EL SALVADOR: DUARTE AND PRIVATE BUSINESS AT LOGGERHEADS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00907R000100070001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: April 13, 2012
• Sequence Number: 1
• Publication Date: February 1, 1987
• Content Type: REPORT

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Directorate of
Intelligence
at Loggerheads
El Salvador: Duarte
and Private Business
ALA 87-10009
February 1987
COPY 2 7 1
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Intelligence 25X1
Directorate of
at Loggerheads
El Salvador: Duarte
and Private Business
of Operations.
ffice of African and Latin American
Analysis. It was coordinated with the Directorate
This paper was prepared by
Comments and queries are welcome and may be
directed to the Chief, Middle America-Caribbean
Division, ALA F
Secret
ALA 87-10009
February 1987
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El Salvador: Duarte
and Private Business
at Loggerheads
Key Judgments Relations between El Salvador's private sector and President Duarte are
Information available marked by mutual distrust, strong ideological differences, and conflicts
as of 3 February 1987 over economic policy-all of which have hurt the country's economic
was used in this report.
performance. Faced with numerous challenges since his election in 1984,
Duarte has largely ignored the needs of the business community, focusing
instead on combating a tough Marxist insurgency, building better relations
with the Salvadoran military, and improving the conditions of the lower
classes. For their part, businessmen accuse Duarte of ignoring their
concerns and pursuing populist policies that have stalled economic recov-
ery, and they have not supported the government even on issues that favor
their interests. Improved government relations with the business communi-
ty seem unlikely under Duarte, and we believe El Salvador will continue to
experience economic stagnation, possibly leading to increased political
instability. This could complicate US efforts to support Salvadoran
democracy, and increase the country's dependence on US aid.
Despite deteriorating economic conditions and pressure by members of his 25X1
own party to improve relations with the business community, we believe
Duarte is unlikely to make significant concessions to private-sector inter-
ests. Many of the measures that would be most effective in stimulating
business activity-such as currency devaluations or the removal of price
controls-are unlikely to be implemented, in our view, because they would
hurt the workers and peasants on whom Duarte relies for support. The
President's longstanding friction with the business community was reflect-
ed most recently in January 1987 when businessmen called a Peneral strike
to protest Duarte's tax reform package
Backing from the military-motivated principally by its need for US aid-
has enabled Duarte to maintain the upper hand in his relations with the
private sector. Despite their concern that continued poor economic perfor-
mance could benefit the insurgents, military leaders are likely to support
the President so long as he does not threaten their institutional interests.
Rising popular discontent or support for the rebels could cause the military
to press Duarte into adopting the private sector's formulas for improving
the economy, but he would be likely to do the minimum-such as soliciting
business views but ignoring their nrooosals-necessary to placate the
armed forces leadership.
Secret
ALA 87-10009
February 1987
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Secret
The cooperation of private business is, in our judgment, essential for stable,
long-term economic growth in El Salvador. We believe, however, that the
private sector will remain unwilling to contribute to the revival of the
economy-by expanding investment or production-until the government
addresses its concerns:
? Businessmen believe government interference, mismanagement, and fail-
ure to adopt policies to stimulate the economy have created an unfavor-
able atmosphere for business.
? They are angered by Duarte's rhetoric, feeling that he has tried to blame
the private sector for all the country's economic problems.
? Despite the government's progress on the battlefield, businessmen feel
the investment climate remains uncertain because of the insurgency.
The business community is divided over how to deal with the government,
particularly how to gain a greater role in economic decision making.
Moderate leaders-who have replaced hardliners at the head of major
private-sector groups-have expressed a desire to cooperate with the
government-largely, we believe, in hopes of protecting their interests until
the end of Duarte's term in office in 1989. A few hardliners, however,
continue to reject any dealings with the President and try to foment
opposition. These divisions have been exacerbated by the failure of
moderate business leaders to change controversial government policies and
by the poor electoral performance of conservative political parties repre-
senting the views of private business
Ironically, Duarte's failure to make reforms that would improve private-
sector confidence has slowly undermined his popularity and contributed to
the economic difficulties facing El Salvador. This, in turn, has made him
even more reluctant to take politically risky adjustment measures for fear
of further weakening his political base. A substantial increase in economi-
cally motivated public protests-or renewed popular support for the
insurgency-might cause the President to take additional measures inimi-
cal to business interests in an attempt to revive support for his government.
In our opinion, Duarte believes he can rely on US economic aid to see him
through hard times without making the reforms necessary to restore the
economy or boost private-sector confidence.
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We believe that continued poor economic performance would increase the
chances for radical moves by either the left or the right and eventually
threaten the political stability of El Salvador. While antigovernment
strikes and demonstrations in January by business groups and leftist labor
unions have increased political difficulties for President Duarte, he retains
control because they lack popular backing and unity. But prolonged periods
of protests and heightened popular discontent almost certainly would
weaken Duarte and impair the government's war effort. Disenchanted
businessmen might choose to support a rightwing extremist group in the
1988 legislative election, further polarizing Salvadoran society. In either
case, the US goal of promoting stable, democratic growth in El Salvador
would be set back. Similarly, the failure of a democratically elected
government to provide a better standard of living for its people-even with
massive US support-could have a detrimental effect on nascent democra-
cies in the region. 25X1
The goal of improved government-private-sector relations is likely to be a
sore point in El Salvador's bilateral relations with the United States. US
assistance programs are based on the premise that the private sector will
play the major role in strengthening economic performance. Duarte's
resistance to policies that might gain business community participation,
however, probably will continue to undermine the impact of US aid.
