Situation and Cooperation

Since the end of the civil war in 1992, El Salvador has been under­going a process of democratisation. Nonetheless, the country remains politically and socially deeply divided. The two main parties, the conservative ARENA – formerly the party of the armed forces – and the leftist FMLN – formerly the party of the guerrilla movement – are rooted in the respective traditions of the erstwhile adversaries in the civil war. The parliamentary and presidential elections of January and March 2009 led to the first democratic change of government since 1992. Mauricio Funes, the country's first-ever FMLN president, has been in office since June 2009. The party does have a relative parliamentary majority. However, for many reform projects the president is dependent on support from the opposition.

The government's declared priorities include improving basic public services in the housing, nutrition, health and education sectors. There are plans to improve infrastructure, expand social housing construction and establish a universal social protection system.

Economic development

Following years of continuous economic growth, El Salvador was badly hit by the global economic and financial crisis of 2008. In 2009 gross domestic product (GDP) fell by 3.5 per cent. In El Salvador the global financial crisis was compounded by the im­pacts of Hurricane Ida, which wreaked devastation in Novem­ber 2009. Clearing up the damage caused by the hurricane swal­lowed up half the funds that had actually been earmarked to boost the economy, balance the budget and reduce poverty.

Figures for 2010 indicated only a slight economic recovery, and experts anticipate only moderate growth in 2011. Declining export earnings, reduced tax revenues and high public in­deb­ted­ness are accompanied by extensive expenditure on state sub­si­dies and welfare programmes. The Salvadorian economy is also heavily dependent on developments in the USA, which is currently undergoing an economic crisis. In 2001 the US dollar replaced the colon as the official currency of El Salvador.

To reduce un­der­em­ploy­ment, in­crease tax rev­e­nues and at the same time meet the challenges created by pop­u­la­tion growth, 100,000 jobs would need to be created in El Sal­va­dor every year. Investors, however, are deterred by the high rate of violent crime, legal uncertainty, corruption and red tape.

El Salvador has few mineral resources to speak of and only a small – and narrow – industrial base. Up until 2005 the textiles industry dominated the economy, but since the WTO Agreement on Textiles and Clothing expired, the sector has come under massive pressure both from Asian competitors and as a result of the global economic crisis. The key agricultural export is coffee.

Economic growth in recent years has been based principally on consumer spending. This in turn depends heavily upon re­mit­tan­ces made by the almost three million Salvadorian citizens living abroad – most of them in the USA. In 2010 these re­mit­tances amounted to around 3.5 billion US dollars, which was equivalent to approximately 16 per cent of gross domestic product.

El Salvador is a member of the Central American Integration System (Spanish: Sistema de la Integración Centroamericana – SICA), and has entered into free trade agreements with key export partners such as the USA. An association agreement between the European Union and six Central American states, including El Salvador, was signed in May 2010. This agreement also includes free trade components. It has yet to be ratified, however.

Education and training deficits weaken the labour market

Despite relatively favourable economic conditions, the situation on El Salvador’s labour market remains problematic. The official unemployment rate in 2008 stood at roughly 6 per cent. If the numbers of those either underemployed or employed in the informal sector are also included in the figures, then the rate of unemployment can be assumed to be almost 50 per cent. Many Salvadorian businesses lack international competitiveness because their workforces are not sufficiently well trained. As a result they cannot meet quality standards, and there is a lack of innovation. Well trained employees often emigrate abroad, whereas foreign investors usually bring their own qualified staff to the country.

El Salvador's school and university systems have a considerable way to go to match the standards set in other Latin American countries. Despite major reform efforts undertaken by the government, primary and secondary school education still display major deficits. The illiteracy rate is 16 per cent. While a few private universities have achieved international standards, access to them is severely restricted by study fees and entrance examinations. This leaves the majority of the population unable to take advantage of higher education opportunities. The government has set itself the goal of reforming the education system by 2021.

Extreme social inequality

The wide disparities within Salvadorian society continue to exist. Although poverty has been halved since the early 1990s, according to World Bank figures published in 2008 some 5 per cent of the population still has to survive on less than 1.25 US dollars a day, and 15 per cent on less than two US dollars a day. Many families depend for their livelihood on remittances transferred by relatives living and working abroad. Since 2008, however, these have declined in the wake of the global economic and financial crisis. At the same time prices for staple foods and fuel have risen dramatically.

