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  Number 159 | Octubre 1994
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Political Ambition; Economic Negligence

Behind the scandal of the huge debts of Minister Roberto Rondón and the transport strikes are a credit policy and a tax policy that are both recessive and highly conditioned by the heavy yoke of foreign debt.

Nitlápan-Envío team

While Nicaraguans with the money to do so prepare their children to live and compete abroad, those who cannot even dream of it, much less attempt it, are resigning themselves to watch their children grow without opportunities, with no future, in an increasingly desperate country. Meanwhile, with well over a year to go before the upcoming presidential elections, personal political ambitions are already kicking loose on a daily basis.

So far, none of the presidential hopefuls offer any concrete alternatives to address this desperation. Not even those who already hold high public office who may or may not be allowed to run for President are doing so, and they are the only ones with the power to actually do something.

Concentration of Wealth: How Much?

Not even those in whose hands is concentrated financial capital, the big farms, the few industrial plants still operating and academic preparation are happy about what is happening in Nicaragua today. A system riddled with nepotism and patronage is allowing a few individuals blessed with family and political relationships to get rich quick.

This is not totally new. What we are seeing today is the natural result of the exclusive policies that have so indelibly marked Latin American societies. Neoliberalism has simply accentuated the features of this portrait, turning it into a caricature. According to Forbes Magazine, the fortune of Mexico's 13 wealthiest individuals grew 40% in 1993 alone, under President Salinas' neoliberal "reign." In concrete terms, this means over US$9 billion. Forbes adds that the 24 wealthiest Mexicans own $44 billion, a third of the country's entire foreign debt and a full 15% of its Gross Domestic Product. Meanwhile, the 40 million poorest live in extreme poverty.

A similar investigation is needed to detail the accumulation of wealth and concentration of privileges that has occurred in Nicaragua under the first four years of Violeta Chamorro's administration, but the broad brush strokes are there for all to see. The strong political dissent among the best situated economic groups is a clear sign that this small country's even smaller economic pie is being sliced up and shared out only in exclusive elite circles.

Somocismo: A Political Culture

Even in the social systems of ancient times, in which family and politics became muddled in the exercise and transfer of exclusionary power, rulers were aware that they had some responsibility for the economic development of the collectivity. To achieve it, they knew enough to promote individual energies, albeit under forms of slavery or peonage.

Closer to our own times, the Somoza dynasty's political system, as nepotistic as it was, promoted economic development after a fashion. Many Nicaraguans at least those who did not suffer the political repression of the last Somoza today long for the economic prosperity of those years, without pausing to consider how dramatically the national and international conditions have changed.

The rupture of Nicaragua's dominant bloc in the 1970s was provoked precisely by General Somoza's break with the business "opposition's" complacent expectation that it would go on sharing the fruits of this development promotion. When, after the 1972 earthquake, Somoza began voraciously displacing this sector from economic activities it had always considered its reward for complicity, a good number of its members passed into the active opposition, significantly contributing to the dynasty's downfall.

In the vacuous image war of today's Nicaragua, the most polarized political groups on both sides of the undeclared electoral campaign use the term "Somocismo" rhetorically. Some so strongly oppose its return as a system that they justify any political step taken to prevent it, while others claim its positive economic aspects and stability as their own. But neither side dares give real and objective content to its respective image.

If Somocismo is understood as a political system that adeptly used clientelistic relations to govern on its own behalf instead of fostering consensus based on democratic debate to govern for the greater good, it can be said that this strong feature of Nicaragua's political culture is alive and well. But it is not the property of any particular party or group. Whether in government or the opposition, all act "somocistically."

Economic Theory and Reality

In the ongoing image war, government politicians, backed by insensitive technocrats, try to convince the nation's thinking elites that we are on the promised road to "modernization," and that only they have the map to the destination. The country they inherited, they tell us, had lost its way and was in bad shape, but is now "going well." By liberating individual energies, they assure us, the market will put everything in order.

This ideological packaging glosses over and justifies the government's growing irresponsibility and its sell out to short term political interests. In this, as in so many other things, we are behind the times. While local politicians sing the praises of the new modernization paradigm and promote the dismantling of institutions for their own greater enrichment, the biggest defenders of this economic philosophy elsewhere in the world are already questioning both its scientific postulates and its tragic ecological and social consequences.

The essence of neoliberal economic thinking lies in the assumption that markets function perfectly, and are thus the best mechanism for assigning resources and setting prices. Such perfection, however, is far from evident in today's markets.

