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.