Envío Digital
Central American University - UCA  
  Number 207 | Octubre 1998



A Country Still in the Making

Nicaragua is a work in progress, and little of what has been built so far is very sturdy. Thinking about how to shore up the structure and then actually doing it require time, institutions, laws, patience and honesty.

Nitlápan-Envío team

The phrase "on the threshold of the new century and a new millennium" is showing up with increasing frequency in the speeches of public figures around the world—Nicaragua included. All nations will cross this threshold into the postmodern 21st century, but a good number of them—Nicaragua certainly included—will do so without ever coming to grips with the modernity initiated in the 19th century. Suffering a vertigo that pulls it forever toward the past, Nicaragua is in bad shape and doesn't seem to be getting any better.

Attempting to sum up in a few words the essential setting in which his watchdog institution is working, Comptroller General Agustín Jarquín described Nicaragua as "a country still in the making." Such a country requires a whole lot of patience of those who decide to help "make" it. To maintain our sanity and not let pessimism get the better of us, we could all benefit from viewing the many explosive political conflicts that crop up every day against this backdrop.

The Executive vs. the Comptroller: An emblematic new episode

One such political conflict is the executive branch's seemingly interminable attacks on the Comptroller General's own office, which has required of Jarquín the patience of a saint. As a result of constitutional reforms pushed through at the end of the Chamorro administration, this institution is now independent of the executive branch. Ever since April 1996, when Jarquín assumed its top post, it has been trying to put some order in the country: unifying the public institutions' accounting systems; creating regulations where they do not yet exist; filling the vacuum of norms in which disorder abounds, encouraging influence peddling; putting limits on discretionality; and promoting transparency through various laws and procedures. It is a huge undertaking, and it has become exceedingly clear that not all those who head other state institutions want to see it succeed.

The conflict reached a new high in September, triggered in part by the Comptroller's naming of three more high government officials who allegedly have some responsibility in the still-unresolved "narcojet" scandal. The jet was stolen in the United States in late 1997 and appeared in Nicaragua soon after as the "presidential plane" amid serious bureaucratic "irregularities"—not to mention evidence of cocaine transport—which came to light in April. All three of those just charged are close to the President and all were previously unsullied.

In this second round of investigations into the case, President Alemán had to make another declaration to the judicial branch, which he did on September 22. As in May, he testified from his own office, as an "offended party," though he never quite made clear who had offended him despite repeated questioning by the defense lawyers of two of those currently being held. Days before his declaration, the President referred to the whole process as a plot that had left several people unjustly detained. New ion detection tests on the plane ratified that it was full of cocaine particles of recent vintage.

After first reacting defensively to try to protect his newly accused officials, the President went on the offensive, accusing the Comptroller's office of "mismanagement" and announcing that he would provide "overwhelming evidence" to back up his charge. Several days of speculation ensued as to whether the comptroller himself would be taken to court to respond to charges of a series of "criminal offenses." In a press conference on September 18, Jarquín said that he would stand trial if necessary, and would immediately renounce his immunity. "I have nothing to hide," he calmly stated.

The day after that press conference, Attorney General Julio Centeno, who not only answers directly to the President but is at his beck and call, presented the National Assembly with a 500-page volume of allegations against Jarquín. Disarmed by the comptroller's announcement, however, Centeno said that he would not put Jarquín through the "crushing force of the tribunals" out of deference, even though Centeno was accusing him of nothing less than "buying and selling impunity," to use his own words. Instead, the attorney general asked the National Assembly to look into these serious charges and sentence the comptroller politically.

Jarquín's only response was to reiterate that he was prepared to submit his report to the Assembly and provide the legislators any further information they might request, but meanwhile would get on with his work. The Assembly's Anti-Corruption Commission did not even touch the case for over two weeks, claiming a lack of quorum. In reality, the Liberal and Sandinista representatives on the commission were waiting for the signal from above. It came after 16 days, when President Alemán declared on television that, "as a politician," he would not hold back in his fight against Jarquín, whom he referred to as an "adversary." He added, however, that if the Assembly condemned the comptroller general, he would pardon him, "as a humanistic gesture." On October 6, once a few more "obstacles" had been gotten out of the way, the Anti-Corruption Commission began studying the case.

