Envío Digital
Central American University - UCA  
  Number 161 | Diciembre 1994



Nicaragua: Through a Glass Darkly

The budget drawn up by the executive has many dark corners: “confidential” expenditures, incomes and spending that always appear undevalued, undefined items. Whose job is it to bring light to such darkness?

Nitlápan-Envío team

Just as the last issue of envío was about to go to press, Nicaragua's Supreme Court of Justice made known its finding that it would be unconstitutional for the legislature to have the faculty to increase the fiscal budget. It was just one discordant note among many. As if with one voice, the population is asking for openness as a basic principle governing public office. Institutions, high level officials and politicians respond with legalistic battles, budget charades and propaganda loaded with methods from other times.

The culture of nepotism and demagogy known in Nicaragua as "Somocismo" cannot be shed overnight; there will inevitably be starts and stops, and even backward steps. Several of the latter were taken in the past month or two, among them the executive branch's juggling act with the fiscal budget and the recovery of the newspaper Barricada by part of the FSLN leadership. These two steps coincided with a veritable dance routine around the constitutional reforms in this tense pre electoral stage. Two back steps were also taken in the economic arena with the increase in milk prices and the crisis in the National Development Bank (BANADES).

The Dark Side of Politicians

It is increasingly clear to individuals of varying political stripes that Nicaragua's political class is incapable of serving and leading the nation, of mediating the conflicts between interest groups for the prosperity of all. It is also becoming clearer that this incapacity will not be resolved by switching some political faces, but by changing the political class itself.

This is not to say that all politicians are crooked or dull witted. In some, age may just have tamed their ambition more than it increased their stubbornness. But taken as a whole, even those who are young or otherwise new to the game feel obliged to accept its implicit rules, which only benefit a tight circle of players.

In Latin America, doubt periodically crops up in political commentaries about whether democracy is really possible. This doubt is accentuated now that almost all governments on the continent have, for better or for worse, come to power through the ballot. It is legitimate to wonder what the future holds and whether a return to military regimes is not predictable. But we should not be fooled about the cause of such a possibility. Oligarchies alone cannot impose dictatorial regimes. Nor does people's ignorance fully explain how those in uniform could manipulate ballot boxes or receive ovations when they leave the barracks. What puts democracy constantly on the razor's edge is the economically irrational and socially unjust distribution of income and wealth, which requires oligarchies, ignorance and a political culture of violence rather than consensus building.

Winston Churchill defined democracy as "the worst of all possible political systems, with the exception of all the others." Those who come to power through the luck of the "democratic" draw open the way to truly worse systems when they do not use that power to raise the political culture of the governed, promote spaces for mediating inevitably recurring social conflict, increase the quality of and accessibility to information so citizens can evaluate their actions, and forge ever better electoral criteria.

In Nicaragua, those who hold power are doing none of these things. They prefer closed door bureaucratic decision making, obscure management of the public coffers, quack lawyer maneuvers, secret back room deals between the powerful that blunt serious debate about political and economic responsibility, and the manipulation of public opinion by using the media as a propaganda tool.

On the Budget's Dark Side

In mid October Barricada exposed the presidential ministry's discretionary expenditure of thousands of dollars in salary extras to a few top officials. Ministry chief Antonio Lacayo whom some have snidely dubbed "prime minister" and others even more snidely refer to as "super son in law" (of President Chamorro) not only did not deny the accusation, he admitted that the funds for it were obtained through foreign cooperation. Many citizens and legislators were quite upset to discover that not all income is declared in the national budget, but they were only glimpsing the tip of the iceberg. In October, by law, the administraton must send the National Assembly its budget request for the following year. In recent years, that budget has been be as much as $100 million less than is later executed.

The administration cares little whether the budget is approved or not. The 1994 budget, for example, was approved on time and with few modifications, but the one for 1993 was not passed until April 1994 with no noticeable effect on spending. Getting next year's budget through the Assembly is turning out to be tough again, but the relationship between what is approved and what is spent remains to be seen.

The budget not only has slippery figures; it has murky spending lines, such as "confidential" expenditures. Other lines are more precisely titled, but the content is arbitrary, as in the case of "investment for peace." Still others have no definition whatever for example, "transfers to private sector others" even though they are assigned amounts ranging up to several million córdobas.

Many other aspects lie on the budget's dark side as well, among them the secretive way economic policy is decided with the international lending agencies and the government's inability to justify many of the budget's aspects or defend the content of various lines with objective technical criteria. The most serious aspect, the one that renders the entire budget murky, is the serious undervaluing of its overall amount and the unclear rules governing this undervaluation. This undervaluing obviously affects income as well as expenditures; as the finance ministry's year end reports always reveal, the budget systematically projects far less income from donations than is later received.

The murkiness is made even worse by the lack of clear administrative regulations to provide each public entity its own budget quota. This suggests that amounts are later apportioned in back room bartering or according to strictly bureaucratic criteria, both of which escape the nation's knowledge or control.

