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CIS

Colonia Libertad,

Avenida Bolívar # 103

San Salvador, El Salvador

Centroamérica

Teléfonos:

(503) 2226-5362              

(503) 2235-1330

e-mail: cis_elsalvador@yahoo.com

January 18-February 13 2001

1. The Earthquake and Responsible Construction

2. Damages (Not Precise)

3. International Relief and Fuzzy Numbers

4. FMLN: Earthquake Will Cost the Country ¢16.652 Billon Colones ($1.9 Billion Dollars)

5. The Civil Society Faces the Earthquake: Repression is Foreseen

6. Reconstruction or Dollarization?

7. Dollarization Didn’t Fall With the Earthquake

The Earthquake and Responsible Construction

"...The whole country is vulnerable and there is no relation between the deaths and the type of construction (of houses)," President Flores, February 2, 2001

On Saturday, January 13th an earthquake measuring 7.6 on the Richter scale rocked the entire country like no other disaster has. The quake left extensive damages ranging from the west end of the country to the east end. The earthquake has exposed the truth of the Salvadoran system even though the government wants to cover up the reality with their rhetorical discourses. "The earthquake will not affect the economy," stated the Minister of Economy. "The country does not seek to nor does it want its loans canceled," assured President Flores.

Political disorder and ecological imbalance are predominating in El Salvador. The situation is a result of the neoliberal capitalist system, which is based on exploitation of labor and natural resources. The current "economic development" is a product of a combination of elements: the impoverishment and social exclusion of the majority; institutional weakening of the state apparatus; the excessive exploitation of the labor force; excessive exploitation of natural resources; the external debt; and the dependency on remittances sent by Salvadorans in the exterior - the remittances contribute to the false appearance of "stability".

The manner in which the government has managed aid has been the target of many criticisms. People have protested and demanded aid.They are not accusing the blind forces of nature or the ungratefulness of God but rather they accuse the Salvadoran government and the financial sector for carrying out policies that don’t take human needs into account.

For those whose lives were already extremely difficult their survival has become even more difficult. In reality, although the earthquake shook everyone it did affect some more than others. The earthquake made manifest the fractionating of the Salvadoran society: the polarization between a minority that continues to become wealthier (the monopolies and the financial sector) and the poor majority who have lost the little that they had.On the one hand, the privileged minority publicly pronounces their “solidarity” and makes a public demonstration of their "good intentions" by forming part of the National Commission of Solidarity (CONASOL).* On the other hand, the poor majority should conform themselves to receiving what the minority gives them. The privileged minority is apparently willing to "save" the poor people in order to palliate the immediate effects produced by the earthquake. They do not, however, have the will to sacrifice so that those affected by the earthquake return to their pre-earthquake standard of living let alone the possibility of raising people out of the extreme poverty in which they lived. The problems of marginilization and unequal distribution of wealth are more profound than ever. In reality, the private sector limits itself to administering the international aid without giving anything themselves.

Another important aspect to study is the nature of the news being transmitted by the majority of the media who have traditionally been allied with the government. The news being transmitted is marked by a grave characteristic: in addition to being sensationalist they have, in coordination with the government, hidden the extensive level of damage caused by the earthquake. The people of El Salvador do not precisely know the magnitude of the disaster. However, foreign television transmits a more profound knowledge of what has happened – apparently the country has been set back 30 to 40 years in regards to its economy and environment.

The earthquake as a natural phenomenon in and of itself is one thing but the disaster (the social impact) is another. Contrary to what the public officials want the people to believe, an earthquake is not synonymous with disaster. A natural phenomenon converts into a disaster when it harms a great number of people who cannot escape from being affected and who cannot easily recuperate from the effects of the phenomenon. The damages suffered by the Salvadoran society are not a “natural” disaster they are the result of the accumulation of different components of vulnerability, which is different than a simple natural phenomenon. This vulnerability is made up of economic factors (for example lack of income), environmental factors (unsustainable use of natural resources, construction in high risk zones etc.) and social factors (relationship between the state and the civil society). “The unpredictability of the natural disasters” appears to be the only phrase in the mouths of the official sectors that go to all lengths so that the population does not perceive the fact that the vulnerability and the lack of an adequate management of natural resources have worsened the situation. “...There is no relation between the deaths and the type of construction,” stated President Flores on Sunday February 4^th.

