No. E 53 a RESTRICTED is report is restricted to use within the Bank 66960 FILE Copy INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT ON THE ECONOMY OF EL SALVADOR July 8, 1949 Economic Department Prepared by Albert Waterston tABLE OF CONTENTS ~sieStatistics •••••••• ~ ••• ,................. i I,. Summat%..................... ~ ••• ~ •••• " ••• ~ •• ~ ••• ~ ~ 11 1 II. Ge,neraJ. •.••••••••••••••••••••••••••••••••••• ~ • • 1 23 A. Geography, Topography and Climate ~ ••••• ~ •• 1 23 B. Population ••••••••••••••••••••••••••••••• ~ 2 29 C. Living Standards, National Product & Income 5 37 D. Government and Political.Struoture •••••• ~. 10 46 III. Qr~anization of Produ~ •••••••••••••••••••• 13 53 A. Agricultural Production ••••••••••.•••••••• 14 57 B. Mining ••••••• ~ •••••••••••• ~ • : ••• t • • • • • • • • t, 25 91 C. Industrial Production •••••••.•..•••••••••• 25 93 D. Transportation ••••••••••••••• ~ •••••••••••• 29 107- - Internal Finance •••••••••••••••••••••••••••••,. 31 ' , ' 110 A. The Budget • ~ ••• ., It • • • 4' • • • • • • • • • • ~ • • • • • • • • •• .31 III B. The Salvadorean Revenue System ••••••••••••• 34 119 C. The Pattern of Expenditures •••••• ~ ••••••• _ 40 136 D. Public Debt ••••••••••••••••••••••••••••••• 43 143 E. Banking and Credit System .. ~ •••••••••••••• 45 149 F ~ Money and Prices •••••••••••..••••.•....••• 51 169 G. l~ages ••• ., ••••••••••••••• ~ ••• ~ ••••••••• ~. • •• 5.3 l72B v. International Trade and Finance ••••••••••••••• 55 --..,. 1 _ ~ .... ; ! ,. . 173 A_ Foreign Trade ".e._ . . . . . . . . . . . . . . . . . . . . . .- ....., . . . . . 55 173 B. Terms of Trade,. •••••••••••••••••••••• '••••• 58 181 C. Commercial Policy •••••••••••••••••••••••••• 58 182 D. Ba lance of Payments •••••••••••••• , ••••,.... 59 184 193 El Salvador - Growth of population~ .•.••• El Salvador's Fourteen Departments •••••• 10 Resources of El Salvador •••••.••••• ~ •••• 14 Highways of El Salvador ••••••••••••••••• 29 Railroads of El Salvador •••••••••••••••• 30 Continued next page ••••• Table of Captents - continued St~istical Appendi~ TABLE I. Growth of Population TABLE II. National Income in 1946 TABLE III. Average Annual Coffee Prices TABLE IV. Gross National Product, Government Budgets and 1tJholesale Prices TABLE V. Taxes on Exports TABLE VI. Tax Receipts and Gross National Product TABLE VII. Government Expenditures Compared with National Product TABLE VIII. Government Gross Capital Formation TABLE IX. Money Supply and its Composition TABLE X. Money Supply by Origin TABLE XI. Price Indexes TABLE XII. Indexes of Coffee Prices and Exports Compared to Imports TABLE XIII. Total Exports and Imports TABLE XIV. Indexes of Terms of Trade TABLE XV .. Balance of Payments, 1938 and 1946 TABLE XVI. Gold and Foreign Exchange Reserves • i EL SALVADOR bASIC ST1:£ETICS Area Total 9,000 square miles Cultivable 5,000 square mUes • - population ,; . Total (1949) 2,250,000 Number per square mile 250 Annual browth (1939-1948) 2.2 percent Currency unit: -'T' p Colon (sign ¢) ~~change.rate (since 1934): 2.50 colones = US~~l External Trade (1948) Exports :)4!~.9 million Imports 41.4 million Balan,;::e of Paym~~ (1947): Current account ,)2.8 million Capital account - 1.9 million Surplus 1 0.9 lJIillion Fore.=i:~!!.~~serves (April, 1949) Gold ",11.j..4 million Foreign exchange (99;:; dollars) 26.4 million Total ~,,40. 8 million Short-term Assets in U.S. (.Jeceli!ber, 1948) $7.6' m;Ulion ~'''''~'-~-''''''''''-'' f • public Finance in 1948 - Receipts ~:i26.6 million Expenditures 25.5 million Public .0ebt (entirely external) 12.9 million Prices (1937 ; 100) 1942 1945 1948 Latest Retail, food ~ I'71T 2r.;- 182 (jan. '49) ""holesale 89 152 239 260 (Dec. '48) Per Capi ta Nati.?~l Income ,in 19L.7 ii I. ;;UlJbAHY 1. The Republic of El :::.alvador is the smallest of tile states in Central .. America. The number of people in the country has been increasing phenomenally, and the densit,y of the population (estimated at 250 per square nale) is exceeded • among the other Latin American Republics only in Haiti. Almost all cuI Uvable land is nOVl being utilized and the pressure of the expanding population on limi ted natural resources has become El ~;alvador' s most pressinC; problem. 2. The vast majority of ;,)alvadoreans depend on agriculture for a l~L\feli- hood and a large part of the population is more or less self-subsisting and au tside the monetary sphere. There is a considerable gap betl'reen the fevl vrll0 are rich and the many 111110 are poor. In 19U.6, 5,:' of the YTell-to-do Salvadorean families accounted for )6% of the gross national product of~.a 71~, million, while 90>~ of the families took only 56i;. The political and social difficulties which have confronted the country from time to time durin!:; the last two decades have their roots in the low standards 01' living of Lost of the population and in the absence of a stabilizing middle income group. 3. El Salvador has been ruled by a hevolutionary Junta since Jecerr,l"'er 1948, when the ar~ overthrew the Castaneda Administration. A neVi constitution is being drafted to replace the one abrogated by the Junta and a Constituent, Assembly is to be elected in the next few raonths to Hmch the new constitution, as well as all the decrees issued by the Junta, are to be submitted for • approval. 4. The ~~alvadorean econonw is based primarily on the production of coffee, "which is by far the principal crop and export of the country. Coffee normally accounts for more than 80,) of the exports of El [:;alvador ~hich ranks iii third after Brazil and Colombia as a coffee exporter. Except for Cuba (sugar) and Venezuela (petroleum), no other Latin American country is so dependent on the export of a sinGle product. other export crops include sugar, rice, cotton, henequen, and sesame and peanuts. The most important food crops are corn and beans. 5. 'Food is the principal source of fuel in EI Salvador, but systematic d deforestation of the countryls woodlanooover the centuries has considerably depleted timber resources. Gold audsilver, 'l/Ihich usually occur in con- junction in El Salvador, are the only tno minerals extracted cOTJmerciallY:I although surveys have ~ndicated that other minerals exist. 6., El ,':alvador I s manufacturing industries Lire small, the most impor- tant ones producing consumer goods typical of '-U:t1derdeveloped- coun tri..:;s. cotton textiles, beverages, vegetable Oils, sugar production, henequen bags, cigarettes, leather product0 and furniture are some of the more important industries other than the procecsing of coffee. The existing 18,500 lav of electric povler capacity operated by public utilities, half of ,vhich c&pacity is hydro, is insufficient to meet the cOlmtry l s require- ments even though public utility ouvput is sr:.pplemented by some 15,000 to 16,000 kvv additional capacity, mostly diesel-powered, installed hl private industrial plants throughout the country. El Salvador's public finances have been conducted on a conservative basis and are among the most orderly in Central- A,'ne:).~ica. The GOVernr,ient has. almostconsis'tently bo.lanced its budgets for over fifteen years and main- ta:ms a substantial account with the Central Bank. The 1949 budget, al- though almost three times as high as in 1941, is expected to shm, a slight surplus. Incr-eased Government expenditures have been made possible by the iv rise in revenues coming,. directly and indirectly, 1 rom the export of bumper coffee crops at high prices. . 8. The rela ti vely small size of El rialvador' 5 public debt has reJuced its role to minor proportions. lit the end of 1948, El ~;alvador's entire .. public debt, all o,f it. external, was equivalent to')12.9million, of vrhich ~ji9.5 million was U.S. dollars debt and the remainder sterling debt equal • to 1:;840,855 (~.;3.4 million). El [,alvador also ovfes,,187,000 to the U.S. for Lend-Lease. The Salvadorean debt burden is very law, amounting to only 37; of Government disbursements and 2.1;~ of exports. Under the terms of the readjustment offer made by the Salvadorean Goverrunent in 1946, over 90% of the bondholders have already exchanged their holdings for new issues. 9. EI Salvador possesses a relatively l'rell-developed banking and credit S,Vstem which compares favorably ~ith those of other Central American countries. The Central Bank's conservative money' policies are reflected in the fact that it normally maintains gold and foreign exchange reserves in excess of its sight liabilities. The Mortgage Bank is the most important agricttl tural credit institution and obtains funds for loans from the Government and the sale of long-term bonds. A system 0;;: rural. credit coope- ratives obtains its funds from the Uortgage Bank and provides credits for small farmers. The credit needs of established enterprises in accepted branches of agr1cul ture and industry are met by existing credit institutions, but lines subject to a hiLh degree of risk, or small units, can secure credits on onerous terms, if at all. 'l'he sizeable flovr of capital to the U.S.' and the ready availability of speculative funds indicate that there may be an excess of capi tal for investment. Hovrever, the securities market is undeveloped and the corporate form of enterprise is not 'widely utilized. v 10. Although El Salvador's money supply has increased four-fold since 1939, prices have not risen as much as in other countries in Latin America, largely because of hoarding and conservative credit policies of the Salvadorean commercial banks l headed by a central bank which has consistently adhered to orthodox monetary principles.. ,.ages have shmvn some increas8 1 • but the general wage level is quite lovf, even in relation to prevalling food prices. 11. Some diversification in agriculture has reduced the relative importance of coffee exports from 95;; of the total in 1936 to 79;; in 19h8. Although the importance of the United States as a market for r;alvadorean products, particularly coffee, reached an unprecedentedly high level in 1945, a stead,y gr01J'rth of Salvadorean exports to the United States was evident in prewar years. In 1947, the Uni ted ~,tates took 78~; of El Salvador1s exports. 12. E1 Salvador's imports a.lmost invariably folloi: the n~ovtJment of its exports. Imports consist mostly of manufactured products and the United States is today, as it has been for many years, the chief supplier, providing 78/~ of ;;alvadorean imports :Ln 1947. In spite of increasin[;, import prices, the rise in coffee prices has made the terms of trade favorable to El salvador since 1940. A free-trade treaty covering most commodities of local manufac- ture exists betHeen EI Salvador and its neighbor, Honduras, but periodic attempts to effect a customs union vii th other Central American countries .. have not been successful thus far. 13. EI ·(')alvador I s balance of pa~rments is characterized by a surplus in its current account and a (l.efioit in its capital account. 'l'he curront account surpluses result from El ;;alvador1s favorable trade balances, while capital account deficits have been due to the small role of foreign investment in El :::alvaclor as compared to short-ton;l movements of "alvadorean capital to the United ,states, the latter facilitated by t11e complete absence vi of exchange restrictions. El Salvador's gold and foreign exchange reserves have been increasing without interruption since 1939 and amount to i)t~O.8 million. 'About 99~; oi the foreign exchange holdings are in the form of dollars. 14. El 3a1vador 1 s dependence on the sale in a single foreign marlwt of a single product subjects its balance of payments to obvious uncertaintj"es, but there are counterbalancing advantages in having as a customer a high- income market able to pay in goods and hard currency. li11ile the loss of its market is most unlikely, the future price of coffee is less certain. For the time being, prices remain near peak levels and the outlook continues favorable. In the long rUIl, hovrever, El Salvador's balance of payments must depend on development and diversificat1.on of its agriculture and industry. 15. Economic policy in El (jalvador largely determined by the interests of the coffee planters who 'want to hold dmm production coats and maintain a large and dependable supply of cheap labor. Prosperity brought by high coffee prices has retarded diversification, but the pressure of the growing population on limited land resources is forcing attention to the need for a more balanced and intensive development of the economy through improved agricultural techniques, the establishment of new" light industries, and the expansion of 30me existing ones. 16. In recent years, some encouragement has been given to the cl,..ltiva- tion of agricultural products other than coffee, particularly sugar, cotton • and hene\tuen..ln industry, ne'd factories have been started to rllanufacture ~_te:ttile1j iron products, pharmaceutical::;, vegetable oils, and sulphuric acid. Nevertheless, only a lJeginnint has been made tmrard diversification and expansion of production. 'Y has had salutar,:; effects, there is little 1 7 . h i l e monetary- orthodQ).. evidence that such policies have brought to El Salvador a rate of economic development strinkingly better Or even equal to that experienced in vii underdeveloped eountrieswhere exchange rates have ·Peen unstable or '!.>,here control$ have been in effect. It is a questi<)n "fOrth considering 'r.rhether it is nossible for an underdeveloped country like El Salvador to diversify and exnand production whil~ maintaining strict adherence to tight credit and pay-as-you~go policies. 18. Government exryenditures for development have been increasing. The Governnent has, in general. endeavored to leave the responsibility for economic development largely innrivate hands. its 01,1/Il developmental expmditures having been disbursed mostly for roads and other,public ,- l!lorks w:Q.:!.dlfurnish a. favorable setting for nrivate initiative. 19. , Economic development in El Salvador is necessarily limited by the extremely small size of the local market, the lack of,natural resources, and the supply of trained labor and managerial talent. ,Until recently. an acute shortage of electric pOl,rer ropresented an effective barrier to develo},)ment •. Although a new 5,0001:\01 steam plant ~'.'as recently put into ope.ration, further expansion of nOlrer capacity is needed. Considerable Opp or tun i ties exist for increasing '[",roduction in mining. 1;!ood"lorking and furnitUre, textiles, shoes, leather goods. foods. ceramics. and construction materials and in the establishment of ne~!J light industries, 20. The Government pro!,oses to construct a hyc.roelectric pm·rer project on the Rio Lempa to provide ele.ctric nO\·ler[or industry and agriculture. There is also a considerable need :~or bringing water to areas nOF \,rithout adequate supnlies, for human and animalconsUI!l!1tion. as 1.-rell as for irriga- tion. It is also expected that an adequate supply of power, such as could be produced by the Rio Lampa inetallation. 1Iwuld minimize the cutting over of forest lands which are now increasing land erosion and reduce imnor~s of fuel oils. ,.rhich have been increasing rapidly since the end of the ",ar. viii 21. In a[:,ricul ture, one ai the grea'~est needs is for land ..use planning, existing methods being,. for the most part, exceedingly primitive outside the coffee plantations. 22. Thus far, El Salvador has taken the first, and somevrhat haphazard, steps to\"ard eli versification and development of its economy.. A more energetic and concerted attack of the problem is needed to counterbalance the growing threat of reduced levels of living as population continues to put pressure on the land .. Methods of tapping aVailable sources of capital funds must be found to augment the country's productive capacity and a sound development program devised to insure an adequate basis for political and social stability•. The role of the Government in economic development, which has been unimportant outside the field of public works, could well be intensified. £-,Quch might be done through an autonomous d.evelol~ment agency and the establishment of a capital budget to be financed in part through higher taxation. The Central Bank could also perform useful functions In prornotint, investment anc.l the 0'> 0'> SOURCE: FAO, Breve Estudio Agricola EconomlCO de EI Salvador I.B.R.D.