We can begin by looking at the goods market. Sugar in Nicaragua, for example, is produced and marketed domestically by a few companies that agree on a price that suits them. Since these companies have enough political clout to block competitive sugar imports, the price they set is far higher than they could get on the world market.

The imperfections in the labor and capital markets are just as evident. Robert Lucas, one of the most famous and conservative neoliberal economists, strongly criticizes neoliberal theory on this score. In a recent article, he argued against continuing to say that Mexican workers can receive the same salary in Mexico and the United States. "To state this is to follow a theory that predicts, but goes against the evidence demonstrated by millions of Mexicans," Lucas cautions, adding that a massive foreign capital flow into poor countries would indeed drive up their wage levels, but would in turn shrink the profits of this new capital.

Investors thus prefer to get monopolistic advantages over the markets, such as exclusive representation of a foreign commercial company, or special legislation, as in the free trade zones. Said another way, the problem with neoliberal theory is not the theory, but reality itself.

The disastrous social and ecological effects of neoliberal policies no longer need be demonstrated. Even the World Bank itself is fully aware of them, and has further concluded that the supposed economic benefits of these policies are simply not evident.

What Has the Government Done?

Looking back over the past four years of government by President Chamorro and her powerful presidential minister, Antonio Lacayo, it becomes obvious that their administration's once glittering image of efficiency and honorability is quite tarnished. A combination of the governing politicians' economic negligence and their technocrats' incompetence and insensitivity has favored an exceedingly small circle of allies and relatives.

Ending the war and hyperinflation were both positive accomplishments. So was the reestablishing of relations with the international financial institutions and the initiation of a structural adjustment changes in the economic structure and in the institutions. It is also true that the withholding of US aid in 1992 and 1993, together with the political instability expressed by rural violence, has scared off both national and foreign private investment, making the country's economic recovery even harder.

But this analysis is pretty stale by now. Despite most Nicaraguans' longing for reconciliation and some consensus on issues essential to economic recovery, most of the political class is now recklessly throwing itself into a premature electoral campaign that does little more than stir up the very personalized contradictions between leaders. It also blocks the channeling of institutional efforts into the design and implementation of a program of economic development, social inclusion and ecological recovery.

Will We Lose Another Year?

Frittering away the next year in such preliminary electoral campaigning implies more erosion and the risk of social explosion. But this would be worth the price if the elections guaranteed the nation a competent government more concerned about the public interest than that of its own top officials. It is illusory, however, to think that simply changing politicians will somehow transform policy. Changing the state presupposes building new spaces for democratic participation in which consensus can be reached on policy and intelligent economic management can be shared between the public institutions and the organizations of civil society.

Parties and political personalities with no concrete proposal for addressing the nation's economic problems and institutional transformations can only sell images to try to stay in power or attain it. But images do not go very far in a debate about bottom line problems.

We have spoken before of the "political bubbles" that get floated in Nicaragua in lieu of real debate about real problems. By the end of August the fight over constitutional reforms had turned into a veritable bubble bath threatening to drown some of the most ardent battlers. Political elites on all sides riveted their attention on the spectacle, betting on who might emerge from it even as clean as they went in. Meanwhile, in the real world, the problems of transport workers, taxes and credits, together with the still unrelenting drought in the countryside, threaten to scuttle the timid growth augured by the dream peddlers. Solutions are within reach, but no one is willing to reach out for them.

Constitutional Reforms

The early entry of some presidential aspirants onto the campaign trail widened the divisions within political society at the very time these divisions should be narrowing. This moves the consensus that the country needs even further out of reach. The only consensus being sought now appears to be around pre electoral arrangements. This is what is now happening to the over 100 reforms that were debated over the course of many months to bring the 1987 Constitution in line with current reality.

Some changes negotiated by the new legislative majority, such as transferring to the National Assembly the power to legislate taxes and giving it more control over budget execution, are important and progressive checks on the Constitution's excessive presidentialist skew. Antonio Lacayo, however, staunchly opposes these reforms, ignoring the fact that the party coalition on whose ticket his mother in law was elected President fought bitterly to reduce presidential power during the Sandinista government. Claiming that giving the legislative branch more power would make the country "ungovernable," Lacayo declared it "alarming to think that a branch of state that has been so erratic in these four years is now trying to assign itself functions that have been in the hands of the executive branch since 1987."
But even the debate about such essential issues as these has taken a back seat to the increasingly acrimonious one about whether to permit reelection for a consecutive presidential term and whether relatives (including by marriage) of the incumbent President should be allowed to run. If the first set of issues sparked Lacayo's truculent opposition, this set is giving him aplopexy.

