Thugs, Telecoms, and Taxes

MS13
MS-13 is one of the two major gangs present in El Salvador and is present throughout Central America

For the last 15 years, El Salvador has struggled to end a problem born out of its civil war: gang delinquency. Earlier this month, President Sanchez Ceren’s government implemented a new tax on telecommunication services to fight gang crime. The tax will be used to fund national security initiatives. It has been one clouded with controversy as both customers and service providers have questioned its efficacy and transparency.

How did the government arrive at this odd decision? Like in any messy situation, uncovering the past helps us understand the present.

I’ll explore this past in a few steps: I will first briefly explore the history of gang activity in El Salvador (Gangs). Second, I’ll discuss the important relationship between the state and telecommunication services (telecoms). Finally, I’ll explore why some aren’t too happy with the new tax (taxes).

(*Some of the sources in this post are in Spanish. It comes with the territory).

Thugs: The rise of gang activity

The history of gang activity in El Salvador has already been extensively covered by a number of sources (such as this one. This one and this one too), but for the purpose of this post, I’ll provide a quick rundown.

The rise of gang activity is an indirect consequence of El Salvador’s civil war. As I have previously written, the 1980s was a decade in which Salvadorans migrated in the masses to the US. For many Salvadoran migrants (legal and illegal), Los Angeles provided a nice city to settle in.

Those who flocked to L.A. faced many challenges as they tried to socially integrate with Californians. One of these challenges was dealing the “threat” from other diasporas and already-established gangs. Drawing on the need to protect one another, some Salvadorans banded together to create their own gang, the Mara Salvatrucha 13, or better known as MS-13.  As the 80s rolled into the 90s, the number of members grew, and so did the gang’s operations: what initially started out as a medium for self-protection had turned had into an avenue for gang activity.

Clinton
Salvadoran gangsters returned to their homeland after President Clinton signed a 1996 immigration law

In the mid-90s, President Clinton’s administration made moves to curb gang activity (and the number of illegal immigrants in the US). One of these was enacting the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (which in greater context was a response to the 1993 World Trade Centre attack and 1995 Oklahoma bombing). This facilitated the deportation of MS-13 members (and by now, the members of another gang prominent in El Salvador, Barrio 18) back to El Salvador: Insightcrime.org reported that according to one estimate, the US was deporting 100 criminals per week to between 2000 and 2004. That would have amounted to 5200 in one year, an amount the country was simply ill-equipped to deal with.

Taking advantage of the unprepared Salvadoran environment, gang members began extorting small businesses for funds. Anyone unwilling to pay their “protection money”, or “rent”, was (and presently, is) threatened with death. Protection money slowly became a valuable revenue stream for gang members: elsalvador.com reported this past June that the country’s bus operators alone (which operate as privately-owned entities) fork over a whopping US $34 million/year to gang members. With 2015 coming to a close, some gang member are asking for a “Christmas Bonus”.

Indeed, criminal activity, particularly extortions and murders, saw a steady rise in the 2000s and continued rising in the 2010s. The Garape Institute reported that in 2014, El Salvador’s murder rate had reached 61.1 per 100,000. This past August, The Guardian reported that El Salvador was on pace to replace Honduras as the country with the 2015 highest homicide rate in the world. Trends suggested that the rate would surpass 90 per 100,000 by the year’s end.

homicdes per 100 000 ppl chart
Source: Garape Institute (http://homicide.igarape.org.br/)

The rise in crime rates was impossible to ignore. The government was forced to act.

In the last 15 years, there have been two highly-publicized but polarizing initiatives introduced by both ruling conservative and liberal parties (ARENA and FMLN, respectively). The first was ARENA’s 2003 tough-on-crime “mano dura”, or hard-hand approach (Bruneau, Dammert, and Skinner, 2011, p. 58). This approach gave law enforcement powers to arrest anyone who was suspicious of gang activity. Naturally, the number of gang members arrested skyrocketed, and unfortunately, so did the country’s prison population.

Moreover, it did little to keep crime off the streets as a weak legal system allowed criminals to conduct operations from within their own jail cells. True, mano dura policies helped take thugs off the streets, but the policies failed when it came to reintegrating ex-convicts into society. Weak social programs meant that ex-cons had little incentive to abandon their old ways. ARENA would eventually lose power to the FMLN in the 2009 federal election.

Viejo Lin, leader of the 18th Street Gang, is able to conduct his business from his prison cell.

