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El Salvador Country Development Cooperation Strategy 2013-2017

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El Salvador Country Development Cooperation Strategy 2013-2017 Country Development Cooperation Strategy 2013-2017 TABLE OF CONTENTS I. DEVELOPMENT CONTEXT, CHALLENGES AND OPPORTUNITIES......................... 3 II. DEVELOPMENT HYPOTHESIS......................................................................................... 8 FIGURE 1 - RESULTS FRAMEWORK GRAPHIC .................................................................. 12 FIGURE 2 – DEVELOPMENT OBJECTIVE 1: RESULTS FRAMEWORK GRAPHIC .................. 13 DEVELOPMENT OBJECTIVE 1: CITIZEN SECURITY AND RULE OF LAW IN TARGETED AREAS IMPROVED ........................................................................................................................... 14 o Intermediate Result (IR) 1.1: Justice, Transparency and Accountability in Key Institutions Improved ............................................................................................. 16 o Intermediate Result (IR) 1.2: Crime and Violence in Targeted Municipalities Reduced ................................................................................................................................. 18 FIGURE 3 – DEVELOPMENT OBJECTIVE 2: RESULTS FRAMEWORK GRAPHIC ........................ 21 DEVELOPMENT OBJECTIVE 2: ECONOMIC GROWTH OPPORTUNITIES IN TRADABLES EXPANDED .......................................................................................................................... 22 o Intermediate Result (IR) 2.1: Business Enabling Environment Improved ............ 25 o Intermediate Result (IR) 2.2: Productivity of Targeted Businesses Increased ...... 27 III. MONITORING AND EVALUATION ............................................................................... 32 ANNEXES ........................................................................................................................................ ANNEX 1: PARTNERSHIP FOR GROWTH: EL SALVADOR: CONSTRAINTS ANALYSIS ........................................................................................................................ 36 ANNEX 2: EL SALVADOR - AVERAGE ANNUAL GROWTH RATE BY SECTOR, 1990 -2009………………………………………………………………………...............41 USAID/El Salvador Country Development Cooperation Strategy 2 DEVELOPMENT CONTEXT, CHALLENGES AND OPPORTUNITIES Overview El Salvador is the third largest economy in Central America, and the most densely populated, with 6.2 EXPECTED RESULTS million mainly urban inhabitants. Between fiscal years 2013 and 2017, In the years following the end of the civil war in 1992, USAID will expand broad-based El Salvador made significant democratic advances, economic growth and security in El including successive free and fair elections. Salvador through measurable development results. These expected While the democratic transition has been accompanied results are: by significant, social and economic progress and social indicators such as infant mortality rates and literacy DEMOCRACY /GOVERNANCE: Citizen Security and Rule of Law in have improved, poverty and inequality of opportunity Targeted Areas Improved have increased as problems. ECONOMIC GROWTH: Economic Meanwhile, criminal activity, particularly gang related Growth Opportunities in Tradables violence, has increased dramatically. In recent years, El Expanded Salvador has had one of the highest homicide rates in the world. Tradables are those goods and services which are or can be traded The United States has an interest in a stable, prosperous internationally and whose prices El Salvador, one that shares U.S. democratic values, is a are set on world markets. reliable partner in the fight against transnational crime, and plays an active and responsible role in international affairs. During a March 2011 visit to El Salvador, President Barack Obama pledged to strengthen cooperation through the new Partnership for Growth (PFG) initiative. PFG is the President’s flagship foreign assistance initiative. Its focus on citizen security constraints to growth is aligned with and complementary to the U.S. Government (USG) Central America Citizen Security Partnership and the Central America Regional Security Initiative (CARSI). The PFG commits both governments to work closely together to boost competitiveness and reduce insecurity in order to rapidly expand broad-based economic growth in El Salvador. Successful implementation of the PFG initiative will be the cornerstone of this Country Development Cooperation Strategy (CDCS). Development Context Political and Economic Overview Following the signing of Peace Accords in 1992, ending over a decade of bitter civil war, El Salvador has had a series of free and fair elections, and peaceful transfers of power. El Salvador has laws and institutions in place that mandate