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El Salvador: Duarte
and Private Business
at Loggerheads
The relationship between President Jose Napoleon
Duarte and the private sector in El Salvador has been
marked by mutual distrust, strong ideological differ-
ences, and conflicts over economic policy, with a
negative effect on the country's economic perfor-
mance. Faced with numerous challenges since his
election in 1984, President Duarte has paid only
limited attention to the economy and to the needs of
the business community, focusing instead on combat-
ing a tough Marxist insurgency, improving the condi-
tions of the lower classes, and building good relations
with the Salvadoran military. For their part, business-
men have not increased investment or expanded pro-
duction because they perceive Duarte to be antibusi-
ness and unwilling to address their concerns. Frictions
between the two have been aggravated over the past
year by the country's worsening economic situation
and by the implementation of government policies
opposed by private business. Although El Salvador is
burdened with a variety of economic and social
problems, the stalemate in government-private-sector
relations continues to be a major factor stifling recov-
ery and contributing to El Salvador's need for US
economic assistance.
This paper assesses the prospects for improvement in
the government's relations with the private sector over
the next two years and describes the attitudes likely to
govern the conduct of both sides. It examines the
major issues of contention and identifies the most
likely course that each side will take. Finally, the
paper discusses the implications of government-
business interaction for the Salvadoran economy and
for US interests.
The current tensions between Duarte and private
business are rooted in the political, social, and eco-
nomic changes in El Salvador that began following a
military coup in October 1979, when a civilian-
military junta-later headed by Duarte-undertook
major reforms aimed at redistributing national in-
come and breaking the wealthy elite's control of the
economy. Measures such as land reform and the
nationalization of banks and export industries under-
cut the private sector's control over its traditional base
of wealth. The business community lost major land
holdings, access to credit, and its near-monopoly of
foreign exchange earnings from coffee and sugar-
the country's most important exports. The private
sector's ability to conduct its affairs was further
hampered by the inefficient and inexperienced erfor-
mance of the new government bureaucracy.I 25X1
The reforms and the more open political system that
evolved also led to a substantial loss of political power
for the private sector. Moderate political forces grew
stronger under the influence of Duarte's populist
Christian Democratic Party (PDC) and the general
population supported the development of democracy.
Meanwhile, the private sector continued to oppose the
reforms and tried to reclaim power. This confronta-
tional approach led to the increasing isolation of the
business community. As a result, according to US
Embassy reporting, the private sector found itself 25X1
increasingly unable to influence the formation of
national policies that directly affected its interests.
Duarte's stewardship of the reforms firmly estab-
lished him as an enemy in the eyes of the private
sector, and relations between the two remain colored
by Duarte's clear distrust of the private sector and the
business community's uneasiness about his intentions.
Since becoming President in 1984, Duarte has pressed 25X1
to consolidate the state's control over key areas of the
economy to prevent the upper class from reestablish-
ing its preeminence.
Duarte believes that Salvadoran business and
the upper class should bear the brunt of the sacrifices
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The fundamental reforms of 1980 followed almost
two decades-1960 to 1978-of prosperity as real
gross domestic product averaged increases of over 5
percent annually. The vast majority of Salvadorans
did not share in the gains, however, because a small
group of wealthy business families and the Salvador-
an military dominated the political and economic
fabric of the country, according to academic studies.
By the late 1970s, increasing violence between leftist
guerrillas and repressive rightist elements contribut-
ed to a growing belief that significant socioeconomic
changes would have to be made to prevent a full-scale
civil war. Determined to head off a takeover by a
rapidly growing Marxist insurgency, a group of ju-
nior and middle-grade officers seized power in Octo-
ber 1979. By March of 1980, the civilian-military
junta they established had undertaken three sweeping
reforms:
? Land Reform. The best known and most controver-
sial of the measures-land reform-is divided into
three phases affecting over a quarter of the cultivat-
ed land in El Salvador. Phase I, involving the
expropriation of all farms over 500 hectares and
the creation of production cooperatives on this land,
has largely been completed. Phase II, yet to be
initiated because of a lack of administrative and
financial resources, was intended to expropriate
farms over 245 hectares. Phase III, carried out
concurrently with Phase I, was a "land to the
tiller"program designed to give peasants full title
to as much as 7 hectares of the land they rented or
tilled at the time of the proclamation. For large
private landowners, the expropriations were a ma-
jor blow, subsequently compounded by continuing
delays in compensation because of government
economic recovery.
necessary to ensure the success of the reforms and
the reforms, while
relatively successful in achieving social and political
objectives, have had an adverse impact on the Salva-
doran economy. Coupled with the growing insurgen-
mismanagement and inadequate financing. Indeed,
World Bank statistics indicate that only half of the
former owners of farms affected by Phase I have
been compensated for their land, and only 9 percent
of the payments have been in cash.
? Creation of Export Monopolies. The National Cof-
fee Institute (INCAFE) and the National Sugar
Institute (INAZUCAR), state monopolies for the
domestic purchase and export of sugar and coffee,
were formed to prevent private monopoly abuse and
capital flight and to provide financing for crop
production. Poor management and inefficiency,
however, have resulted in recurring annual losses
and excessively low prices paid to private produc-
ers. USAID reporting indicates that the lack of
private-sector representation in the organizations
continues to be a major problem, provoking charges
of incompetence and corruption. INCAFE, in par-
ticular, has been criticized for an unaggressive
marketing approach and a failure to cut costs.