Spectators virtually need a scorecard to follow this debate from day to day. Political parties, and even individual leaders within them, suddenly shift positions on it as they shift their alliance tactic in gear with the 1996 elections. For example, Sandinista bench head Sergio Ramírez, who, like Lacayo, originally said he "philosophically" opposed such restrictions on who could run for President, now defends them on the grounds that "the people" are viscerally opposed to dynastic rule. Be that as it may, the interests and calculations underlying his shift are far from clear. It at least seems to scotch the rumor, around for years, that he would consider sharing a centrist ticket with Lacayo.

Meanwhile, just as envío went to press, a fight brewing within the FSLN for weeks, ostensibly over the reforms but going much deeper, threatened to provoke an irreversible split. Pending an analysis of the fallout of this crisis, its key public expressions through September 5 are summarized in the sidebar on the following page.

Whatever the origins of all this politicking, it benefits neither the country nor the majority of the citizens. It only benefits those involved, who have made politics a profitable profession instead of a mission at the service of the public good. The very notion of "public good" is being seriously affected by today's privatization of the state: the political game is being played exclusively on behalf of private interests, which spawns even more politicking.

It will be very difficult, if not impossible, for any politician or party to convince people that their immediate and urgent interests are in any way tied up with the outcome of these sometimes incomprehensible disputes. Perhaps the fact that many politicians are lawyers by profession bolsters the chronic tendency, observable since last century, for them to spend more time trying to change laws than to apply them, to strengthen or improve the public institutions.

The Military Code

On a more positive note, the military code was finally approved on August 23 by a significant majority of those who saw this long and ardent debate through to its end. During a peak moment of the floor debate, US Undersecretary of Defense Marí Luci Jaramillo visited Nicaragua. She said her visit in fact part of US Ambassador John Maisto's scheme to influence the debate was to "learn more about what is happening in Nicaragua." During her stay, General Humberto Ortega, currently head of the army, agreed to the army's future participation in Haiti, only after a military intervention, to cooperate in professionalizing Haiti's army and police. Gen. Ortega stated that such participation would achieve "recognition of this army's legitimacy."
In the end, the legislators introduced many new and important changes in the bill first drafted by the army and later negotiated with the executive. The law marks real progress with respect to the authoritarian tradition of both Nicaragua and the region a whole. Among other things, it establishes that the army intelligence service can never be dedicated to political tasks, and that military personnel are not obliged to obey orders that violate the Constitution or human rights.

One of the most important aspects of the new code, ratified by President Chamorro in a formal ceremony on September 2, the Day of the Army, is that the army's strategic orientations and its chief will now both be subordinated to the executive branch of the state. The President will elect the army chief from candidates proposed by the army itself, and may reject as many as necessary until an acceptable candidate is found. According to a transitional article of the code, Gen. Ortega's successor will be named on December 21 of this year and Ortega himself will go into retirement on February 21, 1995.

Five days before the final vote ratifying the bill with all its changes, the 21 legislative representatives remaining on the rightwing UNO bench abandoned the floor fight to protest the 51 3 passage of an article that permits the army to invest in companies. The earnings from these investments must be used exclusively for the army's new Institute of Social Welfare, thus relieving the national budget of this responsibility for military personnel. The business sectors UNO represents seem unaccustomed to the new rules of competition given the corporativist and nepotistic management of the national economy in past decades.

During the debate, Gen. Ortega assured the National Assembly that the army's investments "have no great weight in this country's overall financial, material, economic activity." A Costa Rican newspaper, however, quoted Major General Joaquín Cuadra as saying that "the volume of funds is considerable compared to the size of Nicaragua's economy." If the army has capital, which it indeed does, the fairest thing is to invest in productive activities in Nicaragua rather than keep it in an account in Grand Cayman or some other banking paradise.

The permission given a public institution such as the army to own companies shows how little support there is for the extreme positions in favor of totally privatizing the state. The importance of public companies in mixed economies as all economies in industrialized countries are does not lie in what set of management criteria is applied. What counts is business profitability, and there is no inherent reason why a public company should be less efficient than a private one in producing a given good or offering a similar service.

The difference resides in the use of the earnings, after replacing the capital used and making necessary new investments. If the public enterprises enjoy no special privileges, such as tax exemptions, other subsidies or inside information, they should not be seen as "bad" on principle. Furthermore, in a situation in which private capitalists always try to obtain such special privileges either as individual powerful entrepreneurs or as smaller ones organized into associations the privatization ideal has no moral foundation and should not influence national laws, whose objective is the public good.

