What can and should a new government do about the economy?

Reflections on some of the candidates’ electoral promises and on the economic changes that a new government— or the current governing party, if reelected— could implement to improve our country.

José Luis Medal

Constitutionalist Liberal Party (PLC) candidate Arnoldo Alemán is going around promising to create a million jobs in five years if elected. Edmundo Jarquín, Fabio Gadea’s vice presidential running mate on the Independent Liberal Party-Nicaraguan Unity for Hope (PLI-UNE) ticket, has promised a 7% growth rate if they win. And President Ortega, de facto reelection seeker, announced on July 19 that his government program will be to “keep doing the same thing,” although some of his spokespeople have promised that should he win a genuine majority, they will “change the system.”

I want to briefly analyze these messages, taking into account Nicaragua’s economic context along with the factors and variables the government controls and doesn’t control. I’ll thus focus on what the State’s role can and should be in a country like Nicaragua.

What were the past

governments’ economic policies? Before looking at what a government can and should do in economic policy, a quick overview of what previous governments have done is in order.

The Somoza government: In the period of the Somoza family government, the fifties through the seventies, things weren’t only left to the laws of the market, as some think. The State intervened quite strongly, with the National Development Bank and National Development Institute playing a very important role in the economy. There was more state intervention in the economy then than there is today. Also very influential was what was then called the Economic Commission for Latin America (ECLA), which in those years was promoting state-sponsored development in the framework of the Central American Common Market. There was free public education and health care, although it didn’t cover the whole country, as it did during the Sandinista government in the eighties. We shouldn’t think, as many young people have been led to believe, that the Sandinista National Liberation Front (FSLN) invented free education and health care. Free public school has existed since the time of Zelaya, at the end of the 19th century. And in fact, the public schools during the Somoza period were of better quality than the ones we have today. Social Security also functioned better than it does today, and I’m saying this as someone who was a strong opponent of Somocismo.

All economists agree that during the Somoza period the macro economy was managed very well. And all indices prove that there was notable economic growth during that period. The Somozas’ development strategy was based on the agro-export model, combined with some degree of the import-substitution industrialization promoted by ECLA. The highest growth rates Nicaragua has ever had came in the fifties, sixties and seventies. In the sixties, Nicaragua’s Gross Domestic Product grew more than 7%, one of Latin America’s highest rates.

The question we have to ask ourselves is whether that growth was thanks to the Somozas. And the answer is no. Our economy grew for basically two reasons. First because the world economy was quickly reactivating after the Second World War, which provoked a boom in exports, and second because our lands were given over to cattle raising and the production of cotton, a crop that flourished in those years. All that contributed to the growth.

But while there was economic growth, there was no sustainable development, which is a whole other thing. Sustainable development includes social, environmental and institutional sustainability. The cotton deteriorated the environment in the northwest, where it was concentrated, and after over four decades of government, the Somoza family’s determination to perpetuate itself in power, to be reelected, generated huge conflicts and led the country into an insurrectionary war. The bad quality of the democratic institutions and absence of democratic governance acted as a drag on the economic growth that had been achieved. The lesson of the Somoza period is simple: growth isn’t enough; sustainable development requires solid democratic institutionality.

In the revolutionary times: With the revolution, the State’s role expanded and was strengthened. And although the FSLN’s ideal was the Cuban model, the correlation of forces didn’t allow it to implement a centrally planned economy, in which the government owns everything. For tactical reasons they decided on a mixed economy model. They nationalized the banking system and foreign trade, established controls on domestic commerce, implemented an agrarian reform, established price and foreign exchange controls and confiscated properties…

Nicaragua’s economy sank in the eighties, only partly because of the war. These policies and the erroneous macroeconomic policy also had a strong influence. The eighties were called “the lost decade” all over Latin America. But in Nicaragua it wasn’t just a decade in which we didn’t grow; we sank. Studies show that Nicaragua’s productivity, which grew over the fifties, sixties and seventies, went under in the eighties and has never recovered. That means that today we have the productivity levels we had fifty years ago. The main lesson of the eighties, then, is what a government shouldn’t do. It shouldn’t put the economy in state hands, it shouldn’t establish price and exchange controls and it shouldn’t nationalize banking or foreign trade or confiscate properties.