? Nationalization of Banks. The junta considered the
nationalization of commercial banks and savings
and loans organizations the most expeditious way
to eliminate the concentration of credit in the hands
of a few people and a limited number of organiza-
tions. The government took over all domestic banks
and placed substantial restrictions on foreign bank-
ing operations. Embassy reporting indicates that
the private sector has suffered because of a cumber-
some and inefficient bureaucracy and the politiciza-
tion of lending and repayment decisions. In particu-
lar, the banking system has failed to provide
greater and easier access to foreign exchange and
credit.
cy, continuing political violence, and a steep recession
in the early 1980s, the reforms have led to massive
capital flight and an exodus of entrepreneurial and
professional talent, undermining the prospects for
economic recovery. Gross fixed private investment in
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Table 1 Figure 2
El Salvador, Gross Fixed Private El Salvador: Selected Economic
Domestic Investment Indicators, 1979-85
Gross Fixed
Private Domestic
Investment
Percent
Change
Invest-
ment as a
Share of
1970
195.6
NA
8.1
1971
209.3
7.0
8.3
1974
281.0
14.4
9.4
1975
320.3
14.0
10.2
1976
355.1
10.9
10.9
1977
430.8
21.3
12.5
1978
495.3
15.0
13.5
1979
371.2
-25.1
10.3
1980
189.4
-49.0
5.7
1982
151.0
-6.4
5.3
1983
164.0
8.6
5.7
1984
186.0
13.4
6.3
1986, for example, was roughly the same as in 1971
and less than half the peak levels of 1978, according
to World Bank statistics. Industrial and agricultural
outputs last year were only 80 percent of 1979 levels.
The 1985/86 coffee harvest was the lowest in 10 years
and only two thirds the level of the 1979/80 crop
according to US Embassy reporting.
Since he became President in 1984, Duarte has
focused on political, military, and social objectives,
often at the expense of the economy. US Embassy
reporting indicates that his major priorities have been
to build good relations with the Salvadoran armed
forces and gain the battlefield initiative against the
insurgents because he considers these objectives essen-
tial to the survival of his government. As a result, a
large portion of the government's financial and mana-
gerial resources has been dedicated to conducting the
Real Gross Domestic Product
Annual growth rate
-10 1979 80
-10 1979 80
Manufacturing Output
Index: 1979=100
an
Consumer Price Index
Annual change
Overall Deficit-Central
Government (before grants)
Percent of GDP
85 -10 1979 80
Agricultural Output
Index: 1979=100
100 100
80 80
0 1979 80
20
I I
85 0 1979 80
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When he has focused on the economy, according to
US Embassy reporting, Duarte has taken actions that
reflect his concern for the poorer classes of Salvador-
an society and his belief that active state participation
is capable of solving any economic problem. Duarte's
1976 book, Comm unitarianism for a Better World,
emphasizes a collective concern for the good of society
and a belief that output should be shared by transfer-
ring income from the rich to the poor. As a politician,
the President is acutely aware that his popular sup-
port depends on his ability to shield his traditional
constituents-workers and peasants-from economic
misfortune. Consequently, Duarte has not undertaken
measures to encourage production or investment, such
as currency devaluations or the removal of price
controls, out of concern over their potentially negative
impact on the lower classes and on his his volitical
standing, the US Embassy reports.
As public discontent over deteriorating economic con-
ditions has grown in the past year, Duarte has turned
to adjustment measures designed to make the private
sector absorb a larger share of the costs of stabilizing
the economy. A government tax package enacted last
December, for example, includes higher taxes for
businesses and the upper class in an effort to address
government budget problems and cover increased
military expenses for 1986. Angered by the tax
increases, businessmen staged a general strike in mid-
January that closed about 80 percent of the businesses
in San Salvador. Private-sector leaders have assailed
the measures as antibusiness and have criticized the
government's unwillingness to cut public spending. In
response to the attacks by private business, Duarte
has tried to portray the business community as selfish
and disloyal to the country and has accused it of
helping the Marxist guerrillas by refusing to shoulder
some of the financial burden of the war. The US
Embassy reports that while the new taxes help ad-
dress El Salvador's budget and inflation problems,
they also are contributing to a further loss of private-
sector confidence and poor growth prospects.
Duarte's policies also reflect his suspicions about the
role and motives of "big business." According to the
Embassy, the President believes that most members of
the private sector are rightwing extremists intent on
unseating him so they can regain power and resume
predominant control over the economy. For this rea-
son, he remains reluctant to give the business commu-
nity a role in decisionmaking. His belief that Salva-
doran businessmen should be willing to sacrifice their
personal interests, coupled with his desire to increase
his popular support, has led him to criticize the
private sector sharply and to question its motives,
according to US Embassy reporting.
The President has been able to pursue his objectives-
and maintain an upper hand over the private sector-
largely because of substantial assistance from the
United States. Since 1980, the United States has
provided $1.6 billion in economic aid and $650 million
in military assistance to El Salvador. Economic assis-
tance has been essential in insulating the country
from high budget and trade deficits and in restoring a
small measure of economic growth in 1984 and 1985;
Duarte has relied on such US aid to shore up the
economy rather than take politically risky adjustment
measures. In addition, US military assistance has
bolstered President Duarte's position with the armed
forces and allowed the government to improve its
counterinsurgency effort
Concerns
Although the business community's political and eco-
nomic fortunes have suffered since the early 1980s,
the private sector remains the dominant force in the
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Salvadoran economy. We estimate that private enter-
prise is still responsible for over three quarters of the
gross domestic product (GDP). Despite substantial
material losses as a result of the reforms, much of the
land and production facilities for the country's major
export crops are still in private hands. As a result, the
business community's investment decisions are closely
linked to the country's economic production and
growth
A staunchly conservative economic and social philoso-
phy underlies private-sector thought and action in El
Salvador Most
businessmen share a common desire to protect the
viability and integrity of free enterprise. As such, they
believe that Duarte's policies are anathema to their
interests and many view him as a near Communist.
