We’re at an inflection point and should be concerned

Our forests are being cut down, our water supply is drying up, our economic model based on natural resource exploitation is being exhausted and our demographic dividend, which we’re not using well, will soon turn against us. The only good news is that our poverty rates seem to be falling, although even that depends partly on the yardstick used. It seems we have a few things to be worried about.

Adolfo Acevedo

I first want to begin by offering my analysis of Nicaragua’s poverty picture because we finally have relatively fresh data. On October 6 the government published the results of last year’s Living Standard Measurement Survey, done every five years by the National Institute of Development Information (INIDE). Among other things, it measures the country’s levels of poverty and extreme poverty. This latest survey indicates that more than one out of every ten poor Nicaraguans ceased being poor between 2009 and 2014 and more than four out of every ten extremely poor Nicaraguans graduated into the generally poor category, news that caused something of a stir.

Based on a sample of 7,150 households and advised by the World Bank, which endorsed the results, the survey revealed that the percentage of people living in general poverty had dropped from 42.5% to 29.6% of the total Nicaraguan population and those living in extreme poverty from 14.6% to 8.3%.

Are these results credible?

At first glance, the new data show Nicaragua with poverty and extreme poverty rates similar to those of Costa Rica, whose per-capita income is five times greater than Nicaragua’s and whose income distribution is the least unequal in all of Latin America. It’s precisely for those reasons that Nicaraguans have been emigrating in droves to Costa Rica and now even more to Panama, whose per-capita income is still higher. One thus intuits that these results are out of line with reality to a greater or lesser degree, which is precisely why their release led so many to charge that they weren’t accurate.

Does this incredulity mean that we’re challenging the survey on technical grounds? Not really, because to do so INIDE would have had to publish its data base, thus providing the complementary information to permit a technical assessment. But it hasn’t done that, so all we’re left with is intuition and doubts.

How is poverty measured?

Before going any further, I’d like to emphasize a few points. One of them is that to measure poverty, you first have to define it, because there’s no single yardstick. Many agencies, for example, define it differently, and each society frequently adopts yet another definition of what it considers poverty. In Nicaragua, everyone has their own vision of what it means to be poor and also what it means for poverty to have been reduced. This survey has measured poverty and extreme poverty according to INIDE’s definitions, which have little or nothing to do with what the majority of our society thinks and feels about what it means to be poor.

If a group of people were to define what it is to be poor or extremely poor, many other criteria would be brought up. Some would say it means not being able to afford to eat three times a day; others would say not being able to live on one’s salary, or not being able to afford housing or other basic services, or not having a fixed salary and thus no income security, making it impossible to plan for the future. The common thread or consensus of all these versions is more or less that a person who is poor can’t meet a series of fundamental needs. And that in turn defines the limit, or floor, of resources above which a person can satisfy them and below which that person cannot. In my opinion, each society must define that limit for itself, then measure the percentage of people below it, i.e. the population that particular society defines as poor.

A debate needs to be opened in Nicaragua to define its floor, the set of fundamental needs everybody must be able to satisfy. Our society’s objective should then be to implement the essential policies and actions for ensuring that all its members can rise above that floor.

This survey’s poverty floors

What poverty and extreme poverty “floors” does this survey establish? It defines the extreme poverty line as the resources considered necessary to cover minimum daily food expenses while the general poverty line addss some other expenses (housing, transport, education, health care, clothing…). By those criteria the extreme poverty line is a daily consumption expenditure of US$1.11 per person and the general poverty line one of US$1.81 per person.