In the post-revolutionary years: With the end of the revolution, the entire economic policy was reversed. I hold that between 1990 and now, throughout the four governments, the economic policy has been basically the same. I also argue that it will fundamentally go right on being the same, no matter which government is elected this year. Nicaragua has signed agreements with the international Monetary Fund since 1990 and a fundamental part of those agreements is that the government pledges not to print money that’s not backed, as it did during the revolution. Do you remember those 5 million córdoba bills that circulated in the eighties? This control helps contain inflation, which always hurts the poorest the most. That’s an IMF policy. Is it bad? No, it’s good. It’s the same policy applied during the Somoza times and since the government of Violeta Chamorro.

Another fundamental element in the agreements with the IMF is to avoid increasing the fiscal deficit. That’s another IMF policy, and it’s not bad either. If you disagree, look at what’s happening to various European countries that didn’t respect fiscal balances. The current government is continuing these policies, which are called neoliberal, sprinkling a little populist salsa on top to give them a better flavor and make them go down easier.

Many neoliberal policies are positive. It’s positive to have free prices, free trade, lower protective import duties, an opening to foreign trade, financial liberalization, exchange rate freedom, promotion of national and foreign investment and respect for private property. All these policies have been applied by all governments since 1990. Although the current government talks about “the 16 years of neoliberal governments,” we’ve actually had 20 years of neoliberal governments, including this one. And it’s not bad. It’s good.

Despite these policies, the average GDP growth rate during these 20 years has been mediocre and high poverty levels have prevailed. So what’s the part we have to change? What must a future government do and not do?

What variables can and
must a government change?

To reflect adequately on what a government can do, the first thing to be clear about is which variables or factors it controls and therefore what it can and must change.

It must be legitimate. Obviously we need to take into account whether a government is legitimate or not. Nicaragua shouldn’t repeat the error made in the Somoza period when one family wanted to perpetuate itself in power: the government lost legitimacy, which generated major political conflict. The Constitution is clear on this: it prohibits reelection and no one has the faculty—as some supposed justices have assumed they have—to declare the Constitution unconstitutional or any of its articles inapplicable, which amounts to the same. It should go without saying, but a future government’s first condition is its legitimacy.

It must redirect public spending to the poor. Here’s a variable the government does control: its public spending strategy. How that spending is distributed, to whom it is allocated and what is prioritized are all variables the government controls. A new government must reorient public spending toward the poorest. For example, it should change the budget structure assigned to public education. It’s unfair that the government in a country such as Nicaragua, with so much underemployment, is giving 6% of the national budget to the universities. This proportion is absurd if we compare it to the totally insufficient budget that goes to primary education and technical and vocational education: barely $100 per student per year. Primary and technical education has to be prioritized in Nicaragua today. It isn’t happening because public universities are a very powerful pressure group. Unlike university students, primary students can’t break the law protesting, firing off homemade mortars to demand a bigger budget.

It cannot be corrupt or demagogic. There’s no room for a government that fosters corruption or makes baseless promises. Mr. Alemán shouldn’t be a presidential candidate given the levels of corruption his government promoted, which were the highest in Nicaragua’s history.

The promise to create massive employment

Okay, now let’s take a look at those campaign promises. Alemán is offering to create a million jobs. My brief comments on this baseless promise are based on data from the formal sector of Nicaragua’s labor market, which only includes workers affiliated to Social Security. When Mr. Alemán took office in 1997 there were 227,600 workers in the Nicaraguan Social Security system and when he left office five years later there were 306,000. That means an annual average of 15,800 jobs created in the formal labor sector during his term. And he didn’t even create them; the inertial growth of the economy did. Now he’s saying he’ll create 200,000 jobs a year and that they’ll be quality jobs, which presumably means they’ll be in the formal sector. Pure demagogy. He says these jobs will come from five projects he’ll initiate, including irrigation, reforestation… But where are the feasibility studies for these projects? They simply don’t exist.