In the middle of this aggressive campaign, the Danish ambassador in Nicaragua publicly expressed the Nordic countries' support for the the Comptroller General's Office, its staff and its chief, Agustín Jarquín himself. Those countries are contributing some US$5.2 million to a three-year program to strengthen this auditing institution. The ambassador referred to Jarquín as a person "we have known since he was deputy minister of the Nicaraguan Institute of Municipal Promotion, when we came to respect his honesty, integrity and intense work for Nicaragua."
After several days of similarly explicit statements of support by other representatives of international cooperation, President Alemán accused Jarquín of being the one in a campaign against the government. Alemán alleged that this supposed campaign cost half a million dollars, and was being financed by Germany's Konrad Adenauer Foundation. It was not the first public spark to fly between President Alemán and Germany's ambassador to Nicaragua, Ulrich Schöning, over Alemán's relentless attacks against the Comptroller General's Office.

This latest episode—which, like the narcojet scandal that triggered it, has yet to conclude—is emblematic. It is a near-perfect object lesson for understanding how much remains to be done to build this country into a nation, and what is standing in the way. Ironically, Nicaragua's recent and still fragile democratic institutionality is threatened every time anyone, anywhere, takes seriously the responsibility of consolidating it.

"Extra-budgetary" funds: A key controversial issue

The 1996 constitutional reform making it obligatory for the National Assembly to approve the national budget—first being fully informed of its details—was a giant step toward "making the country." Before that time the executive office had been exclusively in charge of drawing up the budget, and the legislature's rubber-stamping role did not require disclosure of the details. The legislative branch now combs through the budget before passing it and even has the right to modify it within the same overall budgetary ceiling.

The change was thoroughgoing, but it is still very recent and not quite complete. For one thing, the tradition of moving large sums of money from one institution to another outside of the budget is still not regulated and is commonly practiced. This issue of extra-budgetary funds is an essential part of this chapter of the conflict. The Comptroller's Office eventually wants all of the public institutions' incomes and expenditures to be detailed in their budgets, eliminating financial management of any extra-budgetary funds. A country "in the making" requires such controls, but it won't happen overnight.

The Attorney General's accusation of "crimes" in Jarquín's institution focuses largely on extra-budgetary funds it has received—although it has made no attempt to hide the "evidence." This campaign has three objectives, in ascending order: the first is to derail the institution's auditing work; the second is to publicly discredit both it and Jarquín in particular; and the third is to get rid of him altogether. If all three elements of this strategy work, someone less concerned with the control and transparency of public finances could be put in his place. It's an old strategy of political infighting: even if the accusation is shown to be a calumny, some of the mud will stick. In fact, the Comptroller's Office duly supported, detailed and audited the funds it received. In contrast, the presidential office's extra-budgetary funds, which were precisely what Jarquín's staff was investigating when this new chapter of the institutional crisis blew up, were either not backed up with the proper paperwork themselves or had been shunted into budget lines on which there is no information.

The big development dilemma

Past history—recent past history included—weighs heavily, as this episode reveals from all sides. Top officials aren't used to responding for their actions, since no one has tried to control them before now. Immunity and impunity have always been assured for those with money and power. They are accustomed to resolving political conflicts not through legal institutional channels, but through the special channels that their money and power open up to them. A host of legal loopholes and institutional vacuums further encourages this approach. The historic power imbalance in favor of the presidential office has accustomed its holders to wielding all-embracing power. And a long-standing patronage system that would have been the envy of Chicago's Mayor Daly has accustomed those subordinate to the President—not excluding legislators elected to what is supposed to be the highest branch of state—to total dependence and loyalty. There is no easy escape from this historical trend.

The different public interpretations of the executive branch's effort to get Jarquín out of its way reflect a country used to a vacuum of norms and to this political-boss logic. From the "opposition," the FSLN's Daniel Ortega has tried to shrug the whole thing off as "irregularities on both sides." President Alemán, on the other hand, paints Jarquín as the one who picked the fight, to "hog the camera" and project his image for the next presidential elections. But the conflict reflects better than any other a major dilemma this nation faces if it wants to cross the threshold into the new century with any chance for development. The dilemma is this: Nicaragua either resolves its poverty building respected institutions and democracy or else anti-democratic authoritarianism will drag it into a bottomless pit of misery, backwardness and social decomposition.