*Two days after the earthquake, the National Committee of Solidarity was formed by, according to President Flores, "people who presented themselves to help." The committee is conformed exclusively by prominent members of ANEP (National Association of Private Business) and COENA (National Executive Committee of ARENA). The purpose of CONASOL is to manage international aid. Both institutions are known for serving the government and paradoxically for not having any type of relationship with the communities affected by the earthquake.

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Damages (Not Precise)

The exact number of human victims, economic costs, the level of destruction or the exact amount of infrastructure destroyed will probably never be known. One must add the costs of reconstruction to the material costs. The costs due to the loss of work and loss of sales in stores and the informal sector are also unknown. In addition to trying to minimize the damages, the government also lacks administrative capability therefore making it even more difficult to try to collect accurate numbers. The crisis made clear this incapability. From the beginning the government did not have solid data on the intensity of the earthquake, the territory affected, the number of victims, the number of deaths, or the number of houses affected. For these reasons it is difficult to have a moderately precise idea of the losses due to the earthquake. However, following are some official numbers presented by the government. It is necessary to take into account that, in reality, these numbers are probably greater.

*Note – data does not include Feb. 13^th earthquake.

In addition to the above damages, a number of dangers threaten the already precarious economic situation. It is important to note a few of those dangers: massive migration to San Salvador (as happened during the armed conflict and the earthquake of 1986) and the United States; the cost of electricity rose 18% since January; the recession in the United States will impact the inflow of remittances and will cause less demand for products produced in the maquilas (the maquilas export 90% of their product to the U.S.); it appears that the rainy season will come early this year (the beginning of April instead of in May) which will cause a disaster for the homeless and will probably also cause landslides; and finally the United Nations Development Program has calculated that poverty will increase by at least 10% (according to the University of Central America, UCA, half the population, 49.74%, had already lived in poverty before the earthquake).

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International Relief and Fuzzy Numbers

"International cooperation has only given $800 thousand dollars to our account," President Flores, January 28th 2001.

As usual only the international community has responded to the necessities of the victims. This is partly due to the fact that El Salvador lacks an appropriate disaster management plan and partly because the government prefers to use the country's reserves to subsidize the maquila industry and to implement the dollarization. It is worth mentioning that the reserves are partly a product of the privatizations of ANTEL (now CTE-Telecom) and the remittances sent by the 2.5 million Salvadorans living outside the country.

Over three weeks after the earthquake, the exact quantity of aid given to the country is still unknown. Despite the much-publicized auditing to which the government would submit itself, great doubt persists. The discrepancies between the numbers given by the communications media (print, radio, television, official or not), the government authorities and CONASOL make the task of precisely calculating the quantity of aid received by government bodies almost impossible. What’s more, many times the numbers contradict each other in the same article or on the same page of the newspaper. For example, Sunday, January 28^th, President Flores said that, "[I]nternational cooperation has placed in our account only $800,000." Even so, on Friday, January 26^th, just two days earlier, Consul María Eugenia Brizuela said that the government had $1,007,000.00 at that point. What’s more, on the same page where her words were reported, it states that the government had some $13 million (of a total of $25 million needed) to carryout the second phase of their "plan" which in theory consists of building temporary houses.

Likewise, no one knows if the official figures take into account the material donations, like electric generators, water purification systems, medical supplies, food, basic goods, assessment teams, tents, high-quality plastic, and construction materials, etc. Nor does anyone know if the numbers given reflect donations given, promised, spent, or saved. What is known is what people have been able to observe on TV and radio: tons of donated material aid and millions of dollars given to the country by other countries, organizations, communities, cities, banks, individuals, and transnational and national companies. Every day all over the country communities, cities, villages, and hamlets denounce the lack of aid (or the insulting insufficiency of that which has been given). The aid, after all, is for them.  The reality of many of the homeless speaks for itself and refutes Flores' assurance that, "[T]he worst has passed."

