2019 Index of Economic Freedom

El Salvador

overall score61.8
world rank84
Rule of Law

Property Rights37.6

Government Integrity23.4

Judicial Effectiveness29.1

Government Size

Government Spending86.3

Tax Burden78.1

Fiscal Health81.9

Regulatory Efficiency

Business Freedom57.2

Labor Freedom53.1

Monetary Freedom79.0

Open Markets

Trade Freedom81.4

Investment Freedom75.0

Financial Freedom60.0

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Quick Facts
  • Population:
    • 6.4 million
  • GDP (PPP):
    • $57.0 billion
    • 2.4% growth
    • 2.1% 5-year compound annual growth
    • $8,948 per capita
  • Unemployment:
    • 4.5%
  • Inflation (CPI):
    • 1.0%
  • FDI Inflow:
    • $791.9 million

El Salvador’s economic freedom score is 61.8, making its economy the 84th freest in the 2019 Index. Its overall score has decreased by 1.4 points, with declines in judicial effectiveness, trade freedom, and investment freedom far outweighing an increase in fiscal health. El Salvador is ranked 17th among 32 countries in the Americas region, and its overall score is slightly above the regional and world averages.

Economic freedom has declined steadily in El Salvador after almost a decade of statism. The Sánchez Cerén government has made some regulatory improvements, most notably by cutting red tape in tax payment and compliance systems, but cumbersome bureaucracy and institutional weaknesses continue to slow development. Improving the business climate will be a challenge for the next government, especially in light of fiscal pressures for tax increases. Judicial independence and the rule of law have eroded in recent years.

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Background

After its 12-year civil war ended in 1992, El Salvador enjoyed strong economic growth under pro-market, center-right National Republican Alliance (ARENA) presidents. Since 2009, leftist Farabundo Martí National Liberation Front (FMLN) governments have increased the state’s role in the economy. ARENA regained a plurality in the legislature in 2012, and presidential elections are scheduled for February 2019. Outgoing FMLN President Salvador Sánchez Cerén leaves a legacy of anemic economic growth; weak government effectiveness; and a surge in violence, homicides, and drug trafficking. The economy relies on exports of coffee, sugar, textiles and apparel, gold, ethanol, chemicals, electricity, and intermediate manufactured goods. Remittances account for nearly one-fifth of GDP, and one-third of the population lives below the poverty line.

Rule of LawView Methodology

Property Rights 37.6 Create a Graph using this measurement

Government Integrity 23.4 Create a Graph using this measurement

Judicial Effectiveness 29.1 Create a Graph using this measurement

Property rights are not strongly respected, and enforcement efforts are uneven. No single natural or legal person can own more than 605 acres of land. The judicial system is so slow, costly, and riddled with corruption that it undermines public trust and the rule of law. Narco-related corruption remains a serious problem, bribery and off-the-books payments are common, and anticorruption laws are weak.

Government SizeView Methodology

The top personal income and corporate tax rates are 30 percent. Other taxes include value-added and excise taxes. The overall tax burden equals 19.7 percent of total domestic income. Over the past three years, government spending has amounted to 21.4 percent of the country’s output (GDP), and budget deficits have averaged 2.6 percent of GDP. Public debt is equivalent to 59.3 percent of GDP.

Regulatory EfficiencyView Methodology

Despite some progress, regulations are enforced inconsistently. The inefficient labor market lacks flexibility, and imbalances persist in the demand for and supply of skilled workers. Less than 30 percent of Salvadorans work in the formal economy. Government-imposed price controls on a range of goods and services contributed to a fiscal deficit of about 2.2 percent of GDP in 2018.

Open MarketsView Methodology

The combined value of exports and imports is equal to 72.5 percent of GDP. The average applied tariff rate is 1.8 percent. As of June 30, 2018, according to the WTO, El Salvador had seven nontariff measures in force. In general, foreign and domestic investors are treated equally, and there is no screening of foreign investment. Banking is highly concentrated, and four private banks account for over 70 percent of total assets.

Country's Score Over Time

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Regional Ranking

rank country overall change
1Canada77.70.0
2United States76.81.1
3Chile75.40.2
4Saint Lucia68.71.1
5Jamaica 68.6-0.5
6Uruguay 68.6-0.6
7Peru67.8-0.9
8Colombia67.3-1.6
9Panama 67.20.2
10Saint Vincent and the Grenadines65.8-1.9
11Costa Rica 65.3-0.3
12Mexico64.7-0.1
13Barbados64.77.7
14Dominica63.6-0.9
15The Bahamas62.9-0.4
16Guatemala 62.6-0.8
17El Salvador 61.8-1.4
18Paraguay 61.8-0.3
19Dominican Republic61-0.6
20Honduras 60.2-0.4
21Nicaragua 57.7-1.2
22Trinidad and Tobago57-0.7
23Guyana56.8-1.9
24Belize55.4-1.7
25Haiti52.7-3.1
26Argentina52.2-0.1
27Brazil51.90.5
28Suriname48.10.0
29Ecuador46.9-1.6
30Bolivia42.3-1.8
31Cuba27.8-4.1
32Venezuela 25.90.7
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