Building the Peace in El Salvador

AS Salvadoran rebels lay down their arms, a mini-invasion of a different sort is taking place: investors toting briefcases stuffed with marketing plans.

Peace is good for business.

Hotel lobbies and restaurants are jammed with entrepreneurs in Italian suits discussing financing and production schedules. Occupancy rates have been almost 100 percent for the past six months. United Airlines just opened a new route here from Mexico City. The Japanese trade ministry plans to reopen its offices.

In the countryside, heavy equipment and road crews are busy widening and paving roads where only Army convoys dared to go less than a year ago. The $800 million in foreign aid promised for postwar economic reconstruction is starting to flow into the country, aimed primarily at infrastructure repairs.

The new atmosphere followed the Jan. 16 signing of peace accords that ended the 12-year war between the right-wing government and the leftist rebels of the Farabundo Marti National Liberation Front (FMLN). The sides agreed to phased reforms culminating in a final demobilization of rebel forces Oct. 31.

"Prior to the peace accords, companies were reluctant to look at El Salvador as a place to do business. That's sure changing now," says James Berg, who brought a group of 14 US executives here on an Overseas Private Investment Corporation (OPIC) mission in July. It is the first-ever corporate investment mission to El Salvador sponsored by OPIC, the US government agency that provides political risk insurance for US firms.

The Salvadoran Economy Ministry backs up Mr. Berg's assessment. In 1989, at the height of the war that claimed the lives of more than 75,000 Salvadorans, this Central American nation attracted a mere half million dollars of foreign investment. Last year, the figure leaped to $10 million. In the first three months of this year, $5 million poured in.

Today, some of the $1 billion that was moved from the country during the war is returning. One official estimates that in the next two to three years, $100 million could be reinvested. So far, 40 percent of the foreign capital in El Salvador is from the United States.

Richard Rozier is one US investor impressed by what he saw on the OPIC mission. "El Salvador has been out of the tourism business for the last 12 to 14 years. It's got a fabulous airport right on the coast. And only 1,100 [hotel] rooms in the whole country. We feel it has one of the biggest potentials for growth in Central America," says Mr. Rozier, vice president of Florida-based TransAmerican Hotel & Resort Services.

The FMLN, now a legal political party, also is drawing up development plans. For example, the FMLN leadership is considering a resort complex and museum in the hometown of 1930s revolutionary Farabundo Marti. They believe there is a market there for those foreigners, mostly North Americans and Europeans, who supported their war effort.

This nation of 5.5 million people has what investors consider an attractive business climate. The exchange rate is stable. Financing is readily available.

Regulations are designed to encourage foreign investment. For example, manufacturing operations can repatriate all profits and dividends. Foreign investors are not required to have local partners. El Salvador also has relatively low rents, low electricity rates, low wages, a labor pool with a reputation for high productivity, and one of the lowest inflation rates in Latin America.

Still, El Salvador is not without drawbacks. Rozier, for example, found that some tax and investment laws encourage manufacturing but not tourism.

"The government hasn't made tourism a priority yet," he says. "We think it may be a little early to invest there."

The government is just getting started fixing its infrastructure; during the war, phones, roads, and power were prime targets.

The economy is expected to grow this year at a 3.5 to 4.0 percent clip, slightly ahead of last year's rate. Economists expected a stronger postwar boom, but it has been slowed by low prices for coffee, the backbone of Salvadoran agriculture. Indeed, the government just passed a subsidy to keep growers afloat.

Salvadorans also are concerned the North American Free Trade Agreement (NAFTA) could hurt development.

"NAFTA presents a challenge to us," says Francisco Castro Funes, general manager of El Salvador's Chamber of Commerce and Industry. Although he has seen a dramatic jump in the number of investor trade missions (from the US, Japan, Italy, and Britain), those firms planning to sell to the North American market "may be tempted to choose Mexico over El Salvador because it will have lower tariffs and is closer to their major market."

El Salvador and neighboring nations are hoping to mitigate some of the negative impact by negotiating with Mexico to install a Central American free trade zone by 1996.