Despite the fact that the United States appears as the country which has given the most to ‘respond’ to the public state of calamity (which many describe as “permanent”), the only statistic given in regards to their donation is of $4.6 million - $12 million. In theory, this donation will go to build 12,000 temporary houses. Some people would say that this “support” is a slap in the face of the Salvadoran people, since during the war, the United States Government gave $1.5 million a day for 12 years in military aid which was used to finance the war. That number represents the official quantity, and does not include the aid that was purposely misclassified, the training of thousands of soldiers at the expense of the U.S. taxpayer, the presence of thousands of military advisors and intelligence operatives, and the aid illegally channeled through Israel.

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FMLN: Earthquake Will Cost the Country ¢16.652 Billon Colones ($1.9 Billion Dollars)

According to the FMLN, the earthquake will cost the country ¢16.652 billion colones. To confront the great dimensions of the problem, the party has developed an integral plan that responds to the principal problems that the country is facing, such as housing, employment, sustainability, and disaster prevention. The economic advisor of the FMLN, Salvador Arias, signaled that the earthquake multiplied the existent housing deficit. In addition, a radical change in the economic policy of the country will be necessary to be able to collect the funds needed for reconstruction. Likewise, he stated that the dollarization would cost the nation over $2.86 billion in reserves (product of remittances and the privatizing sales of public institutions), and it deprives the Central Reserve Bank of its ability to implement the needed actions to confront emergencies like the present. Arias expressed that, “[I]f dollarization is halted, the BCR would recuperate its capacity to open emergency credit lines to confront internal problems that do not necessarily have to use the country’s savings and that it could be done with colons.” Similarly, he recommended halting the privatizations and the dollarization, and using these funds [destined for dollarization] for the emergency.

On January 29^th the Government of Spain gave a donation of $65 thousand to the Emergency Committee of the FMLN, much to the dislike of the Government. The FMLN said that the donation represents the confidence that the Spanish Government has in the FMLN. Total aid from Spain could reach $50 million, 99.8% of which has been channeled through the Government. Various public functionaries have publicly expressed their disagreement with the donation, including Vice President Quintanilla Schmidt; and ARENA Deputy and COENA (National Executive Committee of ARENA) member, Carmen Elena Calderón (sister of former President Calderón Sol). Calderón went so far as to say that they would review the legal dispositions of the country to determine if the aid violates any law of the country.

Salvador Sánchez Cerén, head of the FMLN in the Legislative Assembly, stated: “[W]e believe the vision that the executive is pushing continues to be very reduced and very limited. I believe that we have to discuss the emergency aspect, but we must also discuss the problem of reconstruction and development. [There] existed before the earthquake a difficult social situation, economic stagnation, and what’s more, the problems of poverty and the housing deficit, all which were intensified by the earthquake. Therefore, the answers that must be given must be integral with a vision which is not very immediate, but which has a medium or long-range vision including a concept of construction and development . . . [T]here must be priorities regarding national resources . . . First, regarding the country's savings, we believe at the present juncture, it is best to suspend the dollarization and all the savings that the country had in order to change colons for dollars would have to be used for reconstruction.”

The FMLN is proposing to take the international reserves that the country has and put them to work for the reconstruction through the creation of an Emergency Fund. In their judgment, it is of utmost importance that there be a partner to international cooperation, since the country cannot depend solely on this aid. In the eyes of the government the problem is that by doing this [making an emergency fund], there would be no funds left for the dollarization. In addition, the party has said that the most important thing at this point is decentralization with citizen participation and auditing. They also denounced the official party for manipulating the dynamics of the Legislative Assembly since any type of opposition from congress is criticized by saying that in light of the emergency any opposition to the government obstructs relief efforts. In the long term, the FMLN is counting on an increase in citizen participation. They believe that as the population becomes conscious of its situation, it will begin to organize a social struggle, which will question the current economic model and address the origins of their vulnerability.

