Competitiveness and Growth in Latin America: Country Case: El Salvador

This is the latest version available of this paper. This study finds that phenomena associated with migration are key to understanding slow growth in El Salvador. Migration has substantially reduced the growth of labor force. When one accounts for an overestimated labor force in the official statistics, the rate of growth of per capita output is shown to have been substantially higher than previously thought. But the effects of migration are not limited to the size of the population. Migration has also affected human capital. On average, migrants have much higher education levels and are more entrepreneurial than the population who stay. Migration would then cause a vicious circle, where more migration leads to an outflow of talented people, which in turn reduces productivity and economic growth. Less economic growth, in turn, decreases job opportunities and creates more incentives to migrate. Furthermore, remittances sent by migrants are used mainly in consumption rather than investment, and this has led to the appreciation of the real exchange rate, thus affecting negatively the traded sectors of the economy, therefore contributing to lower investment and slower growth, which in turn may promote further migration. Other external factors have also contributed to slower growth. This is the case of declining terms of trade and the increasing competition from Chinese textiles, which have reduced the profitability of Salvadoran maquila exports to the United States. JEL Codes: O4, O40, O5, O54