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Central American University - UCA  
  Number 151 | Febrero 1994



New Political Setting, same Rotten Economy

The end of political polarization will not automatically bring about the end of economic paralysis. That the political respite bring some economic relief for the majority of people is a challenge that still remains.

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As last year drew to a close, the political polarization that had kept Nicaragua's legislative branch virtually non functional since September 1992 finally collapsed, leaving a new and dominant centrist alliance in the National Assembly.

This effort by Sandinista and moderate UNO politicians to realign the legislative body thus succeeded where the government's famous National Dialogue had failed, but the result is not yet stable or even firm. The UNO coalition divided and could disappear altogether, but both the government and the FSLN also suffered fissures that may be hard to mend.

Furthermore, the end or at least the lessening of political polarization will not automatically bring with it a way out of the economic paralysis. Economic breathing room for the majority of Nicaraguans is a still pending challenge. For all that, the break up of the political impasse that had paralyzed Nicaragua for so long creates thinking and implementing room for those who must decide the course of the country's economy.

How the New Center Was Forged

The eight member Center Group's formal separation from the UNO bench in September 1992 had already ended UNO's majority control over both voting and Assembly board membership. But, in response, UNO opted to withdraw its participation throughout the 1993 session, charging that the executive branch had bribed the Center Group for its loyalty. While the Sandinista bench and the Center Group comprised a quorum that permitted the Assembly to continue functioning, UNO's boycott undermined the legitimacy of the Assembly's work as well as the credibility of all leaders of the political class. Something had to give.

In late October 1993, something did. The Christian Democratic Union (UDC), a reunification of the Social Christian parties and a relatively moderate member of the UNO coalition, took the first step. It published a document of reflections on reforms it would make to the Constitution and signaled its willingness to negotiate the issue with the FSLN bench. The Sandinista legislators, led by former Vice President Sergio Ramírez, responded with cautious enthusiasm. After the first promising talks, the UDC was joined by the Social Democrats in the Nicaraguan Democratic Movement (MDN) and by the Popular Conservative Alliance (APC). They, in turn, were followed by individual Assembly representatives from various other UNO parties.

At the end of November, after nine long legislative sessions, the FSLN and the UNO defectors reached consensus on reforms to 92 of the Constitution's 202 articles. On December 9, two days after the celebration of the Immaculate Conception ended with the traditional neighborhood singing known as the "gritería," 58 of the Assembly's 92 representatives signed an accord, heralded as "historic" by the media, formalizing the new agreements. (Changing the Constitution requires the agreement of 56 of the 92 Assembly members.)
Among the most important agreement was the decision to reapportion the weight of the branches of the state. The particular goal was to increase the National Assembly's power and thus neutralize the excessive constitutional leeway given the executive branch, which has encouraged President Chamorro to govern virtually by decree. The affected executive watched the whole process from the sidelines, although with far less enthusiasm than the other spectators.

By January 1994, the 14 parties originally in the UNO coalition had been reduced to 7, and the 52 member UNO bench had shrunk to 20. UDC assemblyman Humberto Castilla, a militant right-winger who could not abide his party's move to the center, ultimately switched membership to the National Resistance Party (PRN), thus becoming the former contras' first card carrying representative in the National Assembly. The new majority now has 71 members, with the 39 member Sandinista bench holding the voting majority.

The National Assembly opened the 1994 session with this new alliance on January 25, following long and complex negotiations regarding not only constitutional reforms, but also the election of a new Assembly Board and the 1994 legislative agenda.
The debate to reach a final definition on all the constitutional changes could take most of the 1994 session. And Daniel Ortega has argued that the population itself should debate the reforms in open forums, as was done when the current Constitution was first drafted.

Change in the Political Scheme

The political and economic changes Nicaragua has undergone in the past three years were headed up by a dominant group comprising new and old business leaders (excluding Somocistas) and top political and military bureaucrats of the state of all political stripes including red and black. This group had to continually try to contain the influence and pressures of the traditional and Somocista right, while also trying to neutralize the left and coopt the rebellions of the grassroots majorities.

This ruling group was never able to consolidate its "centrist" project due to both the contradictions among its members and social resistance to such drastic changes. The FSLN's acceptance of the government's recessive economic program in exchange for political concessions aggravated the social resistance even more.