US Embassy reporting indicates that businessmen
claim Duarte's populist policies and social agenda
have stalled economic recovery and diminished the
competitiveness of Salvadoran products in world mar-
kets. They feel that the private sector has been singled
out to bear a disproportionate share of the country's
economic problems.
Business leaders fault government economic policies
for failing to provide incentives for expanded produc-
tion or investment needed to stimulate the economy.
They also criticize Duarte for his failure to control
government spending and for trying to cushion the
impact of economic decline on his constituents at the
expense of economic health. In addition, businessmen
are upset by the poor performance of Duarte appoin-
tees and by the government's inability to eliminate
bureaucratic inefficiency. For example, Embassy re-
porting documents continuing business discontent
with the lengthy and difficult process of obtaining
foreign exchange, which has resulted in reduced
production and lost sales.
Security also is a serious concern of the private sector
because businessmen and their facilities frequently
have been the targets of both guerrilla harassment
and kidnapings sponsored by rightwing extremists.
Guerrilla attacks on transportation links and sabotage
of the country's infrastructure have constrained pro-
duction and export prospects. Businessmen repeatedly
have asked the government to provide investment
insurance and improve security, according to US
Embassy reporting, and are frustrated by Duarte's
seeming lack of concern on this issue. Their worries
were partially assuaged by the arrest in early 1986 of
several members of a rightwing group responsible for
kidnaping businessmen for ransom, but an uncertain
security situation continues to be a major stumbling-
block to restoring business confidence.
Given the substantial risks involved in operating in a
less developed country with an active Marxist insur-
gency, the private sector has been critical of govern-
ment policies that they feel have prevented them from
making an adequate return on investment. Specifical-
ly, businessmen continue to press for the removal of
price controls, more efficient access to foreign ex-
change, and greater control over the marketing of
agricultural exports. In the area of stimulative poli-
cies, businessmen would like to see trade measures-
including a flexible, competitive exchange rate and
favorable tax treatment-that would encourage in-
vestment and exports of both traditional and nontradi-
tional goods.
Politics
Although the private sector is united in terms of its
goals, it is less cohesive when it comes to choosing a
tactical approach to relations with the Duarte admin-
istration. The business community traditionally has
functioned as a strong and well-organized pressure
group, but its political influence and ability to regain
leverage over national affairs has waned as a result of
the reforms and the development of a more open and
moderate political system. These changes have been
responsible for the divergence within the private
sector over how to deal with the government and over
the role and use of political power.
The divisions are reflected in the orientations of the
country's business organizations. The largest and
most prominent private-sector group is the tradition-
ally rightist National Association of Private Enter-
prise (ANEP). Formed in 1967, ANEP is an umbrella
group that includes business organizations run mostly
by the 50 or so wealthiest families in El Salvador,
according to past Embassy reporting. These families
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Table 2
Leading Private-Sector Organizations
Leader
Political
Orientation
National Association of
Private Enterprise
(ANEP)
Carlos Borja
Rightist
Association of Industrial
Sectors (ASI)
Eduardo Menendez
Rightist
Chamber of Commerce and
Industry of El Salvador
(CC I ES)
Victor Steiner
Rightist
National Federation of Sal-
vadoran Small Businesses
(FENAPES)
Luis Mendoza
Center-
rightist
Salvadoran Foundation for
Economic and Social Devel-
opment (FUSADES)
Roberto Murray
Meza
Centrist
American Chamber of
Commerce of El Salvador
(CCAES)
Unknown
National Council of Salva-
doran Businesses
(CONAES)
Julio Rivas Gallont
Centrist
control key sectors of the business community and
include large landowners, coffee producers, bankers,
and cattle farmers-most of whom are strongly op-
posed to Duarte's agenda. Not all affluent business-
men belong to these key families or are politically
right wing, however. Some belong to the moderate
National Council of Salvadoran Businesses
(CONAES), organized in 1982 by the Christian Dem-
ocrats. CONAES is smaller than ANEP, weaker
Largest and most influential group; formed in 1967 as an
umbrella organization to coordinate activities of more than 30
business associations representing key commercial and agricul-
tural sectors and many wealthy families; other rightist private-
sector groups linked to ANEP through overlapping member-
ships and family interconnections; traditionally supported
ARENA policies, but since 1984 has become more independent.
ANEP member; rightwing moderate leaders have kept group
relatively independent on political issues despite pressure from
hardliners in ASI and ANEP; leaders have supported dialogue
with Duarte.
ANEP member; includes many hardliners antagonistic toward
PDC; in the past has publicly attacked Duarte on many issues
and been critical of what it sees as "US interference" in
Salvadoran affairs; Steiner-called a "responsible conservative"
by US Embassy-maintains control over chamber extremists.
Represents some 30 associations and about 1,600 small busi-
nesses; Embassy says group generally moderate and pro-US, but
Mendoza joined with leftist labor to hold an economic forum in
April 1986 that turned into an anti-Duarte political rally;
opposition to this move from FENAPES members probably will
cause Mendoza to distance himself from leftist labor.
Independent and generally apolitical; created to serve as broad-
based, technical advisory group; supported by USAID and US-
based Caribbean/Central American Action; Salvadoran contact
for Caribbean Basin Initiative matters; membership limited to
nonpolitical businessmen; critical of ANEP's rightist positions
and pro-PDC stance of CONAES.
