Will Clusters Bring Development?

In a talk at envío, Nicaraguan economist Arturo Grigsby analyzed and questioned the development strategy that is part of the Bolaños government’s promised national project.

Arturo Grigsby

Is the year-long political cataclysm that culminated with Alemán being stripped of his immunity and sentenced in court really coming to an end, freeing the government to turn its attention finally to the country’s economic recovery? If so, what is the national development strategy of Bolaños’ much-touted “New Era” to ensure that there will be recovery? While the strategy the government is banking on was published in December 2002 in a “consultation” document currently being circulated among different national sectors in an attempt at consensus building, its elements are reflected in the budget lines for this year, and it is in fact already being implemented. It was a fundamental part of the national project that President Bolaños, in his January 10 annual message, promised to present to the country this year. It will be officially unveiled to representatives of the international community that support Nicaragua when they gather together in Managua for a Consultative Group meeting in June.

The strategy’s focal points

The strategy revolves around three main ideas: 1) business “clusters” will represent the motor of economic growth; 2) public investment, previously based on a poverty map, will be redistributed according to a newly prepared “opportunities” map; and, 3) public investment will represent a key variable for growth and fiscal sustainability.

The idea of basing Nicaragua’s development on “clusters” is at the very heart of the strategy. The conception of the poverty reduction strategy implemented up to now is also undergoing a qualitative change in which social spending and public investment are no longer prioritized according to the country’s poverty map. Rather, public investment will be allocated according to a map of existing economic dynamism and/or the economic opportunities offered by the clusters, while social spending will be directed to the areas left out in the form of “safety net” compensation. Finally, the government will seek additional foreign assistance to finance the public investments needed to sustain this strategy, while the 2003 budget redirects the already contracted resources to the same end.

Basing development on what are known as clusters is not a new strategy. Harvard University has been arguing the theory that the less-developed countries can achieve economic growth this way for years now. The Bolaños government’s proposals are an offshoot of the work that Harvard and the Central American Business Administration Institute (INCAE) did together with the Central American governments, which was presented to the international community as a regional development strategy document in the wake of Hurricane Mitch. It was based on the supposition that Central America could only achieve economic recovery by consolidating its clusters, which would provide the dynamism to set the economy in motion and overcome the hurricane’s devastating effects. Since the Bolaños government’s strategy includes the same concepts that appeared in that regional document, it is no surprise that in 2002 the Nicaraguan government decorated Harvard academic Michael Porter, considered the intellectual “father” of this particular development idea.

The concept of clusters refers to the geographical concentration of interlinking businesses and institutions. The idea is that if a group of businesses concentrates on the same economic activity in one area of the country, covering several municipalities, consolidating this social and productive network and strengthening it to develop a suitable economy of scale will reduce costs, increase competitiveness and improve exports. A good example is Matiguás, a prime area for consolidating a cluster related to cattle raising and dairy production because it already has hundreds of ranchers, long-standing traditions and skills in this field, existing importers of livestock inputs and the capacity to produce and export more milk and cheese. Such a production cluster, with its related producers and businesses, creates the potential to compete successfully on the international market.

The Harvard-INCAE document of the nineties identified the sectors in Central America that already had a certain degree of dynamism in order to select the most suitable ones. The idea was that developing the most dynamic clusters would enable Central America to insert itself advantageously into the world market. This strategy assumes that the region’s governments and export business groups are the key actors and aims for an annual regional economic growth rate of 5% and the reduction of poverty to just 15% of all Central American households by 2015.

The region’s key clusters

Four clusters were identified: tourism, textiles, agroindustry with high value added and electronic products. Tourism had already been developed in Costa Rica for some time and in the decade following the wars in El Salvador, Guatemala and Nicaragua, eco-tourism in particular was seen to be one of the biggest growth areas for these countries as well, given their natural resources and biodiversity. This potential has led the region’s governments to sign and promise to honor various international ecological protocols. With respect to the other three clusters, the export assembly plants known as maquiladoras had already given the textile industry an important presence in Central America, while agroindustry was one of the region’s most traditional activities. Electronic products were included because the transnational giant INTEL had invested hugely in Costa Rica.

Promoting these clusters depends on substantial public investment in each country, the modernization of customs services and reforms in public policy areas such as governance, the judicial system, macroeconomics, competitiveness and the environment. It also depends on greater Central American integration. The broadest framework for supporting it is Plan Puebla-Panama (PPP), one of whose most ambitious projects is the Central American Logistical Corridor, the PPP’s term for a widened and revitalized Pan-American Highway that would run from the Mexican border to Colombia.

