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Central American University - UCA  
  Number 287 | Junio 2005
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El Salvador

Corruption Exposes the Free Market Myth

All analyses concur that the Central American country in which the free market economy functions best is El Salvador. But while that economic model dominates official speeches and government policies, is the Salvadoran market truly free?

ECA Magazine of the UCA of El Salvador

ARENA governments have always boasted about transparency, so much so that the concept now forms part of the established political discourse. Nontheless, a study researched in 2005 by the University Public Opinion Institute of the Central American University on “Transparency in the Salvadoran State: From the Business Perspective” reveals that corruption is rife in El Salvador.

While this conclusion is not novel in itself, what is new is that on this particular occasion it comes from ARENA’s unconditional business community allies. The study reveals a generalized lack of transparency, open administrative corruption and the “kidnapping” of the state by big capital and its monopolies, simply a more sophisticated model of traditional corruption.

Salvadoran public administration is not transparent and has never tried to be, as proved by the deep-rooted nature of the most pernicious forms of corruption. The successive ARENA governments have tolerated this corruption, largely because the very structure of these governments is conceived to allow its proliferation.

ARENA has had ample opportunities and time to contain corruption in the over 15 years that the party has exercised almost absolute control over the state. But it has been unable to do so, and shown little interest in the task. The challenge is greater than its capacity and power, with serious consequences for national life.

Non-transparent budget

The Institute’s survey interviewed 350 businesspeople from different economic segments and sectors to learn their perception of transparency in their relations with the government and corruption in the state. The interviews discussed four different areas: equitable access to timely and accurate information, accountability, clear rules, and civic participation and oversight. Just over 44% of the sample owned smal l businesses (10-49 employees), 21% represented medium-size firms (50-99 employees) and the remainder were from large companies (100 or more employees).

Those interviewed saw little transparency in important areas of public administration, including the national budget. The ARENA governments have not provided information about the financing or implementation of their budget lines or, conversely, about the terms of reference or specific earmarking of public borrowing, making it impossible to link either the budget or the public debt with government programs. The annual reports that government officials present to the Legislative Assembly should prioritize this matter, but the government doesn’t allow even the legislators to evaluate the national budget’s execution.

In any case, this information would be of little use unless the government also offered accurate information, something that cannot be assumed. Like the independent economists, the business executives and owners expressed unanimous distrust of national statistics. They are convinced the data is altered to put a positive spin on reality, obtain good country-risk grades and thus attract foreign investment to El Salvador, and disagree with such practice because the information deficiency not only wards off private investment but also leads to incorrect national policy decisions.

Political control through the Court of Accounts


The Salvadoran state has institutions responsible for controlling and legislating public administration, punishing corrupt practices and providing mechanisms to prevent them. Most businesspeople, however, recognize that these institutions do not fulfill their functions.

The Court of Accounts does not monitor public administration in any systematic way, but rather limits itself to auditing the administration of public officials who have fallen into disgrace. Those surveyed knew of administrative corruption cases officially ignored by the Court of Accounts, which tends to investigate only officials who are either independent or critical of ARENA. The members of the business community state that the Court of Accounts uses information discretionally and prioritizes administrative over technical activities, thus putting bureaucracy before efficiency. This is possible because the rightwing parties view this institution as an instrument of political rather than administrative control.

Bereft of credibility and competence

Regarding the lack of transparency, the people surveyed—particularly those from small and medium businesses—said the government tends not to consult them when it draws up new legislation that will affect them, leaving them no other option but to accept the imposition of the new law. But the same is not true for big magnates, whose desires—or rather demands—tend to be heard.

Contrary to what might be expected, the business representatives do not believe that the superintendences responsible for the privatized sectors provide any guarantee of free competition; in fact they feel that they disturb “the business climate.” Both their institutional weakness and their close links to big capital leave the field clear for these superintendences to violate the regulations and ride roughshod over consumers, particularly harming the most vulnerable and unprotected sectors. The Superintendence of Electricity and Telecommunications is the most negatively perceived by the business community, for both its technical performance and its lack of autonomy.

In the eyes of the businesspeople interviewed, the judicial branch lacks credibility and competence. It is incapable of conducting the judicial process in an expeditious way and its judges do not act autonomously; their sentences depend on who the accused is and what relation he or she has with the government and the political parties. Furthermore, the judicial branch does not control the declaration of patrimony by public officials, leading some interviewees to charge that there are cases of illicit enrichment.

