Wednesday, February 15, 2012

Passport Series: The Forces Shaping Microfinance in El Salvador

This is the first of a three part series taking a deep-dive look at El Salvador, its history with microfinance, Kiva's role in expanding opportunities for Salvadorans, and what it's like to participate in the country's economy as a borrower, lender and field worker. We hope you enjoy.

Nestled in the heart of Central America is El Salvador, the region’s smallest and most densely populated country. Home to 6 million people, El Salvador has long been shaped by social inequality and its susceptibility to natural disasters. But, now, a renewed focus on economic self-sufficiency -- paired with the country’s strong sense of community -- has the potential to redefine and rebuild Salvadorans’ future.

Kiva, recognizing both tremendous need and opportunity in the country, has worked with field partners in El Salvador since 2007. In this blog post, we’ll take a closer look at El Salvador’s current political, economic and social issues. Through these lenses, we’ll discuss the need for microfinance and the role Kiva hopes to play in El Salvador going forward.

In the aftermath of the civil war -- fought largely on rural farm land -- Salvadorans have worked hard to rebuild the country’s crucial agriculture sector. El Salvador’s GDP dropped a staggering 23% during the conflict. But since the the peace accord, its economy has been growing steadily. Investing in sustainable rural agriculture has been key to strengthening food security, decreasing poverty and creating stable jobs.

Monument in El Mozote honoring casualties of the civil war. 

Decades of inequality between the wealthy minority who ran the government and the impoverished majority led to a bitter 12-year civil war from 1980 to 1992. During the conflict, many of the people, institutions, and infrastructure necessary for development and economic prosperity were targeted and destroyed -- including bridges, power lines, independent farmers and university officials. In total, the civil war resulted in more than 70,000 deaths and $2 billion in damages. Even 20 years later, El Salvador’s economy and culture remain inextricably linked to these years of violent unrest.

Investing across sectors is critical to empowering the 36% of Salvadorans who live in poverty. The average annual income is $4,900, with many families relying heavily on remittances. Money from family members working abroad accounts for 18% of El Salvador’s GDP, tying its success to the world’s economy at large.

The economic conditions, social inequality and an increase in deportation of Salvadorans from the United States has led to a surge in gang violence. The transnational gang Mara Salvatrucha, known as MS-13, has a notable and destructive presence in urban areas where the economic divide is most pronounced.

On top of that, the global financial meltdown has deeply impacted the country -- compounded by a string of natural disasters. The economic divide is still prominent, with the income of the richest 10% of the population remaining 47 times higher than that of the poorest 10%.

Further hampering reconstruction is the fact that El Salvador is located along the Pacific Ring of Fire, in a region identified by the United Nations as being most affected by climate change. In 1998, Hurricane Mitch killed 240 Salvadorans and resulted in $400 million in damages. In 2001, a 7.6 earthquake killed 844 people, followed one month later by a devastating 6.6 quake that killed 315 and incurred $1 billion in damages. 

In October 2011, tropical depression 12-e resulted in severe flooding and landslides, costing an estimated $1.5 billion. El Salvador’s vulnerability to extreme weather raises the importance of focusing on strengthening its farming sector. Sustainable agriculture increases a country's resilience across the board.

Kiva believes that helping El Salvador means not only encouraging business and self-sufficiency through loans. Our Strategic Initiatives team is always working to break the cycle of poverty -- in El Salvador and globally -- through creative partnerships that address issues like education, access to clean water and sanitation, and clean energy.

In El Salvador, we are particularly interested in fostering the growing network of women’s groups that have emerged to organize reconstruction efforts and support their communities. Working with successful systems already on the ground and encouraging innovative development, Kiva hopes to play an important role in building a peaceful, strong and more equal El Salvador.

Sources consulted and figures cited courtesy of CIA World Factbook, World Food Programme, New York Times, CGAP, USGS and MIX Market. Photos courtesy of Ahvega, SmithFischer, Shared Interest and CIA World Factbook.