El Salvador - Manufacturing

Manufacturing

The manufacturing industry developed slowly. In 1950, when manufacturing accounted for about 7 percent of GDP, it comprised mostly cottage industries. Of the fourteen larger manufacturing firms (with more than 100 employees), thirteen were located in San Salvador and produced mainly textiles, tobacco, and beverages; most of the smaller firms manufactured clothing, shoes, furniture, and wood or straw products.

The development and manufacturing industries was slowed by a shortage of reliable year-round labor--most Salvadorans worked seasonally as agricultural laborers--and an even more acute lack of skilled workers. In 1952, however, when the government offered tax breaks to small businesses, industry grew almost 5 percent a year from 1955 to 1958. During this period, cement, chemical, and transportation equipment industries began. The intermediate goods sector was much more dynamic than the capital goods sector; with the development of modern chemical, pharmaceutical, and petroleum product industries, it grew rapidly in the 1960s and 1970s. The production of machinery and transport equipment remained fairly stable in terms of its share of the value added for total Salvadoran manufactured goods, rising from 3 percent of total value added in 1970 to 4 percent in 1985.

By 1960 the manufacturing sector represented 14.6 percent of El Salvador's GDP, the highest percentage of any Central American country at the time. The creation of the CACM boosted the rapid development of manufacturing firms in El Salvador throughout the 1960s. By 1965, following three years of 12 percent average annual growth, manufacturing represented 17.4 percent of GDP. Between 1961 and 1970, value added in manufacturing increased (in nominal terms) from US$89.2 million to US$194.1 million.

The manufacturing sector received a temporary setback because of the 1969 war with Honduras, which disrupted CACM trade. Even the CACM's share of Salvadoran exports fell from 40 percent in 1968 to 32 percent in 1970. Nevertheless, manufacturing output increased by a modest 3.9 percent in 1969. Following the war, however, foreign investment replaced CACM trade as the engine of growth for the Salvadoran manufacturing industry.

During the 1970s, manufacturing was the most dynamic segment of the Salvadoran economy, growing by an impressive 16.8 percent yearly between 1971 and 1978. Consumer goods (especially foodstuffs, textiles, clothing, and shoes) continued to be the most important products. Because of the CACM's decline, El Salvador was forced to seek new export markets like the United States, which in the 1970s imported over 20 percent of the country's food exports and almost 35 percent of its exports of beverages and tobacco products. El Salvador also sought export markets for textiles and other light manufactures in the United States and the Federal Republic of Germany (West Germany). The project was not competitive, however, because of poor product quality and outmoded manufacturing techniques and expensive foreign materials. Eventually Japan and West Germany became important export markets for the bulk of El Salvador's nonedible raw materials, fats, and oils.

Because foreign investors funneled their capital to industries producing intermediate goods these industries increased in importance relative to consumer goods during the 1970s. As a result, El Salvador increased the percentage of its exports of manufactured goods exported to industrialized countries. In 1965 over 90 percent of Salvadoran manufactured exports went to other developing countries (primarily CACM states), but by 1986 about 87 percent were being shipped to industrialized countries. Overall exports of manufactured goods increased (in real terms) from US$32 million in 1965 to US$170 million in 1986.

During the 1980s, the manufacturing sector, buffeted by the chaos of the civil conflict, labor unrest, declining investor confidence, and world recession, experienced a major decline. Aside from the generalized capital flight spurred by political instability, the second most damaging effect of the conflict, after guerrilla sabotage of the electrical grid, was attacks on factories.

The industries hit hardest by guerrilla attacks were those producing nontraditional capital goods such as transportation equipment, intermediate goods such as metal products and machinery, and capital-intensive consumer goods such as electric appliances. Traditional industries (foodstuffs, beverages, tobacco, wood products, and furniture) were least affected because their factories tended to be smaller and thus less subject to guerrilla attacks. These industries also had welldeveloped domestic markets and consequently were less affected by the 1980-82 world recession. Exports of manufactured goods declined by 48 percent in value and almost 80 percent in volume between 1979 and 1982, mainly as a result of lower shipments of chemicals, textiles, clothing, and petroleum products.

Labor unrest became a major contributing factor in declining manufacturing output. But it is unclear whether or not there is a direct relationship between guerilla activity and that unrest. There were, however, eighty-six strikes in 1979, involving almost 23,000 workers, compared with only one strike, involving 700 workers, in 1975.

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