Independent; but conservative faction has caused internal prob-
lems; tensions with ANEP.
Pro-PDC counterweight to ANEP; formed in 1982; includes
about 150 members, mostly small merchants; views ANEP as
reactionary leftover from the old-line hierarchy; smaller, finan-
cially weaker, and less influential domestically and internation-
ally than ANEP.
financially, and less influential in El Salvador or
internationally, according to Embassy reporting. The
politically independent Salvadoran Foundation for
Economic and Social Development (FUSADES),
formed with the help of USAID, serves as a neutral,
technical advisory group to the Salvadoran business
community. FUSADES probably includes merchants
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and other smaller scale businessmen, and frequently
provides advice to the government as well as to
business.
In response to their loss of political clout, even leaders
of rightwing private-sector organizations have come to
adopt a more moderate approach to the government
because they feel that it is the best way to regain
influence. ANEP, for example, underwent an internal
power struggle in late 1979 and early 1980 between
an older generation of hardliners who actively opposed
the reforms and a new generation of younger, more
moderate businessmen who recognized the need for
change. Embassy reporting indicates that, in the
months following the October 1979 coup, the hard-
liners lost support within the business community
because their confrontational approach and intense
criticism of the government became counterproduc-
tive and increased the private sector's isolation. Ac-
cording to Embassy officials, the advocates of a
moderate approach-while also viewing Duarte as an
enemy-nonetheless believed that, in order to protect
its interests, the business community had little choice
but to try to get along with the new government. Their
practical approach has won these moderates more
support among businessmen and enabled them to win
and retain control of ANEP and other rightwing
groups in organizational elections over the past few
years. Embassy reporting indicates that hardliners-
including many wealthy businessmen who emigrated
with their money to the United States in the late
1970s and early 1980s-retain some influence over El
Salvador's private business affairs, but most appear to
be resigned to Live way to more moderate leaders.
Private-sector organizations, in our judgment, have,
to some degree, supplanted rightwing political parties
as vehicles for exerting policy influence. In the past,
rightist private-sector groups like ANEP strongly
aligned with the Nationalist Republican Alliance
(ARENA), the leading rightwing party, because both
groups shared a conservative economic and social
outlook. US Embassy reporting indicates, for exam-
ple, that many businessmen actively supported
ARENA candidate Roberto D'Aubuisson against
Duarte in the 1984 presidential election, despite reser-
vations about what even they regarded as his extrem-
ist politics. The electoral success of the Christian
Democrats in legislative elections in 1985, however,
coupled with ARENA's failure to win broad support
because of its confrontational stance, alienated many
businessmen from the political process. US Embassy
officials report that many members of the private
sector have come to believe rightist politicians are
pursuing selfish political agendas that fail to represent
the interests of private enterprise. As a result, many
moderate businessmen now are working through busi-
ness organizations rather than political parties in an
attempt to develop a more practical relationship with
Dissatisfaction with ARENA and other rightwing
parties, nonetheless, has not translated into a shift in
support of business groups for the Christian Demo-
cratic Party, even though some individual party offi-
cials are viewed more favorably than Duarte. For
example, Minister of Planning Fidel Chavez Mena
and Second Vice President Abraham Rodriquez both
have gained support within the business community
because they are more sympathetic to private-sector
concerns and seem willing to consider its suggestions
to improve the economy. The Embassy reports that
many business leaders would be willing to support a
Christian Democratic candidate like Rodriquez, but
he lacks the broad backing and stature within the
party needed to become its next presidential candi-
date. Although Chavez Mena is a leading contender
for the 1989 PDC presidential nomination, Embassy
reporting indicates that he trails Minister of Culture
and Communications Julio Rey Prendes, who is
viewed less favorably by the private sector
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For their part, many government officials appear to
recognize that private-sector cooperation is essential
for stable, long-term economic growth.
Duarte is being pressured by mem-
bers of his own party to be more conciliatory, and he
has, on occasion, acknowledged the importance of the
business community. In the aftermath of the October
1986 earthquake, the President moved quickly to
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Table 3
Duarte's Relations With Private Business-
Alternative Scenarios
Policies That Would Improve
Relations
Trade and Streamline export procedures and
production improve access to foreign exchange.
Allow some private-sector role in
marketing export crops.
Expand duty-free processing zones.
Administration Simplify bureaucratic procedures
and reduce size of government.
Be receptive and responsive to pri-
vate-sector proposals to improve
economy.
Speed up compensation of former
landowners.
Crackdown on criminal activity
against businessmen, like the arrest
of members of a rightwing kidnap-
ing ring last April.
Offer government-backed invest-
ment insurance.
End vitriolic attacks against upper
class and private business.
Policies That Would Worsen
Relations
Fail to implement export promotion
law fully.
Renew "temporary" coffee export
tax.
Expand price controls.
Postpone additional devaluations.
Continue to rely on incompetent
advisers for political reasons.
Duarte continues autocratic style
of decisionmaking.
Cut off dialogue with the private
sector.
Make concessions to the guerrillas.
Expand resource and financial allo-
cations to the war effort at the
expense of the economy.
Duarte resisting pressure to deval-
ue ... price controls likely to
remain in place ... decision on
future of coffee tax will provide
good indication of government's in-
tentions toward private sector.
Bureaucratic redtape likely to re-
main ... private-sector input is
likely to continue to be ignored ...
Duarte unwilling to delegate any
authority over economic policy.
