Nicaraguan Sandinista Economic Model Consolidates Its Success
Despite a lack of capital sources, Nicaragua has managed to prioritize poverty reduction.
January 31, 2016
Published by Telesur
Since the Sandinista Front returned to office under the leadership of Daniel Ortega in January 2007, Nicaragua has been an outstanding example of of gradual recovery by a vulnerable country immiserated in poverty by decades of neocolonial intervention. Without sources of capital accumulation such as mineral and energy resources and without a developed industrial infrastructure, the country has still managed to prioritize poverty reduction. The Sandinista government has worked with pragmatism and creativity on socialist inspired principles to promote stable social and economic progress despite the destructive volatility of global capitalism. One measure of its success is that in 2011, President Ortega's government completed the IMF program it inherited in 2007, and has not had one since.
Today, after eight years in government, President Ortega's team has built a much more diversified economy, attracting record levels of investment from both the international private sector and international financial institutions. The Sandinista government has combined those sources of capital with traditional development cooperation resources and also the hugely important resources made available via Nicaragua's membership the Bolivarian Alliance of the Americas (ALBA). The government has also introduced very important tax reforms, creating a fairer tax structure resulting in higher government revenues.
This matrix of capital investment and resources has enabled Nicaragua's authorities to completely renew the country's infrastructure, most noticeably, roads and ports and electricity generation. While Latin America and the Caribbean generally struggle to cope with stagnant growth or even contraction, Nicaragua's economy is projected to grow at around 5 percent through 2016 and beyond. The country is regarded by economists as being more resilient than its neighbors and less vulnerable to the volatility in much of the global economy, thanks in large part to the remarkable social progress made in reducing inequality.
Although you would never know it from reading Western alternative and corporate media, Nicaragua's macro-economic results last year are among the best in the region, a fact widely acknowledged even by international bodies like the World Bank. For example, on January 20th, World Bank's president for Central America, Humberto Lopez,announcing the bank's prognosis for 2016, publicly rated Nicaragua's economic performance as "admirable": "Nicaragua's performance is one of the best we have in the Latin American region, for us it is a chance to make sure things next year will continue in the same direction",
For its part, the IMF predicts growth of 4.2 percent for Nicaragua this year, against a contractionary prognosis of -0.3 percent for Latin America and 3.4 percent for the world economy overall. Nicaragua's Central Bank reckons that, despite global stagnation, the slowdown in China and the drop in international commodity prices, Nicaragua should show 2015 GDP growth of between 4.3 and 4.8 percent. Over the last twelve months, the World Bank re-classified Nicaragua from an IDA to an IDA-GAP country after three consecutive years of achieving a per capita income above US$900. Accordingly, international credit rating companies such as Moody's and Fitch also improved Nicaragua's credit rating making it eligible for loans in global financial markets. Also in 2015, the United States decided Nicaragua no longer required the so-called “waiver” on unsolved property claims by U.S. citizens that potentially restricted Nicaraguan exports to the US. Finally, Nicaragua was removed from from the “grey” list of countries subject to enhanced controls imposed by the anti-money laundering procedures of the Financial Action Task Force (FATF).
In the end, recognition from international institutions means little compared to what Nicaraguans themselves think of their government. In that regard, a poll in January this year from the respected M&R opinion polling company showed President Ortega’s government with the highest levels of approval of any Nicaraguan government in the last 25 years. Seventy-five percent of Nicaragua's citizens approve of the government. By contrast, the opposition parties together hardly earn the sympathy of 8.1 percent of the electors. For 70.8 percent of those interviewed, the main problems of the country are economic (unemployment, high prices, poverty). However, only 19 percent say their income is not enough to meet basic needs which is 14 percent fewer than a year earlier in December, 2014. Another encouraging indicator is that while in 2004, three years before Daniel Ortega returned to office, 72.3 percent of those interviewed wanted to emigrate, today that figure is 46.4 percent, according to M&R's survey.