In relation to the destruction and damage to homes, the FMLN is proposing measures to alleviate the situation, measures that have met stiff opposition from the official party within the Assembly. One of the measures they propose is debt forgiveness for those who are paying for houses that were completely destroyed. On the other hand, the banks argue that while it is true that people lost their houses, they still have the property, so the banks cannot forgive the debt. For those whose house were damaged, the FMLN proposes a one year moratorium on the payment of their debt, so they can instead invest their money on reconstruction costs. Finally, the FMLN is proposing to create a low-interest credit line, so that it is possible for people to rebuild their houses. And while one of the much trumpeted, “benefits” of the dollarization was the lowering of interest rates, access to credit continues to be exclusive, since a minimum requirement for a loan is having an income that equals at least three monthly minimum wages.

On Wednesday, January 31^st, the FMLN proposed a reconstruction plan with a "strategic vision", according to the words of the FMLN General Coordinator Fabio Castillo. The program is called “For Reconstruction, We Are All Needed”. One of the pillars of the plan attempts to defeat the Monetary Integration Law (dollarization) and in its place, create a National Fund for Reconstruction.

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The Civil Society Faces the Earthquake: Repression is Foreseen

“There are at least four things the earthquake has aggravated: confrontation; exclusion; improvising; and centralization. The response to these four things should be decentralization, participation, providence, and inclusive cooperation.”.*

It is evident that the people of the civil society have begun to organize. The Forum of the Civil Society, which was formed after the tropical storm Mitch, has now formed the Citizens Commission for Reconstruction and Transparency (CCRT), which is a "watch dog" group whose function is to assure that aid gets to those in need. They maintain that the country has received aid and will continue to do so therefore it is necessary that the civil society monitor the aid so that it is not misused.

One of the first activities of the Forum was urging the deputies of the Legislative Assembly to approve the "Prevention and Mitigation of Disasters Law" (the forum presented the said law after the Hurricane Mitch).

Additionally, on February 1st representatives from municipalities affected by the earthquake formed the “January 13th Committee for Local Reconstruction”.

In this manner, the victims from various communities, cities, and towns have begun to take to the streets pressuring the authorities to distribute the aid. During the second week after the earthquake various marginal communities surrounded the Feria Internacional which is where CONASOL is located. On Tuesday, January 30th residents of Apopa closed one of the country's principal arteries. The majority of those who closed the streets were women and children who were demanding basic food goods and materials for construction. On the same day, residents of Atiquizaya, Auachapán, along with the Mayor (FMLN) blocked the highway. The Mayor confirmed that they were 18,000 people affected by the earthquake and they had not received any aid. In the same manner, the residents of Nejapa blocked the traffic on the Pan-American Highway demanding aid (It is worth noting that a Diario de Hoy editorial labeled Nejapa the "Popular Socialist Block" and accused them of wanting to destroy the economy with these types of actions.) Everyday, communities denounce that they have not received any aid. Many times they are not demanding material aid but rather human resources to rescue buried cadavers.

On Wednesday, January 31st, the Incidence Committee for Agricultural Development, CIDAR, published a paid ad demanding that the government open true spaces for participation and coordination with local actors. They also demanded a capital endowment to reactivate agricultural cooperatives and campesina production. In addition, they demanded the execution of rural development policies and the rational use of the environment.

