El Salvador experienced a major political, economic, and social transition during the 1990s. The civil war of the 1980s came to end in 1991, and since that time regular, broad-based elections – most recently in March, 2004 – have helped lay the foundations for a stable democracy. This political transformation was accompanied in the 1990s by structural economic reforms and stable macro policies, which in turn paved the way for the dollarization of the economy, and for El Salvador’s participation in the Central America Free Trade Agreement (CAFTA), signed in late 2003.

El Salvador has registered a number of important socio-economic gains in the decade-plus since the return to peace. The economy grew by an impressive 6 percent per year from 1990-1995 and, then, by an average rate of 2.8 percent from 1996-2002. Moreover, economic growth, coupled with reforms in some key sectors and increases in social sector spending in the second half of the decade, has contributed to substantial reductions in poverty and improvements in basic socioeconomic indicators over the period. In several areas, including in basic education, infant mortality, and access to potable water, the gaps between the poor and the non-poor have also declined over the period.

Notwithstanding its achievements, El Salvador faces important challenges as it looks toward consolidating and extending these gains. For example, despite important gains, a number of key social indicators in El Salvador – especially in education and in access to safe water – are still poorer than the average for the Latin America region and for Lower Middle Income Countries. Moreover, growth will continue to be a cornerstone of poverty reduction in the country. Yet, slower growth in the second half of the 1990s and the early 2000s has meant that average per capita incomes have barely grown over the last several years, observably slowing poverty reduction and socio-economic progress since 2000. While social sector spending can help to catalyze progress, low overall spending levels and tight a fiscal situation limit the scope for action in the near term.