When one speaks of employment-generating projects, one has to keep in mind that any government’s public investment program always starts with projects that are already in the pipeline. In its first three years, the public investment projects any new government executes are those left over from the previous government. Until 2010 this government was executing the projects the Bolaños government had left designed and paid for. Some projects in the hands of the current government are even from Somoza times: Monkey Point and Tumarín, for example. This means that during its first three years, the next government will simply be implementing the projects left over at the end of this year. It’s simple demagogy to make believe that it’s possible to superimpose an enormous portfolio of new projects over those already in the pipeline, not only because there are signed commitments to those old projects but also because any new ones have to be negotiated with those who will finance them.

Let’s also look at Nicaragua’s employment context. The national labor force is currently around 2.5 million people, but only 566,000 workers are affiliated to Social Security. This means that in recent years the jobs created have been temporary ones in the informal sector without contracts. Nicaragua’s main problem isn’t unemployment. The Central Bank figure for open unemployment is 7.5%, less than in the United States, where it’s over 9% today. Nicaragua’s real problem is underemployment, those low-quality jobs one sees all around: people selling little bags of cold water, or lottery tickets on the street, or starting a tiny little business that’s here today, gone tomorrow…. That kind of bad-quality work that’s never full time and pays poorly abounds in our country.

How are quality jobs created? Any economist will tell you that you have to work both on the labor supply, improving the skills of the labor force, and on the demand for labor. Any economist also knows that to figure out the results of these efforts you have to learn how much a country is investing in technical and vocational education. In Nicaragua this investment is minimal. Many high school students are graduating without knowing anything, while the universities are cranking out tons of lawyers who don’t know what to do with themselves and tons of business administrators who are discovering that there are no businesses to administer. If no quality jobs have been created in recent years in Nicaragua it’s predictable that those created in coming years won’t be either because the young people entering the labor market don’t have enough preparation; there’s not enough investment in human capital.

The promise of an annual
7% economic growth rate

Let’s look at another electoral promise, this one by the PLI-UNE vice presidential candidate, economist Edmundo Jarquín. He’s promising 7% annual economic growth. Can Nicaragua grow 7% a year? Potentially, yes. It already did. But what is required to duplicate that in current times? It requires a whole lot of things we don’t have today and that you don’t get overnight, from one government to the next. Just for a start, we would have to improve investment, raise productivity, increase efficiency and eradicate the corruption levels installed in public administration. We would have to have quality institutions, with everything that implies. So anyone who says we could suddenly grow 7% isn’t telling the truth. Having said that, I should also say that, in my opinion, the Gadea-Jarquín ticket at least shows signs of a decided determination to improve Nicaragua’s deteriorated institutional quality, which would certainly contribute to economic growth.

Institutional quality is fundamental to sustainable development. And that’s another variable the government controls. It doesn’t control international coffee, beef, sugar or oil prices. But it does control the quality of its institutions. “Quality institutions” means that if I go to trial, I won’t have to pay off the judge, or fear that the other side will. It means that small and medium businesses, any business in fact, can get their products out of customs without taking months or having to pay under the table. It means the Comptroller General’s Office is concerned about the use of public resources and that there’s an independent, non-partisan judicial branch. Institutional quality means a government whose officials are effective and efficient. It means our rights are respected. If there were solid, quality institutions in Nicaragua, the economy would grow more, improve more. And it’s not that the quality of our institutions has gone bad in these four years. This problem has been around for a long time. A recent study by the International Monetary Fund shows that if Nicaragua had the kind of quality institutions that exist in Chile, our economy would grow an average of at least 3.4% more per year. We would begin to move toward that 7% growth mentioned in that electoral promise.

Governments control the quality of public administration. The current government has increased the number of central-level public employees from 44,000 to 82,000. And I know of institutions where a good part of the employees on the payroll don’t work; they’re political activists. It’s immoral, not to mention illegal that party activists are being paid with taxpayers’ money.

Nicaragua’s per-capita annual gross domestic product (GDP) is the equivalent of US$1,200, while that of our neighbor Costa Rica is $7,400. Why is Costa Rica’s gross domestic product seven times greater than ours today, given that in the forties, fifties and sixties we were almost neck and neck, with only a tiny edge in favor of Costa Rica? What explains today’s huge gulf? Are Ticos more intelligent? Are Nicas more ignorant? Do Ticos have more territory? It’s simpler: Costa Rica has had better quality institutions than Nicaragua for a century, and that largely explains why it is now way ahead of Nicaragua and all other Central American countries in both this indicator and almost all others.

