Would the IMF Accept a More Productive Adjustment?
The politics of the government, the UNO and the FSLN are criticizing as never before the intransigence of the program imposed by IMF. But many of these discourses camouflage that old saying: “You have to change something so that nothing changes at all.”
It is very easy, and always fashionable, to criticize the policies of the International Monetary Fund (IMF). The hard part is to respond to people's just demands for a more efficient and effective economic program, and harder yet to get the Nicaraguan government and business sectors to be bolder and more efficient.
Just between 1988 and 1992 the IMF received a net $6.7 billion from the countries of the South. These countries have about as much possibility of paying their loans to the IMF as a peasant has of paying off a local loan shark. The IMF has effectively charged these countries 26% interest in these same years.
Since the change of government in Nicaragua, this country has paid the World Bank $98 million more than it received in fresh loans. If an authentic structural adjustment program is agreed to for 1994, the flow would reverse again, opening the possibility of finally directing IMF and World Bank resources to the productive sectors that generate development.
This net flow from the poor countries to the IMF and the World Bank has been going on since 1985, due to accords the countries had to sign with these institutions. Why do they sign such negative accords with the IMF? Because if they do not, they cannot negotiate the balance of their debt with other creditors. The IMF and the World Bank act as traffic cops who control who gets to the negotiating table with the rich countries of the Club of Paris. It is thus economic suicide for a nation not to sign with the IMF. But in Nicaragua's case, it will be just as suicidal to sign a new accord whose conditions represent a continuation of the recessive, inequitable and destabilizing economic policy it has faithfully followed up to now.
Since signing its first IMF accord in 1990, Nicaragua has been unable to move beyond the stabilization policies aimed only at corralling inflation to a program of structural adjustment and productive reactivation. The country has misspent the foreign aid available to it in this period to expand consumer imports instead of reactivating exports. The result is at our doorstep: a bankrupt government with a $200 million financial gap that shows no sign of closing. The programs that privatized banking and domestic commerce have not functioned. The private banks make no credit available to viable small producers; they simply channel hard currency back out of the country. Privatized domestic commerce only fills the showcases of import shops; it does not offer efficient services or price schemes to stimulate national producers, for example those working with nontraditional exports.
Fiscal Policy: A One Legged PlanThe fiscal policy scheme wielded by Minister of Finances Emilio Pereira has not been part of a coherent program. It has only responded to three basic objectives: first and foremost, reduce inflation and the fiscal deficit; second, put fiscal policy at the service of the payment obligations on Nicaragua's foreign debt; and, finally, lower the tariff protection for national production from 80% to 20%.
The goal of lowering import duties was supposedly to improve the productivity and competitiveness of national production, but doing it virtually in one fell swoop only resulted in the closure of innumerable factories and small shops and the elimination of entire industrial branches, such as textiles. Experts recommended reducing duties gradually, but Pereira cut them from 80% to 30% just in the last half of 1990. His single minded goal was to encourage such a flood of imports that the quantity of duties would far outweigh the rate cut. He succeeded, but at the cost of skyrocketing un and under employment. He also cleared the way for importers to get extraordinary earnings; to paraphrase the well known Chase Manhattan Bank ad, importers had a friend at the Ministry of Finances. But even they are now beginning to feel the pinch of the hard currency shortage and the continuing fall in demand due to Pereira's adherence to IMF requests to cut public spending and raise taxes. This, far more than the strikers' demands, explains Pereira's likely departure from the economic Cabinet.
A Doubly Cynical Nicaragua IMF AccordBoth signers of the upcoming Nicaragua IMF structural adjustment accord are engaging in a cynical act; they both know only too well that the government has no capacity to implement it. The government is acting like a corporate administrator who signs a credit contract knowing he cannot guarantee the company's efficiency or fulfill the contract's obligations. When the debt comes due, he just says 'talk to the boss,' and goes off to seek employment in another company. In this case the company is Nicaragua and its true boss is or should be the citizenry.
