This chapter focuses on selected key issues that constrain productivity and profitability in El Salvador and provides analysis and policy recommendations to address them. First and foremost, it is essential to combat crime, and to mitigate its impact on business. Improving the quality of El Salvador's energy and transport infrastructure would reduce operating costs for private companies. Removing barriers to international trade and further deepening regional integration could stimulate El Salvador's exports. Reducing the country’s lengthy bureaucratic procedures could also boost productivity and private investment. Access to finance remains an obstacle for micro and small enterprises in El Salvador, which constitute the large majority of Salvadoran businesses. Accelerating digitalisation could lead to significant efficiency gains. Finally, innovation could bring benefits to the Salvadoran economy through the creation and diffusion of new and emerging production technologies.
Multi-dimensional Review of El Salvador
4. Overcoming cross-cutting obstacles to competitiveness and productivity growth in El Salvador
Abstract
In order to expand productive industries and raise the level of productivity, and to attract more foreign direct investment (FDI), El Salvador must improve the provision of key public goods and reduce the impact of existing obstacles to doing business that affect all enterprises. Chief among these obstacles is crime, high levels of which generate additional costs for private companies in the country. Among the other important obstacles that businesses in El Salvador face are delays at the borders, the limited quality of transport and energy infrastructure, relatively low levels of digitalisation, heavy bureaucracy, and difficulties in access to finance. Removing these obstacles to private investment and business growth could reduce the cost of doing business in El Salvador, and, in turn, could increase productivity levels. At the same time, an improved business climate could stimulate private investment, including FDI.
This chapter focuses on selected key issues that constrain productivity and profitability in El Salvador. It begins by highlighting key cross-cutting issues for businesses in the country. Then, it analyses the specific impact on business of a broader socio-economic issue for the country: high levels of crime and insecurity. Education and skills also stand out among the key issues that businesses face in El Salvador, but discussion of that theme is found in Chapter 7 of this publication. The current chapter goes on to analyse infrastructure spending priorities, before reviewing key institutional issues such as trade, regulation and finance. Finally, the chapter looks at the development capacity offered by digitalisation and innovation to overcome some of these obstacles, and to harness the country's development potential.
El Salvador should address key barriers to competitiveness and productivity growth, and target strategic sectors
El Salvador needs to improve its productivity performance. For this purpose, it needs to expand some highly productive services and manufacturing industries, whilst simultaneously further raising their levels of productivity and those of other less productive sectors. El Salvador must also shift to the production and export of more sophisticated technology- and skills-intensive goods and services. Attracting more FDI that is rich in technology, skills and innovation into the Salvadoran economy’s most productive and innovative sectors could help the country to raise the level of sophistication of the goods and services that it produces, whilst at the same time enhancing the productivity of individual industries through innovation and transfers of technology.
In order to expand productive industries, raise their levels of productivity further, and attract more FDI, El Salvador will need to address key obstacles to the development of the private sector, most importantly crime and a shortage of technical skills. High levels of crime and a shortage of skilled labour generate additional business costs for private companies in the country. Crime has long been the main obstacle to doing business for firms in El Salvador, with 48.5% of companies in the country identifying it as a major constraint in 2016, when the latest globally comparable enterprise survey was carried out in the country (Figure 4.1). An inadequately educated workforce also figures among the most important constraints to doing business for firms in El Salvador, with 25.6% of companies identifying it as major constraint (World Bank, 2016[1]). Delays at El Salvador’s borders, the insufficient quality of transport and energy infrastructure, moderate levels of digitalisation, too much red tape, and difficulties in accessing finance, are other important obstacles for firms in El Salvador. Delays at the borders and a lack of regional integration remain important obstacles for exporters and companies that rely on imported inputs. El Salvador’s transport, logistics and energy infrastructure requires upgrades. Business procedures are often lengthy, complicated and costly. Micro- and small enterprises (MSEs) in El Salvador face difficulties in accessing financing and lack digital skills, and these challenges have been further exacerbated by the COVID-19 pandemic. Removing these obstacles to private investment and company growth could reduce business costs for firms in El Salvador, thereby raising private firms’ levels of productivity. At the same time, a better business environment could stimulate more private investment, including FDI.
Figure 4.1. Crime and corruption have long been the most important constraints for firms in El Salvador
Share of firms in El Salvador identifying selected issues as a major constraint (2016)
Source: World Bank (2016[1]), Enterprise Surveys - El Salvador, World Bank, Washington D.C., https://www.enterprisesurveys.org/en/data/exploreeconomies/2016/el-salvador.
While changes in the circumstances that El Salvador now faces have altered the degree of significance that these constraints may represent, the list remains the same. The impact of COVID-19 has raised the significance of constraints in logistics and transport, which stem from disruption in value chains. At the same time, the gradual fall in homicides that has taken place may have mitigated the impact of crime and insecurity. In practice, the key obstacles to doing business that were identified in surveys by the International Labour Organization (ILO) in 2019, and by the grouping of Central American chambers of commerce, the Federación de la Cámaras de Comercio del Istmo Centroamericano (FECAMCO), in 2021, point to the same issues as were noted in 2016 in the World Bank’s Enterprise Survey. Both the ILO’s survey and the one by FECAMCO find common ground among the top six constraints to doing business. They include insecurity, administrative inefficiency and red tape, and a lack of demand linked to market size and, in the case of the FECAMCO survey, to the impact of the pandemic (ILO, 2019[2]; CAMARASAL, 2021[3]). The ILO survey also points to input costs, corruption, and the education of the workforce as key constraints. The results of the FECAMCO survey give more importance to constraints in financing, and to competition from informal firms.
El Salvador should focus on enhancing the productivity of strategic sectors, and on expanding them. An analysis of the country’s position in the products space shows that opportunities for diversification towards more sophisticated products, and for the expansion of El Salvador’s current production basket, exist mainly in chemical products – including the pharmaceutical sector – and textiles, as well as, to a lesser degree, in metal products, machinery, and electrical parts. Chemical products (including pharmaceuticals), plus textiles and some metal products, electrical parts, and machinery, are identified as constituting the main opportunities. This is based on factors such as revealed comparative advantage (RCA), having a central position in the product space, and the number of close links with other products and whether a product is currently being exported by El Salvador (Alvarado and Amaya, 2015[4]). Agricultural production, mining and services including information services, and telecommunications, are identified as opportunities for El Salvador, based on an input-output matrix (Aquino Cardona, 2019[5]).1
The Government of El Salvador has identified several key sectors to increase competitiveness and improve export performance. El Salvador’s Policy for Trade and Investment 2020-50, which was adopted in January 2021, defines textiles and apparel, chemicals, rubber, plastics, metal products, wood and paper industries, machinery, the glass industry, the energy sector, tourism, information and communication services, business services, and financial services, as key sectors with potential for export growth (Secretaría de Comercio e Inversiones, 2020[6]). These sectors were defined based on the product space methodology (Hausmann et al., 2011[7]), as well as El Salvador’s current production and exports. To better guide policy, El Salvador could consider identifying sub-sectors or specific niches, in addition to the broad strategic sectors that could be further developed in the country going forward, and in which El Salvador has comparative advantages.
In addition to tackling horizontal constraints to the development of the private sector, El Salvador should create the right conditions for attracting more investment into selected strategic sectors. First and foremost, this entails identifying the obstacles that have the greatest bearing on key sectors. El Salvador can also increase its attractiveness by generating the technical and other skills that are most in demand by companies in highly productive sectors that produce sophisticated goods (see Chapter 7). Furthermore, El Salvador could build the infrastructure that these sectors require. For example, it could roll out digital infrastructure for affordable high-speed Internet access for telecommunication, information, and business services. El Salvador also needs to improve policy making and co-ordination for productive transformation (Chapter 5).
Box 4.1. From Analysis to Action: A Policy Workshop on Productive Transformation in El Salvador
Phase three of the Multi-dimensional Country Review (entitled From Analysis to Action) was implemented mainly through a series of policy workshops. These were conducted in line with a version of government learning methodology (Blindenbacher and Nashat, 2010[8]) that is adapted to the multi-dimensional country reviews (MDCR). The methodology applies a range of facilitation techniques in order to foster knowledge-sharing and a reform-oriented mind set in complex contexts. Due to the COVID-19 pandemic, several of the workshops were conducted on line.
The workshop From Analysis to Action: Accelerating Productive Transformation in El Salvador was held online on 18 and 19 January 2022. It brought together 56 participants from the public and private sectors, academia, and civil society. Among these were the Secretariat for Commerce and Investment, the Ministry of Economy, the Salvadoran Institute for Vocational Training (INSAFORP), and the Development Bank of El Salvador (BANDESAL). They also included the National Council for Science and Technology (CONACYT), the Central Bank of El Salvador (BCR), and the Empresa Transmisora de El Salvador (ETESAL). The participants also included the Ministry of Education, Science and Technology, the National Energy Council (CNE), the Corporation of Tourism of El Salvador (CORSATYR), the Ministry of Finance, and the National Commission for MSEs (CONAMYPE). Other participants included the Superintendency for Electricity and Telecommunications (SIGET), the Competition Superintendency, and the Ministry of Foreign Affairs. The Don Bosco University, the engineering school ITCA Fepade, the National School of Agriculture (ENA), and the National Centre for Agricultural Technology (CENTA) were also among the participants. Also present were the Foundation for Development in Central America (FUDECEN), the Salvadoran Foundation for Economic and Social Development (FUSADES), the Catholic University of El Salvador (UNICAES), Francisco Gavidia El Salvador University, and the Latin American Social Sciences Faculty (FLASCO). Other participants included the Chamber of Commerce and Industry of El Salvador (CAMARASAL), Ventus (a wind farm), AES El Salvador, Indiva SA de CV, and two other companies: Chapis Pickles and Agroindustria Cultivar.
Participants carried out a prioritisation exercise to rank the different issues addressed in this chapter. They then developed action plans for priority areas identified jointly by the OECD, the Secretariat for Commerce and Investment of the Presidency of the Republic, and the Ministry of Economy of El Salvador. These were: human-capital formation, infrastructure and energy, the financing and the development of small and medium-sized enterprises (SMEs), innovation, and policy instruments for productive transformation.
The action plans at the end of the corresponding sections of this chapter, and of Chapter 5, are built on the contributions of the participants. Many other inputs generated during the workshop are included in the body of the report.
Source: Blindenbacher and Nashat (2010[8]), The Black Box of Governmental Learning: The Learning Spiral - A Concept to Organize Learning in Governments, World Bank, Washington D.C., https://doi.org/10.1596/978-0-8213-8453-4.
El Salvador’s high rates of crime are a constraint for the private sector
Levels of crime were very high in El Salvador for decades.2 The country’s homicide rate fell by four fifths between 2015 and 2020, falling from 105.2 per 100 000 inhabitants in 2015, to 20.67 per 100 000 inhabitants in 2020 (UNODC, 2020[9]; Ministerio de Justicia y Seguridad Pública, 2021[10]; World Bank, n.d.[11]). Nevertheless, it remained very high. The homicide rate fell dramatically in 2022, reaching 7.8 homicides per 100 000 inhabitants in 2022, with the application of extraordinary measures. Furthermore, and notwithstanding this decrease in homicides, extortion has continued to pose a problem in the past few years. This has been a particular problem for micro, small and medium-sized enterprises (MSMEs) being forced to make payments to criminal gangs. Whilst homicides decreased in 2019, extortion increased by 17.2% (Asmann and O’Reilly, 2020[12]). In 2020, the number of extortion cases that were reported declined (Ministerio de Justicia y Seguridad Pública, 2020[13]). However, it is probable that this fall was also a consequence of mobility restrictions implemented in response to the COVID-19 pandemic. In 2020, there were 254 crimes per 100 000 inhabitants in El Salvador (including robberies, extortion and other crimes) (Barrios and Ábrego, 2021[14]).
The cost of crime for El Salvador is high and estimates of its precise extent vary. Even at the lower end of the range, an estimate that includes social costs, private-sector costs incurred in security services, and the cost to the public purse through the justice system, police services, and the prison system puts the cost of crime at 6.2% of gross domestic product (GDP) (Jaitman et al., 2017[15]). At the higher end of the range, an estimate that combines direct costs from material losses (6.7% of annual GDP) with the indirect costs that stem from crime’s negative repercussions on employment and production puts the cost of crime at 19.5% of GDP (Plotnikov, 2020[16]). Furthermore, estimates indicate that a 1% increase in output per capita results in a fall in crime in El Salvador of 0.67%, and that a 1% decrease in output per capita leads, on average, to a 0.75% increase in crime. A 5.25% fall in crime would lead to a 1% increase in production per capita (Plotnikov, 2020[16]). Furthermore, high levels of crime in El Salvador result not only in economic losses, but also in a loss of intangible assets.
El Salvador’s high levels of crime are an important challenge for private companies in El Salvador, and they affect investment decisions. According to the 2019 Entrepreneurial Competitiveness Survey collected by the Salvadoran Foundation for Economic and Social Development (FUSADES), 15% of companies experienced a criminal act in 2019, while 37.2% were negatively affected by crime in that year (a reduction compared to previous years). Most of these companies (72%) reported that crime had reduced their sales, with 31% reporting that crime had damaged their investment prospects (Figure 4.2) (FUSADES, 2021[17]). MSEs reported similar levels of crime in a 2017 survey, with 10% reporting that they had suffered from criminal activity. In the 2016 World Bank Enterprise Survey, which covers about 700 formal companies in El Salvador, 28.6% of companies listed crime and disorder as the biggest obstacle in El Salvador, and crime was identified as the top obstacle for the average firm across sectors. Furthermore, 48.5% of companies (both foreign [49.7%] and local firms [48.%]) that were surveyed identified crime, theft and disorder as major constraints. Crime and disorder were identified as somewhat less important constraints by textile companies, but they seem to be a particularly severe constraint for the food industry (World Bank, 2016[1]). High levels of crime are also a particularly significant constraint for the tourism sector, since crime generates a negative image of El Salvador.
Extortion is the most common criminal activity suffered by firms in El Salvador. According to the 2019 Entrepreneurial Competitiveness Survey, 8% of companies in El Salvador were victims of extortion that year, and extortion was the most common type of crime affecting companies in the country. In 2019, 53% of companies affected by crime in El Salvador suffered from extortion (FUSADES, 2021[17]). The frequency of reported extortion is similar among micro and small firms, with 8.2% (out of which 75% are informal enterprises) reporting having been victims of extortion in the 2017 National Survey of MSEs (CONAMYPE, 2018[18]). Smaller companies are more affected by extortion, although patterns and estimates differ significantly between the different surveys. At the same time, smaller companies are less likely to report extortion to the police than larger firms (Ponce et al., 2016[19]). Foreign firms are less affected by extortion than domestic firms (World Bank, 2016[1]).
High levels of crime create additional business costs for private companies in El Salvador. It is estimated that security costs due to crime amount to 1.6-2.7% of the country’s annual GDP (Jaitman et al., 2017[15]). Part of these costs stem from firms contracting private security services in order to protect not just their premises, but also staff and merchandise, particularly at night. In 2016, 80.2% of the firms covered by the World Bank Enterprise Survey paid for security (Figure 4.2), with security expenses amounting to 4.1% of these firms’ annual sales. A greater share of foreign firms (92.2%) paid for security services than domestic firms (78.7%). Companies in retail and other services were the most likely to pay for security services (World Bank, 2016[1]). The average annual cost of crime for micro and small companies in El Salvador was USD 325 in 2016. The share of this total amount resulting from losses due to crime was 58%. The rest was the result of higher security costs. While this total cost of crime corresponds to less than 1% of average annual sales, the reality that it represents is much harsher than this. Enterprises with fewer than 50 employees are much less likely than larger firms to invest in security. As a consequence, the losses for firms that fall victim to crime are very large, representing 26% of these companies’ operating costs on average (Barrios and Ábrego, 2021[14]).
The security environment also harms investment prospects and limits the scope for doing business. Due to El Salvador’s high levels of insecurity, public transport is not available at night, and companies functioning 24 hours a day therefore face additional costs for organising transport for their workers at night. In 2019, 12.3% of companies covered by the FUSADES Entrepreneurial Competitiveness Survey reported having to increase security measures as a consequence of crime, and 4.5% of companies reported that they had to adapt their working hours. In turn, this affects investment prospects. In 2019, crime affected the investment decisions of 28% of companies, with 29% of these companies reporting higher security costs as the main reason (FUSADES, 2021[17]). Extortion has a particularly negative impact on economic activity and lowers investment. In 2016, 79% of companies experiencing extortion reported that it was an obstacle to their development, while 70% reported that it affected their activities, and 61% reported that it affected their investment decisions (Ponce et al., 2016[19]).