This centrist group ruled with ups and downs for the first two years, but its weaknesses had become fatal by 1993, after the economic program not only failed to take off, but was showing extremely harmful and destabilizing effects. It only continued exercising power due to the inability of the grassroots sectors to find effective political representation and alternative economic proposals.

The realignments culminating with the December accord in the Assembly expressed exhaustion of the political scheme drawn up by this dominant group. Responsible for carrying out the profound and devastating economic changes in the country, the group had been unable to create a social base to back it. This original "center" is today isolated, split and without credible leadership.

The End of a Stage

The political realignments thus signify the end of one stage and the start of another, in which the spaces of each political group are being redefined in the changing institutional setting. This new stage began with the proposed constitutional changes and will come to an end with the 1996 elections. In this "pre electoral interval," the new center, significantly widened to include part of the parties in UNO, will move into the parliament. From there it, too, will still seek to weaken the ultra right and neutralize and coopt the left. The elections will open yet a new stage, consolidating the alliances now in the making.

The Sandinista legislators heading up this broadened "center" are at odds with the Sandinistas who launched the "Group of 29" in mid 1993. That group publicly voiced the unwillingness of a much larger sector of Sandinistas to continue backing the government's destabilizing economic and social policies in the erroneous hope of thus achieving political stability in the country.

The fissures in the FSLN have spread due to the even more solid alliance established with the UNO moderates. This new alliance, however, does not necessarily indicate a shift to the right by the Sandinista legislators. The key question for this embryonic power bloc is not whether it is leaning more to the right or to the left, but what ability it has to favorably intervene in the search for economic alternatives linked to the people's demands. Both the National Assembly and the executive branch face the challenge of social peace and, beyond that, the draw each could have with voters in 1996. Without an economic solution for the majority, the recently achieved political consensus cannot last.

Watson Is Pleased

The change in US policy toward Nicaragua played a fundamental role in the political realignment. The US government's support to UNO's more rightwing and destabilizing sectors up to mid 1993 encouraged the political polarization, neutralized the more responsible UNO representatives and blocked the creation within UNO of a broad center capable of negotiating with the FSLN. Things have changed; the United States no longer stresses removing the FSLN from significant participation in the life of the country.

"I think that it is really fascinating that the Nicaraguans have moved so rapidly and positively in the past months," stated Alexander Watson, Assistant Secretary of State for Inter American Affairs, in his January 25 report to Congress on Nicaragua's new political situation. "I do not know," he added, "whether this has had much to do with the adjustments in our foreign policy or not, but it pleases me to think that we have contributed to it." Watson was being ingenuous; he knows as well as every Nicaraguan how much the adjustments in the United States have had to do with those in Nicaragua.

UNO and the Executive Are Not Pleased

The rightwing extremists in the UNO coalition had maneuvered feverishly to prevent the coming together of the "new majority" in the Assembly. Their failure to do so left them adrift, interpreting the realignment in their typically simplistic way as "the expansion of co government from the executive branch to the legislative." The political impasse that had been lifted from the shoulders of the nation came to rest on those of the debilitated UNO coalition itself. Bereft of a strategy to deal with the new situation, UNO leaders are still calling for the election of a Constituent Assembly (which would form a provisional government and rewrite the entire Constitution), the dissolution of the current National Assembly and the removal of President Chamorro. They even still claim that they will collect 1,700,000 signatures 100% of the adult population in support of Constituent elections. After nine months of proclaiming that this was the only political hope, their creation was stillborn.

On December 27 UNO expelled the UDC from its already shrunken coalition, and on January 3 it kicked out the MDN and APC as well. As a result of all these political switches, the Social Democratic Party split, and expelled Alfredo César, former National Assembly president and the PSD's most rightwing leader, from its ranks.

This does not mean that the ultra right's project can be pronounced dead quite yet. The necessary adjustments could still be made to keep its vital signs alive, given the seriousness of the uncontrolled economic crisis and the social unrest it churns up in its wake. This creates a breeding ground for populist and authoritarian options based on force, which is precisely what the extreme right is good at. If neither the new center nor the left of the FSLN prove capable of changing the economic course, this ultra right project and its candidate could conceivably win the 1996 elections.