The Comptroller's office has given more than enough signs of its willingness to accept this challenge to assure greater development by putting a halt to corruption. As former Vice President Virgilio Godoy very suggestively expressed, the comptroller general has perhaps "been getting dangerously close to the 'black box' of that corruption in the past few months and the Executive hit out at him to force him to back off."
What would that "black box" reveal? In unison, the media offer new reports of corruption in the Liberal government on a virtually daily basis. The government, which seems not to take public opinion into account in governing, responds to this avalanche of examples with two arguments. One is that there is no corruption; the most that exists, to use the President's own words, is "petty theft." The other is that even today's petty theft pales into insignificance alongside the corruption practiced in previous governments. So many tales of corruption are strewn along the road leading to the "black box" that public opinion no longer wants to hear about them, understand them or react to them. People don't seem to care any more who's getting close and who's backing off.

A new survey sponsored by Vice President Enrique Bolaños' National Committee of Integrity shows just how many Nicaraguans believe that public functionaries are corrupt. A full 68% of those polled stated unequivocally that executive branch officials are corrupt. In the citizenry's consciousness, "corruption" means that they steal, that they see state goods as theirs for the taking, that instead of helping the people they help themselves to the state.

International cooperation on red alert

This opinion is not limited to the Comptroller's Office and public opinion. Foreign investors and international cooperation also perceive corruption. Transparency International recently issued a report in which Nicaragua, at 3 on a scale of 10, appears as one of the lowest scoring Latin American countries on its "transparency scale." It is also suspected that there is nearly as much corruption among agencies managing the projects financed by international cooperation as exists in the government's management of public goods. All of this helps explain why international cooperation has so strongly backed the work of the comptroller general and his institution.

The multilateral agencies, interested in orderly and open processes, have had their alert buttons pushed by more than just the executive's campaign against Jarquín. There was also the courageous and dignified resignation of Pablo Ayón, former head of the telecommunications company ENITEL, because he anticipated influence peddling and lack of transparency in the privatization of this lucrative state enterprise. And then there was the President's confusing initiative of September 22. He sent the National Assembly a request, stamped urgent, that it repeal laws that for some years now have impeded the executive office from unilaterally and expeditiously doing as it wishes with state goods. That one set off all the red lights among the international cooperation agencies, which know from close up the extent to which this country is still "in the making."

Political-boss logic vs. democratic institutions

National development, whether according to the neoliberal economic model that the multilateral agencies are applying to Nicaragua or some other alternative one, requires putting a halt to the corruption. And doing that requires democratic institutions managed with maximum professionalism and honesty, ones that are not politicized along party lines or dominated by the authoritarian styles of the past.

The gravity of the political situation right now is that both Alemán's Liberals and Daniel Ortega's Sandinistas seem decided on dominating the nascent institutions with an obsolete political-boss logic. They want to divvy up the posts in these institutions like booty and decide between themselves the rules of the game that will allow them to go on divvying up economic, political and social territories in the future. In a country "in the making" this could trigger a sort of collapse with consequences that are hard to forecast.

The country is soon to witness the public outcome of the pact between the government and the FSLN. The reforms to the Electoral Law, aimed at etching the two-party system in stone by eliminating any competitors, are now ready and both Arnoldo Alemán and Daniel Ortega are speaking openly of reforming the Constitution and of some of the possible changes. Since reforming the Constitution is a two-year process, the changes must be approved by the end of the 1998 legislature and ratified in 1999 if Nicaragua is to "cross the threshold into the new century" with a new Constitution.

So what's to dialogue about?

The dialogue among the parties represented in the National Assembly, which the government convoked in July, continued to limp along against the backdrop of this pact-in-the-making until September 25, when four of the parties participating in the dialogue threw in the towel. Dora María Téllez, the newly elected president of the Sandinista Renovation Movement, shared her take on the dialogue with envío.

"When the government called for the dialogue," she explained, "the talks between the FSLN and the Liberals were already well underway. The dialogue was convened because it was needed to paper over the pact. The Liberals didn't want to appear as if they were arm wrestling with Daniel Ortega any more than Daniel Ortega wanted it to appear that he was arm wrestling with Somocistas. The sessions went on day after day with absurd discussions. We continually pleaded with them to discuss the issue of corruption but neither Alemán's Constitutionalist Liberal party (PLC) nor the FSLN wanted it on the agenda. Finally, toward the end, we took up the issue of public safety, just to have something to discuss. We even got close to an agreement, deciding that the Police would have to be beefed up with 500 more officers and that there should be an increase in all police salaries to guarantee the public a bit more security. But after all that the PLC made it clear that the government would only increase spending that is 'duly supported' [in other words, backed with real funds]. That was the same response they gave to any economic or social proposal that came up in the dialogue. So what did that show us? The government was saying that economic policy is not a matter for agreements until the budget is ready, but that once the budget is in hand there can't be any more spending because there's no more money. And the FSLN was saying that the reforms to the Electoral Law and to the Constitution aren't to be discussed in the dialogue. So what's there to dialogue about then? That's why we stopped going."