Figure 4.2. Crime has a negative impact on private firms in El Salvador
Source: Panels A and B FUSADES (2021[17]), Encuesta de Competitividad Empresarial, Fundación Salvadoreña para el Desarrollo Económico y Social, https://fusades.org/publicaciones/DEC_ECE0121.pdf. Panel C World Bank (2016[1]), Enterprise Surveys - El Salvador, World Bank, Washington D.C., https://www.enterprisesurveys.org/en/data/exploreeconomies/2016/el-salvador.
The government of El Salvador has stepped up the fight against crime through its Territorial Control Plan (Plan de Control Territorial, PCT). With a budget of USD 575 million over three years (2019-21), the PCT, which is a phased initiative, has been enforced since June 2019. Its first phase included deploying a focused presence of security forces in 22 high-priority municipalities, as well as strengthening and equipping security forces, and tightening control measures in penitentiaries. In the second phase, the plan also aims to prevent crime by fostering economic and social opportunities, community development measures, and support for disadvantaged youths (Ministerio de Hacienda, 2019[20]; Forbes, 2019[21]; Presidencia de la Republica, 2021[22]).
Taking into account past trends, and the strict mobility restrictions that were put in place in response to COVID-19 in the first half of 2020, it is difficult to measure the PCT’s specific contribution to the fall in criminal activity (homicides and extortion) (International Crisis Group, 2020[23]). In March 2022, El Salvador decreed a state of emergency, restricting several constitutional freedoms in order to fight gangs. As of September 2022, the state of emergency had been extended, and remained in force. Over 50 000 people had been apprehended and accused of taking part in gang activity. The number of recorded homicides has fallen since the beginning of the state of emergency.
Addressing security issues in El Salvador will require tackling the root of the problem. Notably, this includes offering youths better education and employment opportunities, as well as rebuilding social cohesion at both the local and national level. In El Salvador’s case, youths in many impoverished communities do not encounter alternative options to joining criminal gangs. In these communities, there is a lack of employment opportunities for youths, and drop-out rates from school are high due to poverty and the (opportunity) costs of attending school, as well as a lack of support for impoverished youths, and the presence of gangs in schools (OECD, 2017[24]). Moving the education agenda forward is also critical in this respect, given the country’s high drop-out rates in secondary school levels (see Chapter 7). At the same time, creating more quality jobs for youths requires improvements to the employment and re-integration programmes that target young people. This can be achieved through more private-sector participation, through the inclusion of communities in the programmes, and by lowering the minimum age (currently 18 years for most programmes) (OECD, 2017[24]). In Togo, for example, professional integration programmes benefit from the financial support of various stakeholders, including the private sector, line ministries, civil-society organisations, and development partners (OECD, 2017[25]). In order to tackle the underlying conditions that incite young people to join gangs, including social exclusion and scarce opportunities, the Salvadoran government established a Directorate for the Reconstruction of the Social Fabric as part of the PCT. As a violence-prevention strategy, and in order to create opportunities for Salvadorans, the directorate aims to achieve a sustainable recovery of the social fabric. Its work will focus mainly on 60 selected communities that are particularly exposed to gang violence. Programmes implemented by the unit include state-financed football camps, vocational training, scholarships, and the construction of 50 community centres (Centros Urbanos de Bienestar y Oportunidades, or CUBOs).
Specific attention should be devoted to mitigating the impact of security concerns on businesses. Policing and justice in El Salvador need to be more effective at tackling crime and corruption, and at generating trust among entrepreneurs and citizens. In 2019, only 6% of extortion cases reported by companies were resolved (FUSADES, 2021[17]). In 2018, only 36% of El Salvador’s population said that they trusted the judiciary, while 58% said that they trusted the police forces (Gallup, 2022[26]). In order to resolve more extortion cases, and to strengthen trust in the police and the judiciary, criminal investigations need to become more focused and sophisticated. For example, they could employ special methods of investigation, including wiretaps and the monitoring of telephone conversations of suspects. At the same time, the human, material and financial resources that are dedicated to security forces and to justice need to be increased. Co-ordination between the different institutions of El Salvador’s security and justice system needs to be improved, and the focus needs to shift to the effective and efficient implementation of policies. Furthermore, the recruitment of these institutions should shift to a merit-based system in order to strengthen their human resources (Crisis Group, 2017[27]; Dudley and Avalos, 2018[28]). In addition, abusive practices and human rights violations by police services need to be tackled and deterred in order to enhance citizens’ trust in, and respect for, El Salvador’s police forces, in particular in marginalised communities (International Crisis Group, 2020[23]).
Recent reforms have strengthened the administration’s scope to take action against extortion. The Anti-Extortion Law (Ley Especial contra el delito de extorsión), which was adopted in March 2015, defined extortion in a broad manner that includes extortion attempts. It set a minimum prison term of 10 to 15 years, with five additional years in aggravated cases, including those carried out by organised crime. The law also forbids and sanctions the delivery of telecommunication services in prisons and detention centres, which can be used for extortion. Finally, the law allows the authorities to pursue extortion cases ex officio (Asamblea Legislativa, 2015[29]). However, the law will be effective in tackling and reducing extortion only when combined with improvements in the reporting and investigation of extortion cases, and a higher probability of conviction for offenders.
Policies that take care of the victims of extortion can help to increase the incentives to report cases, and to collaborate with police and the justice system. In 2019, only 31% of companies that suffered from extortion in El Salvador filed a complaint. The main reasons for not denouncing extortion were fear of retaliation (38%), and a lack of trust in the authorities (29%) (FUSADES, 2021[17]). These figures do not differ much from the situation in southern Italy in the mid-2010s, where it is estimated that roughly 30% of entrepreneurs were victims of extortion, and over 70% of cases were not reported to the police (Center for the Study of Democracy, 2017[30]). In order to increase the number of cases that gets reported in El Salvador, the protection of victims and witnesses against retaliation could be improved. This could be done, for example, through anonymous crime reporting, and by the provision of adequate protection. Furthermore, financial support could be provided to victims of extortion, in particular to businesses, thereby increasing their incentives to report extortion. Businesses often pay criminal gangs because they offer both protection and control over economic markets. When they stop paying gangs and report extortion, businesses may lose access to economic markets. Financial support from the government could reduce financial losses for these firms, thus encouraging them to report crimes. In addition to a dedicated legal and institutional framework, two measures that have been implemented to combat extortion in Italy include protective measures for victims, including the creation of a solidarity fund to support them financially, and the involvement of civil society in the fight against extortion. The solidarity fund was designed to reimburse part of the damage sustained by the people and firms that suffer from extortion and decide to report it to the authorities. Starting in the 1990s, moreover, small firms in Italy created associations and foundations against organised crime, and in 1996 these merged into a national federation against theft and extortion, the Federazione Antiracket Antiusura Italiana (Transcrime, 2008[31]).
Recommendations to mitigate the impact of crime and violence on the development of the private sector
Improving the quality of El Salvador’s transport and energy infrastructure would reduce business costs for private companies
Improving El Salvador’s transport, logistics, energy and digital infrastructure has the potential to increase productivity and to foster economic growth. Infrastructure is a key ingredient for economic growth and productivity. Economic infrastructure (electricity, water and sanitation, transport, logistics, and digital infrastructure) that is poor in quality, or inadequate in its scope, raises business costs. It also restricts the flow of goods, services, people and market information, both within the economy and abroad. This has implications for a country’s integration into global value chains, as well as for productivity growth and for broader economic development. By segregating markets, infrastructural weaknesses also limit competition, thereby reducing incentives to innovate and to improve productivity. Problems with infrastructure usually affect smaller firms the most (OECD, 2015[32]).
The quality of transport infrastructure and logistics is especially important for El Salvador, as the share of time-sensitive or logistics-intensive exports is relatively high. To a large extent, the competitiveness of logistics-intensive or time-sensitive sectors depends on a country's performance with regard to logistics. Logistics-intensive sectors include mining, forestry, wood products manufacturing, publishing and printing, and other sectors with a high share of expenditure on transport and logistics. Time-sensitive sectors include perishable products, but also those for which time has an important impact due to the structure of value chains, such as pharmaceuticals or clothing. In addition, manufactured products that are part of value chains also tend to be more time-sensitive (OECD/CAF/ECLAC, 2013[33]). Poor transport and logistics infrastructure can lead to lost business opportunities in time-sensitive or logistics-intensive sectors. In El Salvador, 60% of exports are time-sensitive, and 7% are logistics-intensive (Figure 4.3). El Salvador’s three main export items – textiles and clothing, agricultural products, and foodstuffs – fall into these categories. Several sectors identified as priorities such as textiles and clothing, pharmaceuticals, and wood and paper, also fall into these categories.
El Salvador needs to invest in its transport, logistics and energy infrastructure. According to the country’s recently competed infrastructure master plan, the Plan Maestro de Infraestructura de El Salvador 2019-30 (PMI) (IDB, 2020[34]), infrastructure investments of USD 8.5 billion are required in El Salvador over the next ten years in order to modernise its transport, energy and water and sanitation infrastructure. This level of investment would mean a substantial increase, and the budget would have to be 2.5 times larger than the USD 3.4 billion invested in infrastructure in 2009-19. Just to implement the road infrastructure projects with the highest benefit/cost ratios (above 1.75) would require a 30% increase in spending on road infrastructure compared to the past decade. It is further estimated that improving El Salvador’s digital infrastructure, as well as its port and airport infrastructure, could raise the number of foreign companies established in El Salvador by 15% (Blyde, Martincus and Molina, 2014[35]).
Figure 4.3. A high proportion of El Salvador’s exports are time-sensitive or logistics-intensive
Time-sensitive and logistics intensive exports (% of total exports), 2020 or most recent year available
Notes: Logistics-intensive sectors include mining, forestry and logging, wood manufacturing, paper publishing and printing. Time-sensitive sectors include agriculture, fisheries, food and drink manufacturing, clothing, and horticulture. Latin America and the Caribbean (LAC) consists of 39 countries and territories. Most-recent years available range from 2017 to 2020.
Sources: World Bank (2022[36]), World Integrated Trade Solution (WITS), World Bank, Washington D.C., https://wits.worldbank.org/; UN (2022[37]) UN Comtrade Database, United Nations, New York City, https://comtrade.un.org/.
Road and transport infrastructure
El Salvador’s transport and road infrastructure requires further improvements. The country’s score in the World Bank’s Logistics Performance Index in 2018 puts it above some regional competitors (Guatemala, Nicaragua), but below the performance of most comparator countries (World Bank, n.d.[11]) (Figure 4.4). Compared to the LAC region, El Salvador performs worse in assessments of the quality of infrastructure, but better than average for delivery times and the ease of arranging international shipments.
Although the density of El Salvador’s road network and connectivity is appropriate, 51.4% of the road network was in a bad condition as of 2018. The quality of El Salvador’s road network has been deteriorating, and there has not been sufficient investment in road maintenance and new roads (IDB, 2020[34]).
Figure 4.4. El Salvador’s performance in terms of logistics is worse than in most comparator countries
Logistics performance Index, 2018 (1 = low, 5 = high)
Notes: Data for Nicaragua are for 2016. The Logistics Performance Index reflects perceptions of a country's logistics based on the efficiency of the customs clearance process, the quality of infrastructure related to trade and transport, the ease of arranging competitively priced shipments, the quality of logistics services, the ability to track and trace consignments, and the frequency with which shipments reach the consignee within the scheduled time. The index ranges from 1 to 5, with a higher score representing better performance.
Source: World Bank (n.d.[11]), World Development Indicators, World Bank, Washington D.C., https://databank.worldbank.org/source/world-development-indicators#.
The poor quality of El Salvador’s roads, plus its rapidly increasing vehicle stock, result in high volumes of traffic in cities. The stock of vehicles in the country increased by 12.7% a year on average between 2013 and 2018 (amounting to 1.4 million vehicles in 2018, and 140 vehicles per 1 000 inhabitants in 2018). This has resulted in an increasing volume of traffic and frequent traffic jams, particularly in urban areas. It has also put pressure on El Salvador’s road infrastructure, and has highlighted the need to expand strategic roads (Bukele, 2019[38]; IDB, 2020[34]).
Transport costs are high in El Salvador. In Central America, transport costs are 70% higher than the world average (IDB, 2020[34]). Long transport times in El Salvador are the result of factors including the poor quality of the road infrastructure. They also include delays at the borders in the Central American region due to long customs procedures, with long waiting times combining with the high frequency of border crossings to create considerable delays. Other causes include insufficient regional integration, congestion in urban areas, and the impossibility of travelling at night due to security considerations. Time spent waiting at the international border amounted to 14% of travel time for truck transport from San Salvador to Guatemala City, and border time accounted for an additional 13% of total travel time in 2012. Imbalances of cargo flows between origins and destinations, which result in a large volume of empty containers on return trips, further contribute to high land-transport costs in El Salvador. In addition, fuel costs are high, and transport companies need to pay for security services. Security represents 3-4% of total transport costs in Central America (World Bank, 2012[39]; World Bank, 2013[40]; IDB, 2020[34]). The existing limitations to international investment in the road transport sector constitute another possible cause of high freight costs. Central American companies can engage in cross-border transport, but they cannot provide service on domestic routes, which limits opportunities for cabotage, and for reducing high levels of empty returns (World Bank, 2012[39]; World Bank, 2013[40]; IDB, 2020[34]). Although comparable information on costs dates back to a survey conducted in 2012 by the World Bank, it was identified then that prices and margins were distinctly higher on domestic routes (USD 0.26 per tonne-kilometre) than on international routes (USD 0.14 per tonne-kilometre). The collection of data, and the analysis of transport costs on a regular basis via a logistics observatory, would be useful for the formulation of transport and logistics infrastructure policies in El Salvador.
Poor liner shipping connectivity results in high maritime transport costs, with El Salvador scoring just 9.3/100 in the Global Competitiveness Index in terms of liner-shipping connectivity (WEF, 2019[41]). Therefore, merchandise in El Salvador often needs to be shipped to neighbouring countries’ ports, resulting in higher transport costs.
The poor quality of road infrastructure is a significant challenge for private companies in El Salvador, in particular for importers and exporters. In the 2016 World Bank Enterprise Survey, 16% of companies in El Salvador identified transport as a major constraint, and transport was a more significant constraint for the manufacturing sector, and for the textile and apparel industry in particular (World Bank, 2016[1]). In the 2019 Entrepreneurial Competitiveness Survey conducted by FUSADES, 18% of companies identified the bad state of streets and roads as a major obstacle to exporting (FUSADES, 2021[17]). High-quality road infrastructure is particularly important for exporters and importers, since two-thirds of El Salvador’s exports and imports transit over land to neighbouring countries’ ports (IDB, 2020[34]).
The quality of El Salvador’s road and logistics infrastructure poses a particular challenge for the agricultural sector and agribusiness. This is the case most notably in regions beyond the capital in which poverty is a more serious issue, and in which agricultural production is concentrated. Logistics are very important for ensuring that agricultural and food products are still fresh when they arrive on the North American market. In order to support the development of agricultural exports and organic agriculture in El Salvador, therefore, it is vital to improve the quality of El Salvador’s road infrastructure. At the same time, improving regulations and phyto-sanitary standards for food and agricultural products is also a key consideration, as this has an impact on the food and drink sector beyond agriculture and agribusiness. Improving the quality of El Salvador's logistics infrastructure and road network has the potential to foster economic development, and to improve quality of life in remote regions outside of the capital.
El Salvador is already taking steps to improve road infrastructure. The government is currently implementing road projects that contribute to economic and social development, such as the Camino a Surf City bypass in La Libertad, which has reduced transport times and costs (Gobierno de El Salvador, 2021[42]).
