Abstract
Selected Issues
Reaping the Demographic Dividend in El Salvador1
El Salvador is in the middle of its demographic transition from high fertility and mortality rates to low fertility and mortality rates, when the share of the working-age population increases. During an early stage, the number of children rises rapidly as mortality falls; later, fertility begins to decline, reducing the number of children, and the share of the working-age population increases. This demographic transition is a window of opportunity to earn a demographic dividend, if good policies are in place. For El Salvador to harness its demographic dividend, it should invest in human and physical capital and adopt policies to improve the business climate and foster job creation.
The Selected Issues Paper is organized as follows: Section I presents demographic trends in El Salvador and defines the demographic divided; Sections II and III present the state of play of the doing business climate and makes recommendations on policies needed to reap the benefits from the demographic dividend; Sections IV and V present the state of play of human capital and migration and provides recommendations on how to foster human capital and reverse migration; and Section VI presents likely causes of informality and potential solutions.
A. Demographic Trends and Dividend
1. A first dividend occurs when fertility rates fall and the labor force temporarily grows more rapidly than the population dependent on it. Other things being equal, per capita income grows more rapidly too. A measure for a first dividend is the period when the dependency ratio starts declining (but is still above two-thirds), while the most favorable period is when the dependency ratio falls below two-thirds (2 people in the dependent-age group for every 3 people in the working-age group) and continues decreasing thereafter. This dividend period can last five decades or more, but eventually lower fertility reduces the growth rate of the labor force, while continuing improvements in old-age mortality speed growth of the elderly population. Now, other things being equal, per capita income grows more slowly and the first dividend turns negative. But a second dividend is also possible when a population concentrated at older working ages and facing an extended period of retirement accumulates assets and invests them.
2. In El Salvador, fertility rates2 were falling steeply until the 2000s, which could explain the steady increase in the working-age population (Figure 1).3 Fertility rates were falling 30 percent by the 80s from the 60s and by another 50 percent by the 2000s, reaching 2.2 percent by the 2010–15. Lower fertility rates led to a steady decline in the dependency ratio4 (from 1 to 0.72 by 2005). In the late 2000s and early 2010s, the dependency ratio fell below two-thirds and is projected to remain below this level until the 60s, even though it is projected to increase slowly starting in 2045. The share of the youth population (ages 0–19) is very large at 44 percent of the total population and has been falling more rapidly since the 1990s, and that of the young cohort of 20–39 is 30 percent of the total population and growing. The share of the 40–64 population at about 20 percent of the total population is also growing.
El Salvador: Demographic Indicators
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Wittgenstein Centre for Demography and Global Human Capital (2015). Wittgenstein Centre Data Explorer Version 1.2. Available at: www.wittgensteincentre.org/dataexplorerEl Salvador: Demographic Indicators
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Wittgenstein Centre for Demography and Global Human Capital (2015). Wittgenstein Centre Data Explorer Version 1.2. Available at: www.wittgensteincentre.org/dataexplorerEl Salvador: Demographic Indicators
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Wittgenstein Centre for Demography and Global Human Capital (2015). Wittgenstein Centre Data Explorer Version 1.2. Available at: www.wittgensteincentre.org/dataexplorer3. The share of the working-age population (20–64) is much lower in El Salvador compared to other Latin American countries and Asia (charts on Shares of Distinct Age Groups). However, while El Salvador has a lower share of the young cohort (20–39) compared to Asia, the gap is about to close, and the share will be highest around 2020 before falling. In El Salvador, the share of the working-age population is expected to reach its peak (57 percent) in 2040 compared to 2025 in Latin America, 2030 in Asia, and 2080 in Africa, while it already reached its peak for Northern America (in 2005) and Europe (in 2010). And is expected to fall to about 47 percent in El Salvador at the end of the century.
4. Latin America’s onset of the demographic dividend occurred in the mid-60s following the decline in fertility. Between 1950 and the mid-1960s, the dependency ratio in Latin America increased, reaching a maximum of 100 per 100 people of working age. In the mid-1960s, the dependency ratio started falling but was still at a high level. Some countries in Central America such as Costa Rica, followed by Panama and the Dominican Republic, benefited from demographic dividends faster given that the dependency ratio had fallen below two-thirds faster (by the mid-2000s) and the working-age population share was increasing at a rapid pace during this time (Figure 1). Cuba and Chile are in the most advanced phase of the demographic dividend (when the dependency ratio begins to rise, but is still below two-thirds), while in El Salvador or Honduras, the dependency ratio was steadily declining, but was still above two-thirds in the early to late 2000s (Figure 1). In Guatemala, the dependency ratio is expected to remain above two-thirds until about 2020, and fall only thereafter (Figure 1). Compared to Asia, or even to Latin America, which reached a dependency ratio of below two-thirds by 1985, and 1995 respectively, El Salvador seems to be a laggard (Figure 2).
