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Figure 5. Estimated Gross Domestic Product by Sector, 1986

Source: Based on information from Economist Intelligence Unit, Country Report: Guatemala, El Salvador, Honduras, No. 3, London, 1988, 3.

An examination of GDP by ÍÍÍÍsector confirmed that, despite a modest recovery in 1987, El Salvador's economy was still vulnerable. Even though most sectors showed some growth in 1987, all registered below their 1978 or 1979 peaks.

Thanks to improved weather conditions, the agricultural sector recovered in 1987 from its 1986 decline, rising 3.1 percent, which merely erased the sector's 3.1 percent loss in 1986. The importance of the agricultural sector, particularly coffee, in the economy cannot be overemphasized. In 1987, for example, despite a decrease in coffee production value attributable to lower international coffee prices, coffee still represented approximately 7 percent of GDP, 30 percent of agricultural output, and 60 percent of total exports. Coffee production recovered substantially, about 6 percent, in 1987 as a result of improved weather conditions and increased use of fertilizers. Fortunately, because most coffee was grown in the western part of the country, away from the civil conflict, production was unaffected (see fig. 5).

Analysts believed that in the future the fate of El Salvador's coffee earnings would depend on both producer prices and government-imposed price or exchange controls. According to some estimates, producer prices might eventually decline to levels at or below the average cost of production. Such a decline in prices could have catastrophic consequences for the country in both the short term and the long term. A decline in coffee prices would limit the country's ability to earn foreign exchange, resulting in foreign exchange allocation problems. Foreign currency shortages would then exert upward pressure on prices. Unprofitable production could impede further investment in coffee production and eventually reduce the coffee industry's capacity to generate export surpluses.

Government policies had a major impact on the profitability of coffee production. Price controls and exchange rate policies pursued by the government of Jose Napoleon Duarte Fuentes during the early 1980s led many coffee growers to claim that coffee growing was unprofitable. Even in years of strong world prices, coffee growers were adversely affected by the exchange rate manipulation and price controls effected by the National Coffee Institute (Instituto Nacional de Cafe--Incafe). It was unclear, however, whether Incafe would continue to operate under a more conservative government.

Sugar and cotton, once important agricultural crops, accounted for less than 10 percent of agricultural value added in 1987 and less than 5 percent of total Salvadoran export earnings. Low world prices adversely affected sugar production and inhibited investments. Cotton production declined because of the armed conflict and low international prices. For example, in 1986 average ab4 productction costs of cotton exceeded international prices.

During 1987 manufacturing accounted for about 15 percent of total value added and continued its consistent recovery. Nevertheless, the sector's estimated 2.7 percent growth left value added in manufacturing almost 10 percent below the 1980 level. The gradual recovery in manufacturing could be attributed to increased demand for food products, beverages, and nonmetallic products. In 1987 food processing and beverages represented more than half of the value added in the manufacturing sector.

The construction industry proved to be the economy's only bright spot in 1987, registering growth for the third consecutive year with 14 percent growth above 1986. Compared with 1979, however, activity remained low. Moreover, rapid growth in 1987 reflected efforts to replace the structures and units damaged in the 1986 earthquake rather than a general revival of the construction industry.

Services represented almost half of GDP in 1986. Like construction and manufacturing, service activity continued on an upward trend in 1987 after falling by almost 25 percent between 1978 and 1982. As in other areas, however, 1986 value added by services remained approximately 17 percent below its 1978 peak. Between 1970 and 1978, service output grew by 54 percent. With the slowdown in economic activity after 1978, services declined by 17 percent between 1978 and 1987.

Service activity was tied closely to prevailing trends in the economy and therefore didn't have the dynamism of agriculture and industry. Service activity was also oriented exclusively toward domestic markets and thus did not affect the country's external economic position. Services included transportation, commerce, insurance, health care, utilities, and other services provided by public enterprises.

Data as of November 1988