The Government Wasn’t Able to Change the Budgetary Policy
This economist, author of a study of the fraud-riddled bank collapses of 2000-2001 and the illicit domestic debt that resulted from them, offers his opinions on the 2007 national budget bill sent to the National Assembly by President Ortega.
Although the national budget bill for 2007 was only sent to the National Assembly a few days ago and has still been seen only by the country’s legislators, the tidbits leaked to the media or discovered by journalists give us enough clues to know where we’re headed this year.
The first thing we can say is that the new President’s budget is based on the one already drawn up by the outgoing government of Enrique Bolaños. And looking at two essential elements—spending priorities and the way taxes will be obtained—we can preliminarily conclude that President Ortega’s government didn’t have the capacity to change the budgetary policy implemented for more than five years in our country. We can say this because the public spending priority is still to pay off the onerous and illicit domestic debt, relegating social spending; and because the budget still doesn’t reflect the kind of tax reform our country needs to make taxation more equitable.
The domestic debt still weighs heavilySocial spending adjustments have admittedly been made, adding certain elements to the budget based on promises the President made during his election campaign. These include the “Zero Hunger Program” based in the Ministry of Agriculture and Forestry, whose “food bond” component appears in the budget. But I consider these adjustments cosmetic, because the amounts involved aren’t really enough to shift the essence of the former government’s budgetary policy.
despite increased social spending
These social spending increases come from two sources of foreign cooperation. The first is the incorporation of an old Swedish donation of just over US$29 million which, according to a complaint by the Swedish ambassador at the end of 2005, had not been registered in the budget by the Bolaños government. It has now been incorporated. The other is the second foreign debt cancellation to be granted to Nicaragua recently, the result of what is called the Multilateral Debt Reduction Initiative, promoted by the British Chancellor of the Exchequer, Gordon Brown, who was concerned about poverty in Africa. This initiative, which was institutionalized in the G-8 summit in Gleneagles, Scotland, in July 2005, pardoned the debt that poor, highly indebted countries in Africa had contracted with the International Monetary Fund (IMF), the World Bank and the African Development Bank (ADB) up to December 2004. As Nicaragua belongs to the same club of the planet’s 41 most “highly indebted poor countries” (HIPC), in January and July 2006 the IMF and World Bank respectively pardoned the debts Nicaragua had run up with them up to the same cutoff point. This March, Nicaragua’s debt with the Inter-American Development Bank (IDB)—the equivalent of the ADB in the Americas—will also be written off. This will free up US$23 million a year previously earmarked to service the debt with these three finance organizations. These funds have been correctly assigned in the 2007 budget for increasing social spending, a decision we applaud.
Could more have been earmarked for social spending? Yes, a lot more. It’s worth remembering that during the election campaign our current President promised to review the payment of the domestic debt generated—at great moral risk—by the Central Bank of Nicaragua after the series of bank collapses in 2000 and 2001. He repeated that it was a great injustice to be paying such a debt to three banks at the expense of the social needs of the 80% of the national population that is living on a per-capita income of two dollars or less a day. But this promise was not reflected in the budget and Ortega’s government did not further challenge this debt payment as a national priority.
It should be remembered that in the first foreign debt cancellation, the HIPC initiative ordered the IMF to guarantee that the freed-up resources would be added to the social spending on poverty reduction already set out in the budgets of highly indebted poor countries. President Bolaños did not honor this and it is not being honored now either, because the budget President Ortega sent to the National Assembly suggests that 55% of the US$175 million we’re no longer obliged to pay to the Paris Club countries, the World Bank and the IDB in annual debt service any more—are earmarked to pay off two sets of bonds. These are the Compensation Payment Bonds (BPIs), issued to people whose properties were confiscated in the 1980s, and the Bank Bonds—previously known as CENIS—issued to cover the debts of the banks that collapsed in 2000 and 2001. In fact, in January the new government ordered that US$100 million be paid to cover the BPIs and will earmark US$43 million for the Bank Bonds this year.