El Salvador: Population Pyramids
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Wittgenstein Centre for Demography and Global Human Capital (2015). Wittgenstein Centre Data Explorer Version 1.2. Available at: www.wittgensteincentre.org/dataexplorerEl Salvador: Population Pyramids
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Wittgenstein Centre for Demography and Global Human Capital (2015). Wittgenstein Centre Data Explorer Version 1.2. Available at: www.wittgensteincentre.org/dataexplorerEl Salvador: Population Pyramids
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Wittgenstein Centre for Demography and Global Human Capital (2015). Wittgenstein Centre Data Explorer Version 1.2. Available at: www.wittgensteincentre.org/dataexplorer5. El Salvador can harness this demographic dividend with appropriate policies on cross-border capital flows, human capital and migration, and trade. Cross-country regression analysis suggests that a country with a working-age population growing 3 percent per year, and 1.5 percent faster than its overall population, will see its growth boosted by 0.5 percent a year if its economy is closed, but by 1.5 percent a year if its economy is open (Bloom, Canning, Evans, et al. 1999; Inter-American Development Bank, 2000; Bloom and Canning, 2001; Bloom, Canning, and Sevilla, 2003). In the initial stages of the demographic transition, countries with relatively high dependency ratios and lower working-age population shares tend to have excess demand for investment relative to savings, increasing current account deficits. In countries at more advanced stages of the demographic transition, higher life expectancy increases savings for retirement, while shrinking labor forces reduce investment demand, encouraging net capital outflows.
6. Asia’s more favorable outcomes from its demographic transition have been attributed to a stronger focus on human and physical capital. An initial emphasis on labor-intensive export-led growth created employment opportunities and supported the transition into sectors with higher total factor productivity. Increased employment opportunities and higher labor participation rates, including for women, allowed Asia to maximize the benefits from the increase in labor force.
B. State of Play of Business Climate
7. A large number of Salvadorans enter the working-age population each year, but only 14 percent of them have a formal job. According to think tank Fusades, of a total of 91,300 Salvadorans who enter the working-age population each year on average, only 54,500 are economically active,5 of which 12,400 work in the formal sector (Figure 3). Each year, there are on average 42,100 Salvadorans who cannot find a formal job (Figure 3). However, the Salvadoran economy gained 8,443 formal jobs (7,448 in the private sector and 995 in the public sector) between August 2016 and August 2017.
El Salvador: Labor Market Indicators
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Sources: Fusades, 2017, Household Survey, 2016, Instituto Salvadoreño del Seguro Social, and IDB Information on Labor Markets and Social Security Systems.El Salvador: Labor Market Indicators
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Sources: Fusades, 2017, Household Survey, 2016, Instituto Salvadoreño del Seguro Social, and IDB Information on Labor Markets and Social Security Systems.El Salvador: Labor Market Indicators
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Sources: Fusades, 2017, Household Survey, 2016, Instituto Salvadoreño del Seguro Social, and IDB Information on Labor Markets and Social Security Systems.8. El Salvador improved 22 notches in the World Bank’s Doing Business ranking,6 but scope for further progress remains substantial. Reforms impacting positively the ranking covered four categories: dealing with construction permits, getting electricity, paying taxes, and trading across borders. However, El Salvador is still far from the frontier/best performers in the following areas: protecting minority investors, resolving insolvency, enforcing contracts, pointing to weaknesses in the judicial system. It also has a very low new business entry density compared to the LA-5 and other CAPDR economies (chart on New Business Density). According to the WEF,7 the most problematic factors for doing business are crime, corruption, inefficient government bureaucracy, policy instability, and tax rates. In terms of competitiveness and productivity, El Salvador lags behind other CAPDR and LA-5 countries with respect to the institutional and macro environment, labor and goods market efficiency, higher education, and innovation.
