Nicaragua
The Foxes Are Infighting: But the Hens Aren't Laughing
We cannot continue support recessive politics in the short run, claiming that we will grow in the future. The long run beguns with the short run. And political leaders must understand that.
Nitlápan-Envío team
After the attempts to create a federated Central America failed early last century, 30 years would pass before Conservatives began to consolidate the Nicaraguan nation state. During those three decades, ongoing inter oligarchic disputes left space for the Nicaraguan peasantry, recently freed from the colonial structures organized around indigenous labor, to develop economically. That development, visible in the boom of local markets and population growth, validated the popular saying, "When the foxes fight among themselves, the hens laugh."
Today's governing elites are again fighting among themselves, forgetting to govern, perhaps even losing the distinction between governing and fighting. But this time the people are sinking into a slump. The anarchy discourages investment, international support is getting cautious and the bureaucracy is becoming ever more inefficient due to the lack of civic motivation. All of this is an obstacle to both employment and social development.
Reforms v. Administrative SecrecyUnlike what happened in Mexico recently, where the seemingly successful neoliberal adjustment program went into crisis at the same time as the crisis at the heart of the political system and the rebellion in Chiapas, Nicaragua's political crisis is not even allowing the adjustment to be applied. Controlling inflation, paring back the state and making foreign debt payments are still the only altars on which the government technocracy offers its sacrifices, blessed by its international financial mentors. To meet its debt payments, the government is sacrificing even its fiscal income paid with people's hunger. To serve its anti inflationary obsession, it is promising the international financiers its continued loyalty to a monetary and fiscal policy that only deepens the recession and unemployment.
Meanwhile, assets such as farms and the decapitalized, obsolete factories keep changing hands. Many are losing money and must sell out, but others are right there to snap up the cheap properties like ruthless Monopoly players, then wait for the good times to return. In short, the concentration of capital through the privatization of state goods is chugging ahead: first the Sandinista government piñata, now the piñata of the Chamorro government.
The "grand prize" of this new piñata is the telecommunications system, TELCOR, which generates modest but growing income for the state yet will be privatized in the name of dubious arguments about the advantages of this transaction by World Bank and government officials. Watching these officials try to pressure and even blackmail legislators into approving a bill to allow TELCOR's privatization, one better understands just how serious the need to strengthen the country's institutions is. Far more openness is required in governmental decision making.
Greater balance among the branches of state power facilitates the regulations required by any market economy and the democratic guidance needed particularly by one in its formation process. In contrast, consolidating an all powerful, secretive administration leads to excessive regulations that only hobble economic activity.
The newly approved constitutional reforms are headed in the right direction regarding this balance in state organization. But their application, and even their very existence, are in question due to some unscrupulous political personalities and groups that see their own immediate interests harmed by them. Many of the solutions suggested by those at the top, either speculatively or as a project, show that they have decided not to work for Nicaragua. How long will they let their petty squabbles keep the country and its people dangling?
The Sad Saga of the ReformsOn the evening of February 23, a week after the 15 days President Chamorro had in which to promulgate the reforms to the 1987 Constitution were up, she announced to the nation that her government did not recognize the reforms as valid. The very next day, several national newspapers published the signed text of the reforms sent by National Assembly president Luis Humberto Guzmán.
With that act, the reforms went legally into effect. From that day on, the executive legislative crisis has, without letup, occupied all the energies of the political class. Experts judge this to be the most serious institutional crisis in Nicaragua's legal history.
The Assembly's publishing of the reforms and the presidency's rejection of them were preceded by long meetings between the two branches. The legislative leaders insisted on discussing only the reforms' implementation, not their content. The President's representatives seemed to want only to gain time and prevent their promulgation. Guzmán and several other legislators say that the essential reason for the executive's "inflexible attitude" is simply that the reforms prevent Minister of the Presidency Antonio Lacayo from running for President in 1996.
Even with the crisis far from resolved, the Assembly has begun drafting regulatory legislation to back up the new constitutional dispositions. It has already introduced a bill against nepotism, whose 12 articles detail the implementation of the reform that prohibits both blood relatives and in laws of an incumbent President from holding high government posts such as minister or vice minister and, of course, president or vice president. Lacayo is married to President Chamorro's youngest daughter.
The Assembly also called on the President and appropriate organizations of civil society to suggest candidates for the five new Supreme Court justices (two to fill current vacancies and three more to complete the new bench, since another reform raises the total number from nine to twelve). The National Assembly has the last word in the selection and now even has the right to present candidates. President Chamorro warned that she would not submit a list, maintaining that the Supreme Court must still decide whether or not the reforms are valid. A small problem with this plan is that the current bench has no quorum since she has never submitted her replacement candidates for the two vacancies.
