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Proceso 930
December 6, 2000
ISSN 0259-9864

INDEX

Editorial More of the same, but with some advantage
Politics Foreign policy, national security and ideology
Economy Structural obstacles for dolarization
 
 

EDITORIAL

    Caution has followed enthusiasm. The Flores administration presented the so-called monetary integration as if this were the solution to El Salvador’s economic problems—and he even dared to announce that the advantages it will bring with it would be universal and would appear instantaneously. President Flores would have, at long last, found the key to prosperity and wellbeing. But he is perhaps ignorant of the fact that interest rates are of no particular interest in most Salvadoran homes because they are not eligible for credit, nor do they have savings, and that it is not what the exporting sector hoped for. Governmental economists also forgot about the informal sector, which, in spite of carrying out transactions which come to represent considerable volume, the informal sector operates at the edges of their considerations. In fact, the government exercises no control at all over this sector. Apart from the fact that the interest rate level is not related in a direct way to the question of the monetary measure. Perhaps for this reason, in a second and unexpected intervention, President Flores has moderated his enthusiasm and called for caution. Nevertheless, until now, the campaign to win the good will of the population is intense, even when the approval of the legislative bill was already a fact in the Legislative Assembly where ARENA bartered diplomatic immunity for the head of the National Conciliation Party (PCN) in exchange for support on the dolarization measure and the so-called Highway Fund. At any rate, the Flores administration does not tire of repeating the slogan that the measure will protect acquisitive power and the savings of the populace and will also alleviate the heavy burden of debts.

    The novelty of dolarization is more apparent than real, although it will cause unpredictable shakeups in the least protected groups in society and in some sectors of the economy, the impact of which has been passed over by the economists of the Flores administration and their international advisors. Dolarization is formalization of the rate of exchange which has been operative in the Salvadoran economy for some years now by means of currency exchange. With the so-called monetary integration, the fixed exchange rate will become, in practice, definitive—even when the FMLN promises to overturn the measure if elected to office. If everything continues along the same lines, therefore, except that, dollars will circulate as currency instead of colones, the current situation will not exhibit any great transformations with the change of currency. Being basically the same, one could hope for more of the same; but with the illusion that the situation could get better. Politically speaking, gaining time is a very useful exercise for a government cursed by a stagnant economy and growing social unrest; but, from the economic point of view, it ought to find a solution before the illusion disappears, or, invent another in order to buy time until it can begin the necessary social reforms.

    The fall in interest rates, one insisted upon in governmental discourse, is not related to dolarization. Interest rates had already begun to fall quite a lot before the measure was announced—certainly, some businesses obtain relatively low interest rates at the banks. The terms had also begun to broaden, without the need for currency exchange. Said in another way, this will not have any repercussions on the level of interest rates, but coincides, rather, for other reasons, which depend upon the banks themselves. In any case, interest rates will not fall as much as the government would like us to believe and will only be applicable to new loans—although the government engages in imaginary prognostications when it announces that the fall in interest rates will be in the general. The other side of the coin of this predicted fall in rates is that it will also diminish passive rates—that is to say, the interest paid to the person whose savings it is, who will, as a result, receive less money. This sensitive diminution has been sold to us by the government as the price we have to pay to close off the possibility that a future administration might devaluate the colon.

    Dolarization—in the context of fixed exchange rates—exposes El Salvador to external crises such as the rise in the price of petroleum derivatives, the fall in international prices of export products, massive capital flight, the depreciation of the dollar, etc., against which the country is entirely defenseless. Faced with any crisis El Salvador has two equally unfavorable possible solutions: go more deeply into international debt and increase unemployment. Argentina is the mirror into which the El Salvador of Flores might look to see the future it can expect. The person responsible for the Federal Reserve Bank of the United States has already advised that, in case of a crisis, his government will only react to lessen the impact on his own country, without considering what might happen to countries such as El Salvador. This is to say that El Salvador has given up the possibility of having its own currency policy and has opted for assuming that of the United States, but without being part of the United States, and what is even more dangerous, without having any resources or experience.

    The high fiscal deficit, one of the most serious problems of the Salvadoran economy will not diminish with the change of currency, just as it has not changed up until now. Instead of its fiscal deficit diminishing, on the contrary, it is constantly on the rise. The foregoing notwithstanding, one should not ignore the fact that dolarization has some advantages over the situation of the fixed exchange rate, but under no circumstances can these improvements be interpreted as the response to unsustainable underdevelopment in El Salvador. In this sense, dolarization, being more of the same, but with some advantages, is just a recourse to buy time while something occurs which would rescue the national economy and pull it out of its slump. If dolarization were as good as government propaganda assures us it is, why is it that other countries do not adopt it? The measure is based on the hypothesis that, if it does not happen, it will cause more confusion and discontent. And in these matters, it is very easy to be mistaken.

