2018 Index of Economic Freedom

El Salvador

overall score63.2
world rank75
Rule of Law

Property Rights37.3

Government Integrity25.2

Judicial Effectiveness35.4

Government Size

Government Spending86.3

Tax Burden78.9

Fiscal Health78.5

Regulatory Efficiency

Business Freedom58.2

Labor Freedom52.9

Monetary Freedom79.8

Open Markets

Trade Freedom86.4

Investment Freedom80.0

Financial Freedom60.0

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Quick Facts
  • Population:
    • 6.1 million
  • GDP (PPP):
    • $54.8 billion
    • 2.4% growth
    • 2.0% 5-year compound annual growth
    • $8,909 per capita
  • Unemployment:
    • 6.3%
  • Inflation (CPI):
    • 0.6%
  • FDI Inflow:
    • $373.4 million
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El Salvador’s economic freedom score is 63.2, making its economy the 75th freest in the 2018 Index. Its overall score has decreased by 0.9 point, primarily because of significantly lower scores for property rights and government integrity. El Salvador is ranked 16th among 32 countries in the Americas region, and its overall score is above the regional and world averages.

After nearly a decade of statist governments, El Salvador has suffered a steady decline in economic freedom. Cumbersome bureaucracy and institutional weaknesses continue to slow development, and judicial independence and the rule of law have eroded in recent years. Government interference in the private sector has increased, with populist spending measures and price controls further distorting markets. Open-market policies that support engagement with the world through trade and investment are still largely in place, but overall competitiveness is increasingly constrained by chronic fiscal deficits and regulatory inefficiency.

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Background

After its 12-year civil war ended in 1992, El Salvador enjoyed strong economic growth and poverty reduction with aggressive free-market policies under a succession of center-right National Republican Alliance presidents. Since 2009, governments of the leftist Farabundo Martí National Liberation Front (FMLN) have increased the state’s role in the economy. President Salvador Sánchez Cerén will leave office in 2019 with a record of anemic economic growth, weak government effectiveness, a surge in violence and drug trafficking, and rising gang-related homicides. The economy relies on exports of coffee, sugar, textiles and apparel, gold, ethanol, chemicals, and electricity and the assembly of intermediate 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 37.3 Create a Graph using this measurement

Government Integrity 25.2 Create a Graph using this measurement

Judicial Effectiveness 35.4 Create a Graph using this measurement

The legal system that governs property rights in El Salvador is complex, and enforcement efforts are uneven. The judicial system remains weak, plagued by corruption and obstructionism, and subject to political influence. Corruption scandals at all government levels, often narco-related, are common. Due to rampant gang-related violence, El Salvador is considered one of the world’s most dangerous countries.

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 17.5 percent of total domestic income. Over the past three years, government spending has amounted to 21.3 percent of total output (GDP), and budget deficits have averaged 3.0 percent of GDP. Public debt is equivalent to 59.9 percent of GDP.

Regulatory EfficiencyView Methodology

El Salvador lags behind the region in attracting foreign direct investment. In 2016, the government imposed minimum wage increases ranging from 19 percent to 105 percent. Only about 28 percent of Salvadorans work in the formal sector. The government spends about 4 percent of GDP on poorly targeted subsidies, especially for electricity, liquefied petroleum gas, and transportation, and imposes price controls on a range of goods and services.

Open MarketsView Methodology

Trade is significant for El Salvador’s economy; the combined value of exports and imports equals 64 percent of GDP. The average applied tariff rate is 1.8 percent. Nontariff barriers impede some trade. In general, government policies do not significantly interfere with foreign investment. The financial sector is dominated by mostly foreign-owned banks. Two state-owned banks focus on mortgages and agricultural-sector financial services, respectively.

Country's Score Over Time

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Regional Ranking

rank country overall change
1Canada77.7-0.8
2United States75.70.6
3Chile75.2-1.3
4Uruguay 69.2-0.5
5Jamaica 69.1-0.4
6Colombia68.9-0.8
7Peru68.7-0.2
8Saint Vincent and the Grenadines67.72.5
9Saint Lucia67.62.6
10Panama 670.7
11Costa Rica 65.60.6
12Mexico64.81.2
13Dominica64.50.8
14Guatemala 63.40.4
15The Bahamas63.32.2
16El Salvador 63.2-0.9
17Paraguay 62.1-0.3
18Dominican Republic61.6-1.3
19Honduras 60.61.8
20Nicaragua 58.9-0.3
21Guyana58.70.2
22Trinidad and Tobago57.7-3.5
23Belize57.1-1.5
24Barbados572.5
25Haiti55.86.2
26Argentina52.31.9
27Brazil51.4-1.5
28Ecuador48.5-0.8
29Suriname48.10.1
30Bolivia44.1-3.6
31Cuba31.9-2.0
32Venezuela 25.2-1.8
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