Those trends were clearly confirmed even by the latest survey from the Costa Rican CID-Gallup company, whose anti-Sandinista bias is obvious from its commentary on the results obtained. Such levels of approval are not by accident and correspond to the relevant statistics: average growth of 4.7 percent over the last five years, 30 percent increase in electricity coverage scheduled to reach 90 percent of the homes this year; reduction of poverty from around 50 percent in 2005 to less than 30 percent in 2014. To see the reality of the change, it suffices to take a stroll in any Nicaraguan town or village and compare the overall picture today with the one ten years ago. Roads, streets, schools, parks, public health clinics and other infrastructure have been completely renewed or else built from scratch with all the employment creation and focus on social programs that implies.
Paraphrasing Argentina's former president Cristina Fernández, the results achieved by the Sandinista government “are not by magic”. As a Nicaraguan official report points out, they result from “the approach implemented by the Government, with sensible and pragmatic economic policies within a model of alliances, dialog and consensus”. That model itself can only work via the participation of the whole population in the country's development so that the most vulnerable sections of society become true protagonists. It is a model that guarantees equitable economic development explicitly accompanied by corresponding social development. Everything is interconnected.
Reducing inequality and poverty and adopting highly inclusive social and economic policies, facilitate low crime levels of criminality by making Nicaragua's internationally recognized community-based policing possible. The social and economic success of that policy mix ensures the support of the private business sector, itself made stronger as a result of those same policies. That too is seen in the annual tripartite mechanism to negotiate the minimum wage by consensus, involving workers, employers and the State. It is a mechanism looking beyond the issue of remuneration, aiming rather at improving the country's productive capacity. That consensus is only one component of the national model of dialogue and it interacts with other components in all areas of the national life, especially health and education.
A look at the figures shows how sustained economic growth is enabling Nicaragua to aim realistically at eradicating poverty for good. Since 2007, the country has grown at a rate above the Central American regional average, second only to Panama. According to preliminary numbers, per capita GDP has increased from USD 1,204 in 2006 to 1,929 in 2015. Despite contracting -2.6 percent in 2009, the country recovered quickly to resume its path of steady economic development. Macro-economic stability, especially low, stable inflation, is essential to achieve such results. Since 2008, inflation has been in single figures with a tendency to decline. One tool helping restrain inflationary expectations is the Central Bank's long standing use of a sliding devaluation of the exchange rate against the U.S. dollar of 5 percent a year, reducing currency exchange uncertainty. Confidence in Nicaragua's domestic financial system is also increasingly robust. Between 2006 and 2015, deposits increased by 123 percent and available credit by 151 percent.
Other factors contributing to stability have been the wage consensus mechanism, State intervention to regulate supply and demand of basic foods, monetary stability, guaranteeing property rights for people at grass roots, secure levels of inward investment, determined diversification of export markets and, perhaps above all, the government's integration of a great many previously excluded people, overwhelmingly women, into economic activity by enabling access to credit. The quality of Nicaragua's economic growth has also permitted an important increase in formal employment, in a national and regional context characterized by high levels of informality. In 2006, Nicaragua's Social Security Institute (INSS) covered only 439.000 people, in 2015 the coverage reached 783.000. In 2015, with an increase of 81 percent, Nicaragua had the highest growth of formal employment in Latin America.
Balanced fiscal policy has also promoted Nicaragua's economic growth. During all these years (except 2009), the public sector deficit has stayed below 1 percent of GDP. In 2015 it was 0.7%, and in some years there has been a surplus of up to 0.5 percent. On the other hand, tax revenues have doubled, from US$926 million in 2006 to US$1.969 million in 2015, thanks to an enhanced collection strategy and consensus based tax reforms to make the system more progressive. This has contributed to an increase in public non-financial investment from US$277 million in 2006 to US$655 million in 2015. Just as elsewhere, public investment in Nicaragua encourages and supports private sector investments. Since 2006, Nicaragua has experienced a boom in foreign investment, jumping 423 percent, from US$287 million in 2006 to US$1.5 billion in 2015. The target sectors have been manufacturing, food processing, energy, telecommunications and mining, with substantial participation from the US, Canada and Mexico.
