Papering over the economic divide

JUST 10 yards from a muddy stream where peasants fill their water jugs here, there stands a stark monument to the unkept promises of the Salvadoran government: a concrete well with shiny faucets. Today, the slab of concrete looks less like a water project than a tomb. Nearly six months after the shell was built with funds from the United States Agency for International Development (AID), the project still doesn't work. One look in back explains why: The tubing has not been delivered.

Like this half-finished project, the government of Jos'e Napole'on Duarte began with great expectations but has failed to deliver.

When Mr. Duarte was elected President in 1984, US policymakers and most Salvadoran citizens looked to him to rein in the brutal military, bring an end to the war, establish a genuine democracy, and - with the help of a massive influx of US money - resolve the country's enormous social and economic problems.

None of those goals were fully achieved. And for most Salvadorans, none were more crucial than tackling the economic difficulties, which in many ways are a fundamental cause of the war. Between 1979 and 1983, everyone from wealthy coffee growers to struggling construction workers experienced one of the worst depressions in Salvadoran history, with growth dropping by 23 percent.

But the expectations were unrealistic. The most densely populated country in the hemisphere, El Salvador also has one of the widest gaps between rich and poor (see chart).

It would have required a gargantuan effort, even in a political vacuum, to meet the vast needs of the poor while keeping the privileged private sector happy and productive. But with strong resistance from the economic elite on one side and demands from the poorer classes for dramatic change on the other, Duarte faced a nearly impossible task.

Even with $2 billion in American economic aid since 1980, the populist President has been unable to do more than plug the holes created by the destructive war.

Economy leaking, not sunk

US aid has kept the economic ship of state from sinking. Some sectors, in fact, have benefited enormously from the distortions created by the aid. But according to a range of Salvadoran economists and US officials, the economy as a whole is leaking badly, mainly because of inexperience, corruption, and lack of a single vision of what economic revitalization means.

Such a vision has been particularly elusive in El Salvador, where the age-old chasm between a tiny but powerful wealthy class and the masses of peasants and workers still persists. Duarte has been caught in the middle, trying to push for reforms that promote economic justice without destroying the confidence of the country's largest investors.

In 1984, in order to build a consensus in the US Congress and undercut guerrilla support, even President Reagan went along with Duarte's reform program. Duarte tried to extend the land reform program and state control of banks and export trade, with the goals of broadening access to bank credit and creating profits for the state rather than the wealthy oligarchy.

``Land reform knocked the feet out from under the guerrillas,'' says one US official, commenting on the reform first carried out by a moderate civilian-military junta in 1980. ``If the government hadn't taken those actions, there would be 50,000 rebels instead of 5,000.''

The land redistribution, initially projected to benefit between one-half and two-thirds of the rural poor, ended up affecting only 20 percent. By the end of Duarte's first year, it had completely stalled in the face of powerful coffee growers - and the American Embassy.

The Reagan administration, viewing the Marxist guerrillas more as an externally generated threat than the result of economic injustices, began switching its aid from land reform to support for the private sector - mainly light industry and nontraditional agriculture.

Just as the administration tried to create a political center around Duarte, it sought to create a new business sector apart from the oligarchy that would revitalize the economy and be a base of support for US policies.

But in early 1986, the United States pushed the Salvadoran President to adopt austerity measures that have drawn salvos from all sides.

Hoping to wean El Salvador from its growing dependency on US aid, the Reagan administration dissuaded Duarte from pursuing public-sector programs that would have created jobs and bolstered his political base among the lower classes. At the same time, the government's clampdown on bank credit - as well as the private sector's distrust of Duarte's reformist attitudes - discouraged businessmen from investing.

The right lambastes Duarte for neglecting the country's real economic engine - traditional growers of coffee and sugar - and for basing his decisions more on short-term political crises than long-term economic independence. The left accuses him of abandoning his social base and pandering to the private sector, particularly companies producing nontraditional exports.

Meanwhile, most Salvadorans have not seen a cent of US money. All they know is that real wages have gone down by a third since the war began. Underemployment has soared to more than 50 percent. And the countryside, the original focus of the US pacification effort, remains as backward as it was decades ago, before the first peasant uprisings.

