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Traditionally, the Salvadoran economy depended heavily on agriculture. For much of the colonial period in the 16th and 17th centuries, subsistence farming and ranching occupied most of the population. In the 18th century Spanish economic policy promoted new agricultural products for export, and Salvadoran indigo became Central America’s leading crop. In the 19th century indigo lost importance after the discovery of chemical dyes, and coffee replaced it as the principal Salvadoran export. A small group of coffee planters gained economic and political power, leading El Salvador to depend on international coffee markets. Coffee brought El Salvador enough wealth to build impressive new ports, railways, and paved highways, and to modernize San Salvador.
In the 1940s the planter class took over more land along the Pacific Coast and expanded into other export crops, such as cotton, sugar, rice, and beef. Peasants were forced off their land, and domestic food production lagged behind rapid population growth. While the small group of landowners became richer, most Salvadorans faced hunger and malnutrition that was among the worst in the world. This economic condition led to serious social and political problems and eventually to the civil war of the 1980s. The war devastated the economy, causing an estimated $2 billion in economic damage. Investment and production declined sharply at the beginning of the war, then grew slowly. In the 1980s El Salvador relied on more than $5 billion in foreign aid, mostly from the United States.
Since the war, El Salvador has made notable progress in restoring production and investment. Recent reforms have eliminated many price controls, broken up government monopolies over agricultural exports, reduced trade barriers, maintained interest rates, and reduced the deficit. The postwar governments have worked to privatize government-owned activities and expand the nation’s roads, communication services and other facilities.
Agriculture in 2006 accounted for 11 percent of El Salvador’s $18.7 billion gross domestic product (GDP). Coffee remains the major export, accounting for one-third of export revenues, but is a declining percentage of total economic activity, as investment has widened the base of both the domestic and export economy. Manufacturing now accounts for 22 percent of the GDP. Annual growth in the GDP averaged 4.2 percent in the period 2006. The per capita GDP for 2006 was $2,758.50, but when inflation was taken into account, wages declined in the 1990s.
The labor force is estimated at 2.7 million, with 19 percent of workers in agriculture, forestry, or fishing; 24 percent in industry, including manufacturing, construction, and mining; and 57 percent in services, including trade, finance, and government. Unemployment in 2006 stood at 6.6 percent, but underemployment remains a serious problem.
The total of industrial, rural, and government workers belonging to unions is about 300,000, or less than 20 percent of the labor force. Union organization among rural workers was banned until the 1980s by the government, which was controlled by large landowners, and industrial unions were suppressed from the 1930s until 1950. Antiunion violence connected with the civil war also limited membership. The largest labor organizations are the National Peasants Union for rural workers and the urban National Federation of Salvadoran Workers.
Some 32 percent of El Salvador’s land is cultivated, and 12.1 percent more is used for plantation agriculture. Agriculture accounts for only 11 percent of the GDP but 34 percent of the country’s exports. Coffee is the most important export crop, as it has been for more than a century, but other crops include sugarcane, corn, rice, beans, oilseeds, cereals, vegetables, fruits, beef, and dairy products.
Most of the country’s valuable farmland is controlled by a few wealthy Salvadorans; about 1 percent of the landowners control more than 40 percent of the arable land. A reform program in the 1980s redistributed some land to peasants, but large-scale export agriculture still prevails. With this emphasis on growing crops for export, and El Salvador’s dense population, the country is not able to grow enough to feed its people and must import food.
Forestry and Fishing
Because of early deforestation and high population density, the forest resources of El Salvador occupy only 14 percent of the area and offer little actual or potential lumber production. Most lumber is imported. El Salvador, however, is the world’s leading producer of balsam, a resin from the balsam tree that is used in making medicines and cosmetics.
Commercial fishing along El Salvador’s Pacific shore has become a growing industry. Frozen shrimp is a leading export, and some tuna, mullet, mackerel, and swordfish are also marketed domestically and for export.
Manufacturing and Mining
Since the 1940s, El Salvador has been the most industrialized nation in Central America. The country’s first steel-rolling mill opened in 1966. Although the civil war of the 1980s damaged its industries, by 2006 manufacturing accounted for 22 percent of the GDP. El Salvador’s factories supply mostly domestic and Central American markets, although new assembly plants (maquiladoras) have begun to export beyond the region. Textiles, leather goods, clothing, processed food, tobacco, furniture, wood and metal products, and chemicals are the principal manufactures.
The civil war disrupted the small gold and silver mining operations in the country. Mineral extraction is limited to limestone, gypsum, sea salt, and other construction materials.
El Salvador depends heavily on electric energy, which it produces with four hydroelectric plants and with one of the world’s first geothermal plants. Petroleum imports, however, still provide half of El Salvador’s energy requirements. Electrical service began in El Salvador in November 1890.
Currency and Banking
El Salvador adopted the United States dollar as its official currency in January 2001.
In the early 1990s, El Salvador had one of the higher inflation rates in Central America; it reached nearly 20 percent in 1992. But the rate dropped to 12 percent in 1993 and 10 percent in 1994. The Central Reserve Bank has been effective in regulating interest rates, and the downward trend continued through 1996.
El Salvador has a well-developed highway system, with paved roads accounting for 20 percent of its 10,029-km (6,232-mi) system. The civil war prompted new road building, contributing to the rapid growth of the transportation network. Railroads, on the other hand, are in declining use. The country has 603 km (377 mi) of narrow-gauge tracks, but some sections are abandoned or in ill repair. The major ports are Acajutla, La Libertad, La Union, Puerto Cutuco, and Puerto El Triunfo. El Salvador has 106 airports used mainly for private or military aviation and crop dusting. It has one international airport, near San Salvador, which is served by Transportes Aereos Centro Americanos (TACA), a privately owned airline chartered in El Salvador, and several foreign airlines.
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