Taking the Blame in El Salvador

The Wall Street Journal's Mary Anastasia O'Grady had an opinion piece last week entitled El Salvador Quits the Market Model that Tim tried to take apart over the weekend. O'Grady's argument is that in the last two years, Mauricio Funes and the FMLN have destroyed what was once a thriving economy in Central America. Tim, on the other hand, argues that O'Grady is "simply dishonest with her use of statistics." I'll give this bout to Tim, but in a split decision.

O'Grady's main problem is her lack of evidence. If I were going to put together an article on how Funes has dismantled the free market system in El Salvador, I would have actually tried to come up with some evidence of how he actually dismantled the free market system. Instead, she writes that the level of foreign direct investment increased in almost every country in Latin America except El Salvador in 2010. That might or might not be good, but that doesn't say anything about quitting the market model.

Then O'Grady states that both the Saca and Funes administrations failed to grant operating permits to the Pacific Rim Mining Corporation. Funes maintaining a policy that first started with the previous ARENA administration is again weak evidence of his quitting the market model. There are some worrisome economic indicators in El Salvador that O'Grady mentions (debt-to-GDP ratio and an expanding fiscal deficit), but no evidence that Funes or the FMLN have given up on the market.
 
While O'Grady is selective in the use of her statistics, so is Tim unfortunately. O'Grady reports that El Salvador fell from ninth (2000) to thirty-ninth (2010) on the World Index of Economic Freedom. Tim says that it is important to know that El Salvador still ranks second in the 2010 index even though O'Grady reports that it has fallen seventeen points under Funes. That's not what she said. O'Grady said that while El Salvador fell from ninth to thirty-ninth over the last decade, it fell seventeen of those places under Tony Saca's administration.

If my math is correct, that means it only fell thirteen under Funes. If El Salvador's score is both valid and reliable, then we can see that El Salvador still ranks pretty well in terms of economic freedom - just less so than in previous years. We can then try to figure out why the perceived drop in economic freedom. Was it because of Saca and/or Funes' approach to economic policy or something else.

Here's another issue. Both Tim and O'Grady seem to agree that poverty has declined significantly since the end of the war. Officials statistics indicate that the percentage of households below the poverty line declined from approximately 60% in 1991 to 35% in 2007 and that the percentage of households living in extreme poverty fell from 28% to 10%. While I am not totally confident in these estimates (Dean Brackley at the UCA believes that rate is more like two-thirds), the big debate is what explains the decrease in poverty.

O'Grady argues that El Salvador grew considerably between 1989 to 2008 (at least to 2006) as a result of the neoliberal policies of successive ARENA governments. ARENA's policies promoted growth and led to a tremendous reduction in poverty rates. Tim, on the other hand, says that she under appreciates how much poverty was reduced through both the peace dividend and remittances. Tim then links to a Proceso article from the UCA that credits remittances with much of the growth and poverty reduction.

O'Grady is probably basing her arguments off of the same statistics that Juan Carlos Hidalgo's uses in his report on El Salvador A Central American Tiger? for CATO (2009). Hidalgo argues that El Salvador's growth during the postwar period is even greater than government figures indicate once you accurately control for the country's population and that the economic policies implemented by ARENA fueled this growth.

Hidalgo does try to tackle non-ARENA-related causes of the growth and decline in poverty. Hidalgo's not very convincing in terms of measuring the peace dividend's impact on growth and/or poverty (not all post-civil war societies experience the same level of growth that El Salvador did following the conclusion to its civil war). However, he does cite two studies, one by the World Bank and another by the UN, that found remittances lowered poverty in El Salvador by 5.1% and 4.5%. An important factor in poverty reduction, but not enough to explain the 25% drop.

Hinds

Who's right? I don't know. From the table above (Hinds uses the same data as Hidalgo from what I can tell), it looks like the number of households living in poverty had been steadily improving since the early 1990s but it worsened beginning sometime in 2006. By all indications, poverty has probably continued to worsen since then.

I'm with Tim here when he says that O'Grady neglects the effects of the worldwide economic crisis of the last few years. El Salvador was struck particularly hard given its dependence on the US. Hundreds of thousands of Salvadorans fell into poverty in 2009 because of the economic crisis. While O'Grady likes to blame Funes, she also blames Saca, because that's where the weakening of the Salvadoran economy appears to have begun, in 2006. If several of the country's economic indicators began to worsen halfway through Saca's term in office, it probably makes better sense to look there than midway through 2009 when Funes took office.

The worsening of the poverty situation in 2006 and 2007 coincided with the global food crisis. The World Food Programme believes that between September 2007 and June 2008, 100,000 Salvadorans fell below the poverty line. In 2008, the Inter-American Development Bank predicted that the poverty rate in El Salvador was likely to increase from 35% to 42% in the coming years. Unfortunately, the worsening economic situation that El Salvador is currently experiencing, was predicted well before Funes was elected president. It's hard to then blame him for the dire situation two years into his term in office.

Like Tim said, "My point is simply that O'Grady helps no one in understanding the issues facing El Salvador when she continues to distort her information. O'Grady is a right-wing ideologue with an agenda, plain and simple."

Heck, I was just impressed that she put together an entire story without once mentioning Hugo Chavez.. She did blame a Brazilian "advertising hotshot" but at least it isn't Hugo's fault this time.