Envío Digital
Central American University - UCA  
  Number 162 | Enero 1995



Will Economics and Politics Keep Playing at the Same Table?

The unrestrained rivalry among political leaders and the fight for survival among economic groups, all looking to get rich quick before the game ends, are actually what is bringing the game to its end.

Nitlápan-Envío team

As 1994 rang in, Nicaragua's economy was bankrupt and its political forces were in the process of regrouping. The clearest sign of bankruptcy was seen in the coffers of the Central Bank; they held only US$5 million in foreign reserves less than three days worth of exports. The political realignment was found mainly in the National Assembly, based on a new, broad consensus around a variety of issues, among them the need to reform the Constitution. The legislative body started to take its first forward steps after a two year paralysis.

The bankruptcy was the inevitable fruit of 1993, a lost year in which the government only managed to maintain the prices and exchange rate it had stabilized in the previous two years thanks to the still abundant flow of cash foreign aid, and even with that it wasn't easy. The country certainly did not go from stabilization to growth, as adjustment experts insisted should happen. Unemployment figures kept right on rising, and the external account deficits were only compensated for by the immoderate use of foreign aid, thus creating even more dependency and debt. The restrictions the US Senate imposed on disbursing US aid to Nicaragua in 1992 showed how fragile the economic policy and narrow the government's maneuvering room really were.

Throughout 1994, the National Assembly was mainly absorbed in the constitutional reforms. This left the field open to the executive branch in its game of choice: economic policy in general, and agreements with the international financing institutions involving the foreign debt in particular.

The year got off to a good start by leaving behind 1993's sterile economics v. politics debate. No longer did some insist that "there's no economic growth because the government's economic policy is bad" while others countered with equal fervor that "there's no private investment because there is no political stability or a legal framework that respects private property." Neither position had been wrong, but neither owned the exclusive truth. In fact, the two mutually reinforced each other.

What Sinks the Boat

Without institutions that are up to the task, it is impossible in a market economy to implement a "correct" economic policy one that promotes growth with equity, increasing employment and improving living standards, while simultaneously trying to reduce external imbalances, maintain price stability and reverse environmental destruction. These institutions include not only state or nongovernmental bodies and banks, but also the laws and norms that govern society and make possible its very existence, allowing a mass of individuals with contradictory interests to coexist and function.

Society has the capacity to consciously regulate itself, to form and reform its own institutions so they function appropriately, but only if there is enough political consensus. This consensus is all the more necessary if the institutions inherited from the past are weak, maladapted or insufficient for the functioning of a modern society. It is more necessary yet when society is forced to plug rapidly and deeply into a world system also in the process of totally revamping itself, in which economic war and internationalized finance have replaced traditional diplomatic arenas.

There appears to be no room for unfettered rivalry between political bosses or fights for survival between economic groups' in a country like Nicaragua. If everyone sets about to get rich quick before the boat sinks, that is precisely what could make it go down. This kind of environment makes it very hard to transform institutions or the way they function, and nearly impossible to have an economic policy that actively promotes private efforts. It's like trying to drive a vehicle that doesn't respond to the steering wheel.

Unlike 1993, some advances were made in 1994 along parallel roads the economic and the political. But a lot of work is still needed to link those two roads. All this effort will not have been in vain as long as new "black clouds" do not appear between now and the 1996 elections and wash it all away. At the end of 1994, some advances stand out and some weaknesses are clearing up, but not all the possibilities are encouraging.

ESAF: A Necessary Evil

The year's most relevant economic event was the sign ing of the Enhanced Structural Adjustment Facility (ESAF) agreement with the international financing institutions in April. Those who reject the government's policy have criticized a number of ESAF's points or in some cases the whole package but without presenting a coherent alternative program. The main criticism, however, is that it is too limited: it does not link the concession of new foreign resources over the next three years to any obligation to make structural changes and implement a development policy that promotes growth, thus assuring that today's loans don't become tomorrow's unpayable debt burden.