The new military code is obviously not to the liking of the extremist political sectors for ideological reasons, as well as for more transitory reasons in this already heated pre campaign season. But recalcitrant electoral speechmaking aimed at cultivating the strong anti Sandinista sentiments of an important part of the population is one thing, and institutional arrangements that would be made after the elections is another. At that time, the army will undoubtedly know how to play its institutional role, no matter which political sector wins the presidency.

Transport Workers Back on the Streets

Everyone is thinking about 1996 but no one seems worried about how to get from here to there in the best conditions for the country. The economy, however, insistently reminds us that the situation of most of the population is dramatic and occasionally explosive.

On August 23, eight transportation cooperatives and union federations from across the country parked their 12,000 transport units (buses, taxis, cargo trucks, container vans working out of the ports, etc.) for what dragged on into an eight day transport strike. The overriding issue was that they are being bombarded with costs they cannot pay without raising prices for their services, and the impoverished public cannot absorb a rate hike.

Among other things, the drivers demanded relief from the weekly petrol price hikes linked to slippage in the córdoba's dollar value. A reduction in gas prices was first granted after their September 1993 strike when Nicaragua already had the region's highest gas prices but only through the end of the year. They also demanded exemption from the avalanche of new taxes license plates, licenses, annual circulation stickers, and the like basing their legal argument on a 1974 law exempting cooperatives from such taxation.

And, finally, the bus and taxi cooperatives demanded that the public transportation system be reordered in the major cities, to put a stop to the proliferation of "pirate" units. These units not only drive down prices, but the government allows them to overlap the routes of existing cooperatives particularly the feisty Sandinista ones hoping to drive the latter into bankruptcy. Managua's Sandinista bus cooperative has taken a new, more conciliatory line toward the scab pick ups that move into their routes during each strike: instead of outlawing them, they should be reassigned to expanded areas of the city still without adequate service.

Two umbrella structures, the National Transport Commission (CNT) and the Higher Transport Council, represented the strikers in the negotiations. The first, largely but not exclusively Sandinista, organized the September 1993 strike and the second was formed afterward, functioning as a counterweight in the brief January 1994 stoppage called to demand government compliance with the agreements resulting from the earlier strike. By the August strike, they had reached an impressive level of unity and maturity, withstanding the government's manipulations to redivide them almost to the end and significantly controlling the violence against scab units, despite mounting frustration as the negotiations dragged on interminably.

In the end, the government maneuvered to absent the chief CNT negotiator from the hall long enough to sign an accord with the other group, in which it agreed to lower petrol prices through compensatory bonds up to the end of 1994 and loosely promised to reorder the routes more fairly and review the tariffs. These now traditional stopgap measures will only force the workers to take some new action again next January, which the negotiators hoped to avoid through a more comprehensive and permanent solution to the problem. Losses due to the strike are estimated at nearly US$20 million, borne mainly by merchants and the state (who can recover some of the lost sales and sales taxes) and the transport workers themselves (who cannot recover the lost fares).

Rondón and the Strikers: A Common Denominator

On August 18, a few days before the transport workers' showdown began, a National Development Bank (BANADES) official revealed that goods of Minister of Agriculture and Livestock Roberto Rondón Nicaragua's largest landowner were being attached for nonpayment of loans from that state bank equaling US$1.5 million. It first appeared that the scandal would result in Rondón's removal as minister, but at the last minute Antonio Lacayo reconfirmed him in his post. BANADES declared that another 300 big ranchers, some with equally "public" names also have huge unpaid debts.

It is indeed shameful that a government minister, paid out of the public treasury, not only fell into such spectacular arrears, but there are even suspicions that he diverted the agrarian credit from what was agreed to in the loan contract. More shameful still is that, if this is true, the President did not ask for his resignation, even if only for the moral health of her government.

Both the high costs and small benefits of the transport workers' strike and the ease with which Rondón got away with squandering huge loans from the state agricultural promotion bank show that the existing political system is unable to resolve the nation's fundamental problems but quite able to worsen them. These two seeming independent and central events of August also show that a common denominator links them closely together, as is always true between economics and politics. In this case, both credit policy and fiscal policy are pinned beneath the foreign debt's excessive weight on the public coffers and on private investment.

Foreign Debt First, Productive Credit Later

Few members of the political class understand the pressures the debt exerts on our economy, and are thus playing an extremely negative role regarding this issue.

