Envío Digital
Central American University - UCA  
  Number 171 | Octubre 1995



How Hummingbirds Are Raised

Despite the crisis, the private banks in Nicaragua currently have significant savings deposits in dollars. Where did all this money come from? It is quite possible that in our banks we are breeding “hummingbird capital”.

Nitlápan-Envío team

They say there are no savings in Nicaragua, and that this is why we are a poor country. Since there are no savings, we can't invest and thus can't grow economically. Everyone knows that to invest in a business, a farm or even a house, there first must be savings. If not, one must go to the bank, where others deposit their savings, or to someone who has money saved and wants to "put it to work."
Often, as is happening in Nicaragua today, the government invests with donations from foreign governments, or with money it has borrowed from those governments, or from private banks, or multilateral lending institutions such as the World Bank. These credits and donations are also savings: the "savings" made by governments, businesses and households the world over. A major source today of lending capital in the world, for example, is retirement pension funds in the United States.

Foreign Dependence on Foreign Aid

Speaking in accounting terms, everything that is invested in a country during a specific time period, let's say a year, comes from some savings, either from the country's own businesses and households or from abroad. At times the government itself saves, but more often it operates with a deficit: it spends more than it brings in. Someone must be forced to pay for that deficit: the government obtains credits, which means an authorization to pay the deficit later on. The loan made to the government comes from some savings, which means that there is that much less savings available to invest. It doesn't matter whether it comes from abroad or was loaned domestically.

Households and businesses can also engage in deficit spending; households through loans and credit cards until they are cut off, and businesses until they go bankrupt because no one wants to loan them more money.

In a country that needs to make as many investments as Nicaragua, but where the bulk of the population is poor and the government can't get much in the way of taxes out of them with which to cover its administrative and social costs, savings must come from abroad.

Until the beginning of the 1980s it was relatively easy to get money in the world. Capital abounded and massive sums of money were irresponsibly loaned to countries such as Mexico, then later spent or invested in activities incapable of producing enough to pay back those loans.

That situation, generalized all over Latin America and the rest of the third world, triggered the foreign debt crisis that blew up in Mexico in 1982. Mexico's debt with the world's banks was so great that several major banks would have been bankrupted by a Mexican default. That would have led to the subsequent collapse of other banks, in a chain that would have ended in a world recession even larger than the Great Depression of the 1930s.

The problem was temporarily solved with financial help from governments of the wealthy countries. Household savings in those wealthy countries bailed out the bad policies of "their" private banks. An oft repeated rule: the benefits of private enterprise are private as long as things are going well; when they go sour, the losses are paid by everyone.

The debt crisis caused a worldwide restriction in the availability of long term investment capital. Capital began to seek quicker ways to reproduce itself and to reduce the risks by investing in activities from which it could pull out fast if the winds changed. One of the best activities for making lots of money fast is to speculate on the international currency market. An enormous proportion of the world's savings is now dedicated to doing just that, to the detriment of other, more productive activities.

In a small, poor country like Nicaragua, the situation is a bit different. In the 1980s, the peak years of the debt crisis, savings from the Soviet bloc flowed massively into Nicaragua. Even in the 90s, the flow of foreign aid is still relatively high, although the sources have changed.

Nicaragua now forms part of a group of countries the international financing institutions classify as eternally problematic: they will always require outside savings and cannot move toward a humanly conceivable horizon. These institutions know that countries like Nicaragua are few and don't cost them all that much; although Nicaragua has the highest per capita debt in the world, it represents no more than 0.5% of the combined foreign debt of all underdeveloped countries. For that reason, they don't question its "eternal" dependence. But we in Nicaragua should be questioning it because living eternally from foreign aid is precisely what helps prevent us from saving and developing ourselves.

Investment Savings Investment

They say we're poor because we don't save. They also say that our poverty is what prevents us from saving. The proof offered is that we consume more than we produce. At times this imbalance is blamed on the government: it spends too much and doesn't leave enough for "the private sector" to save, particularly since we can't reduce our meager consumption levels any further. Nicaraguan per capita consumption is among the lowest in Latin America, and undoubtedly below the minimal living standards of the modern, developed world.