The kidnaping arrests have as-
suaged a major private-sector con-
cern, and such efforts are likely to
continue ... Duarte is unlikely to
reduce pressure on the insurgency.
Significantly increase attacks Although significant new state in-
against private-sector interests. tervention is unlikely, Duarte's pol-
Threaten to invoke sweeping new icies continue to reduce private-
statist reforms. sector confidence ... coming
elections and the PDC's waning
popular support make it likely that
the President will continue to at-
tack the business community.
involve businessmen in the relief effort, tasking them
with receiving and accounting for all foreign aid.
Although the unprecedented level of cooperation be-
tween the government and the business community
following the disaster seemed to present an opening
for improved relations, neither side has changed its
fundamental position. Moreover, the clash over the
tax package has aggravated the longstanding frictions
between the government and business community.
Duarte's continuing distrust of the private sector, as
well as his commitment to populist policies, has made
the President unwilling to make lasting peace with the
business community. The government's 1986 stabili-
zation program also illustrates the obstacles to accom-
modation. While the package included a number of
positive steps-including unification of the exchange
rate and an export promotion law-it fell short of
providing incentives necessary to revive private-sector
investment. Embassy reporting indicates that in addi-
tion to Duarte's concerns about social welfare, the
potential for leftist labor unrest and his desire to
strengthen his support among democratic unions
caused him to soften the impact of the program by
including some salary increases and maintaining price
controls. Predictably, major business groups consid-
ered the package interventionist and condemned the
government's lack of consultation, the US Embassy
reports.
Business leaders-recognizing that Duarte is in the
stronger position-have made several overtures to the
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government in the last two years but are dissatisfied
with the President's response. The US Embassy re-
ports, for example, that ANEP has given Duarte
proposals for revitalizing the economy in an effort to
gain a voice for private enterprise in economic deci-
sion making and to persuade the government that
some of its policies are hurting the economy. Embassy
reporting indicates that business leaders are frustrat-
ed, however, because they feel Duarte has ignored
their suggestions.
In our judgment, the private sector's moderate ap-
proach is less indicative of a sincere desire to work
with the government than it is a tactical move aimed
at biding time until the Duarte presidency ends in
1989. Indeed, the business community has not hesitat-
ed to confront the administration when its interests
are directly threatened, such as in January when a
general strike to protest the tax package closed 80
percent of the businesses in San Salvador. Hardline
businessmen have threatened an indefinite shutdown
if Duarte does not rescind the increases and take other
steps to encourage investment. In addition, business-
men rarely have supported government policies, even
when they have benefited from them. Business con-
cerns about security, for example, have not translated
into declarations of support for the government's
successful prosecution of the war. Rather, the private
sector has chosen to focus narrowly on the govern-
ment's lack of attention to economic problems. F_
Further complicating relations, a small but strong
minority of hardliners in the business community, in
collusion with political extremists like D'Aubuisson,
continues to actively foment popular opposition to the
Duarte administration.
he government's stabilization package an-
nounced in early 1986 and tax measures adopted in
December both precipitated efforts by extreme right-
ists to mobilize public protests-some even in cooper-
ation with leftist labor groups-and form a broad-
based opposition front to demand revisions in the
programs. Such efforts so far have had limited suc-
cess, however, because the extremists lack broad
support from the business community and the military
and because of funding shortages and distrust of the
rightists' intentions by labor groups.
The harsh rhetoric employed by both sides also has
hampered the chances for a reconciliation. Conserva-
tive Salvadorans-businessmen and politicians
alike-use every opportunity to lambaste Duarte's
policies and leadership ability. The daily media,
owned mostly by wealthy conservatives, provide the
business community with a vehicle to defend its
interests and voice its opposition to the administra-
tion. The extreme positions taken by some conserva-
tives, such as public support for antigovernment pro-
tests by leftist labor, have fueled Duarte's suspicions
that big business and the political right are trying to
unseat him. In return, Duarte's counterattacks
against the private sector have caused businessmen to
perceive every hardship-even those unavoidable in a
weak economy-to be part of a calculated attempt by
the President to undermine private business in
general.
The Military's Position
As the most powerful political institution in the
country, the armed forces play a key role in the
relationship between the government and the private
sector. Until the coup in 1979, the military protected
a status quo that enriched the business community
and gave wealthy conservatives considerable control
over the direction of national affairs. But by the late
1970s, many military officers had become concerned 25X1
about the intransigence of members of the business
community and the political right, and the increasing
violence between rightwing extremists and leftist
guerrillas. Military leaders feared that, if they did not
intervene, the country would erupt into full-scale civil
war that might lead to a decisive victory for the
rapidly growing Marxist insurgency. After a group of
junior and middle-grade officers overthrew the au-
thoritarian dictatorship of President Romero in Octo-
ber 1979, a succession of civilian-military provisional
governments began to implement reforms designed to
establish more open and equitable political and eco-
nomic systems. Although the pace of the democratic
reforms was uneven and sometimes halted by the
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opposition of some senior rightist officers, the armed
forces agreed in the end on the need for changes to
restore order and reverse the uneven distribution of
wealth in the country. The military also became
increasingly nonpartisan and distanced itself from the
political right and the business class. The loss of
military support for big business, combined with the
impact of the reforms, directly contributed to the
decline in the private sector's power and influence.