With respect to undervalued public debt payments in particular, it is difficult to explain how the government could not know beforehand exactly how much it will pay in principal and interest, since these amounts are determined by contracts signed at the moment of negotiating them. Admittedly the Central Bank makes the payments on the government debt, which it then recovers through the credits it provides the government. Even so, it is hard to see how the government could be wrong by $80 $100 million, depending on the year.

In passing, the overwhelming burden of the foreign debt service on our public finances should be reiterated. In 1993 it represented 33% of all spending, and will probably be 44% in 1994 and 42% in 1995. Reducing this service by 14% this year would permit the salaries of all teachers and health workers in the country to double.

What lies behind these budget manipulations? What maneuvering room does the National Assembly have to intervene in such an important issue? What impact does this debate have on the economic problems and on the political scene as a whole? These are questions to which the public should make it its business to demand answers.

An Open Budget Debate

The Chamorro administration sent the National Assembly its 1995 General Budget on October 15. Three days later, Lacayo warned the legislators not to raise it, since it was "tied" to commitments with the International Monetary Fund (IMF). This, combined with the Supreme Court's decision made in cahoots with the administration increased public tension between the legislative branch and both of the other branches throughout October.

Toward the end of the month, 14 of the 39 FSLN bench members drafted modifications to the budget that would reassign some 130 million córdobas in secondary expenditures from different ministries to raise the incredibly low salaries of teachers, health workers and police by 40%. While this would not raise the overall budget, it still challenges the attempt of the executive and judiciary branches to disqualify the legislature's role in the budget issue. In fiscal policy theory, it is generally admitted that the composition of public spending is as important as its total amount, if not more so. How much constitutional leeway the National Assembly has to modify the budget's composition is thus no small issue.

Government agreements with international financing institutions never include specific amounts in their macroeconomic goals. That is a task for domestic policy, unless the nation's economic authorities admit their total incapacity by turning over executive power to the specialists these institutions send. The lending agencies' goal is to make sure the country reduces its trade gap, makes itself attractive to private capital and meets the payment obligations on its foreign debt, in exchange for new loans.

These three objectives are not necessarily mutually compatible or even simultaneously attainable in the short run, but a restrictive fiscal policy is generally acknowledged to be basic to achieving external balances. (A restrictive fiscal policy is one that does not generate a deficit greater than donations or concessionary loans can cover, and in the medium run does not depend on external resources at all.) What conditions a "go ahead" from IMF evaluators is the size of the deficit, not the public spending level per se, much less its composition.

If containing external imbalances is the IMF's priority, it should not be the government's only fiscal policy objective. Providing public services to the citizenry is equally important: the preservation of order, the exercise of justice in its different forms, investment in infrastructure for collective use, the defense or recovery of ecological balances, preventive health care, basic education, the training of professionals and technicians, the administration of the economic system, technological promotion, research and the like.

In pursuing these objectives, which also cannot all be achieved simultaneously, the state must juggle the interests of the different sectors of society. The extreme limits on Nicaragua's overall budget mean that these interests can be so totally opposed as to be mutually exclusive. Given this, the budget cannot be finalized behind the closed doors of a ministry, no matter how responsible it is or says it is. The conflictive fiscal policy objectives as well as the importance of the policy's scope to the country's economic life and political equilibrium require open and responsible debate.

Who Should Decide -- And By What Criteria?

The Ministry of Finance is in charge of drafting an overall budget proposal compatible with the monetary policy and external restrictions in general. But it cannot decide issues both as detailed and as important as whether more schools should be built in Managua or in Chontales, or whether roads should be repaired instead of schools built. Needed public activities can be combined in many different ways that would represent optimal use of scarce resources. But even if only one magic combination existed, the finance ministry is the least likely to find it, which is precisely why this task does not fall to it. The Constitution gives this job to the nation's legislative representatives. They are supposed to listen to the technical, economic and political criteria underpinning the different alternatives, then approve a fair and sensibly apportioned budget by consensus after open debate. If consensus proves elusive, conflicts are resolved by vote, which is what representative democracy is for. This is "the worst of systems" with the exception of autocratic finance ministries.

To evaluate spending assignments, the National Assembly should take into account the criteria of the ministries and public or para public entities that will later implement the budget. There is no reason why ministers and agency directors should necessarily all be in total agreement with the finance ministry.

What's Wrong With the Administration's Argument?

One wonders why the Chamorro administration is so worried about changes the legislators might make, given its history of executing a budget that is so different than the one approved. Its public pretext is that it alone is the guarantor that the economic policy agreed to with the international financing agencies will be carried out, and only it can oversee the execution of a restrictive budget in accord with the overall goal of reducing the public apparatus. But that argument is far too simplistic.