New Business Density
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Doing Business 2016.Note: Business entry density is defined as the number of newly registered corporations per 1,000 working-age people (those aged 15–64).New Business Density
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Doing Business 2016.Note: Business entry density is defined as the number of newly registered corporations per 1,000 working-age people (those aged 15–64).New Business Density
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Doing Business 2016.Note: Business entry density is defined as the number of newly registered corporations per 1,000 working-age people (those aged 15–64).9. Obtaining permits is time-consuming and costly and bureaucracy is burdensome. Basic principles are not upheld and an environment possibly breeding corruption is being created. Businesses are at the discretion of the public administration and they are facing burdensome procedures which delay indefinitely (2 years) or often deny approval of permits.
Doing Business Ranking, 2018
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: World Bank Doing Business Indicators, 2018.Doing Business Ranking, 2018
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: World Bank Doing Business Indicators, 2018.Doing Business Ranking, 2018
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: World Bank Doing Business Indicators, 2018.
Global Competitiveness Index Ranking, 2016–17
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: World Economic Forum Global Competitiveness Indicators.Global Competitiveness Index Ranking, 2016–17
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: World Economic Forum Global Competitiveness Indicators.Global Competitiveness Index Ranking, 2016–17
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: World Economic Forum Global Competitiveness Indicators.10. In the customs, time to import and export is long and customs laws and procedures do not meet the dual objective of enforcement and trade facilitation and lack regulatory coherence. It takes 3–4 days to transport goods by land in the region (4–6 days to Panama). Criteria and documentation requirements are burdensome and there is a lack of transparency. While some efforts have been made to streamline processes, changes are slow. Intermediary customs officers (middle management) has not increased as it is limited by law. The CIFACIL (Trade Facilitation Commission) has been working for 3 years on 19 procedures and reform of the law on simplification of customs, and of administrative simplification noted above. The private sector mentioned that there is an inconsistent application of laws and regulation in customs which are also inconsistent with some regional treaties that leads to arbitrary decisions and imposition of excessive fines. Empathy with customs officials is also needed as they are facing a choice between national versus regional norms compliance, and they can be observed by the Court of Accounts.
11. Representation on the Board of the regulatory body SIGET has been undermined. Easier access to electricity and reliability of supply, and a good regulatory framework, can be considered as one of the biggest achievements since 2009. However, the private sector’s representation on the Board of the regulatory body SIGET (which regulates electricity and telecom) has been hindered by the government and because the auction of frequency in the telecom sector has to be renewed very soon, the government believes that frequency must belong to the people and not under private ownership. The private sector was looking to appeal the election of the president of SIGET. The local newspaper El Diario de Hoy found that only 1 of the 60 newly created business associations that voted for the new president had a physical office. The rest, only existed in paper, but nobody in the corresponding towns had heard about them and there was no physical location where to find them.
12. Increases in the minimum wages appear to have affected some economic sectors. Some jobs appear to have been lost since passage of minimum wage increases of December 2016, and some sectors such as agriculture and maquila have been more affected. A survey by FUSADES indicated that 43 percent of the firms surveyed were negatively affected by the increase in the minimum wage. Of them, 19 percent reduced their personnel.
13. Barriers to business entry hamper competition, trade and investment. In the airline sector, incumbent airlines can prevent new entry at the “public consultation” phase in the approval process for air traffic rights. In the electricity sector, conditions for third party access to the transmission grid are not regulated. With respect to professional services, lawyers are not allowed to offer their services through public and private limited liability companies. Registration of food companies is bureaucratic and lengthy, and there is still no digital registration of products to shorten and streamline the process. There are restrictions to foreign firm participation in the road transport sector (e.g. only vehicles registered by companies with at least 51 percent of local capital are allowed to operate). Entry of new rice importers is limited by predetermined quotas while a new importer needs to have a record of four years before obtaining higher quotas. Industrial associations can limit the entry, fix prices or quantities produced, as well as quotas for imports in markets such as rice, sugar, maize, beans, and coffee. Industrial associations are frequently exclusive importers of certain products at a lower cost, and can sell at high prices in the domestic market, a practice which can hurt consumers and limit entry. They are also deciding on access to import quotas for new members.
