Are we prepared for “the perfect storm”?

What impact could the conflict with the United States, currently expressed in the debate about the waivers, have on Nicaragua’s economy and on the government’s economic strategy? And what unique opportunity has Nicaragua had with the exceptional funding the Ortega government is receiving from Venezuelan cooperation? Has it made the best of that opportunity?

Arturo Grigsby

For weeks Nicaraguan politics has been dominated by the debate over the US government’s decision not to grant one of the two waivers it gives Nicaragua every year and its threat not to grant the other one. The first has to do with fiscal transparency and the second with property rights and the United States applies both not only to Nicaragua but also to other governments with which it cooperates.

What’s the importance of these two waivers?

Non-concession of the fiscal transparency waiver results in the US government denying bilateral cooperation to the Nicaraguan government. The more recent of the two waivers, it expresses the consensus reached by international development cooperation after the Paris Declaration, which put “good governance” at the center of cooperation’s objectives. The United States assumed this new rule in its decisions about bilateral cooperation in 2008.

Non-concession of the property rights waiver not only cuts bilateral aid but also obliges the US representatives in the international financing institutions, such as the World Bank, Inter-American Development Bank (IDB) and International Monetary Fund (IMF), to vote against funding requests from the offending country. This waiver, promoted by Republican Senator Jesse Helms and largely motivated by his determination to impede any type of aid to Cuba, expresses an internal US policy in response to confiscations of US properties in different parts of the world. It was established in 1994 through an amendment to the legal framework regulating the granting of US foreign aid to other countries.

This year the criteria are
more political than technical

Successive Nicaraguan governments, including the current one, have gotten both waivers in previous years with no particular difficulty, when strictly technical criteria prevailed in the decision to grant them. Not until this year has the issue become infused with notable political tension.

While the Ortega government has already been denied the fiscal transparency waiver, the property rights waiver is much more vital to Nicaragua’s interests. It’s rejection legally binds the US representatives to vote against any loan request Nicaragua makes to these three lending agencies, in two of which—the World Bank and the IDB—the US vote carries veto power. While that’s not true in the IMF case, it’s hard to imagine that the Fund would approve an agreement with Nicaragua—and it is currently negotiating one—if the United States opposes it. Furthermore, given that the Ortega government is in conflict with the majority of the European countries, Europe and the United States together could effectively block any such agreement with Nicaragua if it came to that.

We’ve already lived through that experience in the eighties, when the United States first decided to commercially embargo Nicaragua, and followed that move by suspending Nicaragua’s relations with these multilateral organizations. The political tension around the waivers is a new chapter of that conflict in Nicaragua’s relations with the United States. Denial of the fiscal transparency waiver lost the government US$3 million in bilateral USAID funds to the national budget for health and education projects and for training Nicaragua’s army. If the property waiver is denied, the government would stand to lose some $250 million a year in loans from the IDB and World Bank and the credits granted through the agreement with the IMF. And given that the IMF acts as a traffic signal to at least some other countries, this red light could also affect other bilateral funding.

The effect on the business climate

But we shouldn’t just analyze this moment from the perspective of the loans that would stop flowing to Nicaragua. I think an even more important aspect of this crisis that should be looked at is its impact on the business climate. At the end of last month the Nicaraguan government made a presentation to the Donors’ Table to explain its development strategy for the next five years. The centerpiece of that strategy is to establish a “dynamic, pro-active investment climate” to attract more foreign investment to modernize the country’s economy.

Bearing this model in mind, the most serious implication of the Ortega government’s current tensions with the United States is precisely that they would affect the investment climate on which the whole economic growth strategy rests. With the suspension of the first waiver, effects could already be observed in foreign investors’ perception of the business climate in Nicaragua.

In its presentation to the donors, the government showed a list of the main foreign investments it anticipates in the next five years, including huge US firms such as Walmart and Cargill, both of which already have investments here. The foreign investments for the coming years are projected at US$11 million. Turning this into reality depends on maintaining that “dynamic and pro-active investment climate Ortega talked about,” but conflict with the United States puts both it and the materialization of those investments at risk.

The investment pattern
doesn’t address poverty

It’s also calculated that economic growth for the next five years will fall below what we had last year, despite all the expected investments. The government’s projections for purposes of the medium-term budget indicate that the average annual economic growth rate for the rest of its term in office will be 3.9%. That means that even with all that expected investment we won’t hit the minimum sustained growth of 5% per year that various multilateral institutions estimate would be required to generate jobs and effectively reduce poverty in Nicaragua.

The persistence of our high poverty levels is linked to the economic growth pattern of the past decade, which the Ortega government has continued promoting. This pattern is stimulated by economic liberalization policies and based on sectors that generate relatively little employment: transnational trade, banking, energy, transport and communications, highly mechanized agro-industry such as sugar and peanuts, and traditional cattle ranching. The exception has been the maquila sector, mainly the sweatshops that assemble imported inputs and re-export the finished product. While these companies pay no import or export duty and virtually no taxes to the host government, they have had a significant impact on job creation for young women in marginal urban and peri-urban areas.

