Envío Digital
Central American University - UCA  
  Number 100 | Noviembre 1989



Revolution Seeks Foreign Investors

Envío team

As part of its search for resources to confront the economic crisis, Nicaragua has launched a campaign to attract foreign investment. But, unlike the subordinate relationship the country had with foreign capital under Somoza, this time the Sandinistas hope the relationship can be on Nicaragua's terms. "Foreign investment must adapt itself to the country's development plans. It must be respectful of our national sovereignty and right to self-determination," says Dr. Jesús Castillo, Director of Investments for the Ministry of Foreign Cooperation.

After eight years of war, Nicaragua is desperately in need of the capital that foreign investment could bring. The government also hopes to gain access to advanced technology and know-how, as well as administrative expertise. Foreign companies could contribute to Nicaragua's capacity to generate exports and thus bring in badly needed hard currency. Joint ventures with foreign capital would allow access to new markets. Castillo says the government is primarily looking for investments to strengthen agroindustry and tourism, though he did not rule out other areas.

Revolutionary Nicaragua has some prior experience with foreign investment: there are 36 enterprises with foreign capital currently in operation in the country. Among them are Coca Cola, Nabisco, Esso and Penwalt, which all have some degree of US capital dating from before 1979.

Esso is the most intriguing case. While the US-owned oil refinery in Cuba refused to process Soviet oil in the early years of the revolution, provoking its nationalization, Esso's Nicaraguan subsidiary has a different policy. Its Managua plant does process Soviet oil, part of which, ironically, played a key role in defense against counterrevolutionary forces backed by the US government. "I get the impression they have a practical outlook," said Castillo. "They've reached an agreement which benefits both themselves and the country. Like good businessmen, they take their profits and they work, independent of political questions."

Traditionally, Latin American revolutionaries, including the Sandinistas, have been economic nationalists who criticized foreign investment for its exploitative relations with the local economy. They saw objective contradictions between creating a safe climate for investment and fostering a revolutionary process. Capital, they pointed out, seeks conditions which maximize its profit rate: a cheap, docile workforce, cheap raw materials, freedom to operate with a minimum of restrictive environmental or other regulations, low taxes, etc.

A more investor-friendly law

Reflecting this view, the Sandinistas worked on developing a law in the early eighties that placed strict controls on investment on the model of those in effect in many South American countries. But economic realities forced a change. "I think they realized that if they wanted foreign investment, they couldn't have such a restrictive law," said sociologist Carlos Vilas.

The foreign investment law that was finally passed in 1987 is based on this new outlook. It was written with input from the UN Center for Transnational Enterprise as well as Mexican and Cuban government institutions and was reviewed by Nicaraguan lawyers with experience in the field of foreign investment. Like other Sandinista laws such as the agrarian reform, it provides a broad framework and leaves details to be worked out in negotiations on a case-by-case basis. For investors, this flexibility is an attractive feature. There are no pre-established rules about what sectors they can invest in, what percent of capital in joint ventures must be national, what kind of taxes must be paid or other aspects. Even more important, the law guarantees them the ability to repatriate both capital and profits and the access to hard currency that will make that possible. Investors have the right to foreign credits within debt limits set by the Central Bank and to short-term domestic credits for working capital.

In making the decision to open Nicaragua's door to investment, the Sandinistas do not feel they are abandoning their principles. A key feature of the foreign investment law is the criteria it establishes for acceptable proposals. These appear in the law as follows:
1. Strategic importance [of the investment] evaluated in terms of its contribution to the economic development of the country within the framework of national economic policies and plans;
2. Impact on the balance of payments. Special consideration will be given to those investments which generate positive flows in the short run through the production of goods, their contribution to the penetration of new markets or in import substitution;
3. The contribution of both soft and hard technology and the degree of acceptance of the transfer of technology to nationals;
4. The degree of complementarity of the investment and technology with local technological and financial resources;
5. The generation of employment among sectors of the population, geographical zones and regions prioritized in national development plans;
6. Impact on the supply of basic goods and services for the well-being of the population;
7. Possibilities of vertical and horizontal integration with different sectors of the national economy;
8. Preservation of the country's moral, social and cultural values;
9. Degree of ecological and environmental impact.

