Proceso 900
May 3, 2000
ISSN 0259-9864
 
 

INDEX

Editorial        A worn out transition
Politics          The role of the Legislative Assembly in the current period
Economy      The fiscal deficit, tax reform and the renovation of agriculture
 
 
 

EDITORIAL

    The first plenary session of the new Legislative Assembly was a sorry sight, far from what should have been its solemn act of inauguration. After more than seven hours of the session they were hardly able to elect even the first of the three annual rotating presidents. Ciro Zepeda, the first of them was elected by a procedure that left much to be desired from the perspective of democracy and, concretely at a distance from the citizenry to which the deputies say that they represent and serve. It is for this reason that the FMLN refused to vote but did not leave the plenary. In this way, the first act of what was touted to be a period of consensus-building was, in reality an imposition by the force of brute numbers. In fact, the discussion in the plenary had no other meaning than that of protest and of making known publicly that the decision had already been taken.

    So it was that ARENA made possible the election of a Legislative Assembly president who had been removed —fired— from the presidency of the Comptrollers Office by the legislature in 1989. The decision to remove him, authored by Roberto D'Aubuisson, presents incompetence as the reason for his removal. Zepeda could not answer for several millions of colones given to the Comptrollers' Office by a U.S. governmental agency. To his successor fell the lot of filling in the blanks left by Zepeda but the matter is documented in the files of the Comptrollers' Office. It is not simple happenstance that the head of the Christian Democratic faction admitted, shamefacedly, that the composition of the leadership body of the legislative Assembly was the product of dividing up the cake in terms of power and money. Situations such as this would not occur if corrupt functionaries were called to account and civil and penal responsibilities assigned.

    The election of this curious personage in Salvadoran politics was possible because of the alliance between the ARENA party with the National Conciliation Party together with the Christian Democratic Party. The raison d'être of this alliance is to keep the FMLN from occupying the presidency of the legislative Assembly as would normally have been the case, given the fact that they had the greatest number of deputies, according to customary practice in the Legislative Assembly. What was valid three years ago for ARENA turns out not to be valid for the FMLN. The proposal that the FMLN made at that point in time was that the big political parties should rotate as presidents of that body but this was roundly rejected by ARENA. Now it turns out to be a sine qua non of Salvadoran democracy. It is as the Christian Democrats —almost at the end of the last legislative period— introduced a legal initiative in order to revise the internal rules and regulations, which was immediately approved and without further adieu, passed by violating another legislative accord.

    ARENA has won the day for itself, but has also made it clear just how far they will go along with democracy, making evident their small respect for law and, above all, their inability and unwillingness to recognize the power acquired in a legitimate way by the opposition. ARENA was so decidedly committed to keeping the FMLN from occupying the presidency of the Legislative Assembly that it underestimated the impact that this maneuver would have on public opinion which already had a very low opinion not only of this party but also of other political parties. ARENA also did not take into account what this meant in terms of security in a legal sense. ARENA and its allies have made it evident that one of the focal points of judicial insecurity is to be located precisely in the legislative Assembly itself, and this because of its anti-democratic behavior which flies in the face of legally established procedures.

    This behavior confirms the fact that the so called process of democratic transition is worn out. Right-wing politics expressed through ARENA and the other two political parties with which it is allied accept the FMLN as a political party and its participation in the elections; they accept the fact that the FMLN might occupy some secondary public offices and even that it might obtain a growing number of deputies and municipal offices, but not the presidency of a state dependency. In this case it is a question of a presidency with relative power, given that the person who holds it can count on a board of directors, commissions, the plenary, the parties and the presidential veto. What would ARENA's attitude be if it were a question of the presidency of the republic? What happened on May 1 in the Legislative Assembly shows that the transition cannot, in and of itself, go forward, that its pretensions towards democratization did not reach maturity, thereby reducing it to a simple transition in the post-war period. This implies the assumption that any change which democratization as a real process might impose upon El Salvador must effectively break with the right-wing monopoly on power and also submit it to legal considerations.

