The development challenge in El Salvador: is lower crime enough?

El Salvador’s government overhauled the country’s security policy and ended gang violence, lifting what was thought to be the main constraint on the economy. There have been measurable improvements in such areas as emigration, exports and investment – but to date, growth has improved only modestly.

El Salvador is a small country of 6.4 million people, neighbouring Guatemala, Honduras and Nicaragua. Its president, Nayib Bukele, is one of the most popular yet controversial leaders in the western hemisphere. His policies – from adopting the cryptocurrency Bitcoin as legal tender to building a vast security state – have repeatedly put his country in the international spotlight. Unlike the adoption of Bitcoin, which resulted in vast news coverage but no material gains, the crackdown on gangs has transformed daily life in a country that was, until recently, one of the most violent in the world.

For decades, researchers agreed that crime was a key constraint on El Salvador’s economy. Violence pushed people to emigrate, discouraged investment, raised business costs and helped to trap the country in sustained period of low growth.

President Bukele's security policy has basically removed that constraint. If the old diagnosis was right, El Salvador’s economy should be booming. But the evidence so far is not clear-cut. Homicides and street robbery have collapsed, emigration has slowed and investment has risen – but growth has improved only modestly and the country's export base remains narrow.

El Salvador’s case has broad relevance for Central American countries like Mexico, which still have endemic crime and violence problems. While it is still too early to draw firm conclusions, El Salvador illustrates that although security is necessary for prosperity, it is not by itself a growth strategy.

The old trap: how has the civil war held El Salvador back?

El Salvador has never fully recovered from its civil war, which lasted from 1979 to 1992 and claimed an estimated 75,000 lives. Although the economy has grown steadily since the early 1990s, the country’s relative living standards have barely improved.

Before the conflict, Salvadoran income per person was at roughly 11-12% of US levels – meaning that Americans were around eight or nine times richer (see Figure 1). During the war, El Salvador's relative income collapsed to around 6-7% of US levels. The country eventually recovered its absolute pre-crisis income level, but it has regained only a small part of the ground that it lost relative to richer economies.

Figure 1: El Salvador’s GDP per capita relative to the United States (constant 2015 dollars)

Source: Author’s calculations using World Development Indicators

El Salvador's exports tell a similar story. The country has failed to develop a new breakout sector since the end of the civil war. Textiles, long one of its most important export industries, have drifted downward as a share of the world market for a decade (after stagnating during the decade prior), while agriculture has been broadly stable and other sectors have remained small (see Figure 2).

El Salvador’s performance in the Economic Complexity Index – which measures the relative sophistication of every country's productive capabilities – is flattering, but only superficially. Although El Salvador has climbed ahead of 11 other countries in the ranking, just a handful of new goods have been added to the export basket, and their contribution to income per person has been negligible (at $7 per person per year).

Figure 2: Global market share by sector, 1995-2024

Source: Atlas of Economic Complexity, Author’s calculations

Note: Grey lines include services, chemicals, metals, electronics, minerals, stone machinery, and vehicles

Exports have risen by about 11 percentage points, to 33% of GDP, over the last 20 years. But the composition of the increase is not ideal. The gains have not come from manufacturing and industry exports – sectors with positive economic spillovers, which have stagnated in real per capita terms.

Instead, they have mainly come from travel and tourism, which has risen from around $30 per person in 1995 to roughly $550 in 2024 – an achievement for a country that used to be known for endemic violence (see Figure 3). Still, tourism-led growth is unlikely to be enough to produce the productivity gains, supplier networks, technology transfer and skills effects that are associated with more complex tradable sectors.

Figure 3: Real per capita exports by sector, 1995-2024

Source: Author’s calculations using World Development Indicators

This stagnation was well diagnosed. Before Bukele, national and international development institutions, academic researchers and policy analysts broadly described El Salvador as trapped in a self-reinforcing ‘low-growth equilibrium’. High crime and violence encouraged emigration to the United States and elsewhere, reduced domestic investment and consumption, forced firms to spend on protection and extortion, and pushed the state to devote scarce resources to security.