And the economy?

The pact won't mean any changes in the government's economic policy, but the institutional and legal changes it is expected to bring will have evident repercussions on the consolidation of the economic groups respectively identified with Alemán and Ortega.

Even though the economic context is anything but good, the Central Bank's September report on the projected year-end economic indicators was, as always, optimistic. The government forecasts a 10% inflation rate and a 6% growth in production due to increases in various activities, particularly mining.

The darkest note in the official report was found in the external sector, where exports have dropped and imports increased. With that, the already high trade deficit will increase even more. This is serious since Nicaragua's medium-term economic viability depends on reducing this gap.

"We're in bad shape, but going in the right direction"

The slogan drilled into Nicaragua, like other countries living under the neoliberal economic model, is, "We are in bad shape, but going in the right direction." In our case, the "bad shape" we were in was all too evident in 1990, at the end of a war of attrition fought between Nicaraguans and with a state-planned economic model based on subsidies. The structural adjustment model was presented to the population at that time as a compass that would head us in the right direction. No one—or almost no one—hid the fact that the road would be strewn with thorns. But even paying that high price of the adjustment, we would "get well" and soon "would be fine," as the official propaganda claimed during the Chamorro government.

Today's Liberal government, particularly current Central Bank president Noel Ramírez, spokesperson for its economic model, has continued to use the same language, even though none of those promises have been fulfilled. Numerous signs along our thorny road show that we are not only in bad shape, but are going in the wrong direction and nothing indicates any plan to change course.

The structural adjustment program applied by the international financing agencies in countries like Nicaragua are an attempt to rescue economies with unsustainable macroeconomic imbalances. The idea of the adjustment is to make these imbalances sustainable, essentially by attacking two of them: the domestic deficit and the external deficit. They go after the former by cutting public spending and after the latter by promoting increased exports.

To make us believe that we are on the right track, the government spotlights the figures of the domestic adjustment. The public deficit is indeed being brought under control, but at the extremely high and all too obvious price of impoverishing the majorities with more unemployment and less health care and education. The external deficit, on the other hand, is not only not being controlled but is growing constantly larger with every passing year. As it is being applied, then, the adjustment is a failure because it is making Nicaragua's economy increasingly unsustainable.

The evidence that family micro-economies are in bad shape and getting worse requires no further comment. What does merit more discussion is the new evidence that, even according to the government's beloved macroeconomic figures, we are in bad shape and getting worse. The Liberal government's economic reports don't train so much as a flashlight on this reality.

Internal adjustment under control

The adjustment has been successful in controlling the public deficit. In 1990 it amounted to 20% of the gross domestic product (GDP) and by 1997 was down to only 5%. Such a drastic reduction was achieved in two ways.
The first was cut public spending by reducing the purchase of goods and services and the number of salaries, though it should be pointed out that last year spending on state salaries went up at the same time that public sector employment was cut 3% more. The defense budget experienced the greatest drop, from 20% of the GDP in 1990 to less than 3% today. Spending on social services has been slowly eroded since 1994, when it represented just over 12% of the GDP; by 1997 it was under 10.8%. Although the budget lines for health and education are greater in 1998 than they were in 1997, these increases do not even compensate for the rapid population growth, which is the highest in Latin America. In this situation of a high birth rate and low public spending, the state is dedicating ever less to educating and caring for the health of its citizens. At the same time, it is still earmarking excessive amounts to foreign debt payments: this year Nicaragua is paying US$240 million just in interest, which represents almost 40% of the total value of exports, way above the 20% recommended by the World Bank.

The second way to reduce the public deficit has been to increase tax income. The main change occurred in the tax on consumption of goods and services. Sales tax doubled between 1990 and 1997 and now stands at 15%, with very few exemptions. While that tax represented a little over 7% of the GDP at the start of that period, it was the equivalent of 14% by 1997. Income tax, on the other hand, accounts for just under 3% of the GDP and property tax is insignificant, since it is set at 1% of assessed value. All this paints a clear portrait of who is paying for the adjustment.