Ever since the last week of January, when the Assembly approved the reforms in the obligatory second round of debate, the presidency has been on a wide ranging media campaign against them, inexplicably centered on linking them to a return to the "Sandinista past" (war, rationing and scarcity). National Assembly sources say this campaign has cost about half a million dollars. The Assembly has also engaged in its own media campaign, though a more modest one, to explain the content of some of the 65 reforms, such as abolition of the draft, the legislature's new faculty to decree taxes, the end of government nepotism, etc.
The "Cinderella" of the ReformsNicaragua's population, demoralized by war and violence, is given no example of civic responsibility by its elites. The only lesson offered is that being a state official is the way to get rich with impunity. There is such a loss of values that anyone who leaves government without getting rich is considered a fool. What can society's basic institutions do in this context? Both a lot and a little. There's no room here for legalistic optimism, but we must begin to attack the country's caudillo style political culture. The fact that the Constitution has been changed eight times so far this century is not a good sign: it should alert us to the risk of political shortsightedness into which we could fall yet again.
The reforms still leave a lot to be desired. Their greatest inadequacy is perhaps that the problem of the judiciary, the "Cinderella" of the state branches, is still not resolved. It's bad enough that economic pressure groups can get budgetary regulations changed with a phone call to the minister of finances or even higher up. But it's even more deplorable that judges are so poorly paid that almost anyone with a problem can buy them off. Is this part of the "free market" neoliberals talk about?
Some experts note that the new reforms modify the state from a social model to a more liberal one. While that is true, what some consider an "ideological retreat" is compensated for by the new equilibrium between the branches. In constitutional law, such equilibrium is a guarantee against autocracies, and the authoritarian state their power usually generates.
The existence of a Constitution that designs a more democratic, less authoritarian state does not automatically guarantee more democratically functioning social regulation. This only happens when civil society cooperates in the task. But having a more favorable constitutional framework in which to exercise this kind of social leadership is a major advance. It could begin to propitiate more open administration and economic legislation, favoring citizens' participation and making public the arguments that were considered in reaching important economic decisions.
Social State, Liberal StateThere is strong criticism of specialized bureaucracies or "technostructures" in modern industrial societies. Advocates push for less discretionary leeway in public regulations, more openness in decision making and more equitable application of the measures. But, other than the most preposterous neoliberal "thinkers" who long for the return of savage capitalism, no one questions society's need to regulate itself which should not be confused with regulations. Regulations allude to the whole set of administrative norms by which economic and social life is governed, which become more precise when the state is "social" and wants to firmly intervene in social concerns.
Generally speaking, a social state's principles such as those reflected in the 1987 Constitution center on the desire to legally guarantee equal economic and social rights to all individuals, even if this means occasionally acting against individuals themselves. In the liberal model, in contrast, the state is limited to guaranteeing individual rights before the law and does not try to intervene in economic or social activity by rigorously regulating it. A state of this kind implies a political and judicial apparatus that is effective enough to protect individual liberties and honorable enough to apply the law to all equally.
But society in any kind of state needs regulations, mechanisms to correct distortions before those distortions create upheavals in the social body. Regulations are also necessary in the economic camp, particularly when it is governed by a blind market that destroys competition, and when monopolies and pressure groups continually threaten the market. They are even more important when a society is making a transition from one form of social organization to another, and are absolutely vital when, as is Nicaragua's case today, that society is abandoning one form without knowing where it is going, in an unsure and relatively uncooperative regional and world environment.
Regulations can be made effective through different means: the civic action of citizens, local institutions, consumer and producer associations, unions, high level ad hoc or permanent national committees, and of course the branches of the state, whether of a social or a liberal tendency. Unfortunately, the more unstable and therefore more in need of regulations a society is, the less regulatory capacity it has. The atrophy of civic action, the absence of local associations, the weakness of municipalities and even the imbalances between the branches of the state make the social regulatory task very difficult.
A History of WeaknessesThis state of things obviously does not have a genetic or racial origin, as ultra conservative elites usually believe and blithely insist. Nicaragua's marginal colonialism left the newly independent country in the hands of provincial elites with no social vision, little education and scarce capital. They bound the country up in their continual internal disputes to consolidate a hegemonic political class over a people they considered "backward" the peasants of the 19th century inherited the burden of contempt that indigenous people had borne during the colonial period. Nicaragua's late entry into the world market, without human capital and with weak institutions, condemned it to import both its consumption model and most of the goods it needed to develop.
The great powers took advantage of this weakness, crushing all internal rebellion against it and thus opening the door to the consolidation of authoritarian political systems. Society was blocked from above by these political systems and from below by economic underdevelopment.