The country's political instability is unquestionably one reason the government cannot fulfill its obligations, but there is another, even more important reason: privileged and inefficient groups of importers and bankers exercise control over the industrial sector, micro businesses, farmers and peasants. This parasitic group sabotages any effective application of structural adjustment. The cynical part is that the multilateral agencies apply their recipe knowing all this.
Another hidden cynicism is that such onerous accords are signed as if Nicaragua had not suffered a 9 year war or been battered by a series of natural disasters. The World Bank considers Nicaragua's overall net influx of foreign aid which respectively represented 29% and 34% of its gross domestic product in 1991 and 1992 as "exceptionally high." But it never compares this with the reconstruction aid given to Europe after World War II.
For the World Bank, the major extra economic problems are the recent droughts, the millions of dollars used to purchase weapons from former combatants and the violence of the rearmed rural bands, but all these factors are insignificant compared to the war's devastating impact on exports and industrial development. In the World Bank's analysis, "The absence of adequate guarantees to property rights" is the main cause of the rural violence; but the cutoff of credit to the rural sector is every bit as important. For all this, Nicaragua's problems are not limited to pressures from the IMF and the US ultra right. They also include the irresponsibility of its own major political figures, government inefficiency and its capitalists' unwillingness to invest.
There is a great risk right now that the government cannot or will not want to make the necessary changes recommended by structural adjustment to move from stabilization to growth. The country needs foreign resources, and will for many more years. But without making the structural transformations required to promote production, institutions like the IMF and World Bank will probably continue providing resources only to support stabilization in ever smaller amounts and in exchange for a continually more drastic fiscal adjustments that will do nothing to reactivate production.
Would these institutions be willing to collaborate with Nicaraguan society to carry out the indispensable structural transformations and support its government in strengthening the institutional framework these transformations require? It remains to be seen whether the government can strengthen its negotiating hand enough to persuade them to do so. The trump card in that hand would be a competently designed, medium term growth program for the country that would give it greater possibility of paying its debt in the future. It would have to be matched with firm support for and from those sectors with the greatest development potential: the medium sized producers in the city and the countryside. It has to be understood by all that Nicaragua is currently a bottomless pit for international cooperation, and requires a responsible structural adjustment.
Nicaragua must learn from the example of the Southeast Asian countries: they developed thanks to firm policies that supported and promoted national production. This need not always translate into subsidies, but rather seeing to it that the rules of the market do not just favor the old national and foreign oligopolies. If these countries had a less polarized income structure than Nicaragua it is because they previously invested in structural transformation programs favoring the emergence of less concentrated and more efficient markets. The World Bank argues that Nicaragua cannot use that experience because "those times of the 60s are now past," but such an attitude is like condemning Nicaragua and other Central American countries to perpetual underdevelopment.
An Alternative Economic PolicyScenario 4 in the following table shows the probable results of Pereira's latest plan: to increase fiscal income by selling government assets (vehicles and other high ticket goods). Apart from turning him into a competitor with his old importer allies, it is a restrictive fiscal policy, negatively affecting the gross domestic product (GDP) and household consumption. As with his ill fated vehicle ownership tax, his ministry once again would come out the only winner (see chart in "The Month," this issue). The costs and benefits of the other possible scenarios referred to in this chart are briefly analyzed in the various alternative economic policy points below.
If the government has erred by focusing only on a restrictive fiscal policy, it would be equally erroneous to think that a 180 degree turn, centered only on an active one, would solve our crisis. An authentic alternative would have to seek the participation of all sectors of the economy, including the importers and bankers who have been the sole beneficiaries of the current policy, but now within a new scheme of fair competition in the market. A new economic policy also must be more integral and coherent than the previous one. Some of its elements are summarized in the following nine fundamental points.
