mated at 6.4 percent of GDP and is set to rise to 6.8 percent of GDP in 1996. The government remains highly dependent on revenue from oil exports and domestic fuel sales, but is seeking to increase revenue from value-added and income taxes. During 1994, increased production in the petroleum, banana, construction, and manufacturing sectors generated real economic growth of four percent, double the rate of 1993. Unfortunately, the long-awaited general economic recovery was delayed by the impact of the border conflict on the domestic economy, several months of electricity rationing beginning in August 1995, and the onset of a political crisis that led to the resignation of the vice president in October 1995. Although most observers expect growth to slow to less than 2.5 percent in 1995, the official projection is for growth of at least three percent in 1995 and up to four percent in 1996. Gross domestic product (at current prices) should reach nearly $18 billion in 1995, producing a GDP per capita of $1,560.

In 1994, Ecuador ran a $435 million merchandise trade surplus and a current account deficit of $807 million due to a services deficit of $1,387 million. Although 1995 exports are running about 25 percent above 1994 levels, increased military imports should reduce the trade surplus to around $300 million.

A major accomplishment of the Duran-Ballen administration has been the reduction of inflation from 60 percent in 1992 to 25.4 percent in 1994. Consumer prices are likely to rise by 21-23 percent in 1995. The government hopes to reduce inflation to 17-19 percent in 1996. After two and a half years of capital inflows and a rapid increase in the money supply, M2 growth in 1995 is expected to drop below 40 percent. The border conflict, the political crisis, and increasing expectations of a devaluation, combined with the government's willingness to tighten liquidity in order to protect both the exchange rate and its foreign reserves, have kept real interest rates on 90-day deposits at around 20 percent for much of 1995. With lending rates reaching 35 percent in real terms, the productive sector of the economy has come under increasing pressure and a growing proportion of loans are past-due. The Central Bank attempts to smooth out fluctuations in liquidity through weekly bond auctions and interventions in the secondary market, but no longer uses bank reserve requirements as a monetary tool. During periods of capital inflows, the government compensates for the inflationary effects of foreign exchange influx by increasing its sucre deposits at the Central Bank.

2. Exchange Rate Policies

In 1992, Ecuadorian monetary authorities carried out a substantial one-time devalution, liberalized exchange rate policy and embarked on a controlled float of the sucre. A high interest rate differential between Ecuador and the United States attracted substantial net capital inflows and kept the nominal depreciation of the sucre below the rate of inflation. The strong currency and earlier trade liberalization measures made imports more competitive and served as an anchor against inflation. Ecuadorian exporters, however, are increasingly caught between rising sucre costs and stagnant sucre earnings.

In December 1994, the monetary authorities introduced a pre-announced exchange rate band, with a projected annual devaluation rate of 12 percent. The band was adjusted in February 1995 due to the border conflict and again in October 1995 as the currency came under pressure due to the political crisis and fears of overvaluation. The devalution rate is now projected at 16.5 percent for 1996.

Foreign currency is readily available on the free market, trading at 2,943 sucres to the dollar in mid-January 1996. There are no restrictions on the movement of foreign currencies into or out of Ecuador. The state oil company and other public entities are required to exchange dollars with the Central Bank at a less favorable rate than obtainable on the free market. During 1995, however, the official spread was reduced from 11 percent to 2 percent below the free market rate. By the end of October 1995, foreign exchange reserves had risen to $1.63 billion, enough to cover imports for four months. Renewed payment of debt service in 1995 has been offset by increased inflows of multilateral development funds.

3. Structural Policies

The Duran-Ballen administration has enjoyed only partial success with a structural reform program designed to promote investment and economic growth. Progress was made on budgetary reform, reduction of public employment levels, and elimination of unnecessary and market-distorting regulations. With a few exceptions for pharmaceuticals, some foodstuffs, and fuels, all prices are now set by the free market. New laws have estabished a basis for the development of equity capital markets, modern regulation of financial institutions, and improvement in the security of agricultural land tenure for both peasants and agrobusiness. In most cases, however, implementation has lagged behind legislation.

The 1993 state modernization law allowed private sector participation in "strategic sectors" of the economy, including petroleum, electricity, and telecommunications, but only on a concession basis. The National Modernization Council (CONAM) has sought to promote privatization and the state development banks have sold much of their equity stakes in commercial enterprises to the private sector. The armed forces have expressed interest in selling some shares in militaryowned companies to private sector partners. In August 1995, CONAM completed the sale of Ecuatoriana, the bankrupt state airline, and Congress enacted legislation to sell 35 percent of the shares in the state telephone company, EMETEL. In spite of the severe electricity shortage, Congress has yet to pass a law to encourage privatization of the electric utility.

The government's plan to contract with a private consortium to construct and manage a second oil pipeline across the Andes faces political opposition. Tentative steps have been taken toward granting private concessions for public works, the civil registry, airports, ports and customs administration, and postal and railroad services. There is a general recognition of the need for major reform of public education and the social security system's troubled pension and health systems, but the government faces opposition from public sector unions.