In the past decade, the social authoritarian state made some advances in the educational cultural camp, which produced changes in mentalities (artistic experience was promoted and freed up, women's rights were demanded and people's spontaneous irreverence was unleashed). But these achievements went hand in hand with press censorship and ideological militarization.
There were also achievements in the satisfaction of basic rights such as access to health and education (the massification of these services, the literacy crusade, vaccination campaigns, etc.) But these services suffered a loss of quality as the failures of the new economic system accumulated.
The Will to ReformObviously, not everything is resolved with the reforms. The problem of human capital will continue to make the search for solutions difficult. But the requirement of civic spirit and honor among government officials the main drama of the public institutions will be greatly boosted by more mutual control by the branches of the state.
Nicaragua needs these changes if it is to move toward a prosperous market economy. Otherwise it will go from an authoritarian social state to an authoritarian liberal one. And even with a reformed Constitution, an uncontrolled market will destroy what remains of civil spirit and fraternity in the country. If this happens, comparisons with the "successful" Chilean model to which the neoliberal magi turn ever more frequently will not be very useful.
The most transcendental changes to the Constitution are not found in the reforms themselves, but will be seen in the political will to put them in practice. When the paralysis that the drafting and approval of the reforms and then the debate about whether or not they are in effect is evaluated, it becomes obvious that Nicaragua does not have the luxury of spending years in this sort of process.
In this respect, the proposal that only a Constituent Assembly be elected in 1996, and that a "transition triumvirate" govern for the two year period in which it would draft a whole new Constitution, only postpones the functioning of a rule of law for three more years. In the meantime the "rule of fact" would remain in effect, and would tend toward greater authoritarianism. The game being played with this proposal is clear: stay in power in violation of the new Constitution, using the faculty to create a state of exception to benefit a tiny minority to the detriment of almost the entire nation.
It is true that the restrictions on who can run for high office are not democratic; Minister of the Presidency Antonio Lacayo should have the right to run for president in 1996, even if he is married to the incumbent's daughter. Not allowing the reelection of an incumbent President is more justifiable. In Nicaragua, however, nepotistic succession in power and the caudillo tradition in general are historic evils that most people want extirpated. Like societies, laws evolve, sometimes even against the interests of those who govern.
Eighty three Percent PovertyWhile our technocrats were busy cooking up their secret recipe with ingredients paid for by the people and foreign aid, a recent Nitlapán study of urban households around the country showed that 37% of those households are living at a level of indigence; they do not even have access to basic foodstuffs. Another 30% have per capita incomes below US$335 per year. Using the criteria of living standard indicators, 83% of the households are in poverty. According to a 1993 living standard survey by the Nicaraguan Institute of Statistics and Census (INEC), the results of which were so dramatic that the government held off circulating it, almost half of the urban households that have access to electricity use illegal connections because they cannot pay their light bills.
These levels of poverty, unemployment and unsatisfied basic needs are no secret. The central problem is the attitude toward them by part of society and even of the government itself. Another survey done in different countries of the region in 1994 reveals that Nicaraguans generally expect everything from the state, but consider its current actions to be very poor. This differs from both Guatemalans, who are more resigned and neither appreciate their state nor expect much from it, and Costa Ricans, who also expect little from theirs but assess its actions as positive. If Nicaraguans expect a lot from the state, why don't they focus their energies on demanding better, not more, from it?
The forms of social control over the quality of state services need to be multiplied, abandoning the comfortable excuse of "our underdevelopment." By nature, states are arrogant and unwilling to be accountable. When the electoral sanction is not very tangible, and occasionally postponable, when unscrupulous and inefficient ministers are promoted to ambassadors or other such positions, or when authorities believe too strongly in their capacity to convince citizens that the chosen road is the only possible one because they think the people are ignorant, we can't expect debates or democratic decisions from the state, or expect it to make efforts to improve itself. But there is a huge difference between this and pretending, as the neoliberals do, that the solution lies in making the labor market more "flexible," eliminating taxes and tariff subsidies, not setting minimum wages and dropping duty barriers, as if all that is required for everything to get better is for states to stop intervening altogether.
Neoliberal ContradictionsNeoliberals usually add that, for this whole package of "non measures" to function in poor countries, the wealthy ones should open their borders not only to capital and merchandise, but also to the labor force. Since in these economists' elemental and ideally perfect mathematical models "free mobility of products and factors leads to equalizing remunerations between countries," do they believe that the world economic system will somehow evolve such that it erases the natural differences of productivity and human capital that give each country its own physiognomy?
