Envío Digital
Central American University - UCA  
  Number 350 | Septiembre 2010


El Salvador

Funes’ Dangerous Liaisons With the Business Class

“Fifteen months down the road and Funes’ government has done nothing crazy. Credibility is earned, and he’s earning it.” Thus spake TACA Airlines President Roberto Kriete on his return from a trip with the President to Brazil, invited along with other big business leaders. What results will this dicey friendship bring? What might the confidence he’s “earning” with the business class mean for the country?

Elaine Freedman

The crisis between business leaders and the government in El Salvador has been overcome, declared Carlos Enrique Araujo, president of the National Association of Private Enterprise (ANEP), to a daily morning newspaper after his recent trip to Brazil with President Mauricio Funes. Although such joint junkets with a business delegation were common during the ARENA governments, it was Funes’ first.

The costs of war: Grudging reforms

The very concept of a “crisis between business leaders and the government” is something new for this country, where historically it has been harder to define the line of separation between business and government interests than identify any possible points of difference. Admittedly, the needs of the counterinsurgency plans during the 12-year war led the different governments to implement certain measures that objectively affected business interests. Among the main ones were the agrarian reform and the nationalization of important sectors of the economy—banking, foreign trade and most agroindustrial activities, such as coffee processing and sugar refining.

Nonetheless, while some hard-line sectors of the Salvadoran bourgeoisie protested, its more liberal bloc understood that these concessions were necessary to maintain a modicum of sympathy from part of the population and halt the FMLN’s advance. With clenched teeth they supported such reformist measures because they saved them from the “worse evil” of a real revolution.

A speedy reversal of the reforms

Twenty years of Nationalist Republican Alliance (ARENA) governments were enough to reverse all such measures implemented in the eighties. Alfredo Cristiani, the first ARENA President (1989-1994), was one of the country’s largest businessmen and it didn’t occur to anyone to differentiate between “President Cristiani” and “Businessman Cristiani.” His government’s first measures included the privatization of coffee and sugar exportation, the import of petroleum, a state hotel (the Presidente) and social security’s external medical coverage. This was soon followed by the privatization of the dollar market and banking, which was the most wide-reaching and hard-hitting measure.

After Cristiani came Calderón Sol (1994-1999), with his own package, privatizing the sugar refineries, the issuing of vehicle licenses and plates, telephony, electrical energy distribution and the pension system. The government of Francisco Flores (1999-2004) gave the final brush strokes to the privatization policy, selling off the airport and other lesser public services and dollarizing the economy.

These measures were key to transferring a source for generating public funds to private accumulation. Families such
as the Murray Mezas, Simáns, Pomas, Krietes, Cristianis and others became even wealthier. Cristiani “cleaned up” the arrears portfolio of the state banks with US$400 million from the public treasury then transferred the banks to his friends and family. Fifteen years later, transnational capital bought up these banks for US$4 billion, while the Salvadoran tax system is still waiting for payment of the taxes corresponding to that huge transaction.

The final blow:
Fiscal reforms

The changes in fiscal policy sealed the transfer of public funds to private hands. Capital wealth tax—paid by the owners of large properties—was eliminated and income tax on business profits reduced during the Cristiani government, thus benefiting those who earned more. In addition, import duties were gradually lowered, facilitating the import businesses on which many Salvadoran businessmen had banked.

To make up for the sizable gap all these changes left in public finances, Cristiani introduced the regressive Value Added Tax (IVA) in September 1992. Three years later, in a pact with an FMLN splinter group headed by Joaquín Villalobos, the Calderón Sol government increased it to 13%. This tax particularly hits people with limited resources, given that it is a flat percentage paid on consumer goods by the entire population, independent of income levels. By 2004 it accounted for 52.3% of the country’s fiscal income.

“We need to feel confidence”

Benefited by the privatizations and freed from their tax burden, the Salvadoran bourgeoisie had a lot to lose with the arrival of a government that proclaimed “a change” and faithfulness to the legacy of Monsignor Romero and his “preferential option for the poor.”

During the electoral campaign, Elías Jorge Bahaia, Economic and Social Affairs Director of ARENA’s National Executive Committee (COENA), wrote to business owners requesting monetary contributions for his party’s campaign, arguing that “We must be able to continue constructing the social, political and economic structure within the system of liberties and not allow opposition groups any alternation in power.”

