Export Promotion Strategies: Lesson from El Salvador
Zimbabwe trade deficit continue to soar with indication that the trend will not reverse any time soon. The big question is how can we reserve this trend? There are a number of strategies which can be put in place like raising productivity, improving competitiveness and promoting local products. As we work around these measures it will be important to take notes from other countries with more or less similar conditions with ours. This week’s discussion will draw lessons from El Salvador.
In July 2003 – July 2004, El Salvador hired trade experts to develop an El Salvadoran strengths, weaknesses, opportunities, and threats (SWOT), and a list of priority markets and products derived from the SWOT analysis. This initiative was used to develop an export promotion agency for El Salvador which took into accounts the country’s strengths and weaknesses in international markets. The promotion programs took advantage of strengths/competitive factors and help Salvadoran companies overcome weaknesses. They must also target products that have good prospects in key export regions and sectors.
With respect to the El Salvador competitive factors, the country is at the centre of Mesoamerica (Southern Mexico and Central America), and within easy reach of the United States. El Salvador has good soils and favourable climactic conditions for the production of a wide range of tropical crops. The country’s financial system is well-developed and stable, supported by the country’s adoption of the U.S. dollar as its official currency just like our case. Salvadoran workers, artisans, entrepreneurs and executives, academics, and professionals are well-known for their hard work and initiative; and approximately 2 million Salvadorans reside in the United States, constituting a ready market for traditional Salvadoran products. In addition, El Salvador has a relatively well developed communications and transportation infrastructure.
The minimum 10 daily non-stop flights from El Salvador to cities in the United States facilitate exports of perishable horticulture and other high-value products; and when the port at La Union is completed, El Salvador will have easy access to high-quality maritime service to Caribbean/Atlantic and Pacific destinations. The country’s telecommunications have been privatized and modernized, with high-quality, low-cost international service. With respect to weaknesses, Salvadoran businesses had relatively little experience exporting goods other than traditional primary commodity exports, such as coffee and maquila.
They also had limited knowledge and understanding of the characteristics and cultural idiosyncrasies of consumers in the United States, Europe, and other mass markets. Because most of their exports were coming from Micro Small and Medium Enterprises (MSMEs) couldn’t meet the volume requirements of many potential mass market customers. They lacked the resources and know-how to establish and support their own product brands; and continue to be reluctant to collaborate among themselves, or to cede control over family businesses through mergers and acquisitions. Salvadoran MSMEs in particular have very limited access to state-of-the-art technologies.
In addition, financing for exporters was not widely available or suitable. Many firms, especially among MSMEs, are highly indebted and therefore lack access to additional credit from the banking system. Medium- and long-term (MLT) resources for financing modernization or expansion with acceptable terms are inadequate; equity capital for MSMEs, or effective guaranty mechanisms to facilitate access to MLT credit, is not available; pre-export working capital finance is difficult to obtain; MSMEs cannot get export credit financing to support sales efforts and have difficulty accessing factoring and other related services to facilitate collections; and international monetary transfers by the Salvadoran banking system were expensive and slow. This is also exactly our situation.
On opportunities, El Salvador not only participates in a number of bilateral free trade agreements in Latin America, including agreements with other Central American nations, Mexico, Chile, the Dominican Republic, and Panama, but is also but has a free trade agreement with the US. El Salvador has many opportunities to establish export “beachheads” through sales to the Salvadoran community in the United States. And, given its location and existing capabilities, the country can achieve decisive economies of scale and establish itself as a leading regional centre for the provision of professional services, financial services, transportation services, and warehousing, distribution, and logistical services.With respect to threats, obviously, free trade agreements pose serious threats to the El Salvadoran economy.
At the time the SWOT analysis was undertaken, quota restrictions on apparel exports from China, India, and other Asian nations were scheduled to be eliminated on January 1, 2005. With this, El Salvador could lose up to half of its apparel exports, with potentially devastating consequences for balance-of-payments and employment. The ability of Salvadoran exporters to tap into niche markets in the United States could be affected by changes in U.S. immigration policies and/or the changing demographics of Salvadorans in the United States. Such changes could also reduce the volume of annual remittances to El Salvador. There was internal political instability and obviously this discouraged investment and the growth of new exports; and posed a dollar-denominated production cost rise which was faster than productivity rates Salvadoran export competitiveness will be seriously eroded.
To maintain its international competitiveness, El Salvador put measures to increase productivity throughout its economy and especially in exporting sectors. In doing this, the Salvadoran invested new investment in exporting industries and technology acquisition. This, in turn, will require attracting foreign investment and improving the availability of MLT credit.Initial export promotion efforts concentrated on products and industries where medium-term competitiveness can be established and sustained, and where markets with significant growth potential was identified.
Given its inability to resort to competitive currency devaluations, El Salvador emphasized production and export of products having high value and significant domestic value-added (i.e., products that are highly differentiated and that embody significant intellectual content). With time, as opportunities permitted, Salvadoran exporters ascended the international value-added chain by marketing and distributing branded products within targeted export markets. And, within the Mesoamerican region, El Salvador invested efforts to exploit opportunities, consolidate and expand its leadership as a regional financial, communications, transportation, and services hub.
Zimbabwe shares similar characteristics with El Salvadoran particularly of the issues of:
Key lessons from El Salvador are that in order to promote exports, the starting point is to carry out a SWOT analysis which will inform priorities which gives the country quick wins. We have to target our exports promotion efforts basing on our comparative advantages and the existing demand. In the same vein, we need to take care of our weaknesses and threats as both factors inhibit exports. Then, there is need to establish export promotion agency whose key mandate two fold; that is, support SMEs exports and supports the establishment of business linkages with global players. In our case we have ZimTrade in place what is needed is to equip it with sufficient resources so that it can deliver its mandate on export promotion. In this vein, we may want to start by targeting our exports promotion efforts to South Africa and Europe where the majority of our people resides. In any way, these are our traditional exports markets which can be easy starting point as we know their culture, appetite and we have trade agreements with them.
By: Dr Gift Mugano
Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University. Feedback: gmugano@gmail.com. He is currently in Port Elizabeth, South Africa.