But ESAF cannot be asked to be something it was not conceived to be. ESAF is simply very soft financing that international financing institutions provide to poor countries so they can maintain the macroeconomic stability achieved. In Nicaragua, the only way for the government to get out of the hole it found itself in was to sign the ESAF agreement. With $5 million in international reserves, it had no time to waste and was in a poor position to make demands. Besides, agreeing to the ESAF conditions was a prerequisite to renegotiating the foreign debt with the wealthy countries at any serious level. In sum, ESAF was a necessary evil in exchange for indispensable resources.

The ESAF conditions are more precise in the aspects that refer to macroeconomic balances, fiscal rigor, a greater opening to foreign commerce, and reduced state intervention in the economy than they are in promoting profound structural changes and demanding a development program. This is logical, given the lending agencies' dual role. On the one hand, they try to get the poor countries to pay their foreign debt rather than continue importing more than they export, and on the other they promote increased world trade by eliminating national tariff barriers.

ESAF and the Banking System

Are these the best ways to create a new, more sustainable and equitable international order? Obviously not, but Nicaragua in 1994 offered little room for a debate over principles. Even more seriously, there was virtually no debate about anything. As is customary with this government, the possibility was lost to inform the nation and spark an open debate, to use ESAF to promote structural changes that are compatible with its program but are not explicitly contained in it.

One example. In ESAF, the state banking system is criticized for inefficiency, which is fair enough. The state banks do not promote development, and are not even true commercial banks, since their loan policy responds to corrupt political criteria they loan to wealthy families unwilling to risk the money in their own private banks. But ESAF stops there. It does not consider that simply privatizing the banking system will not solve the small producers' huge need for financing. Banking and credit problems require a more integrated solution than ESAF contemplates.

Does ESAF Leave Any Space?

Could the government itself do something along the lines of such an integrated solution? It could do plenty. It could publicly auction off the collateral put up by big borrowers who have overdue debts, both to clear out the state bank's arrears portfolio and to promote a "revolution of honor." It could design financial mechanisms that include repurchasing the collective arrears, the funds from which could be rechanneled to institutions that offer non-conventional credit schemes. It could even promote these institutions, which could play a decisive role in financing rural and urban development among sectors left unattended by the cautious and few private banks.

ESAF does not consider measures such as these, but they are not incompatible with it. They respond to one possible reading of the quite justifiable criticism ESAF makes of the state bank's inefficiencies. Although ESAF does not impose solutions, it could be used to find a national solution to a major problem for our economy without undermining the philosophy running through the agreement.

Another, supposedly stricter ESAF recommendation is the elimination of arbitrary customs exonerations and other exemptions, leaving only those permitted by law. Little has been done in this area so far, and the tax system is still shaped by the caprice of the most powerful economic groups and influential personalities.

Despite its limitations in both content and implementation, ESAF is a necessary evil. It maintains the basis for stability and gives the government a breather. It opened the door wider for Nicaragua to renegotiate its huge foreign debt and significantly reduce the service on it. Without ESAF, the equilibrium achieved in 1994 would be still more fragile in 1995, and the goals contained in the agreement itself would be increasingly harder to attain. But better use could have been made of it to fill an urgent need: the promotion of nationally agreed to actions to improve the productive and financial structures and draw up a national development plan.

The Chamorro government has begun to speak more insistently of the need to do this. Would the preparation of such a national development plan truly take into account the sectors that, though most numerous, have less voice to make their demands felt? In any case, carrying out the plan, however good it may be, will require institutions that spark development, not stall it.

The Constitutional Reforms: A Necessary Good

Given that the Constitution provides the framework that governs all other societal institutions, it must be adapted to the changes occurring in society so that past legislative visions do not act as a drag on the future. On the morning of November 25, after 10 days of marathon debates and confusing, slanted coverage in the national media, the package of constitutional reforms finally got its first stamp of approval. A necessary second round of voting comes after the new legislative session opens next January 10, and it is anticipated that the amended Constitution will go into effect in the latter half of 1995.