The minimum calorie requirements a person needs to function normally was set at 2,228 calories, making the resources needed to supply them the floor of extreme poverty. Since the foods in that basket have a price, the ones chosen to supply those calories are normally the cheapest possible. Those who conducted and processed the 2014 survey “found” a basket that cost an average $1.11 a day (roughly 30 córdobas at that year’s prices) and satisfied those caloric needs. By that definition, anyone who could afford that basket and still have a centavo left over was no longer extremely poor, or indigent. Similarly, a person who still had a centavo left over after spending $1.81 a day (some 47 córdobas) to cover the defined additional needs had ceased being poor. The currency value of both those poverty lines is extremely low, and if they remain unchanged, the next survey could very well show zero poverty…

The unvarnished truth is that we will only genuinely and structurally reduce poverty in Nicaragua when, in lieu of generating extremely low-productivity and low-income jobs that are informal and precarious, the economy begins to predominately generate better paid jobs with growing productivity, and people acquire the education levels to perform those jobs and insert themselves better into all facets of social life. The most worrying thing is that the necessary things are not being done to make progress in that direction.

Balanced calories or empty ones?

We of course know that some foods are extremely rich in calories and also very cheap. To be able to technically judge the methodology employed in this survey, the first thing I’d like is to see the list of foods selected for that basket, the caloric contribution of each food and its price, to learn whether a basket costing $1.11 a day is really capable of satisfying a person’s minimum caloric needs. But that would require making the information public, something that belongs to all citizens not just the officials involved in the survey. And that hasn’t happened.

Based on the recommendations of the Nutrition Institute of Central America and Panama (INCAP), nutritionist Martha Justina González notes that the correct number of calories a person needs per day is a bit higher—2,300 rather than 2,228—and stresses that they must be balanced calories, not foods that contribute what are known as “empty calories,” which are not nourishing. According to that specialist, the daily cost per person of truly balanced food would be 85 córdobas, nearly triple the extremely low floor established by the survey.

How did they determine
the two poverty lines?

I’d also like to know how the general poverty line got established as only a 1.63 multiple of extreme poverty rather than double at the very least. It’s a very low multiple, particularly given the additional things somebody living in general poverty is supposed to be able to cover, and as the extreme poverty line is already extremely low, both of them end up being hard to believe.

Some time ago the World Bank established international lines to measure poverty: the extremely poor had income of less than $1 a day and the generally poor income of less than US$2 a day (in terms of purchasing power parity). The Bank later abandoned those lines for Latin America because the majority of the region’s countries are now defined as middle income and the original lines are no longer considered adequate for the region as a whole. They may still be used for the world’s poorest countries in Africa, but for Latin America the Bank established a new line of $2.50 a day for extreme poverty and $4 a day for general poverty.

Why then does the World Bank condone using such low lines in Nicaragua, at least one of which is even lower than its now discarded levels for the rest of Latin America? It looks for all the world like the reason is that it was the only way to obtain the results that were published, showing Nicaraguan poverty rates that are similar to Costa Rica’s. If to measure whether the population is tall or short I establish that those measuring 20" are “extremely short,” most of the population will not be considered extremely short. The same thing has happened here: Poverty lines were established that are so low that a majority of Nicaraguans are no longer poor. With such criteria, it should come as no surprise that poverty is “disappearing” so rapidly…

A few months ago the World Bank presented a study of Latin America that referred to another concept: “chronic poverty,” defining families with under $4 a day as being in that situation. As this other “poverty line” used by the World Bank itself shows, there’s no single universal or absolute poverty line. And if we were to use the line established by the Economic Commission for Latin America and the Caribbean (ECLAC), poverty would end up being almost 10% above the line currently being used in Nicaragua.

Moreover, the last survey done in Nicaragua by the International Foundation for the Global Economic Challenge (FIDEG) in 2013, also with World Bank advice and in fact using the same methodology as the official survey, found that 40% of the population was under the poverty line, which is much higher than the 29.6% recorded by the following year’s government survey, the one we’re looking at today.

In synthesis, we may be told that this survey shows a drop in poverty, but the only thing it’s telling us is that it has dropped according to the survey’s own definition and measurement. Nothing more. If it had used other poverty lines, the results would be completely different.

Demographic reasons
for the drop in poverty

The reasons both extreme and general poverty have shrunk in Nicaragua, however, have to do with more than a change in the yardstick. There are also demographic reasons. The country is going through a stage known as the demographic dividend, a moment with the largest working age population as a proportion of the total population.

