2014 Index of Economic Freedom

El Salvador

overall score66.2
world rank59
Rule of Law

Property Rights40.0

Freedom From Corruption34.3

Limited Government

Government Spending85.8

Fiscal Freedom79.6

Regulatory Efficiency

Business Freedom59.6

Labor Freedom63.3

Monetary Freedom80.0

Open Markets

Trade Freedom79.0

Investment Freedom70.0

Financial Freedom70.0

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Quick Facts
  • Population:
    • 6.2 million
  • GDP (PPP):
    • $46.3 billion
    • 1.6% growth
    • 0.6% 5-year compound annual growth
    • $7,438 per capita
  • Unemployment:
    • 5.7%
  • Inflation (CPI):
    • 1.7%
  • FDI Inflow:
    • $515.8 million
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El Salvador’s economic freedom score is 66.2, making its economy the 59th freest in the 2014 Index. Its overall score is 0.5 point lower than last year due to declines in business freedom and fiscal freedom. El Salvador is ranked 11th out of 29 countries in the South and Central America/Caribbean region, and its overall score remains above the world average.

Over the 20-year history of the Index, El Salvador’s economic freedom has been stagnant, with hard-won gains in earlier years wiped out by more recent declines in the areas of the rule of law, government size, and regulatory efficiency. Scores for eight of the 10 economic freedoms, notably freedom from corruption, property rights, business freedom, and government spending, have deteriorated markedly over the past two decades.

El Salvador reached its highest economic freedom score in 2000 and achieved the rank of a “mostly free” economy from 1996 to 2005. However, the Salvadorian economy has fallen back to the category of “moderately free” since 2006 and registers its lowest score ever in the 2014 Index.

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Background

After the end of El Salvador’s 12-year civil war in 1992, three successive presidents from the National Republican Alliance (ARENA) maintained free-market policies that delivered economic growth and reduced poverty. A fourth ARENA president, Antonio Saca, was less interested in economic reform and the rule of law. Mauricio Funes of the leftist Farabundo Marti Liberation Front (FMLN), elected in 2009, has failed either to reduce growing public debt or to reverse the upward trend in food prices. His policies have repelled foreign investors. The state is plagued by corruption and violence. The government brokered a truce between the country’s two major rival gangs, and in little more than a year, homicides dropped approximately 41 percent. However, Security Minister David Mungia Payes, who oversaw the truce, was forced to resign, and a return of gang violence is feared.

Rule of LawView Methodology

Property Rights 40.0 Create a Graph using this measurement

Freedom From Corruption 34.3 Create a Graph using this measurement

Corruption remains a serious problem in El Salvador, but few high-level public officials have been charged or convicted. The judicial system has demonstrated its independence but is still subject to corruption and obstructionism. Property rights are not strongly respected, and law enforcement is inefficient and uneven. Violent crime, much of it gang-related, continues to be a problem.

Limited GovernmentView Methodology

The top marginal individual income and corporate tax rates have risen to 30 percent. Other taxes include a value-added tax (VAT) and excise taxes. The overall tax burden is 15.4 percent of GDP. Government expenditures have reached 22 percent of the economy. Public debt is now 52 percent of GDP, and deteriorating debt forecasts have led some rating agencies to cut credit ratings.

Regulatory EfficiencyView Methodology

Starting a business still takes more than two weeks, and completing the necessary permits costs more than the level of average annual income. The inefficient labor market lacks flexibility, and imbalances persist in the demand and supply of skilled workers. Although electric generation has been largely privatized, the government partially subsidizes fuels and imposes price controls on a range of goods and services.

Open MarketsView Methodology

El Salvador’s average tariff rate is 5.5 percent. Foreign investors can find the legal and regulatory systems challenging. The financial sector is dominated by banks, which are mostly owned by foreign financial institutions. Two of the banks operating in the country, focusing on mortgages and financial services to the agricultural sector, are state-owned. Overall, the banking sector remains relatively stable.

Country's Score Over Time

Bar Graph of El Salvador  Economic Freedom Scores Over a Time Period

Country Comparisons

Bar Graphs comparing El Salvador  to other economic country groups

Regional Ranking

rank country overall change
1Chile78.7-0.3
2Saint Lucia70.70.3
3Colombia70.71.1
4The Bahamas69.8-0.3
5Uruguay 69.3-0.4
6Barbados68.3-1.0
7Peru67.4-0.8
8Saint Vincent and the Grenadines670.3
9Costa Rica 66.9-0.1
10Jamaica 66.7-0.1
11El Salvador 66.2-0.5
12Dominica65.21.3
13Panama 63.40.9
14Trinidad and Tobago62.70.4
15Paraguay 620.9
16Dominican Republic61.31.6
17Guatemala 61.21.2
18Nicaragua 58.41.8
19Honduras 57.1-1.3
20Brazil56.9-0.8
21Belize56.7-0.6
22Guyana55.71.9
23Suriname54.22.2
24Haiti48.90.8
25Bolivia48.40.5
26Ecuador481.1
27Argentina44.6-2.1
28Venezuela 36.30.2
29Cuba28.70.2
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