Some of the reforms, if confirmed in that second round, establish new rules of the game for the government. They reduce its heavily presidentialist character, prevent the reconstitution of the most visible aspects of nepotism by prohibiting relatives of the incumbent president from running for that office, and grant to the National Assembly the role that all democratic Constitutions give to the legislative branch regarding fiscal issues and the ratification of international economic treaties.

The reforms also set new rules for democratic representation. A second round of voting is established in the presidential elections if no party gets at least 45% in the first round, which prevents any party from taking office without a comfortable plurality and obliges small parties or party fractions to make alliances to avoid disappearing from the political map. Another important aspect is that local representatives must live in their electoral district, which prevents parties from "parachuting" national figures into areas where they are weak instead of doing effective political work on concrete problems through their local leaders.

In addition, the reforms represent some very important social achievements. They ratify free primary and secondary education as well as a fixed percentage of the budget for both higher education and the judicial branch. Another reform abolishes military conscription.

Only the First Step

These constitutional reforms are only the first step in a profound modernization process that the Nicaraguan state must undergo in all dimensions. It must also restructure the various dependencies of the executive branch to reduce bureaucratization and improve the quality of their service. It must promote a civil service law and administrative career so its public officials can be recruited on the basis of professionalism rather than on friends in high places. Public finances must be modernized to create a more open fiscal system that is less subject to arbitrariness. And municipal budgets and functions must be further strengthened and decentralized.

But at least this first, important step is now being taken. The support that the reforms enjoyed in the National Assembly, the bulk of the political class and, according to informal surveys, a majority of the population is also a major achievement. The course of the reforms will be hard to stop, even though a significant group of influential politicians sees its various immediate political interests harmed by them and have tried to derail them.

On November 21, when the legislative debate was already in full swing, Minister of the Presidency Antonio Lacayo sent a message to the nation in which he called for a separation of the reforms into "essential themes" and those of "political mechanics." He proposed a full debate on the first, with a stress on the search for a "national development strategy," and suggested that the second be postponed until 1995 or 1996. This late coming proposal, aimed particularly at shelving the legislative debate on the reform that would prevent him, as the incumbent's son in law, from running for President in 1996 was not taken up by the political class.

Again, much more could have been done around such a relevant issue as the reforms to promote more openness in the country. Apart from specific efforts by a few media to explore the reforms' content and implications, most of the changes are still very confusing to a large part of the population. Some media even used the reforms to deceive and disinform. The tense conditions in which the bill made it to the floor for debate and the speed with which it was discussed and passed played a role in both the confusion and the disinformation.

Between now and the next round of debate and voting, many back room deals and realignments could be made. It is an open secret that some parties are conditioning their representatives' vote on the reforms to getting their preferred candidates elected to the Assembly's new executive board, another of the first agenda items for the new session. But the December recess also offers the opportunity for the media to examine the reforms more calmly and do a better job of explaining them to the public. The future of the respect and credibility that the National Assembly began to earn in 1994 will depend on its firmness and on how open the second round debate is.

The Major Obstacle: Election Fever

Once the political and economic problems began being seen as linked, the private sector and economic agents from the government and international lending agencies gained more influence. "In the new game, everyone has to play their part at the same time," we said in the February March 1994 envío. A year has now passed, and the creation of a genuine institutional mechanism that organizes the economic programming in a tight consensus with the private sector is still pending. This mechanism must promote trust in the stability of the economy and the national currency, and must involve the foreign financing representatives so they can coordinate cooperation among themselves and with national demands.

The slowness with which this mechanism will eventually be implemented is comprehensible given the existing institutional limitations, contradictions among the economic agents and the divergent views among those who provide financing. The greatest obstacle of all, however, is found among caudillo politicians, given the approaching elections and the almost inevitable stress put electoral interests over any other consideration.

Since none of the political forces have well founded and publicly debated alternative economic programs, it is probable that we will see the emergence of a cheap fight over votes rather than an informed and informing debate over ideas. Symptoms of this are already appearing. Parties are riding the coattails of members who are also respected leaders of local organizations, unions and even religious groups, to gain entry to these organizations, politicize and polarize them, parasitically sucking votes out of structures that others organized.