Surreal signs of well-being

But out on the bustling streets of San Salvador, there are some surreal signs of economic health. A shiny Mitsubishi jeep with tinted windows wheels into the long line at the McDonald's drive-thru, where the golden arches are flanked by two guards with M-16 rifles.

Not far away, construction workers put the finishing touches on a gleaming new Pizza Hut. Up the road at the exclusive Club Campestre, where the parking lot is dotted with BMWs and Mercedeses, a group of businessmen arrives to have lunch overlooking a plush golf course.

At night, when the thud of bomb blasts occasionally wafts down from the fighting on a nearby volcano, the fashionable sons and daughters of the oligarchy - known as ``garks'' - check their guns at the door before crowding onto the dance floor at a glimmering nightclub named Mario's.

It seems that for some, things are going very well indeed.

But in many ways, El Salvador is floating on US aid. Or, as some say, it has become addicted to massive amounts of dollars. It's not just the government, although the aid now nearly equals the national budget and actually pays the salaries of most of the public administration and the Army.

It's also the private sector. ``They've gotten used to [both] US aid and the relatively high walls of protection,'' a US official says. Even though most businessmen disparage Duarte's model of a state-regulated economy, the official adds that ``in some ways, free enterprise is the last thing they want.''

Of the more than $3 billion the US has funneled into El Salvador since 1980, about $550 million (17 percent) has gone into direct development assistance to help redress the inequalities that fuel the guerrilla war. More than $850 million (26 percent) has gone directly to the war effort.

But the United States has sent much more ($1.1 billion, or 33 percent) to the central bank in direct cash transfers, which sustain the government by providing balance-of-payments assistance. The transfusion creates economic distortions and buoys the exchange rate, keeping it steady at five colones to the dollar.

The overall result: Inflation has been nearly cut in half (to 18 percent) since 1986, and economic growth (2.6 percent in 1987) is outpacing population growth for the first time in more than a decade. The construction and service sectors are thriving, and the US's new target, nontraditional exports, is showing steady growth.

But in the process, El Salvador has become hugely dependent on the influx of American funds.

``Without American aid, this country would come to a complete stop,'' says development consultant Ricardo Stein.

``Everybody recognizes that we're hooked, but nobody wants to go through the withdrawal pains,'' he explains.

Countryside abandoned

Pain - not of withdrawal but of neglect - has always been felt in places like Santa Teresa, where the beauty of towering volcanoes and rolling farmlands cannot disguise the daily struggle for survival.

Here, next to the unfinished water project, 60 percent of the people do not have access to drinkable water, government figures say.

Here, not far from the country's rich coffee plantations, wages are so low that the government says it takes seven average salaries to meet a family's basic nutritional needs. About 27 percent of rural adults are without employment; three of every five families cannot adequately feed themselves.

The distribution of wealth in El Salvador remains among the worst in Latin America. Yet the government now spends virtually nothing on land reform, and only 30 percent of its development programs are aimed at the rural areas where the majority of the population still lives.

The flow of US development funds has now slowed to a trickle. In March, government officials and foreign advisers say, AID severely tightened procedures for using development aid in response to a prominent corruption case involving $2 million in American funds. The US action means the Salvadoran government must provide more extensive accounting of how funds are spent.

``For a system accustomed to spend freely, this restriction was like slamming on the brakes,'' a foreign de-velopment adviser says. It ``put the institution in crisis. There was no management to handle it.''

As a result, the Salvadoran government spent less than 20 percent of its allocated budget in the first half of the year, advisers say. And of that, 90 percent was directed to urban projects, leaving rural areas virtually abandoned.

Many rural families are sustained by money sent home by some of the half million Salvadorans who have fled to the United States. Indeed, the estimated $400 million in annual remittances represents the country's second-largest source of income after coffee.

But numbing poverty remains the rule.

``If we had a time machine and could go back 60 years to before the first peasant revolt, much of the countryside would look the same,'' muses a Salvadoran expert in rural development. ``The same huts, the same food, the same services, the same struggle.''