In the first place, reducing public spending and increasing the efficiency of the state apparatus do not necessarily go hand in hand. The issue is less to reduce spending than to assign it more efficiently. The problem lies in the very way the budget is drafted in Nicaragua and other Central American countries: the amount executed the year before is simply increased by a factor that builds in probable inflation as well as possible reductions when apportioning occurs.

The correct way to draw up a budget would be by program, defining the precise goals in each and evaluating their unit costs. This method should become a basic element of the public sector's structural adjustment, replacing the current favoring of bureaucratic inertia. The bureaucracy does not know the cost of what it wants to do because it does not even know what it wants to do very clearly; it just executes its full budget each year so it will not be cut the following year.

In the second place, open debate between the budget drafters and the nation's representatives is indispensable to the search for consensus among the social and political forces. Nicaragua's extreme polarization makes this process even more necessary here, despite all its limitations, than in other countries. Reducing the social and political polarization is as basic an economic growth factor as stabilizing the economy, if not more so. Depolarization should also be an explicit goal of the structural adjustment program since it is a key to its success.

The third and perhaps most important argument is the institutional logic of economic policy itself. If the economic Cabinet had the infallible technical skill to forecast the economy and know the impact of all its actions, it would need no discussion. This is why authoritarian governments that try to totally direct the economy always set up huge planning ministries. It is also why they are never very successful.

When the government's lack of knowledge is deep and its margin of policy error wide, the government is obliged to provide spaces for debating its actions and time for modifying them according to open and consensual criteria. This is even more important given the signs that its behavior deviates greatly from compliance with the adjustment program's requirements.

The Constitutional Reforms: Deals or Principles?

In Nicaragua, the political class puts deals ahead of principles. As in other areas, this has been the hallmark of the constitutional reform negotiations. In the desire to modify the heavily presidentialist system set forth in the Constitution, politicians have been horse trading reform proposals for over a year. Now, however, parties that think they might win the next presidential elections are losing interest in the reforms the closer that race gets.

The administration's recalcitrance is totally contrary to the spirit of the constitutional reforms. It has refused to discuss them with the National Assembly because it considers economic policy in general and the budget in particular to be its private preserve. On November 7, the Economic Cabinet ministers also sent the National Assembly a letter announcing that they would not appear to inform about or debate the budget lines and counseled the legislators that their time would be better spent working on the law to privatize TELCOR, the state telecommunications enterprise. It was an unbelievable political affront.

Nicaragua needs the constitutional reforms, the most important of which would buttress the principle of the separation of powers. This set of reforms requires lucidity in the floor debate to avoid a swing from the extreme of a dictatorship by the executive branch to one of anarchy in the legislative branch. But others require thoughtful scrutiny to avoid errors as well. In a separate article in this issue ("Descollectivization"), we analyze the possible legal problems that the reform putting an end to confiscations could represent.

Barricada: Old Methods

In a Sandinista Assembly meeting on October 25, 60 of the 67 members present (out of a total of 130) voted to relieve Carlos Fernando Chamorro as director of the FSLN daily Barricada, a post he has held since the newspaper's inception 15 years ago. The measure was called an "adjustment of political accounts" for Chamorro's adherence to the line of Sergio Ramírez. Of the more than 20 Sandinista Assembly members who sympathize with Ramírez, only 2 showed up to debate and vote on the issue. Four National Directorate members Henry Ruiz, Dora María Téllez, Luis Carrión and Mirna Cunningham issued a statement expressing their rejection of Chamorro's removal in no uncertain terms.

The paper's new interim director is National Directorate member Lumberto Campbell; Julio López Campos, who ran the party's International Relations Department (DRI) during the last decade, is vice director. FSLN vice secretary general Tomás Borge replaced Bayardo Arce as board president (most old board members resigned). The new chief editor is well known and controversial political commentarist William Grigsby, owner of La Primerísima radio station. All but 4 of the paper's 22 journalists resigned, assuming their stories would be censored; they have been replaced with other journalists.

The change in Barricada's editorial staff has given the country a lot to talk about, including who has legal ownership rights to the paper. Although even that issue raises doubts and has its "dark sides," it seems clear to most that the paper belongs to those who make the decisions regarding it. They appear to be within their right, and are simply behaving like legitimate bosses. The fact that their behavior is not very different from the bosses of the opposing ideology no longer matters much, because in today's world this ceased being a paradox some time ago.

Propaganda or Communication?

