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Central American University - UCA  
  Number 148 | Noviembre 1993



What Happened in the Economist's Meeting?

Xabier Gorostiaga

As rector of the Central American University (UCA) and president of the Regional Coordinating Body of Socioeconomic Research (CRIES), thus responsible for two important national economic teams, I want to report on the National Economic Forum and the beginnings of a tripartite negotiation involving the multilateral lending agencies, the Nicaraguan government and nongovernmental economists. I feel both an academic and a moral obligation to publicly analyze what is happening.

An October 7 seminar between the government, the economists and the multilateral lending agencies (MLAs) in the Olof Palme Convention Center in Managua has been the subject of biased interpretations. I want to give my interpretation as honestly, objectively and openly as possible, maintaining an autonomy that is beyond party interests. Getting past the "economic secretiveness" is a basic strategic prerequisite for gaining the broad consensus and participation required to get out of the crisis and begin to economically rebuild the country.

We may perhaps be at the door of the last opportunity before the country socially disintegrates with unpredictable consequences. Such hope more than optimism of a "breaking point" in the national crisis is based on three recent and interlinked events:
1) The accord signed by UNO and the FSLN on October 7 [added just as we went to press in "Very Briefs," this issue];
2) The initiation of the National Economic Forum and the foreseeable tripartite negotiation between the government, the economists and MLAs;
3) The very recent beginning of changes toward Nicaragua in Washington, both in the Department of State and in the Agency for International Development (AID), in which the polarization policy appears to be replaced by one that could be called "constructive neutrality."
In addition, the current restructuring of the Agency for International Development (AID) and change of its directors, Bernard Aronson's replacement by Alexander Watson as Assistant Secretary of State for Inter American Affairs, and John Maisto's appointment as US Ambassador in Nicaragua all open possibilities for new political relations between Washington and Managua. Congress continues to be the more difficult problem.

These three changes may be only "marginal," and perhaps none of them is substantive, but an accumulation of marginal changes could begin to break down the national crisis and the crisis of abnormality that has historically existed between Washington and Nicaragua.

Economic Forum, Finally

The suggestion was made to the Nicaraguan government more than a year ago that it should organize a forum with economists of all political persuasions. In July of this year, at the request of the National University Council, President Chamorro and 11 of her Cabinet members finally agreed to initiate the National Economic Forum as an urgent economic necessity and as a way to unfetter political dialogue. The President announced the forum a few days later but, regrettably, it could not be held on the date planned due to the double kidnapping and the resulting political tensions in the country and, frankly, the economic Cabinet's lack of political desire to hold it.

Then suddenly, on October 6, the government summoned the nongovernmental economists to a seminar with the government and the multilateral lending agencies, with less than 24 hours advance notice. The media reported that the majority of the economists declined the invitation, since its rushed nature implied a form of blackmail with which to justify the draconian new adjustment measures that the MLAs wanted to impose on the government.

The government wanted the nongovernmental economists to bolster the economic Cabinet's weak negotiating capacity and make improvements in these additional measures, some of which had already been discussed with the US government in Washington. They included a reduction of current expenditures by another 4.4% of the GDP, privatization of the main state enterprises, greater credit reduction and a devaluation of the córdoba.

The impasse with the economists was overcome when the Executive agreed to meet with them previously, and to change the agenda and methodology for working with the MLAs. It also agreed that the National Economic Forum should continue to meet immediately after the seminar with these institutions.

One of the principal conclusions of the seminar with the MLAs was that a tripartite agreement should be sought among the three groups attending. The government would no longer negotiate in isolation with these international organizations, but do so together with a group of economists representing diverse sectors of society, political parties, research institutes and universities. It is a way to increase the country's negotiating capacity and offers the possibility of a harmonized domestic accord to facilitate the implementation efficacy of the new economic policy.

What happened and what was discussed in the first tripartite encounter on Friday, October 8? I will summarize it in nine central points:

1. Foreign Aid: Economic Opium

The MLAs brought a clear and hard message: international aid is being reduced across the board and Nicaragua cannot escape this reality. The United States and Germany traditional net capital exporters are currently net importers of international liquidity due to the US recession and debt and Germany's reunification costs. In addition, Europe's own recession, as well as those in the Scandinavian countries and even in Japan itself, carry with them a structural tendency to reduce foreign cooperation. The MLAs pointed out that Nicaragua must prepare itself for times of greater scarcity of international funds, making it important to take measures now to supplant the foreign aid reduction with the beginning of domestic economic growth.