The second initiative was endorsed by the FMLN and concocted with the help of the Catholic Church: a gang truce. In 2012, in an effort to curb street violence, the government agreed to move high-ranking MS-13 and 18th Street Gang members from maximum security prisons in exchange for a truce between the two gangs. The initiative was criticized by many Salvadorans as it was thought that 1) it demonstrated the political clout of gangs, and 2) it was thought that gang members would use the established “peace” to strengthen their grips on territories.

In 2015, with some retrospect, those fears were justified: while the number of murders dropped shortly after the truce was established, extortions remained prevalent, and within one year, the truce crumbled, consequently raising the  national murder rate. As I alluded to earlier, this past August was the most murderous in the country’s history; officials speculated that the rise in murders was in retaliation for the government’s unwillingness to engage in further truce negotiations as well as the transfer of high-ranking gang members to maximum security prisons.

So with two initiatives that have failed, the country has turned to a new, never-before-tried idea: taxing telecom services to curb delinquency.

Telecoms: An Important History

For the common reader, the relationship between Central American telecoms and Central American governments is an insignificant (maybe even boring) one, but it’s one worth exploring because of the political ramifications it has in the present day. In fact, it’s important enough that I devoted an entire thesis to it (which you can check out here). For the purpose of this blog, though, I’ll hammer out the relationship à la Coles Notes, because it’s  particularly significant when put in the context of this new tax.

la libertad
The first telegraph line was established between the state capital and La Libertad, an important shipping port

Throughout the 19th century and most of the 20th century, Central American telecom services were wholly owned and operated by the state. This was because telecom services were seen as tools to pursue state interests.

Once Central American countries became independent in 1838, they prioritized themselves as agro-export economies. For El Salvador, this meant exporting coffee.

This led to the state using telecommunications as a means to export to the rest of the world—you can’t export to countries if you can’t speak with them. Thus, El Salvador built and operated a telegraph line that extended from the state capital to the country’s Pacific shipping port, La Libertad. As years progressed, telecom services were used to reinforce the state’s hand in political decisions.

This was the status quo until the 1990s. At the conclusion of the civil war, El Salvador, like many developing countries, looked for new revenue streams to fund infrastructure projects. In a bid to generate revenue and to upgrade its telecommunication services, the state liberalized its telecommunication sector (telephones, both fixed-line and cellular) as well as privatized its telecom operator. Currently, El Salvador and Central America’s major telephone operators are foreign owned, with Spain’s Telefonica, Mexico’s America Movil, and Luxembourg’s Millicom being prevalent in the region.

The results from privatization and liberalization were mixed. When put into the context of the new national security tax, though, they become interesting.

While the number of fixed-lined telephones saw minor growth, the number of cell phones in the country exploded. This is a trend that is seen throughout Central America, as the table below shows. The International Telecommunication Union, a branch of the United Nations, recently reported that the cellphone subscription rate in El Salvador is 144 subscriptions per 100 people. That means there are enough cell phones in the country for everyone to have almost 1.5 of them! (see Annex 4 of 2014 ITU report here)

Subscription Rate per 100 (2014)
El Salvador 144
Costa Rica 143.8
Nicaragua 114.6
Guatemala 106.6
Honduras 93.5

Earlier this year, the FMLN government saw this data as an opportunity to implement a new anti-gang “security” strategy by enacting a new law (effective December 1): The “Law of Special Contributions for Civil Security and Coexistence”. In short, the new law taxes telecom costumers 5% on their services. These taxes will go toward buffing up security services and funding social projects, such as “putting kids in schools” and funding ex-convicts’ reintegration into society (Article 11).  The country’s Finance Minister estimated that the tax would bring in $6 million every month for the initiative.

So, money will go to security operations. All seems well. What’s the problem?

Taxes: The Implication

While the initiative is new and touts promises, it easy to overlook the fact that, because it implicates services so widely used by the population, it carries social consequences. Some have even questioned whether the tax is truly necessary.

The decision to implement the law was rushed, and as a result, there was a lack of consultations with stakeholders. One of the most obvious reprucussions is that the tax will affect the bottom line of both the poorer segments of the population and the large telecom operators of the country. With respect to the latter point, that means that everyone will potentially feel the hit.

Regarding the poorer segments, it’s easy to shrug off the 5% tax and say well, it’s only 5%. However, what isn’t easy to shrug off is the annual average income of Salvadorans: according to the World Bank, in 2013, El Salvador’s Annual GDP per Capita was just below US $4,000. When you bring in less than $4,000 a year in income, a 5% tax is given a new perpsective. If historical trends are indicative of anything, it’s that income level isn’t going to skyrocket any time soon.