The efforts to define the problem as one of ownership or freedom of expression do not go to the crux of the issue. For the nation as a whole, the problem is first and foremost the loss of a pluralist medium that supported the depolarization of society. Given the support the FSLN still enjoys in an important part of the Nicaraguan population and the relative solidity of its party structure, it has an important degree of responsibility for national reconciliation. Nonetheless, it is showing signs of hardening its positions. Replacing the debate of ideas with categorical statements, disproportionate accusations and the stain of insults, and filling pages with monochromatic "opinions" rife with epithets and value judgments lacking reflection and analysis do not help improve the social and political climate in which we live. Is all of this just a preview of what we can expect in living color during the electoral period?
Communication shares with education the quality of being a social activity that reproduces itself. What the public believes from a newspaper generates in the classroom either new generations with a critical and creative spirit or those mentally enslaved by servile models of power and non critical reproductions of imported behavior. Together with other structures, communication and education share responsibility for promoting a more open, democratic, responsible and broadly shared political culture. Without these features, the social mechanisms of reaching some measure of harmonious agreement and mediating conflict do not function, and speeches about the inequality of income and the sharing of wealth are just populist demagogy.

The absence of such a culture is possibly one reason for the recurrent failure of both populist and liberal experiences in Latin America. It is impossible to govern with representative legitimacy without also promoting civic behavior and a political culture of openness about public, municipal and national affairs. Deceiving the nation with populist slogans only contributes to creating expectations that, if not realized, turn into frustration and provoke political instability and social upheaval. These, in turn, serve as justifications for a return to authoritarian forms of government.

Even the boldest attempts to redistribute wealth, such as we saw in Nicaragua in the past decade, fail if a sustainable democratic political culture is not created. In the end, they translate into the reconcentration of economic wealth in new hands, or even back into the hands of those former owners who know how to adapt their activity and discourse to the formal changes in the system.

The essential reason for the changes in Barricada is thus found in the FSLN's failure to profoundly renovate its structures after the period in which it was a party state. This has opened the way for old top down and propagandistic methods to arise anew, since the party has not learned to generate new methods. The FSLN's disoriented grassroots base also finds refuge in these old tried if not so true methods in the midst of the desolation produced by a disastrous economy and a society that is coming unraveled.

Will the FSLN Self Destruct?

On October 13, Sergio Ramírez announced that he was launching a new political group called the Sandinista Renovation Movement (MRS), which will be structured at a national level and have its own Secretariat of Organization. Despite the public, bitter and some say irreversible nature of the crisis within the FSLN, the MRS has not offi cially separated from the party or been separated from it.

Declared MRS sympathizers did very poorly in the FSLN's internal elections for zonal, district and departmental leadership posts over the past two months. Accusations of various manipulations abound among the losers, while the winners claim that the MRS did not even present candidates for all posts, and, where it did, it did not get the results it had predicted. They say the MRS has few followers at a national level among the 330,609 militants and sympathizers who registered to vote, but offer no public explanation for why, only a few weeks after registering, 25% did not turn out to vote.

Twelve days after Ramírez's announcement, poet, priest and former Minister of Culture Ernesto Cardenal called a press conference to reveal that he was resigning his militancy in the FSLN. He said he will continue being "a Sandinista and revolutionary, with the ideals of Sandino and the Frente Sandinista, and will always be a Marxist as well as a Christian." He said he based his decision on the "kidnapping" of the FSLN by Daniel Ortega and the group he heads, which Cardenal criticized for being top down and acused of "shameless theft," though offering no evidence to support that accuastion.

It is said that Carlos Fonseca Amador once proclaimed that "only the Frente Sandinista can destroy the Frente." Today, both sectors of the FSLN seem headed in this direction.

And the Liberals?

The most rightwing factions of the traditional Liberal Party also have a national daily at the service of their ideas La Tribuna. But, like the left, they lack an alternative proposal that assumes major economic adjustments. They have limited themselves to supporting the constitutional reforms and leveling a constant barrage of criticism at the state institutions, particularly focusing on corruption. Their discourse is generically populist and peppered with vague promises.

This attitude reveals an essential problem rooted in Liberal philosophy. As a political doctrine, liberalism was born out of the defense of the individual with respect to the state, a purpose which still embodies Liberals' all powerful social reason to exist. This defense of individuals against oppressive and totalitarian social systems was a valuable contribution to the body of modern political thought. At the same time, however, Liberal ideas have bolstered an economic doctrine that idealizes individuals, assuming they will always rationally adopt the best strategies.

Individuals indeed have this capacity, but two weighty theoretical challenges arise from this concept. The first is that it cannot be demonstrated that if all individuals do the same thing that is, behave rationally in accord with their personal interests the result will necessarily procur the maximum benefit for all. Many cases exist in which a few individuals end up endangering a much larger number. This happens, for example, when a company carelessly buries toxic substances, "rationally" reducing its production costs but thus jeopardizing the health and even lives of hundreds or thousands of others. Actions of this type have recently been discovered in our own country.

The second challenge is the fact that individuals seldom act individually. They organize into small and powerful groups that can significantly affect the rational decisions of thousands of others who, for various reasons, cannot defend themselves.