The only way to grow economically is to invest. We in Nicaragua are poor because we don't invest enough in agricultural production, coffee, irrigation systems, genetic improvement of the cattle herd, forests, industrial equipment to transform the agricultural raw materials that we produce, factories to produce many needed objects we now import, and, above all, because we don't invest enough in human beings to augment their productive capacity.

And we not only receive foreign capital; we export our human capital. It may not be very well prepared capital, but it's ours. This capital is never tallied on the registries as capital flight, but it goes out seeking better remuneration in other parts of the world and becomes productive out there.

Obviously this capital that we export generates some revenue, what are called "family remittances." Although they are conservatively estimated at some $100 million a year (some suggest that the real figure is double that), they are nothing to sneeze at, since even the lesser figure is equivalent to a third of our total exports. El Salvador, which exports much more human capital, receives almost $1 billion a year in return.

We are poor, so we don't save, so we can't invest. But we also don't invest, which is why we're poor, which is why we can't save. We absorb foreign savings, but it doesn't generate the productive investments that would generate the income to be able to pay them back in the future. On top of that, we export the capital that we form with the scarce investments we do make, but that human capital only generates some income to help us pay for some of the imports made abroad with that same human capital. Where do we start breaking these vicious circles?

The Banks Have Lots of Savings

Not everything is tangled up in those circles though. Savings also exist in Nicaragua. The other side of the reality is there, tenacious and insolent on the first page of a newspaper that, despite being "specialized," sells well in all of Nicaragua's supermarkets. In the August 20, 1995, issue of Mundo Financiero appears an eloquent graph showing that hard (foreign) currency deposits in Nicaragua's private and state commercial banks increased by the significant sum of $120 million over 1994 and the first half of 1995. They almost doubled. That amount means that the equivalent of 4.5% of all income generated by the country in that period ended up accumulated in the banks. The figure is even more significant if we compare it to the total investment in physical assets (construction, equipment, plantations, highways) made by both the government and the private sector during that same period: it is equivalent to 25% of that investment.

Since almost all of those foreign exchange deposits belong to the private sector, the sum becomes even more revealing if we compare it exclusively to private investment: the money saved is equivalent to almost 80% of the money invested.

There were also increases in córdoba savings and time deposits in the same time period. They add up to some $50 million more. If we add that to the $120 million in dollar savings, it totals 6.3% of the national product. We are talking about an amount equal to a third of the country's total effort to invest in machinery, construction, plantations, etc. It represents nothing more or less than 100% of all private investment during the period.

Anyone who has studied economy even a bit knows that investment is part of the income spent to built the future instead of consuming it today. Investment is part of the income that is not consumed; it is savings. By definition, investment equals savings, say the economy textbooks. It's the same thing to accountants: investment in a year is equal to the savings in that same year. How do we interpret such significant bank deposit figures? What part of them will go to finance investment? What's happening? The answer isn't simple.

A Very Complex Problem

The reasons for savings, the mechanisms that guarantee their conversion into productive investment, and the relations that exist between financial intermediation and the rest of the economy especially exchange rate management, the use of foreign aid and the commercial and financial opening are not very well understood in any country. The numerous questions these issues open up to scholars and politicians have generated a range of theoretical responses, each with partially valid elements. But up to now their empirical validation has not been clinching. Despite this, the experts do not tire of formulating recommendations, and the think tanks that are trying to mold the world economy into a single system what some call the "Washington consensus" continue drawing up and imposing their recipes.

In Nicaragua's case, the unreliability of statistical data and the weight of the illegal movements of both merchandise (contraband) and capital (laundered narco dollars) in our economy add to the difficulties of the topic itself. These movements join forces with the informal labor market that huge mass of businesses that are unregistered and thus pay no taxes as well as the undue collection systems (graft) in public administration to make up a wide scale "subterranean economy" that is anything but subterranean, because it is visible to everyone.