ARENA was already experiencing an internal crisis by then, evidenced in the internal elections to choose its presidential candidate, Rodrigo Ávila, and in previous demands by a fraction of its leadership for the resignation of then-COENA President Elías Antonio Saca—who was also President of El Salvador at the time.

When President Saca called on businesspeople attending the Ninth National Meeting of Private Enterprise (Enade 2008) to urge their workers not to allow the country to be lost through a change of government, Francisco Colorado, then President of ANEP, responded that such actions were out of order. “We businesspeople must show respect,” he said.

But six months later, in the electoral home stretch, it was evident that the limits of this “respect” exceeded its scope: the Right closed ranks against the FMLN’s electoral proposal. One of the various paid ads published by ANEP revealed its fears of a possible FMLN government, directly calling on Salvadorans to vote for “whoever would offer to promote liberties.” Or as former ANEP President Conrado López Andreu put it, “We’ve had 20 years of governments that have generated confidence in the private sector, and that’s the line we know can take us toward development. There’s a need for confidence to be able to continue doing things.”

Contradictory declarations

In those pre-election months, Colorado changed his discourse time and again. On the one hand he declared he had no fear of a Funes government, given that the candidate “comes from the outside,” and was not at all like the previous FMLN candidate, Shafick Handal. In Colorado’s words, Handal “was secretary general of the Communist Party in the country for any number of years and defined himself as such, never hiding his ideology and his positions, and that makes the scenarios of 2004 and 2009 different.”

Yet less than a fortnight before the elections he admonished Funes for claiming “there are business owners who do not pay their taxes.” “It concerns us,” Colorado argued, “that he’s campaigning to the detriment of a sector that’s been the pillar of El Salvador’s economic and social development.”

Patching up “misunderstandings”

President Funes and ANEP leaders began patching up their “misunderstandings” only 40 days after Funes was sworn in. The new President named a three-member commission—Roberto Lorenzana, Alex Segovia and Carlos Cáceres—to maintain ongoing contact with the different entities associated with private enterprise. The latter two are now among Funes’ closest advisers.

According to Funes, the business fears dissipated because he spoke to them about the need to promote exports and all work together for the good of El Salvador. “The business sector is willing and doubts are a thing of the past,” he said.

100 days of extortion

López Andreu reported that he had asked Funes for transparency and demonstrated that businesspeople were willing to work with the government, but required a free path towards progress.

Such generic, non-specific declarations characterized private enterprise’s discourse during the first year of the Funes government. “Confidence isn’t built overnight,” they repeated incessantly, warning again and again that they had the power to give the new government a vote of confidence, and not the other way around, and that they would give it or withhold it depending on the signs of loyalty the President gave them.

100 days “without clashes”

In his evaluation of the first hundred days of government, Walter Rivas, economist and representative of the FMLN’s Professional Sector, concluded that private enterprise had little reason to distrust Mauricio Funes’ government. “The economic Right seems comfortably installed, because there are no actions by this government that could affect them. The government has opted not to clash with the Right. It could make an administrative fiscal reform that would permit the collection of another $6 million in taxes without seriously affecting big business.

“An Economic Social Council has been formed to debate economic and social policies and everyone has gotten involved. What concessions has the Right made there? To allow union and social movement leaders at the same table. It’s a consultative council to reach agreement about some things, yet it seems more a mechanism for venting than resolving. This is just fine with the economic Right, which still maintains its privileges. The problem will come when you want to lower the cost of electricity or flour, or to break the sugar or airline monopoly or lower fuel prices.”

The telephony battle

All this notwithstanding, ANEP’s big business members opened their analysis of the first 100 days by expressing concern about the announcement of a fiscal reform. Jorge Daboub, president of El Salvador’s Chamber of Commerce and Industry, identified the decision to eliminate the 6% IVA rebate for exporters starting this year as a bad sign. Other issues that he said triggered a lack of confidence were the State’s decision to administer La Unión Port and the opposing positions of the General Superintendence of Electricity and Telecommunications (SIGET) and the Río Lempa Hydroelectric Executive Commission (CEL) regarding the construction of El Chaparral dam.