This framework of foreign aid reduction coincides with the moment in which Nicaragua must, now that its stabilization phase is concluding, begin the reactivation process. This dual situation implies much more austere and difficult conditions for the country, threatening to increase poverty and unemployment, above all given the new conditions that the international agencies are requiring of the government.

The Executive and the nongovernmental economists explained to the MLAs the dire consequences that this would have for the country's political stability and economic viability. The MLA officials retorted that Nicaragua consumes 30% more of the GDP than is covered by international aid, and receives the second highest amount of international aid per capita, which is an artificial and dangerous situation.

I, too, believe that this situation is unsustainable. The obsession to get more foreign aid prevents Nicaragua from designing a national economic policy. The government dedicates more effort to getting foreign aid than to laying out a national economic program and reaching consensus in the search for economic alternatives to the growing recession. In these conditions, foreign aid is much like economic opium.

2. "Donor Fatigue"

If the substantial amount of aid already received has been unable to make a dent in the poverty and massive unemployment, and the tendency is toward a drastic reduction in aid and tougher adjustment conditions, this leads either to the country's collapse and social disintegration, or to an urgently needed concertación and economic mobilization to attain growth and reverse the recessive tendency.

First of all, a critical evaluation needs to be made of how the more than $3 billion in aid has been used since 1990. The data provided in the seminar did not put the economic Cabinet in a good light. Approximately 40% of the aid was used to pay interest on the foreign debt. Of what remained in the country in 1992, only some $50 million was used for production. Commerce and services absorbed the majority, which was channeled toward the rapid growth of consumer imports. About fifty three cents of every dollar of aid that stayed in the country after the debt service was used for imports. The inundation of foreign consumer goods spurred not competitiveness but the collapse of the country's deteriorated industrial capacity. What this moment needs is great political and economic honesty, a recognition of international aid's failure to rebuild the country. This situation should be changed, not only because of the tendency of international cooperation to shrink, but also because of "donor fatigue" given the scant efficacy of the international resources within an economic policy oriented to pay on the debt, finance imports and maintain an overvalued currency.

3. A "Spent" Policy

There was consensus among all three participating groups that aid should be dedicated to production; even the government finally recognized that priority. All those present emphasized small and medium sized agricultural producers as the agents to begin reactivating the countryside, where the country's main economic resources are to be found.

It was significant that the Farmers' Project, presented by UCA Nitlapán at the end of 1991 [see envío, June 1993 for details], was supported by both Minister of the Presidency Antonio Lacayo and the MLA representatives even by a concrete offer of several million dollars from the Interamerican Development Bank (IDB). It is a strategic project since it has a major multiplier effect per dollar invested, both by generating employment, production for the internal and export markets and effective demand, and by being a strong multiplying factor on the industrial, commerce and service sectors. Rural credit has been shown to be the most recoverable in the banking system and generates the highest savings rate per dollar invested. I personally want to underscore the psychological effect of rural reactivation by creating employment and stabilizing its population. It would have an important "demonstration effect" for the whole economy.

A new economic policy could radically transform the failure of the current one, in which foreign cooperation is injected into commerce and automatically flows out of the country through the purchase of imported products without touching either industry or agriculture, thus lacking even a minimal multiplier effect [see the article on the IMF in this issue for a 9 point new policy proposal.] In this regard, the current policy can be said to have failed or, in the best of cases, to be "spent," since it cannot continue functioning due to the foreign resource scarcity and the growing level of poverty, unemployment and recession. These factors are turning the current period into a crisis of political ungovernability and economic non viability, which also implies a credibility crisis for the economic Cabinet. Improving efficiency requires new management, a new economic team and a new margin of credibility.

4. Less but Better Aid

It is necessary to improve the country's negotiating capacity based on a domestically agreed upon consensus and a tripartite negotiation among the government, society's economists and the MLAs. Even if aid is reduced, its efficiency can be improved and the economic results could be even higher than in the past.