The Milk Crisis

Again, an example from Nicaragua: national milk processing and retail distribution is in the hands of two or three companies that can jointly decide not to lower their profit rate, thus imposing their self interest on tens of thousands of families which, given the importance of this basic foodstuff, must buy the milk at any price. In October, cattle ranchers and these processing plants agreed to raise the retail price of a liter of milk from 3 córdobas to 3.75, a 25% increase. For a family of six that easily goes through two liters of milk a day and whose head of household may earn no more than 300 500 córdobas a month, the price hike alone eats up an average 10% of that wage.

Unless the dairy ranchers have sizable herds, their earnings over the past several years have not allowed them to improve their production and thus increase their yield. The processing plants, in contrast, have enjoyed profit margins of up to 80%, but did not steadily reinvest a part their earnings. This finally led to a situation in which they had to either raise the price of milk or make huge investments. They chose the easy way out let the absurd logic of the "free" market do the job, confident that it always benefits monopoly interests.

The government could not directly fix prices because that would go against Central America's free trade agreements and would only trigger shortages, since the plants would pay the dairies less for the raw milk. Another solution, however, would have let the market work for the consumer, even if only temporarily. The government could have used the powdered milk donations it receives to force down milk prices then compensate the dairy ranchers with an incentive policy to reinvest their earnings in the medium run.

Did the government lack the ability, or the will, to affect the monopolies? It had maneuvering room, but it did the one thing it should not have done. Once again it discredited the tax system with a desperate, shortsighted and populist measure by exonerating the milk processors from taxes in exchange for not passing the entire price increase they pay to the ranchers on to consumers. This saved consumers from an even worse price hike, but we can be sure that the government will find a way to recover this fiscal loss one way or another. Will it impose some other tax on consumers? Or cut public services even more? Not only should the administration be unable to decree important new taxes without the National Assembly's approval, it also should not have the unilateral ability to offer exonerations.

Once again, the poor were made to bear the burden, because, as individual consumers of a vital product, they had no means of pressure.

What Health System Public or Private?

Despite the weaknesses of the Liberals' siren song, many are pulled in by it. Economist Milton Friedman's logic is unquestionably seductive when he argues that, if employers pay for their workers' health insurance, they encourage more to be spent on health, which makes the service increasingly costly to society. He further argues that such an expensive social protection system puts a brake on the profitability of companies that must compete in ever more difficult conditions. His gloom and doom conclusion is that, if the companies fail, there is no more production of wealth, which puts an end to any health system and even to jobs.

The developed countries that were obliged to let their companies compete in increasingly internationalized markets and their capital investors move into countries without social protection systems are now forced to rethink how to finance their own health and social protection systems. But these countries cannot impose a social contract on the rich classes of the poor countries that would finance private health systems similar to what they themselves enjoy.

In countries as impoverished as Nicaragua, the situation is even worse. The vast majority of the population does not generate enough savings to finance private health and social security systems. With health attention levels so low that illnesses as common as diarrhea can be fatal and malaria can reach epidemic proportions that palpably affect companies' production capacity, it is necessary for the good of all to endow public entities that have enough scope to undertake collective action with the means to deal with such a serious problem. In both the health and education systems, collective action is obviously more beneficial than completely privatizing these services, as Nicaragua's Ministry of Education now seems to be proposing.

Unlike the satisfaction of our "desire" for consumer goods and services, which depends on our income level, the health and education we all need to be functional in the economic system depends not on income, but on age and nature. It is said that there are "rich people's illnesses," but that does not mean the wealthy are more susceptible to them. The poor simply die before reaching the age at which such problems begin to appear.

Health and education are not just services; they are an investment for Nicaragua's society as a whole. Since a large percentage of the population has health deficiencies, it is vulnerable to epidemics; it also has a very low level of basic and technical education. It is thus illusory to think about economic growth, absorbing foreign capital and improving productivity without first investing in health and education. Later, when prosperity has reached the majority of homes, they will be in a position to choose between public or private health and education. For now, they can only choose between public education and total ignorance, between sickness and public health care. And given the myriad small fees now charged for both these public services, indigent or large poor families do not even have this choice.

The Dark Sides of TELCOR

The dilemma over the relative advantages of public and private activity apply just as well and with the same criteria to other aspects of the economy. Yet preconceived notions and ideological statements prevail in the heated debate over the privatization of TELCOR, Nicaragua's public telecommunications system.

The main difference between this case and those of health and education resides in the basic fact that TELCOR is profitable, even under the current conditions. In the past seven years, it has generated $100 million in gross profits and invested over $97 million. This investment required $35 million in external and domestic financing, but only because TELCOR transfered over $33 million of its earnings to the central government.