Other parasitic behavior is also becoming evident. Local politicians are making use of peasants' saving and credit funds to finance their electoral campaigns. Once again, the end seems to be justifying the means. But what justifies the end?
We are already being bombarded with cheap speeches packed with wild promises. The question is whether a party that wins the elections with these hollow methods can enjoy greater governability after taking office than exists now. In the Somoza era, the National Guard guaranteed governability, and even then it did not last forever. Some will also try to lobby abroad to feel on firmer ground domestically, but everything suggests that the traditional Somocista methods of buying votes with rum popsicles and nacatamales, or a more modern and authentic variation thereof, will probably be the most common tactic.

It is still too early to measure the political forces and evaluate the effectiveness of each in using of the various electoral methods. Nor is it easy to know the degree to which their respective economic clout will give them the cutting edge in an electoral race in which the use of costly propaganda and vote buying will be the order of the day. At least, such a campaign will offer the people an advantage: politics will be a source of jobs for many of them, albeit temporarily.

The most relevant and difficult phenomenon politicans face as the elections move nearer is the tendency of parties to atomize. In a country of some four million people, there are already more than two dozen parties. The closer the elections, the faster this fission process could become, as in a nuclear reaction. Hopefully the political heat released by this process will not spark a sizable social explosion.

Political Forces and Caudillos: A Pretty Pitiful Sight

A brief review of the most organized political forces offers a desolate landscape. The infighting among members of the various Conservative parties seems increasingly like a fight over merchandise in a bargain basement sale. Meanwhile, the Sandinista factions are busy disqualifying each other with references to betrayal that have no historic basis or labels as renovators that never list content. The main result is that both sides are losing legitimacy and moral authority among the more than 300,000 who recently registered as Sandinistas. This is particularly true of those who profess to belong to neither current (and often not even to grasp what the critical points of divergence are) and only want to see the party heal its wounds and reunite.

The Liberals, behind their well advertised unification process, are tossing subtle but poison tipped darts at each other in cartoons or in carefully phrased speeches that demarcate quotas of power. Despite evident and often public tensions, Liberal leaders insist that the unification process of their five parties, which began in March, is moving well and will conclude in the first months of 1995 with a convention to elect the national leaders of a new and unified Liberal Party. How can one expect the population to behave civilly when its political class is so shamelessly uncivilized?
Taking a look at some of the caudillos does not offer a much prettier picture. To one side we see Alfredo César, brother in law of Antonio Lacayo and leader at large of the remains of the UNO coalition, entering gallantly and with great fanfare into the pre electoral fray, bolstered by his friends' return to power in the US Congress. But who will believe in the sincerity of his sudden concern for the nation or in his capacity to forge consensus?
To the other we see Managua Mayor and Constitutionalist Liberal Party caudillo Arnoldo Alemán, confident of his charisma, biding his time while he tries to dazzle with his executive capacity in the capital and makes frequent trips to Miami. But his saccharine populism and new found tolerance of the FSLN rub many of the wealthy and not so wealthy the wrong way. Could he be reading from the polls that people are as tired of verbal aggression as they are of military aggression? Can a leopard shed its spots and pass as a pussycat?
We see Conservative caudillos who have not even managed to convince their own party members. How do they think they will be able to convince the nation? We see an FSLN secretary general still convinced that only a vanguard party can be correct because it owns the one and only truth, and has thus not taken on the task of forging a party of consensus that could contribute to a nation of consensus. But with almost no one believing in vanguards any longer, is this really the best way to put together a political project?
Finally, we see Antonio Lacayo himself, President Chamorro's "super son in law" whose own presidential ambitions have been frustrated by the recent constitutional reforms, heading up a group of politicians he bought some time ago and with whom he is trying to buy a party. But is he not a damp firecracker that will no longer light given all the intrigues with which he is associated? And is his political project not also a dud that can never sparkle enough to outshine the image of his corrupt and inefficient government?
Other, perhaps more authentic leaders, will surely emerge along the campaign trail over the nearly two years that still remain before the elections. One big question mark is the role that General Humberto Ortega, who retires from his post as head of the army next February, will play. At the end of November, a few days after President Chamorro's November 21 announcement that Ortega's replacement would be Major General Joaquín Cuadra, Daniel Ortega was interviewed by the Nicaraguan magazine El País, and listed his brother among the FSLN's "leaders of national projection." "After leaving the army," said Daniel, "Humberto plans to support the party by doing political work with the sectors outside of Sandinismo." Several days after that, General Ortega made a long and evidently important trip to Cuba.