1. Implement a massive public housing construction program to reactivate the urban and industrial economy. Scenario 1 in the table above simulates such a public housing program with a 300 million córdoba investment in materials and job creation executed by private businesses who win bids on government contracts and subcontract out various jobs. This is the most positive scenario, since it directly targets the construction industry, which has a strong multiplier effect in our economy given the highly decentralized number of shops that produce various building supplies. In addition, the major factories in this branch have been privatized to both capitalists and workers, but are suffering idle capacity due to lack of demand.
In this scenario, even the Ministry of Finances' income rises substantially more than it would in the restrictive scenarios (3 and 4). An expansive policy of this type does not provoke a supply demand imbalance and more inflation since the issuing of currency to the construction sector would be matched by 101% of that amount in products.
The IMF insisted that 360 million córdobas be cut from fiscal spending, given the inability to otherwise control the excessive import growth. This scenario shows that investing most of that in production without sparking inflation would free up some $25 million of the aid the IMF and World Bank programmed for 1994.
2. Implement the Farmers' Project and Reactivate BANADES. Nitlapán's 1991 Farmers' Project (see envío, June 1993, for more details) is the most promising program for reactivating the agricultural sector. It stresses rural financing via innovative mechanisms and institutions for small and medium sized rural farmers, merchant transporters and rural processors, instead of for the big agricultural capitalists related to a handful of old families and newer government officials. The Interamerican Development Bank (IDB) is about to approve a $10 million non conventional financing program for farmers, an equal amount for urban micro businesses and $5 million in technical assistance to develop the institutional innovations necessary to make these financial services operable. The European Community will begin a similar program in 1994.
Medium sized farmers are the sector of national private enterprise that can contribute most to Nicaragua in the short run because the imported component of their production is much smaller than that of the big growers and they have more austere consumption norms and smaller administrative expenses. These farmers are the most experienced in traditional agricultural production for the national market, with export potential. The small and medium sized merchant transporters can best and most rapidly reactivate the commercialization networks in the country's most isolated areas. Financing them will not put any pressure on the country's scarce hard currency.
The decision to restrict credit to these sectors has been the main cause of the economic recession and increased poverty in the rural sector, and went hand in hand with the decision to virtually close the National Development Bank (BANADES) so as to stimulate private banking, although the latter have had no interest in filling the vacuum left by BANADES.
The Farmers' Plan proposes covering part of its 42,000 beneficiary families through BANADES' services. BANADES was admittedly inefficient and its loan recovery rates were very low, but the cure was worse for the country's economy than the illness. It is urgent to reopen BANADES branches in the rural areas; despite its inefficiency, the worst error in this moment of economic collapse would be to deny credit to the farmers.
One of various other methods proposed to cover the remaining families in the Farmers' Plan is to support local financing entities administered by the farmers themselves, which could be the most efficient method due to their proximity and the appropriateness of their programs to the farmers' demands. The 40 local banks of this model that already exist have recovery rates of almost 90% and cover the full integral range of rural economic activity. Such innovative rural financing through nonconventional methods implies a speedy investment in developing local human capital and strengthening the capacity for dialogue and communication between the farmers and governmental development promotion organizations. The use of BANADES could be cut back as the credit operations of these local banks and NGOS advance and the rural cooperatives' activities improve.
3. Gradually and cautiously expand public health and education services. As shown in scenario 2 of the above table, this aspect does not demonstrate such positive overall results as scenario 1. The workers and majority of the country's population would be the winners of expanding the fiscal deficit to improve health and education services, but the business sector and investment activity would lose a little. Reducing government savings would have an immediate inflationary effect, as would the fact that issuing currency to finance these improvements would not be equally matched by products (indicator 4).
This is not an argument against dedicating more resources to these social services, nor does it insinuate that health and education are not better and more necessary than mer chandise. It simply shows that years of a restrictive fiscal policy and squandering foreign aid on imports instead of investing it in economic reactivation have made it difficult to improve health and education without short term inflationary risks. To improve these social services, an active fiscal policy must first be established to reactivate production (through rural credits and public construction programs in the city), to allow slow but sure advances in social services in 1994 with expansion in 1995.
