Project assistance completion report : project 519-0287 -- industrial stabilization and recovery

The private and public sector components were implemented, respectively, by the Salvadoran Foundation for Economic and Social Development (FUSADES) and the Ministry of Foreign Trade (MICE), now the Ministry of Economy. The private sector component supported the following FUSADES programs: Trade and Investment Promotion Services (later renamed the Export and Investment Promotion Program -- PRIDEX); the Association Strengthening Activities (ASA) program, which assisted potential exporters; the Investment Development Fund (FIDEX); and the Economic and Social Studies Department"s Center of Studies (DEES). A major achievement was the spinning off of FIDEX and creation of the first private financial development institution in El Salvador, currently BANFIDEX, S.A. DEES contracted high-level experts to develop a major structural adjustment program which put the country"s economy back on track. DEES also significantly improved economic statistics in El Salvador, and is now doing the same with social statistics. PRIDEX has emerged under this project as a well established, successful export and investment capacity; a major project output was its identification of 532 subprojects vs. a target of 300. Total LOP investment amounted to $86.4 million, and hard currency generated by exports is valued at $272.2 million. Under the public sector component, the project supported a high-level, public-private Export and Investment Development Committee (CODEXI); supported the Government of El Salvador"s (GOES) design of CENTREX, the one-stop export documentation center; provided automation and training assistance to the MICE; and supported studies of the San Bartolo Free Zone (SBFZ) that resulted in its privatization. GOES" counterpart resources financed, inter alia, construction of an additional 24,000 square meters of under-roof industrial space at the SBFZ, which is now fully leased out to exporting companies. Overall, however, progress was less than dynamic. Initial problems included the political nature of the MICE, frequent changes of Ministers, managerial and technical weaknesses of MICE staff, and the pronounced lack of GOES commitment to export and investment initiatives. In 3/90, development of a National Export Strategy as the primary vehicle for economic revitalization and growth led to creation of a public-private National Commission for Export and Investment (CONAEXI) to implement the strategy. However, no agreement was reached on the structure of the Commission and USAID funds for its operation were transferred to FUSADES. In sum, in light of the political and economic environment in which the project operated, the public sector component achieved considerable success, principally, three new laws (the Export Promotion Law and its six implementing regulations, the Foreign Investment Guarantee Law, and the Free Zones and Bonded Warehouses Law) that did away with protectionism, made free trade zones legal and privatized, and opened the financial sector to new forms of investment and credit. GOES" policies toward foreign direct investment have become more positive. Lessons learned are as follows. (1) USAID project managers should have their primary offices in their counterpart NGO or PVO in order to ensure their control, knowledge, and ability to stay in touch with their tasks. (2) A country"s suitability for a project should be carefully assessed in advance. A pre-project survey might have shown that El Salvador was better suited to industrial projects than nontraditional agricultural projects. (3) Linking release of Economic Support Fund (ESF) dollars to internal policy change is rarely effective unless the host government is convinced that such change is needed. Otherwise, empty promises will be made in order to secure release of the assistance. Building internal analytical capacity and educating the populace about the benefits of proposed changes, while time consuming, is the most effective way to ensure that policy change will be forthcoming and that assistance will make a lasting impact. (4) In the interest of sustainability, USAID should phase out its assistance gradually and help the client secure alternative funding sources. In 1995, USAID, previously the major funder of DEES, cut off all funds to that entity. (5) USAID should consider an endowment for FUSADES, a move for which precedent exists. Total dependency on USAID funding by any institution is dangerous. FUSADES is now in jeopardy because of this circumstance and is gambling on the success of one project, La Colina, in order to survive.