The expansion of passenger and cargo capacities of the existing international airport, and also of the cargo capacity at the port of Acajutla, are very important for promoting agricultural exports and international tourism. El Salvador’s international airport is the third biggest in Central America in terms of traffic, after those of Panama and Costa Rica. Transit passengers make up 37% of the traffic, and the volume of transit passengers grew by 9.7% a year between 2008 and 2017. Air cargo traffic remained stable over the same period. The capacity of the airport’s passenger terminal is currently being expanded from 2.1 million passengers a year to 3.6 million. The port of Acajutla is a Public Service Port managed by the Salvadoran state. It handles 99.7% of the country’s seaborne exports and imports, and 28.9% of the country’s total exports and imports (IDB, 2020[34]; Portal de Transparencia Fiscal, 2021[43]). The port would benefit from the construction of a specialised container terminal and an agricultural bulk terminal. Finalising the expansion of the international airport’s passenger terminal and cargo capacity, and expanding the cargo capacity at the port of Acajutla, should be prioritised in future in order to improve logistics for agricultural and food exports, and also to boost El Salvador’s connectivity as a tourist location (IDB, 2020[34]).
Improving road connectivity within El Salvador can also help to spur economic growth in a more geographically diversified way. El Salvador’s recent master plan for infrastructure, the Plan Maestro de Infraestructura (PMI) prioritises infrastructure projects on the basis of aggregate cost-benefit analysis (IDB, 2020[34]). Given the importance of road transport for trade logistics in the country, the improvement of connections with key border crossings is a high priority. This includes the connection between the municipality of La Unión, and the border with Honduras to the east, at El Amatillo. Improving connectivity with major economic hubs in El Salvador and neighbouring countries could also contribute to making the port of La Unión economically viable. This port in the east of the country has been empty since its construction was finalised in 2009. The government has not been able to find a private concessionaire for the port. Since it is not being used, it lacks equipment and maintenance, and has been losing depth (IDB, 2020[34]). As policy makers weigh up priorities, there is a strong case for fostering growth at the local level, including in the east of the country, which could further benefit from a functioning port at La Unión.
The government of El Salvador is planning major projects to foster growth beyond the San Salvador area. It is planning to build a train line linking the ports of Acajutla and La Unión with the capital city. The train would carry merchandise and passengers. Plans are also underway for the construction of an airport at La Unión. Both projects have received initial funding allocations, and special regimes have been approved for their implementation by the Legislative Assembly.
El Salvador could consider establishing an institutional framework to support long-term infrastructure planning. Responsibility for planning and project management is distributed by sectors between the government and the country’s autonomous entities. This provides the necessary technical expertise at different stages of the infrastructure project cycle. However, it makes it difficult for the administration as a whole to prioritise economically viable projects. Moreover, as the PMI demonstrates, social rates of return can vary substantially by area, and prioritisation criteria may not, therefore, reflect the government’s over-arching objectives.
Sufficient financing for investment in transport and logistics infrastructure needs to be secured. It is estimated that El Salvador’s transport infrastructure requires more than USD 5.1 billion of investment over the next ten years. Of this, 90% should be directed to road infrastructure (IDB, 2020[34]). Granting access to all municipal capitals via paved roads would require investments of USD 103.3 million (Bukele, 2019[38]). The private sector can be part of the solution to mobilise sufficient funding for infrastructure investment. Reaching out to the private sector to finance infrastructure projects can not only secure new sources of funding, but can also lead to gains in terms of cost and efficiency, and to improved infrastructure services. Private-sector involvement can open up a wider array of options for infrastructure delivery, including the bundling of different stages of infrastructure projects. Other factors that highlight the value that the private sector can bring to bear include the prospect of a more efficient allocation of risk, and increased competition. The private sector’s managerial and technological skills can also make an important contribution (OECD, 2015[32]). Transport infrastructure could be financed through public-private partnerships (PPPs), and by the implementation of tolls on roads that have been newly built with private funding.
Since 2013, a Special Law on PPPs has been in place in El Salvador. The first PPP project to be implemented was the extension of the cargo terminal of San Salvador’s international airport. It was awarded in October 2020, approved by the Legislative Assembly in 2021, and began operating in May 2022. In a context of limited fiscal space, PPPs have the potential to increase financing for infrastructure investment in El Salvador.
However, there is still scope to improve the framework for selecting, managing and monitoring PPPs. Among other issues, regulation does not require the alignment of PPP projects with a medium- or long‑term plan for infrastructure development. A consolidated and prioritised investment plan, as has been suggested, would also create a benchmark for assessing PPP projects. Given that the Special Law on PPPs enables the consideration of unsolicited projects, this is all the more important (Asamblea Legislativa, 2013[44]). Considering unsolicited projects may create opportunities for inefficient investments, or for insufficiently transparent allocations of PPP projects. It is also important to ensure that the PPP law is compatible with sectoral legal frameworks (EIU, 2019[45]). Bidding processes for PPP projects are rather complicated and could be simplified further.3 A reform of the Special Law on PPPs is under preparation, with the main objective of broadening the scope of application of PPPs (e.g. to health services or education). However, it does not address the points mentioned above (PROESA, 2021[46]).
Corruption, inefficiency, management shortcomings, and a lack of transparency all constitute challenges when it comes to building public infrastructure in El Salvador. For example, a road project linking San Salvador to the nearby municipality of Santa Tecla, which started in 2005, was completed five and a half years late, at a cost of almost four times the original budget of USD 25.6 million (CoST, n.d.[47]; Centre for Public Impact, 2016[48]). In 2020, the average number of participants per public infrastructure tender was only four. The cost of completed public infrastructure projects was, on average, 2.2% higher than the original budget, and the cost of projects under implementation was 7.6% higher than their initial budgets. Time to completion was also longer. The construction timelines of public infrastructure projects grew by 15.1% on average in 2019, and between 90.7% (completed projects) and 125% (ongoing projects) on average in 2020. The increase in 2020 was a consequence of the COVID-19 pandemic. In 2020, only 49% of relevant information on public infrastructure projects was published online. Some 38% of information could be obtained through information requests, and 13% of information was not disclosed, in particular information on procurement and contracting phases (CoST, 2021[49]; CoST, 2020[50]).
El Salvador has taken a number of steps to combat corruption and improve transparency in the construction and contracting of public infrastructure projects. El Salvador has been a member of the Open Government Partnership since 2011, and a member of the Construction Sector Transparency Initiative (CoST) since 2013. CoST regularly publishes reports on transparency with regard to the construction of public infrastructure in El Salvador (CoST, n.d.[47]). Since 2018, El Salvador’s Single System of Information on Public Infrastructure the Sistema Único de Información sobre Infraestructura Pública (SUIP) has published information on public infrastructure projects (CoST, 2018[51]). Adopted in 2010, El Salvador’s Law on Access to Public Information (Ley de Acceso a la Información Pública), is also a key tool for citizens to participate in procurement and contracting, and for the improvement of transparency with regard to the construction of public infrastructure. In order to contribute to transparency in the actions of state institutions, the law aims to guarantee citizens’ rights to access public information. The law obliges public institutions to make available to the public, disclose, and update information on their activities, expenditures, budget, structure and contacts, and it also created an Institute for Access to Public Information (Asamblea Legislativa, 2010[52]).
In order to continue fighting corruption, El Salvador should improve transparency, and should reduce the incentives for corruption by officials in the construction and contracting of public infrastructure. It is important to ensure that the SUIP system includes information on all public infrastructure projects, and that it is regularly updated. Transparency can also help to avoid delays and cost increases in public infrastructure projects resulting from corrupt practices. It can do this, for example, through a website that monitors the progress of public investment projects in real time, comparing them with the original cost and time estimates. In order to make sure that the most urgent infrastructure projects are prioritised, El Salvador should establish a national infrastructure development plan that prioritises the country’s needs. An independent body should develop and update this plan periodically. In addition, it is important for the legal requirements for the use of non-competitive procedures for the selection of PPPs, in particular the consideration of unsolicited projects, to be clearly defined and publicised. Likewise, it is also important for the use of non-competitive procedures to be clearly justified, and for these justifications to be made public. It is also important to ensure the adequate monitoring and evaluation of public infrastructure projects in El Salvador, through independent institutions (OECD, 2016[53]).
Electricity supply
The quality of El Salvador’s electricity supply poses a challenge for the private sector. In 2016, almost half of all companies in El Salvador (47.6%) experienced electrical outages. On average, companies experienced 1.2 outages a month, with 19.1% of firms identifying electricity as a major constraint. Electricity was a more significant constraint for companies in the textile sector (World Bank, 2016[1]). In the manufacturing sector, an unstable electricity supply risks damaging machinery. In 2016, 15% of firms in El Salvador shared or owned a generator, and this share was higher (19.4%) in the food manufacturing sector (World Bank, 2016[1]).
The relatively high cost of electricity in El Salvador presents a further challenge for private companies. Indeed, the cost of electricity remains relatively high in the Central American region as a whole (IFC, 2016[54]; OECD, 2017[55]; IDB, 2013[56]). Industrial electricity tariffs in El Salvador are lower or similar to those of other countries in the region. They amount to 15.4-15.5 US cents per kilowatt-hour (kWh) in El Salvador, compared to 21.4-30.5 cents/kWh in Nicaragua, 19.7-20 cents/kWh in Panama, 15.7‑15.9 cents/kWh in Costa Rica, 13.4-15.4 cents/kWh in Honduras, and 9.4-16 cents/kWh in Guatemala (CNE, 2021[57]). However, the price of electricity for private companies in El Salvador is considerably higher than the tariffs in potential comparator countries in other regions of the world, such as in Estonia (0.103 US cents per kWh). It is also higher than in potential international competitors for attracting investment, such as Viet Nam (12.5 US cents per kWh)4 (World Bank, 2020[58]). Furthermore, the cost of a standard electricity connection remains very high in El Salvador. It stands at 517.9% of per capita income, compared to 407.2% of per capita income on average in Latin America and the Caribbean, and 61% of per capita income on average in the OECD high-income countries (World Bank, 2020[59]).
El Salvador’s legal and regulatory framework favours price stability and electricity generation over competition in prices and quality of service for the end user. There are 20 companies in El Salvador that generate electricity, two of which are state-owned enterprises. These are the Comisión Ejecutiva Hidroeléctrica del Río Lempa (CEL), and LaGeo S.A. de CV., which is a subsidiary of CEL (SIGET, 2019[60]). El Salvador’s transmission system is operated by the Transactions Unit (Unidad de Transacciones), which is a private company. A state-owned enterprise, ETESAL S.A. de CV., which is another subsidiary of CEL, is in charge of the expansion, maintenance and administration of the transmission network (IDB, 2020[34]; PROESA/CNE, 2015[61]). Although eight companies are active in electricity distribution in El Salvador, 88% of final demand is served by just five of these companies. These five companies were created from the privatisation of the state monopoly (SIGET, 2019[60]; SIGET, 2020[62]). Since 2010, electricity distribution companies have had to contract at least 80% of electricity demand through a competitive process.5 The introduction of long-term contracts for the supply of electricity has helped to stabilise prices compared to the previous system, in which spot-market fluctuations were passed on to consumers. In 2019, 79% of electricity demand was supplied under long-term contracts. In 2020, the spot market played an even smaller role (11% of demand), with total demand falling by 7% (SIGET, 2020[62]). El Salvador’s legal framework for the electricity sector allows for competition in distribution and retail supply not just between regional markets, but also within each market. In practice, a large fraction of demand in the retail market is supplied by vertically integrated distributors. New entrants to the distribution market are geared towards large clients, and they have very small market shares among El Salvador’s “low demand” clients. This approach results in inefficient and redundant distribution lines (bypasses) (Superintendencia de Competencia, 2016[63]). Since regulated consumer prices are based on real historic costs, this can ultimately lead to higher costs for consumers. The cost-based price-regulation mechanism seems to contradict the idea of a contestable distribution market. El Salvador could evaluate a reform that establishes competition for the market and could consider introducing pricing elements that reward productivity in the distribution and supply of electricity. Furthermore, the electricity distribution network is in need of modernisation (IDB, 2020[34]).
In order to improve the quality of electricity supply by the private sector, El Salvador could establish special zones with better-quality electricity supply. Higher electricity prices in these zones could finance the necessary investments. These zones could be targeted in particular at private companies that need a stable electricity supply in order to operate. They could be established, for example, in industrial parks and free trade zones. The Indonesian model provides an interesting case study in this regard. In Indonesia, companies are now able to generate electricity themselves. Companies that generate electricity for their own use are called private power utilities (PPU). These PPUs can generate electricity for on-site consumption, including use by tenants of an industrial estate. This may include the direct sale of electricity to end customers. In this case, however, PPUs with a capacity above 200 kW must have an operating licence, as well as various other permits, and they must also obtain approval from the relevant minister, governor, or mayor. The PPUs can also establish back-up connections to Indonesia's national grid, and can generate electricity for consumption in other areas under certain conditions. However, there is a need to further improve the regulation of private utilities in Indonesia. This is especially the case with regard to regulations on connections to the national grid, and their use by private utilities (OECD, 2021[64]).
El Salvador already generates a significant and growing amount of electricity from renewable sources. In 2019, these accounted for 3 561 gigawatt-hours (GWh), or 71% of the total electricity generated in the country that year. This was a significant increase on 2015, when 4 335 GWh, or 58.5% of the total electricity generated, came from renewables. This increase was mainly due to investments in solar energy and biofuels (IRENA, 2022[65]). However, there is scope to further increase the share of renewables in El Salvador's energy mix. In particular, there is a lot of potential for geothermal energy, and also for increasing self-production from renewables, especially from solar energy.
Stepping up El Salvador’s capacity in geothermal, solar and wind energy could reduce the country’s dependence on energy imports, and could bring down the cost of locally produced electricity. In 2018, El Salvador imported 25.7% of the electricity to power its national electricity grid from neighbouring countries. El Salvador is the largest electricity importer in Central America, and its electricity imports increased from close to 400 GWh in 2014 to more than 1 900 GWh in 2018. The high cost of producing electricity locally from liquid fuels such as diesel is the main reason for El Salvador’s high levels of overall energy imports (IDB, 2020[34]). Generating more electricity from renewable sources such as solar, wind, and geothermal would be less costly, and could boost domestic electricity supply.
El Salvador’s government has been supporting the expansion of electricity generation from renewable sources of energy. As of 1996, El Salvador’s General Electricity Law liberalised the power sector, paving the way for greater private-sector participation (IRENA, 2020[66]). In 2020, El Salvador’s National Energy Council (the Consejo Nacional de Energía, or CNE) finalised a new National Energy Policy 2020-50 for the country. One of the objectives of this strategic document is to integrate more renewable energy into the energy system, and thus to reduce the cost of electricity and the country’s dependence on oil. The policy is articulated along five strategic axes. These are: regulatory modernisation; research, development and innovation; sustainable energy supply; energy security and integration; and efficient energy consumption. The policy presents a vision of a modern system of energy supply and consumption, and of universal and equitable access to energy. It also paves the way for an innovative energy sector that can attract investment, and for a carbon-neutral, safe, reliable, and high-quality energy supply (CNE, 2022[84]) (CNE, 2022[67]; CNE, n.d.[68]; IRENA, 2020[66]). There is also an investment plan for El Salvador's electricity sector, and at the time of writing an energy transition law bill is in preparation.6
The introduction of higher shares of electricity from renewable sources, which represent a movement away from the more fossil-fuel driven energy matrices of the past, will require an evolution of the electricity sector, and above all it will mean increasing the baseload. Some electricity sources, in particular solar, may serve to accentuate the problem of intermittency, as may other distributed sources. Solar panels, for example, generate electricity for between 10% and 30% of the day, which generates large daytime lags between demand and generation, despite the extra capacity. In turn, this requires storage capacity, a high level of regional integration of the grid and energy markets, and the availability of capacity from a large number of other flexible sources of power that can serve as a baseload (e.g. natural gas, fuel oil, hydroelectric, and geothermal energy). A number of mechanisms are being developed worldwide in order to manage this situation. They include a combination of: demand-response mechanisms (which introduce real-time, location-based pricing), battery storage, and the extension of trading mechanisms (OECD, 2018[69]).