Contradictory as it may seem, then, the least transparent government institutions are the ones responsible for guaranteeing transparency. The Legislative Assembly, the Supreme Court, the Public Ministry and the Court of Accounts are the institutions most negatively viewed by the businesspeople interviewed, an opinion shared by the general public. The private sector feels particularly affected by these institutions as their practices—tolerated and even promoted by the ARENA government—send out a negative message to investors.

While it is certainly paradoxical that businesspeople complain in such terms about what could properly be called “their” government, it is also evident that they don’t dare demand government honesty with any real insistence, let alone publicly denounce its corrupt practices, for fear of reprisals. In this sense, the University Public Opinion Institute’s study provided them a credible arena in which to air their grievances anonymously.

“Donations” to ARENA

Their complaint extends to political parties as a whole. Those surveyed would like parties to have to explain where their funds come from, not only to verify their legality but also to find out whom they are involved with and what their leaders are committed to. The reason for this request is that they know that the parties reward those who finance them with public sector jobs, the awarding of contracts, privileged information and specific policies that favor their companies or activities. Nobody is more informed about how party finances work than people in the business world, as they are in constant contact with the political and economic power circles and are the main source of ARENA party funds, and almost certainly those of other parties as well given the possibility—no matter how remote—that ARENA might lose the elections. At the end of the day, businesspeople look to be on good terms with everyone.

It is well known that ARENA has a donors list organized according by amount contributed. Those who give more are owed the juiciest rewards. Although the main media like to laud their vocation for investigative journalism, they don’t inform the citizenry of such practices. They work under the same criterion as the Court of Accounts, only informing about the corruption of those who have fallen from grace with the authorities and repeating official information in all other cases.
Businesspeople’s very critical view of all this is not because they lack a clear idea of transparency. In fact, their conception of it is quite appropriate, going beyond limiting to the absence of corruption. When they make their statements, they know quite well what they are talking about, as is the ARENA government and anyone else familiar with the Salvadoran circles of power.

Unclear public tenders

This study of transparency offers valuable information from the business perspective about the practices and dimension of administrative corruption, and its clearly negative impact on business and the economy. Those surveyed unequivocally state that one must recur to practices that contradict free competition and even violate the law to provide services to the government. Both business and public officials see such offenses as part of their normal activity, not as a reason for concern. This means that just like the three previous ARENA governments, that of Antonio Saca accepts corruption as a daily reality in public administration.

Public bidding processes and the implementation of contracted works are the biggest sources of administrative corruption, even though national legislation defines it as a criminal, punishable crime. Most businesspeople are not at all clear on the rules for public tender, registering a product in the health registry or getting an environmental license. That lack of clarity leaves the business person in a state of uncertainty and thus gives public officials a great deal of discretionary power to either favor or hinder a business procedure or activity.

Based on their day-to-day experience, the members of the business community stated that public officials modify the technical and legal terms of public tenders according to whim, and even alter signed contracts to favor a given person or business. Generally speaking, the government’s reasons for awarding a contract are unknown, even to those who submitted a bid for it. As a result, the most effective way of ensuring that you will be the bidder awarded the contract in a public tender is to reach an agreement to pay a percentage of the contract to the official who has the last word on the matter. Once the public work has been awarded, it is virtually impossible to verify contract fulfillment.

Providing goods and services to the state

The purchase and contracting of public sector goods and services has a particularly important influence on the gross domestic product (GDP) and the country’s economic reactivation. In 2004, for example, private enterprise provided 17% of all non-financial public sector spending in goods and services, which represented just under US$515 million, equivalent to 3.1% of the GDP. It is estimated that for 2005 the Ministry of Public Works has invited bids for projects worth around $60 million, a full 90% of the annual turnover of construction companies. Given that the commission on contracts averages around 10%, it can be estimated that private industry paid public officials over $51 million in the case of total state spending on goods and services and over $6 million in construction alone.

Businesspeople who are interested in providing goods and services to the government or obtaining a license, or who find themselves obliged to undertake some other bureaucratic procedure, must make illegal donations to the public official responsible as a show of gratitude. People can reject this corrupt practice, but the ensuing denial or delay of a certain procedure could generate considerable losses for their businesses. They are left no alternative but to agree
to display their gratitude to the official involved through gifts, a percentage of the contract, wining and dining, trips abroad, cash or the supply of free products and services.

Such donations grease customs procedures and the issuing of licenses, permits and registration. The amounts paid can vary from ten to a million dollars, according to the businesspeople interviewed. The donations are so common that they are now included as part of company overhead.

