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El Salvador: The Challenge of Poverty Alleviation


El Salvador FY94 PA

Main Report (5.81Mb PDF)

Poverty Profile

In 1992, peace returned to El Salvador after a 12 year civil war, largely related to extreme inequities and an inflexible political system. During the 1980s, overall welfare levels deteriorated, and poverty remained high and probably increased. Today, widespread poverty is a major threat to peace and political stability and a constraint to equitable economic growth in the long term.

The assessment drew a poverty profile from the 1991-1992 National Household Survey carried out by the Ministry of Planning, which is the first survey that includes both rural and urban areas since 1985. Poverty was defined as a monthly income level insufficient to purchase two basic food baskets. Extreme poverty was defined as an income level insufficient to purchase one basic food basket yielding 2,200 calories per day. According to this definition, 48 percent of the country's households (about 2.4 million people) are poor. Of those poor households, 10 percent (over 500,000 people) are extremely poor. Poverty and extreme poverty are predominantly rural. Sixty one percent of all the country's poor and 67 percent of the extremely poor live in rural areas. The incidence of poverty is lowest in the San Salvador Metropolitan Area with 24 percent of the country's poor and 14 percent of the extremely poor. Poverty is largely a problem of underemployment and low productivity rather than one of widespread unemployment. The majority of the rural poor are engaged in agriculture as self-employed or salaried workers. The majority of the urban poor are engaged in informal sector activities in the commerce, cottage manufacturing, and agricultural sectors.

Poor households tend to be larger and to have more children and consequently higher dependency ratios than the non-poor. They also have significantly worse social indicators: higher illiteracy rates, lower educational attainment, and a higher likelihood of living in overcrowded conditions, of lacking access to water and sanitation, and having a large proportion of their school-age children out of school. Those living in rural areas show the worst social indicators. Poor female-headed households make up a large share of poor households in urban areas, but this pattern does not hold for rural areas.

Poverty is also strongly associated with environmental degradation. Population pressure affecting patterns of land use, land scarcity, land tenure patterns, and the markedly seasonal climate are at the root of natural resource degradation. Three-quarters of the territory suffer severe soil erosion due to the encroachment of basic grains production on marginal lands by small farmers, which in turn results in reduced productivity and lower rural incomes. Only 12 percent of the land has forest cover, due to the use of fuel wood for cooking, particularly in rural areas. The country suffers from seasonal water shortages, and the quality of water is deteriorating due to soil erosion, discharge of municipal sewage, and industrial waste water. The health of the poor is disproportionately affected by these environmental hazards.

Incentive and Regulatory Framework

The 1989-94 stabilization and adjustment program addressed fundamental problems in the fiscal, trade, agricultural, and financial sectors. The economic program has been successful in stabilizing the economy and reactivating growth. Reducing inflation had a positive effect on the poor by protecting the purchasing power of their incomes. Trade measures opening the economy have probably had a net positive effect on the poor as economic growth has been led by activities in tradeable goods, where the poor are more than proportionately employed. The elimination of price controls on basic grains has supported poor small producers but has hurt poor net buyers of food, particularly in urban areas. Financial sector policies have probably been neutral for the poor, as their access to credit is limited by regulations and lack of collateral. Fiscal policies have had a mixed impact on the poor. Increased allocations for health and education and better targeting of resources to basic services in rural areas have started to expand access to the poor. The enactment of a 10 percent value-added tax probably hurt the poor, although exemptions granted to beans, white corn, unprocessed agricultural products, and small businesses might have softened its impact. Sustainable measures to raise tax yields will increase the resources available to the government for operating and investing in essential public services. Utility pricing policies (such as water and electricity) have hurt most of the urban poor in the short term; for most of the rural poor, the increases in prices have had no impact, given that their access to these services is minimal.

The second phase of the economic reform program (1994-98) aims to deepen the reforms by ensuring macroeconomic stability and promoting equitable growth, which is a pre-requisite for reducing poverty. The study points out three areas as being especially important for poverty reduction. The first is public sector reform. Expenditure management reform is essential to provide social sector ministries with the necessary tools to target resources effectively to basic services and to rural areas. Civil service reform is also essential for the social ministries to staff basic services adequately, to streamline central offices, to provide incentives for work in rural areas, and to attract qualified managers. These actions, together with tax reforms, are key factors that will determine the amount of resources that will be available to expand the supply and efficiency of basic services for the poor.