The population is no longer passive. They are learning to see that problems need viable solutions. Such is the case with the middle class neighborhood Las Colinas in Santa Tecla. Over six hours after the avoidable catastrophe that left hundreds of families buried, President Flores arrived to "inspect" the damages. The visit was an error - the president arrived hours before any official rescue team. People were desperately trying rescue to rescue their family members with shovels and their hands. Upon the presidents arrival the people screamed and insulted him protesting that he arrived with his hands empty. The case of Las Colinas constitutes a clear example of the consequences of the economic model: the profit of the construction companies is more important the human life and ecological imbalance. The human cost and suffering could have been minimized if those who endorsed the construction on the Bálsamo Cordillera would have respected the security norms, listened to the protests of the inhabitants of the area and if they would have not deforested the Cordillera. Those who endorsed the construction were the Supreme Court, the Salvadoran Chamber of Construction, CASALCO, and the legislative fraction of ARENA. "That's God's Stuff," stated the president of CASALCO, Benjamín Trabanino.

The family members of the victims, the people who cannot return to their houses because of the threat of more landslides due to aftershocks and the nearing rain along with the people who lost their homes are organizing to file a complaint against the state and the construction company. Ecological groups such as CESTA (Salvadoran Center of Appropriate Technology) reiterated the danger of destroying the forest in the cordillera and building in the high-risk zone. The neighbors of Las Colinas protested over the construction. Even the mayor of Santa Tecla, Oscar Ortiz (FMLN) ordered a stop to the construction. His effort was in vein because the Supreme Court ruled in favor of the construction company and even fined the mayor for interfering. The economic elite of El Salvador is only concerned with immediate economic gain, not sustainable development.

Curiously, since the population has started to protest the riot police (UMO) have been installed in front of the Feria Internacional. The UMO is now there everyday ready to repress any possible protests. There are rumors that the Salvadoran government has brought the French military to train the UMO in repressive techniques. Because of the crime wave and the state of emergency the PNC (Civilian National Police) are temporarily (for 6 months) residing in police camps. The police have protested the policy saying that the conditions do not call for such a measure. Some agents have left the institution. Others have suspended their labor due to precarious living conditions, the high cost of food, and not being able to see their families.

The Armed Forces pass through the streets like during the war. The executive has presented a plan to toughen the laws in order to combat crime (the plan includes making conspiring a crime). The Association of Private Business (ANEP) supports the plan.

*Roberto Rubio, member of the National Development Commission and Executive Director of FUNDE.

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Reconstruction or Dollarization?

The government is confronting the disaster with loans, solidarity and international cooperation. After Mitch, the United Nations had stated the no Central American country had an appropriate disaster plan in place. It was never a governmental priority to elaborate such an appropriate program. However, the governments of Central America, coordinated by the United States government, created a unified military to carry out "humanitarian" work and in this way respond to whatever natural disaster. In this way, they were able to "clean up" the image of the armed forces, continue justifying the their existence, and militarize the zone. The logic behind the actions of the government revolves around a central point: confront the crisis with loans... and let the next government pick up the tab. They prioritize using loan money because they do not want to touch the reserve money which is destined for dollarization. The FMLN proposes investing the money from the reserves in El Salvador through social programs.

What El Salvador needs is new fundamentals on which to base society. These fundamentals cannot continue to lie in authoritarian and exclusive practices. The government has to overcome nearsightedness. Their "plan" to assign $15 million dollars to buy lamina and wood and build "temporary" houses translates into building permanent houses due to the lack of a long-term plan.

On March 7th, 2001, the G7 will hold a meeting, organized by the Inter-American Development Bank, in Madrid. The General Secretary of the Organization of American States, Cesar Gaviria, during his recent visit to El Salvador stated that he would help El Salvador obtain loans at the meeting. The Minister of Foreign Relations together with other members of cabinet are planning to meet with donor countries and financial institutions to solicit credits and donations for reconstruction a day before the G7 meeting.

El Salvador's debt totals $3,300,000,000 dollars (¢28,875,000,000 colones) and represents 24% of the annual Gross Domestic Product. When asked why the country was not soliciting the cancellation of the debt, Rafael Barraza, President of the Central Reserve Bank, stated that the country wants to "maintain their reputation" to assure future credits. "The country does not attempt to nor does it want its external debt to be cancelled better than that it will continue in its promise to punctually pay its obligations," stated President Flores on Wednesday, January 24th.