As for the executive branch, the plans of the new legislative majority to fundamentally reform the Constitution seriously worried it. Early on, President Chamorro declared her hope that the reforms to the Magna Carta would be "minimal." Later, after the FSLN and the UNO moderates had agreed to the first reforms, Minister of the Presidency Antonio Lacayo dismissed many of them as "emotional positions rather than rational ones."
He also warned of a future "collapse of the economy" if the National Assembly grants itself the constitutional pow er as many representatives have expressed the intent to do to intervene in the design of economic policy and the negotiation of accords with the International Monetary Fund and other international lending institutions.

Same Old Straitjacket

A future collapse of the economy? The government's economic model has already collapsed. And no political realignment, no new majority of legislative representatives and no constitutional reform can surmount this reality by itself.

The 30% drop in foreign assistance in 1993, and its shift from liquid currency to aid tied to projects, forced the government to try to save the lifeblood of its stabilization policy with fiscal band aids new or higher taxes. The government has squandered the extraordinary flow of aid it received between 1990 and 1992 on an economic program that stimulated imports, discouraged exports, increased the trade deficit and deepened the recession that the country has suffered since 1984. This, together with the rapid fall in aid, has put the government up against the wall. The speeches with which it rang in the new year were optimistic, but reality itself has not changed.

The centerpiece of the economic model's collapse is the trade deficit. In 1993 it meant the loss of millions of dollars of official reserves. This reduces the earnings of those few who still profit in Nicaragua the big importers of foreign goods who, together with the private banks, have been the main beneficiaries of the 1990 93 stabilization program. This shrunken coverage also explains many of the political realignments.

The government's accumulated failures throughout 1993 to disguise the crisis by contracting consumption to shrink the trade gap have only translated into more crisis. The agreement proposed by the IMF in December 1993 is simply an even tighter straitjacket for Nicaragua for the next three years: the same old orthodoxy for a model in crisis. And the government is submissive enough to thrust its arms right in without a fight.

Time to Reap?

The panorama for 1994 described by President Chamorro in her speech inaugurating the new National Assembly session on January 10 was the most optimistic of all. "We are ending three years dedicated to putting the house in order," she said. "In 1993 we sowed reactivation and this will permit us to reap an economic growth of approximately 4% in 1994." After three years of tending the "recently planted saplings" of dialogue, concertación and pluralism, the fruits of "that patient sowing" can now supposedly be harvested.

Government officials all insist that the conditions are now in place to make 1994 finally be the year of economic take off. But the real country contradicts the optimism of the official country. It is worth remembering that the official economic growth figure for 1993 was 0.7%, while per capita economic growth was 4.3%.

The 1994 agricultural figures will be the result of the 1993 94 cycle, which could indeed be higher than the 1992 93 cycle. Nonetheless, the latest available official reports speak of what was planted, not of what is being harvested.

By combining the volume of coffee production with the improved international prices for this product, the government justifies a 2.5% growth of the Gross Domestic Product for 1994. But in the coffee growing department of Carazo, south of Managua, growers estimate that 30% of production could not be picked due to a lack of financing for the harvest. They say that the coffee processing plants were idle in the second half of December well within the peak picking period. A similar situation could also occur in the larger coffee zones of the north, where bad roads and insecurity due to recontra activity could team up with the insufficient credits to make what is picked much less than what was actually grown.

In basic grains production, a 16% increase over last year's cycle is estimated, but at least in the case of rice the production increase is up against the policy favoring imports. National production is either crowded out by the imports or growers are obliged to sell at prices that barely cover production costs.

The Vicious Money Cycle

The perspectives are even less encouraging in the manufacturing sector. On one side is the opening to imported products, and Nicaragua's overvalued currency, which favors those imports. On the other is constantly dropping consumption. Producers produce continually less while the population consumes even less.

The President announced a 31% increase in the volume of credits, but this promise is based on unrealistic predictions of credit recovery. In addition, the cost of credit in Nicaragua is very high (20 24%) due to the cost of obtaining funds and the margin of intermediation, which tends to be high in situations of risk and uncertainty. This, in turn, increases the risk of financial operations.

