Archive for the ‘One Nation Two Economies’ Tag

One Nation, Two Economies – El Salvador’s Informal and Formal economies   Leave a comment

“One Nation, Two Economies” is a phrase that’s been tossed about prior to and during the recession (still going ON by the way, don’t let anyone fool you), and recently in a February 2011 article by Rainer Rupp on how the ‘recovery’ merely funneled up to gamblers on Wall Street.

While Americans enjoyed at least three decades of solid middle class prosperity during what many economists refer to as the Golden Age of Capitalism, and are getting accustomed to what may be a ‘new normal’, down here it has long been –

One Nation, Two Economies
Poverty in El Salvador has fortunately been declining; according to the U.S. department of State, ‘The economy has been growing at a steady and moderate pace since the signing of peace accords in 1992, and poverty was cut from 66% in 1991 to 37.8% in 2009.’   Improving, but still a ways from a thriving middle class.  If you live in El Salvador and pay any attention, you can see clear distinctions between the classes, and easily observe those who participate in the Informal sector.

What are the “Formal” versus “Informal” economies in El Salvador?
Formal economy/sector:  jobs which are part of the ‘system’ where tax collection takes place, public or private health insurance comes with it, and maybe other benefits like holiday or vacation pay.  For instance, a person who works in an office, large restaurant or hotel, hospital, factory, school, clinic, government agency, etc.   And the owners of such businesses.

Benefits of working in the formal economy include being part of the ISSS health insurance system (or private, if you’re lucky enough to be middle class or higher), and building up years of work experience in ‘the system’. If you look through employment ads in the major newspapers, many employers require would-be employees to have things like a social health insurance card or other requirements one won’t have if they haven’t built up time in the official system.  Paying into the ISSS health system means you have access to clinics and hospitals that service this population.  I thought everyone could go to ISSS facilities, but I learned differently.  Apparently, there is a “lowest rung of the health system” set of clinics and hospitals for the poor.  If you don’t have a health card, you will be turned away from the ISSS hospital, and sent to the hospital for the ‘poorest of the poor’.  That’s where most of my in-laws go.

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The Informal Economy:   A LOT OF PEOPLE.  According to the International Labor Organization, nearly a million Salvadorans in 2009 were employed in the informal sector, totally over 53% of non-agricultural employment.  Most of these people make their “own” economy using the resources at their disposal.   It consists of all types of vendors and small businesses, from people with roadside fruit and veggie stands, vendors at the markets, selling door to door or at traffic intersections, and owners of small restaurants and hot foot stands.  The boy who sells peanuts and cashews at the gas station, or the hammock and blanket vendors.   Maria’s Pupusas.  Joes Juice and Liquados. The  ‘muchacha’ who tends to house and children for the more well off.

Why?  If they work in a Maquila (textile mill), or retail position at the mall, they are likely to come home with a little over $5 in their pocket after working 10-12 hours and paying bus fare.   A girl I met at the mall in 2010 made $6 to work an 11 hour day.  My husband worked as a baker for over 10 years when he was a young man.   In the late 90s and early millennium, he made $15 a day working 12+ hours in a bakery.  He interviewed at a bakery in San Salvador last year.  If he took the  job, it would be Monday-Saturday 9+ hours (however many to bake 7 sacs – a lot – of flour), and ‘a few hours on Sunday’.  Based on his monthly salary, we calculated it at $8 a day.

People in the Informal economy are their own boss, they set their own hours, fulfill their own inventories, and often come home with better than the average laborer’s 6 to 8 bucks a day.  Fed up with serf wages, people have taken to the streets, and vendors abound in El Salvador; they are anywhere and everywhere.   As I stroll along the main street in Los Planes de Renderos, several women sell fruits and vegetables, while others sell pupusas.   Cross the street from WalMart in Soyapango to the Plaza Mundo mall in Soyapango, and you ‘walk the vendor gauntlet’, ambushed by dozens of people selling clothing, small electric items, batteries, toothbrushes, you name it.

Mercado Central:  Shopping mall for the poor.  One of the best examples of the Informal economy in El Salvador.  Located in downtown San Salvador, the main, or “central market” is literally a grocery store and shopping mall for the poorest people in this region.   It’s a sea of people taking up several city blocks; at the height of the day, literally hundreds, if not a few thousand customers and marketeers flow in waves, buying and selling to one other.  There is at least one official building set up for market vendors, but the majority of vendors are spread out in various ways throughout these blocks.   Sometimes as small shops in buildings, but more often stands set up along the streets on top of sidewalks, or vendors who sell produce from wheelbarrows to those who carry items strapped to their waistline, hanging from their shoulders, or propped on their head.

It’s a fantastic solution to resist the symptoms of poverty, because they CUT OUT the middle man.  On the seller’s end, there is no boss or distributor taking the large cut and paying them a salary or commission; as direct sellers of their products they are able to offer a good discount and thus, sell a lot.   From the buyer’s perspective, a person of poor means is delighted to buy a product with a better price tag than the mall or local super can offer.   Fruits and vegetables in the cheapest grocery chain, Super Selectos, can be double what they cost at the market.  One can outfit their home with most produce and food goods, home products, grooming items, clothes, shoes, and electronics.  I’ve even encountered a  “hair salon alley” – hair salons along both sides of the first floor of two buildings along an alley connecting two main streets of the market.


Downsides to the Informal Economy:

a) Streets are chaotic and disorderly.   People are so accustomed to vendors selling on the sidewalk that most pedestrians don’t bother using sidewalks the way we do back home.   Main streets in large towns and cities are nuts to drive through, and one feels as if they are driving through a human anthill recently crushed by a giant foot.  Two-lane streets are reduced to 1.5 lanes, or sometimes 1, as pedestrians and cars share the road in transit.

Both the federal government and the municipality of San Salvador have taken their own (separate) measures to ‘re-order’ the city and historic districts.  Resulting in continued protests (manifestaciones) by the vendors.

>> An entire blog post is needed to discuss the ongoing eviction of street vendors throughout the downtown area of San Salvador, and in particular from Calle Arce (Arce Street) and Calle Ruben Dario. <<

b) Taxes?  Who needs ’em?   A fair source of tax revenue must be lost by those who employ themselves in the informal economy.   The improved income they experience is not translated into tax dollars.  Three of my close family members have been selling pupusas and tortillas for years.  They can make up to ten bucks on a good day, and have never paid taxes in their life.  The government is not going to ‘hunt them down’ for that income.  But it might be a case of 6 of one, 1/2 dozen of the other.  The money which informal economy participants pocket tax free is used to buy goods and services in both formal and informal sectors.   If they were making 20-25% less at a job in the formal sector, and paying taxes from those lesser wages, that sharp loss of income would see them buying less things; meanwhile the maquila owner looks for every way possible to dodge tax payments.  So instead of the ‘government’ getting that money as taxes and spending it however un/wisely they wish, it goes back into the economy directly.

Carlos Slim /

Can El Salvador integrate informal vendors into the “Formal” economy?   Obviously, not without participation of serious capital investment, along with a willingness to pay a wage that encourages people to cross over from informal to formal.   One of the biggest complaints heard on the group talk-news programs is the ‘abandonment’ of capital investment in El Salvador.  That people with large sums of capital take their money and run, preferring foreign investments instead.    Hmmmm, sounds FAMILIAR.

There is hope, however.   Carlos Slim (gotta love that name), a gentleman from Mexico and as of 2011 the richest man on earth, is planning on investing over $300 million over the next three years in Telecommunications here in El Salvador.   Now that’s a start.

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