By preaching this regressive and illusory utopia, they are only playing the game of the huge corporations of the North, the great majority of whose commercial exchanges are still carried out among themselves and the countries of the North. To counteract their shrinking profit rate, these corporations need to eliminate the high wages born of the social pact forged in those countries over several generations. And since governments in the North are still somewhat reluctant to turn their backs on their electorates after taking office (except for Thatcher, who counted on British society's proverbial stability), transnationals must rely mainly on the miserably paid labor competition in the South to erode wages in the North and usher in a new cycle of capitalist expansion.
Primary Education: The BasisNicaragua's school year opened on February 27 in the 5,914 public primary and secondary schools with a teachers' strike called jointly by the National Teachers' Confederation of Nicaragua and the Sandinista National Association of Nicaraguan Educators (ANDEN). The teachers are demanding a just revaluation of their living standard and social status, labor stability, recognition of their unions and an 80% increase in their salaries which range from 320 to 450 córdobas ($45 65) a month.
At the end the first week, union sources claimed that 70 80% of the system's 25,000 teachers were participating, while Minister of Education Humberto Belli declared the strike "illegal" since only 1,800 teachers in 5% of the schools had joined. He sent letters of dismissal to dozens of strikers, mainly strike leaders, and launched a costly campaign against the strike in the media, linking it to the "Sandinista past." ANDEN leader Mario Quintana admitted the strike had gotten off to a slow start, and blamed organizational problems as well as the fact that Belli's recent move to make schools administratively autonomous split off the teachers from schools in wealthier neighborhoods of Managua, whose salaries are supplemented by student fees.
Strike participation grew over the days, mainly as teachers in other regions of the country joined. Participation also grew in Managua, however, motivated in part by Belli's callous attitude. In last year's battle by healthworkers for wage increases, the health minister at least publicly sympathized with their cause as she explained that there was no money in her budget. The same explanation by the education minister is curt and unfeeling. Cutbacks in school spending have swelled the ranks of unemployed teachers, allowing him to hire strikebreakers and fire strikers with abandon.
In such a profoundly unequal society as Nicaragua's, it is easier to find 15 parents that can pay $5,000 for one teacher's annual salary in a private school than to get the parents of all public school students to pay 120 córdobas a year and thus double the salaries of all teachers. The result is a tragic split between "free" public schools, with poorly trained and low paid teachers, and costly private schools with all the advantages that brings. The divergence is the same in the universities, although the relative possibility of getting students to pay, as well as scholarships, other subsidies and economies of scale, all allow small private universities with tuition fees of up to $1,500 a month more than three times annual per capita income to compete with each other.
As in other areas, the conflict in social services health, education and social assistance is not and should not be posed as being between private and public per se. The important thing is the transparency and goals of the mechanism, not where the funds come from. For example, they could be privatized to charitable organizations, but the problem is that these organizations have lost more capacity to collect tithes than the states have to collect taxes. Primary education funds could also be public and their administration decentralized, municipal or private. But social services cannot be left exclusively in the hands of profit motivated private initiative.
The current conflict in education will not be solved by breaking the strike, because it is not simply an issue of teachers' demands; it has to do with the pyramid of future development. As all historical experiences show, primary education is key to the development of technical and higher education, and education as a whole is key to society's development.
If Nicaragua's elites could stop fighting among themselves for a minute, they might find that the international community would welcome original and consensual action in this area. Obviously the problem of human capital, especially the issue of education, can only be resolved over time, but time begins now; we cannot continue recessive policies today pretending we will grow tomorrow. A policy of growth and a social policy are compatible.
Privatization of TELCORThe situation is somewhat different in the case of services that are profitable by nature, such as telecommunications. In principle, the market is the indicator of the quality of such services, but this presupposes competition, which is not the case in Nicaragua, where telecommunications is a monopoly. In any case, its exploitation by the state is profitable: $100 million in earnings in seven years.
The self justifying, totalizing discourse of structural adjustment's two mules (see the end of the box on inflation) also appears strongly in the TELCOR case; it is a bit more abstract, but as deceptive as always. It starts from what is true: Nicaragua needs to increase its telephone lines and its telecommunication services in general, which implies costly investments for several years. It is also true that, since telecommunications services are fundamental to development, the future growth of this service will accompany development. They almost say it would produce it.
But behind these official arguments lurks the dubious "logic" of the two mules. If the government does the investing, it would be inflationary because it would have to be done with Central Bank financing. If it is done only by reinvesting TELCOR's profits, according to the "privatizers," the process would be too slow for the "needs" of future development. Enter the second mule to help the first one: the investment would be done more efficiently if a private company did it. Once again administration theory is being confused with that of property rights; once again our privatizers are trying to trick us. Will the company that invests in TELCOR bring some know how that the national company could not acquire with specialized counseling if needed? Are not TELCOR's workers the most specialized and best paid in the country? In fact, did the privatizing propaganda not say that there would be no personnel lay offs?