Nor does the current development strategy attack the structural roots of poverty, which originate in the unequal distribution of income and assets such as land, credit and access to roads and markets. A study done with World Bank support by Nitlapan, a rural research institute of the Central American University, revealed that nearly half of Nicaragua’s rural population is landless.

In its 2012-2015 budgetary framework, the government presents what it will allocate to education, health and public investment. The Health Ministry’s allocation has only increased by 0.2% of the gross domestic product (GDP) for the next four years. The Education Ministry’s allocation has increased by 0.06, bringing it up only to 4.2% of the GDP, when everyone from Nicaraguan nongovernmental organizations all the way up to the United Nations insists that the very minimum that must be invested to have a real impact on access to and improving the quality of public education is 7% of the GDP. These projections show that we’re very far from having any substantial impact on improving the Nicaraguan people’s quality of life.

The private sector is feeling the
pinch of Washington’s pressure

This brings us to another aspect growing out of the US conflict with the Nicaraguan government. When José Adán Aguerri, president of the Superior Council of Private Enterprise (COSEP), was asked why business leaders are lobbying Washington to prevent the denial of the waivers, he explained that one of several reasons is that without these dispensations, private enterprise would have to pay more taxes to sustain public spending. That answer brings us to a central aspect of the current government’s model, one the government presents as a great success: its excellent relations with the big business sector grouped under the COSEP umbrella. With the notable and recent exception of the law creating the Financial Analysis Unit (see “This Month” in this issue), the Ortega government has hammered out all its most important economic laws for the country in close alliance with Nicaragua’s business elite.

COSEP appears very worried about having to pay more taxes, and it’s not an abstract issue because negotiations are already underway over the tax reform the IMF is requiring of the Nicaraguan government in order to sign the next agreement. But beyond the IMF’s demands, a tax reform is urgent for reasons of justice and equity: studies in Nicaragua by the IDB, the IMF and everyone else show that the people with the lowest income—living under the poverty line—pay proportionately more taxes out of their income than the wealthiest people, who receive disproportionate exonerations. The main emphasis of the anticipated tax reform is on partially or totally eliminating the exonerations the private sector has enjoyed for years. It’s logical that the more financial restriction the government feels in this scenario of conflict with the United States, the harder it will lean on the private sector in the give and take of negotiations over the reforms.

Washington’s pressure is also
affecting the pension negotiations

Another central negotiating theme the government has pending with private enterprise if it wants an agreement with the IMF is a reform of the pension system. Only 20% of the economically active population in Nicaragua is affiliated with the public social security system.

What’s putting the system in crisis is that the number of people paying into it is growing far slower than the number reaching retirement age. So some reform is needed to keep the system from going bankrupt. And, as in any other place that faces this dilemma, all proposals being put forward are unpopular: increase retirement age from 60 to 65; increase the contributions of both workers and employers; and/or increase the number of weeks to become eligible from 750 to 1,500. So that’s obviously another angle from which to understand the business elite’s concern: the negotiations over social security will get increasingly complicated if relations with the United States deteriorate further. And if the investment climate deteriorates as a result, the government’s income shrinks due to the loss of loans and donations.

Venezuela is Nicaragua’s godfather

There are those who may be thinking that the abundant Venezuelan cooperation will still be there, and will continue to grow, at least partly offsetting the shrinking aid from the North, as it has done so far after several European countries pulled out of Nicaragua. The nucleus of Venezuela’s cooperation is the oil agreement granted to Nicaragua since 2007 in the framework of the Petrocaribe program. Venezuela has been sending Nicaragua 10 million barrels of oil a year between then and now and this year it will rise to 12 million.

Albanisa, a mixed Venezuelan-Nicaraguan company, controls the import of that oil, and delivers it to the Esso refinery. Esso refines it, charging for the service, and returns it to Albanisa, which sells the bunker to electricity generating companies and the gas, diesel and their derivatives to Nicaragua’s network of gas stations: Puma, Uno and Petronic. Consumers pay for the fuel they buy in the gas stations and households and industries pay for the electrical energy. All earnings along that chain funnel back into Albanisa. Given the favorable oil deal with Venezuela, Albanisa only has to pay for 50% of the oil bill from Venezuela’s PDVSA in 90 days; the other 50% stays with Albanisa, and will be paid back over 25 years on very soft terms: two years grace and 2% interest per year.

So what does Albanisa do with the money that remains in Nicaragua until the debt is paid off? According to the agreement with the Bolivarian Alliance of the Peoples of America (ALBA), half is invested in social projects and the other half in productive projects. A committee coordinated by the FSLN treasurer selects the projects to be financed and assigns them the resources.