- Economic Dept No. 349 - 3 "!' If this 1s true, the population density of 250 per square mile would be exceeded only by Haiti (276 per square mile) among the American Republics. A c~nsus of population, agriculture, and housing is planned for 1950. Until results are obtained from this census, all Salvadorean population estimates must be considered tentative. 3D. As shown on the Chart faoing this page and in Table I of the Appendix, both of which are based on official population data, E1 Salvador has had a phenomenal increase in population, which more than doubled the number of people in the country in the thirty-five years between 1913 and 1948. itlith an annual crude birth rate of about 38 per 1000 and a death rate of about 15 per 1000, the average rate of population grovrth over the last thirty-five years amounted to 2% per annum. However, in the ten years (1939-1948), the average rate of annual increase has amounted to 2.2c~ (compared to 1.9% in the previous twenty-five years), and in 1946 8nd 1947 it reached 3.2% and 2.7%, respectively; in 1948, however, it dropped to 1.9%. The in- crease in population would have been evan more rapid if it were not for considerable emigration, particularly to Honduras, ""hieh has absorbed an estimated 100,000 Salvadoreans. 31. Inquiry concer~ing the underlying ca~ses of El Salvador's rapid and continuing populat:l,on grm.lth, flO much greater than that or any other Central American country except Costa Rica, elicits no completely adequate explanation, The increase in population is variously ascribed to the . religious convictions of the people, the superior industry of Salvadoreans as providers, biological factors, the plantation method of ooffee cultivation, the productivity of the soil, and the clim~teJ among ~~ny other reasons, There appears to be an urgent need in E1 Salvador for a scientific examination of this subject. -4- 32. Unlike many other Latin American Republics, EI Sal va.dort s population is fairly evenly distributed throughout the country. About three-fourths of the people live on t1::e plateau and upper valley regions, 1,rhich are the most intens- iVely developed parts of the country. The lowlands are the most sparsely populated areas and the least cultivated. 33. Unlike its neighbor Guatemala, with its Indian majority almost completely separated from the rest of the people by language, culture, religion, and physical locatton, El Salvadorts popUlation is racially and culturally homogeneous. Over 90% of Salvadoreans are Hestizo, that is, persons of mixed white and Indian parentage; only 2% of the people are listed as white, the remainder being Indian. In spite of dietary deficiencies, the average Salvadorean appears to be a vigorous individual 'lnd an industrious 1,lorke1". No accurate data. concerning literacy is available, but it is estimated that about 60% of the people cannot read or ,,,,rite. 34. Some"rhat less than two-thirds of 'the Salvadorean population lives in areas classified as rural anCl, if persons living in villages of less than 2,500 were included in this classification, the proport:on of rural inhabitants to the total would rise to 75%. 35. The chief commercial center and" he largest city in the Republic, is San Salvador, the capital, 2,238 feet above sea level.. It has a popule.tion of 132,000 and a metropolitan population of some 165,000. Other important cities and tOlms, '1440 1165 10,000 2.,5 6.7 $1440 and over Totals: -' 5011 $435 '!J lQ.:Qilil 400,000 .2.a- 10C.0 ?8.~ 100.0 Y Average for, all families •. 44. On the basis of a 1946 population' of 2,018,895, the gross national product of $174 million equalled $86 per capita. In 1946, agriculture contri:'" buted 46% of the gross national product. On the assumption that the ~p114 million value of agricultural output in 1948 constituted a similar proportion that year, the gross national product for 1948 Hould amount to $248 million and on the basis ofa popUlation of 2,123,000, to $118 per capita. 45. From data furnished to the International Monetary Fund by El Salvador the national income for 1946 is computed at 1;'153.5 million, or $77 per capita. An estimate made in the International Bank for Reconstruction and Development on the basis of existing data, places EI Salvador's per capita national income in 1947 at about $85. This is higher than estimated per capita incomes in Honduras and Nicaragua" butlo'Wer thEm per capita income in the other Central American countries in 1947: Per capita income in ,1947 .1=-:S:;;;;a;.;:1;.;.vadcr£ E $~211 HonduraS 60 lJ Guatemala 9011 Nicaragua. 65 V Panama (including ineome from Canal Zone) 181 ?J Costa Rica 146 Y II IERD estimates g; United Nations estimates EL SALVADOR'S FOURTEEN DEPARTMENTS REPUIBLIG r .G.I.U. REPUBLIC !,eJ T .. • 10 y- F T..: yv~--- OF o UIA T£MALA SANTA ANA HONDURAS CHALATENANGO ,11 'ONSIICA ~, 7 c J- 0 I C .0 E A N - 10- D. Government.and PolItical Structure 46. E1 Salvador's constitution of 1824 was the first independent constitution adopted in Central America. There were several other constitu- tions thereafter, but the constitution of 1886 remained in effect for the longest p3riod until a new constitution was promulgated on January 20, 1939. On November 30, 1945, ho\-,ever, the ,Salvadorean Constituent Assembly voted to revoke the 1939 constitution and revert to the liberal constitution of 1886, supplemented with various amendments. 47. The 1939 constitution provided for a republican form of government. The country was divided into 14 departments, each headed by governors appointed by the President of the Republic. f>;xecutive pOl,,,rer 1,la8 vested in the President and his ministers; the President was elected by direct popular suffrage for a four-year term, and could not succeed himself. Although legislative power was vested in a unicameral legislature composed of rleputies elected by popular vote, the legislature generally proved to be subservient to the will of the President of the Republic. 48. El Salvador has had its share of political unrest. In December 1931, Vice-President Maximiliano Hernandez Martinez ousted the elected President Araujo, who had taken office in ~arch 1931. Martinez was almost immediately faced ~"rith an uprising vrhich he suppressed after more than 15,000 persons were killed. As the dictator of E1 Salvador, l~rtinez thereafter brought to El Salvador a period of political stability until l~y 1944, when he was finally overthrown after several unsuccessful attempts had been made to oust him. 49.. General Andres J. Menendez and Colonel Oamin Aguirre held the Presidency thereafter in rapid succession until January 1945, 1"hen General Salvador Castaneda Castro WRS elected President. On December 14, 1948, after President Castaneda had indicated that, in spite of the constitutional prohibi- tion against presidential succession, he planned to succeed himself in the -11 - Presidency, the army overthrew his government. 50. Since then, El Salvador has been ruled by a Junta, the QQ!!§.~2. £m Qabierna Rev~~rio. The Junta is composed of four men, two of whom are professional soldiers, and two civilians. The military representatives are Major Oscar Osorio and Major Oscar Bolanos; the civilians are Reinaldo Ga.lindo Pohl and Humberto Costa. The Junta does not have a nominal head, but Major Osario's popularity and his control of the !rmy make him an important, if not dominant, political force; however, Senor Pohl, ~ho represents a signifi- cant element in the Government, also exercises considerable power. The Junta has revoked the constitution and rules by decree, whiCh becomes hi,' of the land upon publication in the official journal (Diario Oficia~). The strategic Ministries of Interior (police) ann Defense (army) are held by the military; the others, by civilians. The regime has been recognized by the United states, the Unitee Kingdom, and many other countries. 51. Everyone, including the members of the Junta, consider the present coalition as provisional. Plans r~ve been announced for the holding of general elections for a Constituent Assembly, to 1>1h1ch all the decrees of the Junta, as well as a new Constitution, are to be submitted for approval. Elections for the A.ssembly, for 1'1hich an electoral law on the basis of universal suffrage has been drafted, are to be held as soon as possible after the speeial judicial commission appointed for the purpose has completed the draft of the new constitution, lJhich it is expected, hrill be finished in August 1949. 52. In general, the Junta appears to be managing the nationt~ affairs on sound lines and it has honored the legitimate obligations of previous adminis- trations. However, the absence of a constitutional government has brought some uncertainty, particularly among propertied groups, which was recently heightened when the American manager of one of the privately-owned railroads was somewhat peremptorily deported at the insistence of the railroad's - 12 ~ employees as a condition for returning to work from the first labor strike of importance in El Salvador in recent years. As a result of this incident and at the insistent request of businessmen, the Junta has issued decrees defining future relationships between employees and employers which are designed to prevent a repetition of such incidents. - 13 - III. OnGAIUZlc':::'ION OJ? PRODUCTION .5.3.. The Salvadorean economy is based primarily on agriculture, and especially on cafI:ee. Of the total gross national product of ::,174 million produced in 1946, about :)80 million, or 46;~ came from agricultural and pastoral production, excluding forestry, as is shoV'm in the fol101'Ji.ng t:.a1)le prepared from material furnished by the Salvadorean Government to the ]i'ederal Reserve Bank of New York: %of total Gross product gross national Source of income ~:, millions product Agriculture 80.0 46.0 Coffee 21.2 12.~ Other 58.8 33.8 Forestry and mining 7.0 4.0 Cons truction 6.0 3.4 Industry 16.4 10.6 Interest payments and rents 10.2 5.9 Commercial services 32.2 18.5 Professional services 4.6 2.6 Govenurrent services 9.2 5.3 6.h Other services Tota). - 3.7 100.0 54. Coffee, l"lhich is by far the principal crop and export of :1 Salvador, accounted for ::,21.2 million (26% of all agricultural production), n!1ile other agricultural production amounted to:.>58.8 million. Production in the extrac- tive industries - mining and forestry .. equalled only 4;; of the gross national product, and construction constituted 3.4%. The lOVi level of industrial out.. put in relation to agriculture is cJe arly illustrated by the contribut:Lon of Salvadorean industry to gross national product, only 10.6% of the total, or less than the coffee crop alone. 55. A curious phenomenon for an underdeveloped c01.mtry like:::l Salvador is the high proportion of the gross national product (36j:;), which is accounted for by services. To a not inconsiderable extent, tld.s ref1.:; ets the important -14- position of exporters and importers in the Salvadorean economy. 56. ' According to national income data for 1946 submitted by the Salva- dorean Government to the International Monetary Fund, and included in the Appendix to this report as Table II" the 1946 national income of ::a53.5 m:i.llion shows much the same distribution as the gross national product for that year. Agriculture, including fishing and livestock operations, accounted for j~5.1% of the national income, and forestry for 3.9%. ~dning yielded only 0.7% of total incomes, industry (including electric power) 13.2%, and commerce (including transportation) 12.5%. Rents and returns on private capital amounted to 5.2% and services of all kinds, to l5~4;~. Agricultural Production 51. There are no reliable data on land use in El Salvador., It is esti- mated, however, that of the total lands in the country, only about 60% are adapted to agricultural production. These lands are intensively cultivated to produce a variety of products. According to the official General Statistics Office t 559,399 hectares were cultivated in 1948 to produce almost 15 million quintals (a Salvadorean quintal is equal to lOl_hl English pOlmds) of agri- cultural produce, valued at ¢285 million (:)114 million)¥as fo1101'15: Y The difference between this sum and the value of agricultural output in 1946 (cf. table in paragraph 53, page 13) is almost entirelY attributable ,. to the rise in the value of coffeebetvleen 1946 and 1948_. - 15 - , Area, Output and Value of A~ricultural Production During 1948 'E1Salvador: Production in Value in Commodity Hectares thousands of quintals millions, of dollars Coffee 129,134 1,,551 54.0 Sugar cane 26,510 n.a n,a. sugar 1,,50e 9.4 honey ;60 0.1 Corn and grain sorghum 311,892 9,1$0 30.1 Beans 39,295 775 7.4 Rice 28,577 748 5.6 \1fueat 599 9,,944 0.1 Sesame 7,394 11 121 l.h / Cacao 13,188 _ 0.6 o. ~ Peanuts 201 4 0.6 Yuca 917 56 0.1 Other vegetables 1,963 119 0.9 Cotton 7,884 106 3.6 Henequen 3,798 1 55 0.8 Balsam 90,339 ~ 2 0.1 21 Rubber Tobacco 13,343 1 934 0.3 10 - - 0.2 / Indigo 146 0.3 2 -2/ Castor beans 155 3 -- 559,399 1l~,579 $114&0 Y 1/ Number of trees. "ifl Less than ~?75,ooo. "'J/ Not the sum of the colurnn because of rounding. 58. There are possibly some 25,000 farms in El Salvador, of which about 11,500 are coffee fincas, and another 5,000, sugarcane farms. The majority of the coffee flncas are small, but most of the coffee production is centered in relatively few plantations. Most of the sugarcane farms a re also small, but in a few places tl:ey have been consolidated. into fairly large units 1Jy- the sugar centrals. Corn and beans are grovm by small farmers n110 generally rent plots not more than four hectal'es in extent, for yrhich a fi..,::ed amount of produce is paid to the landlord as rent. 59. Host of the best land at an elevation of 2,500 to 5,000 feet is used for the production of coffee. The major coffee producing region is in the Department of Santa Ana (which produces about 35% of the crop), although good coffee is grown in several other areas as well. Corn is groym everY.ilhere ... - 16 - in the highlands and lowlands, on good soils and poor soils, near the centers of populations and in the most out-of-the-vray places. Much of the coastal region, even the best. soils, is used for pasture. Some corn, beans, and sugarcane are grovvo in this area but these crops are concentrated mostly in the upland valleys. A certain a:mount of rice is also produced in the lowlands, but most of the rice is grown in the hill.. country. In the 101",- lands of San lliguel and Usulutan Departments, considerable terri tory is given over to the production of cotton and henequen. The remaining scattered areas, made up of mostly poor upland or hilly soils, produce sugarcane, sorghum, corn and beans. 60. Except for coffee production, where many of the large plantation proprietors have a good degree of technical knowledge and employ trained assistants, most cultivation methods eliiployed in El Salvador are relatively primitive. The typical farm instruments are a wooden ox-dravr.~ plow ru1d a large curved knife on the end of a stick, called a cuma, which is fashioned locally from used automobile springs or other scrap metal. The date of planting for most crops is usually determined by the moon, the common '~heory being that seed sovd.ng for each crop must be completed at a specific time after the new moon. The same applies to the cutting of wood. Some irriga_ tion is used, principally gravity systems, which are rarely controlled properly. As a consequence, the erosive action of the water more than coun€erbalances its usefulness. 61. The distribution systems for export crops, particularly coffee, are well organized, but for the basic fooct crops, such as corn and beans, they remain primitive. A shortage of adequate storage facilities for food crops exists in the country and substantial quantities of corn and beans are spoiled by the action of the elements as well as insects a nd rodents. The Salvadorean I;flortgage Bank operates a storage warehouse in connection with - 17 - its lending operations, but it is not large enough to cover the need. Plans for increasing the country's food storage space l~ve been made and the Govern- ment has contracted for several grain elevators to be constructed near San Salvador. " 1. ,Principal ~ort Crops a.. Coffee 62. The production of coffee for export dominates the economy of EI Salvador, This crop, which directly and indirectly finances the country, normally represents over 80% of the total value of exports'. ::::Xcept for Venezuela (1tThere petroleum predominates) and Cuba (where sugar rules) no other Latin'American country is so dependent on the export of a single product .. 