Some basic figures. The portion of the 1993 fiscal budget that was spent domestically equaled US$359 million. The medium and long term debt service actually paid by the government and the Central Bank, not including the compounded interest or the trade debt, was US$194 million in other words, an amount equivalent to 54% of domestic fiscal spending. Interest payments alone were US$102 million, or 28% of domestic spending. Amortization payments on the principal of these old loans was covered by taking out new loans. And these figures, it should be stressed, represent payment only on the under 20% of the debt service that the Central Bank has designated as a priority in negotiations with the International Monetary Fund.

These figures speak to an essential problem. The effective service on the foreign debt is a heavy and strangling yoke on the national budget. Domestic spending cannot be financed by indiscriminately printing money, since this would again trigger the hyperinflation we suffered before the drastic stabilization policies applied in 1990 91. Only two remedies remain. One is to try, at any cost, to increase fiscal income by permanently raising existing taxes and seeking new ones. The other is to slash the domestic budget by cutting social spending and infrastructural investment, laying off still more public employees, and the like.

Yet another direct casualty of the debt burden is credit availability. Since the Central Bank must use its resources to pay its part of the foreign debt service, the financial system receives fewer funds for lending. Both the private and state commercial banks increased their portfolio by the equivalent of barely US$88 million in 1993, of which only a third came from the Central Bank. Another third was backed by foreign funds, directly contracted by the banks or intermediated by the state's Nicaraguan Investment Financing Institution. The remaining third came from the private sector's increased bank deposits last year.

The second two funding sources cannot be increased at the will of the banks, since the first of them depends on the availability of foreign capital, and the second largely on public confidence in the national banking system. The fact that monetary authorities were only able to expand private sector credit by less than another US$30 million reveals the narrow maneuvering room left them by the debt service.

Who Decides How Much Room?

Such limited maneuvering room to expand the supply of domestic financing has two aspects, both linked to the conditions brought to bear on the policy of poor and badly managed countries such as Nicaragua by the international financial institutions. These lending agencies have two overarching goals: 1) that the country first pay the greatest possible amount on its debt; and 2) that it then only spend domestically what it can back with hard currency.

Given the rudimentary mechanism of monetary programming practiced by the authorities, which consists of expanding domestic credit only if hard currency is available to back the printing of new córdobas, debt servicing cuts into credit availability on various flanks. One is that the Central Bank uses part of its hard currency to service the fraction of the debt it owes directly (approximately a third of the total service payment). Another is that the government buys some of the hard currency it needs for its debt service payment from the Central Bank, using for this purchase the córdoba credit the Central Bank gives it. And third is that the government also buys hard currency in the market, pressuring up the price offered by financial intermediaries to satisfy private demand, which in turn affects the state's own hard currency reserves and private dollar deposits.

Even though international cooperation directly finances about half of Nicaragua's imports, exports are too small to finance the other half and have anything left over. This virtually limits the government's source of hard currency to the portion of international aid that arrives as untied cash. This explains why the Central Bank's domestic credit to the government is so small: in 1993, its net financing to the government barely equaled US$10 million, never mind being able to sufficiently expand credit to productive activities.

Must Domestic Credit Be Backed by Dollars?

The powerful international financial institutions consider the national labor of our own business owners and workers worthless. Taking into account that international cooperation is tending to shrink, these institutions believe that the income of a country such as ours only has value if it is backed by dollars, that the economic health of such countries is limited to our capacity to produce goods or services that earn hard currency or foreign exchange, as it is known in the trade. This position is a throwback to past centuries, when economic health was equivalent to the capacity to produce gold. Then the classic economists discovered that labor is the source of the production of wealth.

The position that all countries should produce foreign exchange by exporting more than they import is notably incoherent. If everybody in the world did that, some would have to win and others lose, which would be the basis for a generalized doctrine of economic war and the end of any scheme of international cooperation.

But something else lies behind this argument as well. In this logic, the only source of world wealth is the money issued by the US Treasury, which reflects the dominion that country wants to have over the whole planet. At some future point, the only lever of international monetary regulation would be the sale of the International Monetary Fund's gold reserves a mechanism that could be used to cancel the debt of the poor countries if the international will existed to do so.

It can be argued that domestic credit in Nicaragua need not necessarily be backed by hard currency. To assume that all domestic spending must be immediately translated into an equivalent amount of imports or into a demand for hard currency to protect the income generated from monetary erosion is to forget a few things. It is true that all spending by one economic agent is income for another, but a large part of national production is with national ingredients, particularly labor. In addition, the income generated by domestic spending in turn generates a demand for consumer products that are at least partly national.