When the banks' interest rate is higher than industry's earning rate, as is the case in the country's manufacturing sector, it discourages investment and stimulates the non productive use of the companies' savings, since the company cannot be reactivated through credit. In this vicious circle, an increase in real investment by private capital is improbable, since potential investors compare the cost of domestic financing with the profitability of the assets.

In these conditions, it is better business to sell the factory and put the money from the sale in the bank to earn interest. If this has not happened in Nicaragua it is only because no investors want to buy industrial plants due to the general lack of liquidity and industry's limited profitability within the current economic package. For this reason, a person with assets in a company is wedded to that company till death do them part.

This vicious circle of money in the orthodox monetarist program, together with the absence of programs to stimulate industrial conversion, is at the center of the urban/industrial economic crisis. In a climate such as this, it is very difficult to move from an economy of speculation to one of production.

This situation is most visible in the manufacturing companies because they at least maintain accounting records (although three or four months behind), but it can be generalized to all economic sectors. If they continue turning to credits it is because in the country's current economic situation, the old political aphorism that "the most expensive money is the money you can't get" is becoming a reality.

Maybe in 1995?

Rather than think of 1994, part of which is already defined by the 1992 93 cycle, it is necessary to reflect on 1995. Do opportunities exist to break out of the negative circle that is imprisoning the country's economy at least by then?
Seen from many different angles, Nicaragua's economic take off seems blocked by the existing economic policy. The urgency of changing this policy appears evident to all. Outside of the technocracy in power, ever greater consensus exists among the economists and the economic and social agents about this necessity. But these forces have been dispersed up to now. Here, too, a realignment in search of creativity and effectiveness is required.

If, from the outside, there seems to be no way out of the economic collapse, is there from within? Can the new and positive political consensus bring it about? Can the realignments bring not only political stability to the country but also economic improvements for the majority of the country's people? The changes have generated a lot of expectations, and even a glimmer of hope.

What's Up with the IMF?

One can always expect the worst when there is silence about any issue of our economy. And silence is exactly what we are hearing about the new accord that the government should soon sign with the IMF.

The IMF sent its delegation to Nicaragua in December 1993, but refused to sign any accord until the Chamorro government fulfills all the conditions imposed, which are stricter than ever. The IMF is not about to extend a new loan, or give a green light to donor countries to do so, until the government proves itself capable of imposing even more austerity on the country. It permits levels of non fulfillment to other countries, but not to Nicaragua, because the current government has zero credibility with the IMF.

The IMF's current demand is nothing more or less than that the government continue slashing its budget. With the recession and the government's inability to reactivate the economy, the IMF was honest from the outset. It pointed out that the initial 6.7% cuts it had requested would have to be even greater. If the IMF does not sign until the Ministry of Finances does everything it ordered, the government can take one of two roads, both of which accentuate the current economic collapse.
It can get out the scissors and cut the budget already approved in the National Assembly, or it can get out the calculator and see where, how and how much to increase taxes or create new ones or collect existing ones from more people. The Ministry of Finances wasted no time getting out both its scissors and its calculator.

A Country With No Budget

On December 11, the National Assembly modified then approved the 1994 National Budget submitted by the executive. The real value of the budget had already been cut 14 20% compared to 1993, even though the country's needs have multiplied.

After tense discussions with the executive, the Assembly had reassigned $65 million of the draft budget to increase, among other things, the amount assigned to the police, the Atlantic Coast autonomous regions, the Supreme Court of Justice and the poorest municipalities attended to by the Institute of Municipal Promotion. But only a month and a half later, the health workers' union was the first to charge that the executive was unilaterally cutting the approved budget for health by 80 million córdobas.

The fact of the matter is that the people's representatives in the National Assembly have no control over the budget. They only approve it formally; the document containing their signatures has absolutely no value. This is not only unconstitutional but has been and continues to be a cause of social instability.

