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El Salvadorii CA Withcover.Pdf The production of the constraints analyses posted on this website was led by the partner governments, and was used in the development of a Millennium Challenge Compact or threshold program. Although the preparation of the constraints analysis is a collaborative process, posting of the constraints analyses on this website does not constitute an endorsement by MCC of the content presented therein. 2014-001-1569-02 Partnership For Growth: El Salvador Constraints Analysis Joint USG-GOES technical team 7/19/2011 ACKNOWLEDGEMENTS Special thanks are due to Pablo Amaya, Julieta Fuentes, Nicolás Martínez, Juan Osorio and Carlos Sanabria, members of the Economic and Financial Research Department, Central Reserve Bank of El Salvador, who compiled information, made statistical analysis and have contributed and worked in particular topics of the document. Special thanks also to Carlos Arce of the USAID Mission Economic Growth Office for invaluable coordination and support, Rhina Ferrer of the U.S. Embassy Economic Section for research and contributions to specific topics, Ashley Edwards of the MCC for superb support, and Mitchell Ferguson, U.S. Embassy Economic Counselor, for key facilitation, and Leonardo Martinez-Diaz, Franck Wiebe and Jim Parks for helpful technical review and conversations. The technical team who jointly authored this report consisted of: Carlos Acevedo, President of the Central Reserve Bank of El Salvador Mario Roger Hernández, Vice Minister of Economy Roberto Turcios, Advisor to the Technical Secretary of the Presidency Willian Pleitez, Chief Economist of the Policy and Knowledge Management Unit, UNDP-El Salvador Francisco Lazo, Coordinator of the Economic and Social Research Area, Technical Secretariat of the Presidency Oscar Cabrera Melgar, Chief Economist of the Economic and Financial Research Department, Central Reserve Bank of El Salvador Takashoshi Yamagiwa, Manager of Economics and Trade Analysis, Ministry of Economy Carmen Lazo, Program Officer, UNDP-El Salvador René Pineda, Economist of the Policy and Knowledge Management Unit, UNDP-El Salvador Antonio Cañas, Advisor to the Minister, Ministry of Environment and Natural Resources Zaks Lubin, Economist, USAID Jeffery Tanner, Economist, MCC Michael Nicholson, Economist, USAID Anastasia de Santos, Economist, USAID Michelle Yerkin, Deputy Economic Counselor, U.S. Department of State i Contents 1. Executive Summary .................................................................................................................. 1 A. Key Conclusions of the CA ................................................................................................ 2 a. Security/Crime .............................................................................................................. 2 b. Low Productivity in the Tradables Sector .................................................................... 3 B. Methodological Caveats...................................................................................................... 4 2. Partnership for Growth and El Salvador ................................................................................... 6 A. Partnership for Growth ....................................................................................................... 6 B. Growth Diagnostics Methodology ...................................................................................... 6 3. An Economic Overview for El Salvador ................................................................................ 10 A. Macroeconomic Situation ................................................................................................. 10 B. Production ......................................................................................................................... 14 C. Trade in Goods .................................................................................................................. 16 D. Trade in Services............................................................................................................... 19 E. Foreign Direct Investment in El Salvador ........................................................................ 23 4. Cost of Finance ....................................................................................................................... 26 A. Interest Rates ..................................................................................................................... 28 B. Small and Medium Enterprise (SME) Credit.................................................................... 32 C. International Financing ..................................................................................................... 46 D. Domestic Savings.............................................................................................................. 52 E. Financial Intermediation ................................................................................................... 60 a. Cost of Financing ........................................................................................................ 60 b. Competition................................................................................................................. 62 c. Risk ............................................................................................................................. 65 5. Returns to Economic Activity ................................................................................................. 66 A. Low Appropriability ......................................................................................................... 66 a. Is Crime a Binding Constraint to Economic Growth in El Salvador? ........................ 67 b. Political Uncertainty ................................................................................................... 82 c. Institutions................................................................................................................... 90 d. Informality ................................................................................................................ 105 e. Macroeconomic Instability ....................................................................................... 111 f. Analysis of Self Discovery ....................................................................................... 116 g. Low Productivity in the Tradable Sector .................................................................. 127 B. Low Social Returns ......................................................................................................... 145 ii a. Infrastructure ............................................................................................................. 145 b. Human Capital .......................................................................................................... 164 c. Geography ................................................................................................................. 183 6. Conclusions ........................................................................................................................... 198 7. Technical Annex ................................................................................................................... 199 A. Cointegration Tests ......................................................................................................... 199 B. Residual Serial Correlation LM Tests............................................................................. 200 C. Impulse Response Functions........................................................................................... 200 D. An index of Undervaluation............................................................................................ 201 E. Population and Exports in LAC ...................................................................................... 202 8. Bibliography ......................................................................................................................... 203 iii Acronym List AIC Akaike Information Criteria AIDS Aquired Immunodeficiency Syndrome AIES El Salvador International Airport AML Anti-Money Laundering ANDA National Administrator of Aqueducts and Sewers BCR Banco Central de Reserva (Central Bank of the Republic) CA Constraints Analysis CAFTA Central America Free Trade Agreement CAFTA-DR Central America Free Trade Agreement-Dominican Republic CEL Comision Ejecutiva Hidroelectrica del Rio Lempa CEPA Comision Ejecutiva Portuaria Autonoma CNE National Emergency Comission CONAMYPE Comisión Nacional de la Micro y Pequeña Empresa DfID Department for International Development DIGESTYC Direccion General de Estadistica y Censos (National Census Agency of El Salvador) DR Dominican Republic ECLAC Economic Comission for Latin America and the Caribbean EHPM Multipurpose Household Surveys EMBI Emerging Markets Bond Index EMC Marginal Efficiency of Capital ETESAL Empresa Transmisora de El Salvador EXPY Export-weighted average of the PRODY for that country FAO UN Food and Agriculture Organization FDI Foreign Direct Investment FESAL Encuesta Nacional de Salud Familiar FH Feldstein Horioku FMLN Frente Farabundo Martí para la Liberación Nacional FTA Free-Trade Agreement FUSADES Fundación Salvadoreña para El Desarrollo Económico y Social GCR Global Competitiveness Report GDP Gross Domestic Product GOES Government of El Salvador iv HHI Herfindahl-Hirshman Index HKW Hausman, Klinger, Wagner 2008: ―Doing Growth Diagnostics in Practice: A Mindbook‖ HRV Hausman,
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