    While in the Salón Azul of the Legislative Assembly the right-wing deputies speak, paradoxically, of a popular mandate and service to the country, in the news media which opens up so that public opinion might express itself, such discourse is largely rejected. In the news media the frustration and anger of an important social sector is made manifest. Some voices event predict the inevitability of a social conflict, given the right wing's lack of respect for institutionality and democracy and the fatigue and nausea which the politicians of that party evoke. The past is not so far removed from the present that the defenders of the established order would have it.

    The right-wing of ARENA and its allies have placed consensus-building in serious danger —"consensus-building" have being a word which was all the rage during the post-electoral period. While the ARENA delegates converse with the FMLN delegates, ARENA imposes its will. It is more than probable that in order to obtain the votes necessary it will be necessary to make arrangements and agreements unknown to us at present and may even simple buying and selling of votes. This right-wing has very little patience and tolerance for seeking common ground and for ceding positions. At bottom, ARENA does not accept the results of the elections, nor, as a consequence, the loss of the presidency of the legislative Assembly. So it is that it made the worst of itself known: its small regard for legality and its anti-democratic nature.

    The FMLN, for its part, has promised not to join the board of directors until this faux pas of the legislative right-wing is corrected. If, by chance, the revisionist faction of the FMLN had felt tempted by these right-wing offerings, it quickly laid them aside and projected, as few times before, the image of firmness and unity appropriate to a true opposition. Although it is not in the leadership body, but it now has greater moral solvency and perhaps more freedom to become the opposition which El Salvador needs and is waiting for.

POLITICS

    It is a given, at the international as well as the national level, that the process of democratic transition in El Salvador has yielded positive results, in spite of the obstacles it has had to contend with. On few occasions has the UN had such success in a process which it has been accompanying. For this reason, it tends to present the case of El Salvador as an example to be followed, as a model of pacification and the setting in motion of a process of democratic transition. In this respect, El Salvador sets itself radically apart from countries such as Haiti or Peru in which fraud and political violence are the order of the day. The electoral events celebrated in El Salvador after the signing of the Peace Accords have been characterized by an acceptable degree of legality and transparency. In any case, there have not been presented denunciations or evidence of manipulation in the elections in favor of a specific party or grouping. It is important to underline the electoral dimension of the Salvadoran democratization process because, since the signing of the peace accords there has been no systematic attempt to return to the anti-democratic practices of the past, which was characterized precisely by the absence of all decorum at when the popular verdict at the polls was violated..

    Many hide behind the successes mentioned above in order to feed social and political conformism and proclaim the thesis that enough has been done on the question of democratization. All in all, and in spite of what the conformists might think, much is still to be done: starting with a change of certain attitudes which unleash uncontrollable passions which lead to violence —as happened during the recently ended electoral period— and continuing on through the empowerment of the state dependencies and institutions, and up through substantial changes in the mechanisms of political participation —such as the domicile vote— and in the system of proportional representation. Nevertheless, what is essential is the necessary step of an electoral democracy for the consolidation of a democratic regime and its undeniable corollaries such as economic justice, social peace and judicial security.

    It is no secret that the aspects of the Peace Accords relative to these points have not been taken up with any seriousness —nor with any requisite profundity. Still pending is the solution to serious social, economic and cultural problems which affect the greater part of the population. With this backdrop, what is most serious of all is the evident lack of willingness on the part of the government to take up and effectively resolve these problems. This is to say that the government continues to hold tight to an economic model which, far from resolving these problems, actually makes them worse. For all this, the necessity for national consensus-building is spoken of just on these pending problems, while some interpret the results of the last election as a call by the Salvadoran people to the political actors to work in that direction. So then, what can the new Legislative Assembly offer, given the context just outlined?

    The basic function required of the Legislative Assembly by the Constitution is that of legislating (Article 121). This outlining of its function, nevertheless, does not underestimate its competence to take up the discussion of social, economic and cultural topics as well as the question of the security of citizens. The very nature of the topics upon which the Assembly must legislate leads one to think all to the contrary: to facilitate the enjoyment of “the right to life, physical and moral integrity, to freedom and possession...” (Article 2); they oblige the Legislative Assembly to make itself present in the discussion of the most crucial topics of national life.