63. The smallest of the Central American republics is the largest exporter of coffee of them all, ranking third among the coffee-exporting nations) after Brazil and Colombia. However, Salvadorean coffee exports represent only a minor part of the worldis total coffee exports. Coffee Exoorts by countrY '(bags) - 1946/47 1947/48 ]I %of %of ~ountry Number world total Number world total World total 29 t 075,000 30j 85o, 000 Brazil 14,,563,000 ib,687,000 Colombia 6,040,000 5,840,000 El Salvador 978,000 1,0)S, 000 Other 7,494,000 7,288,000 - 17 64. Preliminary In 1939, there were approximately 140 million coffee trees on 11,545 coffee fincas in El Salvador. By far the greatest number of these were on large plantations owned by a fevr proprietors, 4>; of whom o1imed over 5,3% of the coffee land and 15% of vrhom owned 81% of the coffee land. On the other - 18 - hand, 42% of the proprietors with small holdings, ovmed only 2.4% of the coffee lands. Almost all the coffee fincas are held by Salvadoreans. 65. Salvadorean coffee is of the arabica and bourbon varieties, arabica being planted almost exclusively on land more than 3,000 feet high, and bourbon in lower altitudes. The high-grown arabica coffee, which is a mild type, commands a high price in European and United States markets, pal,ticu- larly 'when washed in the processing. 66. There has been a trend; over the years, to""lard a gradual increase in the production of coftee in El Salvador, although any further substantial increase is unlilcely. The 1948 crop is estimated at 1.6 million quintals, valued at (!54 million, an all-time record. In 1947, 1.48 million quintals, valued at.,,36. 7 million, were exported.. This sum represented over 847; of all Salvadorean exports in that year. 67. Changes in the pl'ice for coffee are characteristically reflected in both the foreign and domestic trade of El Salvador. 'Ihe al110unt of goods which the country imports is closely related to the value of its coffee exports and '.'Torld. coffee prices, as is indicated by the data in Table XII of the Appendix. The price of Salvadorean coffee has declined someVfl1at from the 1948 record high ave"'age of 32.2 cents per pound, but the current price of 31.3 cents per pound (as of June 29, 1949 is more than four times above the low average of 7•.6 cents which prevailed in 1940 V 68.. The Salvador Coffee Grov,rers r Association (Asociacion Cafetelera de El Salvador), a semi-official organization ot all Salvadorean coffee " growers, vss organized in 1930 to protect and encourage the coffee industry in El Salvador.. 1.1-].e Association studies problems related to the product.ion, d.istribution and consumption of coffee produced in ~l SalVador, furnishes technical information to producers, helps train plantation supGrvisors, and maintains working relations with international coffee associations 4t The - 19 - Association's operational funds come from a Government assessment levied on ever,y bag of coffee exported from E1 Salvador, 69. An unusual amount of poW'er is concentrated in the Coffee Gror;ers' Association, The Association controls, directly and indirectly, over 95% of the 6tock of the pO'1!rerful Salvador Coffee Company (C,ompania Sa1va?-?~ del ,Ce£e), - theoretically a private company, but in practice, sewi-govern- mental, This Company has the legal right to b~ and sell coffee for the purpose of stabilizing prices an~ to make short...term 108115 to producers, processors, and exporters of coffee. Until thE') expiration on Septercoer 30, 1948 of the International Coffee Agreement of October 1, 1940" the C01:1:9any also administered the exportation of coffee under the quotas allocated to El Salvador and it still retains the right to issue licenses for the export of coffee from El Salvador. 70, In addition to controlling the Salvador Coffee Company, the Coffee Growers t Association is the largest shareholder in =:1 Salvador t s Central Bank, and ovms a controlling interest in the capital stock of the Mortgage Bank, the dominant agricultural credit organization in :;:;1 Salvador. b. Sugar 71. Sugar, also an important agricultural export, but far below coffee in terms of value, is produced principally in the Departments of San Salvador and La Libertad, (which produce about one-half of the total mop). Sugarcane production has been increasing, amounting to 1.7 million quintals in 191f 7 as compared to 1.2 million in 1946. 72. Total 1948 production of centrifugal sugar by 23 Salvadorean sugar mills amounted to 560,000 quintals, vc;.lued at ',,$.7 willion. In addition to centrifugal sugar" approximately 940,000 quintals of sugar, valued at,.J.6 17 See Table 111 in the Appendix, -.20 - million, were produced in 1948, chiefly by small home mills (trapiches) and mostly in the form of panela (a brol'ID sugar from which none of the molasses has been removed); pilon (a 1"Thi te sugar from 17hich only a SIIk'lll part of the molasses has been removed), is also produced mainly in homes. Both types are consumed largely within the country,. T'nere is no production of refined sugar in El SalvadQr. 73.. The price of sugar, as well as export quotas, for each of the mills producing centrifugal sugar is fixed by the official Commission for Protection . which of the Sugar Industry (Comision de Defensa de la Industria Azucarera), " maintains a floor on sugar prices by regula ting supplies. El Salvador ordin- arily produces a surplus of centrifugal sugar, which is authorized for export by the Commission after it has reserved necessary supplies for domestic use. Approximately 360,000 q1.lintals of the 594,000 quintals produced in 19h6-h7 were reserved for local consumption, the remainder being exported to Honduras, Ecuador, and the United States. The 1948-49 crop is e~ected to total 47$,000 quintals. 74. c. - Rice The advancement of rice to the rank of an important agric1.ll tural export is a relatively recent development. It is one of the basic food crops of El Salvador, and in the past has been grovm principally for local consump .. tion, although fairly constant amounts have been exported annually to Honduras. It is cultivated by. small farmers throughout the Republic. In 1948, 748,000 quintals were produced at a value of ~:)5.6 million. d. Cotton 7~, Cotton gro'wing was begun commercially in 1924 but because of plant pests was practically abandoned several years later.. Cultivation was reVived in 1935, however, and production has since increased steadil~y. Since 1939, the Government has prohibited the import of cotton fQr use in domestic r;lills, - 21 -' imposing a high tariff,., the quantity of cotton imports has been Itept at low levels (only ¢70, 000 -.;28,000 in 1947) and local production encouraged. 76. In 1940, the Cooperative Cotton Growers' Association of El Selvador, Ltd. (La Cooperatj,va Algodonera Salvadorena, Limitada) was organized to pro- vide for a greater degree of control.. The law requires all cot ton gro1rers and cotton ginners to be members of the Cooperative, all persons ginning cotton to be licensed by the Cooperative, and all cotton used in the domestic manufacture of yarns and fabrics to be bought exclusively from the Coopera- tive. The Cooperative handles all cotton produced by its members, operates cotton gins and presses, makes long and short-term loans to members, fixes prices, and othel"1'lise attempts to improve the condition of the industry G Costs of operations are covered by deductions from the Cooperativets sales of cotton. 77. The Cotton Cooperative has been instrumental in raising the price of cot.ton from ;::,6 per quintal in 1940 to oVer ;:~33. In 1948, 106,000 quintals valued at ;:~3.6 million, were produced, compared to 1947 productions of 75,000 quintals, valued at,}2.5 million. e. Henequen 78. Henequen, produced on five plantations in El Salvador, supplies the raw material for one of El Salvador's principal manufacturing industries: bags for the shipment of coffee and other agricultural products. In 191+8, 55,000 quint.als of henequen, valued at (;800,000, YJere produced, most of which was absorbed by the large sack factory in San Salvador for use in the manufacture of bags. f. other Export Commodities 79. other agricultural export commodities and the value of 1948 pro- duction were sesame seed and peanuts (,,:,2 million); balsam (:.,)100,000); and honey (:::,100,000). In addition, small quantities of rubber, indigo, and '- 22- castor beans 'lti'ere produced'. 2. Food Crops 80. Preoccupation vlith the cultivation of eJ~ort cash crops has often resulted in a precarious balance in the nationts food supply. In the middle of 1948, temporary shortages of corn and beans led the Government to iY.'lport large quantities of these two important staples. a. Corn and Grain Sorghum 81. Corn, together yr.i th beans, constitutes the basis of the worl{ers' diet in El Salvador and is the most important food crop'. Production in 1948 amounted to 2.2 million quintals, valued at $20 rni1lion. In addition, 3.6 million quintals of grain sorghulU, valued at $10.1 million, v:ere g rov'll in 1948, practically all of 'which was consumed locally. b. Beans 82.. '!he second most important food crop, from the point of view of domestic consumption, is beans. Like corn and rice, beans are grOYID mainly on small plots of land throughout the country. In 1948, 775,000 quintals" valued at $7.4 million, were produced. Formerl;;r, the amount grown was se)dom sufficient to satisfy domestic consumption, but in recent years quantities have been exported. In 1947, 31,000 quintals of beans, valued at $211,000, Here exported. c. Miscellaneous Food Crops 83. A small amount of wheat grovm in El Salvador, but the climate is not well suited to its cultivation. Practically all the wheat gr01il1 comes from the northern part of Chalatenango Department, but the 4,600 quintals produced in 1947 had to be supplemented by imports of 57,000 quintals of wheat and 182,000 quintals of y{heat flour •. Other food crops produced include yuca, mostly for food (56,000 quintals in 1948); potatoes (60,000 quintals); - 23 - honey (360,000 quintals); and tomatoes (43,000 quintals). d. InedibleCrops 84. Tobacco is a minor, but vddely...grovm crop. It is cultivated mostly by small farmers, but some is grmID on large plantations •. Local production (9,300 quintals in 1947), however, is sufficient for only about one-third of the consumption of the countryts·cigarette industry, and it is necessar,y to import relatively large quantities of tobacco (20,700 quintals in 1947) from Honduras and the United states. An Anglo-Anlerican cigarette company, Cigarreria Morazan, providestechnioal assistance and advances crop loans to numerous small tobacco growers in an attempt to increase the quantity and improve the qualir,y of leaf tobacco produced in the Republic. . 3. Pastoral Industries 85. The raising of beef and dairy cattle and the production of wili{, cheese, and other dairy products constitute important agricultural industries. The principal cattle-producing regions of the COuntl~ are the coastal plains along the PaCific, where there are extensive grasslands. In addition to more than 686,000 head of cattle in El Salvador in April 1947, the live- stock population included 283,000 hogs and 157,000 horses. I.lost of the cattle are of the native, or criollo type, descended from the old Spanish breed, and adapted to the tropical conditions of the coastal plains. a. Meat production 86. Almost all the fresh meat consumed in El Salvador is produced domestically. In 1947, 86,000 head of cattle were slaughtered. Imports of cattle largely from Nicaragua and Honduras for fattening, amounted to 25,000 head but exports (mostly ,~ ...er.l".'Ports) totalled 28,000 head. About 200.,,000 hogs were slaughtered (only about 10,000 were imported), and 100,000 quintals of lard VJere produced, as well as 30,000 quintals of rendered tallovr. - 24- 87. The Association of Salvadorean Ca'l:.t,lemen (Asociacion de Ganaderos , de El Salvador) is a governmel1t ..subsidized organization of cattlemen which supervises regulations concerning the sale of meat, administers campaigns for the vaccination and inoculation of cattle to prevent disease, makes and releases teclmical studies, and registers purebred animals. b. Dai:r:ring 88. The production of milk and milk products in El Salvador is mainly for domestic consumption. The high price of milk and low yields in the dry season, because of the shortage of feed in that period, limit the consumption of milk.. Only a small portion of the milk is pasteurized. Cheese is the major manufactured dairy product, and probably 50% of the national milk pro- duction is converted into this commodity. Most of the cheese is the uncured type, such as cottage and cream cheese, and is made on the farms. Several factories, hO'Hever, produce cured cheeses. 4. Forest Industries 89. ~Jood is the principal source of fuel in Bl Salvador and provides an important part of the sInall farm,ers' income. Systematic deforestatj.on of important sections of the country's l'loodJ.ands over a period of centuries has considerably depleted El Salvador's lirrdted timber resources. Because of the frequency of earthquakes; most houses are built at least part~ of wood, and must be replaced about every tvrenty years because of infestation. It is estimated that nearly four million metric tons of wood are consumed annually for firewood alone. 90. Few Salvadorean forest products enter into international trade and practically no timber is exported. The ao-called "balsam of Peru" is the most important forest product of El Salvador produced for eAport. Despite its name, the tree from which tt~s medicinal g'llill is extracted, is indigenous - 25 - to El Salvador. The hard timber of the balsam tree is al$o used in the man- ufacture of furniture, sugarmillrolls,;and agricultural tools. Production is practically confined to a strip about 40 miles long and 15 miles 'i'Tide along the coast betvleen Acajutla and La Libertad, l~novm as the "Balsam Coast". In 1947, production totalled 1,700 quintals and exports~. partly from stocl:s" amounted to 2,,100 quintals valued at ¢362,OOO 0144,800). B. Mining 91. Gold and silver, which usually occur in conjunction in El Salvador, are the only two minerals extracted commercially. T.ogether, they constitute important Salvadorean exports in point of value.. In 1947, a total of ¢1.5 :m:l.11ion ($0.6 million) of gold and silVer were exported. 92. Geological surveys have indicated that other minerals exist in the subsoil, including copper, lead, iron, zinc, lignite, sulphur, quartz, platinum, and bauxite, but information concerning the extent of these deposits is inadequate. No petroleum in any form is produced in El Salvador. From time to tire, reports have circulated that petroleum bas been found, but these reports have yet to be substantiated" c. Industrial Production i 93. El Salvador's manufacturing industries accounted for less than 20% of the national income in 191+1 and, in 1946, for less than 13%., The most important industries, other than the processing of coffee, produce the consumer goods tyPical of underdeveloped countries: cigarettes, soap, candJes, cotton textiles, furniture,. candy". bricks". pottery" carpets, matches, je't'V'elry, alcohol and alcoholic beverages,. beer, and soft drim{s. Other industries, like the manufacture of leather goods, henequen bags, vegetable oils, and the grinding of sugarcane, are closely connected vv.ith the agricultural character of the countr,y. -, 26 ~ 94. , Almost. all Salvadorean industry produces for the lo~al market. Most of the enterprises are small, and processes are generally simple" many . .' \ lines being in the handicraft stage., Salvadoreans have found many ways of utilizing scrap materiqls in the manufacture of all kinds of articles •. Some of the local industries depending on scrap are the manu;facture of aGricultural hand tools from axles of junked cars; buttons from meat bones; paper cartons, papier mache dolls and ornarl1ental friezes from waste paper;constI"l1ction rods forrei.'1i'orcing concrete buildings" as 'well as steel rims for ox-carts, from salvaged steel and iron from a variety of sources •. 