14. The judicial system suffers from a lack of capacity and corruption has plugged some of its institutions. The Anti-Corruption Unit recently created within the Prosecutor General (“Fiscalia”) lacks personnel capacity and technical expertise to properly perform its duties and relies mostly on other institutions and areas of the Prosecutor General office. At the same time, the Prosecutor General distributes corruption cases to the Anti-Corruption Unit in a discretionary way without taking into account the Unit’s mandate. Prosecution and sanctioning of many cases received is being delayed indefinitely. Also, there is a backlog of pending antitrust cases that the Competition Authority has revealed, but the Prosecutor General delays their review or starts their review from scratch, pointing to inefficiencies and redundancies. The Court of Accounts (“Corte de Cuentas”), responsible for auditing the government, lacks autonomy and independence and has no effective control over public funds. It has also suffered from internal corruption (several of its employees are investigated by the Prosecutor General, including for letting cases expire and for unnecessary spending on goods and services).
C. Policy Recommendations
15. Permits and registration processes should follow clear procedures and responses be expedited. Ministry of Health, Ministry of Agriculture, Ministry of the Environment, and water and sewage authorities need to work on best practices to give legal certainty in granting permits. To facilitate doing business, the private sector considers it essential to pass the laws for administrative procedures, which will be a foundation for regulatory simplification and simplification in customs procedures. The already existing Regulatory Agency (OMR) is taking its time to review and prioritize simplification of procedures, while for the private sector it is a high cost to wait indefinitely for a much-needed streamlining of procedures. One step forward in this process is the likely approval of the legislation on administrative procedures which is in discussion in Congress.
16. El Salvador should move forward with reforms required for the creation of the customs union with Guatemala and Honduras. It would be important to harmonize the legal framework and VAT refunds systems and have a plan to reduce import duties to allow more competition in the sugar and agricultural products.
17. Any government meddling in tripartite representation at the key Commissions and broads of regulatory agencies should be avoided. The institutionality of election of Board members of the regulatory body SIGET should be strengthened. Auctions should not be manipulated and concession should be granted to the best offer.
18. To maintain competitiveness, also given that El Salvador is a dollarized economy, no further increases in the minimum wages should be passed. More predictability in decisions on minimum wages is needed on the side of the Ministry of Labor as well as representation of the private sector at the National Council on the Minimum Wage.
19. Strengthening the judicial system and dedicating more resources to the Prosecutor’s General Office is critical to improve the investment climate. Achieving better coordination between agencies fighting corruption (Prosecutor, Court of Accounts, and Ethics Tribunal), as well as giving an opportunity to the civil society to be consulted on corruption cases would be important. In July 2018, election of four members of the Constitutional Court is due and it would be important that the election process is transparent. The Anti-Corruption Unit recently created within the Prosecutor General (“Fiscalia”) should be strengthened through higher personnel capacity and technical expertise. It should receive adequate funds to ensure its proper functioning and guarantee its stability. Prosecution and sanctioning of many cases by the Prosecutor should be swift, and thus, a mechanism to prioritize review of cases of corruption should be introduced. Recommendations to strengthen the Court of Accounts (“Corte de Cuentas”) include: i) the election of independent judges by a qualified majority (now they are elected with a simple majority); ii) revising the regulatory framework to strengthen the functioning of the institution creating 2 separate entities: one with audit functions and another with jurisdictional functions, and by introducing job requirements to attest for competence, honesty and independence; and iii) producing and publishing comprehensive annual reports.
20. The Prosecutor General should resolve the backlog of pending antitrust court cases. If the Competition Authority has already found evidence of anti-competitive behavior, their analysis should be followed and internalized by the Prosecutor rather than challenged and reviewed again from scratch. The process of ruling and sanctioning on the strong evidence should in this case not take too long.
D. State of Play of Human Capital and Migration
21. El Salvador lags behind Latin America in human capital on various indicators (i.e. mean years of schooling, tests). Mean years of schooling are 7 years in El Salvador versus 8.4 years in Latin America, and its educational attainment distribution is skewed towards primary and lower secondary education for both women and men. Attainment of upper secondary education appears to be similar for women and men, while post-secondary education attainment is higher for women than for men (chart on Education Attainment). Acquired skills levels are poor, due to the low quality of primary and secondary education, given that wage increases are unrelated with teachers’ productivity or performance evaluations. El Salvador ranked among the worst in math/science tests (49 out of 53 countries in the 2007 TIMS). The bulk of spending in education is at the primary level in El Salvador, and there is a sizeable coverage gap in secondary and tertiary education. Pupil-teacher ratios in secondary education are much higher compared to regional peers.