Adoption of this strategy means that the Central American governments’ public investment and foreign financing will be channeled into developing these clusters, creating the infrastructure necessary to guarantee their development. Plan Puebla-Panama and this strategy also aim to link up Central America’s Caribbean and Pacific ports. The idea is to develop a communications network that allows Central America to exploit fully the geographical advantage of having coasts on two oceans in a relatively narrow isthmus smack in the middle of the continent. This will involve modernizing the region’s infrastructure, prioritizing the highways, ports, routes, roads and communications required to develop the chosen clusters.

The backing this regional development project received from the Central American governments was an example of consensus over an economic strategy the like of which had not been seen since the region’s governments promised to promote the Central American Common Market project in the sixties.

Commonalities with neoliberalism
and the Sandinista policy of the eighties

Since being adopted by Central America, this development strategy has been the target of certain critiques. The first and main one is that the clusters are to be strengthened and fostered by foreign companies and the most powerful national business sectors and will be aimed at exportation. The big business sectors will thus be the main recipients of the benefits offered by this concentration of public investment, sidelining the extensive small and medium business sector dedicated to producing for the national market. Neither are unions, civil society organizations, social movements or NGOs included in the strategy.

It is interesting to note that this strategy differs from what we know as the neoliberal development strategy in one very significant way. In neoliberal theory, the “invisible hand” of the market guarantees economic growth and the opportunities provided by the market ensure development, whereas this concept includes a planned government effort in concert with the business groups to influence certain areas of the economy. However, as this strategy does not have a broad base and does not incorporate very important sectors of the region’s economies and civil societies, its exclusivity does resemble the neoliberal strategy.

In simplified terms, whatever is not included in the clusters will not be developed in this conception, but will rather be attended by social compensation programs, with public spending on health, education and subsidies. A conception such as this, based clearly on exclusion, means we can assume that the social inequality, social polarization and inequity that have characterized Central American history will only increase.

While adapting this Central American development strategy and proposing it for Nicaragua, the Bolaños government document starts by accepting that Nicaragua is last in the Central American pack. While it does not explicitly say this, it does admit that Nicaragua cannot think about a cluster of electronic products, or even a cluster of agroindustrial products with high levels of added value despite being an agricultural country. Based on such realism, the government concludes that the country’s traditional agricultural sector and its natural resources—a relative abundance of land, forests and cheap labor—will continue to provide its economic motor force in the immediate future, developing Nicaragua and guaranteeing the longed-for economic take-off.

It is also interesting to observe certain similarities between the development strategy proposed by the Bolaños government and the one the Sandinista government pursued in the eighties. The Sandinista government developed a strategy based on agroindustry, processing the country’s agricultural, livestock, forestry and fishing products. To achieve this, it designed a plan of costly public investments in big state-run agroindustrial projects that were never halted despite the limitations imposed by the war; the main symbol of this plan was the Timal sugar refinery, also known as “Victoria de Julio,” financed and inaugurated by Fidel Castro.

Prioritizing big agroindustrial enterprises and lavishing resources on them was a central part of the Sandinista development policy. During those years, the “clusters”—if we can call them such—were state-owned. It was an erroneous policy, unsuited to Nicaraguan reality because it never included the small and medium producers. The main difference in the current proposal is that foreign investors and part of the national big business sector will own and run the clusters rather than the state.

Three comparative advantages, seven clusters

The Bolaños government’s document points to three components it terms “Nicaragua’s strategic positioning”: its geographic location (in the very center of Central America, which is itself at the center of the continent); its year-round agricultural and forestry potential; and its unique natural resources and ecological diversity. These represent Nicaragua’s comparative advantages with respect to the international market, based upon which the government has identified seven clusters: energy, textiles and apparel, forestry and wood products, fishing and aquaculture, meat and dairy products, tourism, and agroindustry and food processing. Some of these clusters already have an incipient development, while others still need to be developed. A little-known group, the National Competitiveness Commission, made up of players from the national big business sector and high-level government officials, was responsible for identifying the clusters. Apparently, no representative small business associations were invited to participate.

There is little information related to the energy cluster while the agroindustry and food-processing cluster has only been discussed in a very generic way, but we do know about textiles and garments, with assembly plants from Taiwan, South Korea, etc., assembling items in Nicaragua for re-export to the United States. The most important criticism of this cluster is the little-mentioned fact that in 2005 the US quota system currently governing world textile trade will disappear. According to this system, Nicaragua and other Caribbean Basin countries have preferential access to the attractive US market and Nicaragua has yet to fill its quotas, which suggests that this rather than the country’s cheap labor is what has attracted Asian investors to Nicaragua’s maquila sector. When this preferential treatment disappears and the World Trade Organization completely deregulates the textile market, the Taiwanese and South Koreans may well transfer their factories to China, for example, where labor is even cheaper. This makes it extremely risky to base development on the textile cluster as we know it today.