With respect to agricultural credit as a category of domestic spending, it is important to take its cyclical character into account. The borrowing repaying cycle for most farmers and ranchers has the same annual calendar, given the simultaneity of activities imposed by climatic rhythms. This forces the financial system to mobilize important quantities of funds all at once, which then remain frozen for the rest of the year.

The criterion for printing money for credit should not be that it is backed by dollars but rather the production it will generate and the likelihood of completely recovering the loan portfolio. The life of this money cannot be extended in time beyond the agricultural cycle that gave origin to it.

This assumes competent and responsible monetary authorities, who neither fear nor cater to the conditions imposed by international financial authorities whose only short term concern is that poor countries pay their debts. Since it is known that fiscal authorities are more inclined to give in to "populist" inclinations, and in fact to occasionally have a policy more genuinely in accord with the nation's interest, the neoliberal theorists' manuals always recommend that monetary authorities be independent of these fiscal authorities and the rest of the government. It is another throwback to medieval times, when private bankers supplied funds to the kings of Europe. At that time, monetary policy had still not been invented.

A credit mechanism that takes into account the rhythms of the agricultural cycle which was used in Nicaragua during Somoza's times assumes clear rules of the financial management game and a financial system able to reach the last of the small and medium farmers. Their production generally has a greater national component and their consumption demands are also more for nationally produced goods. These producers challenge the elitist and facile financial systems, presenting difficulties that the national system is not prepared to face. This mechanism also assumes both a financial system not run by people inclined to favor big growers who already have more social capital and powerful political friends and a government that does not hire foxes to guard the henhouse.

The Lessons of the Rondón Scandal

Two aspects of Nicaragua's credit system that are fatal to economic reactivation are revealed in the scandal involving agricultural minister Roberto Rondón.

The first is the current method of awarding credit, which favors friends, relatives and political cronies. Beyond the occasional dividends reported, a good reason to be a shareholder in a private bank has to do with the special access to financial resources that this offers. The state banks still contribute 90% of the national agricultural portfolio, and social and political capital prevails in gaining access to these resources. The great majority of producers remain on the outside looking in. This criterion excludes not only the poorest growers, who have neither land deeds nor other assets to put up as collateral, but also many successful farmers who have productive capital but lack the social capital to break into the privileged circle of the elites.

The other revealing element is the immense concentration of the credit portfolio. According to the 1993 annual report of the Superintendency of Banks, 8% of the entire financial system's clients received 73% of the total amount lent. This proportion is similar in the case of BANADES itself. The report also reveals that, as of December 31, 1993, BANADES' 14 largest clients had average loan balances of 8.6 million córdobas (roughly US$1.2 million). Together, these 14 accounted for 8.3% of the bank's entire loan portfolio to a total of 10,000 clients.

Financial resources are genuinely scarce, and the bloated debt service reduces them even more. While this is very serious, the unjust and inefficient distribution of these limited resources is far more serious, affecting their impact on generating income, employment and foreign exchange even more than their absolute shortage does.

Sharing these few resources well is both possible and urgent. According to market logic, proportional distribution of financial resources is more efficient than highly concentrated distribution. Proportional distribution assumes a change of mentality in the leading institutions of sectoral policy, particularly the agricultural development banks, which should again function as banks that foster development. This does not mean subsidizing everything and everyone indiscriminately, as in the past, but it does mean ceasing to subsidize only the wealthiest with access to massive financing.

Some entrepreneurs have a very profitable new practice. They buy a piece of cheap land, offer it as collateral to get credit, put this money to work in activities with a rapid profit turnover, then do not repay the loan because the land left as a pledge is worth much less than the earnings from the capital they borrowed. This shows that subsidies are still functioning through the credit mechanism, but only for a minority.

As a consequence of this practice, the state banking system wrote off its past due loan portfolio in 1992 for an amount equivalent to $160 million. Although exact information is not available about the distribution of these arrears by strata of amount, the strategy of not repaying the bank is obviously much easier for big growers with friends than for small ones who no longer even have access to credit. And the few small growers who do get it cannot afford to lose the collateral they put up, since it is their only economic capital. The final self serving touch is that, since the write off was financed with a fiscal bond, future generations will be burdened with new taxes to pay for it.

A Regressive Fiscal Policy

The government's high taxes on numerous key inputs for economic activity such as petrol and vehicle spare parts, for example are another indirect product of the need to pay such an astronomical service on the foreign debt. In theory, a customs tariff policy is conceived of as a lever to protect the national income of businesses from imports that compete with their production. This protection is particularly important when such imports are surplus production in their countries of origin or have a higher productivity level, and are dumped cheaply on the export market.