But then the first mule comes back in to help the second one, arguing that the company will bring capital the government cannot afford to invest. But what profitability will that investment have that would not exist if the capital were national? Nicaragua is a country in which the majority of the population cannot pay for even more basic services than communications, like electricity, water, education and health; many can't even pay for food. How, then, are they going to pay for a service as expensive as a telephone?
Phone rates recently went up precisely to prepare for privatization. A private company will need high rates to operate profitably in a country with a high supplementary investment per new user, which this brings us to the crux of the problem. If the "need" for telecommunications by does not translate into solvent economic demand, how can a private company be expected to do what the state wouldn't do? However explicit the privatization contract may be regarding investment plans required until the year 2000 or 2010, what private company would subject itself to this investment rhythm if demand doesn't warrant it?
In any case, users will pay dearly for the minimum profitability of the new investors. We cannot expect a more favorable price policy for users with a private monopoly than with a public one. Our mule team thus doesn't get very far, even when driven by such an illustrious teamster as the World Bank representative.
An IMF World Bank mission is scheduled to arrive in Nicaragua in mid March to evaluate the government's compliance with the Enhanced Structural Adjustment Facility (ESAF) accord signed in April 1994. One of the most conflictive issues of the visit is the delay in the agreed to privatization of TELCOR, due largely to the protracted tensions between the executive and legislative branches. Could it simply be that the ESAF agreement, which conditions the continued arrival of ESAF funds on privatizing TELCOR, is the only good reason to do it?
Legislators should be asking why the World Bank isn't lending the Nicaraguan government money to develop the communications sector if it's such a profitable investment and expanding it is so necessary. Certainly the World Bank has provided us many other loans that are impossible to repay because they don't promote either development or exports. Fortunately, several heads think better than one, which gives us reason to hope that, with time and the preparation that this responsibility requires, the nation's legislators will decide what is best for the country's future, not for today's politicians.
The executive argument to the National Assembly is that some of the funds from privatizing TELCOR will go to indemnify those unjustly confiscated. But if the executive had promised to dry up Lake Managua and turn it into pasture to compensate these confiscated US "citizens," would a sensible parliament be obliged to back this commitment?
The constitutional reforms give the National Assembly the faculty to debate economic issues and participate in the economic agreements the country makes with the international agencies, as well as in international treaties or other agreements, a faculty up to now monopolized by the executive. The constitutional changes will lead the executive branch to make its decision making criteria more widely known and create some consensus around its economic policy measures. Modern nations need such openness between technocrats, politicians and the people if they are to operate under the rule of law. It is to be hoped that the executive will never again be able to damage the country's sovereignty with a simple signature.
The Past Six Months at a GlanceIn trying to come up with possible scenarios from here to the 1996 elections, we first must ask ourselves how the scenarios envío outlined in mid 1994 evolved. In few words, the economy did not grow and poverty did not diminish, but economic indicators did improve somewhat. They would have improved even more had the energy crisis not emerged.
The country's lands and means of production continue changing hands, and concentrating in ever fewer hands. Business was not good, but capital accumulation followed its course, waiting for better times. Government cronies even those who now have their own private banks continued using easy credit from the state banking system to consolidate their fortunes. The financial aid from ESAF kept the ghost of monetary destabilization at bay, and private investment even grew, according to analysts. The upswing in coffee prices gave the economy the dose of oxygen it needed, but it only made it to a few lungs. Those of the small farmers and small manufacturers are still gasping for air. These vital sectors have not yet begun to recapitalize after more than a decade of selling off bits of their patrimony.
The FSLN, busy with its own contradictions, did not try to rain on the parade of the executive branch and Lacayo in particular. As a result, the government's fragile scenario went well in the sense that it never lost control nor had to be repressive to hang on to it. But its image is severely tarnished with most of the population, whose ongoing frustration cannot be assuaged by the improvement of some economic indicators.
Looking into the Near FutureWith the split in the FSLN, Sergio Ramírez's Sandinista Renovation Movement (MRS) retained control of the legislative bench, while the official party's strength is in the grassroots base and the party apparatus. The split opened up the possibility of engaging on the political battlefield riding the horse of the reforms.
There are now essentially four political groupings in Nicaragua, tactically allied into two blocs. One bloc is made up of the Sandinistas of the FSLN and the Lacayo crowd. His retinue is not in any political party, but it has the strength of a power grouping, dominion over the propaganda apparatus and the cohesive force that economic dependence creates. According to a recent Nitlapán survey, 18% of Nicaraguans live off dollar remittances sent by relatives in the United States; how many live off the "aid" of the Ministry of the Presidency?