In terms of forestry and wood products, it is assumed that Nicaragua possesses the most important forestry reserves in Central America and that there are possibilities for continued timber extraction. It should be pointed out, however, that although official Nicaraguan discourse on the forestry issue always includes the concept of sustainability, the government has been and continues to be particularly flexible in permitting non-sustainable exploitation of forest reserves.

In the area of fishing and aquaculture, Nicaragua has experienced strong development in shrimp cultivation in recent years. The problem for this cluster is that many other countries have now opted for shrimp farming, too, which has brought down prices. Meanwhile, studies show that the amount of lobsters caught in the Caribbean Sea is exceeding levels that would ensure their natural reproduction, as also happened in the late seventies.

Meat and dairy products could perhaps be termed an historical cluster. Furthermore, while various other agricultural sectors have slumped, cattle ranching has remained stable. It is currently the great survivor of the traditional Nicaraguan economy because it has managed to find new markets for its beef and dairy products. The transnational company called Parmalat has made considerable investments in this cluster; El Salvador is now consuming Nicaraguan cheese; and Nicaraguan dairy products are also being exported to the United States. This is thus one of the country’s most advanced and promising clusters, but the prospect of free trade agreements raises some questions. While Nicaragua is the only Central American country that exports beef, it could become cheaper for the other Central American countries to import meat from New Zealand, due to the subsidies New Zealand farmers receive. That could prove to be the point at which Central America yields to interests that are not necessarily in line with Nicaragua’s.

The tourism sector has grown substantially in recent years, although it is still far from having the infrastructure and capacity enjoyed by Costa Rica, or any other Central American country for that matter. Costa Rica’s population has also been educated and sensitized to relate to tourists, while Nicaragua is far behind in this sense as well. The most notable tourism proposals from the Nicaraguan business community thus mainly consist of linking up with Costa Rican tourist projects, which is why the most attractive packages are concentrated in Nicaragua’s southern departments of Rivas and Granada, which are closest to Costa Rica.

The favored investors

The document also names the transnational companies that the government is wooing to invest in Nicaragua and head up the development of these clusters. They include International Paper, Stora-Enso, UPM-Kymmere, Georgia Pacific, Weyerhauerser, Smurfit-Stone Container and Nippon Unipac in the forestry cluster; Chiquita Brands, Del Monte Foods, Fyffes, Goya, Tropicana, J.M. Smucker and Hannover Foods Corporation in the agroindustrial cluster; and Nestlé, Philip Morris-Kraft Foods, Unilever, Danone and Parmalat in the dairy cluster. The idea is for these transnational companies to spearhead the technological changes needed to guarantee development of these clusters in Nicaragua.

It is quite significant that the list does not include the Asian-based corporations that dominate the maquila sweatshops. Could this omission amount to implicit recognition that this type of investment does not “develop” the country? Or could it be recognition—again implicit—of the fleeting nature of such investment? The economic impact of the few foreign companies that have so far set up operations in Nicaragua is markedly differentiated in this regard. The Asian firms that have invested in textile assembly plants have no links with national production and are exclusively dedicated to exploiting both the Nicaraguan textile quota for the US market and the low wages they can get away with paying our workers. At the other extreme, Parmalat, an Italian firm mainly dedicated to processing and marketing dairy products, has already brought new productive and marketing technology to Nicaragua, energizing production and the national dairy market as well as creating new openings for Nicaraguan products on the international market.

Nicaragua’s clusters and
the free trade negotiations

The identified clusters will be the Nicaraguan government’s number one priority in regional negotiations with the rest of Central America and then with the United States in the context of the various free trade agreements on the agenda. Nicaragua’s big problem is that it is going into these regional negotiations at a disadvantage relative to both its neighbors and the colossus to the north. We are not competitive either regionally or internationally, even in those sectors selected as clusters, let alone in agricultural production for the domestic market, which will be given no emphasis in the negotiations.

Productive restructuring is the main challenge facing the Nicaraguan agricultural sector within the framework of these agreements. Responding to that challenge, however, is hampered by an inadequate national institutional framework despite the huge foreign aid investments plowed into state institutions working in this area, such as the Nicaraguan Agricultural Technology Institute (INTA) and the Rural Development Institute (IDR). The corruption cases linked to the IDR are well known, as is the notoriously inefficient way both institutions have managed the aid that has come their way.

