Technology was modernised and expanded with the help of EU funds.
Source: European Commission (n.d.[52]), Smart specialisation - Strengthening innovation in Europe’s regions.
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Notes
← 1. Textiles and apparel, chemicals, rubber, plastics, metal products, wood and paper industries, machinery, the glass industry, the energy sector, tourism, information and communication services, business services, and financial services.
← 2. The committee is composed of representatives of the Ministry of Economy, the Ministry of Tourism, the Foreign Ministry, the Ministry of Agriculture, the Ministry of Finance, the Ministry of Environment, the Ministry of Housing, the National Trade Facilitation Committee, the Office of Regulatory Improvement, CONAMYPE, and three representatives of the private sector (from the Asociación Nacional de la Empresa Privada, or ANEP, the Asociación Salvadoreña de Industriales, or ASI and El Salvador’s Chamber of Industry and Commerce).
← 3. Most importantly, tourism, agriculture, and renewable energies (Secretaría de Comercio e Inversiones, 2020[8]).
← 4. Agroindustry, food and drinks, textiles and apparel, chemicals, pharmaceuticals and natural cosmetics, plastics, electronics, shoe wear, export-oriented arts and crafts, paper and cardboard, logistics, the IT sector, medical services, creative industries, aeronautics, and tourism.
← 5. The economy minister, the foreign minister, the ministers of finance, agriculture, and tourism, the Technical Secretary of the Presidency, the president of BANDESAL, two representatives of El Salvador’s central bank, the directors of exports and investment from PROESA, two representatives of the Salvadoran Association of Industrialists (the Asociación Salvadoreña de Industriales, or ASI), two representatives of El Salvador’s Export Corporation (Corporación de Exportadores de El Salvador), two representatives of El Salvador’s Chamber of Industry and Commerce, a representative of El Salvador’s Institute for Co-operative Development (Instituto Salvadoreño de Fomento Cooperativo), and a representative of El Salvador’s universities.
← 6. The evaluation estimated the additional employment generated through fiscal incentives, multiplied the additional jobs created by the average sectoral salaries, and subtracted tax expenditure.
← 7. Authors’ calculations based on MINEC’s funding for policies relating to productive innovation, the competitiveness of businesses and exporters, the Productive Corridors Programme, the Ministry of Tourism’s budget for the Tourism Development Programme in Coastal Areas, the Ministry of Agriculture’s budget for agricultural production and agricultural innovation policies, and the annual budgets of CONAMYPE, PROESA, the Salvadoran Institute for Agriculture and Forestry Technology, the Salvadoran Tourism Corporation, and the Secretariat for Trade and Investments (Portal de Transparencia Fiscal, 2021[13]).
← 8. This section uses the term “industrial policy” to refer to productive-development policies. Even though industrial policy has sometimes focused on supporting manufacturing sectors – bearing in mind the specific role that manufacturing can play (Rodrik, 2013[66]) – sector-specific and selective policies can also intervene in other areas.
← 9. Including measures to simplify procedures, to reduce delays and costs, to increase transparency, to improve infrastructure, and to strengthen public institutions and strategic planning, as well as legal reforms (MINEC, 2020[5]).