A company’s luck depends on the official’s caprice. It is common practice for the official to receive orders from above to either favor or prejudice a certain person on company, with no justified reason, as was common during the ARENA government of Francisco Flores. Any officials who do not follow such orders risk losing their jobs. In addition, a public sector post offers a singular opportunity to place relatives or acquaintances in the sector as well as to profit from the “gratitude” of those requesting their services. In the judicial system, for example, relatives of magistrates and judges bid for contracts with an unfair advantage, as they exploit their family links to obtain privileged information and influence decisions. Thus nepotism must be added to a black list that already includes lack of institutional commitment and indolence.
Administrative corruption is very common in the construction sector, where a series of different permits are required; in trade, where imports and exports must be authorized; and in agroindustry, where products have to be registered in the health registry.

A generalized practice

Contraband offers another opportunity for corruption in the agroindustrial sector. In the east of the country, this centers around dairy products, while in the west, it involves alcohol, sugar, pork and its derivatives and various other agricultural products. Due to a lack of government inspectors, those negatively affected find it virtually impossible to demonstrate to a judge that merchandise has been brought illegally into the country. The Public Prosecutor’s Office tends to ignore the matter altogether, only to drag its feet if forced to act. And the Ministry of Agriculture issues last-minute documents that actually back up illegal imports. Such documents either attribute greater capacity to national processing plants than they have to explain the origin of discovered or illegally traded goods; or issue licenses to non-certified plants; or authorize imports by companies that have either closed or never existed in the first place.

These irregularities are accompanied by bribes and pressure on secretaries, judges and magistrates. Judges generally leave the decommissioned merchandise in the hands of relatives or friends, after which it unsurprisingly disappears along with any suspicion of criminal activity in the case. The ignorance of government prosecuting attorneys and their disinterest in learning leads to terrible errors that leave the smugglers free to walk the streets. But the prosecutors don’t really care as long as they keep on receiving their monthly paycheck. Judicial officials who do not accept bribes or resist pressure run the risk of death threats without any effective police protection.

The police, for their part, have given up on the fight against contraband. The little that has been achieved in this area can be attributed to certain affected economic associations that have intervened to do the work of the judicial system, the Public Prosecutor’s Office and the police, which increases the operating expenses of the companies involved.

Who can take the lead?

If Saca’s government is really dedicated to wiping out administrative corruption, it knows where to begin. There’s no need to wait for the intervention of the Court of Accounts, the Public Prosecutor’s Office or the judicial system, because none of these institutions has the capacity to take the initiative. They are all part of the machinery of corruption, which is why they enjoy very little credibility among the business community and public opinion.

For the time being at least, the population cannot be expected to take the lead and finger the corrupt either, because people are rightly scared of reprisals. Those businesspeople who, supported by their sector associations, have dared to denounce corrupt practices have first had to overcome their own fears and then, on occasion, face immediate government reprisals. It is not a pleasant experience. Tax or public health inspectors turn up on surprise visits with the sole purpose of putting the fear of God into the owners. Another common government reprisal is to disseminate negative publicity about the company, so it loses money. The commitment to transparency is very expensive and its results very uncertain, and sometimes even counterproductive.

Electronic government?

It wouldn’t be a bad idea to open up an anti-corruption web site, as President Saca suggested in his first and so far only public reaction to the UCA study, although he may have only suggested the initiative to get out of a bind. If well planned and developed, this proposal could provide effective oversight of public administration, but for this to happen, the ARENA government must first make more and better information available to the citizenry. The proposal’s effectiveness doesn’t depend on just opening a web site so victims can denounce the corruption. It has to go much further. True and timely information would offer the possibility of overseeing management of the national budget, public tenders, contracts, inefficiency, irregularities, fraud and other illegalities. This could reduce the spheres in which administrative corruption prospers, allowing the citizenry, the media and political parties to watch over the processes.

Understood in this way, “electronic government” would provide the population with a very versatile tool to help manage public matters transparently, a promise that while repeated to the nth degree has yet to be honored. Transparency would lead to an immediate improvement in public services.

Electronic government must not be limited just to facilitating tax payment or allowing people to speed up procedures by filling in forms over the internet. Above all, it should allow public discussion of how taxes are spent and public affairs managed. The emphasis should thus be on democracy rather than technology, and the discussion should be political rather than technological and centered on the underpinnings and guarantees of democracy.

The “captured” state

Lack of transparency and corruption tend to be associated with public officials, who exploit their position to their own advantage at the cost of defenseless businesspeople. The survey suggests that the beneficiaries of corruption are indeed public officials and politicians, while the victims are not only members of the business community but, at the end of the day, the citizenry in general.

But the survey also reveals a third form of corruption—the “kidnapping” or “capturing” of the state by the small group in which economic power is concentrated. This form of corruption tends to be overlooked, as it is subtler and therefore harder to detect. Those surveyed stated that it definitely exists in El Salvador, where a clique of big capitalists effectively determines government policy, thus governing almost exclusively in their own interests.