Education Attainment Distribution by Age Groups
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Wittgenstein Centre for Demography and Global Human Capital (2015).Education Attainment Distribution by Age Groups
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Wittgenstein Centre for Demography and Global Human Capital (2015).Education Attainment Distribution by Age Groups
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Wittgenstein Centre for Demography and Global Human Capital (2015).22. El Salvador ranks poorly in various facets of innovation. These include spending on R&D, tertiary enrollment rates, number of patent applications, FDI inflows, ease of protecting investors, knowledge-intensive employment, and creative services exports (chart on Global Innovation Index8).
Global Innovation Index, 2015
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Global Innovation Index.Global Innovation Index, 2015
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Global Innovation Index.Global Innovation Index, 2015
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Global Innovation Index.23. El Salvador is unable to seize its demographic dividend due to high migration of its young productive population. The number of unaccompanied children and families fleeing gang violence and poverty in El Salvador has risen dramatically in recent years. The country suffers from weak political and socioeconomic conditions, including some of the world’s highest homicide rates and widespread gang violence, which drive ongoing migration. Approximately 1.4 million immigrants from El Salvador resided in the United States in 2015—the highest share of population of the country of origin. The age-sex pyramid of the foreign-born population from El Salvador has a diamond shape, with the largest number of immigrants in the economically active ages of 20 to 54 and a relatively small number of immigrants under age 20 and over age 54 (chart on Age and Sex Distribution of Immigrants). Unlike the population pyramid of the total immigrant population, the middle part of the diamond (i.e. the economically active population) is stretched out, while the top and the bottom (i.e. children and elderly population) are small. Similar to the Mexican but unlike the Filipino immigrant populations, the foreign-born population from El Salvador has more men overall than women. In addition, there is certain anecdotal evidence indicating that those who migrate are highly skilled.
U.S. Immigrant Population by Country of Birth, 2000-Present (‘000)
U.S. Immigrant Population by Country of Birth, 2000-Present (‘000)
| 2000 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2000–07 | 2008–15 | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Americas | 16,916 | 21,248 | 20,977 | 21,278 | 22,031 | 22,040 | 22,120 | 22,320 | 22,703 | 22,950 | 3.3 | 1.0 | ||
| Latin America | 16,087 | 20,410 | 20,150 | 20,456 | 21,224 | 21,245 | 21,311 | 21,473 | 21,890 | 22,111 | 3.5 | 1.0 | ||
| Caribbean | 2,953 | 3,387 | 3,408 | 3,466 | 3,731 | 3,777 | 3,873 | 3,954 | 4,000 | 4,165 | 2.0 | 2.6 | ||
| Central America | 11,204 | 14,450 | 14,175 | 14,394 | 14,764 | 14,758 | 14,711 | 14,751 | 15,035 | 15,028 | 3.7 | 0.5 | ||
| El Salvador | 817 | 1,104 | 1,095 | 1,150 | 1,214 | 1,265 | 1,272 | 1,252 | 1,315 | 1,352 | 4.4 | 2.6 | ||
| South America | 1,930 | 2,572 | 2,567 | 2,596 | 2,730 | 2,711 | 2,727 | 2,768 | 2,856 | 2,918 | 4.2 | 1.6 | ||
| Northern America | 829 | 839 | 827 | 822 | 807 | 795 | 808 | 847 | 813 | 838 | 0.2 | 0.0 | ||
U.S. Immigrant Population by Country of Birth, 2000-Present (‘000)
| 2000 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2000–07 | 2008–15 | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Americas | 16,916 | 21,248 | 20,977 | 21,278 | 22,031 | 22,040 | 22,120 | 22,320 | 22,703 | 22,950 | 3.3 | 1.0 | ||
| Latin America | 16,087 | 20,410 | 20,150 | 20,456 | 21,224 | 21,245 | 21,311 | 21,473 | 21,890 | 22,111 | 3.5 | 1.0 | ||
| Caribbean | 2,953 | 3,387 | 3,408 | 3,466 | 3,731 | 3,777 | 3,873 | 3,954 | 4,000 | 4,165 | 2.0 | 2.6 | ||
| Central America | 11,204 | 14,450 | 14,175 | 14,394 | 14,764 | 14,758 | 14,711 | 14,751 | 15,035 | 15,028 | 3.7 | 0.5 | ||
| El Salvador | 817 | 1,104 | 1,095 | 1,150 | 1,214 | 1,265 | 1,272 | 1,252 | 1,315 | 1,352 | 4.4 | 2.6 | ||
| South America | 1,930 | 2,572 | 2,567 | 2,596 | 2,730 | 2,711 | 2,727 | 2,768 | 2,856 | 2,918 | 4.2 | 1.6 | ||
| Northern America | 829 | 839 | 827 | 822 | 807 | 795 | 808 | 847 | 813 | 838 | 0.2 | 0.0 | ||
Age and Sex Distribution of El Salvador Immigrants, 2015
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Migration Policy Institute.Age and Sex Distribution of El Salvador Immigrants, 2015
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Migration Policy Institute.Age and Sex Distribution of El Salvador Immigrants, 2015
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: Migration Policy Institute.