El Salvador ranks 90th out of 169 countries on the Human Development Index (HDI 2010). Large numbers of Salvadorians lack access to medical care, clean drinking water and adequate housing, especially in rural regions. Life in these areas is usually based on subsistence agriculture in which productivity is low. The problem of inequitable land distribution that favours a small number of large landowners also remains unresolved. In urban zones a lack of prospects and jobs, especially among young people, is leading to an increase in criminal activity and social tensions.

Obstacles to development

Crime and legal uncertainty pose a hindrance to social, economic and political development. El Salvador is a country with one of the highest crime rates in the world. The high level of violence in El Salvador's society suggests that many of the root causes of con­flict within society are still unresolved even though the civil war has ended. Young people frequently fall in with gangs of youths (maras), which are held responsible, among other things, for a dramatic increase in criminal offences involving blackmail and in drug-related crime. The deportation by the United States of juve­nile offenders of Salvadorian origin, and the growing pres­ence of international drug cartels, are exacerbating these problems.

Environmental pollution poses a further obstacle to development. The lack of proper waste disposal systems has resulted in con­tam­i­na­tion of El Salvador's air, soil and groundwater. Compared to its neighbours, El Salvador also has relatively little land under forest cover. If we also include coffee trees, then around 16 per cent of the country is forested. Natural forest accounts for just 2 per cent of the country's surface area. This situation has been caused by forest clearance on a massive scale, both to supply land for the country's extensive arable and stock farming and as a result of the high population growth rates. In 2001 the govern­ment introduced tough environmental legislation to tackle the problem, although it is proving difficult to enforce.

Development potential

The political and economic stability, growing regional integration, in­fra­struc­tural im­provements and a comparatively robust financial sector can be seen as signs of development potential in El Salvador. The country has achieved the highest level of industrial development in Central America. It could reduce its vulnerability to falling world coffee prices by diversifying its agriculture. El Salvador is a young and populous country. This potential could be harnessed even more effectively in the future by broadening access to education and improving the quality of vocational training.

With regard to social policy, the Salvadorian government has made a public commitment to placing a stronger focus on poverty and has thus given the issue greater weight in the context of policy debate. However, even more determined and far-reaching measures are required if a lasting impact is to be made on the country's social inequalities.

The major challenges include reducing public indebtedness, an issue that is also being raised increasingly by Salvadorian civil society. Since the tax rate is currently only around approximately 13 per cent, the government is planning a comprehensive fiscal reform in order to increase public revenues. The President's initiative, however, is meeting with strong resistance from the private sector. Under the International Tax Compact initiative launched by the German government, 5 million euros was pledged to El Salvador in 2009 for fiscal policy advisory services.

Priority areas of German development cooperation with El Salvador

At government negotiations held in 2008, Germany's de­vel­op­ment cooperation with El Salvador was directed specifically at cross-border and regional cooperative efforts. In the future most of these measures will be implemented through the Central American Integration System (SICA), whose headquarters are located in El Salvador. Only a small number of new bilateral pro­jects will now be launched; these, however, will be linked to regional or global development cooperation programmes to protect global goods (such as climate and environmental pro­tec­tion, or good governance).

One regional focus of German engagement is the environmental sector. El Salvador became one of the first countries to participate in the German government's Initiative for Climate and En­vi­ron­men­tal Protection (IKLU) when it received a corresponding loan pledge of 19.5 million euros in 2008. These funds will be used in El Salvador to refinance environmental investments, particularly by small and medium-sized enterprises (SMEs), and small renewable energy projects.

A total of 20 million euros has so far been pledged for a new regional project in the border region of Trifinio (where El Salvador, Honduras and Guatemala share common borders) involving forest protection and the conservation of mainly Salvadoran water resources. El Salvador is also involved in a regional forest protection project for the whole of Central America (REDD).

The "4E" regional programme to promote renewable energies and energy efficiency, which Germany has so far supported to the tune of 5 million euros (and which is also benefitting Costa Rica and Honduras as well as El Salvador), has already delivered impressive results. This is considered a showcase project of German development cooperation in El Salvador, where it has met with great public interest.

