Recommended actions to foster the adoption of Corporate Social ...

approximately 6.9 million inhabitants (WorldDevelopment Indicators, 2005). With a limited naturalresource base and no remaining agricultural frontier,the country has recently experienced major economicdisruptions as a result of natural disasters (hurricaneMitch in 1998 and earthquakes in 1986 and 2001).Between 1978 and 1990 the country was also torn bya devastating civil war that resulted in approximately80,000 deaths, a half-million people displaced, andanother million fleeing to the United States. 70After a 12-year civil conflict that ended in 1991, ElSalvador undertook significant modernization effortsincluding trade liberalization, financial sectorstrengthening, privatizations of banks and otherstate enterprises, tax reform, pension reform, andimprovements in the environment for privateinvestment. However, while GDP growth averaged5.9 per year between 1990 and 1995, it slowed downto 3.2 percent per year in the second half of thedecade and dropped to less than 1.9 percentbetween 2000 and 2004 (World Bank, 2006). As aresult of this slowdown, impressive socialachievements during the 1990s – e.g. povertydeclined from 64.4 percent in 1991 to 37.2 percentin 2000, while extreme poverty declined from 31.2percent to 15.4 percent – were followed by muchlower rates of poverty reduction in the presentdecade. According to the Research Center onNational Economics (Centro de InvestigacionesEconómicas Nacionales), 55.1 percent of theSalvadorian economy is informal (Dardón andBolaños, 2006). Additionally unemploymentrepresents 6.3 percent of total labor force (WorldEconomic Forum -WEF, 2005).The National Directorate for Statistics and Censusestimated that 41.3 percent of households are stillliving in poverty, while 16.7 percent live in extremepoverty. In rural areas extreme poverty reached 27.4percent and overall poverty 55.4 percent. Thedecrease in poverty during the period from 1991 to1999 was substantial, reaching 18 percent. Thesefavorable results are explained by the steady pace ofeconomic growth and the new opportunities for formalemployment that were created in the maquilaindustries, the increases in social spending, and thehigh levels of migration and foreign remittances. Inspite of the reductions in poverty, El Salvador remainsa country with high inequality. The Gini coefficient ofincome distribution is estimated at about 0.50 71 . In2003, the richest twenty percent of the populationreceived 56 percent of the country's income, while thepoorest twenty percent received only 3 percent (WorldDevelopment Indicators, 2003).On the external front, since the late 1990s the countryhas been hit by a series of negative shocks, includingearthquakes and droughts, declining terms of tradeand the slowdown of the U.S. economy (El Salvador’smain trading partner). On the internal side, the 2004Country Economic Memorandum highlighted thefollowing priority areas to reignite growth: furtheringthe expansion of trade, improving the investmentclimate, removing infrastructure bottlenecks,increasing the level of education of the population,and fostering innovation and technology adoption.Local and foreign analysts have emphasized the latterfactor, arguing that the country’s inability to promoteinnovation has been one of the main factors driving itslackluster growth performance and the limited growthand diversification of exports. This diagnostic isconsistent with the World Bank Investment ClimateAssessment 2005 for El Salvador, which found thatimprovements in the areas of skills, quality andtechnology should be a priority for promotingproductivity and export growth. The assessment alsoshowed that SMEs face worse investment climateconditions than large firms, with hefty disadvantagesin quality and innovation.The following chart shows competitiveness indicatorssupplied by the WEF. All data is from 2005 and thechart is sorted by indicator ranking. As can be seen,research capabilities, costs of crime and violence, andbureaucratic requirements are the main obstacles to70 The transition to peace and economic reform started in 1989 when Alfredo Cristiani of the Republican Nationalistic Alliance (ARENA)party won the presidential elections. The Peace Accords were signed in Chapultepec, Mexico, on January 1992 and the Farabundo MartiLiberation Front (FMLN) agreed to lay down its arms in exchange for political, military, and judicial reforms, although a NationalReconstruction Plan was also broadly defined. The administration of President Cristiani launched an economic program of fiscal austerity,stabilization, liberalization, and privatization, that has been continued by Presidents Armando Calderon Sol (1994- 1999) and FranciscoFlores (elected in 1999), and all members of the ARENA party.71 Data and figures from the World Bank country studies, see www.worldbank.org84 Recommended actions to foster the adoption of Corporate Social Responsibility (CSR) practices in Small and Medium Enterprises (SMEs)