Total Migrant Stock in U.S. as a Share of Population of Country of Origin (Percent)
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: United Nations, Department of Economic and Social Affairs (2015)Total Migrant Stock in U.S. as a Share of Population of Country of Origin (Percent)
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: United Nations, Department of Economic and Social Affairs (2015)Total Migrant Stock in U.S. as a Share of Population of Country of Origin (Percent)
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: United Nations, Department of Economic and Social Affairs (2015)24. Women labor participation rates are particularly low (chart on Labor Force Participation). While total labor force participation rates are already high, El Salvador’s gender gap—the difference between male and female labor force participation—remains large. At around 30 percent, it is more than double the U.S. gender gap. Interestingly, this reflects primarily large male participation, which, in turn, can be attributed to a relatively young population. Nearly four-fifths of men in the region participate in the labor force, versus about two-thirds in advanced economies.
Labor Force Participation Rate
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Sources: World Bank, World Developement Indicators database; and IMF staff calculations.Note: LFP – labor force participation.Labor Force Participation Rate
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Sources: World Bank, World Developement Indicators database; and IMF staff calculations.Note: LFP – labor force participation.Labor Force Participation Rate
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Sources: World Bank, World Developement Indicators database; and IMF staff calculations.Note: LFP – labor force participation.E. Policy Recommendations
25. Important advances in human capital are key to improve productivity of young adults and foster innovation. The wage bill represents 68 percent of the education budget and is 82 percent higher in 2014 compared to 2007, stressing the need to focus on compensation in a fiscal consolidation effort. Any additional spending in the future to account for the aging of the population should be focused on higher levels of education, rather than primary levels. To account for a gradual ageing of the population, the number of primary teachers should decline in favor of those in secondary education. With respect to improving the quality of education and of teachers, it is critical to define teaching standards that guide the stages of teacher development and articulate continuous training with a strategy for teacher professionalization, establish more demanding criteria to select and retain the most talented teachers, and review the salary structure and establish incentives for professional development. Enhancing R&D/technological diffusion will require strengthening institutions, human capital and research, and achieving higher business and market sophistication, and competition in product and labor markets.
26. Policies to foster higher women labor force participation rates and to absorb returning migrants productively into the labor force would raise employment growth. Potential gains from higher female participation could be sizeable. Illustrative calculations show that if Latin American countries were to raise their female labor force participation to the average of the Nordic countries (which is 61 percent), their GDP per capita could be up to 10 percent higher, depending on the country and the existing level of female participation. Incentives for women to work, including free or subsidized childcare programs or increased children’s hours in school, providing additional time available for mothers to work, would boost female participation. Implementing the “El Salvador Seguro” plan and supplementing it with adequate resources and grant funding would be important to reduce crime and reverse migration.