Until recently we were in a phase of demographic explosion, with an average fecundity rate of 7 children per woman. That has dropped extremely rapidly to 2.4 children today, largely but not only due to Nicaraguan women deciding not to continue playing their traditional gender role. When girls today are asked how many children they want, they tend to say two at most and that they don’t want to have them so young. The reduction is also thought to be related to the population’s increasing urbanization.

This turnaround in the fecundity rate has been much faster than projected only a few years ago. The rapidly dropping birth rate is obviously creating an increasingly smaller percentage of children relative to the total population. At the same time, the percentage of working-age people—those between 15 and 60—is growing significantly, both within the population as a whole and within households because those born when the fecundity rate was higher are now reaching working age. The quarterly Continuous Household Survey done in Nicaragua, which also stopped being published a few years ago, revealed that between the first quarter of 2009 and the fourth quarter of 2012, more than 600,000 young men and women reached the age to join the economically active population for the first time and are seeking to generate income. Moreover, a large number of women are now becoming economically active, in fact in a greater proportion than men.

Accompanying this change in the demographic curve is the fact that the size of households is getting smaller. A lower proportion of households contain extensive families in which grandparents, children and grandchildren live under the same roof, with an increasing number being nuclear or single-parent households with fewer children and fewer members in general. A major reason for this shrinkage is massive emigration.

With more working-age people living in smaller households with fewer children, the household’s overall income and thus its purchasing capacity are increasing because the greater income from more people working is spent on fewer people. I live across the street from a family made up of two adults and four children, one adult with a more or less regular income and the other with a fluctuating income. Those two incomes, which at times became only one, originally had to be divided among six people. Time passed and the only thing that has changed is that only one of the four children is still under working age, while two of the other three are working and the other left the country. That example shows that while the working members of the household still have precarious or informal jobs, leaving the per-capita income no better than it ever was, two more people are contributing to the family’s overall income, and it is now divided among only five. The result is a daily per-capita consumption that exceeds the famous poverty line, particularly since exceeding it only requires daily per-capita consumption to increase by a few cents more…

More people working,
but not in more productive jobs

There has been a lot of criticism by economists of the fact that the demographic dividend is not being taken advantage of. What that means is that the majority of jobs available to a large part of the people just starting to work are still neither good quality nor highly productive. The figures not only validate that statement, but in fact show that productivity has dropped.

We can see that by using the economic formula for economic growth, which is equal to the number of employed workers plus the increase in productivity. Between 2009 and 2012 the average employed labor force in Nicaragua grew by about 7% a year. Even with productivity growth remaining at zero, the economy would have grown at 7%, because 7 plus 0 is still 7. But the economy only grew by 4%, which means that productivity actually fell. That in turn means that this new labor force is being absorbed by precarious jobs with extremely low productivity. If such jobs account for 7 out of every 10 jobs in Nicaragua, the economy will still grow, because the number of employed workers is growing, but what needs to grow is the average productivity.

So Nicaragua’s drama is that the demographic dividend isn’t being exploited at a time when the labor force is more numerous than ever before and more numerous than it will be in the future. If the jobs available to the youth entering the labor market were of high quality, high productivity and good salaries, the economy would easily be growing 10% a year. But the sad fact is that the young people and women in this growing labor force aren’t finding quality jobs. The country’s problem isn’t unemployment, because the poor don’t have the luxury of being unemployed; they have to find some way to survive economically. The real problem is underemployment, involving precarious and informal jobs of exceedingly low quality.

What will happen when the
demographic dividend is past?

Nicaragua is aging faster than had been anticipated, but a new population census is indispensable to allow us to determine exactly how fast. That 10-year census was to have happened this year and the United Nations Population Fund was poised to provide assistance in conducting it, but for some reason that has never been explained it wasn’t done. All we have is the updated demographic projections by the Latin American and Caribbean Demographic Center, ECLAC’s population division, based on the most recent information available, surely including the results of Nicaragua’s latest Demography and Health Survey, conducted in 2011. The projections show that Nicaraguans who are 60 and older constitute more than 7.8% of the population, instead of the 7.2% that had been estimated. From here on, instead of having more young people entering the labor market, we will start to see more of the population getting old and dropping out of the labor market, which is obviously less favorable. In 20 years this country will be in an advanced phase of aging and in 30 we will have reached the degree of aging the European countries currently have.