The promise to do more of the same

Now let’s move to the current government’s economic promises. Ortega is promising that he’ll keep on doing the same. Is the current government’s economy a success? Government propaganda claims that the economy has never been better, that we grew 4.5% in 2010, which is indeed true, and that we’ll do the same again this year. If we analyze the statistics published by the Central Bank of Nicaragua, we see that between 1990 and 2010, the economy’s annual growth averaged 3%. But if we break that decade down, we find that in the six years prior to this government, the average annual growth was a bit over 4%, while it was barely 2.3% in the first four years of the current government. The selectivity of that propaganda becomes apparent by taking a simple arithmetic average over the past two years: the impressive 4.5% growth rate of last year with the -1.5% negative growth in 2009.

The explanation for the economic reactivation in 2010 is the good international prices for primary goods due to the relative reactivation of the international economy after the 2009 financial crisis. What I’m trying to say is that the mediocre growth rate of the previous three years in Nicaragua, the reactivation last year and what is expected for 2011 are all largely explained by external factors related to the world economy, rather than what the government has or has not done internally.

It’s also explained by the application of the neoliberal model and by maintaining the agro-export model within globalization. It’s explained by our link to highly criticized “US imperialism.” Nicaragua has sustained its economy based on agro-exports for a very long time, and we’ve used them to insert ourselves into the global economy as exporters of primary goods for the world capitalist market. That’s what explains the growth of exports and therefore of the economy.

Let’s look at some data to analyze the propaganda better: in 2010 we exported US$1.9 billion of goods. What did we export 33 years ago in constant dollars? We actually exported more. Because the dollar is losing its purchasing power, it takes $3.62 to buy today what $1.00 bought in 1977. In that year, with a population half the size it is today, we exported US$637 million of goods. If we multiply that figure by 3.62, it comes to around $400 million more than we exported last year. So, what economic success is the government talking about?

Here’s some more data to help put the official propaganda in its proper perspective: Nicaragua’s per-capita gross domestic product this year is less than it was 35 years ago. That fact alone makes the alleged great economic success sound a bit ridiculous. According to Central Bank figures, the real wage has also dropped in the four years of this government, although I should point out that this reduction isn’t the government’s responsibility. The real wage has shrunk due to the high inflation in 2007 and 2008, in turn largely explained by the rise in the price of oil, which reached $140 a barrel.

So what can and must
the next government do?

Given this picture, what can and must the government that takes office in 2012 do?
Implement a full-blown tax reform. For the past 12 years a group of economists, including myself, has been urging an in-depth, authentic tax reform. In synthesis, “authentic” means something very simple: that the wealthy pay their taxes and pay more taxes, while the poor pay less.

Nicaragua’s tax system is regressive. What that means is that the heaviest tax burden is borne by indirect taxes, i.e. the value added tax, known as IVA, which is 15% in Nicaragua. It’s what all consumers, independent of their income, must pay at the point of sale for many of the products they buy. The income tax paid by salaried workers is also totally unjust. In Nicaragua, more taxes are withheld from salaried workers proportional to their income than the wealthiest businesspeople pay based on their earnings. Furthermore, the middle classes in Nicaragua pay more income taxes than those with the same income level in the United States. In short, our tax system is unjust in many ways.

What’s called the “little reform” of 2009 barely changed anything. Why hasn’t this government authentically reformed taxes? It hasn’t done it because it doesn’t want to alter the strategic alliance it has with the Supreme Council of Private Enterprise (COSEP). It doesn’t want to affect the interest groups that are its allies. A genuine tax reform would eliminate the exonerations and special treatments, which would affect those interest groups while at the same time benefiting businesspeople who don’t have exonerations by allowing a reduction in tax rates.

