ECONOMISTS DISCUSS GOVERNMENT'S ANTI-CRISIS PLAN

UNCLAS SECTION 01 OF 02 SAN SALVADOR 000642 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON PGOV EINV KCRN ES SUBJECT: ECONOMISTS DISCUSS GOVERNMENT'S ANTI-CRISIS PLAN REFTEL: SAN SALVADOR 494 ¶1. (SBU) SUMMARY. Two prominent economists offered similar views of the Government of El Salvador's (GOES) $587 million anti-crisis plan. Luis Membreno and Claudio DeRosa separately said the plan largely consisted of increased spending on existing programs. As an economic stimulus, the plan was likely to add no more than 1 percent to GDP over the next 18 months, which would not be enough to do more than reduce the severity of a recession. Likewise, the promised 100,000 new jobs would be mostly temporary in nature. While the plan's increased spending on social programs may be worthwhile on its own merits, the anti-crisis plan is unlikely to ameliorate the effects of the international financial crisis on the Salvadoran economy. END SUMMARY. ¶2. (SBU) Econoff met with Luis Membreno, a freelance economist who served on the Funes transition team's "Anti-Crisis Commission." Membreno's official role ended June 1, but he is still providing informal advice to Presidency Chief of Cabinet Alex Segovia and various Ministers. Separately, Econoff met July 1 with Claudio DeRosa, a former banking association director turned commentator. DeRosa also drafted the anti-crisis section of ARENA presidential candidate Rodrigo Avila's government plan. ¶3. (SBU) According to Membreno, the $587 million Anti-Crisis Plan's (reftel) expenditures break down into the following rough categories: - $53 million for "employment generating activities," such as labor-intensive public works projects - $255 million for "Solidarity Communities" (the renamed "Solidarity Network" conditional cash transfer program) - $118.6 million for the purchase of school uniforms and school supplies - $75.4 million for the Ministry of Health to purchase medicine - $85 million for all other activities, including pensions for the rural elderly poor ¶4. (SBU) In Membreno's view, the plan was a combination of increased social spending and existing government programs that have been shifted to the plan so they could be funded by international loans. For example, Membreno cited the Ministry of Health's purchase of medicines as an activity that is part of the Ministry's "normal" operations. DeRosa called the plan "nothing new," asserting that "95 percent" of the plan was just existing programs, some with increased funding. DeRosa also faulted the plan's social component for being too focused on rural areas. ¶5. (SBU) Membreno, who also operates a luggage wholesaler, expressed concern over the $118.6 million figure for school uniforms and supplies. In his view, this was approximately double what the cost should be even if the GOES "bought the pricey stuff." DeRosa, on the other hand, thought the estimate was reasonable given the promise of uniforms, shoes, backpacks, books, and supplies. ¶6. (SBU) Asked about the GOES's assertion that the plan would create 100,000 new jobs, Membreno said that it depended on how one counted new jobs. The "employment generating activities" were intended to employ 20-30,000 people per semester at about $100/month, roughly the rural minimum wage. So, over the roughly 18-month timeline of the plan, this would have created 100,000 short-term jobs, just not all at the same time. On the other hand, DeRosa doubted that the new government had the technical expertise to get many new public works projects started within the first year and thus would be unlikely to reach their stated goal. Both Membreno and DeRosa expressed concern that the plan did not involve working with the private sector on job creation. ¶7. (SBU) In terms of economic stimulus, Membreno thought that the plan would add about 1 percent to GDP over the next 18 months. This would not be enough to keep the economy out of recession, he added, but it would help reduce the overall contraction. DeRosa said that the stimulus effect would depend entirely on how much new money was brought in via new international loans. All the existing spending, he said, was already factored into economic projections. DeRosa added that, while the economic downturn was caused by decreased exports, falling remittances, and lower domestic consumption (largely a result of increased unemployment),the plan only included elements to address the last item. ¶8. (SBU) COMMENT: Membreno's and DeRosa's comments track with Post's initial assessment of the plan and its limited stimulus potential SAN SALVAD 00000642 002 OF 002 (reftel). Neither Membreno nor DeRosa thought the plan itself was bad, but neither thought it was the right remedy to address the effects of the international economic crisis on El Salvador. While the increased social spending, particularly through the already successful Solidarity Communities program, may be worthwhile on its own merits, the anti-crisis plan is unlikely to do much to ameliorate the effects of the international financial crisis on the Salvadoran economy. END COMMENT. Blau