El Salvador is already investing in baseload capacity, and more opportunities exist. A natural gas plant is currently under construction in Acajutla. Once it is operational, it will be able to guarantee baseload. This plant will have a capacity of 378 megawatts (MW), and it will satisfy 30% of El Salvador's energy demand. In addition to serving as baseload, this natural gas plant would contribute to diversifying El Salvador's energy matrix, and to reducing the country's dependence on heavy fuel oil and bunker fuel. However, the construction of the was slow. The plant started operations in May 2022 even though the company in charge of construction, Energía del Pacífico (EDP), was awarded the tender ten years earlier (Forbes, 2021[70]). Another, cleaner, possible source of baseload power for El Salvador is geothermal energy. This has a lot of potential in a country whose geothermal potential equates to 791 MW. El Salvador already has two geothermal power generation plants, with a total capacity of 204.4 MW (8.6% of total installed generation capacity, as of 2021). In 2019, El Salvador generated 1 474 GWh of power from geothermal sources. This equated to 24% of the total electricity generated in the country (IRENA, 2022[65]; Asunción Alas and Pabón Chavez, 2019[71]).
In order to incorporate a large share of renewables into El Salvador’s energy mix, substantial investments in infrastructure are required. On top of the investment that is necessary to increase baseload capacity, it is also necessary to modernise El Salvador’s network of electricity distribution and transmission in order to make it possible to connect large renewable energy facilities to the national grid. It is estimated that El Salvador requires USD 2.8 billion of investments to modernise its energy infrastructure over the next ten years. More than 80% of these investments would be in electricity generation capacity, most importantly renewable energies (IDB, 2020[34]). In order to facilitate these investments, the legal and institutional framework for renewables and long-term planning and policy co-ordination in the energy sector need to be improved, in addition to training sufficient numbers of technicians in renewable energies (IRENA, 2020[66]).
El Salvador also needs to design and implement new rules and regulations in order to incorporate a large amount of renewable energy into its energy mix. This is especially the case for handling distributed electricity generation from grid actors that are not traditional producers of electricity, such as households with photovoltaic panels. Better regulation on distributed electricity generation could stimulate more auto-production of renewable energy from people and businesses in El Salvador. The country already has regulation for net metering, which allows eligible auto-producers of renewable energy to inject surplus production into the local distribution grid.7 Auto-producers are compensated in energy (i.e. kWh credit), and this credit can be applied to offset electricity consumption within the current billing period (e.g. one month). There are also established rules for auctions of power from distributed renewable sources.8 Power-distribution companies can purchase up to 20 MW of distributed renewable energy from an auto-producer for the distribution grid. However, current levels of distributed generation are not yet quantified, and there is no centralised metering of established auto-producers in El Salvador. Without this information, distribution companies cannot account for the impact of distributed generation on the demand profile of their customers. In addition, uncapped and uncontrolled increases in distributed generation could affect the reliability of El Salvador's electricity system. There is, moreover, an uneven playing field, as subsidiaries of distribution companies also compete in the market for the development of distributed generation projects. These companies may have access to customer information that is not available to other project developers (IRENA, 2020[66]). Also, net billing would be preferable to net metering. Distributors in El Salvador have already submitted a proposal to complete and improve the regulations for distributed generation to SIGET, but at the time of writing, this had not been adopted.
Recommendations to improve and modernise transport, logistics and energy infrastructure in El Salvador
Removing obstacles to international trade, and to a further deepening of regional integration, is important to stimulate El Salvador’s exports
Delays at international borders can result in higher costs for companies and lost business opportunities in time-sensitive or logistics-intensive sectors. Long waiting and transit times at international borders, plus burdensome customs and other border procedures, raise costs for companies that import and export goods, thereby reducing their productivity levels (ESEN/FES, 2019[72]). In addition, delays at international borders prevent just-in-time deliveries of time-sensitive products, resulting in lost business opportunities. Higher logistics costs due to delays at international borders can make the export of logistics-intensive products unprofitable.
Lengthy and time-consuming customs procedures and delays at El Salvador’s borders continue to constitute important obstacles for companies in El Salvador that rely on imported inputs. In the World Bank’s Logistics Performance Index, El Salvador registered a low performance in the categories of “Quality of trade and transport-related infrastructure”, in which its score was 2.25/5, and “Efficiency of customs clearance process”, for which it scored 2.3/5 (World Bank, n.d.[11]). In the Global Competitiveness Index, El Salvador ranks 115th out of 141 countries in terms of border-clearing efficiency, with a score of only 32.5/100 (WEF, 2019[41]). In 2016, 18.4% of companies in El Salvador identified customs and trade regulations as major constraints. Trade regulations were a more important constraint for manufacturing industries, most importantly for the textile sector (World Bank, 2016[1]). Although the clearing of exports through customs is fast in El Salvador (taking 2.9 days on average, as compared to 8.3 days on average in Latin America), clearing imports through customs takes 18 days, as compared to a Latin American average of only 15.4 days. Given that 67.9 % of companies in El Salvador rely on imported inputs, lengthy customs procedures are a major constraint for an important number of companies in the country (World Bank, 2016[1]).
The main obstacles in customs clearance are cumbersome and ineffective processes and the deficiency of computer systems. According to the 2019 Entrepreneurial Competitiveness Survey by FUSADES, the main problems that exporting and importing firms identified in terms of customs administration were cumbersome processes (identified by 25% of exporting and importing firms), and the ineffectiveness and inefficiency of procedures and the deficiency of computer systems (which was identified by 14% of firms) (FUSADES, 2021[17]). In the OECD’s Trade Facilitation Indicators, El Salvador scored only 1.13/2 in the category “Harmonisation and simplification of documents”, which measures the level of acceptance of copies of documents, the level of simplification of trade documents, and the level of harmonisation of trade documents with international standards. The country also only scored 1.11/2 in the category “Appeal procedures”, which is an indicator for the possibility and modalities of appealing administrative decisions taken by border agencies (OECD, 2019[73]; OECD, 2018[74]). Customs authorities do not invest enough in maximising efficiency, reducing time at borders, technical upgrades, institutional modernisation, or in raising more tax revenues through a greater turnover at border crossings (IDB, 2020[34]).
There is not sufficient co-operation between customs authorities and the different actors that are involved in international trade in El Salvador. In the 2019 OECD Trade Facilitation Indicators, the country scored only 0.91/2 in the category of “Co-operation between external border agencies”, which measures co‑operation with neighbouring and third countries. El Salvador also only scored 1/2 in the category of “internal border agency co-operation”, which measures the level of delegation of control to customs authorities, and the level of co-operation between the different border agencies in the country. Compared to best practices, data requirements for different border agencies in El Salvador are not harmonised or linked to interconnected systems. In addition, El Salvador scored only 1.25/2 in the category of “Involvement of trade community”, an indicator that measures the existence of structures and guidelines for consultations, the publication of drafts, and the existence of a framework for reporting and commenting (OECD, 2019[73]; OECD, 2018[74]).
El Salvador’s government has started a process to identify and remove obstacles to international trade. The country has a Trade Facilitation Action Plan that is updated annually by the National Trade Facilitation Committee (Comité Nacional de Facilitación del Comercio de El Salvador, or CNFC). The action plan aims to reduce delays at international borders, and to facilitate international trade. It includes measures to simplify processes for the inspection of merchandise, including compliance with health and phyto-sanitary standards. It also includes the management of air and maritime freight, and the simplification of different inspection procedures. The plan also contains measures to improve port, airport and road infrastructure, and to reform and improve the legal framework for trade, including customs and sanitary standards. Also in the action plan are measures to further advance the digitalisation and use of modern technologies for customs and border procedures, for example by improving the inter-connection of different institutions, databases, and information systems. There are also measures to strengthen institutional capacities, and to improve transparency and communication between the public and the private sectors, most importantly by informing the private sector on a regular basis about international trade policies and strategic projects. The 2021 Trade Facilitation Plan also aims to develop a national strategy to facilitate PPPs for the period 2020-25, and to reduce the technical barriers to trade in Central America and with third countries outside of the region. The plan includes specific timelines for the implementation of each measure and mentions the institutions that are responsible for the implementation and financing of each measure (CNFC, 2021[75]).
The implementation of the Trade Facilitation Plan has progressed well. By early 2021, 70% of the measures from the 2020 plan had been implemented. Various sanitary and phyto-sanitary (SPS) procedures and standards had been improved and simplified, and there had been good progress in the digitalisation of the customs and foreign trade system. Investments were made in the rehabilitation of different strategic roads, and in the expansion of the container storage yard at the port of Acajutla. In addition, preliminary work was completed to operate a ferry between El Salvador and Costa Rica, and a PPP contract for the cargo terminal at the international airport was awarded. Training was provided to the public and private sectors, and online reports on progress in strategic issues of the Central American Customs Union were published, improving transparency (CNFC, 2021[76]). As of July 2021, progress had been made on the 2021 action plan. The procedure for exporting and importing samples without commercial value had been improved, and there had also been progress in the implementation of the Hague Apostille Convention. Further progress included the publication of information on trade negotiations, and also the implementation of the contingency plan for the Los Chorros road and the maintenance of border roads. There were also improvements in customs management and sanitary and phyto-sanitary standards, procedures and controls, as well as in the simplification of controls at the cargo terminal of the international airport (CNFC, 2021[76]).
It is appropriate for El Salvador to establish priorities for the elimination of obstacles to international trade. In this spirit, the Trade Facilitation Plan includes a long list of measures to remove obstacles to international trade, which is updated annually. In order to achieve results in the short run, it is important to establish priorities for the implementation of these measures. The Trade Facilitation Plan 2021 already includes concrete deadlines for the implementation of each measure, which was not the case in previous versions of the plan. This is a positive development.
El Salvador should prioritise the simplification and automation of border formalities and procedures. The country could more readily accept copies of the documents that are required for border formalities, as well as improving the alignment of trade documents with international conventions and standards, and reducing the number of documents that are required for imports and exports. In addition, it is important to progressively automate border and customs procedures in order to reduce delays at international borders. El Salvador should also favour the pre-arrival processing of import documentation in order to reduce time at customs, speed up controls for perishable goods, and provide preferential treatment with regard to customs clearance for these goods. Also appropriate in this regard would be an expansion in the use of post-clearance audits, and a further simplification of procedures (OECD, 2019[73]). The Trade Facilitation Plan already includes measures for the adoption of a General Customs Law, for the digitalisation of customs, for the implementation of the National and Regional Contingency Plan in customs management, and for the implementation of a strengthening plan for border posts (CNFC, 2021[75]).
El Salvador can also improve co-operation and dialogue between the whole range of stakeholders in international trade. It should improve co-operation with the customs authorities and border agencies of neighbouring countries, as well as co-operation and co-ordination between the different border agencies and stakeholders in border controls inside El Salvador. In addition, it is important to improve the provision of adequate and timely information on regulatory changes to the private sector, to give the private sector the opportunity to comment before the introduction or modification of regulations related to international trade, and to make consultations with the private sector even more inclusive (OECD, 2019[73]). The Trade Facilitation Plan includes measures to improve communication between the public and private sectors on trade policy, and El Salvador has already taken several steps to improve transparency (CNFC, 2021[75]) (CNFC, 2021[77]; CNFC, 2021[76]).
Recommendations to eliminate barriers to international trade
Reducing the length and costs of administrative procedures
Reducing red tape in El Salvador has the potential to boost productivity and private investment. Both the quality of regulation and the scale of the administrative burden have a significant impact on the climate for business and investment, and on firms’ productivity. An excessive administrative burden – so-called red tape – adds to business costs, can impede market entry, lowers competitive pressures, and reduces the incentive to innovate. It also creates uncertainty that can disrupt business planning and can hinder the ability of businesses to respond quickly to new market opportunities. Ultimately, this discourages new domestic and foreign investment, and weakens firms’ productivity and overall economic performance (OECD, 2015[32]).
Red tape is extensive in El Salvador. In the Global Competitiveness Index, it came 131th out of 141 countries in terms of the burden of government regulation (WEF, 2019[41]). According to the 2019 Entrepreneurial Competitiveness Survey by FUSADES, the main problem with public institutions for 21% of companies in El Salvador was that of cumbersome procedures and bureaucracy (FUSADES, 2021[17]). El Salvador ranked 168th out of 190 countries in the World Bank’s Doing Business ranking 2020 for dealing with construction permits. The process for getting a construction permit is complicated and time-consuming, involving several procedures such as getting a water connection permit from the national water utility company, ANDA, and getting an environmental permit. It takes 210 days to request and obtain the feasibility analysis for connecting a warehouse to potable water and sewage services in El Salvador (World Bank, 2020[59]) The process for creating a business also remains long and cumbersome (Secretaría de Comercio e Inversiones, 2020[6]). El Salvador was ranked 148th out of 190 countries in the category of opening a business in the World Bank’s Doing Business Report for 2020 (World Bank, 2020[59]).
Procedures to obtain tax incentives for tourism projects are complicated and time-consuming. They lack transparency, and they often involve multiple institutions. According to market players, the granting of fiscal incentives to the tourism sector is subject to delays, and standard requirements for feasibility studies of tourism projects are not well defined (MINEC/PROESA, 2020[78]). Information on the procedures and requirements for benefiting from tourism tax incentives is, moreover, hard to obtain for investors (Asesores y consultores internacionales S.A. de C.V., 2017[79]). The involvement of multiple institutions in granting tourism incentives renders the process lengthy and time-consuming (MINEC/PROESA, 2020[78]). The granting of fiscal incentives needs to be approved by El Salvador’s Treasury (Ministerio de Hacienda), the Ministry of Environment and Natural Resources (Ministerio de Medioambiente y Recursos Naturales) abd the Secretariat for Culture of the Presidency (Secretaría de Cultura de la Presidencia de la República) for projects above USD 50 000. Projects below USD 50 000 need approval from the Ministry of Environment and Natural Resources, the Secretariat for Culture, and the Tourism Ministry (Asamblea Legislativa, 2005[80]). There is a lack of communication among these different actors, in particular between the Ministry of Tourism and the Treasury (Asesores y consultores internacionales S.A. de C.V., 2017[79]). Delays for the Treasury to approve tax incentives for renewable energy are also excessive. Furthermore, procedures for the management of waste (e.g. obsolete equipment and machinery) are very complex and difficult for companies benefiting from the tax incentives that are provided for by the country’s law on free zones (MINEC/PROESA, 2020[78]).
In the light of these challenges, El Salvador’s government has already taken a number of steps to reduce red tape and delays in business procedures. The implementation of the electronic signature (MINEC, 2020[81]; MINEC/PROESA, 2020[78]) will reduce business costs and delays in doing business in El Salvador. The Ministry of Housing (Ministerio de Vivienda), and the Secretaría de Comercio e Inversiones, are currently working on a one-stop-shop (ventanilla única) for construction permits that is based on the Mexican example. The idea is to simplify the process and to reduce the time it takes to deal with construction permits, including for water connections. Since 2013, El Salvador has had a one-stop shop for firm creation and formalisation. In August 2022, the government launched an online platform (simple.sv). It is meant to be a one-stop shop for multiple procedures, of which a subset can be carried on entirely online. The platform aims to unite a multiplicity of platforms that were mushrooming across the administration (see Chapter 8). A working group on the “Dealing with Construction Permits” sub-index in the World Bank’s Doing Business Ranking has also been organised for this purpose. It encompasses the Ministry of Economy, the Ministry of Housing, the San Salvador Urban Planning Office, the OPAMSS, and the public water utility company, ANDA (MINEC, 2020[81]). The delay for benefiting from fiscal incentives in the context of the country’s Free Zones Law, (the Ley de Zonas Francas Industriales y de Comercialización) has been reduced from 91 to 25 days. The Ministry of Economy is currently working on the digitalisation of the procedures included in the Free Zones Law, the International Services Law, and the Investment Law. The Organismo de Mejora Regulatoria (OMR) adopted a Plan for the simplification of procedures (Plan de Simplificación de Trámites Institucional 2018 – 2019), which aims to simplify a set of ten administrative procedures (MINEC, 2020[81]).
El Salvador’s government has taken further steps to reduce the regulatory burden and improve transparency. The adoption of three cornerstone laws provides the foundation for future improvements in regulatory quality. Adopted in 2017, the Law on Administrative Procedures (Ley de procedimientos administrativos) regulates all administrative procedures, requiring that all existing procedures conform to its stipulations by 2020. Adopted in 2018, the Law on Better Regulation (Ley de Mejora Regulatoria) establishes the principles of the Regulatory Impact Assessment, underpinning the body that is responsible for regulatory improvement (the Organism for Better Regulation). Meanwhile, the Law on the Elimination of Bureaucratic Barriers (Ley de Eliminacion de Barreras Burocráticas), which was also adopted in 2018, establishes an administrative ex-post recourse against specific procedures or their implementation (see chapter on Governance). El Salvador’s Organismo de Mejora Regulatoria is working on a national registry of procedures (the Registro Nacional de Trámites), which will include all procedures of public institutions, in order to improve transparency. The finalisation and publication of the registry was originally planned for mid-2021, and it is now operational, although its coverage should still be increased.