Private enterprise was also evidently displeased with the National Civil Police director’s decision to remove the head of the Elite Division against Organized Crime (DECO), although much of the population approved of the change, since this division’s involvement in the impunity of organized crime was already an open secret. According to the Ombudsperson’s Office for the Defense of Human Rights, this ARENA appointee was responsible for torture, fraudulent handling of legal procedures and coercion of witnesses and defendants, yet ANEP condemned his dismissal, questioning the National Civil Police’s motivations and capacity. It was yet another revelation of the business class’ unremitting defense of the indefensible.

The business associations also united against the government when it joined the Central American boycott of trade with Honduras to pressure for the restitution of President Zelaya after the coup in that country. That time they went beyond declarations and managed to force President Funes to ask for comprehension, offer them economic compensation and pledge to consult them the next time a similar situation came up.

The presidency’s backing of the transnational telephone corporations, particularly Telecom, which controls over 95% of the fixed telephony in our country, was pivotal to building the trust so desired by the businesspeople. In January, the FMLN’s legislative bench opposed SIGET’s positive response to the request by América Móvil (Telecom-El Salvador) to adjust the basic fixed telephone charge in line with the consumer price index. América Móvil, which also operates a cell phone business under the Claro trademark, is one of many transnational corporations owned by Mexico’s Carlos Slim, the wealthiest man in the world.

The FMLN proposed eliminating this charge altogether, arguing that it had been established to recover the fixed investment of the operators, or in this case the operator. According to official information, Telecom’s fixed investment as of December 31, 2008, was US$97 million, which means that it had been able to recover it in less than a year.

The phone companies began a fierce lobbying campaign to vote down the initiative, meeting bilaterally with all legislative benches, including the FMLN, and even with President Funes. A public communiqué, signed by the companies and endorsed by ANEP Executive Director Raúl Melara, argued that eliminating the basic charge would be a negative sign “for the national investment climate, as it is prejudicial to El Salvador’s legal and economic stability, business freedom, property rights and the prohibition of confiscation, recognized and protected by the Constitution of the Republic.”

Another sign is Telecom’s victory

On January 21 of this year, the Legislative Assembly approved the decree with 78 votes in favor. But weeks later, President Funes sent it back to the Assembly with observations. In his public declarations, Funes presented himself as a successful negotiator with the telephone companies: “I succeeded in talking to the telephone companies, persuading them that while the rules of the game had simply been modified, because the contracts had been modified, we could reach an agreement on adequate management in a negotiation with the legislators. Thus, while they could be affected, it won’t be enough for them to decide to withdraw from the country and affect us in terms of job losses.”

Days later, according to the digital newspaper El Faro, a memorandum headed “confidential” circulated among all the legislative benches. It contained the telephone companies’ proposals to Mauricio Funes: reduce the basic fixed telephone charge to $6.34 plus IVA (about $7.20), eliminate Calling Party Pays and establish a maximum per-minute service rate plus IVA for calls from a fixed phone to a mobile one.

In the next plenary sessions representatives from all parties lowered their tone. Finally, the transnational companies’ proposal was passed. According to economist Raúl Moreno, it was a sign that the President wouldn’t turn his back on transnational capital.

Seeking tax collection “solutions”

Another important sign was the fiscal reform bill drafted by the Executive and later approved by the Legislative Assembly in 2009. Moreno called it a “lukewarm reform that never met the expectations of a comprehensive and progressive fiscal reform that could become a tool for justice and income redistribution in the country.”

The most aggressive part of this proposal was the creation of tribunals to prosecute tax crimes. Treasury Minister Carlos Cáceres put it this way: “We’re proposing this to be able to assert the Treasury’s rights, which in the final analysis are the rights of all consumers.” This was the first measure in the bill, and was vetoed by private enterprise. A serious of bilateral meetings was then agreed to between the executive branch and the different sectors that felt affected by the reforms in order to seek “solutions.”

The business owners
slash the reform

These meetings ended up diluting the government’s “fiscal package” proposal, originally designed to collect $250 million. The cuts made by the business negotiators meant it was barely able to collect $140 million. The final version of the reforms mainly affected products such as tobacco and alcoholic beverages. It didn’t remotely touch the regressive structure of the tax system inherited from the ARENA governments and never even planned to do so. Nor were taxes on exports touched and there was no mention of reestablishing the capital wealth tax or establishing a real estate tax.