How the cluster strategy meshes with the
poverty reduction strategy (or doesn’t)

Another central area of the country’s new development strategy is that it is fundamentally changing the Poverty Reduction Strategy currently being implemented. Up to now, responding to this strategy demanded by the multilateral organizations has involved channeling public spending and international aid to the country’s poorest municipalities, identified through surveys periodically conducted by the National Institute for Surveys and Censuses with technical support from the international financing institutions. Now, however, the decision is that channeling public spending and cooperation to the poorest areas is not the best policy so future assistance will be channeled to those municipalities with the greatest development opportunities.

Municipalities in the North Atlantic Autonomous Region, the center north (Estelí, for example) and the country’s more southerly central areas have been identified as having the greatest levels of extreme poverty, while the Pacific region has the fewest poor municipalities. The poverty or non-poverty of these places is not just the result of their greater or lesser degree of economic dynamism, but also of migration levels, because the country currently receives more in family remittances from emigrants than it does in international aid. Obviously, the municipalities receiving more remittances cushion the poverty better.

New maps to guide spending decisions

The projects that the government implemented with international aid in the context of the Poverty Reduction Strategy were guided by the poverty map, but now other maps are being considered. For example, the government has drawn up a migrations map that identifies the municipalities within the country from which people are leaving and those to which they are going, classifying them as high or low emigration and immigration zones. Managua and several other cities in the Pacific zone are migratory destinations in a countryside-city migration pattern. The whole North Atlantic Autonomous Region, Río Blanco, El Rama, Muelle de los Bueyes, the Mines, the central zone and the east of Matagalpa and Jinotega also receive immigrants, but in a rural-rural pattern, as these areas are the agricultural frontier to which peasants go in search of land. The migratory map shows that most people are leaving Nicaragua’s central region, which is also the country’s driest zone, for Nicaragua’s cities and agricultural frontier, Costa Rica or the United States.

Another map has been plotted showing the municipalities with the greatest economic dynamism, combining their potential in natural resources, agricultural development and existing infrastructure, in which the idea is that economic dynamism exists where all three elements coincide. But this map excludes the Atlantic Coast regions and the whole of the department of Río San Juan because of their limited infrastructure, despite their wealth of natural resources, instead prioritizing areas where the population and road infrastructure are concentrated.

By overlaying these three maps—the poverty map, the migratory map and the economic dynamism map—with their differing criteria, the government has organized a new “development opportunities” map to guide it social spending and public investment priorities. These priorities are now concentrated where high poverty coincides with high economic dynamism and potential (see map on the next page). Thus one new priority, for example, is the cattle raising and dairy heartland in the country’s central zone, including the municipalities of Camoapa, Matiguás, Río Blanco, Muy Muy and Boaco. This area has high poverty levels despite its high levels of economic dynamism, due to the exclusive nature of the traditional model, with ranchers who have accumulated land employing tenant farmers who live in extreme poverty.

The map shows three other zones with high dynamism and low poverty, which are considered to be second-level priorities. Those municipalities with low economic dynamism and high poverty will be the last priority and could well end up “abandoned.” In other words, by replacing the poverty map with the development opportunities map and relating those opportunities to the already identified clusters, poverty is again relegated to the back burner.

Avoiding dispersion or
perpetuating exclusion?

The implicit assumption behind this reorientation of spending is that up to now public investment has been badly spent, dispersed to unsuitable zones. This is a disputable idea with even more disputable consequences, as it would only take adequate public investment to achieve high dynamism in many of the municipalities shown on the maps as having low economic dynamism. One of the causes of these municipalities’ stagnation is that their high agriculture potential is concentrated in small and medium producers who have had no access to financing and lack adequate roads for getting to market. Therefore, their own potential to pull themselves out of their current poverty is being wasted.

Furthermore, the dispersion of resources that the government laments and seeks to avoid through this new strategy is not just a technical problem; it is also related to the government’s own management. And this cannot be blamed only on the previous government as many of its officials are still working in the same areas under Bolaños.

Channeling all resources to zones identified as dynamic is unreasonable simply because it excludes too much of the population and will encourage migration towards the prioritized zones, which may be unable to absorb so many people. Such inconsistency constitutes a risk, because one thing is to prioritize some zones and quite another is to utterly exclude some. Could it be that the strategy assumes continued mass emigration to Costa Rica and the United States, and maybe even needs it to guarantee “stability”?

Where will the money come from?