Digitalisation can also help to reduce the costs of administrative procedures. El Salvador’s digital agenda 2020 – 2030 (the Agenda Digital El Salvador 2020 – 2030) aims, amongst other lines of action, to digitalise and simplify public services and administrative procedures, and to improve transparency through digitalisation and open data services (Secretaría de Innovación de la Presidencia, 2020[82]). However, technical issues with online public services remain frequent, as is the case with online requests for environmental permits (MINEC/PROESA, 2020[78]).
Public-private dialogue can help to accelerate regulatory improvement initiatives. The reactivation of the National Committee for Trade Facilitation (the Comité Nacional de Facilitación de Comercio), in 2019, is a case in point. Created in the context of the implementation of the WTO Agreement on Trade Facilitation (WTO, 2014[83]), it includes members of the private sector organised through an inter-professional committee (Comité Intergremial para la Facilitación del Comercio en el Salvador, CIFACIL), and representatives of the country’s administration. In 2019, it adopted a plan of 60 concrete actions, many of which have to do with easing the regulatory burden in international trade. Despite its well-defined scope, the experience of the Committee on Trade Facilitation exemplifies the role that public-private dialogue can play in regulatory improvement, as it allows for a prioritisation of the multiple items in the agenda. Similar experiences form other countries have also been successful. In 2010, for example, Morocco established a public-private National Committee for the Business Environment (Comité National de l’Environnement des Affaires, CNEA), with the aim of improving the country’s business environment and its classification in the World Bank’s Doing Business rankings. It succeeded in the latter goal, climbing form position 128 to 53 between 2010 and 2020. More importantly, it grew into a real public-private dialogue platform beyond the narrow scope of its initial mandate. It has recently taken on the formulation of a national business environment policy.
In future, El Salvador should further accelerate the implementation of different policy initiatives to simplify and enhance the transparency of business procedures, and the country should also give more weight to regulatory improvement. It should deliver on the promise to establish a Court for the Elimination of Bureaucratic Barriers (Tribunal para la Eliminacion de Barreras Burocraticas). It should also ensure that the process of regulatory adaptation to the Law on Administrative Procedures, and the development of the mandated national registry of procedures, receive appropriate resources. The implementation of the institutional plan of 2018-19 for the simplification of procedures should become a policy priority.
El Salvador should pursue its efforts to ease the regulatory burden through better co-ordination throughout the administration. The progress that has been made in digitising and automating procedures in the one-stop shop for international trade (the Centro de Trámites de Importaciones y Exportaciones, or CIEX El Salvador) is a step in the right direction. It is important to finalise the one-stop shop for obtaining a construction permit in order to accelerate a process that continues to constitute an important obstacle to private investment. To avoid the proliferation of “one-stop shops”, the process of co-ordination should be analysed from a user’s perspective, to ensure that users are informed of the available tools and can carry out as many procedures as possible through the same interface with the administration.
Furthermore, procedures for applying for fiscal incentives should be simplified, and transparency should be enhanced. Most importantly, the number of institutions that are involved in granting fiscal incentives in the context of the tourism law should be reduced. It is not necessary to involve both the Ministry of Tourism and the Secretariat of Culture of the Presidency in this process. Furthermore, the timelines that are fixed by law for benefiting from fiscal incentives need to be respected. The availability of detailed information on the procedures and requirements that are necessary to benefit from fiscal incentives should also be improved, for example by publishing it in detail online.
Recommendations to reduce the length and cost of administrative procedures
Access to finance remains an obstacle for micro and small enterprises in El Salvador
Improving access to finance for micro and small enterprises (MSEs) in El Salvador has the potential to raise productivity. Access to finance enables growing firms to seize promising investment opportunities, and this is especially the case for small and innovative enterprises that need external funding to expand and develop their businesses. By facilitating new entrants into product markets, the provision of access to finance can spur competition and boost efficiency and productivity, both directly and indirectly. It does this by helping better performers to grow, and by forcing weaker performers to improve, merge with or be acquired by a stronger firm, or exit the market (OECD, 2015[32]).
Access to finance is mainly an obstacle in El Salvador for MSEs, and for informal firms. Access to finance is a major constraint for 23.3% of micro enterprises in El Salvador, and for 15.9% of small companies, but only for 8.7% of medium-sized companies and 8.5% of large companies (World Bank, 2016[1]). Investment in fixed assets financed by banks is considerably higher for medium and large enterprises (37.8% and 33.2% of investment respectively) than for MSEs (23.9% and 27.5% of investment respectively). While 33.3% of medium and large firms received a bank loan to finance investment, only 22.2% of micro firms, and 23% of small firms, received a bank loan to finance investment as of 2016 (World Bank, 2016[1]). This is evidence that smaller firms face greater credit constraints. According to a survey of MSEs in 2017 by El Salvador’s National Commission for MSEs (the Comisión Nacional de la Micro y Pequeña Empresa, or CONAMYPE), a lack of own funds for investment was the main obstacle limiting company growth for 22% of the companies surveyed (Figure 4.5). Furthermore, for 67.5% of the MSEs surveyed, the main source of financing was their own savings and resources, with only 22% of companies having made a request for a loan in the past. Moreover, 80% of loans were directed towards working capital. Companies operating in commerce were most likely to request loans, with 53% of these firms reporting having done so. In second place were services companies, 32% of which had requested loans. Only 14% of industrial companies had requested a loan (CONAMYPE, 2018[18]).
MSEs constitute the large majority of companies in El Salvador, and informality is widespread. Close to 99% of firms in the country are MSEs (REDIBACEN, 2016[84]), and they account for 31% of employment (CONAMYPE, 2019[85]) and generate about 35% of El Salvador’s GDP (REDIBACEN, 2016[84]). According to CONAMYPE’s 2017 survey, 75% of MSEs in El Salvador are informal, which is to say that they are not registered payers of value added tax [VAT]) (CONAMYPE, 2018[18]). Given the weight of MSEs and the informal sector in El Salvador’s economy, improving their competitiveness and productivity is important for the country’s productive transformation.
Figure 4.5. Lack of funds for investment and low levels of profitability are the main obstacles for MSEs in El Salvador
Main obstacles limiting company growth, 2017
Source: CONAMYPE (2018[18]), Encuesta Nacional de la Micro y Pequeña Empresa 2017, Comisión Nacional de la Micro y Pequeña Empresa, San Salvador, https://www.conamype.gob.sv/download/encuesta-nacional-de-la-mype-2017/.
Formal micro, small and medium-sized enterprises (MSMEs) are less affected by credit constraints than those in the informal sector, but access to finance is still a challenge for them. According to a survey by El Salvador’s Reserve Central Bank (the Banco Central de Reserva, or BCR) of MSMEs in urban areas, of which 81% were formal (registered for VAT), accessing credit was difficult for 36% of companies. For 73% of them, the most important source of financing was their own funds. On the positive side, 59% of the businesses surveyed had already applied for a loan from a financial institution, and for 85% of them the loan request had been approved. This shows that accessing credit is easier for formal than for informal companies. Only 7% of the companies surveyed had already contracted a loan from a moneylender (BCR, 2019[86]).
The relatively low levels of financial inclusion in El Salvador offer a partial explanation of the difficulties in accessing finance. In 2021, only 36% of El Salvador's population aged 15 and older had a bank account or an account with a provider of mobile money services, compared to 74% on average in Latin America and the Caribbean (World Bank, 2022[87]). The financial-inclusion performance with regard to MSEs (MSEs) is better than the performance of the Salvadoran adult population on average. According to the BCR’s survey, at least 82% of formal MSEs in El Salvador have a bank account (BCR, 2019[86]).
High interest rates and lack of collateral represent significant challenges for MSEs that wish to access loans. According to CONAMYPE’s survey in 2017, 60% of MSEs paid an annual interest rate on their loans of above 10%, with 14.2% of companies paying over 16% (CONAMYPE, 2018[18]). Average interest rates for loans to firms in 2017 ranged from 6.37% (for loans with a maturity of up to one year), to 8.67% (for loans with maturities of over a year) (BCR, 2020[88]). The lack of collateral or a guarantor was the main reason for the rejection of loan requests by MSEs (53.6%) (CONAMYPE, 2018[18]). In the survey of MSMEs in urban areas by El Salvador’s Central Bank, 27% of companies identified high interest rates on loans as the main obstacle to accessing credit, with 17% of companies identifying the requirement of a high amount of collateral as the main obstacle. These were the two main obstacles that companies identified in the survey. For the 69% of companies that had to provide collateral or guarantees for their loans, the main types of guarantees used were pledge mortgages (hipotecaria prendaría) (67%), machinery, equipment or vehicles (12%), and a guarantor (11%) (BCR, 2019[86]). All enterprises with loans surveyed in the World Bank’s enterprise survey in 2016 had to post collateral or guarantees (World Bank, 2016[1]).
Difficulties in gaining access to financing, plus limited levels of liquidity and own financial resources, make it harder for MSEs to succeed in exporting. There is a large lag between the production of goods by an exporter, and the receipt of payment from clients. Therefore, only firms with access to credit, or sufficient own financial resources, are able to export. Consequently, only 3% of the MSEs surveyed by CONAMYPE in 2017 were exporters (CONAMYPE, 2018[18]). El Salvador’s exports are concentrated in the hands of a few large companies. In 2017, large companies accounted for 93.9% of El Salvador’s export volume, while MSMEs accounted for only 6.1%. In 2013, 49.1% of El Salvador’s exports were concentrated in the hands of 1% of the country’s companies. This is less than in Latin American countries on average (73.5% in 2013), but it nevertheless represents a high degree of export concentration, which has been increasing over time (in 2018, 53.7% of El Salvador’s exports were concentrated among 1% of companies) (BCR, 2019[89]). Improved access to financing could increase the number of exporting MSMEs in El Salvador and reduce the concentration of export activities in the hands a few large companies. It is also important to try to include more domestic MSMEs in the value chains of exporting firms.
The COVID-19 pandemic further exacerbated liquidity shortages and difficulties in accessing financing in El Salvador. Due to the strict lockdowns and restrictions on movements and businesses from March to July 2020, a large number of MSEs in El Salvador experienced liquidity shortages. Informal MSEs are particularly exposed to the impact of the pandemic. Therefore, their need for better access to credit has become even more urgent. Almost all of the micro enterprises (98%) that were covered by a survey of 400 such companies by the Ministry for Local Development (Ministerio de Desarrollo Local) reported having been completely paralysed by the pandemic. According to a survey of about 2 700 MSEs in June 2020 by CONAMYPE, in which 57% of the firms surveyed were informal companies that were not registered for VAT, 50% stopped operating due to the lockdown imposed between March and June 2020, while 33% reduced their operations, and 4% had to close down. Only 13% of companies continued operating normally (CONAMYPE, 2020[90]). In addition, 71.3% of the MSEs surveyed expressed a need for loans for working capital in light of the pandemic (CONAMYPE, 2020[90]).
El Salvador’s government has already implemented measures to improve access to finance for MSEs. As the country’s official national body for MSEs, CONAMYPE aims to support them, and to strengthen their competitiveness and productive capacities. In order to improve access to financing for informal companies, the Banco Hipotecario de El Salvador, a state-owned bank whose objective is to support El Salvador’s productive sector, and MSEs in particular, recently launched a programme in collaboration with CONAMYPE to provide informal MSEs with micro-loans of up to USD 100. Administered by CONAMYPE, the Fund for Entrepreneurship and Working Capital (Fondo para el Emprendimiento y Capital de Trabajo) finances new projects by existing MSEs in all sectors. Furthermore, MSEs can also obtain public loan guarantees for loans from financial intermediaries through the Guarantee Programme for MSEs (PROGRAMYPE) (CONAMYPE, 2014[91]). They can also obtain public co-investments through the Ministry of Economy for productive projects that would increase their productivity in national and international markets (MINEC, 2020[81]).
Since 2014, El Salvador has had a collateral registry, which allows for the registration of movable assets as collateral. The lack of collateral is one of the main obstacles for El Salvador’s MSEs in accessing finance. Collateral registries that make it possible to record movable property can improve access to credit for MSEs since movable assets are the main type of collateral that MSEs can offer to secure financing in developing countries like El Salvador (World Bank, 2018[92]). The country’s Law on Secured Transactions (Ley de Garantías Mobiliarias), which has been in force since April 2014, aims to improve access to credit for MSEs. The law establishes an electronic Secured Transactions Registry (Registro de Garantías Mobiliarias), and defines a wide range of assets that can serve as collateral, including tangible, intangible, and fungible assets, plus rights over future assets, intellectual property rights, bank accounts, stocks and stakes in private companies, and others (Asamblea Legislativa, 2013[93]; Solano and Tulipano, 2019[94]). Despite the creation of this registry, access to finance remains an obstacle for MSEs (CONAMYPE, 2018[18]; World Bank, 2016[1]), and the use of the Registro de Garantías Mobiliarias by businesses appears to be limited. In 2019-20 there were only 4 995 new collateral registrations (CNR, 2020[95]), even though there are more than 300 000 MSEs in El Salvador (CONAMYPE, 2018[18]).
A reform of El Salvador’s Usury Law (Ley de usura) could reduce the interest rates that are charged to micro and small enterprises that cannot access financing from formal financial institutions. A reform of the Usury Law was adopted by the county’s Legislative Assembly in February 2022. It aims to reduce the interest rates that are paid by the unbanked population. This includes MSEs that are excluded from the banking system, and that turn to moneylenders, pawnshops, and other non-bank providers of financial services. The reform establishes penalties for moneylenders who do not comply with the law, frames the calculation of interest (banning the practice of charging interest on interest), and reduces the maximum effective interest rates that are allowed (Asamblea Legislativa, 2022[96]).
El Salvador has rolled out a number of measures to improve the financial inclusion of MSEs. Since 2015, the Law to Facilitate Financial Inclusion (Ley para facilitar la inclusión financiera) has regulated e-money providers and savings accounts with simplified requirements (SSF, 2015[97]). In March 2021, El Salvador launched a National Financial Inclusion Policy. One of the four priority policy areas of this strategic document is financing for MSEs (BCR, 2021[98]). However, the action plan that is envisaged in the National Financial Inclusion Policy needs to be developed and approved as soon as possible to ensure the rapid implementation of the policy.
In light of the COVID-19 pandemic, El Salvador’s government adopted measures to improve micro and small enterprises’ access to finance, and to help these firms to survive. The government put in place a package of life-support measures for households and businesses that were affected by the pandemic, including subsidies for the informal sector, and loans directed to micro and small companies. In May 2020, a USD 600 million trust fund was constituted to support companies that had been affected by the pandemic (the Fideicomiso para la Recuperación Económica de las Empresas Salvadoreñas, or FIREMPRESA), under the management of the national development bank, BANDESAL. In July 2021, this trust fund received an additional USD 100 million, and as of the end of July 2022, USD 641.4 million of the fund’s total of USD 700 million had already been disbursed. In March 2021, it was reformed through Legislative Decree No. 840. New subsidy and sector-support programmes were created for the arts sector, artisanal fishermen, school transport, and public schools, as well as for shopkeepers who were affected by the Santa Ana fire on 10 March 2021 (Gobierno de El Salvador, 2022[99]).
In the context of the COVID-19 pandemic, the Law for the Promotion, Protection and Development of MSEs was also reformed in June 2021. This reform allows CONAMYPE to use more freely the USD 10 million allocated to it in the general budget to benefit traders and MSEs that experience difficulties in obtaining finance from private financial institutions. To this end, two trust funds were created to support the Guarantee Programme for MSEs (PROGRAMYPE), as well as the Investment, Quality and Productivity Fund (FECAMYPE). In addition, USD 1 million was assigned to carry out a nationwide census of micro and small enterprises, with the aim or registering them in view of formalisation (Asamblea Legislativa, 2021[100]).