    At this stage of the game, the objective of such a risky measure is anything but clear and the use of euphemisms and half truths does nothing to clear up the matter: it is not a question of monetary integration or a policy of double currency but of simple dolarization. The advantages are not such as the government assures us they are; the Central Reserve Bank is relieved of one of its most important faculties, which is transferred, de facto, to the Central Reserve Bank of the United States. Dollars are not attracted to foreign capital, but are attracted by the possibility of profit, the measure of indebtedness capability and the solvency of the economy. One thing is sure: dolarization is not designed to favor the majority of the poor among the population of El Salvador, as governmental discourse would have us believe. The poor are not at the center of the Salvadoran political economy. They never have been and will not now be, by sleight of hand. The most plausible is that the government of Flores will have turned over the Salvadoran banking system to dolarization which is demanding, in exchange, lower interest rates.

POLITICS

    The altercation between Francisco Flores and Fidel Castro in the course of the Tenth Ibero-American Summit conference should be cause for an analysis of the Salvadoran Government’s foreign policy. And it should stimulate deep thought concerning whether those responsible for national public security are the ideal, capable people to be responsible for such important matters. Such meditation ought, at the same time, look seriously at the stale and hackneyed polarization between the left and right on a national scale.

    On the question of ideological polarization, it is curious to observe the virulence with which the left and the right have gone at each other recently. Beginning with the verbal encounter between the Cuban and Salvadoran presidents, as well as Castro’s declarations which followed soon after on a national television channel concerning the links which Luis Posada Carriles has with El Salvador, the Legislative Assembly has been the theatre in which the most varied and assorted accusations have been hurled and bandied about. Once again it was the scene of all sorts of reproachful accusations about who was responsible for what during the civil war. In this new modality of confrontation between national political actors not a whiff of willingness to move towards national reconciliation was to be seen, though it is much called for.

    The end of the Cold War, the tightening of the bonds between Washington and Peking, or Bill Clinton’s recent visit to Vietnam are still not realities that can be assumed in the national arena here in El Salvador. Here, the ideological susceptibilities of each side have obstructed an objective weighing of the importance for Salvadoran diplomacy of the recent events in Panama and have contributed to the banality which characterizes the height of barbarity and the real significance of declarations by those responsible for public security in the Posada Carriles case.

    The Minister of the Interior, Mario Acosta Oertel, has not sufficiently explained his ignorance of the presence of this individual in the country and the source of the Salvadoran documentation found in his possession. On the other hand, neither has President Flores explained to the nation his knowledge, or lack thereof, on the question of the document which the Cuban leader states that he presented on the activities and ties with anti-Castro groups in El Salvador. Were the persons named by Castro investigated at any point in time? And if so, what were the results of this investigation? These are the questions for which the Flores Administration ought to have a reasonable answer.

    In any case, it turns out to be ridiculous to think that Salvadoran authorities have not been able to identify Posada Carriles after he had lived and worked in the country as an advisor to an ex - President of the Republic during the 1980’s. If such a thing were true, Salvadoran citizens would have serious reasons to distrust the capacity of present day authorities to deal with the topic of public security. Likewise, the assessment according to which the current climate of violence and insecurity which the country is owing experiencing, in large measure, to government incompetence in dealing with both problems might take on a new importance.

    On the other hand, what is the responsibility of the Salvadoran Foreign Ministry on this topic? Before the discussion between the Cuban and Salvadoran presidents which illustrated such an abysmal lack of diplomatic ability, the surprise nature of the proposal to condemn the terrorist violence of the Basque armed grouping ETA was noised about in the hallways of the Ibero-American Summit Conference. It would appear that the Minister of Foreign Relations of our country, Maria Eugenia de Avilés was ignorant of the manner in which proposals ought to be made in this kind of meeting because the procedure involves advising the representatives of the participating countries and engaging in a species of lobbying on the acceptability of the proposals. The Cuban delegation denounced the exclusive nature of the proposal—exclusive because it did not take into account terrorist acts which Cuba or other countries have suffered. Thus, the Cuban government proposed a new text, which would take into account a general and inclusive definition of terrorism.

    The reasons for which neither party reached an agreement of any kind should be clarified. In any case, it turns out to be a curious state of affairs in which the Salvadoran government—which, in voting in the United Nations against the U.S. blockade of Cuba, abstained, according to Avilés, because it considered the UN an inadequate forum for dealing with the topic of a commercial embargo by one country against another. And so it chose the Ibero-American Summit Conference, dedicated to the question of children’s rights, in order to make a proposal to condemn terrorism. What could the motivating factors contemplated by the Salvadoran Foreign Ministry have been in making this determination? Was it simply a petition by the José María Aznar administration, the product of a meeting days before the Summit Conference held with the Salvadoran president? What, precisely, are the lines followed by the current government administration of El Salvador on foreign policy questions?