In this stage, according to ANEP President Araujo, “the relations we now have with the government are very good, with some very broad lines of communication in which we’ve been able to participate actively to seek what’s best for our country. We just went through this whole tax reform process, in which for the first time the business class is proposing a fiscal pact.” It thus appropriated the new government’s tax policies, even boasting of playing the lead role, claiming to have authored the “fiscal pact.”

How will the State be financed?

In the words of Central Reserve Bank President Carlos Acevedo, the Fiscal Reform was “lite” and contributed little to the State’s needs. The nation’s 2010 General Budget is $3.654 billion, of which $770 million (21%) is debt service payment (domestic and foreign). Meanwhile the fiscal deficit is some $800 million. With virtually no state businesses left to contribute to the nation’s income, only two possible income sources remain: loans and taxes. Although the government has opted for indebtedness, it’s widely accepted that the limits of this option are not far off.

It was thus not surprising that, months later, Presidential Technical Secretary Alexander Segovia, previously a consultant to “mediate” negotiations between the business sector and the government in Guatemala for that country’s failed fiscal pact, proposed forging just such a fiscal pact in El Salvador. The proposal was music to the ears of those who see the fiscal crisis as a reality that could turn El Salvador into a “failed State.”

Segovia, who also coordinates the Social Economic Council, explained that this entity, inaugurated a year ago by the government, was created “to help construct state policies that provide continuity and predilection to public administration and consequently create an good atmosphere for national and foreign investment.” The Council is made up of 24 members from private enterprise, 8 from the unions and 16 from the non-labor social movement; 10 university representatives and academics; and 4 government representatives. According to Walter Rivas, it is the perfect mechanism to endorse changes that leave everything the same. In his opinion it’s hard for a fiscal pact that comes out of this Council to be significantly different from the reform for the fiscal year already agreed between the business class and the government.

The FMLN’s proposal off the table; ANEP’s proposal becoming law

The FMLN’s fiscal proposal, formulated in 2004 and integrated into the Government Program with which Funes won the 2009 elections, contains a series of measures that would begin to redraw El Salvador’s tax map. With respect to the IVA, which is far and away the system’s most regressive tax, the FMLN proposes eliminating the tax on basic market basket items and medications, and increasing it by 25% on luxury items. With respect to income tax on business earnings, the project was to graduate it from 20 to 30 to 35%, according to the size of the earnings. The FMLN also proposed raising the floor for taxes on the profits of small businesses. But none of this is now being discussed.

ANEP had already called the 2009 tax reform a “fiscal pact,” given that it had “pacted” with the government to ensure that neither the fiscal structure nor its logic would be reformed and that the working class would bear the tax burden (the IVA and FOVIAL taxes represent 70% of tax income). So it didn’t hesitate in taking Segovia at his word. It publicly unveiled its own fiscal proposal in June of this year. The initiative includes a series of conditions for a fiscal pact and reinforces the typical structural adjustment measures of the IMF and World Bank. Its authors propose a cut in public spending and approval of a Concessions Law that would put the ports, hydroelectric dams, highways and even a luxury hotel in private hands. They also severely target the subsidies on propane gas and electricity and would cut ministry budgets.

In addition, the proposal would eliminate the President’s authority to reassign unspent funds from one ministry to another, based on the experience of their own party, ARENA, which used these resources to finance its electoral campaign and other expenses about which there is public speculation but no firm evidence. Their idea for increasing state income is rooted in the theory that by providing it with the optimum conditions for generating its own earnings, private enterprise will act as the motor force of the country’s economic growth and development via investment.

Did the businesspeople win?

With this proposal made law, big business will emerge not only unharmed, but strengthened by the concessions to strategic categories of the economy, while expanding the tax base by affecting the informal sector and workers currently excluded from paying taxes on salary income due to their low salaries.

Although the fiscal pact isn’t expected to be established until the end of the year, several of these proposals are already on their way to becoming law. President Funes announced the formulation of a Concessions Bill by a public-private association that recently went to study the experience promoted by the IMF in Brazil. This association apparently has nothing to do with the mixed enterprise model, but rather represents a simple reformulation of ceding state patrimony to private enterprise to administer and receive earnings from its operations.

In addition, the targeting of propane gas and electricity subsidies will start in October and the Treasury Ministry already presented a bill to the Legislative Assembly to lower the floor for payment of taxes on salaries from $316 to $209, which will affect some 300,000 workers in this low income range.