Correct economic policies cannot be made without having, at the very least, a good system of data registration. But how can anything be registered if it is not controlled? And how can anything be controlled and standardized without impeding? This issue underlies the transcendental debate, so alive today in Nicaragua, about reforming the state. Civil society should participate so that this reform is not just designed and administratively implemented under the tutelage and with the financing of the multilateral banks.

It is necessary to understand Nicaraguan household savings behavior, to comprehend the relationship between savings and private investment, the behavior of financial intermediation that is, how banks and other financial agents function and the impact they have in particular on family remittances and the impressive foreign aid that has flowed and continues to flow into the country. But none of this is receiving adequate attention from either the authorities or the academics. And when any studies, or at least polls, are done, such as the household survey done by the Nicaraguan Institute of Statistics and Census in mid 1993, their data is not processed, much less the results made known. That inexplicable secrecy even prevails in the relations among the various government agencies themselves.

Despite the dearth of studies on the theme, it is now evident that a weighty phenomenon is being produced in the country's economy: banking activity is increasingly flourishing. In the midst of the country's generalized crisis, which is affecting nearly all sectors with the possible exception of shrimp farming and supermarkets, banking activity is becoming ever more successful. Proof of this is that two new private banks have opened: The Coffee Bank and Caley Dagnall, which returned after 15 years of absence. They have now joined the list of nine private and three state banks that already exist. The banking business is obviously attractive.

Since one of the main tools of the structural adjustment policy is promoting financial liberalization, the promoters of these policies and those who drink from the blessed cup of their dogmas could begin to sing hallelujahs. They were already sung by those who less than a year ago were writing hymns to the success of the adjustment and financial liberalization in Mexico.

How Mexico Got into Crisis

Understanding Mexico's financial crisis and its impact on the dominant "economic mode" liberalization of the market and of finances is required in order to unmask the arguments of those who uncritically defend this mode. The highly unusual speed with which the US Treasury Department and the IMF responded to the Mexican crisis with a massive loan reveals not only the importance of financial interests in the game especially those of the Wall Street banks but also the need to prevent greater rejection by other countries of the policies experimented with in Mexico, the IMF's "model child."
The economic crisis that is still hitting Mexico paralysis of its productive and commercial activity, increased unemployment and poverty is not a simple incident in that country's passage to a healthy and developed economy, the ideal predicted by the defenders of the policies of economic opening and deregulation. What has happened is an alarming example of the new kind of crisis that is waylaying an increasingly fragile world economic system dominated by global and countryless financial markets, where very concentrated and volatile capital can be moved at computer speed and in virtually unpredicted fashion.

As the main economist of Kemper Financial Services declared in the Financial Times of January 27, 1995, the crisis of the Mexican peso "has shown the fragility of the boom of guaranteed capital on the financial markets of the developing countries, typical of the post cold war." Although those promoting this evolution of the world economic system recognize its fragility, they limit themselves to proclaiming that the IMF should strengthen its role as "creditor of last recourse" and that it is obliged to save the huge financial operators, which is equivalent to guaranteeing them total license and impunity. In the Mexican crisis, the amount of the emergency financing provided to save the situation equal to the total foreign investment capital to all developing countries in 1993 shows the cost that these "salvation operations" would have and how obviously impossible they are to repeat.

How did Mexico get into this dramatic situation? The Mexican authorities' elimination of controls on monetary flows, the total liberalization of capital movements abroad and the issuing of public debt titles by selling Treasury bonds with high interest rates all attracted foreign, and particularly US, capital, thus creating an "emerging" financial market: one new and totally open to the exterior.

This explains the brutality of the crisis. But it was not a crisis for everyone. The February 1995 issue of Fortune proposed: "The time has come to buy Mexico," in a clear allusion to the fact that the capital that had fled only weeks earlier would return now to take advantage of the stock market plunge and the privatization of the few economic activities still under the control of the public sector.