Most economists agree that a tax system must be based on the principles of neutrality, equity and generality. The principle of both horizontal and vertical equity is fundamental to a tax system. This principle involves taxing higher income levels more, so that those who earn more pay more in proportion to their income and those who earn less pay proportionally less, giving equal treatment to equals. The principles of neutrality and generality are also fundamental, as preferential fiscal treatment is inequitable, since Peter ends up having to pay the tax Paul doesn’t pay.

Nicaragua’s tourist sector has a ton of exonerations, as do the free trade zones and the agricultural sector in the Agricultural Exchange. The latter covers the big cattle and farming sector so that what they pay annually amounts to barely 1-2% of what they call “definitive withholding.” Nicaragua’s total exonerations represent some 6% of the GDP. If all those exonerations and special treatments—which are indeed variables that the government controls—were to be dismantled, there would be more resources for public investment in primary, technical and vocational education. Progress could even be made on a tax system with lower rates and a broader base.

An in-depth tax reform should install an overall income system. Nicaragua currently has a dual income system. An income tax rate of 10% is imposed on passive income (dividends and interest), which discriminates against the income of salaried workers, who are subject to marginal rates ranging from 10% to 30%. It also discriminates against active businesspeople and medium-sized businesses, which are charged the same 30% income tax rate charged the big companies.

A fundamental difference between Nicaragua’s dual income system and the overall income system being proposed is that today’s system isn’t in accord with the principle of horizontal and vertical equity while the global income system is, allowing income tax to be adjusted to each contributor’s income level. It’s not the same to apply a 10% flat tax to a person who earns a thousand dollars a year as to a person with a million dollars in annual capital gains. Under the global system, the first person would pay no tax and the second would pay a progressive rate. It’s absurd that a person who lives off the dividends of stock holdings should pay a uniform rate independent of the amount of income while salaried workers pay marginal rates ranging from 10% to 30%. This clearly discriminates against workers.

In a book I published last October, Aportes a la discusión de la Reforma Fiscal (Contributions to the Tax Reform Debate), I mentioned the need for a tax reform based on dismantling the wide-ranging system of tax exemptions and special treatments that is still in effect despite various attempts to reform it. I also proposed adopting a global income tax system and not the dual one established in Law 712 of November 2009. I further suggested reducing the tax paid by the thousands upon thousands of small and micro-businesses in Nicaragua. The IVA should also be gradually reduced, first to 14% and then to 13%, so the system is less regressive. In addition, the trade duty should be revised, and at a Central American level, eliminating those protective duties that still persist, benefiting oligopolies at the expense of consumers.

There’s a lot to change in our tax system. Some officials of this government have said that the reform will be implemented in 2012, after the elections. Let’s hope that the interest groups don’t keep imposing their will and maintaining the exonerations and special treatments, and that a global income system is finally adopted to make the tax system less inequitable. Fiscal reform is a variable that governments control, but to be frank, I don’t think there will be a true tax reform in 2012. The pressure groups in Nicaragua have always been very effective at blocking it.

Prioritize public spending and salary regulation. Another variable the government controls is assigning public spending. And just as the budget for primary, technical and vocational education should be prioritized, because it’s what most benefits the poor, the new government should also push through a law regulating salaries for the whole public sector. The top public posts, such as magistrates, justices and comptrollers, earn huge sums and self-prescribe major retirement pensions to boot. Managua’s municipal councilors also give themselves excessive travel expenses and perks. The public sector pension system is also unfair. Why should a magistrate or justice elected for a 6-year term receive a lifelong $5,000-a-month pension while someone who works his/her whole life doesn’t even get $150? A lot of work needs to be done on how the public budget is assigned. But again, the power of the top bureaucracy, which is another pressure group, prevents a fairer allocation of public spending.

Should a new government change the salary policy? Can a new government make changes in the salary policy? This government has applied the same salary policy as its predecessors, including an agreement with COSEP not to adjust minimum wages too much because it would create inflationary pressure. We need decent wages in Nicaragua, but any economist will tell you that the best way to improve them over time is to increase the productivity of the labor force. And that’s done by investing in human capital and increasing the investment rate in the economy. That in turn is achieved by creating an institutional setting that permits a business climate that attracts greater national and foreign investment. I don’t anticipate any salary changes in the future, either in the minimum wage or the average nominal salary, currently around 5,500-6,000 córdobas, well below the cost of the basic basket, which is around 10,000 córdobas.