    On the question of the objectives of Salvadoran foreign policy, the head of the Foreign Relations Ministry of the Republic of El Salvador tends to have recourse to the “Alliances” and the Constitution in responding to questions. The vision of what ought to be foreign policy, in the judgment of the functionary, is to be found in a document entitled “Concerning the Principles of Foreign Relations Policy of, with and for Salvadorans”. According to the said document, “the foreign relations policy of El Salvador ought to be built on the bases of aspirations, necessities and specific demands of the Nation gathered as consistent and integrating expressions of what could be called national interest, interpreted and set down in a governmental program which seeks to convert the administration of international policy into the harmonizing and fomenting of this national interest”. These foreign policy objectives might explain the decisions to establish diplomatic relations or not establish them with specific states. On the other hand, the document tells us that foreign policy is made in conformity with the Political Constitution of El Salvador and places the human person at the center of foreign policy. Supported by this text, the Minister would reject the criticism according to which the current government has no concrete vision of foreign relations policy.

    Given the foregoing, one must refer to this document in order to understand the reasons for the recent acts of the Salvadoran government at the Ibero-American Summit Meeting, its attitude towards the question of the embargo against Cuba and its position on the Palestinian-Israeli conflict. Apart from this, what is not to be found in the document is how to remedy the inexperience and lack of diplomatic tact on the part of those responsible for foreign relations policy.

    At the same time, the significance of the phrase “in the interest of the Salvadoran people” or national interest, is not clear. The authorities of the Foreign Relations Ministry seem to confuse national interest with the act of obtaining a few more dollars or stimulating foreign investment in the country. This would explain their unconditional adherence to Taiwan or the establishing of a Salvadoran Embassy in Jerusalem.

    If it is true that the country needs foreign investment and must consolidate its relation with countries which might make an offering in this sense, the foreign relations policy cannot be limited to this alone. Salvadorans, through their government, can and ought to offer solidarity to other marginalized peoples from the vantage point of their poverty, their dignity and their own cultural riches. Foreign relations policy cannot be conceived of only in function of asking for favors from powerful nations. The image of a poor country with its hat in hand offered up by Salvadoran authorities in their behavior and discourse on the topic of foreign relations policy is not a genuine manifestation of national interest.

    Moreover, it turns out to be as absurd as it is inefficient to conceive of international relations according to a tired and hackneyed ideological vision of the world. But there is quite a lot of this in the current foreign policy of the Salvadoran government. It was this, apparently, in the last analysis, which provided the motive for the incident with Cuba, as well as the tolerance of the Salvadoran government for the anti-Castro Posada Carriles and his dancing in and out of our country free as a breeze. There is still much more to be dealt with when it comes to this topic. The Attorney General of the Republic, so anxious for a judicial victory these days, ought to take the matter in hand.
G
 

ECONOMY

    The discussion concerning dolarization in Latin America is not new, but very few countries have dared to adopt this measure, with the exception of Panama and Ecuador, although both because of very particular and distinct reasons. Any country which plans to dolarize its economy ought to take into consideration that it ought to have two final, fundamental objectives: to eliminate strong centralized sources of inflation and reduce the risk to the country by means of eliminating the risk of devaluation. In El Salvador, the exchange rate is not the focus of inflation and, moreover, neither does it present a greater risk of devaluation if we consider that it has maintained the rate of 8.72 colones per dollar for almost eight years. So then, anyone might ask, what is the reason for dolarizing the Salvadoran economy?

    The answer is not to be found only in economic terms because, in reality, the decision to dolarize has a strong political component. Behind the measure there exist economic groupings (especially of the bank) for whom the reduction in the capacity of state intervention in the economic sphere is very appetizing and dolarization would imply the elimination of the authority of the Central Reserve Bank (BCR) in order to exercise its monetary policy. In other words, the objective is to carry to the extreme the discussion between state and market in order to pose—even in the face of the evidence—that the financial markets ought to operate without any intervention. Doubtless this proposal is open to discussion given the structural weaknesses which the national economy present in various spheres and which, finally, might locate the country in a very compromising financial situation.

