Recent analysis by Harvard University has shown that El Salvador has risen in the economic complexity rankings. As a country develops new productive capabilities that are exported, it becomes more economically complex. Harvard’s analysis places El Salvador as the 59th most complex economy out of 100 countries included in their index. The report also forecasts that El Salvador’s will rise in the economic complexity rankings by 14 spots over the next few years as El Salvador’s economic complexity grows at a rate of 1.48% per year.
What Do Economic Complexity Rankings Mean?
Economic Complexity can be described as a country’s diversity of productive capabilities as demonstrated by the different products that it exports. Countries that export a diverse array of complex products like electronics, machinery, auto parts, and other manufactured goods tend to grow faster than countries that export a very limited scope of products. Over time, complex economies have been shown to grow faster than their peers, and improvements in a country’s economic complexity ranking often correlate with stronger long-term growth prospects.
Why Should We Care?
Globalization has led to increasing economic complexity, which has contributed to accelerated economic development around the world. As technology changes at an accelerating pace, countries need to develop new capabilities to surpass their peers in the economic complexity rankings. Harvard’s Center for Growth Research maintains the Atlas of Economic Complexity, an online tool that allows users to analyze the different complexities of economies around the world.
Their latest Economic Complexity report analyzed the changing complexity of 100 countries and how it will affect future growth. This study is important because it has shown improvement for El Salvador and highlights specific industries that El Salvador is developing that can be used for future investment research, particularly as its economic complexity ranking continues to rise.
What Industries Are Fueling El Salvador’s Economic Complexity?
- Textiles/Apparel: Garments remain the dominant sector of El Salvador’s exports. Knitted shirts and sweaters are especially common.
- Agriculture/Industrial Products: Salvadoran exports also include sugar, plastic packaging bags, plastic containers, copper smelting, and nuts and dried fruits.
- Electronics: The Growth Lab lists electronic capacitors as a commonly exported product, which demonstrates the development of electronics assembling and manufacturing capabilities.
Of note, despite adding complexity through diversification of exports, the U.S. still accounts for nearly 80% of El Salvador’s exports, showing strong trade linkages with its northern neighbor. El Salvador also benefits from CAFTA-DR.
How Does El Salvador Compare Regionally?
El Salvador was not ranked highest in its potential to increase complexity, but it also did not rank lowest. Countries like Guatemala have the potential to grow their complexity faster than El Salvador, but are starting from a lower rank. Compared with most of its Central American neighbors, El Salvador ranked higher.
Vietnam leads the list of countries projected to grow fastest over the next decade. Mr. Hausmann, director of the Growth Lab, said, “Countries that are now diversifying into more complex economic activities than their peers today are the ones that we think will generate most of the growth in the global economy in the coming decade.” The full article from MIT Technology Review can be found here.
Multilateral Agencies Expect Strong Growth Going Forward
- International Monetary Fund (IMF): IMF projects 2025 growth to be around 4% by the end of 2025.
- World Bank: Projected growth of 3.5% in 2025 and 3% in 2026.
- Economic Commission for Latin America and the Caribbean (ECLAC): Estimates GDP growth of 3.5% in 2025.
All of these estimates put El Salvador’s growth rate well above the regional average of 2.4% and represent acceleration from 2.6% growth in 2024.
How Nearshoring and FTAs Drive Increases in Economic Complexity
One of the reasons for Salvadoran exports gaining complexity is that multinational companies are investing in El Salvador. They are attracted to El Salvador because it allows companies to nearshore production relative to Asia. Companies can take advantage of FTAs with the United States and Europe while maintaining shorter supply chains with suppliers located in Central America. Additionally, the government has incentivized companies to produce in the country through a variety of programs, such as tax holidays when operating in free trade zones, faster permitting processes, and investments in ports, logistics, and reliable energy.
How Is Economic Complexity Related to the Workforce?
Workforce development will be key to continuing to grow economic complexity. Over the last decade, the Salvadoran government has invested in improving technical education as well as manufacturing-specific skills training. Many multinational manufacturers have invested in training and bilingual services. Additionally, there has been an increase in technical colleges that offer students job-ready skills. While workforce skills have improved over the last decade, there is still significant room for productivity gains moving forward.
What Does Higher Economic Complexity Mean for El Salvador?
Increased complexity reduces risk for investors and corporations because it signals that the necessary inputs and skills are already present in the country or can easily be sourced from neighbors. For policymakers, the complexity analysis shows the benefits of economic diversification. For countries like El Salvador, this improvement signals an opportunity to gain investment from companies that are looking to nearshore their supply chains.