Weak growth, low job creation and limited public investment then fed back into high unemployment, crime and further emigration. The result was a country with too little investment, too much emigration, weak productivity growth and limited fiscal space.

How have changes to security policy affected El Salvador?

Shortly after taking office, Bukele implemented a security policy that can only be described as draconian. By rounding up and imprisoning vast numbers of suspected gang members, largely without due process protections, the government reduced the power of gangs that had controlled neighbourhoods, extorted businesses and shaped daily life for decades.

The human rights costs have been severe. The state of exception powers used to carry out the arrests have weakened basic legal protections, mass detention has swept up many people without trial, and the presumption of innocence has been completely eroded.

Even so, the policy has been extraordinarily effective and popular. El Salvador's intentional homicide rate has fallen from more than 50 per 100,000 people to around two in only a few years. The country is now distinctly safer than its neighbours (see Figure 4).

Figure 4: Intentional homicide rate by country

Sources: World Development Indicators; UNODC; Policia Nacional Civil

It is hard to overstate the importance of this change. In a high-crime setting, firms face the ordinary costs of capital, wages and taxes, as well as a raft of hidden costs such as extortion, security, reduced mobility, threats to workers and uncertainty over whether investments can be protected. Households face similar constraints.

As such, sharply reduced gang activity should make it easier to work, travel, start businesses, stay in school and invest. Beyond the obvious quality of life effects of lower crime, there is this structural economic effect.

Outward migration has also slowed considerably. During and after the civil war, Salvadorans left the country in droves, with between 0.5% and 2% of the population leaving in any given year. That exodus helps to explain why there are around 2.5 million Salvadorans in the United States compared with 6.4 million people in El Salvador itself.

Today, net migration as a share of the population is near its lowest level since 1970 (see Figure 5). Lower crime is likely to be part of the explanation, although tighter control of the Mexico-US border has also played a role.

Figure 5: Net migration as a share of El Salvador’s population, 1960-2024

Source: Author’s calculations using World Development Indicators

Investment has also risen substantially. Before Bukele took office, gross fixed capital formation generally ranged from 15% to 18% of GDP and lagged some regional peers. It now sits around 23% of GDP, roughly in line with Honduras and Nicaragua (see Figure 6).

The increase is important because it suggests that firms, households and/or the state are committing a greater share of the economy’s resources to the future, rather than only consuming the surplus generated by lower violence. That said, it is still too early to tell exactly which sectors are receiving the investment.

Figure 6: Fixed investment as a share of GDP, 2010-24

Source: Author’s calculations using World Development Indicators

What about wider economic growth?

If the old diagnosis was correct, these three changes – to crime, emigration and investment – should have turbocharged economic growth. A country that is safer, retains more workers and invests more should grow faster.

El Salvador has grown faster, but less than the scale of the security shock might suggest. Before the Covid-19 pandemic (and Bukele’s new security policy), GDP per capita was growing at a compound annual rate of roughly 2.2%. The comparable figure for the post-pandemic period during which crime collapsed is 2.8% – a moderate improvement (see Figure 7). That has reduced the time needed to double living standards from around 32 years to around 25 years, but it is not a decisive takeoff.

Figure 7: Real GDP per capita growth, 2015-25

Source: Author’s calculations using World Development Indicators

There are benign explanations for this. It takes time to translate improved conditions into investment plans, which then take time to produce economic output. Firms need to identify opportunities, secure financing, hire workers, build facilities and enter markets. Tourism may respond to improved security more quickly, but manufacturing, logistics and higher-value services have longer lead times. The apparent uptick in growth in 2025 may be evidence that the payoff is beginning to materialise.

But the foreign direct investment (FDI) data are less encouraging. FDI has not yet surged. It has only recovered after a dip in 2022, when financial markets were pricing a high risk of sovereign default amid concerns about fiscal policy and the Bitcoin experiment (see Figure 8). It is not yet the kind of sustained increase that would be expected if foreign firms were lining up to build new productive capacity in El Salvador.