A slide with a happy repair

July opened with the capture of Salvadoran Francisco Chávez Abarca, who collaborated with Cuban-American terrorist Luis Posada Carriles in various criminal activities. Chávez Abarca was arrested entering Venezuela and his declarations led to the arrest of Venezuelan Alejandro Peña Esclusa, a representative of the NGO Fuerza Solidaria.

During El Salvador’s election campaign Peña Esclusa had come at the joint invitation of the Simán family, businesses linked to the Cristiani family and Francisco Armando Arias—legal proxy for sugar magnate Tomás Regalado and president of the American Chamber of Commerce in El Salvador and of the Salvadoran Banking Association. While here Esclusa repeatedly spoke out against the Cuban and Venezuelan governments and against the FMLN as part of the rightwing campaign “I’m not handing over El Salvador.”

Although no businessperson publicly mentioned these detentions, it was noted that only days later ARENA and ANEP began a campaign denouncing Cuba, Venezuela and the FMLN for supposed espionage against “the majority of politicians and many businesspeople.” They accused the FMLN of political harassment and spoke of a police state that’s “leading to 21st-Century Socialism.” Former President Armando Calderón Sol charged that his house had been searched and ANEP officials insisted that the same had happened to other businesspeople, although they didn’t mention any names.

Funes and the FMLN rejected the accusations. The government explained that the Calderón Sol incident was sheer chance and occurred when a police patrol warned that an armed man was halting traffic in a street of the San Francisco neighborhood in San Salvador to allow a vehicle to back out of a residence. According to the police version, police protocol required that the armed man show his weapon permit and they verified that it had expired. They then checked other guards in the neighborhood and discovered that their weapons weren’t even legally registered. One of these men was Calderón Sol’s bodyguard.

Nothing came of the issue because, despite his angry posturing, Calderón Sol didn’t file charges with either the Prosecutor General’s office or the Ombudsperson’s Office for the Defense of Human Rights, thus leaving Funes’ version unchallenged. But as a result relations between the presidency and private enterprise got tense again despite the close relationship that had been established on economic issues, including acting in harmony over the signing of the Central American Association Agreement with the European Union.

A trip to calm the waters

In no time at all a means of reconciliation cropped up for the government and the businesspeople: a honeymoon trip in which the President took 50 of them to Sao Paulo to meet with Brazilian businesspeople and Lula government officials. According to the presidential web page, the delegation included ANEP President Carlos Enrique Araujo; TACA President Roberto Kriete; Dutriz Group president and La Prensa Gráfica owner José Roberto Dutriz; Telecorporación Salvadoreña Vice President Juan Carlos Eserski and other business leaders from the textile, tourism, energy and food industries.

They came back convinced. Traveling at state expense, they saw with their own eyes that “Brazil’s leftwing government is working hand in hand with private enterprise to develop the economy and also develop confidence,” according to Carlos Araujo. Furthermore, their Brazilian counterparts apparently counseled them not to fear a “leftist” government.

In the light of the Brazilian experience, Roberto Kriete returned to finish his analysis of Funes’ first 100 days and concluded that the President was passing the test: “Fifteen months down the road and the government has done nothing crazy. Credibility is earned, and he’s earning it.”

The next trip will be to Cuba

Funes and the businesspeople have plans for another joint trip: this time to Cuba. The President has already postponed two trips to the island, publicly declaring that he did so to prioritize “national agenda issues,” such as negotiating the Temporary Protection Status for Salvadorans living in the United States and the Millennium Funds, and would make the trip later. But the fact is that he didn’t have the support of private enterprise, whose different associations allegedly prohibited their members from participating.

After a discussion with all the legislative benches and business associations, Funes announced that he was reprogramming the trip and would travel with “an important delegation, not only of officials but also of businesspeople and Salvadoran press people” to explore “business opportunities” on the island. He also announced a subsequent trip, this time to Miami.


It would appear that the business sector’s confidence in the government is synonymous with its capacity to twist its arm. If true, surmounting the “businesspeople-government crisis” won’t be good news for the grassroots sectors that voted Funes into office.

The greatest challenge this poses for the social movement at this time is to define how to navigate in such turbulent waters to balance its demands while avoiding this government becoming another government of the Salvadoran bourgeoisie and for the transnational bourgeoisie.

Elaine Freedman is a grassroots educator and envío correspondent in El Salvador.

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