That money from the sale of oil has been growing. In the past five-year government term it has multiplied fivefold, starting at US$138 million in 2007 and reaching US$564 last year, thus equaling the annual average of all international cooperation Nicaragua received during the Bolaños government.

There has also been a significant increase in Nicaragua’s trade with Venezuela, with exports to that country increasing from the equivalent of $6 million in 2007 to $303 million in 2011. As of last year, Venezuelan cooperation alone was equivalent to 40% of what the Nicaraguan government collects in taxes. This not only gives us an idea of the size and importance of Venezuelan cooperation but also illustrates Nicaragua’s enormous dependence on Venezuela today.

The funds for social and productive projects
are largely being sunk into subsidies

How is the government using the Venezuelan cooperation for the social and productive investements that the ALBA agreement determined Albanisa will make with the oil earnings? We only have official statistics from the past two years because the Central Bank didn’t begin to report them until 2010, and then only in response to pressure from the IMF. But studying them brings to light a significant piece of information: in these past two years a significant part of the Venezuelan oil income was squirreled away in Nicaraguan banks: US$222 million in 2010 and US$116 million in 2011. Was the government unclear how to spend the money so decided to save it or did it do so anticipating what could happen in Venezuela?

As for the actual investments, the Central Bank reported that US$122 million was invested in social projects and $157 million in productive projects in 2010, and US$174 million in social projects and US$240 million in productive projects in 2011. But when one looks at the breakdown of the social category, we see that the most substantial portion has been dedicated to various subsidies. Subsidizing Managua’s public transport fares to keep it at 2.5 córdobas for years, plus the “solidarity bonus” of some $30 a month that the government issues to 160,000 low-wage state employees together represent an average two-thirds of the amount allocated to social projects.

Something similar is observed in the money being invested in productive projects. A category the government calls “financing for energy sovereignty” represented an average third of the total assigned to productive investments in the past two years, and is actually nothing more than a subsidy to the electricity rate.

These subsidies could be
covered by a tax reform

In other words, money that is borrowed and thus generates a debt Nicaragua will have to pay back—hundreds of millions of dollars—is being invested in current spending that the budget could finance with taxes by eliminating the exonerations for the wealthy private sector. That money should be invested in developing human capital and taking advantage of the demographic dividend or in productive projects and infrastructure that will guarantee the country greater capacity to pay these loans in the future.

From the moment President Ortega took office in 2007, and even before, he has been talking about Nicaragua’s urgent need for a tax reform that would ensure the fiscal equality we don’t have today and would also permit an increase in social spending and public investment. According to IDB studies, tax evasion and the exonerations that benefit the Nicaraguan business elite are equivalent to 11% of the GDP. This reform has been postponed time and again. And those who always come out the winners with its post-ponement are the country’s most powerful sectors. The civil society organizations under the umbrella of the Alliance for Tax Justice have now proposed a comprehensive tax reform project, but the government’s position on this crucial issue is still not known. In this sense, Venezuelan cooperation has contributed to the repeated postponement of the tax reform because its funds cover needs that should be covered with taxes.

A business logic rather than
a social and environmental logic

The government also presented a five-year projection for the “ALBA productive investments.” The sites for five of these, whose combined calculated cost is some US$180 million, have already been selected. Two are slaughterhouses—one in Mulukukú and one in Muelle de los Bueyes—and two are dairy plants—one in Camoapa and one in Acoyapa. The fifth is a maize processing plant in Ciudad Darío.

One important aspect to consider with respect to the country’s future development is that these investments express a political decision by the Ortega government to use Venezuela’s cooperation to prioritize investments that will consolidate the business group in Albanisa rather than strengthen the more social businesses and cooperatives. It is an especially worrying decision in Nicaragua, where there are cooperatives that have managed to invest successfully in the dairy agro-industry and the export of organic coffee, as well as other agro-industrial chains (see the “Analysis” section in this issue). In Camoapa, where Albanisa is going to install one of the dairy plants, there are already cooperative dairy plants that are now exporting cheese. Is Albanisa going to compete with them for the milk produced in the area? The slaughterhouse planned for Mulukukú also raises questions since that municipality is in the buffer zone of the Bosawas Biosphere Reserve, the most important reserve in Central America. Are they thinking of expanding cattle production into a zone that has to be protected, and where there are already strong ethnic conflicts over land?

The design of these huge investments doesn’t respond to criteria of social inclusion and care of the environment. Like the projects we called “white elephants” in the eighties, these are conceived with a traditional logic aimed at consolidating a business group that can compete with Nicaragua’s traditional business elite and eventually become the hegemonic economic group in the country. This is very serious: the government is using the ALBA funds, conceptually designed in both the ALBA and Petrocaribe agreements, precisely to surmount the obstacles and limitations to socially equitable development and environmental sustainability, with a contrary, strictly entrepreneurial logic.