What will happen when our demographic dividend is over and we’re an aged population? What are we going to do when the National Social Security Institute (INSS) collapses? Since 2006, INSS’ own employment payroll has been growing at an average annual rate of 25% and its workers are paid two one-month annual bonuses, one in November and the other in December, while the payment of pension and other labor contributions has been growing at only 16%, resulting in an enormous resource imbalance. The INSS crisis has become so serious that the government finally decided to freeze the payroll in 2016 and stop providing two bonuses. Another move to compensate for the crisis was to conduct a massive affiliation campaign this year, house by house, establishment by establishment, neighborhood by neighborhood, to attract new contributors. But it hasn’t been enough, so INSS investment expenditures were cut 40% and will be cut even more. INSS has now finally recognized that it will have a deficit of more than 600 million córdobas (roughly US$21.7 million) this year and will have to adopt drastic measures next year to get some breathing space because over the next ten years the population’s aging will be felt even more strongly and more pensions will have to be paid out.

Exogenous favorable factors

In addition to the demographic change, Nicaragua’s economy experienced favorable factors in recent years that have nothing to do with any government. Between 2004 and 2012 the international prices for our raw materials exports—coffee, sugar, beef and gold, the same products we’re been exporting for more than half a century—experienced a major boom. Such a rise in commodity prices in such a small and poor country necessarily sparks a certain economic boom, which also helps reduce poverty.

Venezuela’s oil cooperation also helped, although looking at the government’s use of it, very little has been allocated to poverty-reduction social programs. In fact, the government has earmarked 62% of that roughly US$500 million in Venezuelan oil income annually to “profitable investments,” which we only know because the International Monetary Fund finally insisted that the government report its use of that cooperation.

In other words, only 38% of that income has gone for “social projects,” the most important of which have been the subsidy for Managua’s collective urban transport and the so-called salary bonus to compensate for the low salaries of the State’s worst-paid employees without formally raising them. And now the government has passed those expenses onto the national budget while a similar bonus for retirees, offered in lieu of formalizing their retirement pension, is now paid through the INSS budget rather than with Venezuelan funds. For better or worse these subsidies and bonuses have helped reduce poverty insofar as they help maintain the beneficiaries’ consumption, but the money has not been allocated to increase either production or productivity, which does more to reduce poverty over the longer run.

And of course, the remittances sent back to their families by all the people who’ve emigrated in search of better opportunities have also helped reduce poverty. That money alone explains 12% of the increased consumption since 2006.

To summarize, there’s no question that however one measures it, poverty has been shrinking in Nicaragua due to all the factors mentioned above. The fundamental reasons, however, have been a reduction in the number of household members, an increase in the number engaged in some income-generating economic activity and the fact that the remittances from migrants are reaching many more households today.

What about the economy itself?

But the scenario is now changing because the economy’s favorable factors are weakening. In a small, open economy such as ours that is so dependent on exports, what happens in what economists call the tradable sector of the economy is fundamental. In Nicaragua the tradable sector is made up basically of agriculture, cattle and mining. Some 42% of the population lives in rural zones and the agricultural sector, which includes livestock, generates 30% of the country’s employment while manufacturing generates only about 12.5%. Agriculture, mining and manufacturing together generate 35% of the gross domestic product.

When Nicaragua’s commodities fetched a good price, the value of our exports grew at 20% a year, but export income has been falling for nine consecutive months due to a drop in international prices. The price of gold has plummeted, and the prices of both sugar and peanuts have also dropped, although not as precipitously. Even exports from the free trade zone assembly plants have fallen. The price of meat is the only one that has been sustained, and that, unfortunately, has triggered a major boom in extensive cattle-raising, bearing down even more heavily on the agricultural frontier and thus the invasion of indigenous territories.