Investment liberalization measures in 1991 and 1993 provided foreign investors with full national treatment and eliminated prior authorization requirements for investment in most industries, including finance and the media. Specific restrictions, most applicable to Ecuadorian as well as foreign investors, remain for petroleum, mining, electricity, telecommunications, and fishing investments. A bilateral investment treaty that provides free transfers and a binding arbitration dispute settlement procedure was signed with the United States in August 1993 and ratified by Ecuador's Congress in September 1994.

The capital markets law equalized income tax rates on foreign and domestic companies at 25 percent. A value-added tax of 10 percent applies to imports and sales of goods and services in the formal sector. Utilizing the more investor-friendly procedures of the November 1993 hydrocarbons law, the goverment generated considerable foreign interest in the 1994 seventh petroleum exploration licensing round. 4. Debt Management Policies

In February 1995, Ecuador and its commercial creditors exchanged financial instruments to complete a comprehensive restructuring of its $7.1 billion external commercial bank debt and associated arrears. Under the agreement, creditors exchanged existing instruments for new bonds carrying a 45 percent discount or for par bonds with fixed interest rates varying from 3 to 5 percent. The government spent about $540 million, using multilateral bank financing, to purchase collateral for debt principal and interest. Service on the commercial debt should average about 1.7 percent of GDP through the year 2000, but will rise thereafter unless the government takes steps to retire some of its debt stock.

Ecuador has concluded bilateral rescheduling agreements with most of its official creditors under a 1994 Paris Club agreement covering $304 million in pre-1983 obligations that fell due in 1993 and 1994. However, the financial demands of the border conflict and the commercial bank debt restructuring has resulted in some shortterm arrearages on bilateral debt payments. In 1994, Ecuador completed negotiations on a major structural adjustment loan with the World Bank. In November 1995, the government announced that it was negotiating with the IMF to replace its March 1994 stand-by arrangement with a less strict IMF monitored program. At the end of the first half of 1995, Ecuador's external public debt was about $12.7 billion, down $776 million from 1994. Total public and private debt service owed in 1994 amounted to 69 percent of goods and services exports and 19 percent of GDP. Settlement of the commercial bank debt issue was a major priority for the Duran-Ballen administration and its resolution has improved Ecuador's creditworthiness and attractiveness to investors.

5. Significant Barriers to U.S. Exports

Ecuadorian trade policy was substantially liberalized during the early 1990's, resulting in a reduction of tariffs and tariff dispersion, elimination of most non-tariff surcharges, and enactment of an in-bond processing industry (maquila) law. The Duran-Ballen administration continued the move towards open trade by concluding bilateral free trade agreements with its Andean Pact partners Colombia, Bolivia, and Venezuela. After two years of negotiations with its major trading partners, Ecuador signed its accession to the World Trade Organization (WTO) in September 1995, and became a WTO member on January 30, 1996.

Since 1991, duties and fees for most imports into Ecuador fall in the 5 to 20 percent range. Écuador joined with Colombia and Venezuela to establish an Andean

common external tariff on February 1, 1995. Special exemptions allow Ecuador to continue to charge lower rates for about half of the items on the common tariff schedule. Andean Pact price bands that have resulted in highly effective tariffs for a variety of agricultural products are scheduled to be phased out.

Customs procedures can be difficult, but are not normally used to discriminate against U.S. products. An ongoing customs reform is designed to reduce corruption and improve efficiency in the customs service, thereby eliminating a major constraint on trade. The government has phased out its policy of setting minimum prices for assessing customs duties on certain imports, and has promised not to use sanitary requirements for imported foods and other consumption goods to block the entry of some imports from the United States. Import bans are in effect for used clothing, used cars, and used tires, but are scheduled to be eliminated in 1996. All importers must obtain a prior import license from the Central Bank, obtainable through private banks. Licenses are usually made available for all goods.

A 1976 law prevents U.S. and other foreign suppliers from terminating existing exclusive distributorship arrangements without paying compensation. Foreigners may invest in most sectors, other than public services, without prior government approval. There are no controls or limits on transfers of profits or capital, and foreign exchange is readily available.

Government procurement practices do not usually discriminate against U.S. or other foreign suppliers. However, bidding for government contracts can be cumbersome and time-consuming. Many bidders object to the requirement of a bank-issued guarantee to ensure execution of the contract.

6. Export Subsidies Policies

Ecuador does not have any explicit export subsidy programs. The government has terminated a temporary program to compensate banana and shrimp exporters for increases in fuel costs.

7. Protection of U.S. Intellectual Property

Ecuador's protection of patent and trademark rights is based on Andean Pact Decisions 344 and 345, while copyrights are covered by Decision 351. The decisions provide 20-year patent terms (except for some pharmaceuticals), protection for plant varieties, and control of parallel imports. Ecuador's implementing regulations provide transitional or pipeline protection for patents registered during 1994.

