Saving graces.

After suffering through earthquakes, hurricanes and a civil war, El Salvador--the smallest country in Central America--managed to become the fourth-largest economy in the region, with gross domestic product (GDP) per capita of US$1,977, poverty cut by 22% and unemployment down to 6.5%. These macroeconomic advances are the work of the past three governments, all of which have been lead by the same political party, Arena, which has promoted private investment and improved competitiveness. LATIN TRADE Spanish Editor Andres F. Velazquez spoke with El Salvador's Economy Minister Yolanda de Gavidia.

How has the decision to adopt the U.S. dollar affected competitiveness?

This has been an extremely positive subject. In the first place, it gives certainty to short-term investment and eliminates exchange-rate risk. This has had a positive effect on the issue of inflation--we have one of the lowest inflation levels in Latin America--and has reduced interest rates. The chance to have access to global capital markets, with low rates and long terms, has been very positive for the banking sector, the government and some big businesses.

How has the financial system reacted to dollarization?

We haven't suffered a lack of liquidity--quite the contrary. The banks have expanded regionally in a significant way and they have had significant access to capital markets. Some of the banks have placed foreign bonds with great success. So it has not only diversified our sources of financing but, also, improved financing conditions.

And foreign investment?

We have the problem that capital-markets accounts are very open. We do not force nor require businesses to register their capital. When one talks of foreign investment in El Salvador it's said that we are among the countries with the least. What is happening is that there is no clear registration process. As soon as we dollarized, we began to have considerable foreign investment, and it has increased.

What advantages does a country like Honduras, which has a weaker currency, have compared with El Salvador?

Take into consideration that gains made in competitiveness in terms of exchange rates are short-term gains, but in the long term one faces inflation and other problems. This is not among our competitiveness policies. Thus we decided to formalize our fixed exchange rate. We wanted to have the benefits of a hard currency.

What are the implications of a hard currency for low-income Salvadorans?

In the short term there was a minimal inflation impact to the degree that colons were rounded in the exchange for dollars. But in general I would say that the effect has been positive, above all in terms of personal credit and housing. Interest rates dropped considerably. At the beginning it was a little expensive because we were dealing with two currencies but now we are more than 98% dollarized. In addition, since many Salvadorans live in the United States, most of the population was used to using dollars. This is very important in terms of social security since it gives people a sense that their pensions will not be cut in half because of an arbitrary government decision.

Remittances are a key source of income for El Salvador.

Remittances are around 15% of GDP and are up to about US$2 billion a year. If one studies the migratory trends it can be concluded that this will continue for at least another generation. Although there is some productive use of remittances--we have around 4,000 projects under way--for now most of the money is used for consumption. In addition, we are working on the possibility of allowing Salvadorans abroad to buy homes here.

How goes the opening of the Salvadoran economy?

With all of the treaties we have negotiated and those in negotiation, we are talking about creating a market of 400 million inhabitants. We have agreements with the United States, Chile, Panama and the Dominican Republic; we are closing deals with Canada and Mexico; and, in the short term, we are thinking of doing something with the European Union. In addition, we are in talks to make free-trade deals with Mercosur, the Andean countries, Taiwan and Japan. The strategy is to continue to reinforce the opening process.

What have been the results of those treaties?

In general terms the balance has been utterly positive. On the U.S.free-trade deal I think we made an excellent deal, although some sectors could face bigger challenges than others, especially agriculture--rice, dairy, pork. In addition, the industrial sector is going to have access to nearly 99% of raw materials at zero tariffs. For agriculture, there are some positives. For example, we managed to nearly triple the sugar export quota to the United States. Also, I think we have the opportunity to direct productive strategies in agriculture toward products and niche markets in the United States where we have advantages. Due to the war and agricultural reform there are many rural areas that are practically abandoned or with very low added value.