The same thing happened during the Sandinista revolution in the eighties. Traditional business logic was employed in the organization of the state sector, albeit with one difference from what’s happening now: the state businesses of those years were subjected to audits and follow-up by the corresponding state institutions. Today the Albanisa business group has no public accountability. It is being managed as a totally private corporation.

Supporting the poor with handouts,
not economic transformation

There are also some significant differences in the nature of the support being provided to the peasantry and to the enormous informal commerce and services sector in the cities. In the eighties, the support that broad sectors of the rural population were giving the counterrevolution forced the Sandinista government to reform its land tenure scheme to favor the peasantry and foster the development of cooperatives.

These incipient transformations were largely truncated by the political change and the shift in development strategy in the nineties. To palliate their effects the current government has put into practice massive programs to help the grassroots economy survive. Zero Usury, for example, provides a maximum of $500 credit to women who own micro-businesses, and Zero Hunger provides poor rural women a “productive bond” of a cow, a couple of pigs, hens and seeds to support their families’ food security. But these programs are not a serious attempt to transform the economy and living conditions of the grassroots sectors.

This transformation model promotes neither social inclusion nor environmental sustainability

All these decisions show us that the historical opportunity Nicaragua now has thanks to the copious resources offered us by Venezuelan cooperation are not being used in the best way. For one, the money is being used for social subsidies that could be financed with tax collection. And for another, the productive transformation model promoted by the government is not concerned with either social inclusion or environmental sustainability.

The Ortega government’s decision regarding this use of the Venezuelan cooperation puts Nicaragua in a more fragile position. Rather than banking on constructing and developing a strong social economy by transforming the broad sectors of the grassroots economy that generate the majority of the country’s jobs, the government has shown in these past five years that it doesn’t trust those sectors enough to use Venezuela’s resources to head up its transformation with them. Rather it made two different decisions: it banked on creating and consolidating a new hegemonic business group around Albanisa and meanwhile deposited its trust in the traditional business elite and in foreign investors. Hence the fragile position it now finds itself in having come into conflict with the United States.

What will happen if Chávez dies?

Some months ago the Nicaraguan Foundation for Economic and Social Development (FUNIDES) laid out what the impact on Nicaragua’s economy would be if Venezuelan cooperation were cut. Based on current projects, it calculated that our economy would drop by at least 2%. In that situation we would be facing “the perfect storm”: no aid from the international financing institutions due to the US refusal to grant the waivers and no Venezuelan cooperation.

I don’t share the idea that Venezuela’s aid would be immediately suspended if President Hugo Chávez dies. Nor do I believe that the Venezuelan opposition has a real chance to win the next elections. I think the underlying problem, the one that could affect us, is what form the transition might take in Chávez’s party, in the political bloc that supports him. Because Chávez’s charismatic figure is dominant, it’s what gives the party cohesion; it’s the cement that holds together very diverse social forces. Will that bloc remain united if he dies? Who will manage the transformation without him and how? There will be power struggles, very strong internal contradictions and conflicts of interest. There will be, and in fact already is, a behind-the-scenes struggle over how post-Chávez Venezuela ought to be. That will very likely bring about a chaotic transition in Venezuela that could put the Petrocaribe agreement at risk and also endanger the terms of the oil agreement that has provided Nicaragua such opportunities.

If the Venezuelan cooperation continues, we still have a historical opportunity at hand. There’s still time. We have exceptional levels of Venezuelan cooperation with which to change the current course of the economy and promote a socially inclusive productive development strategy. We have the opportunity to design a tax reform that really improves equity and a tax collection system that can deal with the educational challenge, take advantage of the demographic dividend and transform the health system and public investment program.

What are the chances of a
change in the next five years?

Does the will exist in the business elite to contribute to the budget by paying a fairer share of taxes? The business groups had the capacity to halt the reform before and have already begun the discourse to do so again: they say that the world’s economic situation is very fragile, that Europe’s in crisis, that the euro won’t survive, that conditions don’t exist at the world level, that more taxes will mean no investment… It’s a discourse we’ll be hearing a lot in the coming months, one that emphasizes that the conditions don’t exist for a tax reform; but the truth is that the conditions have never existed for them and never will.

Does the will exist in the government to change the course of the model it’s gambling on? Daniel Ortega already promised in his 2011 reelection campaign that he’ll do “more of the same” in these next five years. Does that mean the same development model?

If there’s no change of course, if we have more of the same, what Nicaragua will continue to have in the next five years is a model that differs very little from what we’ve seen in the last decade. The only difference will be the consolidation of a new business group linked to the governing party and backed by the Venezuela funds, and it will have achieved considerable economic power.

Arturo Grigsby is an economist and member of the envío editorial council.

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