For his part, President Duarte has won high marks
and support from the military leadership for his
commitment to strengthening the war effort against
the guerrillas. The military's continued backing is due
in large part to the President's success in gaining
support from the United States. US military assis-
tance has helped improve the performance and capa-
bilities of the armed forces and enabled the military to
gain the battlefield momentum. In addition, the im-
provements by the Duarte government in the area of
human rights and the image of El Salvador abroad
have kept the insurgents generally on the defensive
politically and brought about a sharp decrease in their
credibilit and o ular support over the past two
years
Military support for Duarte has been essential in
allowing him to follow through on his agenda and
maintain control over the business community. The
High Command has generally endorsed his economic
policies and sided with him in disputes with the
private sector, Following
the announcement of the economic stabilization pack-
age last year, for example, Minister of Defense Vides
Casanova warned business leaders not to incite public
opposition to the measures.
military leaders are
becoming increasingly concerned about public dissat-
isfaction and fear that the worsening economy is
benefiting the guerrillas' efforts to expand their public
support.
Relations between the private sector and the govern-
ment are unlikely to improve significantly in the next
two years, in our view, making the prospects for
sustained economic recovery poor. Despite the impor-
tance of the private sector, we expect that Duarte will
continue to lean towards satisfying popular demands
at the expense of measures to restore business confi-
dence. The President's insistence on avoiding tough
economic measures that would hurt the lower classes
probably will intensify in the aftermath of the earth-
quake and keep him from correcting underlying weak-
nesses in the economy. He is likely to argue that new
austerity measures would unjustly tax the lower class-
es, already suffering from the effects of the earth-
quake. As a result, businessmen probably will remain
skeptical of the government's economic policies and
unwilling to boost investment or otherwise contribute
to the revival of the economy.
We believe a key objective for Duarte will be protect-
ing his political base of support among workers and
peasants. Poor economic performance has caused the
President's popularity to wane since the beginning of
1986, as the
economy has replaced the war as the issue of highest
popular concern. We believe Duarte most likely would
respond to growing popular discontent over deteriorat-
ing economic conditions by intensifying his populist
and antibusiness rhetoric and expanding government
programs to protect the poor. He probably would feel
justified or even compelled to do so if serious econom-
ic difficulties sparked major antigovernment demon-
strations by labor or a resurgence of popular support
for the leftist insurgency. Ironically, the failure to
enact measures to stimulate business activity and
regain private-sector confidence will likely exacerbate
the fundamental economic difficulties that currently
are undermining Duarte's popularity.
Alternatively-but much less likely, in our judg-
ment-Duarte might overcome or at least repress his
hostility to the private sector and adopt a set of
policies that would encourage businessmen to expand
investment, production, and exports. Initiatives such
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Table 4
Shifting Private-Sector Confidence:
An Economic Scorecard a
Annual real output moves above 3
percent for a sustained period.
Capital is repatriated ... sustained
annual growth in private-invest-
ment of over 20 percent ... return
to levels of late 1970s ... opening
of new firms.
Production levels approximate
those of the 1970s ... sustained 5-8
percent growth in manufacturing
... steadily increasing agricultural
output ... diversification to non-
traditional exports.
Balance of payments Significant, improvement as ex-
panding exports outpace growth in
imports ... increased earnings
from nontraditional exports ... im-
port and foreign exchange controls
eliminated.
Unemployment drops below 15 per-
cent as production and investment
increase ... underemployment also
declines.
Growth remains at levels be- Little or no growth ... possibility
tween 1.0 and 3.0 percent. of new recession.
Continued slow expansion of in- Investment stagnant or declin-
vestment ... annual growth ing ... capital flight reappears
rates between 5 and 15 percent. ... additional business closings.
Little improvement in output Manufacturing and agricultural
... 0 to 4 percent growth in output fall ... continued reliance
manufacturing ... stagnant ag- on traditional export products.
ricultural production ... only
minor growth in nontraditional
production.
Continued trade imbalance Large deficits with sharp fluctua-
with some restrictions on im- tions due to shifting commodity
ports and foreign exchange prices ... stringent import and for-
necessary ... traditional ex- eign exchange restrictions.
ports continue to provide major-
ity of earnings.
Limited job creation but insuf- Continued high rates of unemploy-
ficient to absorb all new en- ment and underemployment.
trants into the labor market ...
unemployment remains be-
tween 20 and 30 percent.
a This chart plots significant macroeconomic conditions in El
Salvador based on shifts in private-sector confidence and participa-
tion in the economy. It is highly speculative in that it links
economic performance solely to the actions of the private sector,
without considering other complex, internal and external factors-
such as commodity prices, weather, world economic growth, and
external aid flows-that also influence the economy. As such, it is
intended to be illustrative rather than predictive.
as streamlining the bureaucracy or giving business-
men a greater role in marketing export crops would
bolster private-sector confidence without forcing the
President to sacrifice his objectives. Despite their
strong bias against Duarte and overall lack of support
for the government, we believe that most businessmen
would respond favorably if the steps taken led to
increased profits and a healthier economy. We be-
lieve, however, that Duarte would not embark on such
a politically risky strategy unless popular discontent
was reduced.
We believe the major private-sector groups will con-
tinue to try to gain a voice in economic decision
making while maintaining their criticism of the gov-
ernment. In our judgment, however, the private sector
will not be able to alter Duarte's agenda significantly,
given its lack of unity and reduced political clout. For
this reason, we expect that the business community
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will again seek out rightist candidates willing to
represent its interests as the country prepares for the
next legislative election in 1988.