But what is not said is that while big construction companies, the owners of TACA, the financial sector, La Constancia, fertilizer distributors, and other monopolies and oligopolies continue enjoying the protection of the government the small and medium business, campesinos, professionals, street sellers, the unemployed and sub employed have lost more than ever and find themselves without a governmental economic plan to support them to overcome the crisis.

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Dollarization Didn’t Fall With the Earthquake

The “Monetary Integration Law” took the vast majority of Salvadorans by surprise when it was announced at the end of last year. Fortunately, since our last bulletin we have been able to access more information, study, and develop an analysis of the dollarization of El Salvador. In addition, many new events in relation to the dollarization have unfolded since our last publication. Therefore, taking these factors into account and given the seriousness of the issue we would like to present another article on the dollarization of El Salvador.

Calling a Spade a Spade

First, in order to better understand our subject it is necessary to properly name it. The “Monetary Integration Law” is NOT monetary integration; it is a clear and rapid dollarization of the Salvadoran economy. In Europe they have gone through monetary integration within the European Union, but it has distinctly different characteristics. Their process of monetary integration started 50 years ago and went through different planned phases. Its general scheme looks like: customs integration; to a common market; to relaxing immigration laws; to establishing common economic policies; to finally, as an outcome, monetary integration. In addition, in the European case, each country has a voice and a “chair” at the economic table. In the case of El Salvador many of these ingredients are missing. For example, El Salvador has no say in what the monetary policies of the United States are going to be - it is a unilateral situation not bilateral. Furthermore, there is no common market or flexibility of immigration laws.¹

Another reason why the law is not monetary integration or “bi-monetarism” is because the government has planned that the only currency to circulate in El Salvador will be the dollar. “Central Reserve Bank Will Restrict Emission of Currency (to dollars)” reads the headline of La Prensa Grafica November 24^th, 2000 edition. The Central Reserve Bank will no longer print colones and will give dollars, in exchange for colones that will no longer have value, to private banks in order to convert all the accounts into dollars. Another headline reads, “Banks Substitute Colones for Dollars”.² Under the law “banks must change them (colones) for dollars when they are presented for whatever type of transaction”.³ This means that the banks would only give out dollars when presented colones. Because of popular disgust over the law, the majority of people demanded colones instead of dollars. As a result, for the time being colones are also being given at the bank. However, all the accounts officially remain in dollars and the cash machines only give out dollars, making it impossible to obtain colones from the cash machines. As an effect of these aspects of the law, the colon will be deliberately faded out of circulation.

Reasons For Dollarization

Traditionally, dollarization is implemented as “shock therapy” prescribed by the international financial institutions. They usually decide for dollars when there is an unstable economy, high inflation and a risk for devaluation. It is true that the Salvadoran economy was in serious problems when the government decided to dollarize however dollarization was not, as is usually the case, necessary to fix the Salvadoran economy. As is true with many “shock” methods, the dollarization will in fact hurt the Salvadoran economy. The section entitled “Who Benefits? Real Reason For Dollarization” will give a more profound explanation of the true reasons for dollarizing.

Context In Which Dollarization Took Place

Before dollarization El Salvador was, and continues to be, in economic crisis. El Salvador has historical structural problems. Some of them are: lack of competition (for example La Constancia makes and imports all beer); low levels of savings and social inversion; oligopolized and monopolized structures; very unequal distribution of wealth; negative commercial balance due to the fact that El Salvador exports a few raw goods and imports the majority of its “necessities”; and a large fiscal deficit (which 11 years of structural adjustment programs have not fixed). In addition, El Salvador’s economic policies suffer from a lack of democratic participation, lack of planning and a lack of coordination and cooperation from diverse social sectors as well as political parties of opposition. Furthermore, there is a lack of institutional and judicial framework coupled with a lack of will to implement existing laws. For example, the alcohol company that was responsible for the 127 deaths resulting from alcohol poisoning was not held responsible.