accountability and transparency in the use of public funds. In recent years, El Salvador, with USAID assistance, has undertaken a series of transparency and accountability reforms, including the passage of the Ethics Law (2005), the USAID/El Salvador Country Development Cooperation Strategy 3 creation of the Government Ethics Tribunal (2006), the creation of the Sub-Secretariat of Transparency (2009), and the passing of the Access to Public Information Law. However, the country’s culture of transparency and accountability needs further strengthening and official corruption remains a serious problem. Although democratic reforms have been implemented, tangible improvements in government efficiency and effectiveness have proceeded slowly. In the economic realm, El Salvador is seeking to boost investment and growth, which has been inhibited by low productivity, natural disasters, and insecurity. However, El Salvador’s poor economic performance is driven in part by a rift between the Funes government and the private sector, which contributes to an unstable investment climate. Partially as a result of USAID-funded structural adjustment and policy reform programs in the 1980-90s, El Salvador is an open economy. Over the last decade it has reached out to global markets as a signatory to the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR), a regional free trade agreement (FTA) with the United States, and six FTAs with Chile, Mexico, Panama, Dominican Republic, Colombia and Taiwan. From 1992-2006, the country’s poverty rate declined significantly. With the global financial crisis of 2008-9, coinciding with the leftist government taking office and a protracted wave of gang-led crime and violence, El Salvador’s economy suffered reversals that are still being felt today. According to the National Household Survey, total poverty levels, defined by the number of households in poverty, increased from 30.7 percent in 2006 to 40.6 percent in 2011. Urban poverty increased from 27.7 percent in 2006 to 35.4 percent in 2011, while rural poverty had a significant jump from 35.8 percent in 2006 to 50.2 percent in 2011.1 A major factor in this reversal was the global financial crisis, which reduced remittances from the U.S. by 10 percent, and led to a decline in demand for Salvadoran products. The country is dependent on remittances, which total 17 percent of Gross Domestic Product (GDP), and surpass the combined value of the nation’s coffee and sugar exports. By 2011, combined unemployment/underemployment was 42 percent. While men have traditionally had higher levels of unemployment, women are more likely to be underemployed,2 and 47.6 percent of women live below the poverty line.3 El Salvador has also lost ground to its regional neighbors in terms of GDP growth and in the attraction of private, especially foreign investment. Economic growth rates (1.4 percent in 2010 and 1.5 percent in 2011) are well below the Latin American average. In 2012, for the fifth consecutive year, El Salvador had the lowest level of gross GDP growth in Central America of 1.5 percent, with the regional average around 3.9 percent. The International Monetary Fund 1 Dirección General de Estadísticas y Censos, “Encuesta de Hogares de Propósitos Múltiples 2011”, DIGESTYC, San Salvador 2012, http://www.digestyc.gob.sv/index.php/temas/des/ehpm/publicaciones-ehpm.html 2 Cuadro Y7. “La igualdad y la equidad de género en El Salvador.” June 2011, No. 10, UNDP 3 2011 National Household Survey USAID/El Salvador Country Development Cooperation Strategy 4 (IMF) projected that real GDP will grow at 1.5 percent in 2013-2014, reflecting low domestic investment and lower export prices. The IMF further suggested that the Salvadoran Government should strive to raise investment and increase competitiveness in order to reverse the downward trend in economic growth. El Salvador, however, faces severe challenges in its levels of Foreign Direct Investment (FDI) due to insecurity, weak macroeconomic stability, a poor business environment, and low competitiveness. Since 2009, El Salvador has had the lowest level of FDI in the Central American region. In 2010, FDI dropped from a previous average yearly increase of $645 million to only $80 million, though it since has recovered slowly to $420 million in 2011, and to $515 million in 2012.4 El Salvador’s economy is dominated by the service sector, which accounts for 60 percent of GDP. The manufacturing sector accounts for 25 percent, and agriculture and related sectors for 12 percent. The economy has been officially dollarized since 2001. El Salvador’s most important export category remains maquila products (manufactured products assembled for re- export), which account for 22.6 percent of all exports, and which have traditionally been composed of products with low value-added that are not technologically intensive.
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