This matters because, besides capital, FDI brings technology, managerial know-how, market access, supplier relationships and training that spill over into the wider economy.

Figure 8: Inflows of foreign direct investment as a share of GDP, 2010-24

Source: Author’s calculations using World Development Indicators

Recent export data point in the same direction. Lower crime may have made El Salvador safer and more attractive, but a broad transformation of the country's tradable sectors is not yet visible. The country is exporting more services, especially tourism, but it is not yet moving into a wider set of more complex goods and services. The distinction is relevant because a safer economy can enjoy a consumption and tourism boom without becoming much more productive.

What new constraints might be holding El Salvador back?

It is possible that the same political model that improved security has created new economic risks. Under Bukele, El Salvador's democratic institutions have been heavily eroded. The governing Nuevas Ideas party and its allies have removed and replaced the constitutional chamber of the Supreme Court, enabled presidential re-election despite a constitutional ban, renewed emergency regimes that suspend basic protections, and weakened judicial independence.

Freedom House data show deterioration across most indicators of civil liberties and political rights, and the Economist Intelligence Unit's democracy index tells a similar story (see Figure 9).

Figure 9: Civil liberty sub-category scores, 2012-24

Source: Freedom House, Freedom in the World data

The theory is that while investors value low crime, they also value the rule of law. A government that can act decisively against gangs can also act decisively against judges, opponents, firms, contracts and property rights.

In the short run, the benefits of government discretion may outweigh the costs, but in the long run, unchecked executive power can produce significant uncertainty. Firms making small, reversible investments may tolerate the risk, but firms making large, irreversible investments in manufacturing industries may hesitate unless they trust the courts, the tax authority, regulators and future governments.

In the background, El Salvador’s fiscal constraints have also tightened. The country’s economy is dollarised (it uses the US dollar as its primary currency), which limits monetary flexibility. On top of this, public debt now exceeds 100% of GDP (double the pre-pandemic level) and costs the country around 5% of GDP in annual interest payments.

In February 2025, the International Monetary Fund (IMF) approved a $1.4 billion loan agreed after years of stalled talks and conditional on the government going back on its Bitcoin project and cutting the budget deficit by 3.5% of GDP over three years. The programme should shore up macroeconomic stability, but the fiscal constraints limit how much the state can invest in the productivity-enhancing projects that growth requires.

Is low crime enough to boost economic development?

El Salvador has achieved something remarkable. At the cost of human rights and due process, it has made a country with a painful history of violence dramatically safer and disrupted the old low-growth equilibrium. Crime has collapsed, emigration has slowed and investment has risen.

But the evidence so far suggests that improved security is the beginning, not the end, of a new phase in the country’s economic development. Growth has improved, but not by enough to suggest a decisive break. FDI has recovered but not surged. Tourism and services have grown, but there is still no evidence of a broader productive transformation.

The experience highlights that security is only part of the development problem. El Salvador has better conditions for growth than it did a decade ago, but it still has to build the industries, skills, institutions and firms that turn these (remarkably) better conditions into productivity gains.

Low crime has made many investments possible. But improved security cannot by itself spur promising sectors, train or import key skills, build supplier networks, maintain credible institutions or guarantee macroeconomic stability.

For Bukele's supporters, the country’s toughest problem has been solved, and the economic gains should compound over time. For sceptics, the security state has brought peace at the cost of institutions – and this will eventually deter the investment needed for development.

While El Salvador has created the conditions for an economic acceleration, it still needs a growth strategy to capitalise on it. Safer countries do not automatically become richer. They must still compete in the global marketplace for investment and exports, which requires active planning and follow through.

Where can I find out more?

El Salvador: 2025 Article IV Consultation and First Review Under the Extended Fund Facility: A detailed IMF diagnosis of El Salvador's macroeconomic imbalances – debt, fiscal policy, external buffers and the Bitcoin project – together with the reform programme now underway.

El Salvador's (perpetual) state of emergency: how Bukele's government overpowered gangs: A six-part investigation into how the state of exception dismantled the MS-13 and Barrio 18 gangs, and what it might mean for the country's future, by InSight Crime.