These criteria are to serve as guidelines for the Ministry of Foreign Cooperation in negotiating agreements with individual companies. Clearly much depends on the commitment to these principles and bargaining skill of the government representatives in charge. There is a danger that the urgency of Nicaragua's need for capital in certain areas could force compromise. For example, Penwalt, a chemical plant with foreign and state ownership, continues to operate despite its polluting effects on the environment and health hazards for workers. At this point, the country cannot afford to force a cleanup and risk driving out the foreign investors and losing the hard currency the plant earns with its exports of agricultural chemicals. Neither can the government afford to invest its own capital in replacing obsolete equipment.

Such tradeoffs may also occur with new investment projects, though harmful compromises may be easier to resist with new applicants than with established enterprises. Castillo cites the case of a proposal by Costa Rican business interests for the exploitation of lumber resources in the southern border region of Río San Juan. Protests arose when environmentalists learned of the project, and it was cancelled. "The government is responsive to the population," said Castillo. "If this had happened during the previous regime, the concession would have been granted. Somoza didn't stop to think about ecological questions."

As Vilas pointed out, "The fundamental issue is not the nationality of capital, it is how to control its potential harmful effects." The contradictions between profit and social concerns already exist within Nicaragua's mixed economy whether or not there is investment from abroad. Foreign capital is not necessarily more exploitative in all areas. Often, for example, a foreign company can offer better wages and working conditions to workers than a local one because of its greater resources. The real danger lies in the greater power of transnationals to exert control over a small, vulnerable economy.

In any case, Nicaragua will have an uphill battle to attract investment. Most risk capital, according to Castillo, has shifted to Southeast Asia. Latin America's debt problems make it a potentially unstable and unattractive choice. Nicaragua, in particular, lacks modern infrastructure and a skilled workforce. The revolutionary nature of its government and US hostility are also discouraging factors. The US economic blockade, while not affecting capital invested prior to 1985 when it went into effect, makes new US capital investments illegal. It also prohibits the purchase of spare parts and raw materials from the US. Francisco Boza, lawyer for Nabisco Cristal, S.A., a company with 51% US capital and mostly US-made machinery, explains the practical problems caused by lack of access to products from the US. "If you change the raw materials and use whale blubber from Russia as we have had to do, the crackers have an awful taste. The flour now comes from Canada and Argentina. It's different and the machines know it." Though Nabisco Cristal can get spare parts from the company's other Latin American subsidiaries, it is unable to get access to lines of credit from US banks.

Investor feelers already

Despite these difficulties, a number of investors have already sent out feelers. Thirty US business executives met recently with Minister of Foreign Cooperation Henry Ruíz and expressed interest in investing and working against the trade embargo. Investments Director Castillo says US investors are interested in a $100 million project to recover lumber from trees felled by Hurricane Joan last year. There are East Germans interested in processing and exporting tobacco and Soviets interested in a joint venture with the state-owned banana company. Investors from Spain, El Salvador and Guatemala are discussing shrimp-processing projects and Czech interests are exploring a possible jewelry-making venture using semi-precious stones from Region II along the Pacific Coast north of Managua.

Why is there so much interest in setting up shop in Nicaragua, given all the reasons to look elsewhere? The kind of legislation passed here has had a positive effect. "I see the law as very attractive for the investor," commented Nabisco Cristal representative Boza. According to Castillo, investors see Nicaragua as the most stable option in the region. "They look at the problems in El Salvador and Guatemala... In their view, the social changes that are being fought for in Central America have already been made here." The unions, for example, enjoy protection and benefits not available elsewhere. In turn, because they see the government as protecting their rights, the pro-Sandinista unions, which represent the majority of workers, have committed themselves to raising production to promote economic recovery. They oppose strikes as a means of resolving conflicts. As elsewhere in the Third World, in Nicaragua the cost of wages and raw materials are low in terms of their dollar equivalents. Unlike other countries, corruption and graft are minimal.

It is only now, with the winding down of the contra war and a government shift to an economic focus, that a campaign to publicize the law and draw foreign investment could be launched. But the effort isn't likely to show instant results. In the long run, Nicaragua's success in attracting investment will depend on the further progress of regional peace initiatives and the way the February elections are viewed internationally. If the Sandinistas win, which they seem likely to do, and international observers certify the process as clean and fair, the US will have little choice but to reduce its level of hostility. Better US-Nicaragua relations and an end to the embargo would significantly improve the country's "investment climate" as well as its chances of receiving international aid for its struggling economy.

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