El Salvador

The
Economic Freedom
Network

El Salvador

			Total Government Expenditures
Economic Freedom Rating			As a Percent of GDP


Part 1: The Economic Freedom Ratings for the Components and Various Area and
Summary Indexes: 1975, 1980, 1985, 1990 and 1995.
(The numbers in parentheses indicate the actual values for the components.)

Components of Economic Freedom	1975		1980		1985		1990		1995
I. Money and Inflation	2.3		1.9		3.8		2.5		8.5
(a) Annual Money Growth (last 5 yrs.)	2	(18.4)	3	(16.9)	7	(9.8)	6	(11.5)	6	(12.3)
(b) Inflation Variablity (last 5 yrs.)	5	(4.5)	3	(7.5)	5	(4.7)	2	(8.2)	9	(1.8)
(c) Ownership of Foreign Currency	0		0		0		0		10
(d) Maint. of Bank Account Abroad	0		0		0		0		10

II. Government Operation	6.0		5.0		6.8		8.4		6.8
(a) Gov't Consump. (% of Total Consump.)	8	(13.5)	6	(16.3)	7	(16.0)	9	(11.4)	10	(8.1)
(b) Government Enterprises	4		4		6		8		8
(c) Price Controls	-		-		-		-		6
(d) Entry Into Business	-		-		-		-		5.0
(e) Legal System	-		-		-		-		2.5
(f) Avoidance of Neg. Interest Rates	-		-		8		8		10

III. Takings	5.8		4.6		5.0		4.5		6.9
(a) Transfers and Subsidies (% of GDP)	8	(2.5)	8	(2.7)	9	(2.0)	9	(1.4)	8	(3.2)
(b) Marginal Tax Rates (Top Rate)	4	(55)	3	(60)	3	(48)	2	(60)	8	(30)
(c) Conscription	-		0		0		0		0

IV. International Sector	3.5		2.3		1.9		3.1		5.8
(a) Taxes on International Trade (Avg.)	4	(6.4)	4	(6.2)	3	(7.1)	6	(4.1)	7	(3.6)
(b) Black Market Exchange Rates (Prem.)	4	(20)	1	(100)	1	(195)	3	(24)	8	(1)
(c) Size of Trade Sector (% of GDP)	4	(35.7)	2	(33.7)	1	(26.1)	0	(21.5)	1	(29.6)
(d) Capital Transactions with Foreigners	2		2		2		2		5

Economic Freedom Rating	4.4		3.5		4.3		4.5		6.9
Ranking of Country	38		74		51		60		14

Part 2: Recent Economic Indicators:
Population 1996:	5.9		Real Per Capita GDP			:	1995=	$2,911
(in millions)			(in 1995 U.S. dollars)
Annual Rate of Change (1985-96):	1.7%			Avg. Growth Rate:			1980-90=	-1.3%
							1990-95=	4.0%

Economic Indicators:*	1988	1989	1990	1991	1992	1993	1994	1995	1996
Change in Real GDP: Aggregate	1.6	1.1	3.4	3.6	7.5	7.4	6.0	6.1	-
: Per Capita	-0.1	-0.6	1.7	1.9	5.8	5.7	4.3	4.4	-
Inflation Rate (CPI)	19.8	17.6	24.0	14.4	11.2	18.6	10.6	10.0	7.2
Change in Money Supply: (M1)	8.1	13.5	22.3	17.9	29.6	17.2	5.0	11.8	-
: (M2)	12.2	12.8	32.3	23.5	30.7	27.4	24.9	9.8	-
Investment/GDP Ratio	12.8	15.3	13.9	15.4	18.5	18.6	19.8	19.7	-
Size of Trade Sector (% of GDP)	19.1	18.5	21.5	20.9	21.5	20.8	27.6	29.6	-
Total Gov't Exp./GDP Ratio	11.1	10.3	10.9	11.5	12.2	12.8	14.5	13.3	-
Central Government Budget
Deficit (-) or Surplus (+)
As a Percent of GDP	-0.6	-2.3	-0.1	-2.8	-3.8	-2.1	-1.5	-1.1	-
Unemployment Rate	-	8.4	10.0	7.5	7.9	-	-	-	-

* The figures in this table are in percent form.

After years of civil unrest and economic restrictions, El Salvador’s economic freedom rating has improved substantially in the 1990s. Its rating jumped from 4.5 in 1990 to 6.9 in 1995, one of the largest improvements registered during this time period. Perhaps even more impressive, it ranked as the 14th freest economy in 1995, up from 60th in 1990.

The major factors underlying this dramatic gain were:

Substantial reduction in the variability of the inflation rate;
Legalization of foreign currency accounts;
Reduction of the top marginal tax rate from 60% in 1990 to 30% in 1995;
Virtual elimination of exchange rate controls (note the sharp reduction in the black market exchange rate);
Relaxation of several restrictions limiting the mobility of capital.

More needs to be done. Monetary policy is still too expansionary and the inflation rate is too high. Perhaps most importantly, rule of law principles need to be built into the legal code. A start has been made, however, and this economy has experienced solid growth in the 1990s.

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Last Modified: Wednesday, October 20, 1999.