4. Expand emergency programs to combat poverty to rural areas. The temporary job creation program of the Emergency Social Investment Fund (FISE) has been effective in economic terms, but its funding has been far too limited. Expanding it into the rural areas, instead of focusing just on the cities, would be a positive step. Although the effects of this kind of program are not as positive as the Farmers' Program or reactivating the construction industry, it does not carry the inflationary risks of expanding health and education spending.
5. Increase import duties to protect selected national industry and thus promote its reactivation. The problem is not a program of opening up to foreign competition per se, but in the Ministry of Finances' single minded objective of increasing tax collection. A good part of the economic collapse and scarcity of hard currency is due to this erroneous policy, which should be quickly rectified. The other Central American governments are willing to grant Nicaragua exceptional treatment, allowing it to increase its duties because they, at least, recognize that this country's recession and instability are more damaging to regional economic integration than a change in its duty scheme.
6. Implement a financial reform to channel private and public savings to the urgent reactivation of production. This reform is necessary to overcome the rupture between production and both the banking system and fiscal policy, which are serious problems for any economic program.
The reform would have three essential elements: 1) reduce the excessively broad liberties conceded to the private banks; 2) require government agencies such as the Social Security and Welfare Institute (INSSBI) play on the government's team and not that of the private banks; and 3) reduce interest rates.
A clear indicator of the current anomalies is the growing hard currency savings in private banks, when the country is growing through such a profound financial crisis and lacks the foreign exchange to guarantee minimum economic functioning. Worse yet, a substantial part of the $140 million dollars in savings in private banks is not even in the country. According to current legislation these banks have the right to send 70% of their deposits out of the country, which is absurd, particularly when the importers then request hard currency from the Central Bank.
As for INSSBI and other public entities, they convert their córdoba budgets into dollars and deposit them in private banks. They should be obliged to place their liquid assets in the Central Bank coffers.
And, finally, with regard to interest rates, the Central Bank receives donations at zero cost and loans with international interest rates, which it then loans to private banks at favorable rates. The latter turn around and extend credits at 18% interest, almost double the rates in the industrialized countries. These funds should be channeled to nontraditional export initiatives and viable farms and micro enterprises at much lower interest rates.
7. Effect a devaluation at the appropriate moment for exporters and peasants with a floating exchange rate. This is necessary to stimulate exports and stop commercial and financial speculation, but it can only be effective if it goes hand in hand with an expansive economic policy. None of the policies recommended by the IMF (cutting public spending, raising taxes, privatizing the water and electricity utilities) guarantee the positive effects expected from a devaluation and a package of measures that spark economic reactivation.
Not accidentally, all devaluations in the past five years were made after the exporters and peasants had sold their harvests, since the timing was determined by the influence of imports on economic Cabinet circles. If a devaluation is to really improve the exporters' position, it must be decreed between November 15 and 20.
The IMF is not the one requiring that Nicaragua break the córdoba's dollar indexation; the culprit is a fiscal and monetary policy that has destroyed the country's productive capacity and stimulated imports. Without a package of policies that begins to close the enormous import export gap, the cycle of inflation followed by devaluations will continue. The 20% devaluation in January 1993 was cancelled almost immediately by inflation.
A devaluation helps close that gap by encouraging export production, and investing in production in general helps curb inflation. But if the country's business sectors are unwilling to make such investment, the least they must be forced to do is speculate in Nicaragua's black market and not in the financial markets abroad. As crude as that sounds, the laws of the market work such that it partially curbs inflation and maintains the córdoba's value with respect to the dollar. The financial controls proposed in point 6 would help assure that dollar savings return to or stay in the country.