The Process of Dollarization

As with other economic policies, such as the Free Trade Agreement with Mexico, the privatization of ANTEL etc, the dollarization law was characterized by a lack of democracy, transparency, and consultation.  Of course, the IMF, World Bank, and the Inter-American Development Bank were in on the deal and in fact they helped create the law. There was no referendum nor was there a national debate. Many say that the dollarization plan was “the best kept secret in El Salvador”.

The “Dollarization Law” was not only undemocratic, it was unconstitutional. FESPAD (Foundation of Judicial Studies for the Correct Application of Law), the FMLN and the CDU (Democratic Unified Center) all filed law suits in the Supreme Court regarding the law’s unconstitutionality. According to the demand placed by the FMLN, articles 3,4,5,11,15,16,18, and 23 of the law violate 8 articles of the constitution.  In this regard, the Supreme Court asked both the Legislative Assembly and President Francisco Flores to present a report proving the law’s constitutionality within 10 days. As of this writing the 10 days have passed and nothing has been reported about the law’s constitutionality.

Benefits For the Majority?

The government has stated that there will be a number of benefits but the reality is quite different. Official Benefit: Elimination of risk regarding the change rate between colones and dollars.  Reality: There was no risk prior to dollarization. The change rate was fixed. The net gain is therefore zero. Official Benefit: Cost of international transactions will be reduced. Reality: This benefit favors only those who have access to international markets. The percentage of Salvadorans that have access to international markets is next to nothing. Official Benefit: International investment will increase. Reality: More quality investment depends on a variety of factors such as the country risk, conditions of insecurity and lack of technology. Investors interested in the service sector, who are looking for cheap labor and all the neoliberal cutbacks will probably increase their investment in El Salvador. However, this has negative long-term effects. It keeps El Salvador dependent on poor quality jobs and maintains a vicious cycle of lack of social investment, dependency on maquila jobs, then poverty. Official Benefit: Interest rates will go down. Reality: Interest rates have nothing to do with dollarization. According to CEPAL, in all of Latin America interest rates had gone down from beginning of 1999 to the end of 2000. The reduction of interest rates is due to the Latin American economic crisis provoked by neoliberalism. El Salvador was no exception. From May of 1999 to December of 2000 the active interest rates had fallen from 16% to 12%.⁴ So it was dishonest when President Flores praised the dollarization saying that because of dollarization the people affected by the earthquake can now rebuild their houses with interest rates below 12% instead of 20%.

The Negative Effects of Dollarization

The negative effects of dollarization are numerous and quite serious. First, prices of goods and services have risen due to “rounding” and speculation.  In the case of rounding, often times the price in colones after being converted into dollars is an inconvenient number. For example, the bus fare now costs ¢1.50 (colones) and ¢1.50 converted into dollars is $0.17. As a result, bus fare, after the dollarization process is complete, will cost $0.20. In colones that means that the price will rise by ¢0.26. For the unemployed and those making minimum wage (the great majority of the country) this price hike represents a grave threat.

Dollarization will also cost large sums due to the process of transition from colones to dollars. There is the need for new software, training staff etc. If past experience is worth anything, we can safely say that these costs will be dumped on the consumer.

Also, dollarization violates El Salvador's sovereignty in that it takes away their power to create their economic policies.  "The monetary integration measure announced by the government will eliminate monetary policies...".⁵The Central Reserve Bank (CRB) will not emit or print colones. The U.S. Federal Reserve will print dollars and sell them to El Salvador. Before, the state of El Salvador received the profit from printing money. The CRB will no longer have any control over interest rates. The CRB will also loose the benefits of the "encaje". The "encaje" is the money that the CRB received from the private banks as insurance. The CRB would ask for a percentage of the total money that the clients of each bank would have in savings.

