SAN SALVADOR, El Salvador -- When it adopted the U.S. dollar as its currency four years ago, this tiny nation took another step toward having the most trade- and investment-friendly economy in Latin America. It is still waiting for the payoff.
While promoting stability, the dollar did not attract the foreign investment expected. With the economy in stagnation, a totally unexpected kind of dollar is keeping things afloat: the $2.6 billion per year in remittances sent home by Salvadorans working in the U.S.
"There's money here, sure, but for people who have families up there," said Maria Mendoza, 45, a traveling saleswoman.
Now, as El Salvador and its neighbors prepare for their next plunge into the free-market economy--adoption of the Central American Free Trade Agreement with the U.S.--a period of economic woes and challenges has raised new questions about the promises of that path.
The trade agreement, called CAFTA, was signed last year by Bush administration officials after being negotiated with El Salvador, Guatemala, Honduras, Nicaragua, Costa Rica and the Dominican Republic. U.S. lawmakers plan to begin hearings soon in preparation for a ratification vote this spring.
Proponents say CAFTA will create jobs and investment by eliminating trade barriers. Opponents charge that it will drive down labor standards and hurt farmers, and they are vowing a fight similar to the one that unsuccessfully opposed the North American Free Trade Agreement in 1994.
Last week, a protester died in clashes with police in Guatemala after that country ratified the treaty. Guatemalan President Oscar Berger dismissed the protesters as ill-informed vandals.
"When they receive the dollars [from CAFTA trade], I want to see if there are demonstrations," Berger said.
The CAFTA decision also is a symbolic showdown for the United States.
A decade ago, much of Central America turned toward U.S.-backed market economies as the region's civil wars ended. They were wars on which the U.S. had spent billions of dollars to combat the spread of communism.
Turning left
Today, much of Latin America is turning away from strict "Washington consensus" economic models and toward left-leaning leaders who promise to address social problems and the region's stubborn poverty. The swearing-in this month of Uruguay's president, Tabare Vazquez, a physician with a socialist background, was the latest evidence of that.
In contrast, El Salvador continues to be the most loyal U.S. ally and pupil. Its pro-business ruling party, the National Republican Alliance, has spent 15 years doggedly liberalizing the economy, and it is the only other country in the hemisphere to still maintain troops in Iraq.
But while some say the country has made impressive strides since its 1980-92 civil war, El Salvador's attempt to convert from mainly a coffee grower to a broader exporting country has not solved its problems. In fact, some believe that a parallel reduction in government services has fueled poverty and the nation's horrific violence among youth gangs.
By one estimate, the nation of 6.5 million has the 12th most open economy in the world, but it mostly stopped growing in the late 1990s. In 2003, 43 percent of Salvadorans were living in poverty, 19 percent in extreme poverty. The government says those numbers have dipped, but economists say that is due almost entirely to money sent back by Salvadorans working abroad.
Alarmingly, UN experts say the divide between El Salvador's rich and poor is worse than it was at the end of the civil war. The top 20 percent of the population controls 58 percent of the wealth; the bottom 20 percent controls 2.4 percent.
And experts predict that the recent lifting of quotas in the global textile market will allow China and India to displace countries such as El Salvador and Honduras as sources of cheap labor. Last year, El Salvador lost at least 8,000 of its 90,000 jobs in factories that stitch together patterns for the Gap, Liz Claiborne and other U.S. brands.
"This country needs a change of direction," said William Pleitez, a Salvadoran economist who heads the UN Development Program office in El Salvador.
Last year, Pleitez said, the country had the second-slowest growing economy in the Western Hemisphere, topping only Haiti. It is a stark contrast with a decade ago, when the clothing factories were opening and El Salvador was second in growth only to Chile.
Now, aside from an uptick in agriculture last year, the remittances represent the only real economic growth. Most of that money is spent on food and clothing, and economists say the country must find a way to keep the profits from being taken out of the country by international companies.
"Immigration today [and the money sent back] is so much more important to the economy than coffee was 30 years ago," Pleitez said.
`Globalization from below'
"While the government has insisted for the last 15 years on pushing globalization from above--led by exports and the attraction of foreign investment--there has been a process of globalization from below--led by immigration--that has changed the national reality in a much more radical way," Pleitez said.
El Salvador President Tony Saca and his aides blame the stagnation on two earthquakes in 2001, sunken coffee prices in previous years, the recent global recession and a contentious political climate marred by lingering wartime divisions.
Analysts say the business class is tiring of the lack of results. They note that Saca's year-old government has broken with its more hard-line predecessors by raising taxes, introducing an anti-poverty program and relaunching a national development plan.
In an interview, Saca predicted that CAFTA would help El Salvador begin to see a turnaround in its economy by 2006.
"I don't see another opportunity this big to help the region," he said.
After Panama and Ecuador, El Salvador became the third dollarized nation in Latin America when then-President Francisco Flores Perez hustled the idea through the Legislative Assembly in late 2000 in an effort to stabilize and stimulate the hobbling economy.
Many believe dollarization lowered interest rates, which made credit more accessible to business executives and homeowners. It also prevented a currency devaluation after the 2001 earthquakes.
More worrisome to many, however, is the harm the strength of the dollar has done to exporters. At least until the dollar's recent slip in value, it made Salvadoran products more costly, as well as the price of Salvadoran labor compared with its neighbors.
Meanwhile, Salvadorans discovered that other factors--such as the gang violence--may have offset the dollar's stabilizing effect in the eyes of investors, said Roberto Rubio, executive director of the private National Development Foundation.
"The positive effects of the dollar were very limited, while the negatives flourished," Rubio said. "This scheme of growth has not worked."