The rather unfriendly discourse between the two groups in this bloc is not surprising. The Sandinistas of the FSLN are positioning themselves as "grassroots" in relation to those of the MRS and the executive knows that a good part of the electorate that voted for UNO welcomed its anti Sandinista rhetoric. Each side is thus now trying to wipe out the memory of a Sandinista Chamorro "co government." It remains to be seen, however, whether the people's memory is as short as that of politicians.
The other tactical bloc is made up of Liberals and Conservatives some of them in the traditional middle class parties and others in those of the oligarchy as well as the Christian Democratic Union (UDC) and the MRS. Sergio Ramírez declared recently that Nicaragua requires a "national unity government" in 1996, and that the political alliance that made the reforms possible (Luis Guzmán's UDC, the MRS and the remnants of the UNO coalition) will serve as an "antecedent" for the creation of a virtual electoral alliance. The MRS has announced that it will formally constitute itself as a party on May 18, the centennial of Augusto César Sandino's birth.
It is still too early to speculate on how these two blocs will evolve. In the process of resolving the conflict around the reforms, the stakes are the country's short term political, social and economic stability. Out of the resolution of the political legal standoff between the two blocs a new scenario will emerge that could last until the elections if there are any.
The current impasse is born out of each bloc's inability to make its position reign through legal means. But a negotiated political solution is probably not only illegal but illegitimate, given the nature of the issue, and using force does not seem possible. The threat of decomposition is great since the political class has stopped governing to play its legal political games. At the very least, this abdication threatens to create more hunger among the people.
The army, which is usually the "savior of the homeland" in Latin America, will not act this time. Its current professionalization process and its need to win international approval do not permit it. Military institutions have their own logic, which does not always coincide with that of the nation or of politicians. They take to the streets to save the political class, even from itself, only when doing so allows them to come out morally or economically ahead. Nicaragua's army knows that it has nothing to win economically today, and even less to win morally since the memory of the war is still so fresh.
A Fujimori style self coup is not possible either, because the executive lacks the popularity the Peruvian President had at that moment and the Nicaraguan legislature is not as weak or discredited as the Peruvian parliament was.
The ideal thing for the country and the wisest thing for the presidency would be for it to recognize that it has lost the legal battle and accept that its legitimacy does not give it the political force needed to victoriously take on the constitutional reforms. In holding back from acknowledging its defeat, the country is the big loser.
What can We learn from the Mexico "example?"
What just happened in Mexico concerns us for several reasons. First, Mexico was touted as a successful application of structural adjustment polices for over a decade. During Salinas' term in office, particularly with Mexico's entry into the North American Free Trade Agreement (NAFTA), the country was held up as a shining example of how a third world country can join the ranks of the first world.
Mexico's crisis also concerns us because NAFTA is just the first round of a game in which the United States aims to turn the whole American continent into "its" economic bloc in its rivalry with Europe and East Asia.
Finally, it concerns us because, for better or for worse, its model can influence those in Nicaragua who decide policy. It is not that the "tequila effect" could have repercussions in our financial market, as in Argentina, Brazil, Chile or Peru, since we don't have a financial market. It is rather that neighboring economies could react to such a happening in a way that would make Central American integration even harder than it already is. Our economies vitally need to form a sub bloc, not join the continental market one by one.
Behind Mexico's Financial Fragility
The Mexican model has failed. The government decided to devalue the peso because it was faced with the obligation to service the public debt and the Treasury bonds at a cost of US$26 billion in the first half of 1995, and had an $18 billion trade deficit, while beginning the year with barely $5 billion in foreign exchange reserves. The private sector also had a $300 million foreign debt, which led Mexican business to strongly pressure the dollar market. The devaluation revealed the fiction of a strong and stable currency, freely convertible with the dollar.
No government can prevent speculation against its currency when large capitalists are looking for safer financial markets because they feel things beginning to unravel. The conflict in Chiapas and the government's inability to negotiate a political solution to it, as well as the crisis within the party state expressed even with assassinations led these large capitalists to try to protect their own flank, thus precipitating the fall of the system.
Behind the financial fragility expressed by the Mexican crisis is a tremendous economic fragility. A decade of structural adjustment policies may have multiplied the number of Mexican multimillionaires by ten, but the successive internal recessions supposedly aimed at reducing the external deficits, as adjustment rhetoric always proclaims put national businesses in an unsustainable financial situation. Since these businesses could not survive the fall of their shares on the stock market, the number of them going bankrupt increased. In the case of the state enterprises, many more went on the auction block.