The changes that were or weren’t madeThis is lamentable and demonstrates that corruption is still licit in Nicaragua, because corruption isn’t just stealing from the public coffers, it also includes the bad allocation of resources in the national budget. Why hasn’t Daniel Ortega’s government renegotiated the internal debt and modified the priorities, policies and objectives of Nicaragua’s national budget? The person who ought to answer that question, to explain his reasons, is President Ortega himself, particularly now that he’s saying “the people are the President.” I don’t know what he’d say, but I can imagine that he encountered a great deal of distrust from this country’s economic agents when he took office and has now started to foster confidence among them. A conflict could break out with big capital if the government decided not to pay the three financial groups that benefited from the bank bonds—actually, the Bank of Production (BANPRO) and the Central American Credit Bank (BANCENTRO) are the only two left as the debt with the Bank of Finance (BDF) was paid off in November 2006. It could be that this conflict of interests and the need to win over the confidence of big capital, especially financial capital, has stopped President Ortega from acting fairly and correctly.
to the government’s budgetary policy
The few changes made to the new government’s budgetary policy were the principle of free public primary and secondary education, guaranteed food for public primary school pupils and the resources allotted for the purchase of medicines—although my colleague Adolfo Acevedo is arguing that less money has actually been earmarked for medicines this year than in 2006. Taken together, all the resources assigned by the government for these changes are below the amount freed from the foreign debt payment and supposedly to be channeled into social spending; they will instead be poured into the pockets of private sector creditors in the local market. It is up to civil society organizations, universities, churches and the population in general to demand that those resources be correctly assigned. If the motto “The people are the President” is for real, they should call on their elected President to account for his broken promises.
It would be worrying if the population remained passive, without demanding its budgetary rights. What I said at the beginning of the previous government still holds true today: it’s not enough to have transparent use of budgetary resources; transparency also has to be demanded in the budget formulation. Because once the budget is approved in the National Assembly it’s law and a minister who executes that budget in accordance with the law is doing nothing illegal. Approval by the National Assembly makes illicit things legal, as former Central Bank president Noel Ramírez keeps arguing by claiming that any illicit reclassification of the collapsed banks’ portfolios had nothing to do with him, because the National Assembly approved his payment of that domestic government debt year after year.
Gaps in the budget and warnings from the pastThere are also gaps in the budget, which create a risk of widespread social discontent over time. For example, the 2007 budget doesn’t include important salary adjustments for teachers even though there is a commitment to bring their salaries into line with the other Central American countries. Nor is there any sign of salary adjustments for medical and paramedical workers in the national health system, despite commitments to increase their salaries signed in 2006, after a health workers’ strike that started in late 2005 and paralyzed the public health system for nearly six months. Only time will tell how the teachers’ and health workers’ unions, two of the few strong unions that still exist in Nicaragua, will react.
Also absent from the budget is a rate policy for public services. What prices will be set for water and electricity, or collective urban passenger transport in Managua and Ciudad Sandino? All of this has to be reflected in the budget because it involves subsidizing the population. It’s not clear whether the subsidy for families that use up to 150 kilowatt-hours of electricity a month will be maintained, and whether the prices charged to the rest of the population will be hiked up. We’ve already heard that water prices are going up, but by how much? The 2007 budget proposal left by the Bolaños government showed only three months of subsidies for collective urban bus transport. Has the new administration extended this subsidy to cover all 12 months? And what happened to the President’s promise to reduce bus fares to just two córdobas? In other words, the “oversights” are not just in reviewing payment of the domestic debt, but also in the budgetary policies related to the population’s welfare.
How are answers going to be provided to the many social expectations created during the election campaign? I think there’s a risk that President Ortega will confuse party functions with state functions and that political populism will infect economic policy. This may not happen; hopefully President Daniel Ortega will be twice shy knowing he was jointly responsible—although by no means solely responsible—for Nicaragua having the world’s fourth highest hyperinflation in the 20th century. I’m certain there will be a solid monetary policy to avoid any inflationary outbreak that would repeat such disastrous consequences.
Public investment shortfallAnother budgetary concern is under-implementation of the public investment project portfolio. What’s our capacity to spend on investment rather than consumption? In 2006, the volume of public sector construction was 40% below that of 2005. A third of budgetary spending is financed by international cooperation and most of these foreign resources are concentrated in public investment projects. If an externally funded public investment project isn’t executed, the funds allocated for it can’t simply be switched to another budget item.
masked by the low fiscal deficit
One of our problems is that after foreign donations are recorded, we have an apparently low deficit in accounting terms. But this conceals the under-implementation of the public investment project portfolio. If the public sector were excellent at construction work, the fiscal deficit would be greater, probably 2% more of the gross domestic product (GDP), given that the government would have had to pay for its third of what was actually built. Sometimes we create fiscal mirages, saying how well we’re doing, that there’s fiscal discipline, fiscal health, but without considering the public investment projects that were never completed. It’s being predicted that this year’s fiscal deficit will equal 0.2% of the GDP, but without explaining that it’s already financed with foreign donations.
Will all the public constructions now be executed? Two months after the change of government there’s still no sign of any reactivation of public construction. Construction’s economic year—basically December to June, before the rains set in—is being wasted. We’d also like to know what the public policies will be for the 2007-2008 agricultural cycle and what contingency programs exist to combat the effects of the climatic phenomenon known as El Niño, which will affect the first crop of basic grains for the second consecutive year. There’s no sign of anything yet. What’s up with the public officials? I fear that the whole economic year will be affected by the economic lethargy of this first quarter. If the Bolaños government officials were mediocre, at least they talked a good line. This lot doesn’t talk; for the most part the current ones don’t show their faces in public to explain how they’re planning to direct and energize the national economy.
Off to a slow start, butOne could argue that the economic lethargy we’re witnessing is because the government is just getting started. But why didn’t Ortega get the new officials, the new public servants, working intensely as soon as he won the elections in November 2006 for the two months preceding his official swearing in to organize their administration better? A new finance minister would only need a couple of weeks to be up to date on all the information at hand: the contents of the projects portfolio, what’s being implemented, what’s in the pipeline, what’s still being negotiated. It’s said that the delay is because the new officials dedicated a lot of time during those two transitional months to discovering the bad management of the Bolaños government’s civil servants. But they shouldn’t have made the same mistake as President Bolaños did during his first year in government, when he had all his officials pouring through desks and filing cabinets for evidence of corruption committed by the Alemán government. There are state bodies to investigate corruption, including the economic police, the Attorney General’s Office and the Office of Comptroller General. Bolaños spent a year basically doing nothing, chasing the corrupt... and in the end only really inconvenienced one of them. Here in Nicaragua, you’d have to build stadiums, not prisons, to punish all the corrupt! It must be admitted that this new government, like any other, has also been affected by the limited availability of public officials qualified to implement the government program and their limited preparation. On the other hand, this is the only government with a past history in power, and that should give it a bit of a leg up in terms of experience.
starting to leave its “distinctive seal”
It’s said that a government should leave its “distinctive seal” within its first 100 days of administration. As we’re nearing that milestone, the new government’s seal so far has been the elimination of school autonomy, the initiation of the Zero Hunger Program, climbing aboard Venezuela’s Bolivarian Alternative for the Americas (ALBA), the signing of a memorandum of understanding with Iran and certain austerity measures in the executive branch such as cutting the high salaries, eliminating the use of credit cards, scrapping the state’s payment of top public officials’ rent and eliminating payments to cover the cost of domestic employees and security guards in their residences. But other things were left untouched, such as the allocation of vehicles and a significant amount of fuel for the personal use of high-level public servants. The national budget should detail which items are to benefit from the resources freed up by these re-ductions, which I assume will bolster existing social spending.
The need for a tax reformWhat other possible sources of financing exist for social spending? I see no tax reform proposal on the government’s desk. Why? If President Ortega has promised a significant increase in social spending, which is a correct way to revert and reduce the country’s poverty, we must ask ourselves how he plans to finance it if he’s already ordered payment on the huge and illicit domestic debt, which accounts for 20% of our taxes? How will social spending be financed if the public sector investment projects are tied to foreign resources and can’t be touched?
Nicaragua needs a tax reform. The Fiscal Equity Law must be honored not just in name, but also in practice. The tax system should be equitable, so that those who have more pay more, those who have less pay less, and those who have the same pay the same. Three years ago my tax expert friend Julio Francisco Báez and I charged that the bankers had failed to pay the equivalent of over US$62 million in income tax. Would it be unjust to collect that pending debt now? There’s a lot of talk that this government should avoid confrontations because it’s dedicated to reconciliation and peace. Let’s assume that the President is paying the domestic debt to the banks because he’s politically dedicated to avoiding confrontations. Why didn’t he propose a debt swap with the banks in which they pay the taxes they owe the state in return for the state paying on the Bank Bonds? To avoid contradictions, we ordinary Nicaraguans would pay a fair price for the bank liquidations and the financiers would pay the taxes they owe the state.
To finance social spending, the Tax Office and Customs Office should be given the political clout they need to collect taxes appropriately. And if necessary, the President should issue a decree delegating these two institutions all his authority to charge taxes properly. Each year the state loses US$250 million through exonerations and exemptions. Nicaragua’s current tax system should be more rightly called a tax exemption and exoneration system, in which the main beneficiaries are the private monopolies and oligopolies. The owners of micro, small and medium businesses don’t get any exonerations and are chased down when they don’t pay their taxes—unlike the non-paying big business owners.
At least half of the exonerations and exemptions should be eliminated soon, not by wielding a club but by calling their beneficiaries in to talk things over. This action needs to be accompanied by a reduction in tax rates, particularly the high value-added tax, which affects producer and consumer prices and is the highest in Central America even though Nicaraguan is the region’s poorest country. In Nicaragua, those with less pay more. The poorest suffer the inequity of both income distribution and the tax burden.
What can be expected fromHow are the negotiations going with the IMF? I have to applaud the new government because for the first time in our economic history we won’t have IMF servants in our government. The previous government’s finance ministers and Central Bank president were the public sector’s most expensive messenger boys, as their work was limited to taking warnings and messages from the IMF to the National Assembly and then taking the answers back. Now what is being announced is “Nicaragua’s economic program” as opposed to the “IMF’s economic plan for Nicaragua.” A national vision is now being announced, although the 2007 budget has some rough edges that remind us of the interests of small but powerful business groups.
negotiations with the IMF?
The IMF now has to be invited to honor the name of its program: the Economic Growth and Poverty Reduction Program. The IMF has never discussed poverty reduction in Nicaragua because every time the subject cropped up we always heard its classic answer: “Go to the World Bank, which is the expert in poverty; we’re experts in fiscal and monetary matters.” The IMF has also never accepted the idea of discussing poverty reduction as the Nicaraguan budget’s main policy. The Nicaraguan government is now announcing that it will insist that the IMF prioritize a discussion of poverty reduction along with fiscal and monetary questions, and I applaud its political will in this respect.
Can we expect any significant increase in social spending in 2007 from the negotiations with the IMF? No. In 2008? Maybe. I would advise the government in its negotiations with the IMF this year not to accept any structural reforms being demanded of Nicaragua that the Bolaños government left pending. The IMF is making these reforms the condition for the country accessing the US$59 million to be donated by the Budgetary Support Group—which consists of countries who make direct donations to the national budget—and the US$75 million to be lent by the World Bank and IDB in 2007. The impact of these pending structural reforms on the country’s poor population needs to be analyzed, and the IMF could help determine it.
Structural reforms demanded by the IMFLet’s take a quick look at the reforms the IMF is demanding from Nicaragua. First it wants to reform the social security law to reduce the benefits for people with pensions, including retired people, increase the retirement age to 65 and, if possible, increase the social security contribution rate. The aim of all of this is to prevent the collapse of the social security system within the next 15 years. The government should not rush through any such reform and should instead ask the IMF to present a detailed study on the reform’s social impact on the poor.
The IMF also wants a reform to the energy stabilization law that would totally liberalize what are called “occasional energy markets.” This, for example, would allow a barge to come into the port of Corinto to generate oil-based electricity with no price regulation on the electricity or any restrictions on when the barge could come or go. Where does the state’s supervisory role in the generation of this public service fit in here?
The IMF’s third demand is to reform the municipal transfers law to fiscally neutralize 100% of the transfers this year. This means that all transfers would have to be accompanied by their corresponding public spending responsibilities; in other words, spending on specific projects and programs in the municipalities that the central government will stop implementing directly and turn over to the mayors. The mayors will no longer be able to use the municipal transfers according to their own criteria; they’ll be limited to implementing only the projects the central government specifies for the use of the tax money transfers. The objective of this reform is to avoid any increase in public spending and the fiscal deficit.
The fourth structural reform the IMF is pushing is the Fiscal Responsibility Law, which Bolaños left fully prepared for the Ortega government. It basically ties the National Assembly’s hands with respect to modifying the budget’s ceilings or ratios for different fiscal variables (debt-GDP ratio, spending-GDP ratio, deficit-GDP ratio). None of these could be touched. The law would make it impossible for the National Assembly to significantly alter the executive branch’s budget proposal. In reality, the legislators’ role in discussing the budget would largely be neutralized.
The IMF also proposes granting full autonomy to the Central Bank, so that it answers to the National Assembly, not the President, as is currently the case. The aim here is to provide greater macroeconomic and price stability and ensure that currency is issued correctly. The IMF is also asking for immunity to be granted to officials of the Superintendence of Banks and Other Financial Institutions. In this respect, we should recall that Noel Sacasa, superintendent during the highly questionable bank liquidations of 2000 and 2001 that left Nicaraguans over-burdened with debt, who is a fugitive of Nicaraguan justice as a result, is currently an IMF official... And finally the IMF is asking for legislation on micro-financing organizations to reduce their high interest rates.
These are the main demands the IMF is making of the Ortega government that the Bolaños government was unable to carry out. I think the government shouldn’t commit to any of them, at least not this year. As all structural reforms to the economy imply a social cost for the population, the most advisable thing to do is to negotiate a schedule for implementing the reforms starting in 2008, providing the IMF presents the government with the effects each of them would have on the country’s poor. This would change the former logic, putting the IMF to work rather than just accepting that it can come and dictate its orders to our country, which is still not eligible for credit in the international financial market after two foreign debt write-offs.
Still hostage to the IMF, like it or notIt seems to me that, due to inertia, we’ll continue to observe the same kind of economic policy in 2007 as the previous government. We have yet to see a new policy that supports economic growth in favor of the poor. It appears to be very difficult to change the last government’s socioeconomic policy. The President caused a stir when he said he didn’t want anything to do with the IMF, even though nobody likes being a hostage to it... and the 41 HIPC countries are precisely that. We’ve seen how middle-income countries like Costa Rica or Argentina can do without the IMF on many occasions, but the HIPC countries in general and Nicaragua in particular don’t have that kind of economic and financial autonomy. As what President Ortega was trying to say in his declarations on the IMF was open to misinterpretation, Nicaragua’s new Central Bank president took the floor to calm things down, declaring that there would indeed be an agreement with the IMF. We’ll be free of the IMF the day Nicaragua has credit standing in the international financial market. Until then, we’ll have to continue going to the highly concessionary loan windows of the IMF, the World Bank and the IDB.
Not even Venezuelan cooperation can free usVenezuelan cooperation will never be able to replace these international lending institutions. In reality, Venezuela is coming to promote projects mainly with the private sector through a cooperation agreement. The only foreign public debt component that can be observed in the new Venezuelan package is the purchase of oil, with immediate payment of 60% of the shipment bill and a loan for the other 40% to be paid over a 23-year period, at 1% interest with two years of grace. In my opinion, this is the main aid to Nicaragua within the Venezuelan cooperation framework. All the rest will be between private entities with private investment, including the Bilwi-Río Blanco highway, because any projects that involve public investment would enter into contradiction with the IMF, as they imply debt and there’s a limit to the indebtedness the IMF allows. If the country is being “un-indebted” by our creditors, we can’t start over-indebting it, no matter how concessionary a loan might be. One of the IMF’s objectives is to reduce Nicaragua’s debt-GDP ratio and it won’t accept projects contemplated in the ALBA agreement that involve public investment and generate new debt.
A new form of aid that bypasses the budgetThe private debt generated by the Venezuelan projects would not be reflected in the budget, which is a way to administer the Venezuelan aid without entering into any contradiction with the IMF. The proposed oil refinery will probably be jointly constructed by a Venezuelan company and a private Nicaraguan one, just as the construction of a factory to manufacture aluminum goods will probably be shared by Venezuelan and Nicaraguan investors. It won’t be public investment. But it does, of course, remain to be seen who the Nicaraguan investors are…
Indebtedness to Venezuela can be dealt wth according to this cooperation paradigm. In fact, the United States is already using it for the public construction projects being implemented in León and Chinandega with the Millennium Challenge Account. This account is a new form of US cooperation in which resources are donated to countries that have good relations with the IMF, fulfill all of the adjustment and structural reform measures, fight corruption, practice good governance and meet all the other conditions imposed and administered by the IMF with help from the World Bank and IDB. All countries that display adequate behavior with the international financial police are candidates for US donations in the Millennium Challenge Account, but they are aimed first and foremost at poor, highly indebted countries, of which Nicaragua is obviously one. But the resources for the Millennium Challenge Account projects are not included in the recipient country’s public investment project portfolio or even registered in the national budget, even though Nicaraguan law establishes that all resources from international cooperation must pass through the single window of the national treasury.
Even though these US funds are donations and thus not subject to the indebtedness limit, they don’t pass through that window. It is a way for the United States to directly administer its projects, probably to avoid the treasury having to include them in the fixed percentages of the budget that must go to the public universities, the Supreme Court and a couple of other institutions as established in our Constitution. In any event, if there’s already a paradigm for international cooperation that doesn’t involve including it in the budget, why would the IMF complain if projects financed by Venezuelan resources aren’t registered in the budget either? With this precedent, I think the government will take the same route to avoid reaching the foreign debt ceilings stipulated by the IMF in the Fiscal Responsibility Law.
Flirting with economic populism?Up to now the government has shown no signs of economic populism, at least in practice. It has engaged in no heterodox economic actions that require funding that the government doesn’t have. A populist solution would be to irresponsibly issue money and we already know the results: more inflation and more discomfort for the population. I’ve always pointed out that we complain about the social costs of the IMF’s adjustment when we analyze its measures in our country, but we must also ask ourselves about the social costs of not adjusting. Could one be more benign than the other? Nicaragua has experienced both adjustment and non-adjustment and suffered both social costs. Both have perverse effects. Unemployment is a cost of adjustment and inflation a cost of non-adjustment. All economic policy actions have costs, which we as economists are obliged to deliberate about and try to balance off.
President Ortega made certain campaign promises that would be very hard to fulfill outside of a discourse of political populism. These included the promise of “zero unemployment,” but jobs are mainly generated by private enterprise, not the state. The only jobs the state generates correspond to the state’s bureaucratic apparatus, teachers, health workers and construction jobs in public works. So how can the government reduce unemployment to zero? It was an expression of political populism.
It also promised “zero poverty,” but where will the resources come from to honor that promise? To reduce poverty, the state must have active strategic participation in those market sectors that are essential to reducing it with growth, economic development and equity. I believe that neither the market nor the state alone could honor that promise.
The role of the state and In addition, after all of the structural reforms imposed by the IMF and implemented by the World Bank and IDB, our state is like a body with a head, thorax and abdomen, but no upper or lower limbs. It’s a state that can do very little because it has no instruments anymore. If those in power want the state to play an active and constructive role in our economy again, they’ll first have to restore its arms and legs, which can’t be done overnight. All of the structural reforms took away the state’s instruments, such as its development bank, an instrument for coordinating a nation’s equitable economic growth and development. During the elections our new President promised us a development bank again, so where is it? Could he have forgotten to write into the 2007 budget bill any mention of it or of some initiative that would facilitate its future establishment?
the national development bank
It’s rumored that Venezuela will financed the development bank, but that’s not true. Venezuela’s National Economic and Social Development Bank (BANDES) will set up shop in Nicaragua to give loans with 2% interest and two years grace for agricultural production, particularly bean production. These loans will go to peasant bean farmers who will then export their harvest to Venezuela. This doesn’t add up to a development bank, which is supposed to coordinate a country’s long-term economic growth and development process with equity; implement the government’s economic strategy; ensure productive transformations; privilege market niches; transfer technology; provide technical education to the work force; offer market information to economic agents and reduce the country’s human poverty.
The state isn’t God and The state isn’t God because it can’t be omnipresent. And the market isn’t all-wise, because it frequently messes up. If the market were so infallible, Nicaragua would be a lot better off today than it is after 16 years living with “the market’s wisdom.” Several years ago I visited the poorest municipalities in the northern part of the department of León. The mayor of one of those municipalities invited me to walk through his town’s six dusty, parched blocks with him. When we returned to his office, I asked him, “So where’s the market?” “It already left,” he answered. “What do you mean?” I asked. “It’s gone. The market is a truck that passes through here every morning selling goods to the people from all the surrounding districts.” While this was happening in a very poor Nicaraguan municipality, President Bolaños’ economic ministers in Managua were saying that “the market resolves everything.” What market? First you have to build markets, and those that exist in our country are still very primitive for the most part.
the market isn’t all-wise
This is one of the great contradictions of our economic reality. The civil servants here in Managua trust in the market to resolve all the problems, while the mayor in northern León doesn’t even have a market. A large part of Nicaragua’s poverty can be explained by the lack of markets and the fact that those that do exist haven’t grown and aren’t developed. What is the Nicaraguan stock exchange? Nothing more than a desk where public bonds issued by loss-making institutions circulate. What is the Nicaraguan financial system? Six small Nicaraguan banks with little international competitiveness. Our monetary market is totally primitive and our monetary aggregates don’t exceed the sum of córdobas and dollar deposits. The first thing the government should do is build markets. And then it should avoid taking control of them. The state is no God. It should help create and develop markets then leave them to the producers to maintain, expand and strengthen.
At the same time I believe there should be active state participation in strategic market sectors such as the energy market, be it geothermal, hydroelectric or wind. This market shouldn’t be left just in private hands. In this kind of market we need to see state formation and regulation, as well as its co-participation with private enterprise in the development of new projects. Where the state has no strategic interest, it should leave the market to the private sector; and where it has maximum interest, everything should be state-run, as in the case of a possible development bank, because private bankers are concerned only about the growth of their banks’ profits, not about national economic growth.
The state isn’t God and the market isn’t wise. The two have to be brought closer together. John Maynard Keynes, the economist who defended state intervention in the market, has to be brought closer to Milton Friedman, who proposed zero state. They have to be brought together to reap the maximum benefit from the lessons they both left us in their economic theories. So my advice to President Daniel Ortega is to be a President of the center and not veer excessively to the savage capitalist right or the economic populism left. Stay in the center and start building a real market-based social economy in Nicaragua. I believe he can do it.
Nestor Avendaño is an independent economist who is an activist with the Civil Coordinator of NGOs.