1. Electric Power 95. Without petroleum or coal suitable for industrial purposes" El Salvador relies on wood,1mported fuel oil, and hydroelectric installations as the chief sources of power. Imports of diesel and fuel oil have shovnl a steady increase in the last few years. In 1948, imports of diesel and fuel oil are estimated at 262,000 bb1s. as compared to 224,000 in 1946. 96 Estimated installed capacity of public utility systems in El Salvaeor is 18,447 1(;\1, of which 9,121 kw is hydroelectric, 4,326 kvl diGsel power, and 5,000 kw steam•., New hydro capacity of 1~850 kw capacity and some 3,500 horse- power of unconnected prime movers are on order or under construction. In addition, betltfeen 15,000 and 16,000 lev; are believed to be available ll"l indus- trial plants, most of which consist of diesel units. 97... By far the Jargest part of the total public utility capacity is con- centra ted in and around the capital, San Salvador, where the Compania de Alumprado E1ectrico i ' de San Salvador, ' , a Canadian subsidiary, operates units with a capacity of 11,470 kiv. The Company also supplements its OVnl output with electric current purchased from another utility outside its area of operation.. Since all hydroelectr;tc plants operate at strea"ll sites vd.th only - 27 - small diversion plants and inadequate storage faciJ.:i.ties, power shortages are cOIn."llonplace, particularly in the dry season. 2. cotton Textiles 98. Most of the cotton produced in El Salvador is used by the twelve spinning or weaving cotton textile factories (most of them using antiquated machinery) in the country to produce cotton thread, drills; and course gray sheeting (the latter, kno~~ , for domestic consumption and export to as manta) other Central American countries. One mill also manufactures rayon cloth out of imported rayon stock. There is also a limited production of clothing, and a hat factory ~~pplies local requirements. Authoritative statistics for cotton textile production are difficult to obtain, but best available estimates set the 1947 yarn output at 6.5 million pounds and the production of cotton goods at over 5 million yards. Domestic production is supplemented to a consider- able extent by imports of cotton cloth~ In 1947, such imports totalled ¢l~ million (~~5.2 million). About six years ago the Government purchased a cotton textile mill to be operated by a Government Agency as a. "pilot ll plant. However, difficulties prevented the start of operations until recently. It is hoped that the entire mill will be operating at capacity by the end of 1949. 3. Food Processing Industries 99. Beer is produced by a single locally-o'Vmed plant which manufactured ,,3.8 million liters in 1947. The production of &"llerican-type soft drinks is expanding, output in 1947 probably exceeding 18.4 million bottles. There are several distilleries which p!Oduce alcohol, aguardiente (cane spirits), brandy, rum and cordials. According to the latest data, 1.9 million liters of aguardien te and 188, 000 liters of other alcoholic beverages were pro duced in 1945. - 2S - 100. Since local grain is of an inferior grade, most of the wheat rr~lled in the cOillltry's two large mills (t.'1ere are also several s mall mills) is imported from the United states. In 1947 (when United states wheat e:xports 'Were considerably restricted), 2.4 million pounds of flour were produced in E1 Salvador. 101. A large new vegetable oil plant commenced operations in 194h, 'with facilities providing for the pressing of 10,000 tons of oil seeds annually. There are also several other plants producing vegetabJ.e oils. Cottonseed j.s the principal source of oil, but peanuts and sesame seed are also used. '111e amounts of sesame and peanuts produced have been increasing. In 1947, such production totalled 30,000 and 5,200 quintals, respectively. 4. Cigarettes 102. Factory production of cigarettes reached 375 million in 19l+6 and an estimated 410 million in 1947. The only one of the three factories flith a sizeable output is the Cigarreria Morazan, an Anglo-American company. Cigar- ette paper is a heavily-taxed Government monopoly in El Salvador. Virtually the entire local cigarette demand is supplied by cigarettes manufactured in El Salvador from domestic and imported tobaccos, although a small quantity of cigarettes are imported from the United States. There is no corr~nercial productioJl of cigars or other tobacco products in El Salvador. 5. Henequen Bags 10J. Since 1933, an El Salvador~7 practically requires the shipment of Salvadorean coffee only in domestically-produced henequen bags, thereby guar- anteeing a IDafket for this product. Over 1&8 million bags Viere produced in 1947, of whj.ch the largest factory produced 1.5 million o In 194 7~ the factory produced over 1 0 65 million bags. Henequen bags are also used in E1 Salvador to store and ship sugar" cprn, beans and other staples. A campaign to prOMote 92' .. ' 30 ~,,~ "'0,........ NDu HIGHWAY MAP OF IY 4S SALVADOR "'~~ r:,~~ t, . . . . . ·'" "-", '.- ", "'" ...... ro,o"" •••••• •........ ._ t..--L.t . ~ holotenonvo ,,- , , c ' ,... "'. ," '" . I . . ..... "" j ..................... " 1ro . .......l ;flo '" v...p .. ' .i"f - ~ ',,~ r@rnur(Jo IV ~ \ W' .. ? , _', _ \ ' ..... '- ...... '" D ~ ' \ \ I I I \ ... ~ "' ..... I r- ......... {J ' I ,I '" l , .' ,.... '" \ \. , h <.>=~,~ ~ \ \ "J- ! : '.~ ---. . 4 >~I\OlatenangQ ~. / :. 0 N ",.,' • ,-. ,;) lo.~ ____1.«r,.,,, " " ., ..- . I ! ';" _APerquit\\ ," s . -N'IOr,Qnc.epc , • / {' I .\ (j r-"---.. )"" Ch!n.Jmos- "{ ...) ~, -. ,_.. . '., . ~', ,\. - '-; ••" ',/.~. / " / ". t· \ / s.'lr.....".. _• ' J . . ._____ •.\ .:! ........... 'i "J3 ",,, __ .; _ \ , '=';;;" 'G~''': I ......_-----,""1\ , '"",., ' " / •• 0 0 0 d .. i J ... ~ : . "'~"" "~ r / ':~: .r,o~, ) ( ~ , ~ ~ ' ( "' Jose .. .. 0 +OIiCOIO s: •".\ ' "( .~ " \ .' I ,J. " o " ." " , (LloboSCO: "\ '. A0 ' : R CO .." "I i 1;, . '. .',~ '~ ,......~ ,~ ~., ' : : " ,\ : • :• L V ,\ r- : . ,-" ) ' ~" ,, • " • 'S ' A / .'" '.." "', Ciudod 80rrio$ . ~~ .. , c.,,,,_.. I '" ... '-, \ ,\ , ,.. ' ,, ". ' . " . " po'''''' . '. " ' " " j'.. , ,. . Oom,.,. ,,, • " V.. " ' ' ' ' ' ' ' ' ,: :l , \ ":""_'" .:. __ \ \' ' .. .. " ".w"''' ... , l , ) . • ',... I fr' RAILROADS SonMigue~ ~ ~ EI Carmen I. OF E L SALVADOR - LEGEND- /) I INTERNATIONAL RAILWAYS OF CENTRAL ) AMERICA - AMERICAN OWNED - :3 FT GAGE 4 SALVADOR RAILWAY COMPANY, LTD. GULr c .. -...... BRITISH OWNED·.3 FT GAGE PAN-AMERICAN HIGHWAY OF PAN-AM(RICAN H .GHWAY UNDER CONSTRUCTION r C/ II S EC.A NATIONAL HIGHWAYS I j: MAJOR PORTS J:' c o lULl , 10 t;I·fLts O"UfMf .. T 0' cOlll.t~r o c E A N lu••• 01 i'(NtlIG" ,,.p oO¥.,nt (:O.IIII'lIo('t !) 0 4' I" - 30 - are hard-surfaced. !he Sal~adorean section of the Inter-American Highway is almost entirely paved. The number of motor vehicles in El Salvador increased from 1,322 in 1946 to 6,107 at the end of 1948. About t;-,"{o-thi:i."ds of the vehicles at the end of 1948 were passenger cars and taxies, the remainder being buses and trucks. There are no trolley lines, local and interurban passenger traffic usually being handled by buses. 2. Railways 108. There are two railways in El Salvador: (a) the International Railway of Central America (IRCA), primarily armed by tbe United Fruit Company. It operates 285 miles of mainline track betYfeen the Guaternalan border" San Salvador, and the port of La Union, and (b) the Salvador Railway Company, Ltd., o'imed by British interests, with 100 miles of mainline track vmich connects San Salvador vdth Santa Ana and the port of Acajutla. 3. Seaports 109. El Salvador has three seaports on the Pacific Coast: Acajutlc., La Libertad, and La Union (Cutuco). Acajutla is primarily used for the export of coffee from the Santa Ana district. La Lioertad is the principal port of entry for shipments to the Capital, San Salvador. La Union is the leading port of the Republic, being the only one of the three ports which can accoll117:odate ocean ,. going vessels alongside the docks at Cutuco. L~.Union handles 57 per cent of the export trade and 31 per cent of imports. - .31 - IV • J-NTERNAt FINANCE 110. El Salvador's public finances have been conducted on a conserva- tive basis and are among the most orderly in Central America. The Govern- ment has almost consistently balanced its budgets for more than fifteen years and has maintained a substantial account with the Central Reserve Bank, which amounted to ;13.3 million ($5 • .3 million) at the end of April 1949. A. The...]udget Ill. The published budget figures give no indication of the size of the annual surpluses, although it is certain that for the past few years there has been a superavit at the end of each fiscal year. As a matter of fact, available figures1l give the wholly deceptive impression that the budget during the four years 1944-1948 haa had an average annual deficit of ¢1.3 million ($0.5 million). This situation arises in the main because of the establishment, in the annual budgetary liquidation, of substantial con- tingency reserves against unexpended budgetary obligations, the aggregate of which usually proves to be in excess of eventual payments •. The unex- pended funds revert to the Treasury in subsequent fiscal years and apfear in subsequent budgets as surpluses from previous operations. It is not pos- sible, however, to correct the original liquidations for the resulting over- . statement of expenditures • 112. For the calendar year (which coincides with the fiscal year), 19M3, El Salvador f s budget was reported as follo'{.ls: Surplus carried forward January 1, 1948 $ 3.1 Receipts 2ls2 Total Funds Available $26.6 Expenditures 2?5. Surplus $ 1.1 11 See d~lumns (3) and (4)- of Table IV in the Af}endix. "- 32 - 113. The original budget for 1948 called for expenditures of only ¢58.0 million ($23.2 million), but with receipts greatly exceeding est.imates, addi- tional authorizations were passed by Congress which raised appropriations to ¢66.6 million (~26.6 million), Aotual expenditures and co~~itments by the year1s end, however, amounted to only ¢63.7 million (~;25.5 million). 114. During the last few fiscal periods, actual revenues have consist~ ently outstripped estimates to a sizeable extent. This continuing error in the estimates arises from the requirement of the budget law that estimates of receipts may not exceed average actual receipts during the previous five fiscal periods, except when new revenues are included. \'lhile this require- ment results in the maintenance of a safe margin for error, it permits (in the absence of restraints) the supplementary appropriations which have become characteristic of Salvadorean finance and which customarily raise actual expenditures well above original estimates. 115. The 1949 btldget was originally prepared by the Castaneda G~lern­ mant, but "Then the present ~ ract.Q government came into pOvJer in December 1948, it discarded that budget and lJTOceeded to prepare its own. Since this work involved a certain amount of delay, the ne'\-] administration functioned on the basis of the 1948 budget for the first tlTo months of the current year. It was originally intended to expand only two-twelfths of the original 1948 .. budget of ¢58.0 million C:,23.2 million), '"Jhich "Tould have amounted to ¢9.6 million (:.,;3.8 million), but several additional authorizations raised total expenditures for January and Februarv 1949 to ¢13.l million ($5.2 million). 116. The budget for the ten-months perion from March 1, 1949, to December 31, 1949, was promulgated on February 28, 1949. It authorizes expenditures of ¢49.4 million ($19.8 million) during the ten months, which added to the expenditures of ¢13.l million ($5.2 million) authorized for January and February, makes a total of ¢62.5 million ($25.0 million). - .3.3 - Against these ex-penditures, revenues are estimated at ¢60.0 million ($2/... 2 million), which with the estimated March 1, 1949, surplus of ¢2.l million ($0.8 million)!! from previous operations, increase the funds available to the Government this year to ¢62.7 million ($25.1 million) and leaves a sur- • plus of ¢0.2 million ($0.1 million).g! Summa.r,v of Ell Salvador's 1949 Bud,gl!'!t (}ilillions of colones and dollars) Surplus as of March 1, 1949 $ 0.8 Receipts ~ Total Funds Available $25.1 Expenditures 22.,Q $ 0.1 117. The magnitude of El Salvador's budget has almost trebled since 1941, when it totalled ¢21.4 million ($8.6 million). Before 1942, annual expenditures remained relatively stable. After that year, there was an increase, at first gradual, but beginning in 1946 rapid, in the size of expenditures until 1948, when expenditures reached record levels of ¢63.7 million ($25.5 million). Total 1949 expenditures are now estimated at ¢62.5 million, but past experience suggests that final expenditures may even exceed that figure if supplementary appropriations are authorized as they have been in previous periods. 118. The increase in the government's annual eXFenditures wa~ made pos- sible by the rise in revenues as a result of the expanding wealth and income ... of the country, and is accounted for partly by the increase in Government functions and partly by the decline in the purchasing power of the currency. The rise in prices was particularly noticeable between 1944 and 1948, and 1/ This es~te was made at the end of February, befor;fi~a1' figures for 1948 revealed that the surplus was actually ¢2.9 million (~1.2 million). g! On the basis of a surplus of ¢2.9 million {~~1.2 million} instead of 0'2.1 million ($0.8 million), the 1949 surplus would amount to 0'1.0 million ($0.4 million). - 34 - was largely responsible fOr the two and one-half time increase in Government 1/ expenditures since 1944.- B. The Salvadorean ReveQue S~stem 119. The fact that a sizeable part of the Salvadorean gross national product is derived from agricultural activities only loosely connected with the monetary sphere of the economy, goes far to determine the country's fiscal struoture, and partioularly its tax system. The large number of small agri- cultural units produoing mostly for their own requirements and the consider- able amount of small business enterprises which do not possess adequate book- keeping systems, have retarded the development of a comprehensive system of direct taxes. As a consequence, and in common with many other IRtin American countries, El Salvador's governmental revenues are heavily dependent on taxes on its foreign trade and on other indirect taxes. The following classifica- tion gives actual Government revenues, in absolute and relative terms, for 1937/38, 1945, and 1948. .. Mil~~Qns of Colones _ Percent 1937L;§ 1~ 1948 1937Z}~ '12tt2 12i& 53,,6. Taxes, fees and fines, Total Direct taxes 19.5 -0.9 26.7 -3.6 3.8 91.9 ---.- 4.4 91.9 12.2 -- 91.0 6.5 Taxes on exports 2.1 1.8 9.4 9.7 6.1 15.9 Taxes on iro}:-orts 11.7 11.2 24.8 54.9 38.7 42.1 Consu~ption taxes 2.9 7.0 11.0 13.8 24.3 18.8 Other taxes, fees and fines 1.9 3.1 4.6 9.1 10.6 7.7 Loans 0.1 0.2 Reoeipts from Govt. Enterprises 1.3 1.7 4.5 6.3 6.0 7.6 Other receipts 1.7 1.4 0.7 1.8 1.9 1.3 Total 22.5 29.8 58.8 100.0 100.0 100.0 120. Taxes, including fees and fines, make up the bulk of government receipts, accounting for 90% or more of all government revenues. Between 1937/38 and 1948, tax receipts increased more than t,,,,o and one-half times 11 Table IV in the-Ap}:-endix traces the' gross-national product,~~;;-tn Government revenues, expenditures, and prices since 1939, - 35 ... from ¢19 million ($7.6 million) to ¢S3.6 million ($21.4 million). 