El Salvador’s sluggish economy and outdated economic model present serious challenges for the future. Weak economic performance means that life is hard and opportunities are scarce for large portions of the population. It also has far-ranging implications for a variety of issues, including migration, social inclusion and security.

Economic Trends

Sluggish economic growth of 2% on average over the past 15 years has simply not provided enough resources to strengthen the country’s economy.  Meanwhile, GDP per capita has only grown at 1.5% a year, on average, and one third of the population lives below the poverty line.[1]

Moreover, this very limited growth has occurred as a byproduct of an outdated economic model that presents few opportunities for sustainable, equitable development. As of 2014, 26% of the country’s GDP originated from exports (mostly agriculture and maquilas, plus a few services), 17% from family remittances, and 4% from tourism.[2] Basically, exports and migration constitute half of El Salvador’s GDP.   

CORRECTTable1.remittances.2.11.2016 

But upon closer examination, El Salvador’s export-oriented approach is even more problematic. Its export market has traditionally been vulnerable in that it produces a relatively small number of products for a handful of countries. Its main exports are knit T-shirts and other clothing items, sugar, coffee and electrical capacitors.[3] Moreover, an estimated 40% of the value of exports is generated by only 10 firms that trade in only a handful of products.[4]

 Implications for Migration

Because of poverty, transnational links and social tensions, many Salvadorans choose to migrate in search of better opportunities abroad. Migration is the byproduct of push factors associated with violence and limited economic opportunities in a context where jobs are mostly informal, low paid and unskilled. Pull factors such as transnational family networks and demands for low-paid foreign labor (a Salvadoran in the US will make 12 times more than what he or she makes in El Salvador) also come into play.

Table2.remittances2.11.2016

Implications for Development

Overall, given these economic realities, El Salvador is in between two income generation poles (exports and migration), with a “missing middle,” the informal economy. These economic realities present various problems.

First, the value chain connecting trade with export business is very limited, with few policy incentives for small businesses to engage with the global economy. Most exporting businesses consist of large enterprises (no more than 30 companies) handling the majority of exports and employing about one third of the labor force, mostly low skilled workers such as coffee pickers, garment makers, or call center operators.

Second, the economic dimension of migration is completely neglected by policy makers. Salvadorans abroad send home over $4 billion in remittances annually, supporting one million households in a country of 2 million households. In addition, they purchase Salvadoran products, call and visit home, and send money for business investments and philanthropic efforts. The impact of these activities is significant. For example, on average, one in five Salvadorans is interested in investing in their home country.[5] Moreover, ninety percent of Salvadoran migrants purchase Salvadoran products totaling about $130 in value each month.[6] Despite the fact that this dimension represents opportunities for growth with equity the government largely ignores it.[7]

Table3.remittances2.11.2016

Third, the ‘missing middle’ continues to be neglected or addressed with incomplete and inconsistent tools. The informal sector works in saturated and non-competitive markets (it accounts for over 30% of the labor force and 60% of businesses in the country). Therefore, is important to focus on the informal sector through a two-tiered approach, reducing the size of these unipersonal micro-businesses by transferring them into secure and stable jobs through skills and value chain anchors, and second, improving the competitive capacity of small businesses by tackling some of the challenges that prevail: low financial access and no tax incentives, among others.

Towards a New Strategic Approach

In the age of the knowledge economy, a central development challenge for El Salvador is to strengthen the human capital base of their youth and workforce. Education, skills attainment and workforce training are not only precarious but also disconnected from the demands of a competitive labor force in the global economy. Moreover, the labor force feels entirely demotivated to stay in their homeland when there are no means to achieve the material circumstances that can be enjoyed in the modern society.

An innovative development strategy integrating migration, remittances, savings and education can help El Salvador attain greater levels of development and ensure that Salvadorans have opportunities without having to migrate. The approach links migration and development through five unique and innovative components:

• Financial education for remittance recipients,

• Access to credit for small enterprises—especially those in the knowledge economy,

• Promotion of diaspora-driven trade opportunities (the so-called “nostalgia trade”),

• Diaspora funding of education using remittance platforms, and

• After-school programs in areas of high emigration.

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[1] 31.8% of the population lives below the total poverty line of $4/day. For more information, see Working to End Poverty in Latin America and the Caribbean: Workers, Jobs and Wages, World Bank, 2015.  Available at: https://openknowledge.worldbank.org/bitstream/handle/10986/22016/9781464806858.pdf?sequence=4

[2] We estimate that half of this tourism is from Salvadoran migrants returning home to visit.

[3] “Country Profile: El Salvador,” The Observatory of Economic Complexity, MIT. Available at: http://goo.gl/atClP7

[4] “INT encourages countries to diversify exports,” Inter-American Development Bank. Available at: http://goo.gl/HYGTNI

[5] A 2009 study by the Inter-American Dialogue found that 19.6% of Salvadoran migrants in the United States were interested in investing in El Salvador, and the area they were most interested in investing in was housing. As a point of comparison, a 2014 study by Food for Development found that 12.3% of Salvadoran migrants in the United States would be interested in investing in El Salvador over the course of the next five years. Their primary motivation for doing so was “helping their family,” according to survey responses.

[6] A 2014 study by the Inter-American Dialogue found that Salvadoran migrants in the United States spend, on average, $137/month on Salvadoran products. Among the most popular Salvadoran products are cheese, beans and fruit.

[7] Public policy needs to strengthen financial inclusion among remittance recipients, who represent more than one million households and whose stock of informal savings amounts to more than US$700 million. That stock, once formalized, can be mobilized into financing knowledge markets for which there is a demand. In turn, financial inclusion and access to credit can increase the rate of growth through new business opportunities. Meanwhile, expanding nostalgic trade can enhance growth in the productive sector.