The Trouble With Sending Money Home

By Marcela Sanchez
Washington Post Staff Writer
Thursday, December 8, 2005; 4:21 PM

Two decades ago, economic gurus proclaimed El Salvador had to break away from its dependence on coffee and other traditional agricultural exports. The country should diversify, they said, by attracting investment and utilizing its inexpensive and dedicated work force to increase production of labor-intensive exportable goods.

El Salvador did go on to create a thriving export industry, but because of civil war and other factors, it wasn't entirely what experts envisioned: Salvadorans exported themselves. Now more than one-fifth of the population lives outside the country, most of them in the United States. This migration has had the single greatest economic impact on El Salvador in recent years, for better and worse.

By this year's end, Salvadorans abroad will have sent nearly $3 billion to friends and family back home, $500 million more than the country's entire national budget for 2005. In the Washington area alone, Salvadoran immigrants will have sent up to $600 million. With frequent flights and telephone calls home, Salvadorans have helped make the El Salvador-based airline, Grupo TACA, one of Central America's largest private employers and have generated hundreds of millions of dollars for Salvadoran and U.S. phone companies. Salvadorans abroad long for native foods, a yearning that represents as much as 10 percent of all the nation's exports, according to a report released this week by the Institute for the Study of International Migration at Georgetown University.

According to another report, this one released last week by the United Nations Development Program, these growing transnational links make migration "El Salvador's ticket into the club" of countries with higher development such as Costa Rica and Chile. Migration and remittances have profound effects particularly in rural areas. The level of extreme poverty among families that receive money from loved ones abroad is one-third lower than among those who don't receive it.

Money coming from abroad, however, has handicapped a part of El Salvador's economy at home. Far from becoming an export economy, Salvadoran consumption of foreign goods has increased dramatically. In other words, as soon as remittance money comes in, it leaves, tilting the economy more toward consumption and imports, and away from local production and exports.

Economic growth has slowed to a trickle over the last few years -- 1.8 percent in 2003, 1.5 percent in 2004 and 2 percent in 2005 -- lower than any other Central American country.

If remittances stayed longer in the country, they would have what the UNDP report coordinator William Pleitez calls a "multiplying effect" that would allow the money to touch more hands than those of retailers and importers. Pleitez argues that money doesn't stick around because the government is not taking action in crucial areas such as tax policy and job creation, relying too much instead on market forces to improve the fundamentals of the economy.

Some of UNDP's most revealing findings come in a comparison between two Salvadoran municipalities, Santa Catarina Masahuat in Sonsonate province and Concepcion de Oriente in La Union province. Santa Catarina Masahuat has the lowest number of households that report receiving remittances in El Salvador (0.6 percent) while Concepcion de Oriente has the highest (63 percent).

The significantly larger amount of remittances in Concepcion de Oriente does not appear to be making the local economy more dynamic, nor is it generating new jobs. In fact, Concepcion de Oriente's unemployment rate (19.3 percent) is three times that of Santa Catarina Masahuat (6.9 percent).

What's more, despite the fact that Concepcion de Oriente brings in more than $200,000 a month in remittances, it pays 46 percent less tax annually than Santa Catarina Masahuat (both cities have a similar number of taxpayers). The most revealing aspect of this tax differential is that people in Concepcion de Oriente are not finding opportunities to spend their money locally and are heading to malls in urban centers to do so, it is only then that the government can tap remittance dollars through value added taxes.

These differences, according to Pleitez, should inspire the Salvadoran government to change the way it distributes tax revenues to localities. If localities that receive the greater amount of remittances barely see any compounded benefit, such localities will simply continue to export people.

The gurus of two decades ago were right in one sense that the inexpensive and dedicated work force of El Salvador was going to be the engine for the country's economy. What they didn't foresee was that El Salvador's exports would become both a boon and a crutch.

Clarification

In my most recent column I reported that Juan Luis Bosch and Dionisio Gutierrez have been accused of diverting a portion of Pollo Campero's earnings to personal accounts in Miami banks. I based this on pending civil litigation in Guatemala and in federal and state court in Florida that was filed by their uncle against several family-owned businesses. Pollo Campero is not a defendant in the federal litigation. I did not mean to imply that Bosch and Gutierrez had been charged with any crimes. No criminal proceedings have been filed in the United States against Bosch and Gutierrez.

Marcela Sanchez's e-mail address is desdewash@washpost.com.


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