1. I!!ll?2rt Taxes 121. The greatest absolute revenue increase between 1937/38 and 1948 (from ¢11.7 million to ¢24.8 million) occurred in the tax on imports, the most important source of revenue for the Republic. It is noteworthy, how- ever, that the relative importance of import taxes has declined to about 40% of receipts since 1941, prior to which time they always accounted for more than half of all receipts. The ease with which import duties can be assessed and the difficulty of evasion account for the pre-eminence of these taxes as a source of revenue in El Salvador. The prime ~urpose of the Salvadorean tariff is to raise revenue, the granting of protection to domestic industry and agriculture being secondary. However, an exception to this general rule is made in the case of imports of cotton, cotton textiles, wheat, wheat flour, jute bags, tobacco and sugar, which all carry heavy protective duties. ll:hile the heavy duty on most of these items might be justified, it is hard to do so in the case of wheat which is grown under the most uneconomic condi- tions. Moreover, it would be less onerous on consumers if the local wheat producers were protected by subsidies than by tariffs. 122. El Salvador's tariff rates are predominately sfecifie and are stated in terms of U.S. dollars per 100 kilograms, although collections are made in Salvadorean colones. The tariff schedule covers a "Tide range of items, but the highest duties appear to be concentrated on consumer goods. and on commodities characterized by inelastic demand. The burden of import duties is lower on many luxuries than on necessities, the ad valorem equiva- lent of the import tax on automobiles being 21%; on watches, 9.2%; on musical instruments, 11.2%, compared with duties on pickaxes of 42.3% and on machetes (the farmer's most important work implement), of 46%. Textiles, even when they do not compete with domestically produced commodities, are subject to particularly heavy duties (rayon yarns 86%, cotton shirts 39%). 2. Consumpt~on Taxes 123. Consumption taxes constitute the second largest group of taxes in the Salvadorean revenue system, accounting in the last ten years for 20 to 25% of total reeeipts. Approximately one-half of all consumption taxes come from taxes on alcoholic beverages, other consumption taxes being levied on cigarette paper~ domestically produced matches, sugar consumed domesM.- cally, cotton, entertainment, boat and airplane fares, etc. 3. EX]!9rt Taxes 124. The coffee tax L~urrently '/.7 ($2..80) per bag of 45.5 kilogram~7 is by far the most important levy on exports, accounting for over 90% of all export taxes. Duties are also levied on the export of gold and silver and on bags not produced of domestic raw materi"~, the latter duty affording protection to domestic henequen and cotton producers. lI 125.. Hhile export taxes, like duties on imports, are easy to administer and evasion or delinquency is practically impossible, the yearly collections from these taxes are characteristically unstable, varying with the frequent and often drastic changes in the price of coffee, the size of the crop, and changes in the tax rate usually made when coffee prices change. The consid- • erable fluctuations in export tax receipts are also due in ~art to the fact that in some years late shipments of one crop and early shirments of a suc- ceeding crop coincide. In the njne years between 1940 and 1947, receipts from taxes on exports have varied from '/.892,600 ($357,OOO), or 4.2% of total receipts in 1941, to ¢9.4 million ($3.8 million), or 15.9% of total receipts, in 1948. 4. Direst ,Taxes 126. As has been indicated, direct taxes do not· play an outstanding role 17 Table V in the Appendix gives the total"';eceipts from coffee and oth;;;-- export taxes in 1935/36, and 1940 to 1948. - 37 - in the Salvadorean fiscal system, largely because the present organi~ation of the economy does not lend itse·lf to easy collection of such taxes. The problem is further complicated by the fact that most transactions, being made in cash instead of by bank check, are diffioult to trace in the absence of adequate accounting systems in business and agricultural enterprises. It has been suggested by the New York Federal Reserve Bank investigators, how~ ever, that collections could be improved if a payroll deduction system were introduced or if the taxpayers were assessed, at least in part, at the time they filed their tax returns instead of being delayed normally for up to a year or more. 127. In 1937/38 direct taxes contributed only 4.4% of total receipts, and in 1948, 6.5%. However, these figures do not adequately reveal the extent of What is in effect direct taxation in El SaJ~ador because the coffee export tax as well as the taxes on sugar, cotton, henequen, and the tax on the gross receipts of electric companies, are all paid in lieu of income taxes. If the amount of such taxes paid in lieu of income taxes ~hich in 1948 amounted to ~10.7 million ($4.3 million) against direct taxes of only ¢3.8 million ($1.5 million17, were added to direct tax revenues, the propor- tion of such receipts to the total would increase substantially (in 1948, to almost 25%). 128. There are six kinds of direct taxes in El Salvador: (a) an income tax; (b) Vialidag Series B, C, and D taxes; (c) inheritance and gift taxes; (d) fees for the extension of the Cedulas de Vencidad; (e) a 2% tax on cor- porate dividends; and (f) a 1% tax on commercial bank profits. Some of these require elucidation: 129. The low income tax ranges from 7% on annual incomes of ~9,000 to ¢lO,OOO ($3,600 to $4,000) to only 20% on incomes over ¢50,OOO ($20,000). - 3$ - In 1946, the number of taxrayers totalled only 2,435. The law exempts capital gains from taxation and this has been one of the major reasons \liymcane'iax-col- lections have lagged well behind the rise in the gross national product. The exemption of capital gains from taxation has also stimulated a postw~r rnlild- ing boom, some of it of a sreculative character, and in the words of the report on the Salvadorean fiscal system prepared by the Federal Reserve Bank of New York: IIleads to a perpetuation of the investment of savings in land and real estate, a form of investment that is one of the least prodllctive of all potential investment outlets. 1I 130. The Vialiqag taxes, which obtain their name from the fact that their proceeds were reserved originally for road construction, are a eombina- tion of income, capital, and head taxes. They are generally, although not exclusively, levied on persons on lower income levels and are in effect downward extensions of the income tax. The CE?dulaR d~y~.d is a graduated poll tax. The primary purpose of the ~J~~~DC!d~g is the identifica- tion of the residents of El Salvador, but a progressive tax has been attached to the issuance of the Cedulas. The small amount collected from the corporate dividends tax is an indication of the relative unimFortance of corpor(,te enterprise in El Salvador. Proceeds from the 1% tax on bank profits are even less important than those from corporate dividends. 5. Other Taxes, Fees and Fine§ 131. Other taxes include a variety of transactions, taxes, business license fees, stamp taxes and motor vehicle taxes. Although revenues from these taxes, fees, and fines havA increased to some extent in absolute terms, their relative importance has declined from 9.1% in 1937/38 to 7.7% in 1948. 6. RegeiEYs from Government Enter~rise§ 132. The relatively small amount of receipts from government services - 39- and enterprises refleet ther:act that the Government of El Salvador, unlike those of several other Latin American c-ountries, has not engaged to any sig- nificant degree in industrial and co:mmercial acti"ities. 7. Ca~cityfor ~igherTax Yields 133. According to data prepared by the New York Federal Reserve Bank,lI the proportion of tax collections to gross national product was stabilized at 7.6% in the years 1939-1941. During the war, the proportion fell sharply to 6.1%, largely due to a decline in import tax collections beeause of the reduction in imports. By 1946, however, the ratio of tax receipts to national product had more than recovered, standing at 8.4. In the absence of current information on gross national product it is not possible to determine the present relationship of tax receiptl3 to national product, but it is likely that the proportion is still below 10%.21 134. As i? the case of receipts, Government ext:enditures as a r:ercentage of gross national product have also been moderate, although higher than in the case of tax receipts. In recent years, Government expenditures have averaged only about 9% of the gross national product, ranging from a low of 7.3% to a high of 10.3%.11 These proportions are low com~ared to other countries Hith similar economies, and El Salvador may be considered fortunate in the small portion of its resources absorbed by Government activities._ 135. In view of the relatively low ratio of Government services to gross national product, and the great need in El Salvador for additional social, cultural, and development expenditures, it is pertinent to enquire into the existing possibilities for increasing taxation for such purposes. The 1:/ See Table VI"10 the AppendiX.' Y This J;ercentage ,,,auld be even lower if the non-monetary part of the economy were included in the gross national product. 11 Detailed data are given in Table VII of the Appendix. - 40 - investigators from the Federal Reserve Bank of New York, who made an exhaus- tive examination of the Salvadorean tax system, concluded that a "reasonable increase in the present very modest ratio of taxes to national income is possible." The investigators suggested that tax revenues could be increased by tI(l) more effective ad.ministration of existing taxes; (2) increases in the rates of existing taxes, which in most instances are moderate (the chief exception being certain import taxes); and (3) expansion of the present tax system, which still is far from tapping effectively all the sourceS of revenue available to modern government." c. The Pattern of Expenditures 136 •. The Federal Reserve Bank of New York has preFared data tracing the historical pattern of E1 Salvador's Government expenditures, from whioh the following table is abstracted: Annual Government Ex£enq.:!ture§ by Purpose Millions of Colon~§ ______ F.e~~rg~e~n~t~ _______ 1937/38 1945 1945Ji 1937/38 1945 194s!i General administration 8·i l~:A 22.7 37.7 40.0 39 .. 4 National defense 4.· 5e4 18.5 13.1 9.4 Cultural and social services 3,,2 5.2 14.6 14.4 18.0 25.3 Economic develoFment 4.1 5.8 12.0 18.7 19.9 20.9 Debt service Total - 2.4 22.2 2.6 29.1 2::.2 57.6 19.:1 100.0 9.0 100.0 ~ 5.0 100.0 17 Estimated. 1. GQveInment Administrat!ve Ex£endituISU'! 137. The general Fattern of expenditures shows that the costs of Govern- ment administration which, like the cost of other State functions, rose in absolute terms, has not increased to the same extent proportionally since the feriod immediately preceding the lolar. In the last ten years (1939-1948), the proportion has remained remarkably stable, never going above 42% of total expenditure or below 39%, except in 1946, when it accounted for only 31% of - 41 - total expenditures. The relative ex~enditures for national defense have been falling almost steadily, accounting for 9% of total estimated expenditures in 1948 com~ared to "19% in "1937/38. Even the absolute increase in expenditures for this ~rpose have been unsubstantial. 2. Cultural and Soci~l Serviges Exr;enditur~§. 138. Disbursements for oultural and social services have shown the most important single increase and now account for one-fourth of .the total budget as against only 14% before the war. Such expenditures include outlays for education (which is responsible for the bulk of the increase), health, and subsidies to orphanages and other semi-public institutions. 3.. Economic Deve10:Ement Disbursements 139. Ex~endituresforeconomic de~1eloI-ment have also increased consider- ably, though at a less rapid rate than those for cultural and social FUrposes, with the consequence that the 21% of the total budget which these activities absorb is only about 2% above the prewar proportion. Expenditures for economic developnent are mainly for public works (",hich, in the form of road construction, building of bridges, and improvement of dock faoilities, have eXFanded sharply) ; and subsidies to the Social Deve1or::ment Administrat.ion (a Government organization engaged in the sale of Government lands to small farmers, and in certain other aotivities), the Mortgage Bank (which has financed expansion in ~gricultur~), and such organizations as the Coffee Growers' ASSOCiation, the Salvador Coffee Com~~ny, the Cattlemen's Associa- tion and the Tourist Board. The following table divides eXFenditures for economic development into four main groups: P~~~~n~94811 ~1il1ions of Colones 1940 "1945 194817 1940 Publi. "'lorks 2 ...8 4.9 9.3 52.9 . 84.4 77 •.8 Social Developnent Adminis. 0.7 0.7 2.0 13.8 11.3 16.7 Mortgage Bank 1.5 28.4 Subsidies to Coffee Growers' Association, etc. Total 0.3 5.3 0.2 --- 5.8 0.7 12.0 4.9 100.0 4.3 100.0 -5.6 100.0 17 Estimated. 140. The New York Federal Reserve Bank estimates that in "real" terms, i.e., at 1942 price8~ Government capital formation in the form of roads, buildings, plant and equipment, etc .. , ranged, during the years for which data are available, from a low of 8.6% of total "real" expenditures (in 1946) to 17.1% (in 1940). The data show that while money ey.penditures for capital formation have fluctuated considerably, that the ratio of capital formation to total expenditures has shown no pronounced tendency to increase with rising revenues.lI 141. Figures on capital formation in the private sector of the ec.onomy are too sketchy to permit any quantitative comparison between the Government ratio of capital formation and that of the private sector. Hovever, in the most tentative terms, it may be said that the ratio of governmental capital formation tends to be slightly higher than that of the private sector. 4. Public,Debt Service 142. The public debt service, which absorbed 10.7% of total ex~~nditures in 1937/38, took only 5% in 1947 and in 1948. In absolute terms, exrenditures for this purpose have risen slightly over the period lirom ¢2.4 million ($1.0 million) to ¢2.9 million ($1~2 million17; the relative decline ia attributable to the rise in over-all expenditures over the period. However, the service of i7 See Table VIII in the Appendix for details. - 43 - the debt would have been higher were it not for the settlement of the debt which has taken place since 1946~ D. Public Debt 1. Present Status of Debt 143. The relatively small size of EI Salvador's public debt has reduced its role to minor proportions. At the end of 1948~ EI Salvador's entire public debt, all of it external, was equivalent to $12.9 million, of which $9.5 million was U.S. dollar debt and the remainder sterling debt equal to b840,855 ($3.4 million). In addition, E1 Salvador owed the United States $187,000 for Lend-Lease as of December 31, 1948. Except for short~term loans which are repaid within the fiscal year, El Salvador has no internal debt. 144. Of the 9.5 million dollar indebtedness, $1.1 million represents the unpaid portion of an Export~Import Bank loan (originally totalling $1.7 million), for construction of the Inter-American Highway, public works and roads. The remaining dollar debt ($8.5 million) and all of the sterling indebtedness were originally oontracted under the National Loan Aot of 1922, which authorized the issue of two series of dollar bonds and one series of sterling bonds for the purpose of retiring certain foreign and internal debts, financing public works, and making subsidy payments to the International Rail~ ways of Central America (IRCA), one of El Salvador'.s two railways. El Salvador's Outstanding Public Debt gs of December 31. 1948 (Millions of d~11ars) National Loan Act of 1922 Dollar Bonds -- $11.9 8 .. 5 Sterling Bonds (~840t855) 3.;4 Export-Import Bank Loan Inter-American Highway Bonds - 1.1 0.5 Public Works and Roads Bonds 0.;6 Total $12.cjl/ 11 Does not include the $187.000 owed to the.U.S. on Lend-Lease Account. -44- 2. Debt Service 145. Excluding Lend-Lease payments ($150,000 of the total $187,000 owed is scheduled for repayment in 1949), the. Salvadorean annual debt service amounts to $960,000, of which $160,000 is for amortization and interest on the Export-!m]?ort Bank loan and ~890,000 for the remaining debt. On this basi~, the Salvadorean debt burden is very low, amounting in 1946 to only 0.6% of gross national product, 5.3% of Government expenditures, and 3.7% of exports; in 1948, the debt service represented even smaller proportions amounting to only 3.0% of Government disbursements and 2!1% of exports. The ratio of debt service to exports. will remain low as long as coffee prices are high. The immediate outlook for coffee is favorable but in the long run some decline in coffee prices is to be expected. 