The reform of the national development bank, BANDESAL, opens up new avenues for providing support to MSEs. During the COVID-19 pandemic, BANDESAL’s mandate was changed through a reform of its organic law (the Ley del Sistema Financiero para el Fomento al Desarrollo [BANDESAL]), and the institution can now make direct loans to companies. In the past, BANDESAL supported access to credit for the private sector – and most importantly to MSEs only through financial intermediaries. The reform of its organic law aims to improve access to finance for the productive sector through loans that have more favorable conditions, such as lower interest rates, longer maturities, and longer grace periods (Asamblea Legislativa, 2020[101]).
Box 4.2. The BNDES Card (Cartão BNDES) of Brazil’s National Bank for Economic and Social Development
Brazil’s Banco Nacional de Desenvolvimento Econômico e Social (National Bank for Economic and Social Development, or BNDES) is a federal public company that is associated with the country’s Ministry of Economy. Its objective is to provide long-term financing to companies that contribute to the country's development. The BNDES is one of the largest development banks in the world, with assets in the vicinity of 835 billion Brazilian reals (BRL).
The BNDES finances investment to expand, modernise and recover the productive capacity and competitiveness of national companies, including MSMEs. It offers various financing products to meet the financial needs of MSMEs (which are defined as companies with annual gross revenues of up to BRL 300 million). MSMEs have access to credit lines and financing from the BNDES through the Banco do Brasil, the Caixa Econômica Federal, and other state-controlled banks, as well as through a number of privately owned banks with broad outreach. In the first half of 2018, MSMEs accounted for 48.6% of total disbursements by the BNDES.
Among the BNDES's initiatives to facilitate access to credit for MSMEs is the "BNDES Card". It was launched in 2003 and is a type of pre-approved credit card aimed at financing investment on the part of MSMEs. The credit limit of the BNDES Card (up to BRL 2 million) is set by the issuers of the product, which are Brazilian financial institutions authorised by BNDES to issue the card. These financial institutions are in charge of selecting the companies that apply for a BNDES Card, so they are also responsible for analysing credit risk. The financial institutions that can issue BNDES Cards include state and private banks, as well as credit co-operatives. BNDES Card financing is for up to 48 months, with fixed instalment payments. Interest rates are preferential, and below market rates.
Business owners who hold a BNDES Card can only purchase products from suppliers that are willing to sell to holders of the BNDES credit card. All products that are available to such cardholders are published on the BNDES website.
The BNDES Card stands out for its easy accessibility, affordability, and operational simplicity. It makes it possible to finance MSME investments in a simplified manner, and at a lower price than the market offers. It also reduces the fixed costs that are associated with granting credit. In addition to reducing transaction costs, the card stands out because it does not require collateral and it offers the possibility of financing 100% of the investment. In this way, it facilitates easier and more agile access to credit, thus contributing to the growth of MSMEs. In 2017, there were more than 650 000 companies with an active BNDES Card. It has been in increasing demand since its creation in 2003, suggesting that it is a well-designed public policy for MSMEs.
Source: OECD (2020[102]), Financing SMEs and Entrepreneurs 2020: An OECD Scoreboard, OECD Publishing, Paris, https://dx.doi.org/10.1787/061fe03d-en.
It is important to make sure that public programmes to improve access to credit for MSEs in El Salvador are aimed at making markets work efficiently and sustainably. The government should focus its intervention in areas where there have been market failures, for example due to asymmetries of information between lenders and borrowers.
Public programmes to improve access to finance for MSEs should prevent an excessive transfer of risk from the private to the public sector and should respect the principle of risk-sharing. This means that official contributions should encourage partnerships with the private sector. This implies that priority should be given, wherever possible, to channelling public funds towards firms that are facing credit constraints through private financial institutions, rather than lending to them directly through public institutions such as BANDESAL, the national development bank (OECD, 2015[32]). Loan guarantee schemes such as PROGRAMYPE should be privileged over the direct lending of public funds to firms. Co-investments such as those implemented by the Ministry of Economy, in which investments are financed partly through public loans or grants, and partly through firms’ own funds or private-sector loans, are another option for risk sharing. In the short term, and in particular in the context of the COVID-19 pandemic, more direct public interventions by public financial institutions such as BANDESAL may be necessary as a counter-cyclical credit-policy instrument. Key conditions for their success include regulation and supervision – as is the case for loans from private banks – as well as an assurance that public lending will not crowd out private credit (Blancher et al., 2019[103]; IFC, 2011[104]).
Furthermore, efficient government support schemes should guarantee “additionality”, and should include rigorous evaluations. Additionality refers to the allocation of resources exclusively to viable firms that are nevertheless partially or completely excluded from financial markets. This implies that enterprises that lack access to private financial institutions (e.g. due to lack of collateral), or that face excessively high interest rates, should benefit from government support schemes, and that the viability and profitability of enterprises benefiting from public support should be rigorously assessed. Public programmes to improve access to finance for MSEs should also be assessed and evaluated rigorously in order to phase out policies that have become ineffective, or that are no longer necessary because market activities are maturing and are able to take over (OECD, 2015[32]). Currently, the institutions that implement public programmes to improve access to finance for MSMEs carry out evaluations. However, evaluations differ across institutions in terms of methodology and rigour, and public policies for MSMEs are not yet evaluated at the national level. Evaluation is not yet a consolidated and systematic practice in all public institutions when it comes to MSME programmes, and it needs to be consolidated and become mandatory.
The BNDES card of the Brazilian National Bank for Economic and Social Development (BNDES) is an example of a successful and innovative financing product for MSMEs from a national development bank (Box 4.2). It facilitates fast, affordable, and easy access to credit for MSMEs. The BNDES Card respects the principles of risk sharing and “additionality”: It is not the BNDES, but financial institutions, that are responsible for analysing credit risk and selecting businesses that apply for a BNDES Card. In addition, business owners with a BNDES Card can only buy products from specific suppliers, which discourages firms with access to other types of credit from applying (OECD, 2020[102]). The number of businesses with a BNDES Card has increased rapidly since its introduction in 2003 (OECD, 2020[102]), and there is evidence that it has been successful in easing credit constraints for these businesses (IDB, 2017[105]).
Access to credit among micro and small firms is closely linked to formalisation. Informal businesses in El Salvador face more difficulties in accessing loans than do formal ones. Only 22% of the MSEs covered by CONAMYPE’s survey, 75% of which were informal, had requested a loan, and 10% of loan requests were rejected due to the company’s lack of formalisation (CONAMYPE, 2018[18]). Conversely, access to financing does not appear to be a sufficient incentive for MSMEs to pursue formalisation. The degree of formalisation – as defined in this case by registration and the payment of social security contributions – of firms that requested credit is very similar to those that did not (Banegas and Winkler, 2020[106]).
Measures that encourage the formalisation of MSEs could facilitate both access to finance and the financial inclusion of MSEs. Simplifying the administrative procedures for formalising MSEs could encourage more of them to formalise (BCR, 2021[98]). In addition, the introduction of a simplified tax regime for MSEs in El Salvador, similar to the regimes that already exist in other Latin American countries such as Argentina, Brazil, Paraguay and Uruguay, could facilitate the formalisation of more MSEs. For example, in the context of the Argentine Monotax (Monotributo) System, which was introduced in 1998, small taxpayers (those with up to a maximum amount of gross annual income) can fulfil their main tax and social security obligations with a lump sum payment. The number of taxpayers enrolled in the Monotributo has grown steadily since its introduction in 1998, and more than half of these so-called monotributistas are in the lowest income category (ILO, 2014[107]).
A special limited-liability form of incorporation for MSEs can also facilitate their formalisation. In most countries, a minimum number of partners or employees, and a minimum amount of capital, are required to open a limited liability company. However, many countries have established special limited-liability company regimes for MSEs (such as Panama, see Box 4.3). Limited liability companies allow the separation of personal and business assets. In this way, they protect personal assets from business debts and lawsuits against the company, and in case of insolvency of the company. One disadvantage of limited liability companies can be credit restrictions, as personal assets cannot serve as collateral. In Salvadoran law, one such form is the Individual Limited Liability Company (the Empresa Individual de Responsabilidad Limitada, or EdRL). The minimum amount of share capital that is required for standard limited liability companies is USD 2 000, and they can have between two and 25 partners (Asamblea Legislativa, 1970[108]). However, the use of the EdRL legal form by MSEs is not common. This lack of use can be attributed in part to a lack of awareness of its availability. There are also limitations to the regulation that have been noted in comparative law studies (Díaz Martinez, 2017[109]). Firstly, the EdRL does not grant a legal personality to the company, but rather a separation of assets with a number of exceptions, including the possibility of guaranteeing operations with personal assets. The benefits in terms of access to risk-limited credit are therefore reduced. Secondly, the regulation limits the use of company law to companies with at least two partners. This implies the dissolution of companies, and a change of legal form, when a company becomes a sole proprietorship. This is contrary to the option pursued, for example, in Panama.
Other initiatives that are under way in El Salvador seek to facilitate the formalisation of MSEs through the simplification of accounting and tax requirements, and the provision of credit on more favourable terms. The work that has already been done on the draft bill on Transition towards Integration into the Economy, prepared by CONAMYPE and announced in 2020, set out to facilitate the transition of enterprises from informality to formality. It includes a simplified accounting regime during the transition of informal enterprises to formality (Gobierno de El Salvador, 2020[110]). Currently, only 15.6% of MSEs keep formal accounts (CONAMYPE, 2018[18]). The 2014 Law for the Protection, Promotion and Development of MSEs (the Ley de Protección, Fomento y Desarrollo de la MYPE) already contains provisions that allow for the introduction of simplified accounting principles for MSEs (CONAMYPE, 2014[91]). However, a simplified accounting regime for MSEs has not yet been approved by the Supervisory Council of the Public Accounting and Auditing Profession of El Salvador.
Capacity building in financial literacy for MSEs, along with the provision of technical assistance, could improve their access to finance. The main reasons why MSMEs report going to moneylenders for loans is that the procedures are easier and faster (88% of respondents), and that there is less paperwork (27% of respondents) (BCR, 2019[86]). Assistance in completing loan applications at formal financial institutions, and capacity building in the form of training sessions on how to apply for formal loans, as well as on financial management and business development in general, could encourage more MSEs to apply for loans at banks and other formal financial institutions rather than borrowing from moneylenders (OECD, 2015[32]). Financial education programmes for MSEs are carried out by CONAMYPE and the Superintendencia del Sistema Financiero (SSF), and CONAMYPE also provides capacity-building and technical assistance. However, the number of MSEs benefiting from these programmes seems to be modest (500 such firms participated in financial education workshops organised by CONAMYPE and SSF) (SSF, 2019[111]; BCR, 2021[98]).
Box 4.3. Limited liability entrepreneurial companies in Panama
Limited-liability entrepreneurial companies known locally as Sociedades de Emprendimiento de Responsabilidad Limitada (SERLs) were established in Panama in 2020 via a law that regulated entrepreneurial companies as part of the government's plan to reactivate the economy after the COVID‑19 crisis. SERLs aim to encourage small entrepreneurs to formalise their businesses by granting them access to various benefits.
SERLs differ from Panama’s ordinary limited liability companies, which are called Sociedades de Responsabilidad Limitada (SRLs), in that they can be created by a single person, while SRLs must have at least two partners. Only micro enterprises (those whose gross revenues or annual turnover do not exceed 150 000 Panamanian balboas [PAB]), and small enterprises (with gross revenues or annual turnover from PAB 150 000.01 to PAB 1 000 000) are eligible. The minimum capital required is PAB 500.
The key benefits offered to SERLs include lower costs to open a business than for other forms of enterprise, four-year exemptions both from the annual flat tax and from having to use fiscal printers, and a two-year exemption from income tax. They also include rebates of up to 50% on import tariffs for the inputs and raw materials that are required for the creation of innovative products, services or processes, plus a digitalised process for opening a SERL through a one-stop shop. In addition, the inclusion of SERLs in submissions to public tender proposals for best value, grants the bidder, whether they are a natural or a legal person, an additional score of 5%. After being contracted by the state or by a private company, payments that are due to a SERL must be made within a period of no more than thirty calendar days.
The Panamanian SERL regime has several limitations. For a start, SERLs cannot carry out all types of economic activities. In addition, the same natural person cannot be part of more than one SERL, and a SERL cannot be constituted by more than five natural persons.
Source: Asamblea Nacional (2020[112]), Ley N° 186 que regula las sociedades de emprendimiento en la República de Panamá, https://www.gacetaoficial.gob.pa/pdfTemp/29167_B/GacetaNo_29167b_20201202.pdf; IPAL (2020[113]), Sociedades de Emprendimiento de Responsabilidad Limitada, https://www.ipal.com.pa/post/sociedades-de-emprendimiento-de-responsabilidad-limitada; IFLR (2020[114]), Panama: New regime for limited liability companies, https://www.iflr.com/article/b1nf34fmm7b6v9/panama-new-regime-for-limited-liability-entrepreneurship-companies; Kraemer & Kraemer (2020[115]), Entrepreneurship companies in Panama, https://kraemerlaw.com/en/articles/entrepreneurship-companies-in-panama/.
Evidence from different countries shows that insolvency frameworks that are tailored to the needs of MSEs can improve their access to credit and lower the collateral requirements that apply to them. Most traditional insolvency frameworks rely on complex rules, and firms require the specialised knowledge of experienced legal professionals, plus significant time commitments and financial resources, to deal with these insolvency proceedings. However, MSEs often lack the resources and know-how for dealing with such complex insolvency proceedings. In addition, creditors tend to lack interest in investing resources in restructuring MSEs. A study of distressed SMEs in Germany, France and the UK revealed that creditor recovery rates can vary widely depending on the insolvency framework, and that banks adjust their lending practices to reflect the strength of an economy's insolvency framework. Banks in France, where insolvency law provides limited protection to secured creditors, require higher levels (and different types) of collateral than banks in Germany and the UK. Insolvency reforms in Brazil and Italy reduced the cost of credit while expanding the availability of it (World Bank, 2018[92]).
Out-of-court workouts, pre-insolvency proceedings, and specialised insolvency proceedings can facilitate questions of insolvency for MSEs. Out-of-court workouts are informal debt-restructuring procedures that rely on a voluntary multi-lateral contractual agreement (compromise) between the debtor and creditors to restructure the debtor’s assets and liabilities without judicial intervention. The advantages of out-of-court restructuring procedures include shorter timeframes and lower costs than formal insolvency proceedings. Advantages also include confidentiality and the protection of debtors’ reputations, plus the prospect of businesses being able to continue, and the possibility of tailoring the agreements to the specific needs of debtors. Out-of-court settlements were first promoted in the United Kingdom by the Bank of England in the 1970s, in order to minimise banks’ financial losses from corporate failures through co-ordinated and well-prepared settlements, and to use restructuring to avoid unnecessary liquidations of viable companies. Many other countries were inspired by this successful strategy and went on to implement out-of-court settlement frameworks of their own. These include Indonesia, Malaysia, Korea and Thailand. Pre-insolvency proceedings aim to restructure firms before they become formally insolvent, and they tend to be less expensive and time-consuming than formal insolvency proceedings. They also ensure business continuation. A third option is the pursuit of specialised insolvency proceedings for MSEs, which are less costly and time-consuming. Such proceedings can go ahead either through a separate insolvency regime for MSEs, or through exceptions in the insolvency framework (World Bank, 2018[92]).
El Salvador’s legislative assembly has been discussing a draft insolvency bill that would establish out-of-court workouts for micro-enterprises. The draft bill allows for out-of-court settlements for natural and legal persons, including micro and small merchants, for debt up to USD 90 000. The new law aims to improve the management of the increased number of insolvencies that have come as a consequence of the COVID‑19 pandemic, via the restructuring and consolidation of debt in favourable conditions for small debtors. Among the other benefits that the draft law provides for debtors are grace periods for small debtors, the exemption of the payment of certain administrative charges, fees, and penalties, extended terms of payment of debt, the application of an interest rate of 6% on outstanding liabilities, and special credit lines for small debtors through the state bank (Asamblea Legislativa, 2020[116]). El Salvador should also consider extending some of the benefits of this bill to somewhat larger companies, since not only merchants and micro-enterprises but also small companies face difficulties in dealing with the complexity of traditional insolvency procedures.