External adjustment out of control

If there is control over the domestic deficit, even with such devastating social consequences, control of the external one is being lost and the resulting macroeconomic variables are becoming a matter of some concern. Exports have dropped in 1998 while imports have never stopped climbing. The trade deficit is not only still high but has been growing year after year since 1995, when it represented 24% of the GDP. By 1997 it had reached 36% and according to Central Bank projections will follow the same tendency this year. The adjustment is not working in this arena.

There are several essential reasons for this. One is financial: the dollar price of the córdoba is fictitious—overvalued between 13% and 20%, according to a range of calculations. This is a disincentive to exports but it stimulates imports. Another is institutional: the privatized national financial system suffers from a short-term lending philosophy. The private banks aren't interested in providing long-term credits for investment in production, especially if they are for small and medium producers. Their loans go largely for consumption, commerce and services. Anybody can get a $25,000 credit to buy one of the sumptuous 4-wheel drive vehicles that are clogging the streets of Managua, but no one can get the same amount—or even less—to renovate a coffee plantation. The myopia of short-term luxury consumption overrides any medium- or long-term production consideration—not the least because the owners of the Toyota and Mitsubishi dealerships are also members of the banking groups.

The projected export reduction in 1998 is partly due to the closure of national assembly plants such as Hermoso y Vigil, which were benefiting from the Tax Benefit Certificates (CBTs). By taking this "subsidy" away from them, their earnings fell and they closed up shop. Even though this plant and others like it depended on a high proportion of imported components and added little value inside the country, their closure is felt in the economy.


If the public sector reduced its deficit, the increase in the external sector gap can only be the result of a private deficit triggered by increased consumption, particularly of luxury import products bought by one sector of society. "To understand something about what's going on in the national economy," one economist commented to envío, "you have to leave the analysis aside and start talking to the plumbers and housekeepers so they'll tell you. They are witnesses to the fever for luxury, ostentation and squandering seen in certain homes, which sheds light on some otherwise incomprehensible data."
The increase in private consumption originates in part from the surprising increase in long-term consumer credits in hard foreign currency between 1995 and 1997: from less than 1% of the GDP to 8%. This in turn reflects another key figure: the enormous increases in foreign currency deposits, which have shot up from representing 1% of the GDP in 1991 to 35% last year.

The obvious question is: where are all these private dollar deposits coming from if they cannot be explained by exports, the normal source of hard currency? About $200 million a year comes into Nicaragua via the family remittances of those who have escaped Nicaragua's crisis to live abroad. Although this is a sizable flow, it is not as important as the total sent to El Salvador. Since most of it is sent to relatives $25 or $100 at a time and is changed into córdobas to help survive these hard times, not saved as dollars, it also fails to explain the massive fattening of savings accounts in the banking system, even assuming that some of it finds its way into somebody's savings account and doesn't continue circulating.

"Fly-by-night" capital?

Could these voluminous foreign currency accounts be the fruit of speculative investment? Are the high interest rates offered by the national financial system so attractive to this "fly-by-night" capital, particularly now that most Nicaraguan banks offer the technology to permit these accounts to earn from overnight currency trading around the world? While this could also provide part of the explanation, it still leaves certain questions unanswered, because Nicaragua offers other financial investment alternatives that are even more profitable, particularly the CENI bonds, which have an attractive interest rate with zero risk.

Some international investment firms like Lehman Brothers have taken advantage of this opportunity and bought $75 million worth of these bonds. While not risky for them, it is for the country, since the redemption of these bonds would mean the loss of a third of Nicaragua's international reserves, thus throwing new shadows on the economy's fragile external sector.
The increase in the external deficit, redemption of the CENIs and the shock waves from the current world financial crisis—which will surely come—could threaten the stability of the exchange rate. It will come as little surprise if by the end of the year changes in the monetary policy and new public spending reductions have to be made.

Or the dry-cleaning industry?

If remittances and fly-by-night capital cannot fully explain where the avalanche of foreign currency deposited in savings accounts is coming from, we have to look beyond the obvious, and legal, answers. Could it be from money laundering?
Some qualified national observers calculate that at least $300 million could already be circulating through the Nicaraguan dry cleaning business. For a small country still in the process of "being made," this is a huge amount and could have considerable consequences. In fact the consequences could be important enough to "unmake" this country and "make" another in its place. It may not be long more facts emerge to provide us with a clearer picture of what is really going on behind the scenes.

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