Bolaños’ government needs resources to start implementing the clusters strategy. The document argues that the fiscal adjustment established in negotiations with the IMF should not affect public investment. The obvious tack, then, is to attract extra support from the international community, and in fact the document is explicit in saying that it seeks some US$250 million ($80 million a year), on top of the $1.2 billion established in the three-year agreement with the IMF.

The government’s reasoning behind this request for extra resources is as follows. If Nicaragua executes the IMF agreement to the letter and receives only $1.2 billion, it can expect growth rates of no more than 3%, which means the country will grow at the same rate as its population and therefore remain stagnant. A country can only reduce poverty if its economic growth rate is higher than its population growth rate.

This argument demonstrates recognition of something the government never states in its declarations: Nicaragua will neither develop nor reduce its poverty by honoring what it signed with the IMF. It is also recognition that the country’s public finances will not be sustainable once the IMF agreement concludes in three years’ time, if we understand fiscal sustainability to be a rate of indebtedness (domestic and foreign debt) that does not exceed the country’s economic growth rate. Right now the opposite is true: the debt is growing faster than the economy.

The government is therefore requesting the extra $250 million to guarantee development, poverty reduction and fiscal sustainability. According to government calculations and to this proposal, the additional aid will enable the country to grow by 4.5% to 5 % a year, meaning that by the end of the three years the country’s finances will be sustainable and poverty levels will be starting to fall.

The government’s proposal can be summed up as follows: OK, we’ve signed with the IMF, we’ve accepted its conditions, but this only means ‘more of the same,’ more stagnation, without picking up, without developing and with the same extreme poverty levels. So we need more; quite a lot more. This dramatic subtext reveals a desperate situation that is not reflected in official speeches or declarations.

Is it realistic to expect this request for more international resources to be successful when the aid that Nicaragua has already received has been so abundant and so badly used? The bilateral sources will probably not provide any more donations but the multilateral organizations may well make it easier to achieve extra support in the form of soft loans for programs they run.

The Ministry of Education, for example, has already included an additional item in its budget because Nicaragua has qualified for a World Bank initiative that will provide the country with $20 to $30 million to finance scholarships so poor children can complete their primary school education. This is very important given the country’s dramatic and desperate situation in the education field. According to a ministry study, some 900,000 people between the ages of 15 and 45 are functionally illiterate. This represents no less than two thirds of Nicaragua’s labor force! Such backwardness imposes extreme limitations on development, with clusters or without. In addition, the fiscal adjustment means that the ministry has been unable to increase the number of public primary school teachers, so some 800,000 school-age children will be left outside the education system this year.

Why leave small producers out?

There are many questions still to be answered and many challenges still pending. One of the central questions we should ask ourselves is why the government doesn’t contemplate incorporating into its development strategy the many small and medium businesspeople with great potential who are located around the clusters it has identified? The fact is that the current government apparatus does not have the institutional structure to promote these sectors and doesn’t appear to want them. The Ministry of Development, Industry and Trade, for example, focuses on promoting foreign investment. Its officials are oriented toward negotiating with foreign investors and certain national business groups and are much less prepared to promote small and medium producers to make them more competitive—despite the existence of the Small and Medium Enterprises Institute.

The country also lacks an institutional framework to provide financial services to these sectors. The small and medium enterprise sector is immense and has great potential, but with no financing it is stagnant and cannot generate employment. If each of the 200,000 small and medium rural producers in the country created one job, that would amount to 200,000 jobs! The numbers are even higher for small and medium urban businesses, and the predominance of women there would multiply the benefits and the possibilities even more. But starting with the Sandinista government, we have had neither the political will nor the capacity to develop an adequate institutional framework or structure for this sector. Developing them should be at the heart of any alternative to the strategy currently being presented to guarantee national development.

Local vs. central control

The predominant vision from Sandinista times right up to today has been that the central government and not the municipalities should decide what to do and where to invest at the local level. If Nicaragua transferred enough resources to the municipalities, as happens in Bolivia, El Salvador and other Latin American countries, we would have a much greater local development potential: El Salvador transfers 8% of its national budget to the municipalities, compared to just 1% in Nicaragua. We would also have the possibility of a much more balanced national development.

There are very clear alternatives, but the underlying problem is an ideology deeply rooted among the political class, the parties and government officials that the country can only be developed through large-scale business-style investments from the central level. That was how the Sandinistas operated and the Bolaños government has decided to go down the same path. As long as we fail to move beyond this vision, Nicaragua will be closed off to any other possibilities that could achieve a more inclusive, hence more equitable, and hence more democratic form of development.

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