The government is making a political decision if it prefers to protect the monopoly companies against sugar imports instead of protecting the income of thousands of small producers against basic grains imports. But the instrument is the same: taxes. This is true whether the barrier is explicit or disguised, as would be the case if the government put a fair price on its sale of rice donations.

In Nicaragua, the government uses import duties and selective sales taxes on certain goods indiscriminately. It conceives of them simply as a privileged source of income, since they are much simpler to collect, for example, than income or capital gains taxes. At the same time, it protects some private monopolies.

Given this situation, the only solution to the transport strike and only a temporary one at that was to hold out and see who got exhausted first. The transport associations lost US$370,000 a day while the government forfeited some US$460,000 in taxes on lost sales. The country as a whole lost even more: about US$2.2 million a day. To these direct losses must be added the negative impact of this kind of instability on private, particularly foreign, investment.

Obviously, these direct and indirect costs for the nation would have been smaller had the government waited less time before agreeing to negotiate, and not spent so much time at the table trying to wear down its opponent with unacceptable proposals before settling. But its maneuvering room is so narrow that it turned to these simple tactics, hoping it would have to capitulate less at the end.

It was a shortsighted calculation, lacking in astuteness about its adversary. The transport workers combined unity, organization, political management of the strike and clear economic counseling. The government did none of those things as well as the strikers did. Betting too heavily on its stall tactics, the government lost more than it gained, since its uncollected fiscal income was greater than what it had to concede. Taxes on petrol sales alone represent 16% of total tax income (some US$55 million in 1993). Having to accept a tax reduction to the transport workers through a compensatory bond equivalent to 8% of petrol taxes equaled the effects of 10 days of strike. Starting there would have cost the country infinitely less than accepting it after 8 days of transport paralysis. And, to boot, the government faces another round in January.

Populism or Responsibility?

A serious risk exists that, as the elections draw near, the government team will use its hold on the reins of the national economy to engage in electoral populism. This would alleviate the immediate situation of some sectors, but could throw overboard the economic stabilization achieved at such cost in the first years of the Chamorro government.

Many things could still be done to the economy, in a non patronage sense, in the year and a half remaining before the elections. There is enough time to kick off a coherent program of economic reactivation and national reconstruction, based on a consensus shared by the different sectors of society. The reach of this program could extend beyond the election horizon, and be bequeathed to the government that ends up elected. This would politically favor a broad government platform, which would avoid falling into Latin America's traditional alternation in power, in which each government, instead of working for the good of the nation, just enriches itself as quickly as possible and leaves nothing for its successor.

This anti patriotic attitude appears to be prevailing in the government in these last months before the foreign debt is to be renegotiated. The government has turned a deaf ear to an independent proposal drafted to frame December's bilateral debt renegotiation in a coherent overall effort conditionally linked to an economic reactivation strategy. It has preferred to maintain the triumphalism and secrecy with which it has so far handled this issue, one it seems to consider its own exclusive attribute.

Although the government indeed signs the payment vouchers on the public debt, it is the nation that actually pays it through its taxes, even though it is seldom told much about the use made of the loans that contribute to increasing the debt. There has probably been some international pressure on the government not to undertake an overall renegotiation strategy. If this is so, it is surely not due to the size of Nicaragua's debt, which is barely 2.5% of the total debt of Latin America. It would have to be due to the "bad example" that this could set for other countries, and the precedent that such a decision could create.

The Debt Could Be the Key

The excessive foreign debt burden not only shackles economic development because its service seriously affects the maneuvering room for fiscal and credit policy. The very existence of such a huge debt half of which is in arrears is a threat that hangs over the future. Since not even 20% of the service that should be paid is currently being paid, this pending threat undermines Nicaragua's credibility to carry out international financial operations and contributes to slowing down the possibilities of foreign investment.

Not even a full pardon of the debt is, by itself, a magic wand that could make all the underdevelopment bottlenecks disappear. But under the current conditions, alleviating the debt burden by forging broad consensus around an economic plan that would permit growth is absolutely essential. The fatigue of the donor countries, the scarcity of foreign capital and the intransigence of the multilateral lending agencies would all loosen up simultaneously if Nicaragua's social sectors were to back a national growth strategy based on a kind of "debt for development" swap.

It is really a question of replacing Nicaragua's vicious circle of political instability and economic stagnation with a positive dynamic, in which the debt pardon issue is taken up and defended by a gamut of social sectors. Doing so would also serve as a cornerstone of consensus building around a program of productive reactivation and social investment, in turn notably increasing the possibilities of this program's success.