In any event, a real possibility exists of increasing foreign cooperation for the productive sector, for agriculture and for small and medium sized growers. There is also a possibility of foreign cooperation for investing in human capital, in both health and education, and for a specific program on the Atlantic Coast. And, for the first time, joint international aid cooperation for Nicaragua is possible. That was not true in the past decade: foreign aid mutually cancelled itself out, since the Nordic countries supported government policy and the grassroots sectors while official US aid financed the war. This is not the moment for more aid, but for better quality aid and for using it where it has an impact. The possibility exists to negotiate better and with more strength, even to obtain more aid for certain strategic sectors as well as joint international cooperation to transform the aid into a more efficient instrument than in the past.

5. Full Disclosure

A profound change is required in the economic policy, the administration of that policy and in the economic team itself. A fundamental element of the new policy and of a new administration must be the full disclosure of information about the economy's progress so as to overcome the secretiveness of both the Sandinista government and the current one. Democratized economic information is a key factor for market efficiency. The current contradiction is that the market is defended while the principal element of market efficiency timely economic information rapidly available to all sectors of the population is eliminated. Economic democratization in the countryside, achieved with the millions of acres of land distributed by both the past and present governments, requires efficient use of available resources. The government's economic team has not only demonstrated that it lacks this capacity but has also created a profound credibility crisis that will be difficult to get over in the short term, as the urgency of the current crisis requires.

6. Nicaragua: Sisyphus' Rock

Even if economic management is improved and an agreed upon economic program is established, even if we win a "10" in economic efficiency, it will not be enough. Nicaragua's social, political and economic conditions are objective obstacles to economic reactivation, due to the wounds left by the war, political polarization, our products' low prices in the world market, and the protectionism prevailing in that market.

The US Sanford Commission recognized Nicaragua's peculiar situation several years ago, and demanded a post war program for the country. It was also recognized by an MLA expert, who said that "Nicaragua has had the worst conditions for adjustment in the whole world." These conditions have been made worse by the natural disasters that have befallen Nicaragua in the past two decades: a major earthquake, hurricanes, a tidal wave, volcanic eruption, floods, droughts, you name it. As in the Greek legend, just as this country's hope for peace, democracy and reactivation this rock of Sisyphus seems to be reaching the summit, down it rolls to the bottom again, destroyed by the natural catastrophes that aggravate the drama of political and social cataclysms.

7. Nicaragua Essential to Region

In May's meeting in Guatemala of experts called by the United Nations' Economic Commission on Central America and the Caribbean (ECLA), Nicaragua was also dubbed "Darian's Plug" on the regional integration map, for the obstacle represented by its geographic spread across the center of the isthmus and its permanent instability. On numerous occasions the Central American countries have requested preferential treatment for Nicaragua, thus demonstrating to the international community Nicaragua's strategic economic and political importance to integration and to its neighbors' political stability.

8. Technical Topics

In the seminar some timely technical points were analyzed: among others, the danger of separating finances and the banking system from production; the short term nature of the economic policies; the need for a selective but non discriminatory opening to foreign commerce, unlike now; the need for realistic exchange rates and for a sliding devaluation without traumatic jumps; a review of the interest rates, which are 10% higher than the world rates and are thus speculative and productively inefficient.

9. Poverty and Unemployment

The last point discussed was the crisis of ungovernability due to the political polarization and social destabilization caused by constantly rising unemployment and poverty. All present accepted the latter as priority issues, which makes possible a qualitative change in the economic policy and management style favoring democratization and broad participation in defining and implementing a new policy.

It was also pointed out that the crisis of ungovernability brings with it economic non viability. The two crises are interwoven and are polarizing and paralyzing, creating greater fragility and increasing the government's credibility gap. These crises demand a tripartite accord among the government, the MLAs and the nongovernmental economists.

It was proposed that this pressured but successful seminar on October 7 be continued, with more and better preparation. The government agreed to call the national economists on October 15 to continue the National Economic Forum and jointly prepare the next meeting with the MLAs.

Four Veto Powers

I personally stated that the need for economic consensus is fundamental to overcoming the four veto powers that exist in the country:
1. UNO, which has the ability to sustain a "capital strike," in which the business sectors refuse to invest in the country and encourage foreigners to follow suit, as COSEP president Ramiro Gurdián has declared.

2. FSLN, the largest party in the country, which can also depend on the strongest grassroots organizations and on major influence in the armed forces.