Regulate prices? In addition to tax reform and revised public spending, what else should a new government do or not do? Should a future government regulate prices? No. Price controls are only justified when there are monopoly market structures, as in the case of electricity. The government must regulate electricity prices. But who’s regulating the regulators today? Is the setting of electricity prices currently transparent? No, it isn’t. I was against the privatizing of public companies in previous years, but once electricity was privatized, I viewed it as very positive that the State got shares in Unión Fenosa, the Spanish transnational corporation that distributes electricity in Nicaragua. But who’s supervising the State’s participation? To whom is it accountable? The ALBA companies? The government also has to regulate gas prices because the single refinery is a monopoly and there’s now a group called Albanisa that has a monopoly on fuel distribution. Venezuela subsidizes the oil it sells Nicaragua, but no one knows where the resulting income goes or where it stops. A future government must make this subsidy transparent, incor¬porating it into the national budget. Venezuelan cooperation is quite welcome, but it must be transparent. A new government mustn’t fight with the sources of foreign cooperation and must diversify them, because it’s not healthy for an economy to depend on a single source of cooperation, as the FSLN was the first to say in the eighties.

What about the credit policy? What role should the government play in credit policy? In the Somoza period, there was what were called “portfolio caps” so the private banks would have to provide credits to the agricultural and industrial sectors. The government itself also financed the agricultural sector, to a degree that the little Banco Produzcamos, the new state development bank, can’t remotely compare with. And what are the private banks financing now? Very little production and a whole lot of consumption and credit cards, which are getting many people into debt. Is it appropriate for the government to oblige banks to grant credits to the productive sectors? The word oblige is the inappropriate part of that sentence, but it could certainly adopt policies to induce or stimulate them to do so. There are ways of doing it.

Nor should we believe that the banks are as solid as a rock in Nicaragua. Bank earnings and stability in 2009 and 2010 weren’t as great as we’d like. And if the rate of unrecoverable loans continues to increase thanks to the Non-Payment Movement, that movement will end up affecting not only the micro-financing institutions, but also the commercial banking system. That non-payment culture, and we all know where it was fostered, is very negative. So what should a government do in the field of credit policy? It should be disciplined with its own borrowing and should discipline other beneficiaries of credits. It shouldn’t politicize credit. That’s a variable the government has complete control over.

Will the current government
change the system if reelected?

This government has adopted many neoliberal policies of the Washington Consensus, but not all of them, and there are some a new government should apply. The original Washington Consensus document establishes that a good part of the national budget should go to primary, technical and vocational education, and that fiscal exonerations and special treatments in the tax system should be dismantled.

Will the current FSLN government change the system if reelected? It’s hard to say because it wears various hats. When it suits it, it wears the IMF and neoliberal hat, but it also dons a populist hat and a Christian hat. And at times it still wears the “revolutionary” hat of changing the economic model. As I mentioned, there are people in the government who are saying that if they win the elections with 56-60%, that will give them a parliamentary majority, and then there won’t just be a People President, but also a People Legislator, and they’ll “change the system.”

Let’s analyze this seriously. This government’s project is defined as “socialist,” so we can assume that if the system is changed, it will be toward socialism. But what meaning does that have today? We have to remember that socialism was defined as state ownership of the means of production, which was how real socialism was in the Soviet Union and Eastern Europe. We also have to remember that that socialist model failed at the end of the eighties.

So here we’re talking about a “change of system” without even discussing why the system in the Soviet Union tanked. Was it due to the attacks of the hated “US imperialism”? No, it wasn’t. It was due to the inefficiency of the centralized planning system, because when the State owns all the means of production it generates inefficiency and corruption.

My opinion is that we need a model in Nicaragua that’s neither savage capitalism nor savage socialism. I favor a social market economy. No country in Latin America except Cuba has gone to either extreme. And while the FSLN wanted to in the eighties, the correlation of forces didn’t let it. With variations, the Washington Consensus policy has been applied almost throughout Latin America, and the current government is continuing to apply it right here.