The government thus cannot argue that TELCOR is a drain on the budget or is responsible for the fiscal deficit. Its argument is simpler: if we want telecommunications in Nicaragua to grow faster in order to increase productivity and competitiveness, we must turn to foreign investment because the public treasury cannot afford such investments. Up to this point, the argument is fine except that it does not occur to the government to mention that such growth would also raise education and professional training levels. The problem is that the government is prepared to sell off 40% of TELCOR's stock for only $30 million. Why sell installed investment at such a low price instead of selling new use rights?
More questionable still is the effort to make legislators believe that the solution to the property problem depends on this sale. Following in the footsteps of Jimmy Carter's earlier visit, US Vice President Al Gore took the opportunity of his attendance at the First Ecological Summit in Managua in mid October to publicly urge the quick privatization of TELCOR, so the money from its sale can be used to compensate US citizens unjustly confiscated in the 1980s. But as the article on decollectivization in this issue of envío points out, the property issue is not limited to the problem of those "unjustly" confiscated, and least of all to those who can defend their interests because they are backed by US friends. The key issue at stake is the reversal of the entire agrarian reform, and it is occurring through the much revered market.

Gore wants the sale to go to the US transnational ATT. But why give away nearly half of a profitable company to an investor we are not sure will reinvest in production? And why the rush to sell just to compensate confiscated Nicaraguans who fled the country and became US citizens, instead of strengthening the thousands of small growers who, even without property security or financing, have no intention of leaving agricultural activity as long as they can manage to survive on it?
Instead of framing the legislative debate over the privatization of TELCOR this way, the government prefers to accuse the Assembly representatives of "not cooperating with the country" if they do not cut the legal hobbles to the sale. They thus camouflage with terms like patriotism and responsibility the voracity of transnational companies that are now determined to hook the countries of the South into complete dependence on their communications systems by building "informatic expressways" of the future all across our continent.

In early November, the Minister of Finance tried another tactic to intimidate the legislative representatives, saying that if they do not pass the law to privatize TELCOR, there will not even be a 1995 budget, because, according to him, half of the budget depends on foreign resources. What resources: the 263 million córdobas that figure in the budget proposal, or the 1.437 billion that appear in the IMF's own projection?

Shedding Light On the Darkness

What can be done about the budget? What maneuvering room really exists to improve it before its passage? Even more to the point, what sense does it make to modify a budget that will not then be implemented as approved?
If the budget bill is systematically undervalued every year (or its execution later inflated, which amounts to the same thing), it cannot be by accident, particularly since the same lines are always the ones undervalued: foreign debt service and capital transfers to both the public and private sectors. Since the executive branch must have good reasons for doing this, it would seem most necessary to ask for explanations and greater detail about these particular budget lines. They would also seem the ones whose expenditures might be easiest to reassign. Before trying to reassign expenditures, however, it is necessary to know what the true budget is.

One possible reason among many for undervaluing donations could be to lower the "extraordinary income" of which the universities have the constitutional right to 6%. About 90% of the donations coming to the central government are tied to public projects, or nongovernmental ones in which the government is the intermediary. But that leaves 10% some 80 million córdobas free.

Capital transfers may be undervalued for a similar reason. A detailed study of the 1993 budget shows that unspecified capital transfers (those that do not fit within specific categories such as social action, indemnification, support to privatization or even the so called investment for peace) were undervalued by about 100 million córdobas. Nothing suggests that this figure will differ in the 1994 budget. Should this not be explored further? Could this not be the place to find resources that can be reassigned? It would be if the finance ministry admitted to a more realistic budget, but it is more comfortable arguing that legislators have no constitutional right to raise the spending ceiling. Should the executive have this right?

What to Do with the Funds?

Once a way is found to reassign budget expenditures, the next question is what to do with the freed up funds. One argument put forward by the executive to stop the National Assembly from meddling in public spending is that the representatives, seeking political patronage, would spark inflation, which would put the entire national economy at serious risk.

It is a valid concern. Any arguments for reassigning spending should be based on the goal of improving public sector efficiency and should have a positive impact or at least not a negative one on macroeconomic imbalances. In this effort, it should be remembered that no economic policy measure can simultaneously improve all four indicators the trade gap, the fiscal deficit, inflation and unemployment. Economic policy is, or should be, a set of measures whose effects partially offset each other.

At the same time, expenditures cannot be reassigned with the sole objective of repairing a social injustice. When such injustices are many, choices can be made among those that also have more positive impact on the supply of goods and services. One such example would be the choice between increasing the pitiful salaries of teachers and health workers or putting a dent in the enormous housing deficit.

Some preliminary macroeconomic projections show that if government spending on other goods and services were reduced in order to increase the salary mass of teachers and health workers by 100 million córdobas (a 67% increase), the positive impact on the Gross Domestic Product would be about 0.4%, which would in turn have a mildly positive effect on overall employment. The measure would not affect the consumer price index and would put about 18 million córdobas into the fiscal coffers in taxes. The impact on foreign trade would be minimal, with an estimated $4 million increase in imports.

If the same 100 million córdobas were invested in public construction, the macroeconomic effect would be slightly different. The GDP would increase by 0.8%, fiscal income would not change, and the negative effect on the trade gap would be $6 million due to the imported building products required.