On January 1, the government welcomed in the new year by raising petroleum prices to increase its tax income. (At over $2 a gallon, gasoline in Nicaragua was already the most expensive in Central America.) Three weeks later the majority of transport workers in Managua and the rest of the country began a work stoppage. Part of their aim was to protest the government's failure to comply with the agreements resulting from the September strike, but their main demand was that petroleum prices be frozen for the rest of 1994. The strike lasted nine days, but it was not total and did not receive the popular support that the previous one had. Nor was it violent like the earlier one. Nonetheless, the government drew attention away from the protest against the gas tax increase by jailing dozens of striking workers in a preventive sweep marked by police abuses. The new National Assembly publicly called the strikers' demands just and criticized the government for using petroleum as a source of fiscal revenues it cannot find elsewhere.

Following the IMF's "suggestions," the government also announced new public employee cutbacks in a plan known as "voluntary" Labor Mobility. There is talk of 9,000 layoffs between January and March.

We are, then, in the worst of situations: we must comply with the IMF's conditions with no assurance of getting the foreign aid it is promising. It is another surgical operation with no anesthesia. If the government does not manage to fire thousands of public employees, increase taxes and cut the budget further, the new agreement will not be signed.

We Must Agree to a Solution

The economy does not march to the same drummer as politics. While the political realignment was taking place, the government and the financial organizations went right on drawing up their more recessive economic package. The time required to put through the constitutional changes that will limit presidential power and allow greater political democracy is very long compared to the pressing needs of the economic agenda. What stability can the new center dominating the legislature and the world of political parties have if the dramatic economic situation does not improve rapidly? Political agreements, like political conflicts, do not only seek quotas of power. They also occur around the distribution of wealth. And without a sufficient production of wealth, no political agreement can last.

Can this new legislative majority move from reforming the Constitution to laying out essential solutions to such a desperate economic crisis, and relatively soon? Will it have the capacity to renegotiate or even violate the ESAF II accord that the IMF wants to impose on Nicaragua? Will these realigned political forces be able to mobilize the social forces they represent against the economic course consecrated in the IMF accords? A new economic package that could attract the forces to design a really popular electoral process must be consolidated in 1994, before entering into the 1995 pre election process. Is there the commitment and the time for this task?

Four Actors, Four Tasks

Each of the four lead actors on the Nicaraguan stage must play its part if economic improvement is even to be hoped for in 1994, before the electoral agenda begins to repolarize the situation. If the script is to be a hit, they must not only play their part, but do so harmoniously and simultaneously. None can bow out and none can carry the load of another.

The organized political sectors, particularly the parties, must continue promoting the peace and stability the country requires if it is to get beyond the polarizations that have historically eroded it. This is the part that has been played best so far, culminating in the current realignment. The consolidation of this stability would encourage the productive effort.

The international lending agencies must believe in Nicaragua's capacity to grow in the near future and promote a renegotiation of the country's multilateral and bilateral debts. This would at least permit the aid that is still coming to be used to rebuild the country and not just pay the burdensome interest on the past debt. Such a position implies leaving to one side the recessive orthodoxy that the IMF and others traditionally impose on countries in trouble. Reducing the state only makes the government's macroeconomic administration more difficult and weakens its role as guarantor of social stability.

The government has to promote a macroeconomic and institutional framework that stimulates production and channels the effort of the economic sectors toward growth. The key elements of such a framework are less trade openings, monetary stability but with more credit, more public efficiency and sectoral and marketing technical support (see the November 1993 envío for an outline of a consistent economic program).
It should stop giving the lending agencies the pretext of government inefficiency to impose its drastic budget cuts. The only thing this recession accomplishes is to further weaken the public institutions, which favors the imposition of more recessive measures from outside.

The private economic sectors must take seriously their commitment to production and assume productive risks rather than speculative ones. Encouraged by the government's change of attitude and by a more stable political environment, they should justify the hopes of those who believe that private enterprise can cure all the evils of the economy. A private company that stresses production over financial speculation and import trade, and invests in national agriculture, industry and commerce will guarantee that the change of attitude by the lending agencies and the effort of the government have not been in vain.

Political society has begun to provide the example by placing its bet on Nicaragua. Will the other actors be up to the challenge to give up a little of their own facile and comfortable positions? If they are not, they will be ceding the stage to those at the extremes who are wagering that the only way to come out ahead is through chaos.

Without wishing to predict the worst, everything indicates that this is the last opportunity, and should not be missed.

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