Going to El Salvador

On an April trip to El Salvador, Bobbin got an insider's look at the country ? from tours of several apparel manufacturing plants and free zones to meetings with high-level government officials and investment associations ? and a better understanding of its energetic people and its rapidly evolving free market economy.

Since 1992, when El Salvador signed a treaty to end its 10-year-long civil war, "not a shot has been fired," declared Miguel Lacayo, minister of economics. During this 10-year period, the country has maintained stability while at the same time downsizing government and transforming El Salvador into a competitive, market-driven economy.

Having resolved its internal conflicts, El Salvador is increasingly looking outside its borders for opportunities to become a global player. At the top of its agenda is a Free Trade Agreement (FTA) between the United States and a group of Central American nations to include El Salvador, Guatemala, Honduras, Costa Rica and Nicaragua.

Additionally, the country currently has free trade agreements with Mexico, the Dominican Republic, Chile and Panama, trade and preferential agreements with Venezuela and Colombia and is in negotiations for free trade agreements with Taiwan, the CARICOM nations and Canada.

Internally, El Salvador has put a heavy focus on creating a business-friendly environment by downsizing the public sector (from 7,000 to 700 people) and privatizing many formerly state-run industries. The government's economic regulations are geared to encourage the country's development through free enterprise and foreign investment, with no controls on interest rates, foreign exchange or the repatriation of capital or profits.

The country has a strong financial sector, telecommunications and energy industries (both privatized in 1998) as well as a sturdy infrastructure that includes a strong road and port system and efficient airport.

In concert with its strengthening infrastructure, free zones are flourishing in the country, creating thousands of jobs for El Salvadorean citizens and a favorable and secure atmosphere for international companies looking to source or invest offshore.



"You Don't Need Friends to do Business"

"One of the priorities of El Salvador's government is the promotion of foreign investment in the private sector," asserted the country's Vice President Carlos Quintanilla Schmidt.

To that end, the typical bureaucracy involved in setting up shop overseas has been reduced, replaced with the services of investment organizations that are devoted to providing soup-to-nuts assistance with setting up a business. Furthermore, investing in El Salvador does not require "under the table" payments or dealing with corrupt officials, according to those interviewed by Bobbin. "You don't need friends to do business in El Salvador," said Lacayo, emphasizing that foreigners are "treated as nationals."

For assistance, one may enlist the services of El Salvador's investment promotion agency, PROESA, a unique organization that combines public- and private-sector resources to encourage international investment in the country. The office provides information about the economy, trade agreements and investment opportunities and incentives, explained Mauricio Infante, PROESA's general director.

Additionally, PROESA will help connect investors with the necessary offices for establishing business in El Salvador, such as the National Investment Office (ONI), which provides a one-stop window for obtaining all necessary permits to establish a business venture in El Salvador. The process ? which used to take up to a year and a half to accomplish and required trips to individual government associations ? has been chiseled down to 10 working days. Through the ONI, both local and foreign investors can clear all requirements and be ready to operate within this time frame, explained Infante.

Serving the apparel industry specifically is ASIC, the Salvadorean Apparel Manufacturers Association, whose goal is to develop and promote the Salvadorean apparel industry and its member companies, explained Francisco Escobar, president. To this end, ASIC provides technology transfer; professional training of industry employees; advancement of legal, technical and economic initiatives; and access to industry-related information.

Logistics, Labor, Economy

Doing business in El Salvador has become increasingly easy from a logistics standpoint as well, said Infante. The El Salvador International Airport is the largest and most efficient in the region, with 20 daily flights from the United States. As for shipping, the country is modernizing its port in Acajutla and building another, Cutuco, which will be the first deep-sea port on the Pacific Ocean side of Central America, and will allow shipments to be consolidated in El Salvador, he said.

The region also has a strong system of roads. It takes six hours for a shipment to make it from one ocean to the other by land.

As for customs, registration of documents is available 24 hours per day, cargo can be verified and registered from any office connected to customs and clearing goods and primary products used for production takes two hours, said Infante.