If the FSLN were to win a parliamentary majority, could it change the system? I think that proposal is demagogy for idiots. What do those who are announcing it even understand by a new system? Economists today talk about economic systems, economic models and economic development plans… In the last century people talked about the contradiction between the capitalist system and the socialist system. With respect to economic development they talked about the Asian model, the outward development model and the inward development model…

What does 21st-century socialism amount to?

Today they’re talking about a model of 21st-century socialism. I’ve read Heinz Dieterich’s book, which is on Internet, and explains what this consists of. It has no theoretical underpinnings whatever. What’s more, it distorts Karl Marx’s labor theory of value, by proposing things like this: a system in which one can exchange one hour of labor for another hour of labor, independent of the labor force’s skill level. What that means is that a man who hasn’t studied anything and weeds a field would be paid the same for an hour’s work as a doctor or a nuclear physicist. Or things like this: he proposes creating a great matrix of values (prices) to establish the exchange of all merchandise at a world level. Any serious economist would laugh reading things like this.

What has Hugo Chávez’s 21st-century socialism done? Things Nicaragua no longer does because it learned its lesson in the eighties. In Venezuela they’ve just passed a law of fair prices and fair costs. In the eighties Nicaragua learned that price controls foster a black market. And the black market demonstrated that the remedy is worse than the illness. This government isn’t doing that anymore, and if wins again it will keep on with the same neoliberal free price policy. Chávez has established price and foreign exchange controls and expropriated some properties, all of which the FSLN did in the eighties and hasn’t done again.

That’s Venezuela’s 21st-century socialism, which is still in effect because that country is standing on a sea of petroleum. Without it, that socialism would have already crumbled. And we’re not going to change to that system because we’re not on a sea of petroleum. Could we be talking about changing to the Cuban model, which Fidel Castro himself recognizes has failed?

This government and many people confuse socialism with social policies. But being in favor of social wellbeing isn’t socialism. Many social policies can be applied within capitalism. In Nicaragua there’s never been a real debate about socialism. Nicaragua needs a social market economy, and doesn’t have one. One economist said recently that with this government we’re already in a social market economy, which functions well and is the best we’ve had. Nothing is further from the truth. A social market economy requires democratic institutionality.

Let’s discuss concrete things, not models

Debating a theoretical model is exhausting. We economists prefer to discuss concrete things. Is it possible to make an agrarian reform today? What public budget is projected for the coming years?

The 2012 budget is already projected and it’s a neoliberal one, so next year is already defined. Let’s discuss whether making big business people in the Agricultural Exchange contribute the income tax they should pay on their million dollar earnings instead of the current 1-2% of “definitive withholding.” That would be a concrete tax equity measure. Another concrete measure would be to promote workers being stockholders in the companies they work for. In short, I believe the only possible route is to reform capitalism. Eliminating the market system is neither possible nor desirable. What is possible is for the State to intervene when it’s suitable to do so, and do it to benefit society as a whole.

The State-market dilemma is a false one to a certain extent. There are shortcomings in the market and shortcomings in the State. What we need is more and better markets and more and better State. There’s no point in repeating the errors of the Soviet model, putting all the means of production in state hands; nor in leaving the markets with no state intervention, though you have to be very careful with state interventions, which often are more damaging than the failings of the market. Technical analyses and open and transparent public debate can provide adequate pointers to the appropriateness or inappropriateness of different State intervention mechanisms.

When the socialist bloc fell apart, history didn’t end, as Fukuyama argued. The lesson learned was simply that real socialism didn’t work. We’ve also learned that real capitalism is very imperfect, not to mention unjust. The proof is in the acute income distribution problems we see in the United States. Which capitalism do we think is best? For some, it’s the capitalism of the Scandinavian countries, with its income tax of over 50% and very well functioning redistributive policies. In Nicaragua’s case, rather than increase tax rates, what should be done is dismantle the extensive system of exonerations and introduce the global income system to better target public spending in favor of the poorest.

More and better States,
and more and better markets

Ideologically, what calls itself “the Left” today hasn’t defined a new model; it has no clear vision anymore of what it understands by socialism, or of what it wants to or can do. In a seminar of Latin American economists we defined positions not about something total or ideal as “a system”; rather we did it on each concrete topic: ownership of businesses, salary policy, tax policy… We discussed concrete things with our feet on the ground.