Will he use his sizable personal fortune to invest in Nicaragua, creating productive enterprises and generating employment, thus demonstrating that he is a more patriotic entrepreneur than others and that investment should not only be made abroad? As a big capitalist, he might be able to generate sizable support in the dominant circles. And being patriotic, he may be able to carve out a new political image for himself. But it is still too soon to flesh out this possibility.

Despite the Economic Policy...

While 1995 is shaping up as a year full of uncertainty regarding the behavior of the political parties and their leaders, the economy is sending out contradictory signals. Agricultural production for export is making a comeback, but the main reason for the upswing is the rise in international prices, particularly for coffee. The economy is thus growing in spite of the economic policy.

Given that international prices for Nicaragua's agricultural exports are expected to be good for the next two years and that ESAF guarantees a flow of aid for the same period, the country should not face any serious external restrictions before 1997. But if authorities are complacent about the superficial growth indicators and do nothing about the increasingly inequitable income distribution, the economy's structural weaknesses will remain.

The government has all the right in the world to feel good because exports are growing, and it is right to make policies that stimulate further growth, but the distribution of the benefits of growth and the windfall advantages of the world market should not left unattended. If the country as a whole is to develop, the profits generated should have an impact on the formation of internal savings and on productive investment.

National development is not the least bit served by the coffee growers, or the fraction of them linked to processing and export, who get huge dollar earnings if they use them to import new vehicles for their personal use. If this happens, ways to stimulate new imports will have to be sought to finance the extra petroleum and spare parts needed to keep these vehicles on the road once the international price bonanza is over. This may sound like an extreme case, but it is very possible in Nicaragua.

Who Should Pay?

The issue of stimulating exports has been on the table for some time. Given that the starting point is the need to export more so as to finance growth, which is understood as importing the equipment, inputs and consumer goods that growth requires, it would appear that stimulating exporters should happen at whatever cost.

The crudest way to do it is to return part of the profit tax that the exporters declare, in a proportion equal to the amount exported. But this system is the same as paying the exporters a higher price for their products than they receive on the international market.

Such a system of generalized subsidies to exporters, who are already one of society's most privileged sectors, is the one preferred by the very politicians who defend the "free" market and the state's non intervention in the economy. These politicians argue that an alternative system such as a law to temporarily promote specified exports would arbitrarily decide which exporters should win and which should "lose". But is it not worse to arbitrarily decide that all exporters should gain more, when they are always the winners in a country as linked to the international market as Nicaragua?
If the relevant constitutional reforms are ratified next year, the moment will soon come in which all such tax laws and mechanisms will have to be debated in the National Assembly. This is not because legislative representatives are wiser and better informed than Economic Cabinet officials, but because this system offers greater guarantees of open decision making and more space for economic agents and social groups to participate in the debates and decisions. It is also because this gives the citizenry access to information, explanations and involvement. It opens up the game.

The Game Is Closing

The tax policy is now seen as one of the greatest limitations on transforming eventual economic growth into development. Or, to say it more precisely, to turn accidental and fragile growth that depends on rain and international prices and always favors a few into sustained growth with greater levels of social equity. If the National Assembly is to play a socially useful role in the issue of taxes it must duly inform itself and solicit the required explanations from the Ministry of Finances. It is a broad and complex issue, which covers both the amount of taxes and decisions about who pays them and the nature of the different taxation instruments used.

Another of the country's big economic problems, and one which largely closes the game, is the increasing fragility of foreign aid. The country's economy relies heavily on such aid, which the momentary boom in cash income from coffee exports should not let us forget. Although ESAF guarantees a foreign resource flow for two more years and could even be renewed in the future, a large part of the cash resources that come through this agreement are used just to service the foreign debt.