    Likewise, in a state of affairs such as is currently in effect, characterized, as it is, by the refusal of President Francisco Flores to recognize that the opposition can present topics for discussion on the question of where the country should go —and moreover it can do so in a climate characterized more and more by the need for dialogue and consensus-building—, the Legislative Assembly is called upon to play its role effectively and completely not only in monitoring the executive power, but it also ought to be characterized as constituting a focal point of discussion, criticism and the presentation of proposals, of the most serious problems and challenges which confront El Salvador at the present time. In order to respond effectively to this need, it is imperative that there be a Legislative Assembly with character and personality, capable of proposing topics for the national agenda. This is to say, the new Legislative Assembly ought to be the echo of the citizens most urgent demands and not a mere receptacle of decisions which arise from the Executive Office.

    On this point, the results of the negotiations for the conformation of the leadership body of the Assembly are not very hopeful. The events which marked its inauguration augur three years of combat and sterile discussion which, for all intents and purposes, will not offer much for the good of the country. An example of how difficult this task will be, if it continues the same dynamics, are the difficult points which justifying the struggle for control of the presidency by the Executive Office. It seems to be a fact, if tradition is any indicator, that the major party will preside during the new legislative period. Nevertheless, in a last-minute agreement between the PDC, PCN and ARENA, a reform of the internal regulations of the Legislative Assembly which establish the revolving nature of the presidency during a one-year period. Although a rotating presidency is not negative in and of itself, one must ask what the basic reasons were for arriving at that decision. It is imperative to clarify that according to the internal regulations, the president of the Legislative Assembly has no privilege whatever which would make this a key post which is imperative for the aspirations of a political party: it does not have a double vote, nor does it participate in the formation of the government administration or in the naming of the ministers, as is the case in other countries. So then, what is the struggle for the president of the legislative body finally about, given that the costs of such a struggle are a squandering of political effort together with the construction of an image of intransigence?

    The FMLN, in defense of its “political right” to hold the presidency of the primary state body, makes reference to tradition and previous protocol. For the FMLN members, the majority ought to preside over the Legislative Assembly. To the contrary, if their right to the presidency for the three year legislative period is not recognized, they will not participate in the leadership body. And even more, they give a hint for the future that with this posture the right is setting up a situation of three years of confrontation. How is the FMLN's position to be explained? Beyond the defense of these principles, which are doubtless legitimate, a political reckoning is at play: should the FMLN take up the presidency of the Legislative Assembly —and with it, the possibility of appearing in the official decisions side by side with the presidents of the other state entities— the FMLN will be projecting itself not only as an opposition, but also as part of the “government”. And this, on the level of public image, is very positive for its political interests. To hold the presidency of the first state entity is not only to give us to understand that the FMLN is on the road towards ascending to the Executive Office, but that it has also forgotten the old idea that the left does not have the ability to govern. It is for this that the ARENA leadership body is trying so hard to obstruct the political promotion of the FMLN. This leadership body, which believes as much in image and the superficiality of a few cosmetic changes, is not willing to hand over this opportunity for the left party on a silver platter.

    On the other hand, what has happened to the much touted consensus-building? Is showing a real willingness for dialogue the political image of good losers not compensation enough for the fact that they do not govern the Legislative Assembly? Is it not in the interest of ARENA that the FMLN wear itself out governing the Legislative Assembly through Shafick Handal, whom the ARENA members describe as intolerant and much given to wrath and loss of control? What is happening is that beyond the speeches, there is an undeniable reality: ARENA is not willing to accept any dialogue which lessens the interests of its leaders. That the FMLN might preside over the Legislative Assembly would be favorable for promoting, from the vantage point of the Legislative Assembly the discussion of topics of great national interest which would threaten the economic interests of the ARENA leadership body. And, from this perspective, a profound discussion which questions the basic tenets of the current administration cannot be permitted. What is least wanted is a Legislative Assembly with character and personality which could confront the Executive Office. The opposition to the FMLN's coming to hold the presidency of the legislative body —more than anything else that Shafick Handal might be chosen for the post— is owing to the governing party's fear of having a serious speaker who is clear in his principles and willing to formulate alternative proposals on economic and social questions at the head of it.

    Looking at things this way, it becomes clear that the political parties which worked all night in the Legislative Assembly are not counting on any consensus-building, and even less on a serious discussion of what the country most needs in this current phase of the process of democratization. They show clearly that, when they have sufficient votes, that they are capable of messing things up as they like so that the rules of the game can be used for their own interests in pushing other parties into confrontation and a belligerent attitude.