From the first financial scandal, which occurred in the 17th century, to the crises that regularly shook the developed economies in the last century, a social need has been seen to control financial activities to prevent them from "delinking" from the real economy, the one that satisfies consumer needs and produces the goods needed to feed the productive process (inputs, capital equipment and the like). It is necessary to control these activities to make finances fulfill their social role, that of relating financial savings to productive investment needs. Although it has always been this way, the so called financial "markets," which are not really markets, became generalized in the 90s, endangering even the traditional banks and financial activity itself.

These "second class" finances, if you will, in which the buying and selling of money and financial assets has become an end in itself, escapes all controls and represents the greatest perversion the economic system has produced in its history. But the defenders of neoliberalism, deceived by their own terminology, which is an apology for the freedom of the market, now demands absolute liberty for a totally speculative market, without measuring the planetary dimensions of this phenomenon, which has already become so dangerous that it could be compared to the great ecological catastrophes that are waiting to ambush humanity.

The Dark Hummingbirds Are Here

It is useful to look closely at the current Mexican crisis given the exemplary character attributed to the success of that country and the no less exemplary character of its failure. But the Mexican case isn't exactly the same as the Nicaraguan one. It is possible that part of the financial savings being generated in Nicaragua today, especially the dollars accumulated in the form of financial assets (foreign exchange, savings accounts and fixed term certificates of deposit), could head off on the road abroad, to end up in those "emerging" speculative markets that are popping up everywhere like mushrooms.

The expression "hummingbird capital" has been coined in Latin America to refer to foreign capital that buzzes into our countries for a quick visit, buying up shares in the stock markets or titles to the domestic public debt which are promissory notes with fixed maturity dates that the governments issue to finance their short term deficits like they were sucking honey from flowers. This "hummingbird capital" makes what economists call "portfolio investments," as distinguished from real investments used to set up solid and enduring businesses that cannot be packed up and sent out of the country overnight.

Nicaragua still does not have hummingbird flocks flying through its skies or nesting even briefly in our stock markets, but this could be happening since we are raising some of our own hummingbirds, who are only waiting for their wings to get stronger so they can fly to other nests.

If such significant financial savings are being generated in Nicaragua but there is not enough fixed investment, an explanation must be sought particularly in the profound structural problems that affect the so called financial intermediation, in everything that has to do with the savings investment relationship via credit. These problems have been manifest for a long time and cannot be resolved with simple superficial measures.

The Banking System: from Somocismo to Sandinismo

The structure of Nicaragua's financial intermediation and the culture of savings and credit have certain particularities. In the 1960s and 70s, financial intermediation was structured around banking groups that closely related financing to business activities, often in a patrimonial fashion. Having a bank was not an economic activity in and of itself, which competed in the market with other activities. It was a way to provide capital within the economic groups. The interest rate was not a price that determined where capital ought to go.

For that reason, interest rates were not an instrument of macroeconomic policy, but simply an internal price that the financial groups used only to attract money from small savers. Since there was not much inflation, certain deposits were always attracted. In the absence of a capital market with stock markets where those with savings could have chosen to buy shares instead of trusting their money to the banks, that was the only existing system to guarantee the financing of large businesses. The 1972 earthquake allowed Nicaragua to get international credit lines with low interest rates and long maturity schedules for real estate loans. They bolstered the housing construction market, which is always difficult to finance in the financial circumstances normally prevailing in Nicaragua.

The system favored a dual and elitist growth, and the majority of small producers, mainly in agriculture, did not seek credit given institutional, sociological and geographic restrictions. The system also contributed to strengthening the idea that a credit system for those producers could only be a subsidized one: if that sector was economically unprofitable by definition, how could it be financially profitable? Were its poverty and backwardness not obvious proof of this judgment? It occurred to no one that reality could be the other way around: since peasants had no access to credit or to the chains of distribution and marketing, whereas the large producers did, the small ones could not compete and, ergo, were not profitable.

The credit from the state development banking system, created with the paternalistic and developmentalist logic that characterized the modernizing side of the state, had one characteristic in those years: it attended the producers not covered by the private financial groups, but only insofar as they were capable of incorporating a certain technological package, aimed at making them "profitable" in the future. Thus, the producers were not subsidized, their productive transformation was.