The effects of losing the ability to create and manipulate the economic policies of one's own country is quite serious and has several severe effects. First off, El Salvador will have to use public money to obtain dollars. This includes its international reserves, 100% of which will be used for dollarization. The government will also have to use the public money gained from the privatizations in order to carry out the measure. In addition, the state will have less capacity to confront disasters, such as the earthquake. The state not only will be without money but also will have less capacity to give credits, play with interest rates etc. The loss of economic sovereignty also creates more vulnerability to internal corruption and facilitates money laundering. El Salvador's economy will be directly linked to that of the United States, which could be dangerous given the current recession in the United States. Last, but certainly not least, since El Salvador will lose its power to create economic policies it will limit the possibility of a future's governments ability to create structural change. El Salvador will be tied as a slave to the United States.

Another negative effect will be its effects on labor. Joined with the dollarization is the flexibilization of labor due to the fiscal crisis that it will create which will then trigger further economic crisis. As stated above, the CRB will be responsible for giving dollars to the banks. In exchange, the CRB will receive colones that will have no value; therefore billions of dollars will be lost. This combined with the loss of other public money (from privatizations and social security for example) and the inability to generate state income will create a fiscal crisis. This crisis will then provoke an "adjustment" program which will probably include raising the IVA tax, raising the minimum retirement age, and "flexibilizing" labor. The flexibilization of labor will be carried out under LERE, the Employment Reactivation Law. Flexibilizing labor in reality means loss of a set minimum wage, loss of contracts, loss of job stability, loss of benefits, worse working conditions and environmental degradation.

Who Benefits? Real Reasons For Dollarization

As stated above, the Salvadoran economy was in a recessive crisis and the dollarization gives a shot of oxygen to the banks, which are the principal Salvadoran beneficiaries of the measure. The banks, in addition to not having to pay the "encaje" also benefited because they are heavily indebted in dollars. Due to the reasons discussed under "Benefits For the Majority", the measure consolidates El Salvador as a service economy from which large national and international capital benefit. Dollarization also closed the possibility for economic debate and interchange between the opposition parties and the government.

As is usually the case, there are also larger global motivations behind the dollarization law. The dollarization of El Salvador fits within a larger global economic and political plan: Free Trade Area of the Americas (FTAA). The principal force behind this plan is big capital. The FTAA is a NAFTA for all of the Americas. It is commonly referred to as "NAFTA on steroids". The talks for FTAA were officially started by the initiative of President Clinton in 1994.

Dollarization of Latin America is part of the United State's plan for the Americas. The goal is to dollarize until Mexico through Argentina, Ecuador, El Salvador, and Guatemala then up to Mexico. As part of this strategic plan, the United States wants to break regional alliances between Latin American countries. Such alliances would build stronger and healthier Latin American countries but would run in conflict with the economic interests of the US elite. Therefore, Mexico has been playing the role of "thug" by signing Free Trade Agreements with individual countries ripping apart the regional alliances. The dollarization of El Salvador therefore fits within this larger plan, called the FTAA (an in-depth analysis on the FTAA will follow in the next CIS bulletin).

Dollarization and the Earthquake

The earthquake that hit El Salvador on January 13th 2001 has aggravated the problems of dollarization. As stated before, the state now has less capacity to respond to the emergency due to its lack of economic sovereignty. In addition, there is a lack of political will on the part of the government. The government insists on continuing with the dollarization in spite of its consequences. The government could have used the money destined for dollarization, to aid reconstruction and development. Instead of using this reserve money, which is supposed to be used for exactly these types of emergencies, the government will continue with dollarization draining the country of its reserves. Since the international reserves of the country have gone to dollarization, the country is left without sufficient funds for reconstruction and development.

1. Comparison of the monetary integration of Europe with that of the dollarization of El Salvador was given in an interview with Raul Moreno, Director of Macroeconomic Policies and Development at FUNDE on Feb. 6^th, 2001.

2. La Prensa Grafica, November 24th, 2000.

3. Article V of the Monetary Integration Law. Unofficial translation.

4. Opinion Piece by Francisco Molina, in La Prensa Grafica, February 5th 2001

5. La Prensa Grafica Pg. 6, Friday, November 24th 2000.

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