El Salvador struggles to keep business investment at home

In order to kickstart El Salvador's economy, convincing local investors to keep their money at home could be critical first step.

• A version of this post ran on the author's blog, centralamericanpolitics.blogspot.com. The views expressed are the author's own.

The United States and El Salvador, as well as the Salvadoran private sector, clearly see increased foreign direct investment as necessary to kick-starting the Salvadoran economy. The first Millennium Challenge Corporation compact for the northern region of the country and the second proposed compact for coastal and maritime areas are designed to provide needed investments in infrastructure that will encourage foreign direct investment.

The Partnership for Growth is also designed to tackle insecurity and corruption that will then lead to more investment and better returns on investments. Those investments will create jobs and, hopefully, improve conditions so that Salvadorans lead better lives and fewer leave (among other benefits).

However, I was speaking with someone yesterday who reminded me just how difficult this is going to be. Here is Raul Gallegos from February:

The country's business leaders are no visionaries either.

Many local entrepreneurs sold out to foreign companies and invest their money in Nicaragua or Costa Rica rather than at home.

El Salvador's investment levels, at 14 percent of GDP, are low compared with peers.

But no one can blame the business community: As economist Ricardo Hausmann has put it, El Salvador is a "low-return country" with a lack of productive investments or profitable opportunities.

Many Salvadoran businessmen seem to have cashed out their business investments in the 1990s and early 2000s. Since then, they have instead been investing in neighboring countries where their potential returns on investments are perceived to be much greater. I don't know how true this holds up to more systematic analysis but it sure passes the smell test.

Anyway, yesterday, the person was telling me about Salvadoran friends of his whose family is seriously concerned with the new FMLN government headed by Salvador Sanchez Ceren. They remain fearful that he and the FMLN intend to turn the country into another Venezuela. They are worried about increasing corruption, insecurity, and the greater potential for nationalizations of private businesses. As a result, they have been moving assets out of the country.

Now I don't know the details, but when I think of all the resources that the US and international community, including ALBA, are investing in this small Central American country, it is going to be all for nothing if Salvadoran economic actors do not invest themselves. It doesn't help if foreign investments are simply replacing national investment as I fear has been occurring these last few years and the potential for which will only increase under the FMLN's Sanchez Ceren.