Economy in El Salvador

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Economy in El Salvador

By | May 2008
Page 1 of 7
After El Salvador’s civil war which lasted for 12 years the economy has experienced mixed results from the ARENA government. The ARENA party known as the Nationalist Republican Alliance started in 1981. ARENA government's commitment to free market initiatives and conservative fiscal management that include the privatization of the banking system, telecommunications, public pensions, electrical distribution, and some electrical generation, reduction of import duties, elimination of price controls, and an improved enforcement of intellectual property rights. The GDP has been growing at a steady and moderate pace since the signing of peace accords in 1992, in an environment of macroeconomic stability. A problem that the Salvadoran economy faces is the inequality in the distribution of income. In 1999, the richest fifth of the population received 45% of the country's income, while the poorest fifth received only 5.6%.

As of December 1999, net international reserves equaled US$1.8 billion or roughly five months of imports. Having this hard currency buffer to work with, the Salvadoran Government undertook a monetary integration plan beginning January 1, 2001, by which the U.S. dollar became legal tender alongside the colon, and all formal accounting was undertaken in U.S. dollars. This way, the government has formally limited its possibility of implementing open market monetary policies to influence short term variables in the economy. Since 2004, the colon stopped circulating and is now never used in the country for any type of transaction; however some stores still have prices in both colones and U.S. dollars. In general, people were unhappy with the shift from the colon to the U.S. dollar, because wages are still the same but the price of everything increased. Some economists claim this rise in prices would have been caused by inflation regardless even had the shift not been made. Some economists also contend that now, according to Gresham's Law, a reversion to...