Ecuador and the U.S. signed a bilateral Intellectual Property Rights Agreement (IPRA) in October 1993 that guarantees full protection for copyrights, trademarks, patents, satellite signals, computer software, integrated circuit layout designs, and trade secrets. However, the Ecuadorian Congress has not ratified the IPRA or enacted legislation to harmonize local law with the agreement's requirements.

Enforcement of intellectual property rights remains a problem for Ecuador. Copyright infringement occurs and there is widespread local trade in pirated audio and video recordings, as well as computer software. Local registration of unauthorized copies of well-known trademarks is a problem since the government lacks the resources to monitor and control such registrations. If a recent court decision is upheld, foreign trademark owners may be prevented from terminating license arrangements with Ecuadorian companies. Some local pharmaceutical companies produce or import patented drugs without licenses and have sought to block improvements in IPR protection.

8. Worker Rights

a. The Right of Association.-Under the Ecuadorian constitution and labor code, most workers in the private and parastatal sectors enjoy the right to form trade unions. The revised labor code of November 1991 raised the number of workers required for an establishment to be unionized to 30. Less than 14 percent of the labor force, mostly skilled workers in parastatal or medium to large sized industries, is organized. Except for some public servants and workers in some parastatals, workers by law have the right to strike. Sitdown strikes are allowed, but restrictions on solidarity strikes were imposed in 1991. Ecuador does not have a high level of labor unrest. Most strike activity involves public sector employees.

b. The Right to Organize and Bargain Collectively.-Employers with more than 30 workers belonging to a union are required to engage in collective bargaining when requested by the union. The labor code prohibits discrimination against unions, requires that employers provide space for union activities, and provides for resolution of conflicts through a tripartite arbitration and conciliation board process. Employers are not permitted to dismiss permanent workers without the express permission of the Ministry of Labor. Despite reforms in 1991, employers consider the labor code to be unfavorable to their interests.

The in-bond (maquila) law permits the hiring of temporary workers in maquila industries, effectively limiting unionization in the sector.

c. Prohibition of Forced or Compulsory Labor.-Compulsory labor is prohibited by both the constitution and the labor code and is not practiced.

d. Minimum Age for Employment of Children.-Persons yournger than 14 years old are prohibited by law from working except in special circumstances such as apprenticeships. Those between the ages of 14 and 18 are required to have the permission of their parent or guardian to work. In practice, many rural children begin working as farm laborers at about 10 years of age, while poor urban children under age 14 often work for their families in the informal sector.

e. Acceptable Conditions of Work.-The labor code provides for a 40-hour work week, two weeks annual vacation, a minimum wage, and other variable employerprovided benefits such as uniforms and training opportunities. The minimum wage is set by the Ministry of Labor every six months and can be adjusted by Congress. Mandated bonuses bring total monthly compensation to about $140. The Ministry of Labor also sets specific minimum wages by job and industry so that the vast majority of organized workers in state industries and large private enterprises earn substantially more than the general minimum wage.

The Duran-Ballen administration has proposed a simplification of the complex wage and bonus system. The labor code also provides for general protection of workers' health and safety on the job. Occupational health and safety is not a major problem in the formal sector. There are no enforced safety rules in the agriculture sector and informal mining.

f. Rights in Sectors With U.S. Investment.-The economic sectors with U.S. investment include petroleum, chemicals and related products, and food and related products. U.S. investors in these sectors are primarily large, multinational companies which abide by the Ecuadorian labor code. In 1995 there were no strikes or serious labor problems in any U.S. subsidiary. U.S. companies are subject to the same rules and regulations on labor and employment practices governing basic worker rights as Ecuadorian companies.

Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1994

11995 figures are Central Bank projections (as of Nov. 95).

2GDP at market cost; Central Bank exchange rate as shown elsewhere.

3 Other services includes: Commerce, transport, storage, communications, restaurants and hotels. *Includes maquila processing.

5 Ministry of Planning household survey.

6 Loan rate.

7 Excludes military aid.

1. General Policy Framework

With increased output in the agricultural, transport, and manufacturing sectors, the Salvadoran economy stayed on a steady growth course in 1995. Real GDP growth was estimated at 5.5 percent, moderately slower than the 6 percent achieved in 1994. Inflation for the year was estimated to be in the 11 to 13 percent range, an increase over 1994's 8.9 percent rate and substantially higher than the 6-8 percent forecast. The unexpected increases were attributed to a record 2.6 percent spike in prices in July, stemming from a value added tax (VAT) tax hike and public sector utilities rate increases, and aggravated by the impact of heavy rains on agricultural prices.

El Salvador's balance of payments continued to show a net surplus. Exports in 1995 grew slightly faster than imports, narrowing El Salvador's almost two-to-one trade deficit. As in the previous year, the large trade deficit (1.6 billion dollars) was