    Moreover —and what is even more serious— with the brusque and suspicious change in the rules for the choosing of the presidency of the legislative body, the political actors, especially the political right-wing, they do not demonstrate sufficient maturity for accepting the goals of the transition. In denying the FMLN the presidency of the Legislative Assembly, they show their lack of capacity for accepting that the left is a political force which cannot be ignored. And in this sense, those who, perplexed, ask themselves about the possible reaction of the right should the FMLN win the presidential elections of 2004 are right. With this new attitude on the part of the right-wing, one must ask oneself up to what point would they be willing to accept a defeat in the next elections? These questions merit serious reflection and a process of consciousness-raising on the part of the citizenry. To the contrary, the country could be preparing itself for a return to the ways of the past, which have presumably been surpassed.

ECONOMY

    At his inauguration on June 1, 1999, the President of the Republic, Francisco Flores, announced the adoption of a series of measures for reactivating the agricultural and livestock sector and increasing tax collection. As part of these measures, he highlighted the elimination of the tax exempt status for the application of the Value Added Tax (IVA) to agricultural and livestock products, which several agricultural and livestock business groups have been calling for some time now.

    To please these interests, the Legislative Assembly recently approved the elimination of this exemption and included pharmaceutical products as well. Nevertheless, this measure is to be located more within the strategy of combating fiscal deficit than in the context of the reactivation of the agricultural sector because the problems here are much more complex than those generated by the exemption of the application of IVA. Below we explain this proposal, outlining the situation of public finances, the characteristics of the proposals for reforming IVA only recently made known together with the possible social and economic effects.

The public finance situation

    During recent years, public finances have become one of the most evident weaknesses of macroeconomic policy. While prices have been stabilized, the deficit in the balance of payments has been reduced and has remained at a moderate level, and production growth rates have been maintained at a moderate but appreciable level, public finances continue to represent the Achilles' Heel of macro-economics: In 1999 the fiscal deficit moved to levels close to 3% of the GNP after it had been reduced to only 0.1% in 1995.

    What is most questionable is the deepening of the fiscal deficit after important reforms in Salvadoran tax system, the aim of which was to eliminate this phenomenon, obtain resources for the public treasuries and finance development programs. Tax reform included measures such as the elimination of the inheritance tax and the tax on exports, reforming the income tax law, reducing customs duties and the substitution of a stamp tax for IVA. These reforms, it was hoped, would make the tax system more equitable and more efficient. However, in practice, its implications were otherwise, to such a degree that in some cases the reforms provoked inefficiency and regressive taxes. The problem of the fiscal deficit was not resolved because, while new taxes were introduced, existing taxes were eliminated and, with this, the effectiveness of the reforms went by the wayside.

    The elimination of the inheritance tax and the tax as well as the reduction of income tax for corporations translated into an important reduction in tax income and the tax burden of sectors with greater income. For 1990, inheritance tax and tax on exports represented some 12% of the total tax income and, fundamentally, they were paid by persons located in the higher income brackets (i.e., agricultural exporters, industrialists, landholders, real estate enterprises, etc.). The case which shows the most clarity for the objectives of tax reform is the reform of the income tax law, which contemplated reducing by half the rates applied to businesses or corporations in such a way that their taxes went from 50% to 25% for businesses, while sectors located in the low income bracket experienced increases in the withholding of taxes and were even submitted to a tax table with notable failures in its design (Proceso 502) which meant that employees with lower incomes paid higher taxes than those with more income.

    The introduction of IVA was the only way to save the tax reform from total failure because, fortunately, it compensated in a large way for the reduction in tax collection provoked by measures such as those outlined above. In fact, currently, IVA has become the most important tax, given that it represents close to 65% of all tax income. With the introduction of IVA a greater tax burden was saddled onto the shoulders of consumers and opportunities for business people were created —abusing fiscal credit— by avoiding the payment of IVA on their own consumption. In effect, in the first seven years during which IVA was in effect, it became a window of opportunity for the contributors in the register (mostly businesses) who evaded payment of income tax applicable to their own consumption expenses. In this way business people achieved the capacity to solicit fiscal credit for their personal and family consumption by means of which they evaded paying taxes to the government treasury.