But a decision should not only be evaluated this way. Macroeconomic imbalances must be taken into account, but they are not fetishes. What are called "sectoral supply" criteria in this case the satisfaction of basic health and education or housing needs are just as important. At least in the medium run, all three needs must be addressed simultaneously.

The impact of the first option on the work of teachers and health workers must also be considered. Although no such studies exist in Nicaragua, experts judge that the problem is more complicated in health than in education. In the latter, an overall salary increase can be expected to lead to more and better productivity, since the quality of teaching depends on teacher motivation. To expand health service coverage and improve its quality, on the other hand, requires growth throughout the system. Given the system's current structural limitationss, increasing salaries is not enough. To give an idea: in education, 20 cents of non personnel goods and services in education is supplied for every dollar spent on salaries, while it is one to one in health. Among the structural limits in the health system are the high cost of medicines due to the recent proliferation of small importers and the skewed salaries of doctors and other workers (a state doctor's base salary is equivalent to $80 a month and a nurse's is half that).

If we add the criterion of sustainability, investment in housing could be viewed as a priority, given the lasting indirect effects it would have on the Gross Domestic Product by generating additional demand for household durable goods. How many of these goods would be imported depends on the kind of houses and the sector of households targeted by a housing policy.

Less "Scientific" Criteria

Illustrating the different criteria that must be included in assigning fiscal spending is but one example of the multiple ways to approach an economic problem. Most important is the need for openness in discussions of this nature, to orient the decisions based on a clear hierarchy of criteria approved by the majority. If not, other criteria could win out. The Chamber of Construction surely has many friends among the legislators, as do the teachers' unions. Such political influence is inevitable, but at least it is not as hidden as when ministers decide privately and the construction minister also happens to own a big construction company, and the bid mechanisms are not made public.

Naturally, not all aspects of economic policy can or should be debated by the legislators. Throughout the year, the economic Cabinet must make quick and correct decisions for the good of the nation about problems that constantly arise. In the past few weeks two such cases occurred, both of them almost textbook examples. Unfortunately the government was not up to either challenge. The first was the milk price hike, already discussed. The other was a problem in the state's National Development Bank (BANADES), which resulted in the closure of many of its rural branches. Lamentations over the reduction of this bank's activities should not be overdone, however, since BANADES has little to do with development in practice.

The BANADES Crisis

In October the government announced that, due to economic difficulties, it will close 23 of BANADES' 66 branches, almost all of which are in the rural municipalities. This will also result in the layoff of 203 bank employees.

BANADES is responsible for 87% of national agricultural production credits, but the 300 largest producers have made off with loans that should have gone to thousands of small and medium sized growers. BANADES has based its lending policy to these big producers and cooperatives on friendships mixed with political criteria. Many of the biggest creditors among them Minister of Agriculture Roberto Rondón have millions of córdobas in overdue debts, which the bank has done little to collect. Since this inability to recover massive debt arrears is the main reason for the bank's solvency problems, reducing its operating costs will fix nothing.

Taking the easiest route by closing its rural branches only affects growers who have no vehicle to get to more distant branches. Furthermore, concentrating the loan portfolio in fewer branches means small growers will have to compete even harder with larger growers. BANADES' demonstrated preference for such large growers a few big loans involve less work, which shows that BANADES does not have much of a development mentality means that the closures will jeopardize already marginalized small growers even more without resolving anything in exchange.

An IMF mission was in Nicaragua between October 11 and 27 to study the progress of the Enhanced Structural Adjustment Facility agreement signed with the government in April 1994. While here, the IMF imposed the measure of closing the BANADES branches. Its goal is to weaken the state banking system in favor of the plethora of new private banks, but this also reduces the only bank with national coverage that still has some capacity to provide funds to agricultural growers. How do they imagine that reducing the number of bank officials will translate into more agricultural employment by magic?
According to the ESAF agreement, the government was to persuade 7,500 state employees to "voluntarily" leave in 1994 by offering some compensation incentive; so far it has only managed to convince 2,000. The mission thus demanded the layoff of another 5,500. Of Nicaragua's current total of 106,000 public employees, 13,500 are to be "freed up" over the period covered by the ESAF agreement (1994 96). The bureaucrats' dream is that reducing the public payroll will mean less state spending and thus more money to finance the private sector, just like they read in their economic textbooks.

The Government Is Digging its Own Dark Grave

The Chamorro government is swallowing most of the reasoning of the extremist neoliberals who fill the halls of the international financing institutions, despite the obvious cost this has imposed over the past four years. An article by one such neoliberal appeared in La Tribuna on November 9, in which the author, a former president of Chile's Central Bank, referred to taxes as "an armed assault." This must have discomfited the government, since taxes are one of its favorite assault weapons.

States are inefficient only when they let the nation's most powerful economic interests do whatever they want. There is no good reason and no study of the issue has yet been able to contradict this why the production of social services, the construction of public interest works or the use of food reserves to regulate market ups and downs are more efficient when in the hands of private companies.