3. Recent Debt Record 146. The three series of bonds issued under the terms of the National Loan Act of 1922 bore interest rates of 6 to 8%. During the depression of the 'thirties these rates proved to be a heavy charge, accentuated by the decline in prices in the 1930's which increased the real burden of the debt, and in 1932, service payments were suspended. In 1933, interest paj'1D.ents were resumed for a time under a temporary agreement Hith the bondholders, but in 1935, payments 'vere again susrended. After another settlement in April 1936 reduced interest rates, payments were resumed once more, but they were stoPFed again in January .1938, the debt remaining in complete default for a period of eight years, until 1946. In spite of the steady eXFansion in foreign reserves during this period (they rose from $9 million to $31 million), no attempt was made to resume rayments on the debt. Instead, the Government reduced the outstanding dollar bonds during this period by more than a third fr9m $11.8 million to $7.8m111ion by ~urchasing the bonds in ;;..44- 2. Debt Service 145~ Excluding Lend-lease payments ($150,000 of the total $187,000 owed is scheduled for repayment in 1949), the Salvadorean annual debt service amounts to $960,000, of which $160,000 is for amortization and interest on the Export-Import Bank loan and $800,000 for the remaining debt. On this basis, the Salvadorean debt burden is very low, amounting in 1946 to only 0~6% of gross national product, 5.3% of Government eXf,enditures, and 3.7% of exports; in 1948, the debt service repreElented even smaller proportions amounting to only 3.0% of Govern~nt disbursements and 2.1% of exports. The ratio of debt service to exports will remain low as long as coffee prices are high. The immediate outlook for coffee is favorable but in the long run some decline in coffee prices is to be expected. 3. Recent D~bt Re90rd 146. The three series of bonds issued under the terms of the National Loan Act of 1922 bore interest rates of 6 to 8%. During the depression of the 'thirties these rates proved to be a heavy charge, accentuated by the decline in prices in the 1930's which increased the real burden of the debt, and in 1932, service payments were susf,ended. In 1933, interest payments were resumed for a time under a temporary agreement ,.rith the bondholders, but in 1935; :payments l.Jere again susrended. After another settlement in April 1936 reduced interest rates, payments were resumed once more, but they were stoPFed again in January 1938, the debt remaining in complete default for a period of eight years, until 1946. In spite of the steady eXFansion in foreign reserves dUring this period (they rose from $9 million to $31 . ' . , . million), no attempt was made to resume I-ayments on the debt; Instead, the Government reduced the outstanding dollar bonds during this feriod by more than a third from $11~8 million to $7.8 million by purchasing the bonds in - 45 - the open market at distress prices. Protests '''ere lodged by bond.'101ders with the Salvadorean Government against these purchases, but they were inef- fective. 147. Under the terms of the readjustment offer made by the Salvadorean Government in June, 1946, which is to renain open until Jan~ary 1950, out- standing bonds issued under the NatioJ1a~ Loan Act of 1922 I:l::ly be exchanged on a par for par basis for new bonds d'U.3 :'Xl. J,976 and DE!'... y:b~ ',~'n 'llalf the original interest rates. New bonds at .3;:; (J16.3 million); during the same period, currency in circulation increased only 164% from ¢17.3 million (C6.9 Dillion) to ¢63 million (~~25.2 million»)! By far the greatest part of the increase in the monetary means is traceable to balance of payments surpluses" parti- cularly in 1942 and 1943" the net effect of the budget and the barucing system to credit expansion ha,ving been relatively unimportant. In 1948, 84% of the total money supply originated from the purchase of gold and foreign exchange by the banking system.Y 171. Although prices more than doubled during the war years [the whole- sale price index rose from 73 (1937 =100) in 1939 to 148 in 1945 and the retail food index from 74 (1937 =100) to 174 in 194~,1I the increase in prices was relatively moderate compared to many neighboring countries because of price control measures as well as volTh"1tar'Y and forced aCCUli.luJa tion of liquid balances. Since 1945, most prices have continued to rise as a result of latent inflationary factors having their origin in the large liquid bal- • ances, on the one hand, and the shortage of goods" on the other~ The whole- sale price index at the end of November 1948 stood at 259 and the retail price index at 268. In December 1948, as a result of a Government decree Y Table IX in the Appendix shows the increase in the money supply from 1939 to date. Y Table X of the Appendix traces the source of the Salvadorean money supply since 1939. 11 Table XI lists wholesale and retail prices in E1 Salvador since 1938. - 53 - prohibiting the export of corn, the retail price is reported (quite possibly in error) to have fallen from ¢22 (8.80) a fanega to ¢8 ($3.20) a fanega (a f'anega is about 24 cubic feet) ." Because of this change, the ul'lweighted index of retail prices (in which corn is by far the most important item) in December 1948 and January 1949 declinedt~ and remained at 182; the less primitive weighted index of wholesale prices was not affected similar~, and rose slightly in December 1948 to 260." 112.' Higher prices have absorbed some savmgS,:Y'WhiCh represented an inflationary threat, although considerable sums are still ava.iJa ble to 't·he public. However, higher bank balances may reflect a greater preference for liquidity on the part of high income groups rather than a source of de~and in the near future. The Government is endeavoring to supplement domestic food production, which has shown no substantial per capita improvement, by increasing imports of toods and c1.ll'tailing exports of basic food crops, but future price movements remain uncertain. 112A. The conservative management of the Salvadorean commercial banks,' headed by a central bank which has consistently adhere~ to orthodox monetary principJres; has helped a void ex-treme price fluct ua tions .' Tne banking system has refrained from expanding credits in proportion to the very sizeable increase in reserves which has taken place during the past few years. This policy, promoted by the central bank and gene~ally followed by the commercial . , . . banks, has curbed speculation and reduced the intensity of the boom, so as to make unlikely extreme credit contraction in the future. G. Vlages 172B. A proposed labor code vras at Je ast partly completed in 1947 by a labor Code Commission set up for the purpose, but it has not yet been enacted YOnlya negligible part of the public's savings are held in time deposits, which hav:e never been greate~ than in 1942 when they a.'l1ounted to ¢4.8 million ($1~9 !pillion), In IfJB.rch 1949, such deposits were only ¢1,0 million ($0.4 million). - 54 - into law~ There is very little information available on wages rates paid to agricultural labor.. For rural ]a bor in general." the average wage is approx- imately equivalent to :}.40 or ~~.50 per day.. Coffee pickers get a daily wage equivalent to about 72 cents during the three-months harvesting perio~ In coffee processing plants, semi-skilled workers earn from 80 cents to :·:1,20 per day; in the sugarcane fields, laborers get 30 cents per ton of cane cut; cotton pickers average about ~~1.• 50 per day; and longshoremen get 10 cents an hour.. Basic food prices for rural 110 rkers have been rising in spite of Government attempts to stabilize them and they are high in relation to pre- vailing wages. - 55 - v. n~TERNATroNAL -. TRADE AND FINANCE A. Foreign Trade 173. Salvadorean exports, which declined at the beginning of the war from :jp12.2 million in 1939 to.i,;l10.4 million in 1940, rose sharply throu(~h the ,:ar and postwar period. In 1948, exports reached a record figure of ~~45 mHlion and <;lata for the first four months of 1949 in<;licate that current exports exceed those of the corresponding period last year .. ]/ 174. Crop diversification in recent years has slightly reduced El Salvador's dependence on coffee, but that commodity still dominates the country's export trade. In the prewar years of 1936 and 1947, coffee accounted for 95 and 92% of all exports respectively; in 1947 and 1948, coffee shipments amounted to 84 and 79%, respectively.' The remaining commodity exports mainly included gold and silver, sugar, rice, cotton, beans, balsa"ll, vegetable oil and oi1seeds, and textiles. 175... Although the importance of the United States as a market for Salva- dorean products, particularly coffee, reached unprecedentedly high levels during the war, a steady growth of Salvadorean exports to the United States was evident in prewar years, as indicated in the following data; Percentage of Total Salvadorean bxports ..,...,..- Year To the U.S. . To Othe::::" Countries 1930 23 77 1935 48 52 1939 60 ho 19h2 82 18 19h.5 85 15 1946 71 29 1947 78 22 ~able XIII in the Appendix shows annual exports since 1936. - 56 - 176. In 1942, following the outbreak of the war and the resulting shifts in trade patterns, the value of Salvadorean exports to the United States rose to about 82% of the total, and in 191.S, they reached a high point of 8SC;. u~ith the return of more normal trade condittons, the United States share of Salvadorean exports fell to 71% in 1946, but rose to 78% in 1947. 177. Canada, Honduras and Guatemala constitute other fairly important Salvadorean markets, while Germany, Scandinavia and the rest of Europe, which in 1934, took 68% of Salvadorean exports, are now reduced to relative insig- nificance as markets for El Salvador: Percentage lJistribution of Salvadorean t.xports by Destination Market 1939 ,!947 Canada 4% Honduras 4% U Guatemala 1 3 Other Latin·America 2 5 Germany 9 Scandinavia 10 2 Other Europe 8 4 178. As may be seen from the data in Table XIII of the Appendix, Sal- vador t S imports have customarily followed the movement of its exports. ~':hen eXports began their upward movement, imports increased likevnse, although they took a Im~er time to reach the same proportional increase as exports. Thus, as in the case of exports, imports responded to the opening of hostili- ties in .Lurope by declining (from ~)B.8 million in 1939 to ;.,8 ..1 million in 1940) • Thereafter,. they increased slowly,. largely because the wartime shortage of goods limited demand. Beginning in 1946, 'when more consumer goods became available in the United States, imports were accelerated and in 19L.8 they had reached ·;.,41.5 million. In consequence of the slovver upward movement of imports as compared to exports, El Salvador's trade balance, always favorable in recent years, was especially so from 1942 through 19L5. - 57 - 179. El Salvadorfs import trade consists mainly of manufactured products. Iron and steel, textiles, machinery, petroleum and products, automobiles, and wheat and wheat flour account for about ,0% of total imports. 180~ The united States is today, as it has been for many yea~s, the chief supplier of 61 Salvador's imports, and as in the case of Salvadorean eiiports, has been playing an increasingly important role as supplier as a result of the war. In 1939, when the growing importance of the United States as a supplier was already manifest, E1 Salvador purchased 53% of its total imports from the United States; in 1947, 78% of its imports came from this source. During the war, Germany, which furnished 33% of E1 Salvador's imports in 19;6 and 17% in 1939, was eliminated as a supplier. other Eu.ropean countries, which retluced their exports to E1 Salvador during the war almost to the vantshing point, are beginning to reopen the Salvadorean market. Great Britain, however, is an exception, her sales to 11 Salvador having continued to decline. Percentage Distribution of Salvadorean Imrorts by Orisin SUEplier united States -53% 1939 19h7 78% Canada 1 2 Honduras ;3 3 Guatemala 1 1 uther Latin America 3 6 Germany 17 Great Britain 7 3 Other Europe ];/ 1.5 7 , 100% 100% • ]} In the postwar period, consisting mainly of the Low Countries and Scandinavia, ... 58 ... B~ Terms of Trade 181. On the basis of an index constructed by the Federal Reserve Bank of New York which uses 1939 as a base, );/ the terms of trade have been fa'Tor- able for 11 Salvador since 1942. In 1940, the terms of trade "!gere unfavor- able to 11 Salvador as a result of increasing import prices and low coffee prices, and in 1941, because of high import prices. Since 1940, h01':6ver, the index of the terms of trade has risen almost without interruption, in spite of increasing import prices, as a result of the greater rise in coffee export prices. In 1947 it was 69% above 1939. c. ,Commercial Polici{ 182. In the last half of the nineteenth century, several attempts were made to establish a customs union covering the Central American countries, and from time to time El Salvador negotiated trade agreements with its neigh- bors to effect such cooperation, '\"ost of these arrangements, hoo/rever, were of short duration. In 1932, El Salvador established a Central American Tar- iff, applying preferential import duties from neighboring countries. El Salvador has come closest to effecting a customs union with Honduras, ;,vith which a special agreement has been in effect since 1918 providing for free trade between the two countries in all locally-produced commoditi.es except coffee, hides, and cigarettes. On the other hand, a free .. trade agreement with Guatemala, which resembled the one 'I'd th Honduras, was terminated in November 1943, after a provisional period of two years on the grounds that it caused a substantial loss in customs revenues. 183, Since 1937, £1 Salvador has had a trade agreement with the United States negotiated under the U.S. ~eciprocal Trade Agreements Act. favored-nations agreements also exist with lilexico, Switzerland, Cana,da, and the United Kingdom, A cornmercial agreement is in effect with Sweden and treaties of commerce and navigation 'l'n th the Netherlands and ir.Ji th Nor'N'ay. 17 See Table XIV in the'Apperidix. 59 ~ D. Balance of Payments I 184.. El Salvador's balance of payments is characterized by a surpJ.us in its current account and a deficit in its capital account. In 19J.~7, the bal- ance of payments showed a surplus of ~~2.8 million in current account 'while capital transactions were deficitary to the extent of $1.9 million, reducing the balance of payments surplus to $0.9 million. These figures compared '\Jith a surplus of :;;;3 1 4 million in the 1946 current account, a deficit of :v3.3 mil~ lion in capital movements, and an overall balance of paJcments surplus of ~O.l million. . 1/ - Su~~ry of £1 Salvador's Balance of payments for 1947 I (millions of dollars) 1947 . Net Credit Credit Debit or Debit --.-.,....,---......- I. Current Account Exports (f.o~b!), imports (e.i.f.) 39,6 36,8 t 2.8 Coffee expOrts (33,7) All other merchandise exports Non monetary gold, net exports ( 5~9) O,~ - t 0.2 Foreign travel 0.8 1.7 ~ 0.9 Investment income 0,!2 1,2 - 1.0 Other services 3.7 2,3 t 1.4 Donations O~3 ~ .J. 0.3 Total current account 4418 42.0 T2:13 II. CaEital and Gold t Private Long~term Capital Private short-term balances (net) 0.1 ~ - 3.2 f - 3,2 0,1 Official: Gold subscription: nlF, IBED ~ Other long~term capital 1~0 .. 1,0 Short-term liabilities 0.7 "!' f 0.7 Short-term assets 3~8 ~ f 3~8 Monetary gold 2~3 - 2.3 Total capital account Li";6 b'3 ~ 1~'9 Difference f 0.9 Source: IMF, International Financial Statistics, and Federal Reserve Bank oi'~ New York 11 See Table XV in the Appendix for details. .... 60 .... 