The crisis provoked greater transnationalization of Mexican production, since few Mexican capitalists are wealthy enough
to do what Carlos Slim did. Slim, Mexico's wealthiest businessman, spent millions of his estimated US$8.5 billion personal fortune buying up shares in Mexico's stock market before the January 11 crisis.
Another element is salary erosion, both a product of the financial recession and a factor that conspires to keep companies teetering on the edge of bankruptcy. Thanks to PRI state union arrangements, the purchasing power of Mexican wages has dropped 60% since 1982. One fifth of all Mexicans now lives in extreme poverty.
The result of all these recessive monetarist policies could be expected. The desire to control inflation supposedly because it is a tax charged against the people, but really because it hobbles the freedom of international financial speculation contracts investment and employment. This encourages companies to keep salaries low, to compensate for their loss of profits due to slow business. Over time, both industrial capital and labor end up paying the price, while finance ministers take unconcerned pride in the glorious results of "low inflation" and a "reduced fiscal deficit."
Low inflation and fiscal savings are not bad in themselves. The problem comes when they are the result of illusory monetary policies, not of a healthy, balanced and growing economy in which labor is well paid and capital is invested without fear. What Mexico shows is that a country's economy cannot be put on a road like this, paved with recessive credit and monetary policies.
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A LESSON ON INFLATION: WHAT DIRTIES THE WATER?
There is again talk of inflation and a big devaluation. Antonio Lacayo pledged his word and the government's in March 1991 that no more "dirty water" would be pumped into the monetary system. He's lucky that the National Assembly never held him to that promise. He's luckier yet that the legislature cannot force the government to resign because it has lost the vote of confidence for defaulting on a promise, as in some European countries.
In understanding why Lacayo's luck held, the first thing is to figure out what he meant by "dirty water." If he was referring to "a monetary supply that does not provoke inflation," he was on shaky ground. An economy such as Nicaragua's has many sources of inflation, some of which may have little do with the monetary supply and its variations. Furthermore, in an economy endowed with an independent financial system, the money supply particularly credits partly escapes the central authorities who are busy establishing the credit supply and often even rediscounting it in other words lending it to the commercial banks to maintain their short term balances.
When Is Credit Inflationary?
All credit that does not translate into a supply of goods or services whose sale allows that loan to be repaid is inflationary over time. Production loans not used to produce, not repaid and later even pardoned by the bank that issued them thus generate inflation. The easy credit that state banks have been granting in the 1990s to big producers who often have overdue debts already even including government officials are as inflationary as the easy credit these same banks provided to the state enterprises and big "patriotic" producers in the 1980s. It matters not a whit whether either the bank or the loan recipient is state or private. Legal property relations have nothing to do with the issue.
At the beginning of the 1980s, it was not inflationary because of rationing and the controls on distribution and many prices. But over time, those controls became increasingly inefficient and inflation took root. Going against elementary economic laws in the name of the political passions of a state that tried to control everything, interest rates did not keep up with inflation and slowly became negative in real terms that is, the capital returned was worth less than what was received.
Today's interest rates are not lagging, but the fact that many "producers" who receive credit use it to buy land instead of to make the land they already have produce is "dirty water" in Lacayo's sense of the metaphor. It produces less inflation only because the phenomenon is restricted to a select group of elite friends and other "deflationary" forces in the economy compensate for it. A nation's economy is like a complex organism; if its feet are in scalding water that doesn't mean its head will get burned.
But prices are easy to raise and almost impossible to lower, since any business that wants to lower them loses out to competitors unless it can capture part of their market, and doing that assumes that all communities have the same purchasing power and preferences. Since neither free competition among businesses nor equal income distribution exist in Nicaragua, prices will continually go up bit by bit, and end up flowing into the same channel of price hikes that constitute inflation.
Why Print Money?
Often in dependent countries with open markets like Nicaragua, economists convince the technocrats and politicians that the main form of "dirty water" is what is officially called "inorganic issuance," the printing of unbacked currency. But that is not necessarily the case.
Why does the state print more money? Because the economy requires it: to make transactions for already produced goods, to advance the value of goods to be produced, or simply to keep some reserve purchasing power, a given amount of savings, in one's wallet or bank. Local currency is also used to buy dollars when there is little confidence in the national banking system. Obviously the demand for money is always greater than the supply.
A typical error is to speak of households and companies in the same breath, as if they all had the same possibilities. A
household that brings in 5,000 córdobas a year spends it on day to day expenses. It cannot save even enough to buy some dollars for a relative in the United States to send needed medicine that is not available in the country. A household or company that has 50,000 córdobas a year can perhaps save 10% and prefers to do it in dollars. And the company that earns 500,000 or 5 million can only spend a small part in the country so converts the rest into dollars that can earn dividends or interest, preferably in other countries where many such transactions escape paying taxes.