Those who, like the author of the above mentioned article, confuse administration with ownership are not really making an error; they know exactly what interests they are serving. Building private schools does not preclude the state from using public funds to offer quality education to students who cannot afford private education. If this were not the case, there would no schools at all in poor countries except for the children of the few families in whose hands all the wealth is concentrated.

Public patrimony of an activity for example road maintenance does not mean that private administration criteria cannot be applied to measure its efficiency and pay its engineers well enough to make the work durable. Roads will never have a fair market price that measures their value for all users, even those who cannot pay. Would private companies prefer that their workers, who cannot afford road tolls, walk to work on paths, arriving exhausted and tattered?
The neoliberal liturgy does not hold up against sensible and dispassionate analysis. Of course the state should improve a great deal so it does not offer a weak flank to its enemies. Its major advantage is that only it can guide the overall economy, rationally and efficiently regulating market aberrations. To do so it needs open information and decision making processes. It also needs to worry about training its technical administrative staff. It should ideally offer a Civil Service career with an appropriate curriculum of academic and civil training.

It should also assure that debate and consensus is always present in the proper political spaces where important economic decisions are made, to strengthen the democratic rules. If it does not do this, it will continue digging its own grave.


The final reworked constitutional reform bill was submitted to the National Assembly for floor debate by the Assembly's special commission on November 7. The draft it received two months earlier altered 140 of the 1987 Constitution's 202 articles, and even created new chapters. A one time law passed last year would have allowed the reforms to be passed in a single legislative session, but the political crisis that earlier draft reforms unleashed among a number of parties, as well as the fact that President Chamorro never signed the one time law, led the commission to limit the changes to 70 articles and extend the debate to two consecutive sessions, as the Constitution itself mandates. A yes vote by 60% of the representatives is needed in each session to approve the reforms; at least for now the version hammered out in the special commission appears to have the support of most legislators from all parties.

Among other things, the reforms would reduce the President's term to five years and that of municipal mayors to two and a half years; mayors would be elected by direct vote rather than chosen by the municipal councilors from their own ranks following election. Two voting rounds would be instituted for cases in which no presidential candidate receives a majority. An incumbent President could not run for a consecutive second term and close relatives of the incumbent by blood or marriage could not hold high office or run for President. Special Supreme Court benches would be created and the number of magistrates would be increased from seven to twelve. The National Assembly would be granted the faculty to create or do away with taxes and make other important economic decisions; property confiscations would be forebidden and full guarantees would be established for a market economy.

The special commission held open town meetings in various places to discuss the reforms. It also invited 59 political and social groups and heads of government institutions to offer their input, of which only 47 agreed to appear, with the most notable refusal coming from the executive branch. Assembly president Luis Humberto Guzmán said that "not even a line" of the presidency's opinion about the project was formally submitted.

Presidential minister Antonio Lacayo, however, made his opposition to the economic attributes given the legislative branch quite public; he is also opposed to the reform that would prohibit his presidential candidacy as the incumbent's son in law. The executive branch has given signs that it is preparing a recourse of unconstitutionality to the Supreme Court to impede the reforms.

In Daniel Ortega's first and virtually only appearance in the National Assembly after taking his seat back from his alternate,
Sergio Ramírez, he proposed a "national dialogue" to hammer out consensus among all sectors on three issues: the reforms, a law to resolve the heated property issue once and for all, and the economic crisis. Several representatives retorted that the National Assembly was the proper forum for such a dialogue, but the legislative executive tensions and those between the FSLN's National Directorate and its legislative bench have weakened the validity of this institutional forum.

Later in October, Ortega backed the executive branch's evident opposition to the reforms in the name of the FSLN. This was, in part, a tactical position that grows out of the tensions between
most National Directorate members and the majority on the Sandinista legislative bench over the importance of pushing through the FSLN's property bill alongside the reforms. Arguing the lack of national consensus regarding the reform bill submitted by Ramírez and others, he defended the idea of electing a Constituent Assembly in the 1996 race to draft an entirely new Constitution. The most rightwing parties in the now dissolved UNO coalition pushed a similar proposal in 1993, which Ortega opposed at the time due to the unfeasible costs and polarizing effects of such a special election. Arnoldo Alemán's Constitutionalist Liberal Party has promised a Constituent Assembly if it wins the 1996 elections. Meanwhile a majority of the 39 Sandinistas in the National Assembly backed the 70 reforms that came out of the special commission.

All of these elements the crisis that the earlier reform bill sparked among the top political echelons, the executive branch's staunch opposition and the internal splits in the FSLN, which
became more personalized than ever between Ortega and Ramírez
around the reform issue coalesced in October with a new political rumor: that the November 1996 elections would be moved up a year or more with the installation of a provisional national unity government while a Constituent Assembly drafted a new Constitution.


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