The Creditors' Logic

The creditors are not monolithic. Each creditor country tries to get Nicaragua to pay it most of what it owes, even though this implies not being able to pay others. It is possible, particularly in forums like the Paris Club, to get acceptance of the principle that Nicaragua's debt should be reduced to a level compatible with its "ability to pay," understanding this as the maximum that can be paid without the new loans incurred in the future increasing the debt faster than the country's gross domestic product grows.

The idea is circulating among bilateral creditors that a large part of their help to poor countries only goes toward paying their debt with the international financial institutions. This is increasingly hard to justify to the wealthy countries' national parliaments, since they must approve this aid.

These creditors also have the idea that the government of Nicaragua is not credible and that continuing to pardon its debt is throwing good money after bad, providing resources that will only be wasted, as happened with much of the US$3 billion in aid received in the past four years.

For all these reasons it is even more necessary for civil society as a whole to intervene, backing a renegotiation strategy tied to a proposal for economic reactivation. This should be done not only because the creditors will not accept the goal of condoning the debt unless it is backed by a coherent economic program whose medium term objective is to get Nicaragua out of its situation of over indebtedness. It should also be done because, without the solid support and active participation of all social sectors, neither the negotiating strategy nor an alternative economic program will have any real possibilities of success.
Showdown in the FSLN over the Constitutional Reforms

August 22: The Sandinista Assembly appoints a "negotiation commission" to discuss with the government and other parties the constitutional reforms and the FSLN's property bill, as well as other issues that "transcend parliamentary debate." Two of its four members are general secretary Daniel Ortega and legislative bench head Sergio Ramírez, each of whom also heads one of the two currents that have emerged in the party. The Assembly also proposes emphasizing relations with the bench members to avoid "sterile confrontations."
August 29: After an eight hour meeting with these bench members, the National Directorate agrees to submitting the reform bill to the National Assembly on September 5, pending ratification by the Sandinista Assembly on September 4. It bases its decision on a month long study of a draft of the reforms first agreed to by the FSLN and UNO in November 1993 then "retouched" in ensuing months by the new legislative majority (see p.4 of the March 1994 envío for a list of parties and individual party members in this 71 member bloc). Ramírez declines participation in the negotiation commission, saying any further negotiation of the reforms now belongs in the National Assembly.

August 30: Arnoldo Alemán's Constitutionalist Liberal Party announces it will participate in legislative debate on the reforms "as long as the bill presented is essentially what was agreed to by the FSLN and UNO last November."
August 31: Lacayo denies rumors of a deal with Ortega to support the FSLN's property bill in exchange for removing the reform impeding his candidacy. He criticizes the FSLN Christian Democratic Union (UDC) decision to submit the reforms without the necessary 60% support (the 11 legislators from the Center Group, the Social Democratic Party and Revolutionary Unity Bloc support Lacayo's opposition to the candidacy reform). "We would have preferred to finish the work we were doing," Lacayo says. "It's a shame the bill now won't have the support of the branches of the state."
September 1: Ramírez accuses Lacayo of violating a May 18 agreement to publish a reform approved at the end of last year to permit passage of the full reform package in one legislative year instead of two. He urges the Assembly president to publish it himself, thus making it law.

September 4: After 10 hours of debate, the Sandinista Assembly reverses the National Directorate's decision on submitting the reforms. Its main arguments are that 1) a new version was provided for perusal only two days earlier and requires study; and 2) submission would be counterproductive since the bill lacks 4 of the minimum 56 votes needed for passage, thus giving the UNO bench veto power. Several Sandinista legislators present, including Dora María Téllez, also a National Directorate member, threaten to submit it anyway, while Ramírez, in a TV interview the same day, says he will abide by any decision of the Sandinista Assembly, as the FSLN's highest body.

September 5: In a meeting of 33 of the 39 FSLN bench members, 27 vote to introduce the bill along with the three other parties supporting it (UDC, Miriam Argüello's Conservative Popular Alliance and the Nicaraguan Democratic Union). Argüello says it is a race against time, since the findings commission will have 60 days to consult the populace and government, leaving little time for floor debate and first round approval before this year's session ends. She also notes that in the article by article floor vote, the constraints on candidate eligibility could still be defeated. Tomás Borge, acting secretary general in Ortega's absence from the country and supporter of the bill's submission, calls a Directorate meeting for September 6 and a Sandinista Assembly meeting for September 9 to discuss a response to the bench's insubordination. "There hasn't been an attitude of indiscipline like this in two decades," Borge tells reporters.


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