Venezuela’s cooperation has also been reduced to an important degree with the fall in oil prices. The government is compensating for this reduction in its own income by not matching it in the form of lower fuel prices and lower electricity rates for the population. The decision not to pass on the reduced cost of generating electricity leaves the government with some US$100 million per year that would otherwise be a savings for households and businesses.

With the three tradable sectors of the economy currently experiencing important drops, the sectors most closely tied to the domestic economy—commerce, construction, the financial sector and services—are growing—by 30% in the case of construction alone. That raises another factor in this economic scenario that needs to be considered but it isn’t talked about. The reduction in fuel prices, which has freed up some US$50-60 million that people can now use for other consumption, explains part of the growth of commerce, but not all of it. Where are the other resources coming from that are creating so much growth in the domestic economy—i.e. the non-tradable activities—even with the tradable sectors in a recession?

We are at an inflection point

Whatever the answer is, this government had extraordinary luck up to now because a series of factors converged to give the economy a certain injection. But, as I mentioned, that scenario is changing with the current weakening of the favorable factors in the form of falling export prices and oil cooperation and the inflection in the demographic transition.

In fact, even more of what is happening in Nicaragua today could be interpreted as an inflection point as we come out of a favorable curve, a fact that is also clear from other angles. Our development model has always been and is continuing to be a “mining” model, one that extracts as much wealth as possible without measuring the long-term consequences of doing so. What I refer to as a “mining” model includes extensive cattle-raising, the method we’ve always promoted in Nicaragua by extending the agricultural frontier and deforesting to make soils available for agriculture that aren’t apt for cultivation because forest soils quickly lose their fertility. The inevitable result is that the land is soon sold to cattle ranchers who dedicate it to clear-cut pasture, destroying the forest cover. On top of everything else, this sacrifices the watersheds to short-term earnings.

This “mining” model is wearing out

Not only is the agricultural frontier reaching its limit but we’re also beginning to realize that the country doesn’t have an infinite supply of water. Seventy percent of our main aquifer is in León and Chinandega, departments in the Pacific zone where the majority of the population lives. The ever more frequent droughts are reducing that and other aquifers and their refill capacity is shrinking, yet the León-Chinandega aquifer is being “mined” to irrigate ever growing areas of sugar and peanuts. With less water, the peasants’ wells are drying up. We’re extracting increasing amounts of water from a shrinking supply because there’s still a growing population and ever more demand for irrigation.

The last analysis of the León-Chinandega watershed’s hydric supply was done about 10 years ago; in 2005, I think. The recent study by Environmental Resources Management (ERM) for the Chinese company that wants to build an interoceanic canal across Nicaragua says we must do a new analysis of the hydric supply in the whole country because a canal of these dimensions requires enormous amounts of water. Yet the country is already contractually bound to build that canal, even though there’s no up-to-date national assessment of the water supply. The 2005 assessment of the León-Chinandega watershed pointed out that it would begin to have problems by 2015. So here we have another inflection point. We can’t continue extracting water from the aquifers at the same rate, much less at a greater one. The only remaining strategic water reserve in the Pacific that can serve the needs of the growing population in this region is Lake Cocibolca. Preserving it is strategic.

For these many reasons we’re beginning to understand that our development is based on a short-sighted “mining” model that is destroying the environment and natural resources, and for those very reasons is no longer sustainable. Adding the exhaustion of our development model and its predatory resource exploitation to the population’s aging process and it becomes unarguably clear that this model isn’t sustainable and that even the population has sustainability problems. Right about the time we reach a disproportionate percentage of elderly people we will also be running out of natural resources to be exploited, water included.

Shouldn’t this concern us? This country’s elites don’t seem the least bit bothered. While it’s difficult, if not impossible, to predict the future, the trends are clear and we have the power to inform the population about them. At this moment it’s essential to give people this information because those of us who will be hardest hit, without the personal wealth to cushion ourselves from the results, are the only ones around to work out how to change this situation.


Adolfo Acevedo Vogl is an independent economist.

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