    There exist at least three structural obstacles which would be worthwhile to consider, given the public finances deficit, a volatile and not very competitive economy, and the existence of strong distortions in the structure of credit which would weaken the capacity for productive investment. It is public knowledge that the tax reform developed by the ARENA administrations has not succeeded in overcoming its leaning towards the fiscal deficit and during recent years the deficit has increased up to close to 3% of the GNP. Owing to the fact that dolarization would eliminate the Central Reserve Bank—the Government’s own, preferred loan broker—El Salvador would remain at the full discretion of what the creditors decide (to finance or not to finance the fiscal deficit), unless one could count on a strong, efficiently regulated and highly capitalized financial system. Unfortunately, the available evidence shows that the financial system has experienced an increase in its default portfolio, a fall in profits (which has even led to numerous “strategic” fusions of banks) and different cases of fraud or poor administration (as in the cases of FINSEPRO, CREDISA, CREDICLUB), which show that the Salvadoran financial system is not as strong or solvent so to be able to confront the process of dolarization.

    Neither does the national economy present a graphic illustration which would suggest the pertinence of dolarization. The Salvadoran productive apparatus is far from being competitive and, rather, what springs up to be noticed is, on the one hand, the scarce diversification of exports which depend, fundamentally, on traditional exports and of the net exports of the maquilas (runaway shops); and, on the other, a stagnation of industrial activity which has not permitted greater diversification of the exports of the sector. Owing to the foregoing, the income in dollars (upon which even internal transactions would depend) are not guaranteed, first of all because international prices of exports show strong tendencies as falling; secondly, because the net maquila exports are volatile in the measure that other neighboring countries also compete to receive the investments of the maquila; and, a third point is because the industrial sector is not of much help in the generation of exports or for obtaining dollars.

    With the entering into effect of the dolarization or 2monetary integration”, the situation may be seen as experiencing additional aggravation because of strategic interaction with other countries in the area—for example, if Honduras or Guatemala devalue their currency, their exports will be more competitive than Salvadoran exports, their salaries in dollars will be less and, in general, the costs of investing in those countries will also be less. Given this, the government of Francisco Flores would be defenseless because it could not devaluate in order to compensate for the shares of its neighbors or adopt any other monetary policy. The only element which could offer a certain stability to the national economy is the growing influx of productive investment resulting from the particular credit practices of each bank. During recent years, there has existed a marked tendency towards financing urban service activities (construction, commerce, services, hotels) and to reduce the percentage of credits earmarked for financing of industrial, agricultural and livestock activities.

    As one can see, there are huge obstacles in the way of the dolarization of our country and the only weighty element in favor of its adoption seems to be the supposed reduction of interest rates which are reported with the elimination (or reduction) of risk factors. In fact, it is around this very topic that the president’s speeches revolve, given that for him the reduction of interest rates would come to alleviate the stress on the family economy in diverse sectors, as well as open up opportunities for financing for productive activities.

    Unfortunately, it is not so sure and true that the risk might be the greater determining factor on the question of interest rates in El Salvador. As has already been pointed out, the exchange rate has been stable, for eight years’ time; this means that, in practice, dolarization should seek to maintain the exchange rate at a fixed rate and, therefore, lessen the possibilities for devaluation. Even so, and at the criteria of the bankers, the situation would still be such a high risk that it would justify maintaining excessively high interest rates. Dolarization does not bring with it greater changes in terms of risk, because the exchange rate is being maintained practically at the same level of stability as before. So then, is it pertinent to ask why the banks are going to renounce charging high interest rates? Certainly not in this decade have bankers ever been exposed to devaluations and dolarization does not, therefore, eliminate practically any tangible risk.

    The negative consequences, on the other hand, are much clearer: in dolarizing the economy there the monetary instruments for facing external shocks would no longer exist, and the government, therefore, would not able to apply anti-cyclical policies in case of economic recession or deceleration. The Central Reserve Bank will not be able to carry out operations in the open market, nor will it be able to regulate credit or legal bonds in order to arrest inflationary tendencies or economic contraction.

    In this context, it is clear that before dolarization is implemented, it is necessary to attend, as soon as possible, four problematic areas: the strengthening of public finances in order to eliminate the fiscal deficit; being able to count on a solid financial system which is efficiently regulated; eliminating distortions in the assignment of credits; and, finally, creating conditions in order to create a more competitive economy. The government seems to have confused the prerequisites with the effects and aims to dolarize without even complying with the elemental conditions for it. This breakdown could lead the country into a very vulnerable position when it comes to international economic crises or even regional crises without even guaranteeing an effective reduction in interest rates, as the government cheerfully supposes. In fact, some private banks announced that their active rates could already be going down, but by the middle of the next year; while the only matter which goes forward—according to them—is the reduction of the rates paid on deposits. But if this were not all, the reduction of active rates by the state bank so much touted by President Flores does not have any great importance because it does not account for even 6% of the total bank deposits.