El Salvador a Business Study

Topics: International trade, Gross domestic product, Foreign exchange market Pages: 13 (4752 words) Published: April 13, 2013
1. Executive Summary 

After centuries of colonization, revolutions, civil wars, and political corruption, El Salvador now finds itself poised for strong economic growth. There are several key factors that have created this position for El Salvador.

The election of President Carlos Mauricio Funes Cartagena in 2009 has shown significant promise in the improvement of Salvadoran society. Already, Funes’ policies have demonstrated significant drops in violent crimes, a major deterrent to foreign direct investment in El Salvador. Education and healthcare reform are key components of his policy aimed, at eliminating the 40% poverty stricken nation.

Accession into the WTO, the signing of numerous free trade agreements such as the CACM, the CAFTA-DR, as well as several “preferential partner” trade agreements has opened many doors for trade between El Salvador and numerous nations, most notably, the United States. With the help of some of these agreements, El Salvador has also opened and increased trade between itself and many European and Asian nations. Positioning the United States as its key trading partner was accomplished via dollarization. Accepting the US dollar as its sole form of currency eased trade complications between El Salvador and the US and eliminated volatility of the Colón in the foreign exchange market. This dollarization gave Salvadoran industry the credibility of the US dollar, eliminating or limiting national inflationary effects upon trade. This dollarization, however, lessens the Salvadorans control on their economy through fiscal policy, but also serves to prohibit political instability’s effect on the currency.

The nation’s current economy exhibits a trade deficit with imports outnumbering exports in 2011 by 180%. Key exports from El Salvador include coffee, textiles and value-added cloth apparel, and unskilled-to semiskilled labor produced manufactured goods. Key imports are in the form of fuels and energy, foodstuffs, and commercial and capital goods. Without diversification of industry and increased government spending to develop comparative advantages for El Salvador, the nation’s economic growth has been stifled in recent years – although it has become less volatile as well. GDP growth has slowed significantly in the past few years, but international initiatives through the IMF, the WTO and the US aim to increase the nation’s infrastructure, lessen the poverty rate, and stimulate further industrial and trade growth.

El Salvador carries a debt averaging roughly 40% of its annual GDP. While their total debt ranks them as number 86 in the world, their debt as a percentage of GDP ranks them as 47, indicating that their debt is higher than it should be or their GDP is lower than it should be. Cuts in government spending in the past few years showed promise in correcting this imbalance, save increased spending after significant natural disaster devastation in 2010.

With the assistance of foreign aid and international initiatives, El Salvador has already halted overall economic decline and has begun to diversify its exports into more lucrative manufacturing industries. With continual progress from these initiatives and a more favorable political situation, El Salvador is on the verge of correcting its trade imbalance, improving its economic stability and fostering economic growth.

2. Country Background
Located in Central America and bordered by Honduras to the north and east and Guatemala to the north and west, El Salvador’s southern border touches the waves of the Pacific Ocean. El Salvador’s population of 6,227,491 people in 2011 resembles the population of Massachusetts with 6,587,536 people. At a glance, El Salvador’s GDP is $23,054,100,000, making its GDP per Capita $3,701.99. (1). Salvadorans use the U.S. Dollar as their currency, and have a republic form of government with one legislative house. (2). After thousands of years of Nanuatl Amerindian and Spanish rule,...
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