El Salvador is considered a middle-income country, but assets and income are unevenly distributed. The country’s economy has traditionally been based on agriculture but has been dominated since the 1990s by service and manufacturing, mainly from production in compound factories, called maquilas (maquiladoras), in tax-free export zones. There is also a large informal sector in the country.
El Salvador’s economy is closely tied to the United States which provides the country with assistance and is its main trading partner. An important source of income is the money that Salvadoran overseas send home to their relatives.
El Salvador was characterized by stable economic growth in 1950–79. During this period, the country had an average GDP growth of 5 percent per year, and the country developed into Central America’s most industrialized country. The Civil War 1979–92 largely destroyed the country’s economy. In 1979–82 GDP fell by 23 percent, while the country had an annual population increase of 2.6 percent. After 1983, the economy recovered somewhat, but the country continued to be highly dependent on strong US support. In addition to the civil war, natural disasters have also hit the country, including an earthquake in 1986 that partially destroyed the capital of San Salvador.
After the end of the war, stricter market economies were introduced and large parts of the former state-owned sectors were privatized. Declining world market prices for coffee during the early 1990s had a major negative impact on the economy, but a new free trade agreement between the US and Central America led to a strong increase in trade between the countries, and El Salvador’s economy grew by just under 5 percent in 2007.
El Salvador’s close relations with the US meant that the country was hit hard by the global financial crisis of 2008–09. To reverse the negative trend, the country has implemented social changes to reduce the economic gaps and introduced new taxes, but the country still has a large external debt (about 60 percent of GDP). The country also suffers from widespread violence that discourages foreign investors.
Agriculture is the country’s main industry and accounts for 3/4 of export earnings. About 35 percent of the land is cultivated land, and almost as much is pasture land, while the forest accounts for only 6 percent. All arable land has been used. However, an expansion of the irrigation can provide increased returns. During the 1980s, attempts were made to implement a land reform with the aim of, among other things, improve conditions in the agricultural industry, but without much success. After the end of the war, the distribution of land to demobilized soldiers has created major problems.
Coffee is the dominant product, and El Salvador is a significant coffee producer. The coffee is grown at an altitude of 1,000–1,800 m. However, they want to reduce the country’s overly strong dependence on coffee harvests. Cotton and sugar cane have become more important, but attempts have also been made with cultivations of e.g. coconuts and citrus fruits. For domestic consumption, corn, beans, rice, vegetables are grown, mainly by small farmers. Production in the agricultural sector, especially by export goods (coffee, sugar, cotton), was strongly adversely affected during the 1980s by the civil war. After the Civil War, attempts have been made to escape the unilateral dependence on agriculture, and investment in manufacturing and service has been given priority.
Forestry has no major economic significance. The fish industry has expanded, and shrimp has become an important export commodity.
Minerals and energy
El Salvador is largely devoid of its own mineral resources. Hydropower resources, including in the river Lempa, however, are good and partly exploited. In anticipation of a better expansion, energy needs must be based primarily on imported oil. In the future, geothermal energy is also expected to be important, especially in the eastern part of the country. Under prevailing conditions, wood and charcoal, despite the lack of forestry, play an important role in many places.
Industrial growth in El Salvador has been relatively steady and strong since the 1950s. The Central American Common Market, CACM, has benefited. However, the Civil War caused a sharp decline in the 1980s. The food industry, with the production of coffee powder and sugar, the beverage and tobacco industry as well as the textile industry, has been the most important sectors. Thanks to tax cuts, the textile industry has grown sharply in the 2000s. The metropolitan area and Santa Ana are the main industrial areas. In the port city of Acajutla there are oil refineries and petrochemical factories.
According to Countryaah, El Salvador’s most important export commodity is coffee, which gives the country 25-30 percent of its export revenue. Furthermore, among other things. textile products, cotton, raw sugar, tobacco and beer. Also important is the sale of fresh shrimp and lobster. About 45 percent of El Salvador’s exports go to the United States. Important buyers are also the countries within CACM and Germany. Imports come from the US (just over 1/3) and from Guatemala and China. In addition, El Salvador buys large quantities of oil from Mexico. The import goods are mainly made up of machinery and means of transport and chemical products. The previous trade surpluses were transformed into significant deficits during the 1980s. Financial assistance from the United States has been very large. El Salvador has also raised large loans elsewhere, so the country has received a considerable foreign debt.