    This situation was hardly remedied in 1999 with the introduction of a tax reform law for IVA which limited the extension of fiscal credit for those purchases related exclusively with business economic activities. Nevertheless, this does not obviate the fact that at the current time we find ourselves with a tax system which aims to treat all contributors equally when, in reality, there is a very unequal income distribution. The tendency to concentrate in IVA almost all tax collection seems to continue to be the principal strategy used by economic authorities, to judge by the reforms to the IVA law proposed during recent months, one of which was approved by the Legislative Assembly.

The IVA reforms

    Last April 13, the Legislative Assembly approved the elimination of the exemption from IVA for agricultural, livestock and pharmaceutical products, by means of which they aimed to favor the “reactivation of the agricultural and livestock sector”. Logically, the measure has been received favorably by representatives of agricultural and livestock associations, which have even pressured for assuring that the measure would provoke a very insignificant increase in the value of the basic food basket and which, in turn, would increase production and employment in the agricultural and livestock sector to an appreciable level. According to studies attributed to governmental entities, the cost of the basic food basket would increase only by 1.23% as a result of the application of the 13% IVA tax to the products mentioned therein while, according to representatives of the Chamber of Commerce for Agriculture and Livestock (CAMAGRO), the elimination of the IVA exemptions will protect national products, owing to the fact that imported goods will have to pay IVA and so increase their prices.

    In addition to the approval of the aforementioned reform, another reform, but with greater implications, is at present ready to undergo discussion in the Legislative Assembly. President Flores' proposal, entitled “Simplified Regulations for Small Contributors”, aims to convert small and very small business people with earnings of between 5,000 and 200,000 colones every three months into fiscal “contributors”. For this reason, a fixed rate and additional tax of 10% will be established on the fixed rate which, taken together, would correspond to a species of “simplified” IVA. It is not clear if the small and very small business people will have the right to fiscal credit, but, at any rate, it turns out to be a questionable proposition if taxes are to be extracted from sectors with such a low acquisitive capability.

    Should this measure be implemented, it would tax contributors located in the informal sector with monthly earnings of 1,666.7 colones (or, 5,000 every trimester) and above, which has two notable variations with relation to the characteristics of IVA and income tax: it incorporates business people of the informal sector and also contributors with income less than the limit exempt from income tax (approximately 2770 colones).

Implications

    At this point in time it would seem that the principal objective of the government administration for fiscal reform is not so much the promotion of production and agricultural and livestock jobs, but more the implementation of changes in the tax system which would permit the significant increase of public income, especially by means of greater collections of IVA and in this way would combat the problem of the growing fiscal deficit. It is difficult to foresee what the inflationary impact of the elimination of IVA exemptions will be, especially considering the inveterate practice of the business sector to speculate with prices and the fact, moreover, that business logic presupposes transferring any increase in costs or taxes to the consumer.

    Apart from increasing fiscal income and the inflation rate, the elimination of IVA exemptions would increase the participation of that tax within the total context of tax income, making it even more dependent on IVA income. The positive effects which this measure could have on the agricultural and livestock sector will not benefit peasant sectors which consume their production and will not necessarily change in a significant way the anti-agriculture bias of the macroeconomic policies because, as was mentioned above, the problem of agriculture implies topics which have not been taken up and which are related to customs and tariff policy as well as credit and exchange rate policies, technical assistance, territorial ordering, sustainable administration of natural resources and environmental protection, for example.

    On the other hand, the proposal to “simplify” IVA for the small and very small business people also has an inflationary impact, in this case, on products coming from this sector and which are generally consumed by social groups with lower income. Nevertheless, what is most important is to take into account that this reform could set a precedent for the creation of taxes for the lowest income sectors. To try to tax a very small business person with monthly income (or profits) of 1,666.7 colones implies ignoring the most minimal norms for equity and progressive taxing.

    In spite of the fact that reality shows the tax reform to have failed, it is worrisome to insist so much on preserving the structure which sustains it as in the case of the deepening of the public treasury’s dependence on IVA. New solutions should be sought which necessarily mean moving from the acceptance of the necessity for promoting a progressive tax system and promoting reforms of a different nature from that of IVA such as taxing corporations, customs and tariffs and even the creation of other taxes.