In the wake of the political, social, economic and diplomatic crisis of 1977 79, which produced a radical change in the structure of power and in Nicaragua's insertion in the world system, the Sandinistas tested a different development model, centered on the boss planner state. The model overestimated the state's real managerial reach and planning skills. It was taken for granted that the state knew itself and the rest of the economy and had the means to act and obtain the desired results. But it wasn't quite like that. In the absence of a genuine system of production administration and planning, of exchange and of final and productive consumption, the attribution of credit turned into the main instrument of control in the economic field.

The nationalization of the financial system was the principal administrative lever over the economy and the only mechanism truly controlled by the state. This lever was used with no restrictions, but it did not have the hoped for effects on real production. All the economic theories about money whether quantitativist or regulationist agree that an abundance of credit money that does not correspond to the supply of goods and services causes inflation. In the 1980s, the private sector's rejection of Nicaragua's monetary unit the maximum symbol of the state and the consequent dollarization of savings took charge of turning inflation into hyperinflation.

With the change in the development model organized by the revolution, private financial intermediation was eliminated. Not only were the banks nationalized, but the private financing by small intermediaries and merchants that assured the small producers some access, albeit in disadvantageous conditions, to the financial and product markets was prohibited. As a result of the banks not competing with each other, and because there was no financial market, the attribution of credit resources with no consideration of costs became the rule of the day.

The logic was rooted in ignorance of the sanction of savings. Investment was fostered with public spending, in an ample sense, and the money necessary for that was printed. Soon the cost became macroeconomic: imperceptible to the microeconomic agents and irrelevant to the politicians responsible.

The system also became inadequate to its own ideological ends: private banking had disappeared, but not the private production linked to it. Private production was only partly replaced by the boss state. Between 1980 and 1989, the state and large private production consumed two thirds of the credit for the agricultural sector. The remaining third was distributed among all the other peasant farmers and ranchers.

Private Banking Reappears

When the next political change came in 1990, the development model of the revolution had already fallen into crisis, but its adaptation to that crisis had only been partial. The required institutional and structural transformation needed many social and political ingredients and Nicaragua's new insertion into a fast changing world system.

The first response to the accumulated crisis came in 1988, with restrictions in credit allocations. That recipe was implemented with even more emphasis after the political change of 1990, when credit restrictions became generalized. It began with the producers for whom attention assumed greater intermediation costs for the bank: those farthest away, those most dispersed, and the smallest. In other words, the majority of the country's rural producers, but not necessarily the least profitable ones, because in fact those are the very ones who are the most profitable.

The reappearance of this restrictive microeconomic logic in financial intermediation was the result of another structural change: private banking returned, competition among banks reemerged and state intervention in fixing interest rates was done away with.

It was expected that the appearance of private banks would improve the supply of credit. But the precaution that these banks adopted against the risk laying in wait for economic activities in a context of recession meant that the mechanisms of competition between banks was not enough to lower the interest rates. The need to reconstruct the habit of financial saving and the use of the banking system to attract deposits has presupposed offering high interest rates to depositors. But the assignment of credit really only depends partly on interest rates. It still depends much more on the structural, social and geographic inequality that exists in the country. While all this was occurring, the state banking system, the development bank, ceased to fulfill its role of fostering production.

Neither Fostering Nor Banking

Within the logic of the current social changes is the fact that economic groupings are beginning to restructure around the nascent private banking system, and following the same patrimonial logic that existed in the 1970s. The profound changes that these groups have undergone since then and the general profile of capitalism in the country, however, have made a simple reconstruction of that old scheme difficult.

Paradoxically, the state development bank still partly fills its old role of a patrimonial bank. The family governmental patrimonial profile of Nicaragua's wealthiest economic sectors, in which "new" and "old" capital comes together, is making the state development bank, which has already ceased to foster development, also cease being a bank. It is lending with political criteria that are neither rational nor professional. The incredible part is that some financial and productive Nicaraguan groups, even though they have their own private bank, continue getting agricultural credits from the state bank.