F. Likely Causes of Informality and Potential Solutions
27. High informality, associated with low productivity, has undermined the potential benefits from a young population and full exploitation of the demographic dividend. While unemployment (7 percent in 2016) is only slightly above some Central America countries and the LAC average, El Salvador ranks among the top LAC countries with the largest share of employment in the informal economy—68.2 percent (ILO, 2014). It is among the 15 countries in the world where informal employment represents at least two thirds of total non-agricultural employment. Based on IDB System of Information on Labor Markets and Social Security, informality is 72 percent (Figure 3). Formal employment has been stagnant since 2000, compared to other countries in Latin America where it has risen over the same period (Figure 3). Based on household surveys (2016), informal employment in urban areas1 is 42.6 percent, not much different compared to 2006 when it was 48.7 percent (Figure 3). It is higher for women than for men and is more prevalent in commerce followed by manufacturing. 64 percent of poor are part of the informal sector. The share of employees not covered by social security and considered part of the informal economy is as high as 60 percent. Those not covered by social security/pensions are more prevalent in rural areas and among men, and are own-account workers to a large extent. Since 2008, those unremunerated family workers and domestic workers have grown the most, as well as those workers in large and micro enterprises (Figure 3). About 44 percent of the economically active population is not covered by the minimum wage legislation, and there are more people earning below the minimum wage since 2008, not only those not covered by the minimum wage legislation, but also those who are covered (Figure 3). As the legal minimum wage is being raised, while productivity has not improved, more people will fall below minimum wage.
28. A lower efficiency of economic institutions may be a determinant of informality in El Salvador. Informality may reflect weaknesses in economic institutions, such as regulations (on both firms and workers), enforcement policies, and tax policies, including tax rates, penalties, and fines. Workers can choose to exit or not enter into formal arrangements following a cost-benefit analysis about the quality of government services and benefits, and firms employ informal workers which costs less based on the extent of institutional enforcement (Perry et al, 2010). Because an informal worker costs less to a firm, employers choose informality when the chances of detection are low.
29. Reducing informality requires greater efficiency of institutions, including regulations, penalties, and enforcement. Increasing the cost of avoiding regulations, including through penalties for tax evasion within formal firms, and a penalty for informal activity, and strengthening enforcement to detect informal workers/firms, would discourage informal output and employment. It would also be important to create incentives for firms to become formal, including policies to reduce tax, financial, and regulatory constraints, including enhancing access to credit at a reasonable cost and reducing costs of registration (e.g. permits cost more than bribes). A corporate tax rate of 35 percent appears too high given low investment and high informality, and should be reduced significantly, while limiting incentives and loopholes to broaden the tax base.
30. Reducing barriers to formal employment requires revamping benefits and improving the quality of education. Revamping the benefits of belonging to the formal workforce and creating more flexible social security schemes for segments of the workforce (with lower contribution rates but also lower benefits) could increase incentives to formal labor agreements. Enhancing the coverage and quality of education to reduce mismatches between university-level graduates and the needs of the marketplace would help gain better access to formal employment.
VAT Evasion (% of Potential Revenue)
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: IMF FAD TA, 2016.VAT Evasion (% of Potential Revenue)
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: IMF FAD TA, 2016.VAT Evasion (% of Potential Revenue)
Citation: IMF Staff Country Reports 2018, 152; 10.5089/9781484359792.002.A006
Source: IMF FAD TA, 2016.References
Lutz, W., W. P. Butz, and S. KC., 204, World Population and Human Capital in the Twenty-First Century, Oxford University Press, Demographic Mapping Tool: Wittgenstein Centre for Demography and Global Human Capital.
Bloom, D., D. Canning, and J. Sevilla, 2003, The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change, The Rand.
Bloom, D., D. Canning, and J. Sevilla, 2001, Economic Growth and The Demographic Transition. NBER, Working Paper 8685.
Informe de Coyuntura Economica, Fusades, Noviembre, 2017.
Women and Men in the Informal Economy: A Statistical Picture, ILO, 2014.
Prepared by Iulia Ruxandra Teodoru.
The average number of children born in a period to the women of reproductive age (15–49).
Working-age population is defined as those in the age group 20–64.
Dependency ratio is defined as the ratio of the youth (0–14) and elderly (65+) population over the working age (15–64) population.
Economically Active Population (PEA: Población Económicamente Activa) includes all employed, whether formal or informal, plus the unemployed.
Survey-based indicators reflect investors’ perceptions on the business environment.
The World Economic Forum’s Global Competitiveness Index combines both official data and survey responses from business executives on several dimensions of competitiveness.
The Global Innovation Index gathers data from more than 30 international public and private sources, covering a large spectrum of innovation drivers and results, and privileging hard data over qualitative assessments (57 are hard data, 19 composite indicators, and 5 survey questions).
Informal employment in urban areas is defined as salaried or own-account workers in firms with less than 4 workers or employers with less than 4 workers. Economically active population in urban areas represents 66 percent of total.