Recommendations to improve access to credit for MSEs
Accelerating digitalisation can contribute to productivity growth and make El Salvador more attractive to private investment
Accelerating digitalisation could boost productivity in El Salvador and produce significant efficiency gains. Digitalisation can lead to innovations in business models and production systems. It can also lead to a re-organisation of economic sectors, new dynamics in the world of work, and new conditions of competitiveness. In addition, it can boost financial integration and the supply of smart goods and services. Digital technologies also promote integration in productive chains by facilitating interaction in supply and distribution. Furthermore, they can reduce information asymmetries and transport costs (OECD et al., 2020[117]).
However, the magnitude of the positive effect of digitalisation on productivity depends on complementary factors. Proper access to and diffusion of digital technologies, a favourable business climate, the engagement of SMEs in digital transformation, adequate transport connectivity and skills, and sufficient competition in the digital economy are all important complementary factors. Furthermore, the efficient use of digital technologies is related to the capabilities of firms, technological sophistication, managerial competences, and workers’ skills. Due to significant complementarities between new technologies and other investments that raise productivity, firms that are more productive are more likely to adopt new digital technologies (OECD et al., 2020[117]).
Digitalisation is an important success factor for several of the Salvadoran government’s priority sectors (as identified in the country’s Trade and Investment Policy 2020-2050, and in its Digital Agenda 2020-2030). The competitiveness of international service industries, such as information and communication services, business services, and financial services, depends to a large extent on the availability of quality digital infrastructure, especially high-speed Internet access, as well as a sufficient supply of human capital with digital skills.
Figure 4.6. The amount of fixed and mobile broadband subscriptions in El Salvador is still low, and prices are still high
Note: Panel A. Data for El Salvador are for 2018 instead of 2019, and those for Guatemala are for 2017 instead of 2019.
Source: Panel A. ITU (2021[118]), ITU Statistics, International Telecommunication Union, Geneva, https://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx. Panel B. DIRSI (n.d.[119]), Indicators, http://dirsi.net/indicators/about.php.
El Salvador’s level of digitalisation and Internet access is moderate. In 2017, only 33.8% of the country’s population was using the Internet. This was a notable increase compared to 15.9% in 2010, but it was still much less than the Latin American and the Caribbean average of 65.9% (World Bank, n.d.[11]). In 2018, there were only 7.7 fixed broadband Internet subscriptions per 100 inhabitants in El Salvador, and 54.5 active mobile broadband subscriptions per 100 inhabitants. This compared to Latin American averages of 17.9 fixed broadband subscriptions per 100 inhabitants, and 97.4 active mobile broadband subscriptions per 100 inhabitants (ITU, 2021[118]). In rural areas, Internet access is even more limited. More than 90% of rural households in El Salvador do not have an Internet connection, most importantly due to the low degree of accessibility of the Internet in rural areas, and the low availability of broadband (IICA, 2020[120]). Furthermore, only 16.7% of households in El Salvador had a computer in 2019, compared to a Latin American average of 47% (ITU, 2021[118]). In addition, El Salvador’s population lacks digital skills. El Salvador scored 0.62 (out of 1) in the human capital category of the E-government Development Index (UN, n.d.[121]).
Figure 4.7. El Salvador has gaps in human capital, online services, and telecommunication infrastructure for e-governance
E-Governance Development Index (EGDI), 2020
Note: The EGDI is a composite measure of three important dimensions of e-government, namely: the provision of online services, telecommunications connectivity, and human capacity.
Source: UN (n.d.[121]), E-Government Development Index (EGDI), United Nations, New York City, https://publicadministration.un.org/egovkb/en-us/About/Overview/-E-Government-Development-Index.
There is scope to improve El Salvador’s digital infrastructure. In 2020, the country scored 0.51 out of 1 in the telecommunications infrastructure category of the E-Government Development Index, compared to a Latin American average of 0.56 (UN, n.d.[121]). El Salvador is the only country in Latin American and the Caribbean that has access to the ocean but that does not have its own submarine fibre-optic cable. Furthermore, it lacks its own Internet Exchange Point (IPX), and there are only a few of these in Central America (OECD/IDB, 2016[122]; SVNet and SOCIUM, 2020[123]; TeleGeography, 2021[124]). There have been attempts to establish an IPX in El Salvador since the early 2000s (by SVNet, a non-governmental organisation). However, these attempts failed due to the reluctance of Internet providers to make financial contributions to the project, and their lack of confidence to join a project with other companies that would be competing for the same customers. In December 2020, SVNet finally signed a formal agreement with the commercial data centre DataGuard to host the equipment of the IXSal Internet Exchange Point. So far, there are five Internet providers that want to join the project. Most of these are very small Internet service providers (Rosas, 2021[125]; Rosas, 2021[126]; DataGuard, 2021[127]). The amount of radio spectrum that is allocated to mobile broadband remains low in El Salvador. In 2017, the allocation was still under than 200 megahertz, which is less than 10% of the amount of spectrum that the International Telecommunication Union recommended should be allocated to mobile communications by 2020). El Salvador’s incomplete analogue switch-off (the transition from analogue to digital television) explains the low amount of spectrum that is available for mobile broadband in El Salvador (IDB, 2017[128]). The transition started in 2018, but it is progressing slowly (Orellana, 2020[129]; Alemán, 2020[130]).
Given the gaps that persist with regard to digital infrastructure in El Salvador, there is room to improve high-speed Internet access and broadband speeds. Only 86% of the country’s population was covered by at least one third generation (3G) cellular network in 2018, compared to 94.6% of the population on average in Latin America (OECD et al., 2020[117]). Internet connectivity and digital infrastructure, especially the fibre-optic network and mobile broadband, need to be improved throughout the country, and especially in rural areas. The digital infrastructure deficit also translates into low broadband speeds. In 2016, El Salvador’s average fixed broadband speed was only 23.6% of the Latin American average9, and only 7.4% of the average fixed broadband speed in Trinidad and Tobago, the region’s top performer. El Salvador’s maximum fixed broadband speed was only 12.9% of the Latin American average10, and only 2.5% of the maximum fixed broadband speed in Peru, which was the region’s best performer in this regard (DIRSI, n.d.[119]).
Although mobile Internet is relatively affordable in El Salvador, fixed-line broadband remains expensive. This notwithstanding, post-paid mobile broadband in El Salvador was one of the cheapest in Latin America in 2016, retailing at USD 5.99 for one gigabyte (GB), the equivalent of 1.3% of GDP per capita. This compared to a Latin American average of USD 9.94 for 1 GB, or the equivalent of 2.4% of GDP per capita. The least expensive pre-paid mobile Internet plan in El Salvador (100 megabytes for one day) cost USD 0.99 in 2016, which was in line with the Latin American and Caribbean average (USD 0.97). However, it was more than five times as high as in Paraguay (USD 0.18), which was the top performer in the region for pre-paid mobile internet. Fixed-line broadband Internet, meanwhile, is expensive. In 2016, the cost of the least expensive fixed broadband plan in El Salvador amounted to USD 19.16, or the equivalent of 5.4% of GDP per capita. This was above the Latin American average of USD 17.81 (or the equivalent of 4.4% of GDP per capita), and twice as high as in in the countries with the lowest prices in the region such as Panama (USD 9.99, or the equivalent of 0.9% of GDP per capita) (DIRSI, n.d.[119]). Prices in El Salvador are high because of the digital infrastructure deficit, plus the limited degree of competition in the broadband market (IDB, 2017[128]). Even though five companies supply mobile Internet in El Salvador (Claro, Tigo, Digicel, Movistar and RED), only two firms offer fixed-line broadband (Claro and Tigo) (GSMA, 2018[131]) (TeleSemana, 2017[132]).
There is also room for El Salvador to improve its performance with regard to e-government. In the E‑Government Development Index in 2020, the country scored 0.57 (out of 1) compared to a Latin American average of 0.62. This index measures the delivery of online services, telecommunications connectivity, and human capacity (UN, n.d.[121]). Furthermore, El Salvador scored only 0.12 (out of 1) in the Global Cybersecurity Index in 2018, a deterioration from 0.21 in 2016, and a score that came in well below the Latin American average (0.43). The proportion of the population assessing e-commerce as secure in El Salvador (61.5% in 2019) is in line with other Latin American countries (on average 63.1% in 2019), but it has been declining (it was 66.7% in 2018). Trust in online privacy is falling (39.2% in 2018, compared to 44% in 2016), and it is lower than the average in Latin America (54.9% in 2018) (OECD et al., 2020[117]). El Salvador scored 0.28 (out of 1) on the OECD's Open, Useful and Re-usable Data Index (OURdata Index) in 2019, compared to 0.43 on average in Latin America. The OURdata Index assesses the openness, usability and reusability of government data (OECD, 2020[133]).
Levels of digitalisation and the use of new information technologies remain particularly low amongst MSMEs in El Salvador. According to CONAMYPE’s 2017 survey of MSEs, 76.1% of firms did not use the Internet at all, and 54.9% did not make use of electronic devices – not even a basic mobile phone (CONAMYPE, 2018[18]). In a survey by El Salvador’s Central Reserve Bank of mainly formal MSMEs in urban areas, 96% said that they only accept cash payments (BCR, 2019[86]). According to the Entrepreneurial Competitiveness Survey by FUSADES in 2019, 88.3% of companies in El Salvador had access to the Internet, but only 56.7% of micro-enterprises and 84.8% of small enterprises did. Furthermore, 58.9% of companies in El Salvador had a website, but only 39.2% of small enterprises and 11.9% of micro enterprises did. Online payments could only be made on only 14.9% of those company websites, and online orders or reservations were possible on only 24.9% of websites (FUSADES, 2021[17]). High transport costs in El Salvador (see section on infrastructure) hamper the expansion of e-commerce (OECD et al., 2020[117]).
E-commerce is not very well developed in El Salvador. In 2017, only 9% of Salvadorans made online purchases, compared to 14.8% of the population on average in Latin America (OECD et al., 2020[117]). El Salvador ranked 106th out of 152 and scored 37 (out of 100) in the United Nations Conference on Trade and Development’s (UNCTAD) Business-to-Consumer E-Commerce Index in 2020. This compared to a Latin American average of 51.5 in 2019. UNCTAD’s index measures Internet access, financial inclusion, secure Internet servers, and the quality of postal services. The low proportion of people with an account either at a financial institution or with a provider of mobile money services stands out among the barriers to financial inclusion in El Salvador. Only 30.4% of the population over 15 years old had such an account in 2017, compared to 55.1% on average in Latin America and the Caribbean (World Bank, n.d.[11]). The lack of secure Internet servers (131.1 secure internet servers per million people in 2020, versus 1964.1 per million on average in Latin America and the Caribbean) (World Bank, n.d.[11]), plus the low quality of postal services (which scored 29/100 in the Business-to-Consumer E-commerce Index in 2020) (UNCTAD, 2021[134]), also constitute notable barriers to the development of e-commerce in El Salvador. In addition, high transport costs in the country hinder the expansion of e-commerce (OECD et al., 2020[117]).
The COVID-19 pandemic has accelerated digitalisation in El Salvador. COVID-19 forced the country’s companies to accelerate their digital transformation, most importantly in terms of teleworking, online sales, the digitalisation of value chains, and improvements to companies’ websites and their presence on social media. According to a survey by El Salvador’s Chamber of Commerce and Industry (CAMARASAL) in October 2020, 10% of companies had developed new online platforms for sales during the COVID-19 pandemic, and 14% had developed new digital platforms for sales. This share remains relatively low, since many firms in El Salvador lacked the necessary capital and liquidity to invest in digital-transformation measures during the pandemic, due to the fall in sales and the closure of businesses during the strict lockdown that was implemented in the country (FUSADES, 2021[17]). However, many changes in consumer behaviour can be expected to continue after the pandemic. Therefore, the acceleration of digitalisation will continue to be important for private companies in El Salvador in the near future (OECD et al., 2020[117]).
Digitalisation, including the promotion of digital services, is a priority for the Salvadoran government. In this connection, it set up a special secretariat for innovation (the Secretaría de Innovación) in June 2019, in order to define and execute strategies and policies for modernisation and innovation, and focusing most importantly on the digital transformation of El Salvador. Since January 2020, the country has also had a national digital agenda for 2020-30 (the Agenda Digital El Salvador 2020 – 2030). Its main objectives are to set up a unique digital identity for all citizens, to promote digital governance and the modernisation of the state, and to promote innovation, competitiveness, and education about new technologies. One of the key lines of action in El Salvador’s digital agenda is to close the digital gap through improved physical coverage of, and access to, telecommunications services. Other key actions include improving digital inclusion, incorporating modern technologies into school curricula, and ensuring a better offer of technical curricula at educational institutions. There are also plans to connect El Salvador to a submarine fibre-optic cable, to accelerate the deployment of 4G and 5G across the country, and to reduce the costs of telecommunication services (Secretaría de Innovación de la Presidencia, 2020[82]).
The government of El Salvador has rolled out a number of measures to develop both e-government and the soft infrastructure for digitalisation. The electronic signature is currently being operationalised in El Salvador and could accelerate the country’s progress with regard to digitalisation. The law on the electronic signature came into force in April 2016, and its implementation is currently ongoing. A special unit for the electronic signature (the Unidad de Firma Electrónica) has been set up at El Salvador’s Ministry of Economy. The construction of the physical infrastructure and data centres for the electronic signature is ongoing, and technical assistance is being provided to public institutions in the implementation of the electronic signature for public services (MINEC, 2020[81]). The unit for the electronic signature has been established as the root certificate authority for the project and, since May 2021, Salvadorans have been able to obtain their electronic signature (MINEC, 2021[135]). The electronic signature could contribute to reducing business costs and delays in doing business in El Salvador. Other complementary initiatives that could accelerate digitalisation and e-government are the Law on Teleworking, which was approved in the context of the COVID-19 pandemic, plus the Law on Electronic Commerce which came into force in 2021, and the Law on Personal Data Protection, which was adopted in April 2021. The Legislative Assembly has also been discussing a bill on Universal Digital Inclusion (FUSADES, 2021[17]).
In order to accelerate digitalisation, El Salvador should improve its digital infrastructure. In this connection, it should improve access to fibre-optic cables, digital broadband, and other digital infrastructure in rural areas. It should also invest in the development of its own IXP and submarine fibre-optic cable connection. El Salvador should also accelerate the transition from analogue to digital television in order to free up radio spectrum for mobile broadband. Improvements to digital infrastructure can improve Internet access and quality, and can contribute to lowering the cost of fixed broadband Internet, which remains high in El Salvador.
El Salvador should enhance the digital skills of its population and foster the digitalisation of MSMEs – two of the priorities in the country’s digital agenda for 2020-30. Endowing the population with better digital capacities would improve Internet use and boost the availability of human capital with sufficient digital skills. Given MSMEs’ low levels of digitalisation, it is also important to invest in capacity-building in digital skills for MSMEs, and to expand industrial policies in order to encourage them to adopt digital technologies. Increasing the digitalisation of MSMEs can raise their productivity (OECD et al., 2020[117]).
Reducing transport and energy costs, and improving transport and energy infrastructure, could both accelerate El Salvador's digitisation. Transport costs are high in the country, and in order to support the expansion of e-commerce it is necessary to reduce transport costs, as well as to improve the country's transport and logistics infrastructure (OECD et al., 2020[117]). The quality of electricity supply, and the relatively high cost of electricity, also pose challenges for the private sector. A more stable electricity supply, and lower electricity costs, could promote more digital investments – for example in data centres.
El Salvador should continue to improve e-governance. The country should finalise its implementation of existing initiatives, in particular the electronic signature. In addition, the Law for Universal Digital Inclusion should be approved as soon as possible. It is also important to improve the quality of, and online access to, government data. Better e-governance and online access to government information and data can also improve the impact of transparency initiatives, such as the Law on Access to Public Information.
Sufficient financial resources for investments in El Salvador’s digital infrastructure need to be raised. Significant financial resources will be required in order to modernise and upgrade El Salvador’s digital infrastructure. This includes expanding the fibre-optic network and connecting El Salvador to its on submarine fibre-optic cable. It is estimated that the monthly cost of granting access to the Internet to all of the households in El Salvador that are without access is 2% of the country’s monthly GDP (ECLAC, 2020[136]).