Second, measures to develop a market-oriented and viable rural financing system (including increasing the access that small producers have to credit) as well as further trade reforms should assist some of the rural poor. Strengthening the agencies responsible for land financing, titling, and registration and mobilizing additional financing for land purchases should also improve the lot of farm households. Efforts to increase the productivity of basic grains producers and to expand extension services and research for small farmers should also be strengthened.

Third, for the urban poor, the most important measures are labor market reform and private sector development. An in-depth investigation is needed of trends in formal sector employment and wages, conditions of entry, obstacles to growth, and failure rates. The analysis should include the regulatory framework, rigidities that hamper the movement of labor to the production of tradeable goods, constraints faced by informal sector workers, and incentives and opportunities for informal sector workers to enhance their skills and, hence, their productivity.

Public Expenditure

In the 1989-93 period, improvements were made in the delivery of basic health and education services, particularly by strengthening community participation, especially in rural areas. Some progress was made in increasing social sector spending and restructuring expenditures within health and education. The assessment identifies two major issues that should start to be addressed in the 1994-98 period. The first issue is the fact that constraints such as limited resources and inflexibility in resource allocation exist to expanding further the supply of basic social services for the poor. According to the assessment, planned public sector reforms alone are not likely to provide enough resources, as El Salvador's health and education spending lags behind the average for Latin America by about 2 percent of GDP. The second issue is that the low management capacity of line ministries limits the possibilities of increasing the efficiency of expenditures.

Safety Net

The assessment estimated that, in the 1989-93 period, between 1 and 1.2 percent of GDP was mobilized for safety net programs (infrastructure rehabilitation, income support, generation of income-earning opportunities, and access to assets). This is a sizable amount, considering that public expenditures on health and education are less than 3 percent of GDP. The safety net has a number of positive features. First, it emphasizes rural areas where the majority of the poor live. Second, most of its programs have a demand-driven orientation, which leads to projects in tune with the needs of local communities. Third, it gives communities an incentive to organize themselves, improves participation, and fosters the democratization process. Finally, its largest agencies are financing entities; implementation is left to local bodies, NGOs, and the private sector. The report recommends that the government should address the following problems: (i) complex institutional arrangements and too many agencies implementing similar programs; (ii) limited inter-institutional coordination with sectoral agencies, which is key to ensuring the maintenance of investments and the provision of recurrent expenditures to operate services; (iii) inadequate information systems and a lack of routine impact assessments to determine the effectiveness of programs; and (iv) inadequate implementation of the nutrition policy due to lack of leadership.

Poverty Strategy

The strategy is based, first, on an economic program that promotes sustained economic growth as the basis for reducing poverty. Second, it has a two-pronged poverty alleviation strategy, including a safety net to alleviate the impact of adjustment on the most vulnerable groups in the short term and increased access to pre-primary and primary education, primary health care, and nutrition, to help the poor to take advantage of economic opportunities in the medium to long term.

For the 1994-98 period, the assessment recommends that the government should prepare an action plan setting specific priorities for both the safety net and medium-term programs. As both resources and institutional capacity are limited vis-à-vis needs, the government should: (i) target public financing to priority interventions with a large public good content, particularly the provision of basic services, particularly water and sanitation, primary health care, pre-primary and primary education, and environmental protection; (ii) concentrate its efforts predominantly in rural areas, while targeting its interventions in urban areas to cities outside the San Salvador Metropolitan Area and to poor female-headed households; (iii) undertake a detailed analysis to select investments with the highest return, which, given that the infrastructure network has seriously deteriorated, is likely to mean water and sanitation and roads in rural areas and water and sanitation, transport, power, and housing in urban areas, taking into account possible tradeoffs between economic efficiency on one hand and poverty reduction on the other; and (iv) define the role of social safety net entities vis-à-vis line agencies, striking a balance between the expediency of providing infrastructure and services and the longer-term need to reform sectoral institutions.

Statistical System

Poverty analysis is limited by the lack of a monitoring system and database and by inadequate institutional arrangements in government agencies. The study recommends that the government should: (i) replace its current survey programs with a Living Standards Measurement survey, which would provide higher quality data, a better picture of household welfare and poverty as measured by consumption, relevant social indicators such as health, educational and nutritional status, sources of incomes, assets, and household and community level data; (ii) process the 1992 population census immediately to start developing an adequate targeting mechanism with a well-defined target population, thus providing a basic set of indicators by municipality that should be used to rank them according to need by both safety net and line ministry programs; and (iii) redefine existing institutional arrangements so that the Advisory Group for Economic and Social Affairs at the Ministry of Planning is fully in charge of the statistical system.

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