Additionally, in 2003, the borders will be effectively opened between El Salvador, Guatemala, Honduras and Nicaragua. Customs offices for all four countries will be set up at all points of entry, so that, for example, a shipment entering Guatemala will need to clear customs just once, and then can proceed into El Salvador unimpeded.

On the labor front, El Salvador is known for its very productive work force (which is increasing by 85,000 each year), low employee turnover and extremely high work ethic, said Lacayo. While El Salvador has one of the highest wage rates in the region, "worker productivity compensates for the higher cost," he stressed.

Indeed, the foreign minister of El Salvador, María Eugenia de Avila, related that she often receives requests from the citizens of other Central American nations for Salvadorean citizenship. Why? Because in the United States, when construction crews come around to pick up daily workers, they ask for the Salvadoreans first.

In the financial arena, El Salvador has the most sound banks in Central America, said Lacayo, with the top three El Salvadorean banks holding that same position in the region.

But while Salvadorean banks are strong, big challenges remain for companies investing in the region in terms of receiving loans from U.S. banks, which are often not comfortable dealing with Central America and in many instances simply choose not to do so, said Jeff Rives, president of North Carolina-based Rives Apparel International.

Part of the problem is the still-developing judicial system in El Salvador, which presents a stumbling block for U.S. banks that want to have a secure recourse for guaranteeing loans. Nevertheless, progress is being made in this direction, and "the U.S. financial industry is getting more comfortable with putting its money in El Salvador," said Matt Rooney, U.S. economics advisor to El Salvador.

From another angle, low interest rates ? the lowest in Central America ? are encouraging individual investment in El Salvador, and the country put another feather in its cap when it chose to dollarize its economy last year. This measure achieved dramatic results, with loans falling from 18 percent to 8 percent, Infante said.



Free Trade Agreement on the Horizon

During a visit to El Salvador on March 24, U.S. President George W. Bush met with El Salvadorean President Francisco Flores, as well as the leaders of several other Central American nations to discuss the creation of an FTA between the United States and Central America.

While not a formal summit, issues such as labor, environment, security and democracy were put on the table for discussion, and a good exchange of views took place, according to Rose Likins, the U.S. ambassador to El Salvador. No definite timetable for the FTA was set, as President Bush is still waiting for Trade Promotion Authority (TPA) from Congress, but expectations are high.

"There is no question in my mind that there is absolute commitment on all sides to have an FTA," said Likins.

Why five countries? "Six million people is not that interesting a market for business, but 50 million is," said Likins. Beyond that, the FTA may be less about the volume of trade and more about the strategic vision of Central America and the importance of the region's stability to United States, she emphasized.

Moreover, the FTA could offer other concrete advantages to the United States. For example, while the Caribbean Basin Trade Partnership Act (CBTPA) can be revoked at any time and provides limited U.S. export benefits, an FTA would provide real trading leverage to the United States, noted Likins.

From another angle, the FTA would put the Free Trade Agreement of the Americas (FTAA) more squarely on the game board. It would likely put pressure on other Latin American countries, such as Brazil and Argentina, to roll their dice with the rest and bring the Western Hemisphere that much closer to becoming a strong trading bloc.

China Looms Large

Perhaps most important, an FTA would further development of a strong full-package industry in the Western Hemisphere, which is imperative if this region is to compete successfully with China after quotas are lifted in 2005, said Lacayo, in an interview with Bobbin.

"I am absolutely certain that FTA will happen. It's a win-win situation," he said.

When their imports of U.S. goods are combined, the five Central American countries comprised within the proposed FTA represent the third-largest importer of U.S. products in the world. The region also buys back 80 cents' worth of goods for every dollar's worth of goods it exports to the United States.

By contrast, said Lacayo: "The U.S. buys from China, but China doesn't buy back."

Lacayo also noted that under the agreement, El Salvador would likely experience a doubling of exports to the United States, with apparel and textile exports probably peaking at approximately 20 percent to 22 percent of total exports.

"FTA is about the future of the hemisphere in many ways," said Lacayo. "The agricultural and textile sectors are important to all countries involved and we need to be sensitive to political issues, [but] there is plenty of room for both regions' interests. ? We just need to be creative," he concluded.



Jordan K. Speer is senior editor of Bobbin.