18S. The pattern of the postwar balance of payments ha.s remained substan- tially unchanged from the prewar period, with receipts from merchandise trade representing about 89% of current receipts in 1947 as against 87% in 1938; expenditures for imports accounted for 88% of total current account payments in 1947, compared vii th 82% in 1938. l/ 186. The surpluses on current account result from El Salvador's f8"1.'orable trade balances,. The deficits in other current account items l',rhich have usually offset the trade surplus to some extent, are relatively small. !lOther ser- vices ll in the current account customarily show a deficit, but in 1947, because of increased remittances from Salvadorean workers abroad, higher administra- tive expenses of foreign companies operating in E1 Salvador due to increased prices, and larger commissions earned by Salvadorean agents of foreign com- panies, such credits exceeded debits. 187. Capi tal account deficits, in the Salvadorean balance of payments have been due to the fact that capital receipts from dire~t investments or from other private sources have been relatively smaller than the outflow of short-term private capital. Foreign investment in ~l Salvador has remained low, despite the relatively favorable conditions created by a free-exchange market and stable exchange rates since 193h. thUe these advantages have attracted short-term bank credit, long-term capital has not entered the country in substantial amounts, in part because of the lack of mineral resources or the availabili ty of substantial amounts of lowlands for the establishment of banana plantations whioh have typically provided outlets for foreign investment in other Central American countries. l,}oreover, the small size of the market has discouraged foreign investment for the production of goods for domestic con- sumption, while the default on the foreign debt and political uncertainty since 1944 have reduced further the potential interest of foreign investors in El Salvador. 17 See Table XV in the Appendix. - 61- 188. On the ather hand, in the absence of exchane;e restrictions, short- term capital has continued to flow outvlaru in the form of funds held abroad by coffee exporters and by increased foreign holdings of the Salvadorean Coffee Company and other agencies. The short-term assets of ~! 7.56 million held by Salvadoreans in the U.S. at the end of 1.948, as reported by U.S. banks in the New York Federal Reserve District, do not adequately measure the size of such holdings for several reasons. This total inc+udes official as well as unof- ficial holdings. However, it does not include deposits in west coast banks where the greatest part of Salvadorean funds in the U.S. are maintained. The Salvadorean Coffee Company alone has balances of over $2 million in San Fran- cisco banks', Nor do the New York Federal Reserve Uist:dct data include Salvadorean funds in t.>te hands of U.S. importers, or moneys deposited in U.S. banks as domestic accounts, although ,salvadorean exporters use both these means of retaining an adequate supply of working capital in the U.S. in connection with their business activities. It is a safe guess, therefore, that the actual Salvadorean holdings in the United ,states are well above the amounts reported by banks in the hew York Federal Jieserve .lJistrict. 189, AS a consequence of its balance of payments surpluses, as well as the monetary conservatism of both the Government and the Central rteserve Ba.nk, the Salvadorean colon since 1934 has presented the unusual spectacle of a currency not only completely stable in terms of gold, b1.lt also completely free from exchange controls. 190. 1ange reserves increased uninter- El Sabrador's gold and foreign exc1 ruptedly from ;;i9 .. 4 million at the end of 1939 to ,,31.8 million at the end of 1946, since when there has been little change. Largely because of seasonal receipts from the sale of coffee, however, April 1949 holdtngs amounted to :;;;40.8 million, of which :",14.4 million was gold and practically all the rest was foreign exchange. About 99fo of the foreign exchange holdings of - 62 - Salvador are in the form of dollars and the remainder is largely made up of Guatemalan quetzales and Honduran lempiras, both of which are convertible. JI Current data on long-term Salvadorean assets in the United States are not available; in 1941, they were recorded at $3.2 million. 191. iNi th more than three-fourths of its current foreign exchange receipts coming from the export of coffee, the state of 11 Salvador's balance of pay- ments is, in a real sense, a function of the value of coffee exports, and in particular, of such exports to the United States. The country's dependence on the sale in a single foreign market of a single product which is character- ized by a highly unstable price over which it exercises no control, subjects the Salvadorean balance of payments to obvious uncertainties. There are, how- ever, favorable aspects to E1 Salvador IS posi ti on l\'hieh actually emanate from its dependence on the United States as a market, not the least of which is the country's complete freedom from the convertibility prob lem it would have had if Europe had remained its prime customer. Iforeover, the high level of incomes in the United States and the increase in coffee consumption in recent years (per capita consumption rose from 12 pounds in 1929 to 18 pounds in 19L7), present El Salvador with an unusually stable market for its coffee. The absence of any interests in the United States seeking protection against coffee imports~ and the superiority of its coffee over the Brazilian product, account for the fact that El Salvador has rarely experienced difficulty in disposing of its coffee crop. 192. But while the loss or curtailment of its market is not a likely development, the future price of coffee is surrounded by some uncertainty. On the basis of the estimated current export crop of 1.5 million Quintals, a drop of only one penny per pound means a foreign exchange loss of ~d.5 million, or ).3% of 1948 exports. For the time being, prices remain high, although slight- ly below peak levels. As past experience has demonstrated, the key to coffee ,. 11 Table XVI traces the movement of El Salvador's international reserves since 1939. - 63 - prices lies in the quantity of coffee produced in Brazil. From this point of view, the outlook appears favorable, since there is no sign of the overproduc- tion which caused coffee prices to sink to the low levels of previous years. Furthermore, present indications are that the forthcoming Salvadorean crop will also be a bumper crop, although not as large as last year's output. If the price of coffee should fall, however, imports also will prObably decline. This is likely, as past experience has shoVl'l1, since the country produces most of the basic foodstuffs it consumes and a large part of its imports are of the kind 'which can be postponed during periods when the terms of trade are unfavor- able to EI Salvador. Under these circumstances, the Salvadorean balance of payments on current account is likely to remain favorable, although possibly at somewhat lower levels than those which now prevail. In the long run, how- ever, EI Salvador's balance of payments, as well as the welfare of the country's people and economy, must depend on the expansion of agricultural production and diversification of its economy_ Only a small beginning has been made thus far in these directions~ - 64 - VI. nATIOlifAL D:~VELOP::Ei:TT POLICY AlTD PROGRAl~S 193. :Economic policy in :Ell Sp,lv!:>,dor is to a mD,jor extent determined by the interests of the coffee '')lD.nters, uhoclominl'1,te the life of the cO'Ul1tr~r. Thi s aCco'QIlts for the ftl,ct th~,t, ~,1 though the mmounced nr,tion!:>1 '!Jolic7 of the country has been to diversify 11rocluction "nd to esk,blish ns'·r industries, reb.tively little h,),g been accomnl1shed to bring e,bout re<>l di versificrtion. The problem of economic development is com,/lic..,ted by the necessity for recon- ciling the desire of :;1lontation o\-mers to hold dONn IJrocl.uction costs (cou''''led Hi th the need for large end clepend~.ble sources of cheap 1 '1.bor) "nd the g1'o"'in& recognition thD,t the country's long-term interests require gre!",ter diver8ifi- cation of the economy. 194. It is perhaps too much to eX]!ect thnt C', concertecl effort ','ill ·oe made to diversify the country's economic life D,S long fI.S the prev~.ilingly high price of coffee brinGs B, return of lOO~ OVer outl"1Ys to the groNers I pros:peri ty to e.."tporters nnd importers, 8, high level of em}?lojlment, ana. l[',rge Government revenues. To ,nn ever greater extent, ho,·reV'er, the ~~')ressure of the grolc Ting popul~,t1on u'V)on E1 S[l~vad.orls limitGd. l:mcl resources is forcing f\,ttention to the long-term need for a more bal~nced nnd intensive development of the economy through im'V)Toved ",griculturc\l technioues, the esto,blishmf3nt of :us,-, light industries, fmd the expansion of existing ones. 195. In spite of the urgency for economio develo11ment; hOT.rever t there h".6 been no effort to est~,blish ~. comT}rehensive i")rogr"'m for economic eX'po.."lsion end diversific8,tion. ,for E1 Se,lvmlor's governments, to fl. much greater extent than those of mrmy other Lp,tin Americ~n countries, heye refrained from engaging in economi c (Leti viti es t even in ,;:l,rens 1'Thi ch hewe corne to be reeogni zed as nu.bli c utilities. !"hen the Rio Lempe. electrification :project t,re,s pro),)ose<:l, - 65 - consideruble opposition [1,rose even Hithin the Government, ug"',inst public oHnership of the project," ~nd the question "':'S fin",lly resolved in f'wor of public operution only becr.use of the continuinG f£1.ilure of }lri v['.te po"'er compnnies to :,orovide sufficient electric! ty. 196. In at lem:;t a pa.rti~,l uttempt to overcome the l'),ck of orr;~mi zed economic thinldng in the country, the governinr; Junt('. recently cre:':'.tec. c, Commission for Economic Studies to develop 'nhms for ue,·' projects Hhic1'1 Hould e:x:p~llcl proc'tuctlon, :provia.e em},loyment" "nd rrl.ise "I),?,;e levels. The Oomrl1ission h:'1.8 enressed. "articulrt.r interest in c!'6:",ting investment oplortuni ties for inD,cti ve c!'.pitI'1,1 in productive enternri ses. 197. It is noteNorthy, hONever, thut the Salvc.doreDn Government hD.S chosen not to emub,te its neighbor, GU£'.tem~.lD" by orgenizing [;1, develo:;?ment institute che.rged ~.ri th the ulC'nnin,; and execution of development 'f)rojects. The Sool ~l Develo:nment .-idIi1inistro,tion (lIejorl:l,miento ~oci[',l) coulel. be rego,rded ",$ [" first step in tho,t direction, but it is n. very sm~ll step inc:.eed. The lIe tior0miento Social h'l.s been in existence since 1932, bl1.t in 1943 "Ie.s recon- sti tuted ,.rith consider":,,bly gre.::.\ter resourcesY and bro?der po,rers. OriginC'1ly t the yrimary purpose of lie.iore.miento SooieJ. ·,r8,S to survey :'1.nd distribute public l?nds in small f.';l.rm units. Later, it also acquired and operp.ted 0. ds,iry ".nd f1n!:'noed the development of lOl.r-cost urb:-'n housing projects., It 11.:-',13 recently begun to oper~/:;e a textile fEl.ctory 1",$ n. "pilot n nlent for the Sv,lvadorenn textile incl.ustry and hopes to provide the country 1!ri tb. lo"r-cost Yl".rns for domestic "'elwln[; ".s Hell !01.S cloth. 1I The Cor:.)or~.tion "'as provided I'd th [I,!l origin!"',l c9:oi tl'1.l of ¢800 ,000 ($320,000), in the form of stoel,:, of Nhich t,·ro...,.fifths "1",8 to be sub- scri bed by the Hortgc,ge Bankt t','o-fifths by the rurf',l oredi t cooperatives, ('elld on~f:tfth by private stockholdel's. It ~lso received the funcls and property of the lTr-.tiono.l BO".rd of Soci:-.1 Defense, \·,hich it s1).'f)ersectec1.•. - 66 - 198. It h~,s been suggested thrl,t the Government could obt~dn funcls to fin9!lCe a, development corporation by (a) collecting the d.i:fference from coffee J1roducers 1,~hen the tot,"'.l !laid by 3. producer as exnort t"1XeS on coffee (no 1., p~dd in lieu of income t('xes) is not equa,l to the nmount for "rhioh he ~"ould be liable if the eXisting income tax Here a:"l:9lied to his inco~e; (b) r0.ising import tariffs on lmruries ,.,hich are no'" belOH ro.tas charged on necessities, and (c) introducing social security taxes. 199. In recent years, the Government hc;l,g encouragecl cliversific':'.tion in E,gricul tur['.l production an(l. some 1JrOGress has been me-.de tot"o,re. reducing the reb,tive im]")ort"Ilce of coffee in the economy. ~he domestic sUGo,r industry hl).s been r.ided through mee.aures restricting im:lorts of aug::',r ['Ind aug!',r pro- ducts. the remov!C',l of ~ort duti es t limi try.tion of 10c,.".1 T)roduction" ano. the :fixing of minimum prices on sug!",r sold "Jithin the country. SimilE,r measures he.va been t:,.l:en to encourage the domestic production of cotton. The Govern- ment [>,lso iml10rted speci"~ seed from Ce,liforniEl. ~ncl. restricted the import of foreign cotton. The reouirement tht 0.11 S~.lv!).dore.:7n coffee be l')t'.ckeo. '"nd shi:o,,?eo. in henequen brV;s of 10c<':,1 manu:fD.cture am1 the exem:,ltion of such b~ES from export ctuty h'-',s n.lso stimuloted the nrocluction of the fiber in El Ss,lvEl.dor. F1..U'thermore, the est,-"blishment of the ruro,l credit cooper"'.tivea 111'1,8 h[),d B, }'Y\rt in stimulFl,ting :oroduction of sm;",ll un! ts in !:',gricul twe [',S "rell t;>,S h?nc1icr~,fts~ 200. The most im~"ort"'nt mine 0','ner6 operfl,te l.Uld.er extremel:7 :t~worD,ble concessions from the Governnent \·rhich include income t,~x concessions ~m(l relief from im1)ort duties on m'~,chinel"J ['no. supply im'.orts, In the industrial :flele1, Government policy has promoted the est"blishment by priv!),te enteIl'Jrise of a f8.ir number of fE',ctories, including textile mills, iron foundries. pharma- ceuticp.l plent$, vegetable-oil mills ~nd a sul,,?huric acid factory. ..:. 67 - 201. Salva.doreen tax policy pl?ces fe~-' obst"cles in the "r::>y of develop- ment incentives by private enterprise, the lJrogressiveness of ta."1:at1on being exceedingly mild. In fact t 1 t '!>,euld s,Tnee.r th,':'.t Se.lve.dorel.;ln fiscal provisions encoure,ge neN pr1 vate investment by tariff protection (e.g., textiles '"'.nel sugar) ['nd by frequent, though e.YJparently unsystem£l,tic. exemptions from customs duties on 1m'Jorted me.chinery used by ne1tT industries. HONever, E1 Salve.dor has not encournged ne1'! industries in the same "re:y I:'.s other countries (e~g. CostE!. Ricl'l.) f by gr~nting exemptions from income t0X on lJrofi ts of neH investment for !:I. limited period. It is probf'.bly true, hOHever, thfl.t the El.bsence of 8. tax on c!'.mital g8-ins, tenc.s, in D. negn.tive ,-Jay, to t:'l.ttr'·.ot M.pit'::>.l to s:'?eculative re.';:-"l estate 1Jromotions ,. ,h1Ch might otheI'"'·rise be utilized for ~Jroc1:uctive neH investment. This si t,uation could be overcome if, in accordvnce Hi th recom.rnend-',tions of the Feder ....l Reserve Bank of Fe," York. c~.pi tnl geins "'ere t"xed Hi th the exception, in Hhole or in part, of g~,ins re~1ized in l:lUsiness ventures "hich contribute to the develo:Jment of the country. 202. EJ. Salvador enjoys the e.lmost uni que eli stinction in Le.tin Americo. of having maink.ined e, st!':'.ble exchan&e r[l.te [lnd a free exchengB marIret since 1934. The 2.baence of excl1l'nge restrictions has been of unouestionCl,ble v.;),lue to merchrtnts t trl.welers and investers, ~md has mcule E1 Sa,lvador a preferred market for Amel'icn.D. exporters. There is little evidence, h01,rever, that orthodox exchange policies hn.Ye resulted in a rate of economic development, strikingly different from thg,t eX')erienced by undercleveloped countries "There exchange rates have been unst1:'.ble or ",here controls h(we been in effect. A good part of the substnntb.l s~wincs 11hich hf1.ve been !'.caurnul1),ted from coffee sales at high prices, lie relatively inactive in co~rnercial baw{ deposits, hoarded banknotes, or h!we found their '-ray to the Uni ted States, insteC',(l of being invested locally in productive enterprises. Since, moreover, foreign capital has entered the countr,r in only limited amounts, economic develo~ment ... 68 - he.s not been stimul!'.ted to ~ny greo.t extent by orthodox eXCh~.l1ge policies. 203. The failure of monet!:'.ry ot'thodox~r to e.cce1er!:',te the ro.te of (leveloy- ment h!1.s been due to some extent to the restrictions ",111ch such orthodoxy imlJOSeS,. It has been the Government1s 'Jo1iey to finr,nce public Horl:s. not through borrm.Jing, but out of current receipts. This pe.y-a.s-you-go S;rsteJ,l, he,s r.woid.ed inf'le,tionc.ry borro"ring, but necessarily has limited the volume of development:",l expenditures. 