Annual GDP per Capita (US Dollars)

Country Name 1990 1995 2000 2005 2010 2013
Costa Rica 2,404.85 3,370.23 4,058.04 4,621.36 7,773.18 10,184.6
El Salvador 898.35 1,652.83 2,204.15 2,814.93 3,444.45 3,826.08
Guatemala 860.5 1,468.06 1,721.72 2,146.18 2,882.38 3,477.89
Honduras 621.75 699.4 1,139.51 1,401.97 2,078.32 2,290.78
Nicaragua 243.95 888.61 1,001.25 1,158.99 1,535.19 1,851.1

Source: World Bank (2015) World Development Indicators

To emphasize this point, in 2013, Salvadorans used, on average, 4.95% of their monthly salaries toward broadband internet services. It wasn’t as bad as Nicaragua’s 11.63%, but what this shows that, indeed, 5% can go a long wayFurthermore, a large segment of the population, both in El Salvador and Central America, relies on pre-paid cell phone cards as monthly, post-paid services are largely unaffordable. Customers are cutting it close as it is.

Wired broadband monthly subscription charge (converted to US Dollars)/ Percentage of GDP Per Capital Spent

Country 2013
Nicaragua 17.95/ 11.63%
Guatemala 28.03/ 9.67%
Honduras 13.94/ 7.3%
El Salvador 15.81/ 4.95%
Costa Rica 14.79/ 1.74%

Source: World Bank (2015) World Development Indicators; ITU (2014) World Telecommunications Indicators database

Adding to this set of problems is that the country’s Telecommunication Universal Service Fund, which is a fund dedicated to promoting access to telecommunication services for all, is largely non-existent. As I explained in chapter 5 of my thesis, funds collected by the telecommunication Universal Service Fund go toward funding electricity projects. As a result, the poorer segments will feel the financial hit while it becomes harder to access publicly-funded telecommunication services.

The second of these groups are the large telecom companies. The law doesn’t exempt large telecom companies from the tax, so companies are required to pay a 5% tax on top of their net profits. This blindsided telecom companies within the country as they weren’t consulted, and has prompted at least one, America Movil (operating as “Claro”) to hold off on taxing its subscribers until January 1st. Some are taking the decision to the Supreme Court arguing that the tax is unconstitutional. The government has made it clear that telecom operators who refuse to implement the tax will not have their spectrum rights renewed, and if that’s the case, all facets of the population will potentially feel a hit. It seems that the struggle to get operators to comply is real (to put it in colloquial terms).

Underlying all this is one question: what if the security initiative doesn’t work? Will the tax continue to be in effect, in spite of a lack of progress? If the government can find a reason to say “yes”, it will only further frustrate customers and telecom companies.

Conclusion: A bigger social problem

The success or failure of this plan will be determined in the coming months. However, my personal (and informed) opinion leads me to believe that the plan misses the mark on addressing the much larger, social, and institutional issues plaguing the country.

President Sanchez Ceren's governement recently approved the Country's new telecom tax
President Sanchez Ceren’s government recently approved the Country’s new telecom tax

El Salvador has been trying on its feet since the end of the Civil War. Unfortunately, it has continuously set itself back: a continuously struggling economy and years of political corruption have only added incentives for citizens to join gangs. Initiatives put forth by governments to curb gang activity have failed tremendously: they have increased the level violence across the country.

Justice Minister Benito Lara said on December 7 that the country “is on the right path” to a more secure El Salvador in 2016. The perceived optimism is one that has been seen too often by Salvadorans, so naturally (and unfortunately), I’m a bit skeptical (but at the same time, hopefully wrong).

That’s because there can be no “Band-Aid” solution to end violence and gang activity. A telecom tax on its own misses the mark as a solution: gang violence is a microcosm of much larger economic and social problems plaguing the country which must be addressed at the same time as the tax. If you’re Andres Oppenheimer, this means tackling government corruption. If you’re Canada’s International Development Research Centre, this means addressing the issue of integrating those who are socially excluded from communities (I encourage you to check out that report). If your Ewan Sutherland, it means addressing government corruption altogether (sidenote: Sutherland writes specifically from a telecom policy perspective, for those interested in telecoms). On top of all this, the tax’s parameters are vague.

Telecom taxes likely won’t help strengthen a teenager’s home life. Nor will they likely restore faith in government. In a country desperate for a solution, one could only hope that they’ll at least poke the giant that is gang violence.

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