3. The government, which has available to it foreign economic aid and the legitimacy of state power.

4. The people, who, in both the recent transport strike and many other varied mobilizations in these past three years, have demonstrated their autonomy and their ability to struggle. People singly, people who are Sandinistas, members of the Resistance, of UNO or without a party; religious people, hungry and jobless people; people who in the majority are profoundly desperate and skeptical of both government and political parties.
If a national, consensual and fully debated accord is not reached, not only among the upper echelons but also among the grassroots of society, there will be no economic solution. Any of these four groups have the veto power to paralyze Nicaraguan society.

The Aid Myth

In the midst of a few hopeful, but still marginal signs, the big question is: are the key actors willing to begin a new economic process, with an agreed to position in negotiations with the international organizations, a new government management approach and the creation of an economic Cabinet that responds to these characteristics?
It is a very difficult question to answer. The lack of a leadership able to govern the great majority of Nicaraguans consensually and the absence of a long term vision among the dominant political groups means that dialogue is required, both to harmonize a broad consensus around immediate issues and as an ongoing structural feature. This is the only possible way out of the twin crises of political ungovernability and economic non viability.

The first priority is to shake off the deeply embedded economic culture of depending on foreign aid. It is not true that Nicaragua is not viable without aid. It can and must be viable without it. In essence, there is a profound deformation in the economic culture, which has created and continues to foster a kind of "collective subsidy consciousness."
Nicaragua has resources, economic potential and the geo economic position to be a viable country and once again reach growth rates similar to those of 1958 70, which were the highest in the world during that period. The challenge facing the country is to correct its deformed income distribution.
Our "growth" data can be schematized, as in other poor countries of the South, as a long stemmed champagne glass: the poorest 80% of the population is crowded in the stem sharing 20% of the nation's wealth; they hold up the 20% in the goblet, who wallow in the other 80% of the wealth. Furthermore, the share going to those in the stem keeps on shrinking: 60% now live collectively bored and wasted lives on less than 6% of the national income. Nicaragua thus reproduces nationally the North South relationship.

In order to become stable and not depend on foreign aid, the new growth must begin from below, and have a "volcanic effect." That is to say, it must have a broad productive base and a summit of accumulated wealth that is increasingly dedicated to expanding areas of greatest technological sophistication and international competitiveness.

The "trickle down" model of wealth distribution illustrated by the champagne glass polarizes, paralyzes and destabilizes the country, trapping us in political ungovernability and economic non viability, and even provokes the fatigue of those abroad who cooperate economically with Nicaragua.

A Test Case For the USA

To shake off the economic culture of aid, the government must negotiate with the support of the majority of civil society, the parties, the nongovernmental organizations, churches and grassroots organizations. The government should not give the image of being a weak and isolated institution. We could even negotiate the difficult foreign debt situation if we achieve a majority national consensus with which to mobilize a cancellation of the debt in the Club of Paris on the grounds that ours is the only country in the world with an economic collapse, a per capita GDP in 1993 inferior to 1960, and the highest per capita debt in the world.

The exceptional nature of Nicaragua's case and the profound repercussion of its destabilization on Central America this natural bridge between the north and south of the continent at the very moment in which the great mega market of the Americas is being born has not been sufficiently exploited as an active negotiating card.

The positive impact of such a position was shown somewhat in the meeting with the MLAs in the Olof Palme Center. The international organizations emphatically approved the aid to rural production and perceived that Nicaragua is a destabilizing factor to Central American integration and the Free Trade Agreement between Canada, the US and Mexico.

I believe they also accepted that the United States has so many domestic and international problems (Russia, Somalia, the Middle East, the loss of competitiveness with Europe and Japan) that it does not want Nicaragua back on the State Department agenda much less on that of the White House. Avoiding a mini Moscow in Managua is an element of the new US policy.
There is also a perception that a new policy for the region is needed in the post Cold War period. Nicaragua is a test country and some gestures and declarations indicate a new policy. Deeds are now required. Nicaragua could be a demonstrative case to show Latin America that the US policy of interference is being replaced with one of constructive neutrality. What could have seemed optimistic speculations only a few months ago may today be the result of the new US administration's pure and cold realism. It is a hope.

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What Happened in the Economist's Meeting?

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