'rhe tight cre(li t policy s:90nsorecL b~T the Centr~l BDnk he.s :\180 had its anti-infl::>.tiont'l.ry effects "net i t h::-,8 reduced. :oressure on the b~.bnce of payments, but i t hns curt ",il ed. the PillOunt of ftUlo.s mnd.e avails.bl e to private business. Simil.9.rly, freedom from exchr.nG9 controls ho.s permitted savings to be sent ~'.broD,d instet'l,d of their being investecl o.t home. \·Tb.ile it ,·muld be incorrect obviousl~T to 1'1 ",C9 the res:;?onsi b11i ty for the rel£'.ti ve1J~ modest rate of development upon El S~lv~dorts monetary orthodoxy, it is a question "forth considering 1!,hether it is possible for an undercl.evelopEd CotUltry like El Salve,dor to meet the grol'Tingly urgent need for eli versific".tion nnd r>ro- ductive 9Xps";''lsion "rhile maintaining strict adherence to its present finn-neie.l policies. 204. Governmente~ expenditures for clevelo!)ment he.ve not gone directly into the creation of neH enterpri ses but t01.rp,rd the cre8,tion of f3,oi1i ti es fl.ncl oon- di tions 1'Thich '·rould encournge I'd Vf),te investment, special em::)hasi s he.vine 'been :plneed on the construction of ror,ds "rhich I"ould open u!' ne~·r f),ree,s for (1.ev910:::>- ment,. Such expenditures hllve been increasing, ~bsolutely end relatively, as mlW be seen from the follo"'ing tfl.ble: Budgetary.:l!Rmendi t;ures for De'relopmen;t Economic Develonment Exuenditures Totel Gove;rnment In thous~~ds Ratio to tot8~ EX'i)enditures of colones Government ex- Period (thous~nds of colones) nenditures 1929/30-1933/34 2-;1.,810.5 ~,580.5 11.8 1934/35-1938/39 21,178.7 4,033.1 10.0 1939-1943 22,061,6 4,424.5 20.1 1944-1948, (est.) 4+,597,4 8,859.9 21.3 ... 69 - 205. In api te of the Government' s encLe~vors to le~we the res:~,onsi bili ty for economic development b.rgely in pri V!;.te h~nds * ho,·rever, it e.:ppet\rs (in the ','ords of the lIe", York Federd Reserve Bank re:!,ort previously cited) tlthat the Government' a efforts to stimul ".te pri vO.te ini tiati ve h~we met ,d tIl only modera.te success so fa.r .. ,; •••• it may be suggested that in ord.er to increase its effect- iveness; a. more comprehensive I'nd b::>.10ncec1. e,lj'1ro".ch "Tould be desirable. Roc.ds D-nd electric pOHer a.lone may not be sufficient to stimulD.te the cre!:"tion D-ncl. ex:p~nsion of entel"l)rises. Credit, techniC?l instruction. store.ge Dnc1 marketing fe.cili ties, and an ('.P7'ropri"itte soci.~.l and noli tic,,]. climate are import!',nt r'nd perh?ps essentir~ fD.Cts of fl. bf-.lDnced develo,])ment -progrrun. n 206. The devices employed to aid-'gricul ture tllrough the limitation of competition "Iud the su:r,yrort of commodity prices hC).ve nr.turr.lly been e.cconrp~nied by incrensing government'.',l intervention in the :;:>.ffr,irs of the various £:.,',:'ri- culturr>l industries involved. The utiliz1'l.tion of semi-government£'.l orgC'niza- tion~ (suc...'1. as the Coffee Gro'.,rers I Associe1,tion [l;Wl. the Cotton Gro"'ers' Coo:,?er:?- tive) Dnd the "ride regula.tory !loHers concentr"'ted in the hands of these grQUDS I m~ny of them "'i th interlocking directorl).tes, h:;'l,g 11.".(1 the effect of limiting the sphere of pri ve.te init~.ti ve in favor of the Government. Horeover. the methods used to ~rovide a,ssist['.nce to agriculture, indic"'cte fl. definite trend to"p,rd a.rtifici.!ll :price surrports and the 1)lncing of limitt",tions on competition in the production, JJrocessing, fe.bri cation , elld me.rk:eting of the more im'')ortant !'I.gri- cultural commodities nroduced in El Salve,dor. 207. Economic development in El Salvador is necessarily limited by the extremely small si ze of the loce.l me.rket. the 1 "'.ck of n?tureJ. resources J and the supJJly of trl;dned labor and manageri&,l t8lent. Since labor is rep,sonf'.bly fully employed, an outlet for all the s~.vin[~s generD.ted. by high coffee ex:port prices m~.y not be reD,dily avcilable.. HO~rreyer, from the point of vieT·r of the existing level of technology, there is in f·'1ct p. consider[>.ble nmount of dis- guised unemployment ,·,hich could be diminished through the introduction of more efficient techniques. 208. Until recently, the ncute short:J,ge of electric pO"rer £1,1so represented an effective ba.rrier to develoy.llnent, although some expansion ;.-rns ID1"de ~.Jossible by the installation of diesel i1lants by private factories., P01·'er cOID'!)~'nies '··,ere for a. period un~.ble to meet minimum demands, even after restricting service and rationing industrial users. As a direct result of the le>,ck of r.dequa.te supplies of pOI·rer, even the most p.ctive entrepreneurs hesl to.ted to imnlement "}Iens for indust:rie.l development a.nd mf'ny progrl'lms for the establish- ment of ne," f~.ctories and the expe.nsion of existing plonts remained in 'the blue'Orint stfl.ge. 209" The recent inst"'llr-tion of fl. ne~'r 5000 lC1·r steam pll;'mt in S"m Selv~'.dor reduced the critiC!'.l shorte.ge. There C.9n be little question, hm,rever, th.~,t E1 5e.1 vD.dor needs further exp8,nsion of its el ectri c pO"'er resource~ in ord.er to diversify nnd expand production on sounel economic lines. ;'1hile the b.ck of nf'.ti ve ra',' m8.terio.ls t the she of the loc~~l market, [l,ncl the generB~ st;J.te of economic org."nization limi t the extent of industri~.lizD.tion,. considertlb1e opportuni ties exist for expansion 9.11d further mechanization in mining, "700(1.- ~,rorking and furniture •. textiles, shoes, leather goods, cerflmics, construction ml'.terie.ls. fertili2;er e.nd. feed, and dairying and other fooel industrien. The establishment of variety of ne"r light industries are also quite feasible. 210. A hydroelectric })0101er phnt such as the Rio Lempa project, if soundly conceived, promises to bring ma;n.y other 8.clvo,nta{;es besicles permitting the ex- pansion of old industries Bnd the development of ne1. r ones. A not incor!se- Cluential number of persons B.re noi"' engaged in bringing "rater by most inefficient means to me,ny tOHns and rural areas presently 't-ri thout 1'rater from sources "rhich - 71 - are often e. fe~,r kilometers D,l'Tay. The greater utili zat!on of electric ptun1}S for this purpose ,,,ould release B. considernble D.lilount of mEmpOHer for more pro- duct! va t;l,cti vi ty Dnd permi t the irrigation of agricru turcl IMcls "rhich ~,re no',! in need of Nater. 211. One of the gr~west :vro'blems confronting E1 Salvador is the n~Jstem8,tic denud.c"ttion of its forests for fire"Tood for the generation of energ~,ndin{;, find. it necessf',ry to rely on their O,,~ pm·rer to at least supplement palTer obtt:dned from public utilities. Diesel installo,tions in El Salvador are often c1ifficult to repD,ir and m<:l.intain because of the le,ek of capable technicif':ns and many operators informed the Bank's m. ssion thg,t they "lOulo. ,relcome the op-portuni ty to convert to electric! ty if it "rere availD,'ble in adeqm;·.te quanti ti eSt using their diesel uni ts !.".s sto,nd-by equipment.. The constantly increasing vf'~ue of kerosene (extensi vely used for home light:tng) t fuel oil, ,!:l,no. diesel oil imports is not unimport"nt J !I.mounting to ¢l million ($0 .. 4 million) in 1946, ¢1,,7 million ($0.7 million) in 1947, end ¢Z.8 million ($1.1 million) in 1948. Almo~t B~l of these imnorts come from the Uni ted Stntes.. T"hile the q1..1.estion of saving dollar exchange for such imT)orts by shifting to .h. ydro :OOl·'er is perhaps not 1?S compelling ,!rhen high coffee prices provirle !1mple supplies of exchange, the matter m!\V become more urgent ,·rhen (md if coffee prices fall. - 72 - 213. In the$~rlcUlturtl.l field, one ot the gre?test needs is for land-use planning. according to agricultural experts f~Jl1iliar Hith farming problems in El Sal.vador4! Some of the etee).!> arel'l.s nOT", being cultiv~.ted at the risk of com- plete annihilation of the land by erosion, might better be left in forests. To bolence the loss of such land nON being cul tivs.ted, more efficient use of the lowlands could prob~bly be m::tde, eS'}leclally if additionl:'.l electric po"er T,'ere lwallab1e for irrigation" ,,'here it is not fet',si ble to retire hillside lo,nds from cul ti vat! on. mo re modern fa.rming metho O.S, including erc si on control t neecl to be adopted. A good system of ero,!? rotl;l.tion ,·rould also supply green mMure and more varied crope, .214. There is '"',lso ~, consider·"l,ble need, 1"'\f\,rtioularly in rur,'"),l ?,re",s, for an im;,>rovement in the social &lel economic conditions uncler Nhich the pcpulation lives, pnd ~'rithout ,""hich agricultural develo~)ment or political stl'\'bility is hardly to be expected~ A program designed to better rural he~lth, i~)rove le.nd distribution, provide technionl a,ssistanoe ?nd ~,deC1uate credit. as Hell as training in the manual arts, ,!Toulcl do much to enoourage the develOljment of rural agriculture a:nd h!?ndicrafts. 215. There is a need for integrated economic thinking, not in terms of :E1 Salvador e~one perhaps t but in cooperation 1>Ii th othor Central AmericoXl countries. since the problems of one country in the e,rea are often intimately ooncerned ;.rUh those of its neighbors. Certainly, the solution of El Sa,lvador's population problem eould be hastened Ni th the assi stance of Honduras or Gua.te- mala. both of "rhicl1 possess large amounts of rels,tlvely unpopu.lated territory. And there are questions inVolving the coordination of production ~.nd marketing ,.,hiah could be aol ved expeditiously by Central Amerioan coopera~ion. ,216. In concluaion, it may be said that El Salvador has only talcen the first steps tOl. ro,rd development E1nd diversifioation, ~nd the,t a more concerted - 73 - and effective attack of the problem is needed to counterbalance the effect of increasing popub.tion on limited resources. lIethods of tap:::>ing the sizeable private oa:::>ital funds ','ithin the country can be found to augment t?nd diversify the country's ;;>roductive ce.pacity. iHth a recent history of conserv'~,t1ve fin211ce, and the country's rele,tlvely good credit stending. El Salvador should not find it too difficult to obk.in fin"'ncing for a sound development program. " "X@LE I .' ':GrsYL~l;1 of Popg1ation in F1 Salvador 1913";' 1948 .. 4 - - - Total" ' . j' • - Year D9I!u~a ti on _ _ _ _ , . b: Number Annual increase i "~'!!I'- Percent _____ 1913 1,059,707 -- . 25,855 26,446 ., -------- 2.50 1914 1,086,153 2.49 1915 1,099,764 13,611 1.25 1916 1,104,582 4,818 0.43 1917 1.,120,537 15,955 1.44 1918 1,136,436 15,899 1.41 1919 1,155,350 18,914 1.66 1920 1,178,665 23,315 2.01 1921 1,203,600 24,935 2~11 1922 1,228,305 24,705 2.05 1923 1,259,851 31,546 2.56 1924 1,287,395 27,544 2.18 1925 1.,311,877 24,482 1.90 1926 1,334,863 22,986 1.75 1927 1,365,834 30,971 2.32 1928 1,398,834 32,446 2.37 1929 1,424.,682 26,402 1.88 1930 1,459,594 34,912 2.45 1931 l,493,826 34,232 2.34 1932 1,522,186 28,360 1.89 1933 1,544,999 22,813 1.49 1934 1,574,510 29,511 1.91 1935 1,597,564 23,054 1.46 1936 1,631,982 34,418 2.15 1937 1,665,350 33,368 2.04 1938 1,704,497 39,147 2.35 1939 1,744,535 40,038 2.34 1940 1,787,930 43,39; 2.48 1941 1,808,873 20,943 1.17 1942 1,846,398 37,525 2.07 1943 1,896,168 49,770 2.69 1944 1,915,546 19,378 1.02 1945 1,936,]87 40,841 2.13 • 1946 2,018,895 62,508 3.22 1947 2,072,506 53,611 2.65 1948 2,122,749 40,243 1.94 .' f i~ - SOUl'ce: FAO, Breve Estudio Agricol~ - Economico de El Salvad9r for all years except 1948;- 1948 data from the Salvadorean General Statistics'Office. Nat~onal Income of E~ Salvador ----..- Millions of % of total Income from US$ national income Agriculture $58.9 38.4 Forestry 6.0 3.9 Fish and fowl 2.0 1 • .3 Livestock 8.3 5.4 Mining 1.0 0.7 Industry 19.6 12.8 Construction 6.0 3.9 COIll1'nercial 18.2 11.9 Transportation 1.2 0.7 Electric power o~6 0.4 Domestic services 4.0 2.6 Various services 4.6 3.0 Artisans 14.0 9.1 Rent 5:.5 3.6 Private capital 2.4 1.6 0.7 Various services Total -- 1.2 $153.5 100.0 Souroe; From official statistics submitted by the E1 Salvador Government to the IMF. . TABLE III Average Annual Salvadorean Hashed High-Grown Qnen Coff£~ices in New York. 191J - 19M~ (Based on green coffee spot prices) --- U.S. cents U.S. cents U.S. cents. Year per p0\lnd Year Year per pound per pound 1913 15.25 1925 26.17 1937 11.20 1914 14.38 1926 24.84 1938 C).51 1915 11.a4 1927 22.73 1939 9.22 19]6 12.13 1928 23.71 1940 7.62 1917 11.34 1929 20.78 1941 14.57 1918 13.58 1930 14.29 1942 11 15.50 1919 25.43 1931 12.58 1943 JJ 15.50 1920 18.24 1932 9.63 1944 11 15.50 1921 12.70 1933 9.63 1945 11 15.50 1922 15.32 1934 12.33 1946 21.28 192.3 15.25 19.35 8.78 1947 29.86 1924 23.52 1936 9.66 1948 32.17 1949 31.25 ---------- Source; Pan-American Coffee Bureau as quoted in the New York I"edera1 Reserve Bank's study: The Economics of_public Finance in El Salvador; price shown for 1949 is the spot price on June 29, 1949 as given in the New York Journal of Commerce. V OPA ceiling prices 1942 through 1945 --- TABLE IV Gross Nationa1 Product,Government'Revenues and Expenditures.~d,Wholesa1e Prices i2 El Salvador Gross Government Government l>1holesale national receipts expenditures prj_ces Year product (¢ millions) 11 (¢ millions) = 1939 100 (¢ millions) (1) (2) (3) (4) (5) -~ 1939 244 n.a. n.a. 100 1940 229 19.5 22.2 90 1941 232 21.1 21.4 107 1942 279 21.7 21.8 123 1943 251 26.2 23.3 151 1944 267 29.2 25.2 181 1945 398 29.1 29.1 210 1946 435 39.5 45.0 226 1947 531 53.6 51.8 270 1948 n.a. 58.8 63.7 316 1949 n.a. 60.6 62.5 n.a. --_.-'.... ,-- 11 Does not include surpluses carried over from previous operations. Source: Federal Reserve Bank of New York for Columns (2), (3), and (4); .. Statistics for Column (5) IMF International Financial ~-.......-----.. (thousands of colones) ~ Coffe~ eftR0r~ tax Other export t~~ ~ 1935/36 1,394.5 6.4 1,400.9 1940 1,472.2 43.7 1,515.9 1941 864.6 27.8 892.4 1942 1,353.0 21.9 1,374.9 1943 1,388.8 82.7 1,471.5 1944 4,392.3 31.4 4,423.7 1945 1,751.9 23.7 1,775.6 1946 4,414.3 84.6 4,498.9 ----, 1947 7,221.3 '7,221.3 1948 9 ,L~OO.O 9,000.0 Source: New Yor!t Federal Reserve Bank, ~conomics of Pl2£ll£ Fin~nce in El Salvador • • TABLE VI Tax RecelQ~S lLand National Product, 1219-19,6 Total tax Import ta.xes Estimated gross Percent to gross - Year receipi;'! iLm!l;tionsl national Qroduct national nroduct of Total tax 4: ----- Import receipts J:~ 1939 18.50 10.!79 244 7.6 4.4 1940 17.43 9.21 229 7.6 4.0 1941 17.64 9.21 232 7.6 4.0 1942 18.50 7.78 279 6.6 2.8 1943 21.52 9.70 .351 6.1 2.8 1944 26.14 9.72 367 7.1 2.6 1945 26.71 11.24 398 6.7 2.8 1946 36.72 15.03 435 8.4 3.4 JJ Including fees and fines. Source: New York Federal Reserve Bank, .TIle Econqmics of J)ublic_ll~-.m El Salvador. -~---- • Government Expenditures Compared with Gross National Product at Current Prices (In millions of colones at current prices) Total governrnent Gross Total expenditures national government as percent of product expenditures grOSt!I national ---...- .......------ product 1939 244 10.5 11 n.a. 1940 229 22.2 9.7 1941 232 21.4 9.2 1942 279 21.8 7.8 1943 251 23.3 9.3 1944 267 25.2 9.4 1945 398 29.1 7.3 1946 435 45.0 10.3 11 Second half of 1939 only. • Source: New York Federal Reserve Bank, The Economips of Public Finance in-~l Sa~£r. .,..LE~VI=I;.::;;I T~. Governmen~ Gross Capital Formation (In thousands of colones) Ratio of government Total Government Government gross capi tal forma Uon to total ____~!Qengitures capita~fo~i2n gQY.§~en~~xp~u9J1!ures At current At constant At cu.rrent At constant At current At constant prices~ prises ,lL _mces 2L Bric2LU prices. Brices 1940 22,330.8 26,050.9 3,026.2 4,450.3 13.6% 17.1% 1942 21,838.5 21,838.5 1,894.0 1,894.0 8.7% '6.7% 1946 45,026.1 35,766.2- 5,470.3 3,073.2 12.2% 8.6% 1947 51,875.9 33,462.3 8,964.1 4,208.5 17.3% 12.6% ------,- 11 At 1942 prices. "Fixed" govern.'llent expenditures are deflated by an index especially designed for this purpose; for additional information, see Appendix E. "Variable" government expenditures are deflated by the index of wholesale prices. Expenditures for debt service are undeflsted y Taken from the Ann\1al Budget and adjusted to the "Liquidated Budgetll. The expendi tures for the Pan-American Highway, '"hich were budgeted separately, are excluded. II At 1942 prices. Deflated by the index of wholesale prices. Source: New York Feneral Reserve Bank Study - !h~ .~.2n0mics