Opposition to Duarte from the private sector could
increase if it perceives his earthquake reconstruction
plans are designed to enhance his popularity or to
foster greater public dependence on government pro-
grams at the expense of private enterprise. In view of
the substantial damage to the private sector's facili-
ties, businessmen are faced with serious choices with
regard to replacing fixed assets. Unless Duarte can
persuade the private sector that reinvestment will
yield profits and remain free of government interfer-
ence, businessmen probably will remain unwilling to
seek new financing or repatriate any of their capital
from abroad.
In our judgment, the threat of a serious confrontation
leading to radical actions by the private sector, such
as a prolonged business shutdown, is relatively minor
because such tactics would hurt business interests as
well as the government. Such a development most
likely would occur only if the government attempted
to revive popular support or divert attention from
serious problems by undertaking a spectacular initia-
tive that attacked a fundamental interest of the
business community. Although the possibility of such
a confrontation is small, a complete break in relations
between Duarte and the private sector could cripple
the economy, make the government more vulnerable
to agitation by both leftwing and rightwing opponents,
and slow or reverse the progress made toward consoli-
dating democracy.
The backing of the military will remain important for
the President in his relationship with the private
sector. In our judgment, as long as Duarte remains
judicious in dealing with the armed forces and does
not interfere with their institutional prerogatives, they
will continue to support him. In the aftermath of the
earthquake, the armed forces will remain most con-
cerned that the government maintain its aggressive
counterinsurgency effort and not divert resources
from vital civic action and rural development pro-
grams for reconstruction in the capital. Duarte ap-
pears to recognize the sensitivity of these issues, but in
Prospects for economic recovery in El Salvador re-
main dim, due to a destructive insurgency and the
October 1986 earthquake, as well as more fundamen-
tal trade and budget woes. After real GDP growth of
approximately 1.5 percent in 1984 and 1985, the
economy failed to grow in 1986 and per capita income
has continued to fall because of a population growth
rate of nearly 3 percent. Inflation, fueled by wage
increases and expansionary fiscal and monetary poli-
cies, accelerated from 15 percent in 1984 to 22
percent in 1985 and 30 percent by the end of 1986.
Slightly over half the work force lacks full-time
employment.
Despite some improvement, the fiscal and balance-of-
payments deficits remain large, and the country
continues to face a heavy debt service burden. The
government's short-term economic program enacted
in January 1986 was poorly implemented and largely
unsuccessful in achieving its stabilization goals, ac-
cording to US Embassy reporting. President Duarte
has been slow to consider additional measures, in
part because of the damage and uncertainty following
the earthquake, making it unlikely that fundamental
economic problems will be addressed in the near
term. As a result, we believe GDP growth will
languish under 1 percent in 1987. In large measure,
El Salvador's ability to recover from the earth-
quake-while maintaining its war effort-will de-
pend on the government's success in generating new
sources of development assistance and on continued
economic and military aid from the United States.
the face of massive reconstruction costs he will be
hard pressed to avoid budget cutbacks in the rural
programs.
Although military leaders so far have backed Duarte's
economic policies, widespread popular protests or
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rising support for the insurgents could cause the High
Command to pressure the President into adopting
private-sector formulas to improve the economy. In
such a situation, we believe that Duarte would repeat
his past practice of doing the minimum needed on his
part-such as initiating dialogue with the private
sector but ignoring its proposals-to persuade the
armed forces leadership that he was making an effort
to improve relations
The continuing stalemate in government-private-
sector relations will exacerbate an already clouded
economic outlook. In combination with guerrilla sabo-
tage, fluctuating commodity prices, a lack of foreign
capital, and widespread earthquake damage, the poor
state of government-business relations probably will
contribute to low economic growth-under 1 percent
for 1986 and 1987, and under 3 percent, the level
needed to restore per capita income growth, even by
1988. In addition, we foresee no end to a reliance on
traditional export earnings, because the business com-
munity will remain unwilling to move toward produc-
tion of nontraditional exports without incentives from
the government
Continued tensions in government-private-sector rela-
tions, and the economic stagnation that this implies,
could have a negative effect on US interests in El
Salvador. Poor economic performance-especially
further decline in per capita income-will increase
the chances for instability and may benefit either the
extreme left or the far right. Heightened popular
support for the guerrillas or their front groups could
seriously impair the government's war effort and
allow the insurgents to expand their political and
propaganda activities. Increased pressure by the left
also could provoke renewed political violence by the
extreme right. Similarly, disenchanted businessmen
might choose to support a far rightist group in coming
elections, further polarizing Salvadoran society.
Duarte's recalcitrant attitude toward the business
community is likely to make the objective of improved
government-private-sector relations a sore point in his
dealings with the United States. With the assistance
of USAID, several joint government-private-sector
policy analysis and advisory groups have been formed
in an effort to improve cooperation, and US assistance
programs are based on the premise that El Salvador's
private sector will play the major role in improving 25X1
economic performance. Duarte, however, appears un-
likely to implement measures that would provide the
encouragement necessary to the business community.
Without increased private-sector involvement in the
economy, El Salvador's economic dependence on US
aid probably will increase. In our judgment, Duarte
believes he can rely on US economic aid to see him
through hard times without making the politically
risky reforms essential to revitalizing the economy
and boosting private-sector confidence. In addition,
Duarte probably calculates that his support for US
policy in Central America provides him with addition-
al leverage in bilateral relations to justify pleas for 25X1
higher levels of financial assistance. 25X1
Finally, the failure of a democratically elected gov-
ernment to deliver a better standard of living to its
people-even with massive US support-could have a
detrimental demonstration effect on nascent democra-
cies within and beyond the region. Likewise, the
government's failure to cooperate with and encourage
private enterprise sends a negative signal to important
private-sector groups in other countries. 25X1
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