During a visit to El Salvador by Development Minister Dirk Niebel in October 2010, a loan of 15 million euros was also granted for modernisation of the waste management system. This will involve the construction of new landfills and the rehabilitation of existing ones. Germany is thus helping solve a further pressing en­vi­ron­men­tal problem in El Salvador.

In addition, El Salvador is becoming involved in regional projects for HIV/AIDS control, regional planning and sustainable economic development. A major regional project to prevent youth violence has also been implemented jointly with Guatemala and Honduras since 2009.

For 2008 and 2009 respectively, El Salvador was granted debt swaps of 10 million euros. The funds made available through debt conversion for 2008 are being used to promote infrastructure measures for basic services (education, health, water supply and sanitation, power supply) in the 32 poorest municipalities in the country. No final decision has yet been taken on how the funds emerging from the debt conversion for 2009 will be used.

Decentralisation and community development

In light of its substantial experience with federal structures, Ger­many has agreed with many of its partner countries to provide support in the field of decentralisation and municipal de­vel­op­ment, and this is the case with El Salvador. Here, the primary ob­jective is to improve local project planning and implementation, and promote transparent and participatory governance at local level.

In 1990, the government of El Salvador launched the Social In­vest­ment Fund for Local Development (Fondo de Inversión Social para el Desarrollo Local, FISDL), which promotes development in the country by funding local infrastructure projects such as water/electricity supply systems and road-building. Services for the poor rural population are also provided through the Fund. Responsibility for planning and implementing the FISDL projects is to be transferred to the municipalities as part of the de­cen­tra­li­sa­tion process.

German development cooperation will continue to advise El Sal­va­dor on decentralisation until the end of 2011. One way it will do this is through the Advisory Services to Communal De­vel­op­ment and Decentralisation programme (Programa de Asesoramiento en el Fomento Municipal y la Descentralización, PROMUDE). The aim of this programme is to support the development of municipal management capacities and promote dialogue on policy between the national institutions and the municipalities. It is already evi­dent that the PROMUDE programme has strengthened municipal administrative structures significantly.

Young people make up the majority of the population – the average age in El Salvador is 21. Their active involvement in local development is to be achieved by building youth networks and including them to a greater extent in decision-making within the municipalities. More leisure activities will also be provided for young people, with Salvadorian-German cooperation focusing on municipalities in the La Paz region. The experience gained in this context feeds into policy dialogue at national level, thus im­prov­ing broader conditions country-wide for a successful policy of decentralisation.

Sustainable economic development

Within this priority area the income and employment situation of economically disadvantaged groups, especially women and young people, is being improved. The measures target the economically weak region of La Paz in particular. In future, the youth de­vel­op­ment component will be expanded as part of Technical Co­op­er­a­tion and then carried over into the regional programme on prevention of youth violence.

The government has recognised the important role played by micro, small and medium-sized enterprises (MSMEs) in El Sal­va­dor's economic growth. Germany is supporting measures to develop this sector, such as the establishment of a market in business services for MSMEs, vocational training, and en­vi­ron­mental protection in industry.

Publicly assisted housing construction

The housing sit­u­a­tion in El Salvador is dif­fi­cult: many people live in shacks made from cardboard, plastic sheeting or cor­ru­gated iron. An earthquake in 2001, Tropical Storm Stan in October 2005 and Hurricane Ida in November 2009 further ex­ac­er­bated the housing shortage. For reasons of cost, homes are often built in hazardous locations, leaving them vulnerable to natural disasters such as landslides or floods. Despite con­sid­er­able reconstruction efforts roughly half a million homes are still needed. In addition, there is frequently no infrastructure in place for drinking water or sanitation facilities.

German development cooperation is assisting El Salvador with the construction and reconstruction of housing and with land use planning, for instance through the Participatory Spatial Planning for the La Paz Region Programme (Programa Planificación Territo­rial Participativa para la Région de la Paz, PROA). Slum rehabili­ta­tion in the country’s cities is also a major area of activity. This includes measures to improve the local infrastructure and environmental conditions, reinforce social cohesion and reduce youth criminality, as well as addressing gender-related issues. Prior to government negotiations in 2008 it had already been decided that cooperation in this priority area should come to an end in 2011.