The National Association of Private Enterprise (ANEP) claims to represent the business sector as a whole, but half of those interviewed said they feel they have benefited little or none from this organization’s lobbying of government institutions or that done by its member associations. Nor do they feel they have benefited much from national policies. Small-scale business has been least favored, while the group that has taken over the national market has most benefited from ARENA’s economic policies, because its contacts facilitate access to privileged information for its members that translates into maximum economic returns. An additional advantage is that big business almost never falls prey to administrative corruption. It doesn’t need to offer bribes and sweeteners because the rules are tailored to its interests, providing preferential treatment that acts like a protective shield. Put another way, it doesn’t resort to corruption because it is part of it and therefore defends and conceals it.

Big business demands were prioritized in CAFTA

Most of the businesspeople said that the owners of big companies decide economic policy, while a third attributed that task to the Cabinet. But even the latter answer means big business decides, since it is well represented among the ministers. The relationship is so close that business leaders can easily become high-level officials, occupying strategic government posts from which to peddle influence and favor their own particular business groups. This is how technical and legal terms of reference for public tender and contracts are modified and explains the promotion of legislation that benefits this select group by giving the official significant discretionary power to interpret and apply the law. Impunity is guaranteed in this process as well, as the judicial system is also at the service of big business interests.

In the negotiation of the Central American Free Trade Agreement (CAFTA) with the United States, for example, only the demands of the biggest private business groups were included in the text. The ARENA government prioritized their petitions over those of representatives of small- and medium-scale business sectors.

Who they are and which sector they represent

Control is in the hands of a hegemonic business group that, according to the interviewed businesspeople, is dominated by a financial sector that branches out into countless companies dedicated to coffee exportation; fertilizer distribution; cement and flour production; production and distribution of beer, soft drinks and purified water; shoe production and export; the metal industry; marketing of new vehicles; hardware chains; air transport; merchandise storage services and the development of shopping malls and hotels.

“Big business” is an ambiguous term, as it doesn’t refer to any big company, but only to those with a dominant and privileged position in the national market that have come to occupy it as the result of their owners’ close ties to top-level officials responsible for guaranteeing it. When asked whether “monopolies and power circles exist in El Salvador,” nearly 90% of those surveyed said they did. When asked where they were located, the sector most mentioned by far was the financial one (banks, insurers and pension trusts).

The privileged hegemonic group

Some of those surveyed rightly note that this hegemonic group has “kidnapped” the state to do its bidding, a phenomenon known as “technical corruption.” This practice, which is so heterodox among free market believers, is explained by the close relationship between top-level officials and big business.
The rules governing the economic activity of this exclusive hegemonic group are very different from those governing other businesspeople and the citizenry in general. Those surveyed mentioned that certain companies have incredible tax privileges and are in practice untouchable. Foreign investors interested in doing business in El Salvador are forced to associate with one of the business groups from the hegemonic circle if they want to ensure their projected rate of return and, like their new partners, must also make a financial contribution to ARENA. By falling in line with corrupt Salvadoran practices, foreign investment is obliged to contribute to the further distortion of competition. This may be why El Salvador is not attractive to foreign investment, which prefers other countries in the Central American region.

Success guaranteed rather than due to their own merits

Those who are either part of or linked to the hegemonic group are guaranteed business success, not so much because of any free market or free competition practices, let alone because they play faithfully by the rules, but rather because of the advantageous position they find themselves in and the privileges they receive as a result. In this sense, the University Public Opinion Institute’s study throws some light on their dominant position in the market, which tends to be attributed to greater efficiency, agreements between companies competing in the same market or unilateral practices.

This “guaranteed success” also helps explain why public policies aimed at stimulating the Salvadoran economy’s competitiveness have not produced the expected results, particularly among small- and medium-scale businesses. The advantages and privileges of the hegemonic group imply losses for both those businesses not included and consumers, who must pay the costs of this “kidnapping” of the state. The levels of efficiency and productivity currently demonstrated by businesses in the hegemonic group are due to benefits directly provided by the state rather than their own particular merits.

The ARENA government’s public administration mission is to guarantee the success of these businesspeople, who occupy key state posts to ensure that it happens. In fact, the most popular way to shift from the private to the public sector involves becoming part of a trade association management board. These offer businesspeople a unique opportunity to become familiar with their economic sector and with national economic activity. Some also exploit this position to favor their own companies. Generally speaking, they later pass from these boards to some high-level government post, which explains why trade association agendas sometimes represent the interests of their leaders rather than their members.