Recommendations to accelerate digitalisation in El Salvador
Enabling productive transformation through innovation and research and development (R&D)
Innovation can increase productivity across sectors and bring further benefits to the Salvadoran economy through the creation and diffusion of new and emerging technologies of production. For example, intelligent systems can almost completely eliminate errors in production processes. Robots can dramatically increase productivity in assembly lines, because they are faster, stronger, and they perform more consistently than workers. By printing mechanisms that are already assembled, three-dimensional (3D) printing can eliminate certain assembly steps in production processes. Emerging production technologies include digital technologies, new materials, and new processes (OECD, 2017[137]).
For most enterprises in most countries, and especially in developing countries such as El Salvador, efforts should focus on the dissemination and adoption of technology rather than on the creation of new technologies. On the one hand, disseminating technology implies an increase in the entry of new firms, and the growth of firms, that can be vehicles for new technologies. New or young firms often play a key role in net job creation and cutting-edge innovation. On the other hand, the spread of technology can occur when entrenched firms implement productivity-enhancing technologies. Small firms use novel technologies less frequently than large firms, and they may need more government support for the adoption of new technologies (OECD, 2017[137]).
The level of innovation remains moderate in El Salvador
The amount of innovation is at a medium level in El Salvador and is very low among MSEs. In 2019, there was only one patent application per 100 000 inhabitants of El Salvador (World Bank, n.d.[11]). The country received a score of 27.9 (out of 100) for its innovation capabilities in the Global Competitiveness Index, ranking 121th out of 141 countries. For entrepreneurial culture, El Salvador received a score of 42.2, ranking 118th out of 141 countries. The country lags especially behind when it comes to the growth of innovative firms, and of firms adopting disruptive ideas. It also performs poorly in indicators of international joint inventions, and in multi-sector collaboration and cluster development (WEF, 2019[41]). In the Global Innovation Index, El Salvador’s worst performances were in: knowledge linkage (with a score of 10.8/100, and ranking 125th out of 141 countries), knowledge creation (score of 1.1/100, 131st out of 141 countries), and knowledge impact (score of 5/100, 124th out of 141 countries) (Cornell University, INSEAD, and WIPO, 2020[138]). Conversely, broader innovation indicators do show higher levels of innovation at the firm level, with 52% of firms covered by the FUSADES Enterprise Competitiveness Survey indicating that they had innovated during 2019. Still, this was lower than the 62% of firms that had done so in 2011. The main reasons for innovating were to increase the quality of goods and services (69% of innovating firms), to position themselves better in the market (67%), to increase the supply of goods and services (51%), to improve security (51%), and to reduce production costs (46%). The types of innovation that were carried out were: offering new goods and services (22%), improving processes (22%), substantially improving the goods and services offered (20%), developing new processes (18%), safeguarding company security (17%), and design activities (13%) (FUSADES, 2021[17]). However, innovation levels are much lower for MSEs in El Salvador, with 92.7% of the country’s MSEs reporting not having carried out any innovation in 2017 (CONAMYPE, 2018[18]).
Figure 4.8. Expenditure on R&D is low in El Salvador
Note: Panel A: R&D Expenditure is for 2014 for Ecuador, 2010 for Morocco, and 2015 for Nicaragua and Sri Lanka. The number of researchers is for 2014 for Ecuador, 2016 for Morocco, 2013 for Panama, and 2015 for Sri Lanka.
Source: Panel A. World Bank (n.d.[11]), World Development Indicators, World Bank, Washington D.C., https://databank.worldbank.org/source/world-development-indicators#. Panel B. World Bank (2016[1]), Enterprise Surveys - El Salvador, World Bank, Washington D.C.., https://www.enterprisesurveys.org/en/data/exploreeconomies/2016/el-salvador.
Low levels of investment in R&D, and a lack of funding, put innovation at risk in El Salvador. In 2017, the country had only 63.7 researchers per million inhabitants, and R&D expenditure was 0.18% of GDP (Figure 4.8, Panel A). El Salvador invests more than some other countries in the region such as Guatemala, Honduras and Nicaragua, but less than Costa Rica, Ecuador, or countries in Europe and Asia. El Salvador's comparative performance in the Global Competitiveness Index in terms of R&D is poor, including in scientific publications (WEF, 2019[41]). In 2016, less than 10% of Salvadoran companies surveyed in the World Bank Enterprise Survey had invested in R&D. By sector, investment was highest in firms in food processing, trade and textiles, and apparel (Figure 4.8, Panel B). According to the FUSADES Business Competitiveness Survey, 92% of the innovation projects of companies were financed with their own funds, while 14% of firms had access to external private funds for their innovation projects, and 6% to other sources of financing (FUSADES, 2021[17]). These results show the potential of public funding for innovation. Innovation is difficult for firms that lack sufficient own resources and that face credit constraints, especially MSEs (FUSADES, 2021[17]).
El Salvador has put in place a number of policy instruments in order to foster innovation in private enterprises. Many of these are implemented by the Ministry of Economy through its General Directorate for Innovation and Competitiveness. The non-reimbursable co-financing funds of the Fund for the Promotion of Innovation and Competitiveness, which is managed by the General Directorate for Innovation and Competitiveness, include a funding line for innovation. In addition, CONAMYPE programmes aimed at MSEs also finance innovation investments. Among other financing instruments, there are also competitions and calls for proposals to stimulate early stages of the innovation cycle. As part of El Salvador's strategy for industrial innovation and technological development, in 2019-20, the "Innvestiga" programme was designed to support medium-sized and large companies in strategic sectors in the field of applied research for the development of new products, services, materials and industrial processes, as well as to promote a culture of R&D in these companies. The government also continues to work on the creation of Innovation and Technological and Business Development Centres (CIDTES) for key sectors. The goals of these centres are to support the development of new products, foster access to new markets, incorporate new technologies and materials into production processes, and to increase the sustainability of production processes, thus increasing the international competitiveness of these sectors. By mid-2020, only the CIDTE for footwear was operational. All of the others were still in the planning and feasibility-study phase (MINEC, 2020[81]). The Law on International Services also allows for fiscal incentives for R&D activities, although to date, this provision has not been utilised. Other ministries and agencies play an important role in supporting business innovation at the sectoral level. Of these, the Parque Tecnológico Agroindustrial (PTA), which was established in 2013, can be highlighted. The PTA is a joint effort on the part of the Ministry of Agriculture and Livestock, the main agricultural research and extension agency (the Centro Nacional de Tecnología Agropecuaria, or CENTA), the National School of Agriculture (ENA), and the Ministry of Education – through its Vice-Ministry of Science and Technology. The PTA provides research and development services to enterprises, and it has been instrumental in the development of marketable research results.
It is necessary to create appropriate framework conditions for innovation in El Salvador
Overcoming horizontal barriers in skills, access to credit, digital infrastructure, and electricity supply, among others, would increase the effectiveness of innovation policies in El Salvador. Generating the skills that are needed for the future, and closing El Salvador's skills gap, can facilitate the dissemination and upgrading of technology. El Salvador performs poorly in terms of the diversity of its workforce, which is one of the components of innovation capacity in the Global Competitiveness Index 2019 (WEF, 2019[41]). The country also faces skills gaps and shortages. In addition to training scientific personnel, digital and machine-complementary skills are also key to facilitating technological change in the future. Strengthening general skills (literacy, numeracy and problem solving) across the population as a whole is also essential for facilitating technological improvements. This is because they facilitate the acquisition of specific skills that change rapidly. A system of lifelong learning and on-the-job training, plus co-ordination with universities and other educational institutions, is essential to upgrade skills where necessary (OECD, 2017[137]).
Improving access for MSEs both to credit and to digitalisation is key to supporting technological upgrading in El Salvador. However, MSEs may need support with their modernisation, in improving their access to finance, and with regard to their digitalisation. Access to finance and the lack of digitalisation both constitute challenges for MSEs in El Salvador. Policies to accelerate the digital transformation of MSEs are also important for supporting the dissemination of technology. Technology extension services can play an important role in this process, by providing information and outreach to MSEs, (OECD, 2017[137]).
Improving digital infrastructure and the supply of power will be key to taking advantage of emerging production technologies. These technologies generally need a stable and uninterruptible power supply, and a reliable broadband telecommunications network. Success factors in this regard include covering rural areas and ensuring connectivity to facilitate the rapid exchange of data (OECD, 2017[137]).
Strengthening and modernising the institutional framework for innovation in El Salvador
The institutional framework for the development of science, technology and innovation (STI) in El Salvador, which has been built up over the past decade, remains fragmented. Adopted in 2013, the Law on Scientific and Technological Development provides the legal basis for El Salvador’s STI system. It established a Vice-Ministry of Science and Technology in the Ministry of Education as the lead agency for science and technology. It also set out a strategic framework, with a Policy for Innovation, Science and Technology, plus a National Science and Technology Plan. In practice, however, the implementation of support activities for business and commercial innovation within the framework of the Innovation, Science and Technology Policy remains the responsibility of the Ministry of Economy. A National Council for Science and Technology (CONACYT) was re-established in 2013 under the Vice-Ministry of Science and Technology, but it has relatively limited functions, which are essentially linked to the formation of human capital for research and observatory functions. In practice, the El Salvador’s STI policy established an inter-ministerial committee for STI, as well as a parallel consultative body. This governance structure is common in OECD countries, although there is great diversity in the role of the councils, which can range from being mere platforms for exchange with non-governmental actors, to engaging in joint planning of innovation strategy (OECD, 2017[139]). If they remain in place, the institutions that have been established by the STI policy can act as co-ordinators of public-sector action. However, they are institutionally weak – in part because they have their legal basis in a policy document, rather than in laws or regulations.
El Salvador should consider institutionalising the co-ordination of STI policy. A supra-ministerial body in charge of implementing STI policy can gather together the relevant ministries and agencies with competencies in the field. The Secretariat for Innovation within the Presidency of the Republic plays an important role in co-ordinating innovation policy. However, its role is focused on key objectives of the current administration, especially its digital agenda and its goals with regard to the modernisation of the administration. Consideration should be given to revising the normative framework and expanding the functions of the Secretariat for Innovation in order for it to take on the role of a co-ordinator of public action in STI, which El Salvador’s STI policy had attributed to the now extinct Technical Secretariat of the Presidency. Beyond clearly identifying leadership in the implementation of El Salvador’s STI policy in the Presidency of the Republic, a co-ordinating body is needed that includes the key ministries and agencies that have a role to play in defining and implementing innovation policy. This body needs to have sufficient resources for its secretariat and monitoring activities. The National Agency for Innovation, Science and Technology, which is currently in the process of being created, could play this role. It will be created by law and will have the function of a policy-implementing agency.
There is scope to strengthen the legal and policy frameworks for innovation in El Salvador
Innovation and productive transformation policies should converge. It is also important to align innovation policy with policy for higher education and agriculture. At the very least, the review processes of the productive transformation policy and the Innovation, Science and Technology Policy should ensure their compatibility and complementarity. It is relatively common in Latin American countries to treat these two cross-cutting policies as separate areas (even in countries with well-established planning systems, such as Colombia) (OECD/UN/UNIDO, 2019[140]). In practice, however, the existence of two policy documents with their own processes and governance structures can make complementarity too cumbersome, and can lead to co-ordination failures. By contrast, a unified policy document that provides a clear definition of innovation in the Salvadoran context, and puts it at the centre of the productive transformation of the economy, would enable greater synergies around cluster- and problem-based approaches. It is important to include a clear vision of business innovation policies in this unified policy document. El Salvador could draw inspiration from a draft plan for business innovation that was drawn up in 2015 but was never adopted.
Active technology-diffusion policies can foster technological change and upgrading. Such policies can help firms to adjust their business approaches, and to adopt new technologies, products and strategies. In El Salvador, both the Ministry of Economy and CONAMYPE implement technology-diffusion policies and programmes, as do sectoral ministries, especially the Ministry of Agriculture. Technology-diffusion bodies must be effective and able to adapt quickly to change. It is also essential to ensure that the policies and institutions that are tasked with disseminating technology are adequately resourced. Experimentation, and the testing of new approaches and policies, are also of the utmost importance. Instruments for disseminating technology can include the provision of mentoring, collaborative projects, and benchmarking services to support firms in adopting and absorbing new technologies and methods. Policies such as tax credits or vouchers for R&D or innovation, regulations and standards to encourage R&D and the adoption of new technologies, and feasibility studies and grants for entrepreneurs to access training, can also support the dissemination of technology. It is important not only to focus actions on early adopters of technology, such as high-tech start-ups or large companies, through programmes such as Innvestiga, but also to design policies that are tailored to the needs of MSMEs. This is especially important in the case of El Salvador, given the large number of MSEs in the country (OECD, 2017[137]).
A long-term perspective is essential for the formulation of policies and strategies to foster innovation. Policy makers and politicians, the business community, and education and trade-union leaders should also establish long-term strategies beyond electoral cycles, in order to create appropriate conditions for technological upgrading and innovation. A reflection is necessary on the range of risks and challenges that emerging technologies pose, notably with relation to intellectual property systems, trade and competition policies, and distributional effects, and also on the policy priorities for the future. Moreover, policies for innovation and the dissemination of technology should be designed for the long term (OECD, 2017[137]).
There is room for improvement in El Salvador's system of protection for intellectual property (IP), but it already has many of the necessary building blocks. Adopted in 1993, the country’s Intellectual Property Law has been amended several times (Asamblea Legislativa, 1993[141]). The national IP policy of 2014 establishes a National Intellectual Property Council composed of representatives from the Ministry of Education, the National Registry Centre (CNR), and the Ministry of Economy. It also establishes a technical committee composed of representatives of the institutions that make up the national IP system (MINEC/CNR, 2014[142]). Finally, an IP Registry is administered by the National Registry Centre. However, El Salvador needs a dedicated intellectual property institution that can be in charge of managing IP, including taking responsibility for the Registry, and that can also take the lead in implementing the country’s IP policies. Many OECD countries have dedicated IP offices. For example, the United Kingdom has the Intellectual Property Office, and other examples include the Swiss Federal Institute of Intellectual Property, the Korean Intellectual Property Office, and the German Patent and Trademark Office (WIPO, 2021[143]). A dedicated IP institution could contribute to improving and simplifying registration and other patent-related processes, and to facilitating access to the IP Registry.
Recommendations to foster innovation in Salvadoran businesses
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Notes
← 1. Based on an input-output matrix, eight key sectors with many backward and forward linkages are identified in the economy of El Salvador, using 2014 data. These are: livestock farming, poultry farming, the production of oils and fat from animals and vegetables, milling and starch production, wood and cork, the production of paper, the production of coke, the production of non-metal mining products, the production of base metals, and information services and telecommunications. The following key sectors are identified for their job creation potential: coffee growing, sugar-cane growing, the cultivation of cereals and vegetables, other cultivations, bovine livestock breeding and the production of raw milk, livestock breeding of other animals and products of animal origin, forestry, fishing and agriculture, milling and starch production, wood and cork, commerce and vehicle repairs, agriculture supporting activities, and other services (Aquino Cardona, 2019[5]).
← 2. This section was drafted with information available as of early 2022, predating the most recent wave of actions against gangs and the fall in crime rates. At the date of approval of this report for publication (October 2022), no enterprise surveys are available accounting for the impact of such measures on Salvadoran enterprises.
← 3. Information received during the policy workshop on accelerating productive transformation in El Salvador, 18-19 January 2022.
← 4. The cost of electricity for private companies is 20.1 US cents per kWh in Guatemala, 20.8 US cents per kWh in Honduras, and 20.1 US cents per kWh in the Dominican Republic (World Bank, 2020[58]).
← 5. Decreto Ejecutivo N°88 del 2 de julio de 2010 (Executive Decree No. 88, 2 July 2010).
← 6. Information received during the policy workshop on accelerating productive transformation in El Salvador, 18-19 January 2022.
← 7. Norms for final users producing electrical energy from renewable sources (Norma para Usuarios Finales Productores de Energía Eléctrica con Recursos Renovables), agreement number 120-E-2013 of the Superintendencia General de Electricidad (SIGET).
← 8. Norms for free-competition processes for long-term contracts underpinned by renewable distributed generation, (Norma de Procesos de Libre Concurrencia para Contratos de Largo Plazo Respaldados con Generación Distribuida Renovable), agreement number 120-E-2013 of SIGET.
← 9. Average based on the following sample of Latin American and Caribbean countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela.
← 10. Average based on the following sample of Latin American and Caribbean countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela.