Envío Digital
Central American University - UCA  
  Number 344 | Marzo 2010



The Economy Will Be Austere And Uncertain in 2010 and 2011

This economist compares the Ortega government’s economic model to that of the Bolaños government and analyzes the outlook for the next two years. He also provides clues to how the current government’s economic performance could influence or condition the results of the elections in November 2011.

Arturo Grigsby

Unemployment is perhaps the main social and economic problem facing President Daniel Ortega as he enters the fourth of his five-year term and contemplates the electoral year in 2011. Current unemployment levels are far higher than when he took office and are still rising. According to Central Bank and Nicaraguan Institute of Statistics (INIDE) figures, the open unemployment rate increased from 5.1% in 2006, President Bolaños’ last year in office, to 8.4% in 2009, representing 60-65,000 more jobless people, again according to official figures.

Jobs, joblessness and lousy jobs

The concept of open unemployment includes only those with no employment at all; even selling little bags of cold water on the street for a few hours a week at the equivalent of $0.02 a bag is classified as underemployment in surveys. But underemployment levels have also grown during the Ortega government. INIDE’s latest household survey puts the visible underemployment rate at 13.8% of the working labor force. It also shows that 28.4% of employed workers receive less than the minimum wage established by the State, a situation known as invisible underemployment.

Another cloud darkening the government’s economic scenario is that if its forecasts for 2010 are correct, we will enter 2011 with virtually the same per-capita income level Nicaragua had when Bolaños left office. In other words, economic growth did not outstrip population growth, even though the latter has been falling in recent years. Per-capita income grew 1.9% per year during the first two years of the Ortega government, approximately half the annual growth rate the World Bank estimates is needed to reduce poverty and achieve the Millennium Development Goals. According to official calculations, it was in the red in 2009 and will be again in 2010.

A field day for the opposition

The unemployment levels and stagnated per-capita income will give the opposition important weapons in the next electoral campaign to argue that the Ortega government has again demonstrated an inability to manage the economy. Responding that the global crisis has played a determining role in these problems gets tricky in an electoral campaign because voters generally attribute employment and the population’s wellbeing strictly to the national government’s economic management, independent of external factors. It’s the government’s economic results that will count in 2011: bad in the eighties and bad again in the first decade of the 21st century, which the opposition will say demonstrates a clear case of incompetent economic manage¬ment.

The figures appear even more negative if we contrast them with the expectations in 2007, when Ortega took the reins of government after promising “Zero Unemployment” and “Zero Hunger,” a Production Bank to facilitate producer access to credit, the promotion of small and medium production and free health and education services during his campaign. They must also be contrasted with the ambitious goal set by the Sandinista National Liberation Front (FSLN): continued expansion of social spending to significantly reduce poverty. Reality and the government’s own statistics show results falling very short of those promises and expectations. If Ortega’s reelection campaign has a vulnerable flank, it’s the combination of economic stagnation, the government’s conflictive relations with foreign cooperation—which have distanced donor countries, particularly European ones—and its discretionary use of the hundreds of millions in Venezuelan cooperation.

The difference between the
Bolaños government’s approach…

Some argue that the national economic situation has further deteriorated because the economic policy differences between the Ortega and Bolaños governments are essentially minimal. Despite his anti-IMF rhetoric, Ortega has signed an agreement with the International Monetary Fund that in practice respects the economic policy framework agreed to by Bolaños. Others argue that there has been only partial policy continuity, because other policies and actions by Ortega have significantly deteriorated the country’s business climate.

While the Ortega government has essentially retained the neoliberal policies of the past 15-20 years with respect to the macroeconomic framework, there are significant differences between its approach to the country’s problems and that of the Bolaños government. For the latter, Nicaragua’s main problem—the persistence of such high levels of poverty—basically resulted from an inadequate business climate, which scared off foreign investors and stagnated national investment. Among the structural problems it detected behind this was a corrupt judicial system that didn’t guarantee investors’ rights.

Added to this was the country’s paltry infrastructure. For example, Nicaragua is the only Central American country without a highway connection between its Pacific and Caribbean coasts. It’s easy to travel from the Pacific to the Caribbean by highway in Honduras, and there’s a first-grade port on the Caribbean side: Puerto Cortés. The Pacific and the Caribbean are also connected by a major highway in Costa Rica, as they are in Guatemala. But that’s still not the case in Nicaragua, even though it was promised by the dictator Anastasio Somoza in the seventies and by all governments after him. The latest such promise was made by Venezuelan President Hugo Chávez in his first visit to Managua in 2007, when he offered the help of his country’s army to build a highway that would link the Pacific to the Caribbean. Furthermore, any investor who wants to send merchandise from Nicaragua to Europe or the east coast of the United States has to ship it by land to Puerto Cortés in Honduras or Puerto Limón in Costa Rica because Nicaragua also still has no adequate port facilities on the Caribbean side.

The Bolaños government proposed to attack the country’s structural problems to attract foreign investment and stimulate national investment, convinced that this would result in jobs that would produce the famous “trickle-dow” effect, thus reducing poverty. According to this vision of development, the State’s role should be to facilitate such structural transformation processes. To that end, the Judicial Career Law was pushed through and important public investment resources were allocated to modernize the port infrastructure and build roads and highways. To further encourage a more favorable business climate, it was decided to privatize everything remaining in state hands—fundamentally the energy, telecommunications and drinking water services. The privatization of telecommunications was completed under the Bolaños government, as was the privatization of energy with the exception of hydroelectric production. Very little progress was made on the privatization of the water utility.

With such a focus, it’s logical that the media, economic research institutions and politicians who served in the Bolaños government still repeat that Nicaragua’s main problem is an inadequate investment climate, and that it has worsened significantly with the Ortega government.

…..and the Ortega government’s approach?

The FSLN came to government with a different assessment: in its view Nicaragua’s problem isn’t exclusively a poor climate for investors, but a market that excludes the majority of small and medium businesses and farmers, denying them access to credit and business services. According to this approach, the State’s role would be to intervene to promote access to markets, credit and services, and make basic health, education and social security services accessible to the entire population. The new government halted the water privatization process and bought part of the shares of the Spanish transnational electricity distribution company, Unión Fenosa, in the State’s name.

Another key aspect of the FSLN’s economic policy was Nicaragua’s incorporation into the Bolivarian Alliance for the Peoples of Our America (ALBA). Bolaños’ strategy emphasized taking advantage of the business and investment opportunities opened by the signing of the Central American and Dominican Republic free trade agreement with the United States (DR-CAFTA) and the association agreement (AA) being negotiated between Central America and the European Union, both of which have already been discussed in envío. Without pulling out of those spaces, the basic gamble in the FSLN model is to diversify Nicaragua’s markets, reducing its dependence on those of the United States and Europe by joining ALBA, an arena considered critical to surmounting Nicaragua’s current international trade situation.

What is ALBA in essence?

ALBA was born in Venezuela as an alternative to the Free Trade Area of the Americas (FTAA) initiative, launched by President Clinton in the early nineties to create a US-led trade bloc from the Río Grande to Patagonia that would go toe to toe with the global competition for world markets. But by the end of the decade, it had bogged down.

ALBA was also born as an alternative to the CAFTA and AA projects, because its basic principle is solidarity, which is based on respect for the asymmetries among trading partners with differing levels of development. For Nicaragua this has translated into the oil compensation fund by which Venezuela supplies oil to the country at what amounts to preferential prices. Another basic ALBA strategy is to develop what are called grand nationals, businesses of the ALBA member States that are established in strategic sectors of the economy. The idea is that they will provide an alternative to the transnational corporations that are the principal bene¬ficiaries of the free trade agreements such as CAFTA and AA.

The ALBA strategy’s concrete expression in Nicaragua has been the formation of the Albanisa business group, whose main economic base is its control of oil imports from Venezuela. Albanisa has invested in diverse areas, such as electricity generation, food production and export, and the importation of transport equipment. The creation of this group has generated conflicts with the transnationals interested in importing and distributing oil and its derivatives, and with other business groups that see Albanisa as a threat of “unfair” competition due to its links to the government.

There are thus important differences between the Bolaños government’s economic assessments and plans and those of the Ortega government, despite their similar economic policy framework. In practice, what we have today is a juxtaposition of policies, which is triggering constant tension between managing the economy with the same macroeconomic framework Bolaños had, while at the same time using the state apparatus in a discretionary manner to promote a new business group and foster preferential trade relations with the ALBA bloc. The prestigious Guatemalan economist Gert Rosenthal, an expert in Central American integration, said in a recent interview in Managua that over the long haul Nicaragua will have to choose between the dynamic of ALBA, an economic agreement administered by governments, and the dynamic of Central American integration, which like CAFTA and the AA operates basically according to market rules.

The paradox of economic
growth without poverty reduction

In broad brush strokes, these are the differences between the models of the two governments. With respect to more concrete plans, it’s useful to recall that the Bolaños government developed a clusters strategy, selecting eight key dynamic economic sectors in which Nicaragua has greater potential for insertion into the world market (textile assembly plants for re-export known as maquilas, tourism, coffee, dairy products, beef, fish, forestry and mining). All efforts were geared to promoting these strategic sectors, concentrating public investment in them to create infrastructure and capacities with the aim of turning them into the locomotives that would pull the country’s economy.

The clusters strategy did generate growth, with the economy growing at an annual average of 3.4% over Bolaños’ five-year term. But according to both government and World Bank statistics, that growth did not reduce poverty. While the economy grew, poverty remained the same between 2001 and 2005, the last official measurement—which happens to correspond to the years covered by the Bolaños government. Nicaragua thus became a totally atypical case: economic growth with no poverty reduction. In all other countries, poverty is at least partially reduced when the economy grows, depending on the extent to which the added wealth is distributed.

How can we explain the fact that poverty didn’t drop at all in Nicaragua? Part of the explanation lies in the economic growth pattern maintained in Nicaragua during those five years. It was a period in which maquilas flourished; new shopping malls were built and existing ones expanded; housing developments for the middle and upper classes were constructed; and the financial system was expanded, with banks establishing branches all over the country. In addition, sugar plantations and refineries were modernized and expanded, as was the highly mechanized cultivation and export of peanuts. Cattle ranching and the export of meat and dairy products also grew. Most of the investment of those years was used to import machinery and equipment for these sectors, which with the exception of the maquilas and construction, didn’t significantly generate employment. Furthermore, the benefits of this economic growth remained highly concentrated in transnationals and Central American and national business groups. The government didn’t develop any broad-based growth pattern to incorporate the sizeable sector of micro and small commerce and service businesses or small agricultural producers.

The Bolaños government’s fiscal policy also partly explains the paradox of economic growth without poverty reduction. The tax reform implemented during those years did nothing to alter a regressive tax system in which the bulk of tax income is from indirect taxes and there are multiple exonerations for certain high income sectors. The modest increase in fiscal income of those years didn’t generate the resources to cover the social spending projected in the goals of the Bolaños government’s National Develop¬ment Plan.

The paradox of economic growth without poverty reduction is also explained by the type of social policies promoted during those years, which marks another major difference of approach between the Ortega and Bolaños governments. The Bolaños government’s social policy had various dimensions. The proposal in education and health was to improve efficiency through a policy of administrative decentralization that involved promoting autonomous public schools in education and creating private care wings within the public hospitals in health. One of the FSLN government’s first actions was to eliminate educational decentralization, rightly arguing that it had excluded students from the poorest families. It did this by scrapping the administrative school autonomy and the “voluntary” contributions paid to these schools by parents. Also eliminated were the semi-private wings in the public hospitals and charges for medicines and medical services in the public health system, thus taking the first step to changing the approach to reducing poverty through social policies.

Another important dimension of the Bolaños govern¬ment’s social policies was the social protection net, a model basically inspired by Mexico’s Progresa program. It consisted of giving money to heads of family in extreme poverty, especially in rural areas, in exchange for their assurance that their children would go to school and eat adequately. The family’s compliance was monitored by later measuring the children’s height and weight and having the schools certify that the children attended classes. The idea behind the program was that, by guaranteeing their education and nutrition, the children would break the inter-generational cycle of poverty that affected their parents.

The FSLN berated this program as paternalistic charity, criticizing the fact that people were being paid to do this and proposing programs that would strengthen people’s productive capacities. That alternative vision gave birth to the Zero Hunger program, transferring animals, seeds and inputs to rural women to bolster production, employment, food security and the acquisition of their own resources. The Zero Hunger program, however, has failed to become sustainable or to promote the organization of rural women around their own needs, and has largely used party criteria in the beneficiary selection. Although the results of Zero Hunger are very debatable, the difference in approach between the two governments is clear. The main similarity of their social policies is the desire to extend the network of schools and health centers in both the countryside and the cities.

The clusters strategy also failed to reduce poverty because it didn’t tackle the key structural problems that generate and maintain the high poverty rates in the countryside, where most of the poor are concentrated. The first such structural problem is that education is inadequate and non-contextualized from rural primary schools right up to the university agrarian science departments, passing through agricultural technical schools and the extension service of the Nicaraguan Agricultural Technology Institute. None of them provide rural families useful theoretical and practical knowledge to help them solve agricultural problems. Second, land distribution and access is extremely unequal, despite the redistribution of lands promoted by the revolution in the eighties. According to studies done during the Bolaños government, landless families make up 38% of the rural population, and a study conducted for the Ortega government by the UN Food and Agricultural Organization and the World Bank shows that Nicaragua again has one of the highest concentrations of land ownership in Latin America. Third, although access by poor rural families to financial services has improved with the development of micro-lending institutions, it’s still very limited. Only a quarter of rural families have access to credit, according to the latest living standard survey, and only a fifth have access to paved roads, making it very hard for them to gain access to markets and basic services.

The Human Development Plan:
Visions and Reality

The Ortega government’s National Human Development Plan partially noted all these problems, but its rural development policies don’t address the inadequate rural education or unequal access to land and land markets. Moreover, while the government has promoted the creation of a new state bank to develop rural financial services, it has also supported the movement fighting to get its members’ debts written off, thus weakening the micro-credit institu¬tions that have provided these services since the closure of the previous state development bank. Meanwhile, the government’s budget restrictions have seriously limited the rural road construction program, at least partly due to the freeze on budgetary support aid by international cooperation in response to the 2008 municipal election fraud.

From the outset, the Ortega government’s economic program emphasized expanding social spending, although there was no clarity about how it planned to generate jobs. And while it rejected the clusters strategy out of hand because it excluded small and medium production, it offered no alternative. The discourse of the government’s Human Development Plan exalted the country’s agro-industrialization, always including small and medium rural production, but this has yet to be given any concrete expression.

When it launched its first version of the National Human Development Plan in 2008, the government proposed seeking more support from the international community to expand social spending and meet the Millennium Development Goals. The proposal was to exceed the $500-600 million received during Bolaños’ term. What has happened in these three years, however, is that traditional European cooperation has been reduced while Venezuelan cooperation has increased, but the latter doesn’t finance public spending.

In November of last year, the government released its updated version of the National Human Development Plan, which has abandoned many of the first version’s targets and significantly deflated the expectations for both social policies and economic growth. The reduction is explained both by the global economic crisis and the aftermath of the 2008 electoral fraud.

What are the perspectives for 2010 and 2011?

The government now forecasts economic growth of 1% for 2010 and 2% for 2011, and these official goals are the basis of its commitments with the International Monetary Fund. A significant public spending reduction, measured in both dollars and as a percentage of the Gross Domestic Product (1.2%), is planned for 2010. Current spending, which pays salaries and operating expenses to maintain public administration, will be cut further, which means a lower health and education budget since those two lines absorb the bulk of public spending. According to the latest version of the National Human Development Plan, the social spending originally programmed for the 2009-2011 period will be cut by a total 8.6% of the GDP, which amounts to approximately US$552 million.

Public investment spending, which has been continually reduced since 2007, is also being reduced more in GDP terms, despite the fact that the national assessment indicates an urgent need to invest in drinking water and sanitation and the building of rural roads and highways, schools and health centers. This means the government has completely abandoned its initial goals for budgetary reasons.

The obvious question of what effect this will have on the 2011 election results can only be answered by time. What is not open to debate is that the government’s commitment to the IMF to reduce the fiscal deficit has led to very austere budgets for these two years due to the loss of two financing sources. First, the extraordinary financing received last year from the multilateral financing institutions, including the IMF, to mitigate the impact of the global crisis will not be repeated in either 2010 or 2011. And second, Europe’s budgetary support is no longer available thanks to the electoral fraud.

In addition, this year will see an increase in payment on the domestic debt to the national banks that hold most of the bonds issued as compensation to property holders whose real estate was confiscated during the Sandinista revolution. The current Ortega government is respecting that debt and paying it. Amortization of it will rise from $128 million to $150 million in 2010, triple what Nicaragua is paying to amortize its foreign debt.

Is there any good news?

Taxes? Although the government expects increased income from the application of the tax reform that went into effect this January, it won’t compensate for the fall in the other sources of income, increased domestic debt payments or the cost of transfers to the Central Bank to strengthen the international reserves. There are, however, signs of hope in the economy that allow the government to imagine it might be able to loosen up on its austere realism over the nearly two years left before the elections.

Coffee and sugar? There are good forecasts for the export of coffee and sugar because the international prices for both these traditional Nicaraguan crops are good. The limited care given to most of Nicaragua’s coffee plantations means that there’s always a pronounced biannual harvest cycle: good one year and mediocre the next. A good harvest is anticipated in 2010, and it’s coming at a time when international coffee prices are the highest they’ve been in 10 years. This should provide a stimulus to the national economy.

Coffee prices are high because coffee consumption has continued to rise despite the world crisis. Consumers in the North may not be splashing out to buy a coffee at Starbucks, but they’re still buying coffee to drink at home. And the designer coffee drinks—frappuccinos, mochaccinos, etc.—have become very popular with the younger set… including in Nicaragua. A few years ago, barely 10% of the coffee production was consumed nationally, and now it’s up to 18%. Another reason for the good prices is that Colombia, a major producer of coffee for the international market, has had climate and pest problems, which has decreased world stocks and increased prices, in contrast to previous years.

In the case of sugar, the increase in international prices isn’t because the cane is being diverted to ethanol production, as had been forecast, but because climate problems resulted in terrible harvests in India and Brazil, both of which are very important in the world sugar trade, shooting the price up. Two of Nicaragua’s cane sugar refineries—the Pellas family’s San Antonio in Chichigalpa and the Guatemalan Pantaleón group’s Monterrosa—have already installed ethanol-producing plants, but they won’t be operating in 2010 because the good international prices make it more profitable to export sugar.

Cattle? The situation isn’t as good for cattle products—meat, milk, cheese and other dairy items. The international crisis has reduced meat consumption among the middle classes in our main markets for these products—the United States, El Salvador and Mexico. This in turn has driven down world meat prices, which had reached record levels in 2008 when both Chinese and Indians increased their consumption thanks to improved incomes. There’s hope for meat exports with the opening of the Venezuelan market, and an important part of Nicaragua’s national meat production is already being exported there. The cattle crisis would be even worse if it weren’t for this new market at a time when the entire cattle sector—small, medium and large—is grappling with a generalized crisis caused by a lack of financing and the over-indebtedness of both ranchers and merchants.

Call centers and maquilas? A new call center was recently inaugurated in Managua and President Ortega himself cut the ribbon on a new textile maquila investment with Mexican capital. It’s striking to see Daniel Ortega enthusiastically inaugurating what are more pejoratively known as sweatshops. Are there expectations that the maquila industry will reactivate? Maquilas flourished in Nicaragua with the signing of CAFTA and the possibilities of exporting textiles to the US market. Their reactivation will depend on the speed and extent of the US economic reactivation, since there are still very high levels of unemployment and household indebtedness, with a drastic loss of buying power, a situation not expected to change soon. The government announced 7,000 new jobs in the maquila industry for 2010, but to put this into perspective, we need to remember that while a total of 89,000 workers were employed in such plants in Nicaragua in 1998, while only 72,000 were employed in February this year. It will take many more than 7,000 new jobs to recover the pre-crisis figures.

Remittances? Another key element in whether the economy will grow in these two years is remittances, the money sent home to their families back home by emigrant workers in other countries. Before the crisis, income from family remittances grew every year. In 2008 we were already receiving over US$800 million, equivalent to over half the value of our exports. However, this amount dropped by around 6% in 2009 and whether the figure holds steady or grows again depends on whether or not economic activity in the United States and Costa Rica recovers, since they are the two main destinations of Nicaraguan migrants. The US outlook is not very bright, with official forecasts of continued high unemployment levels and thus very limited job opportunities for our migrants. The prognosis is more favorable for Costa Rica, where a relatively more vigorous recuperation is expected for 2010.

Private investment? What fell most in 2009 weren’t remittances, but rather both national and international private investment: a whopping 25%. Can such an important fall be recovered? Moving into 2010, the government has put its hopes in electricity generation projects. The largest will be the Tumarín hydroelectric project with Brazilian capital. Also in the works are other hydroelectric and geothermic energy projects with the participation of international companies. These sizable projects will obviously increase the private investment level, but recovery is much less likely in the areas of tourism, maquilas and the agricultural sector.

The stagnation in the construction sector—which has a very dynamic effect on job creation—has to do with the loss of dynamism in the national economy and the deterioration of the investment climate. The government recently initiated a $40 million housing construction program through private bank credits. But the limits of that program are already beginning to appear. The banks have specified that applying families must have a monthly income of at least $1,000 and an indebtedness level that doesn’t exceed 40% of that income. Many people will be unable to meet one or even both of these criteria, making it very difficult to imagine how this program will reactivate the construction sector. The government program called Houses for the People—financed with Venezuelan money—is moving slowly and we haven’t been told what resources are available to it. Nor is there any massive program to improve low-income housing, allowing people to upgrade the houses they already have.

The reactivation of the tourist sector, which also energizes the national market, depends on how fast the economies of developed countries recover and all signs suggest it will be slow. There’s currently an underutilization of installed capacities in Nicaragua’s tourist industry and it’s hard to imagine any investment in new infrastructure in these next two years.

Are there any other options?

The government has two possible ways to improve this picture. If it could negotiate and reach an agreement with the Europeans, the budgetary aid would be reactivated. Rather than cut projects after the 2008 electoral fraud, the Europeans froze their budgetary aid, which is the best kind of aid a government can get, because it goes directly into the Treasury Ministry coffers for the government to distribute in line with its own budgetary priorities. Between 2005 and 2008 Nicaragua received an annual average of $70-80 million in this form, of which some $50 million were donations from the European Union and individual European countries. Recovering the money they contributed would give the government an important margin for managing its finances better. But there are no signs that the government is willing to take this path, because it presumes rectifying the rules of the electoral game, which have become overwhelmingly favorable to the FSLN due to its control of the Supreme Electoral Council apparatus and personnel.

The other solution would be to change its use of Venezuelan cooperation. According to the National Development Plan, over $300 million came into Nicaragua in 2008 through the oil supplied by Venezuela on very favorable credit terms. Adding Venezuela’s aid to all the other foreign cooperation, the Ortega government currently receives nearly US$900 million in foreign aid, which is more than the Bolaños government received.

These resources give it an exceptional opportunity to respond to the historic challenge of significantly helping to wipe out Nicaragua’s poverty. But so far the government has had other priorities: to use the Venezuelan aid to finance the investments of the Albanisa business group and the expenses of the party apparatus.

The contrast between this and the political strategy followed by ALBA’s other member governments is quite acute. Chávez in Venezuela, Morales in Bolivia and Correa in Ecuador have built solid electoral majorities by substantially increasing social spending and public investment. Will the Ortega government change its priorities and political strategies in the next two years? Or will it conclude that its quasi-absolute control of the state apparatus and a weak and fragmented opposition is enough to get it reelected?

Arturo Grigsby is the director of Nitlapán, a socioeconomic research institute of Managua’s Central American University.

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