We agreed that the solution is more and better markets and more and better State, with neither savage capitalism nor savage socialism; in other words a social market economy. This means a State adequately assuming its elemental functions: creating a good public infrastructure, organizing an independent justice system and creating efficient education, public health and social security systems. It makes no sense to promote excessive state interventions and even less to speak of a “change of system” when the State in Nicaragua isn’t even adequately implementing these elemental functions.

Another concrete discussion should tackle the Central American Common Market, since it’s been around for half a century. Supposedly it was going to keep advancing until there was free movement of the labor force among our countries, but it never went past being an imperfect customs union, which is now trying to shape up. Approximating what the European Union is today doesn’t seem possible to me in the short run. In its initial stage the Common Market implemented an inward development strategy of import substitution industrialization with high import duties. But since the nineties, Central America has followed a strategy of open regionalization and outward integration. What that means is that with all the free trade agreements the protectionist tariff on goods imported from outside the region was slashed from 60% in the eighties to 6%.

Central America has inserted itself into globalization, something the Left has rejected, opposing free trade agreements and insisting on prioritizing inward develop¬ment. That debate has now been superseded. Inward and outward development aren’t contradictory; they’re complementary. Central America’s insertion into the world economy is positive. It’s good for Nicaragua to open itself up to the world economy. We’ve already done it and will keep on doing it. Although the Left argues that globalization is bad, on balance it has more positive aspects than negative ones, especially for small countries such as ours.

What is the FSLN’s vision?

Personally speaking, I find democratic socialism, like European social democracy or the Chilean Socialist Party or Spain’s PSOE, palatable. That current of socialism doesn’t involve the State taking over the means of production or having a single party or suppressing the market. Nor is it based on authoritarian leadership with lifetime Presidents.

Is it socialism to join the FSLN as a social climbing mechanism? Is it socialism that a single family is always in power or that only one person can lead the FSLN? That’s flunkeyism, the same as we saw in the Somoza period, based on the same premise: that a single person is indispensable. Karl Marx never said socialism was about creating monarchies or lifelong Presidents. That if Hugo Chávez gets seriously sick, which is lamentable, because I don’t wish anyone ill, his brother Adán should take his place; or if Fidel Castro gets sick his brother Raúl should take over; or that after Daniel’s next five years it should be his wife Rosario Murillo. Who calls that socialism?

I see more similarities with Adolph Hitler’s National Socialist Party in that “monarchic” model. The caudillismo in the countries of the Bolivarian Alliance for the Peoples of Our America (ALBA) has at least one important similarity with fascism: a system of power based on an enlightened and indispensable caudillo, or political strong-boss, who has an atavistic relationship with the masses, in which institutionality vanishes. “Quality institutions” also implies quality political parties, which are also institutions. Do our political parties have quality? The PLC is the personal property of a family, as is the FSLN. The FSLN hasn’t evolved, as the Chilean Socialist Party or the Spanish PSOE did, into a democratic socialism based on a social market economy and a real division of powers. To the contrary, it has backpedaled into a system of personal and family power, which has serious repercussions on our precarious institutionality.

I honestly don’t believe the current FSLN has any ideology as a point of departure for “changing the system.” Nor do I believe it’s even going to change it. I don’t think anyone here is going to change the system; independent of who wins the elections, the IMF and neoliberal policies will continue. I see more differences on economic issues today between Republicans and Democrats in the United States than I do between Nicaragua’s governing party and opposition parties. Who in either the opposition or the government is talking about an authentic tax reform?

What can and must we citizens do?

In addition to asking ourselves what the government can and must do—or not do—let’s ask what we citizens can and must do. The first thing we can do is educate ourselves, inform ourselves, analyze and respect our differences. What we must not do is view anyone who thinks differently as our enemy. Nor must we abstain from voting, even though the current process has traces of an electoral farce. Young people, who have their whole life ahead of them, must participate in the debate and in the struggle to achieve sustainable development with solid democratic institutions. That debate and those struggles will reach a lot farther than the November 6 elections.

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