El Salvador’s Dilemma of Painful Prosperity : Trade: Free market reforms are triggering investment and expansion, but knocking the props from under the urban poor.

For the young businessman, this is the best of times: Business is strong and life is good. For Victoria Miranda Vairez, it is the worst of times: Business is almost nonexistent and she is losing her home.

“We’ve never done better,” said the businessman, who asked that he not be identified. “Production, demand are all up, and so are profits” at his agricultural enterprise.

It looked that way as he sipped a whiskey while two red and yellow parrots chattered against the rustle of the tree limbs shading the veranda of his more than comfortable home in San Salvador’s well-to-do upper Escalon district.

His life and business were never bad. The family-owned enterprise prospered even during the worst of his country’s civil war and the corrupt and inefficient past governments.

“But we are flourishing now because of Cristiani’s policies,” he said, raising his glass in a salute to Alfredo Cristiani, Salvador’s free market president.

Exports in 1990, the first year of Cristiani’s administration, grew 18%, and agricultural production increased by 8%. Inflation fell from 25% to an estimated yearly rate for this year of 12.3%, the lowest in Central America.

Real economic growth climbed 3.5% in 1990 and should reach 4.5% this year, again the highest in Central America and greater than the rate of such growth in the United States.

In fact, the prosperity for some sectors has caused many businessmen interviewed to ask for anonymity because of a recent wave of kidnapings for ransom by both right-wing groups and the country’s radical leftist rebels.

Less than half a mile away from upper Escalon is the personification of the other side of El Salvador’s economic story, Miranda Vairez, who belongs to the half of the nation’s workers who the Salvadoran Foundation for Economic and Social Growth estimates make their living outside the formal economy.

She stands in cheap, plastic sandals in the dirt behind a crude, handmade stand where she peddles razor blades, coconut milk, tortillas, warm soda, fried banana chips and assorted odds and ends to the poor commuters who come and go at a nearby bus stop.

At least she tries to sell. “People just don’t have any money,” she shouted against the bellowing buses waiting at the entrance to Plaza Masferrer.

Only a leaky tin roof shades her from the sun, and a sooty residue from the buses settles over everything in the area.

She tells a reporter about her home, located in a ragged canyon just below the site of her stand. A patch of scrub trees surrounds the house--a hut with a corrugated tin roof and walls made of a mixture of splintered plywood and crooked saplings.

“I think President Cristiani is a good man, but he is rich and he doesn’t understand how hard it is for the poor to make a living. And now he is making life worse.”

Life has never been easy for most Salvadorans, but the current misery for the country’s urban poor is a result of Cristiani’s free-market policies, which have sharply increased costs for the products Miranda sells, costs that she has to pass on to her customers, making it even harder for them to buy.

According to the Center of Technological and Scientific Studies, 90% of Salvadoran workers live in some poverty, meaning they can’t afford the $282 a month reckoned to be necessary to feed a family of four. That poverty figure in 1989 was 62%.

Eduardo Ramierez is one of those workers. He makes about $5 a day selling fruit, he told the newspaper Diario Latino. “I have four children,” he told the paper, “but this year I can’t send the two oldest to school, and they had to stop studying.”

His wife, Maria, gave details. Earlier this year, the price of a pound of beans was 35 cents. This month the same quantity costs more than a dollar. “Milk is a luxury and the price of eggs has gone up. We are poor and can’t afford to eat,” she said.

Poor as the Ramierezes are, others are far worse off, according to William Pleitez, a private Salvadoran economist. He recently told Diario Latino that a third of the people here live in “extreme poverty.” That is, they are unable to earn enough to eat or provide any permanent shelter.

But while Miranda and her urban customers are suffering what Cristiani admitted in an interview is a painful adjustment, much of the economy, particularly in the countryside, is booming.

Coffee, the country’s main export product, brought in $250 million in net profits last year, and there were increases in the production of sugar, rice, beans, corn and sorghum.

Cristiani broke up monopolistic marketing boards for most agricultural products and abolished government agencies that controlled the production and prices of other goods.

“This increased prices at home,” a foreign economic expert said, “but it increased production and exports, so profits and wages went up. There were record crops and even labor shortages in the fields and coffee farms.”

By lowering all import tariffs and abolishing many altogether, Cristiani also “opened up the economy to trade, “ said the economist. “He wanted more competition, and it worked. Imports have increased, but there have been no major bankruptcies.”

At the same time, the administration cut taxes, but widened the tax base. As a result of these actions and the increases of profits for those taxed, government revenue has increased, while spending has declined 15% to 20%.

Phillip Hand, a 44-year-old San Francisco-born businessman here who runs one of the country’s largest food production plants, said in an interview that Cristiani’s program has given him both the incentive and the opportunity to expand.

He now employs 300 permanent workers in a large plant that exports canned food and beverages throughout Central America. He even sells refried beans to Mexico and is test marketing some of his products in the United States, particularly in those areas where many Salvadorans live.

“It is a case of taking advantage of opportunities,” he said. “There has been a change in the mentality of businessmen and workers alike. Both are more responsible. There has been a maturing on both sides.”

Cristiani’s “measures are the right ones,” Hand said, “even when they hurt.”

And hurt they do, even by Cristiani’s reckoning. “This is the stabilization phase,” he said in a recent interview. “It requires the most sacrifice.” And while the poor are affected, “we have to build for future economic growth,” he said.

“There is no question but that it is tough out there on working-class consumers,” said a foreign economist. “The government changed the rules of the game in order to promote earnings in the productive sector.

“People are hurting, but what are the options?”

And if the poor are suffering with a promise of better times ahead, the success of the current policy holds the seeds of serious problems for the government and those benefiting from its program.

“It’s called ‘Dutch Disease,’ ” said the economist. “It is the phenomenon of too much money in effect hollowing out the economy by leading to too much consumption and too little production.” According to the economist, the name resulted from the Netherlands’ having at one time gained a surplus of dollars from oil production, leading to a spending spree and a shift to consumerism.

“A problem exists with skipping directly from an agricultural-based production economy to a non-productive consumer economy and skipping the industrial phase” that marks normal economic evolution, the expert said.

“A big problem coming is that they are not creating a new, productive middle class,” said the foreign expert.

In El Salvador, the problem is caused not only by the sudden surge in imports and increase in export earnings, but because of a huge influx of dollars unrelated to the economic system.

Not only does the United States provide more than $ 1 million a day in economic aid, but Salvadorans living in the United States send $700 million a year to their home country in so-called remittances.

This has led to an unusually strong local currency and an increase in prices for directly imported goods and for many local products using imported parts.

“This is leading to too much inflation, too expensive currency. We are being squeezed,” Hand said.

Still, he said, “businessmen are crybabies. They are never satisfied. I know the government and the Central Bank are looking at solutions.”

Foreign experts agree, pointing out that the problem is new and hasn’t gotten hold of the economy over the long run. Local businessmen are still investing locally, said one economist, pointing out that there has been an increase in the importation of major capital products used for large-scale production and building, not just consumer goods.

In addition, said another expert, “growth here is the result of greater efficiency in both government and private sectors, increased productivity and the full utilization of capacity. There is more to the program than fancy imports and lots of dollars.”

Remember, said one diplomat, “all of this has been accomplished in a country at war. If that can be ended and the economy stabilized, even the poor here will have lives they never imagined.”