VIOLENCE HOBBLES THE SALVADORAN ECONOMY

UNCLAS SECTION 01 OF 02 SAN SALVADOR 000353 SIPDIS STATE ALSO FOR AID/LAC USDOC FOR 4332/ITA/MAC/MSIEGELMAN USDOC FOR 3134/ITA/USFCS/OIO/MKESHISHIAN/BARTHUR E.O. 12958: N/A TAGS: ECON EINV ES SUBJECT: VIOLENCE HOBBLES THE SALVADORAN ECONOMY REF: 05 SAN SALVADOR 2978 ¶1. (SBU) Summary. Direct and indirect costs of violent crime, estimated at $1.6 billion in 2003 (or 11.5 percent of GDP),pose the most significant challenge to El Salvador's economic growth. High security costs discourage potential investors, and represent resources that are lost to more productive uses. The Saca administration has redoubled efforts at combating violent crime, and its success will likely determine to what degree El Salvador can take full advantage of CAFTA-DR implementation and the proposed Millennium Challenge Account (MCA) project to jumpstart its lackluster economy and create sustainable growth. End summary ¶2. (U) Violence, much of it gang related, has been mounting in recent years in El Salvador (reftel). A 2005 UNDP study showed that violence cost the Salvadoran economy $1.6 billion in 2003, equivalent to 11.5 percent of GDP. This estimate included health costs, intangible costs (psychological damages),productivity losses, institutional costs (legal, judicial, and police),preventive costs in private security, disincentive for new investment, and material losses (loss of property due to criminal violence). ¶3. (U) Looking more closely at the impact of violence on investment, a 2005 World Bank survey signaled that for El Salvador, violence is considered the most significant obstacle among eleven variables identified as possible investment barriers. A 2005 quarterly survey of business conducted by the Salvadoran Foundation for Economic and Social Development (FUSADES) shows that violent crime has become a growing concern for the private sector and is cited as the principal factor behind El Salvador's poor reputation as an investment destination. In 2005, the magazine "El Economista" published by leading daily "La Prensa Grafica," surveyed 25 business leaders in El Salvador; most believe the principal reason the economy has grown so slowly in recent years is the lack of public security. ¶4. (SBU) Investors complain often about the costs of crime, which add to security and insurance costs. Small businesses bear the brunt of the costs, because preventative measures are a larger proportion of their overall expenses, and the often are more convenient targets for robbery. Raul Melara, Executive Director of the National Private Enterprise Association (ANEP),recently estimated that security expenditures represent approximately 10 percent of businesses' production costs--resources that are therefore unavailable for more productive activities. Others estimate that security accounts for 25 to 30 percent of the variable costs of doing business in El Salvador. Taking a longer- term perspective, Alberto Padilla, Executive Director of the Salvadoran Chamber of Commerce and Industry, stated that violent crime has affected doing business in El Salvador for decades, especially during the war, and that local businesses have found ways to cope with it. ¶5. (SBU) From the perspective of a U.S. investor, American Chamber of Commerce (AMCHAM) Executive Director Enzo Bettaglio has reported that security is a primary concern. Potential investors cite concerns about the safety of their executives' family members as an important factor in deciding whether to locate operations to El Salvador. One prominent U.S. investor told Emboffs that "Clearly our team is worried that due to the nature of their work and what they are getting paid that they are becoming targets. We do not feel that security and safety are improving." In August 2005, a Salvadoran employee working for that U.S. investor was murdered while riding public transportation, and other employees have been victims of ATM kidnappings. ¶6. (U) Public transportation has been a favorite target of gangs, which extort what locals call a "violence tax" from bus drivers and their passengers. The president of one small transportation firm reported that between November 2004 and January 2005 his company lost approximately $120,000 through extortion payments and the suspension of service due to violence. Recently, there are reports the gangs are bypassing the drivers to demand payments directly from bus owners. Salvadorans remark that buses are not the gangs' only target, and many small businesses face similar extortion. In some neighborhoods in greater San Salvador, all businesses must pay $2 daily to gang members. Schools are even being targeted, with teachers being charged $0.25 a day to enter their schools. ¶7. (SBU) Comment: During the nation's 1980-1992 armed conflict, and continuing with today's rising tide of gang- related violence, crime has long been a feature of doing business in El Salvador. Although, as outlined above, Salvadoran businesses have found ways to cope with criminal violence (either through security, or by foregoing new investment),most believe that gangs are becoming more aggressive in targeting businesses such as the bus operators for extortion and other crimes. Recent polls continue to show Salvadorans concerned with the nation's rampant criminal violence, and frustrated at the government's lack of progress in public security despite the high-profile "mano duro" campaign. The Ministry of Governance and Civilian National Police (PNC) on February 2 unveiled a broad new plan to combat violent crime. The degree to which their new approach is successful bears significant ramifications for the nation's future prosperity--at stake is whether El Salvador can attract domestic and foreign investment to take full advantage of CAFTA-DR implementation and the proposed Millennium Challenge Account (MCA) project to jumpstart its lackluster economy and create sustainable growth. End comment.