Even if the strategy for renegotiating the debt is successful, it is most likely that achievements in reducing the amount of back debts and those that are no longer being serviced will be obstructed by the reduction of current debt service. The service on the current debt will continue to grow and to absorb the lion's share of the funds freed up by the costly fiscal adjustment to which the country is being subjected.

The return of a Republican majority to the US political scene, with Jesse Helms at the head of the Senate Foreign Affairs Committee could further close the game, blocking the aid that Nicaragua receives from international agencies in which the United States has a decisive voice. Senator Helms has persistently pressured the Chamorro government on several issues over the past few years: the return of properties confiscated from US citizens by the Sandinista government, the clearing up of possible official involvement in the arms cache that exploded in Managua's Santa Rosa neighborhood in May 1993, and the results of the Tripartite Commission (made up of representatives of the Nicaraguan government, the CIAV OAS and Cardinal Obando y Bravo) investigation into human rights violations. In 1992, Helms pushed an amendment through Congress that forced the US government to freeze its aid to Nicaragua for over a year.

To the possibility that the aid provided by the United States and the agencies to which it belongs must be added the fact that even those cooperating countries that have been most generous with Nicaragua are backing away. They are coming to a decision not to be an easy mark in the looming electoral game, indirectly financing the campaign with funds for "social aid" that end up being nothing more than tools for electoral populism.

The Challenges Ahead

The coming year will begin in better shape than 1994, but the international community will be watching how our economy functions more closely than ever. They will not easily accept a rerun of the irresponsible speeches that lay the blame on the IMF or the unions depending on their political bent to justify Nicaragua's inability to take charge of its own development.

Increasing the public sector's efficiency, reducing corruption and arbitrary management, making social spending policies more effective, stressing the formation of human capital to position development on a more solid substratum, strengthening the democratization of economic decision making and the capacity of consensual economic administration between the social actors and the government, designing a tax system that is more progressive and less subject to the arbitrariness of pressure groups, and promoting a flexible financial system adapted to the diversity of demands in the country are huge challenges that cannot be met overnight. But it is possible to meet them. Taking on these challenges requires social participation in the change process and a government with responsible technical leadership capabilities.

IMF director Michel Camdessus said in Washington at the beginning of 1994 that "a correct social policy and a good government are needed, not only for their intrinsic value, but because this supports the adjustment and the reforms. Special attention should be given to developing the technical capacity to put the correct measures in practice. At the same time, governments should maintain an open attitude, disseminating economic information and explaining the adjustment policies and reforms publicly."


The government has to start sometime. The medium term economic plan it is drafting contemplates these elements and many others that will have to be taken up slowly to put Nicaragua on the road to sustained growth with social equity. But anything is possible in the medium run, particularly on paper. Even the miracle of a more civic society is possible, in which the majorities stop waiting for manna from the government and the minority stops milking everything it can out of the weak and passive government.

Finding a path in the medium run has requirements in the short run. The short term difficulties and contradictions must not keep the system paralyzed. The social space in which the policies of tomorrow are drawn up openly, respecting today's balance of forces, should begin to function right now, despite the weakness of the current institutions. Finding the path presupposes a political class that starts collaborating with national interests, not one that continues to put a priority on getting everything it can from power, to the detriment the country as a whole.

Seeking this path under these conditions is one possible scenario. But there are other, more depressing ones. In one such scenario, party and personal interests are worsened by the ticking of the electoral clock. In this one, the nation would be held hostage by political parties, and the "black clouds" would return to darken the sky until they provoke the downpour of the anticipated elections.

Hopefully patriotism will win out over party temptations. The game between economics and politics is closing quickly. Not much time remains to think about how to play the hands. Neither cold technocratic options that tolerate the abuses of power nor electoral populism will produce positive results in Nicaragua. Either we will return to chaos, even greater the second time around, or we will begin to move along the path of more equitable and consensual development. What card will each team play?

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