Not just in El Salvador

This form of corruption is not exclusive to El Salvador. According to the World Bank, it is common in all countries that followed its instructions and opted for neoliberal economic policies in the nineties. So what was hailed as the ideal solution for “emerging economies” has in fact generated an extreme form of corruption and bad governance, in contrast to its expected results.

This evil is rooted in the relationship between companies and the state, the almost total elimination of state controls over company activities and the placing of the state at their service. As a result, the big magnates decide on the rules governing the economy and therefore influence the law, its regulations and public policy formulation.

That explains why instruments such as the “Public Administration Acquisitions and Contracting Law” have been unable to reduce corruption in public tenders and the acquisition of goods and services during the five years it has been in force. Nor will competition be stimulated by the law designed to do just that—passed at the end of 2004 and due to come into force this year—or any other law related to public administration, for that matter. The law on competition was discussed for ten years, during which many drafts were presented, most of them by the ARENA government. The now-approved version, discussed for just six months and passed overnight, was the least demanding of all the drafts.

Contrary to the principles of transparency, it is the President who will guarantee competition, according to this law. The project to merge the oversight offices responsible for the financial and securities system points in the same direction. Decisions relating to these two activities will be made by a single, powerful superintendent, thus eliminating the current, more pluralist executive boards from the oversight process. The logic of this new reform, launched under the pretext of reducing operating expenses, is to turn control over the national economy to the financial system.

Just by freeing the state

Paradoxically, technical corruption is the way to compensate for the weakness of Salvadoran institutionality. The influence and control exercised over the state by the owners of certain business groups distorts the market by giving them false competitive advantages. As a result, the establishment of genuine competitive advantages, such as technological innovation and improved quality, is irrelevant for most of the business sector. Salvadoran business practices suggest that any policy that aims to stimulate genuine competitive advantages is doomed to fail as long as the state is not freed from the big business groups that have kidnapped it.

The task of liberating the state is enormous because, unlike administrative corruption, it is not easy to identify the subtle mechanisms through which this kind of corruption operates. Up to a certain point, it is invisible. Not even the press, which is so attracted to scandals, tends to be interested in it, either because its owners form part of the hegemonic group or are closely linked to it, or out of fear of reprisals, or because its subtlety escapes the journalists’ primitive investigative methods.

The scandal surrounding corruption in the autonomous body responsible for managing the water and sewage systems, into which the national press has sunk its teeth, is an extraordinary affair. For some as yet unknown political reason, the hegemonic circle allowed this corruption to be aired before the courts and public opinion. It is not so much
a question of the absence of legislation, as the public and private immorality of officials and business magnates.

An economy with no growth

This compensatory alternative to El Salvador’s institutional weakness has a negative impact on ARENA government policies, because the corrupt practices further limit economic growth and influence existing deficiencies in sectoral growth, while draining the generation of value added and the population’s already insufficient income. In short, it aggravates inequality. According to the World Bank, the business sector growth rate in a “kidnapped” state is reduced by around ten percentage points over a three-year period.

The Salvadoran economy thus finds itself trapped in a vicious circle. Political reform and institutional strengthening, essential to improving the government’s economic management, run up against a formidable obstacle resulting from the conspiracy among certain powerful businesses, public officials and politicians. They privilege their own private profits and benefits, without worrying about their negative impact on economic activity. But while it is very difficult to break this vicious circle, it is not impossible. In fact, it is essential if robust economic growth is to be achieved.

Improving the economy would harm ARENA

The ARENA government could work in three areas. First, promote greater public transparency, in which new information and communication technologies could prove highly valuable and enormously effective. Second, promote greater competition in the private sector. And, third, pay special attention to small and medium businesses and to consumers. But controlling corrupt practices would obviously leave the ARENA government facing a paradox whose very solution runs against its own party and ideological nature.

To a large extent, economic growth, foreign investment, poverty reduction and inequality are directly related to the extent of ARENA’s independence from the hegemonic group, and Salvadoran society will benefit in direct proportion
to the degree in which it manages to achieve this independence. But at the same time, the party would be affected by the loss of financial, political and social support the group provides. It is understandable that the ARENA government would want a country with a healthy economy, a wealth of foreign investment, less poverty and greater equality. But it is impossible to imagine an ARENA government independent of the hegemonic group. As long as this liberation fails to take place, the free market creed preached with such devotion by business magnates and the ARENA government will remain little more than a tall story.

The above article was the editorial of edition No. 678 (April 2005) of the magazine Estudios Centroamericanos (ECA), published by San Salvador’s “José Simeón Cañas” Central American University.

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