The Multinational Monitor

MAY 1983 - VOLUME 4 - NUMBER 5

N E W S   M O N I T O R

U.S. Aid, IMF Loans, and U.S. Companies

Gluing the Salvadorian Economy Together

Last month, under strong pressure from the Reagan Administration, the International Monetary Fund (IMF) approved an additional loan of $17 million to the government of El Salvador. Coming at a time of escalating violence and civil warfare, the loan underlines the deteriorating economic and political situation of the Salvadoran government and the determination of the Reagan Administration to prevent a total collapse of its Central American ally.

The loan - which was granted despite IMF objections to the Salvadoran government's fiscal policies - will be in addition to large increases in U.S. economic aid in the past two years and a $40 million IMF loan last year. Its purpose is to help the Magana government maintain 1982 production rates and avoid further drops in the GNP, which has fallen drastically since 1980.

A secondary purpose is to stabilize the Salvadoran economy in the face of the millions of dollars being siphoned out of the country by Salvadoran businessmen, and to compensate for the shrinking level of foreign investments. According to Alberto Bonilla, president of the Central Bank in El Salvador, without further financial aid "almost all our industries would stop, and we would have at least 20 percent negative growth."

With guerrilla forces announcing their intention to step up economic sabotage in 1983, the prospects for economic stability - let alone growth - remain dim. Thus there is little doubt that U.S. and IMF assistance is vital to the government and private business sector in El Salvador, and to the still sizeable stake of U.S. investment in the country.

As in the past, much of the recent aid to El Salvador will be spent on the purchase of imports, primarily from the U.S. Historically, aid has not been used for development of El Salvador's infrastructure - such as its trade, transport, and communications systems - but for import purchases. Sixty percent of 1982 aid allocations, for example, were allocated for imports, while approximately 85 percent of the $75 million of Caribbean Basin Initiative funds destined for El Salvador will be spent in the U.S.

Many of the government's 1982 expenditures reflect the needs of a country at war: $10.7 million in construction equipment, $11 million in communications equipment, and $4 million in medical supplies. The U.S. Embassy projected that U.S. firms would provide 50 to 60 percent of these imports, and predicted "good prospects for U.S. suppliers over the next three years." These imports ensure long-term dependence on the U.S.

But while aid continues to benefit American firms in the U.S., it also helps to support the activities of U.S. investors in El Salvador. With capital flight on the rise, foreign investors have assumed a crucial position in the country's economy. U.S. investments are in three major areas:

  • Export manufacturing. El Salvador's economic growth of the early 1970s was based largely on U.S. companies investing in light manufacturing for the U.S. market, based on the model of Taiwan and South Korea. In 1974, El Salvador passed the Export Promotion Law with encouragement from the U.S. government. The law provided tax holidays, unrestricted repatriation of profits, guarantees against expropriation, and a specialized recruiting agency for laborers, who earn about $4.00 a day.

    Many of these workers produce garments, which are assembled from pieces shipped in from the U.S. and then reexported to U.S. markets. A number of electronic companies, such as Texas Instruments and Dataram, operate factories in El Salvador's San Bartalo Free Trade Zone; both moved to El Salvador from other Third World locations.

  • Local production. A number of U.S. firms produce goods in EI Salvador for the local market. Phelps Dodge employs 270 Salvadorans in its copper products factory. Sherwin Williams supplies paint from its base in San Salvador. Exxon's Acajutla oil refinery processes 16,000 barrels of Venezuelan oil every day for the local market. Exxon runs its own marketing operation, but also sells to Standard Oil of California, which controls 15 percent of the domestic market. Other U.S. corporations in El Salvador include IBM, Xerox, International Harvester, Ralston Purina, and Sears, Roebuck and Company.

  • Food processing. Since the late 1960s, U.S. firms have worked with the Salvadoran oligarchy to export cash crops from El Salvador. Corporations like Proctor and Gamble and General Foods purchase and process over one-third of El Salvador's coffee crop, which accounts for 70 percent of El Salvador's exports. Other significant exports such as sugar, fish, and meat are purchased almost exclusively by U.S. firms.

In all, more than eighty U.S. corporations with over $100 million in direct investments continue to conduct business in El Salvador. Kimberly Clark recently expanded its paper products plant. The manager of one U.S. manufacturer reported that his company is increasingly invulnerable to interference from the Salvadoran government because it continues to produce the foreign exchange so badly needed in the war-torn economy.

But as the war drags on, many U.S. corporations are beginning to leave El Salvador. The U.S. Congress - unwilling to accept the Reagan Administration's strategic analysis of Central America - has been reluctant to prop up the current repressive government with military and economic aid. Without such guarantees, and without sufficient clout in Washington, multinational investors in light industries, such as Texas Instruments, Maidenform, Bristol-Myers, and the Pillsbury Company have begun to disinvest. (Last year, Texas Instruments actually closed a factory in El Salvador.) According to the Financial Times, "Direct foreign investment has virtually dried up."

But causing even deeper worry in Washington is the increase in capital flight from El Salvador, estimated by the U.S. government as $1 billion in the last three years. Money is being spirited out of the country in three ways: siphoning off U.S. aid to Salvadoran businesses which then invest it in places like Miami; evading exchange controls; and mortgaging overvalued property and escaping when banks foreclose on the loans. These practices have come under attack by the U.S. Ambassador to El Salvador, Deane Hinton, and Democratic opponents of President Reagan's policies. The Salvadoran government, however, has been unwilling to take measures to stem the flow of capital.

Thus U.S. and IMF aid continues to support a government whose primary political task is preventing a revolution. It was the threat of political instability followed by real social change that spurred the initial increases in U.S. funds in the first place. But without an end to the fighting, El Salvador's economy will worsen, necessitating further increases in aid. A recent IMF staff document concludes that "no recovery in output [in El Salvador] is now anticipated for 1983, while the balance of external accounts will critically depend on continuation of a high level of external assistance mainly from the United States."

This article is based on a report by Vincent Brevetti, a New York-based journalist.

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