8. Ask the IMF and World Bank for financial support and technical assistance to increase state efficiency in implementing the structural reform programs and policies necessary to reactivate the economy. The current economic Cabinet has followed the IMF recipe so blindly that now, neither it nor the economic and social forces that benefit from it can or want to implement any of the structural reforms that would favor the most efficient producers over the commercial and financial speculators. The government's adjustment measures come out of an orthodox monetarist ideology, but its concrete administration of those such as privatization, deregulation and the opening to international commerce has been the most heterodox in Latin America's history of structural adjustment. This administration has not only not led to an equitable structural adjustment, it has failed even to produce an inequitable one. Many observers have remarked of the several institutional crises that "the problem is that there is no longer a government."
The privatization program has done more to spark real estate transfers and speculation than reactivate the economy. The IMF now insists that INE (electricity) and INAA (water) be privatized so as to put a stop to the 40% of the population that illegally taps into these services. Doing so without first dealing with unemployment and poverty makes this goal as unrealistic as stopping juvenile delinquency by putting more cops on the beat. It just begs the poor to attack the new private installations, which would only increase the cost to middle class paying users. Privatizing Telcor is much more rational in this sense, since the poor don't have telephones, even illegal ones.
The economic Cabinet has been just as inept in managing economic information. Today, the IMF is demanding that public spending be cut $60 million to reduce the deficit, but nobody except Emilio Pereira even knows the deficit's behavior in the first nine months of 1993.
The state has also acted as if export expansion grows magically out of the liberties conceded to the richest strata of the population, which is not even true in countries with a far more advanced entrepreneurial tradition than Nicaragua's. The government has done precious little to promote new export lines, for example. But perhaps its weakest area is in its tax system, in which it has repeated and amplified the most negative characteristics inherited from the Sandinistas. Indirect taxes are increasingly replacing direct taxes on earnings, and even the latter fall more heavily on workers than on most businesses since the biggest ones in particular have a family ownership structure that facilitates tax evasion.
Scenario 3 shows the effects of a progressive income tax policy that would affect the salaries of the highest strata of public officials. By implementing such a policy, the state could collect 12 million córdobas more than it would have with its transport tax plan, and without the uprising and increased political crisis that left it even further in debt.
The biggest lesson of this scenario, however, is that cutting the salaries of the big ticket public officials would have no immediate impact on economic reactivation; the weight of indirect taxes on fiscal income is so enormous that this measure would just be one drop in a sea of inefficiency.
Not even the Foreign Ministry is exempt from the inefficiency running through all government levels. The disarticulation of Nicaragua's embassies has reached the point that many of them are damaging the country and even its ability to adequately negotiate its foreign debt. This and all the other issues above illustrate the need for serious technical training of the government team in all spheres.
9. Negotiate this package with the IMF and World Bank, and include a serious discussion about whether the IMF will allow Nicaragua to have a fiscal deficit as high as Costa Rica's. The cynicism of both the multilateral lending agencies and Nicaragua's political actors defines this period, in which the country is moving toward signing a new accord, and the IMF is asking for more of the same even though the negative economic results are in plain view. Without a serious and bottom line negotiation between Nicaragua and the IMF, the only remaining hope must lie in social reactions such as the transport strike. It is absurd and tragic to have to say that only these initiatives of collective pressure from producers, efficient service agents and society as a whole will be able to challenge the reigning cynicism and change the course of the country.
The Central Bank could quantitatively think through this package and argue persuasively against continuing with a policy of more recession and inflation. It has enough technical capacity to do simulations to evaluate the impacts of all of these scenarios together, not just one by one as we had to do. The problem rests in the unwillingness of the Cabinet and the political parties to deal with their importer and banker friends who so intransigently defend their own privileges. The UNO and FSLN politicians and the executive branch are very good at accusing the IMF of intransigence, but lose their political and patriotic nerve when it comes to pointing the finger at the Nicaraguans who speculate in people's hunger.