To produce goods or services, each company also needs a certain amount of dollars, depending on the nature of its activity. Growing soy beans with tractors and chemical fertilizers in Chinandega requires more dollars than growing beans with ox drawn plows in the hilly areas of Matagalpa. All these considerations help us understand the complex relations among the multiple activities for which economic agents need money and why they demand dollars.
Those who do not know better, or who are trying to enslave the eco nomies of defenseless countries like Nicaragua, warn that "we are giving you this many dollars through the Central Bank, and if you issue more córdobas than are backed by them, it will be 'inorganic,' which is forbidden, since it sparks inflation." Not only is this profane, it is wrong on three counts. First, the dollar supply does not come only from the Central Bank; the private sector contributes them as well as demands them. Second, córdobas are not printed capriciously, but in response to the economic demand. Third, this demand is only inflationary when the credit required is not turned into production; it does not depend on the dollar backing in the Central Bank.
One Size Fits All
This absurd and simplistic monetary policy is like a shoe factory that makes all its footwear in the same standard size, then tells those whose foot is shaped differently to figure out how to make the size comfortable. But national monetary authorities in poor countries need a simple norm that is easy to apply, so they can believe they are deciding on the amount of money even though foreign reserves can only increase very little: foreign debt payments are sucking them dry, their exports are fetching ever lower international prices, and their development aid is shrinking. Such a simplistic monetarist recipe also has a hidden goal, which may seem perverted, but is genuine: it is guaranteed to promote recession and contract the domestic economy so the available funds can be used to pay more on the foreign debt and shrink the trade deficit. Proof of this is that when "by luck" the price of some export product rises, monetary authorities go on alert, contradicting everything they have argued before.
In Nicaragua, for example, a supplementary $100 million will enter this year due to increased coffee prices. If the government "organically" issues córdobas based on this amount, these authorities warn, it will double the monetary mass, thus provoking more inflation. One might be tempted to ask how that could happen if the issuance is, as their recipe says, "supported" by dollars. Is that "support" just a trick and a pretext?
Those who prescribe recessive policies in poor countries have, together with their crude monetary instruments, a surer method of keeping national demand very low. Since they are bothered by the idea of constraining the private sector for ideological reasons as powerful as the ones that bother socialists about supporting it they do it by an indirect, falsely neutral, but effective monetarist method: directed credit. While they try not to use it on the private sector, they apply it with glee against the only economic agent their creed claims it can legitimately be used: the government itself.
The technical experts on the negotiating missions of the international lending agencies require that the Central Banks of poor countries like Nicaragua not finance their governments' deficits. But there is no obligatory cause and effect relationship between inflation and financing the public deficit with Central Bank resources.
As explained above, financing is inflationary when it does not trigger the supply of goods and services, whether the receiving agent is public or private. In the case of the state, it doesn't matter whether its services are actually sold or not, because they are a necessary condition for increasing the private supply of saleable goods and services. (At times, admittedly, these services could even be an impediment, but bureaucratic efficiency depends on the efficacy of the social mechanisms that evaluate and control its activity, not on its financing source.) The relationship between financing the public deficit and inflation thus depends on how efficient public spending is at sparking the economy as a whole.
Now, when the Central Bank pays the government's debt with its dollars as happened in Nicaragua throughout 1994 and later
reimburses itself from foreign loans or donations entering the country, its de facto credit to the government has no inflationary effect. If not enough foreign resources come in to compensate for the payments made as also happened in Nicaragua in 1994 the government has an outstanding debt with the Bank, but that doesn't mean inflation either. Since the Central Bank directly handles the public treasury accounts, it is easy to reduce a credit to cancel a debit in the same books.
Given the importance of the amount at issue (85 million córdobas), we must ask how the government, which had more expenses than forecast during 1994 (a higher energy bill to compensate for failures in the hydraulic generator, few takers for the "labor mobility" plan to reduce the number of state employees), could still have 85 million córdobas, 3.5% of its entire 1994 income, in its account in January 1995. Once the secretive way authorities manage the public treasury became evident, legislators should have demanded an explanation duly backed with evidence.
The structural adjustment cart is pulled by two mules: one is inflationary control and the other reduction of the state. The state must be shrunk because state spending is supposedly inflationary. And inflation must be reduced because inflationary policies tend to fatten the state. The problem comes when the two mules are harnessed to a cart whose cargo is secret. Each mule justifies the other, but the cart doesn't justify either of them, and the worst thing is when we aren't even sure there is a cart.
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