Access to credit by the small producers is limited more than just by the banking system's microeconomic logic and its interest rates; it is also limited by the economic behavior of these interest groups, which act outside of the logic of the market. The requirements of the international financial institutions regarding the restructuring of the state banking system, in the framework of the conditions in the Enhanced Structural Adjustment Facility (ESAF), must be placed within this contradiction.

To Save or To Invest: That Is the Question

The central idea of the current model is the primacy of the private sector: the private financial sector and the private sector that produces goods and services. But the model seems not to know how to get to that scheme. Today, the "ideal" scheme is still not being implemented and the defects of the previous scheme remain. The essential arguments used to defend the model seem seductive because they idealize it, but they don't say how to get to it. That translates into a situation of permanent crisis within which seeing the outline of a positive structural change is almost an act of faith.

The current model is almost exactly the inverse of the previous one, but it is no less extremist. Its starting point is the macroeconomic response that there are no national savings: the foreign trade and services balances and the national accounts tell us that we consume more than we produce. And that we have to force the public sector to save, to compensate for the lack of private savings.

But reality shows that sectors of Nicaraguan society do have a surplus, that they spend less than they earn. Hence, lacking serious incentives to reinvest their earnings and having an attractive interest rate incentive indexed to the dollar, the savings of these sectors is channeled into the banks. The attraction of deposits mainly in dollars, but also in national currency has grown enormously in the past couple of years. But all this savings is not transformed into productive investment, because those who have access to credit have little interest in running the high risk that characterized the agricultural sector, as well as many urban activities due to the lack of demand. Meanwhile, those who could invest at lower cost and with less risks have no access to credit.

The microeconomic logic of each actor adapts to the situation, but it cannot be changed because a macroeconomic logic is imposed that claims that someday savings will favor investment. Although this claim seems correct, it is erroneous. With time, it is investment that will produce savings. Even though neoliberal economists say that the increase in savings should cause the interest rates to drop and spur producers to invest, this statement is nothing more than a sad expression of their blind faith in the market.

Active interest rates, those paid to the banks by borrowers, will not drop, because for the banks they reflect the risk of lending more than the real price of money. It is not the interest rate that is preventing producers from getting credit. Many small producers have shown that they can pay high interest rates, and in fact do to the usurers they are forced to turn to. What is happening is that the deposits are very volatile, the economic and legal environment is too insecure, so the deposits could shrink if the passive interest rate the one the banks pay to their savings depositors, falls.

The relationships between the savings the banks attract, investment and growth are very complex. They are made even more complex by the institutional dimension, which is changing over history, along with the political and social changes.

Savings Is Stored Or Else It Flies Away

The banks' attraction of savings in the past several years, the distribution of the public accounts and of the portfolio of the banks by strata, the lack of an apparent relationship between the increase in savings and private investment, the differences in behavior by the banks with respect to financial intermediation and the relationships between the flow of foreign aid, investment and financial intermediation are issues for a follow up analysis.

But we can already draw some preliminary conclusions. The first is that, although Nicaragua is a poor country and the majority of its habitants are as well, there is a sufficient flow of foreign aid that does not all go to investment projects, and there are enough family remittances and enough concentration of income generated by exports to create significant dollar savings. These savings, as well as the savings in córdobas, are accumulating in the banks, which are not managing to place them in production, at least in part because there are many obstacles to the real economy's ability to absorb the available credit.

The second one is that not all producers who could need credit have access to it. Those who need it are often not candidates to receive it for reasons of legalization of their properties, dispersion, geographic isolation, the meager amounts they require (in the case of small producers), the high interest rates for long term investment loans (in the case of medium sized producers), or because they are already in arrears and can't or don't want to pay their back debts (the case of the large producers and the former production cooperatives).

The third reason is that, although the system is generating financial savings, it could be raising "hummingbirds" by not generating either the means or the conditions for these savings to be productively absorbed. If we add to this current reality the lack of controls over the flow of capital from abroad and the total license to take capital and the earnings from lucrative activities out of the country, the conditions already exist in Nicaragua for these hummingbirds to grow strong wings and set off for the financial paradises of the global economy.

(To be continued)

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