MAY 1983 - VOLUME 4 - NUMBER 5
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:
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.