That outright commercial investment is balanced by Nicaragua's membership of PETROCARIBE which frees up half the cost of the country's oil imports from Venezuela to invest in credits for agriculture and small businesses and in poverty reduction programs. More traditional international development cooperation relationships permit investment from countries as diverse as Russia, Souht Korea, Brazil, Japan, Iran, Taiwan, the European Union and the United States, as well as international financial institutions. Transparency, efficiency and appropriate use of that development cooperation have ensured high flows of international funding, even as Nicaragua loses access to concessional loans thanks to its economic progress.
Nicaragua received record funding from the International Development Bank (IDB) in 2015 of US$275 million. For 2016, IDB plans over US$225 million for health, transportation, energy and production. High levels of development funding have not incurred excessive levels of public debt. For example, in 2006, Nicaragua's public debt was 86.7 percent of GDP. Since 2009, public sector debt as percentage of GDP has been going down year by year dropping by just over 48 percent last year, 2015. Likewise, the country's international reserves have increased by 170 percent from just US$924 million in 2006 to a record high of almost US$2.5 billion in 2015, over twice the country's monetary base and enough for 5 months of imports. This indicator is comfortably above the internationally recommended levels of twice the monetary base and 3 months of imports.
Nicaragua has shown how export diversification and financial stability mutually reinforce each other. Diversification has helped exports grow 149 percent between 2006 and 2015. Free Trade Zone exports reached almost US$2.5 billion in 2015, more than double the 2006 figure. Overall, exports increased from just under US$2 billion in 2006 to just under US$5 billion in 2015, slightly less than in the record year of 2014. Although exports did fall in 2015 due to the international crisis, the country's overall growth held up thanks to increased remittances from Nicaraguans abroad (by 5.3 percent), sustained public investment, and more income from other sources like tourism (by 16.3 percent), among others.
President Daniel Ortega's Sandinista government took office in January 2007 with a clear strategy of combining sustained economic growth with an explicit commitment to poverty reduction. Nicaragua's National Development Plan envisages eradicating poverty as the path to achieve sustainable development by consolidating an expanded domestic market while also expanding export capacity so as to achieve a resilient, flexible, balanced national economy. The encouraging results are clear. Poverty has fallen overall by over 20 percent since 2005 and rural poverty by more than half.
For the global economy, 2016 is full of uncertainty. Capitalism has been proven to be hopelessly inefficient in allocating resources and dismally incapable of ensuring sustainable prosperity. The stupid idea that free markets exist in some way independent of political and financial manipulation has been completely discredited. The international oil market is just the most obvious example of this. In any case, overall demand in the U.S. and European economies is stagnant or contracting and slowing in China. In that global context and even more so in the regional and national context, progress on Nicaragua's interoceanic canal with the construction of the Brito deep-water port in Rivas will be of major significance.
Apart from that, Nicaragua has various strengths allowing the country to face the global economic uncertainty with confidence. Nicaragua enjoys overwhelming domestic consensus around its successful model of national dialog and alliances. Internationally, Nicaragua has developed a wide ranging network of contacts considerably increasing the number and scope of its trade and investment partners in the world. Nicaragua's membership of ALBA and Petrocaribe contributes tremendous economic stability. Through 2016 and beyond, Nicaragua has scheduled very important projects for the future, among them the Canal, a major hydroelectric scheme on the Caribbean Coast, Nicaragua's first satellite, being built by China, and the major oil storage and refining facility under construction on the country's Pacific coast.
All these factors interact very positively with the progressive, concerted diversification of the national economy, in which the facilitating and normative role of the State is fundamental. In this context, Vice-president Omar Halleslevens recently explained that the Sandinista's Good Government Plan of 2016 published this month “Is a kind of continuation of what has been done so far, but it is also a plan making many aspects more robust, much stronger; it is a program true to the beliefs and policies that President Ortega, his government and the Sandinista Front have worked out for Nicaraguan society.” Indeed, that plan is the conscious expression, under contemporary conditions, of the three fundamental policy principles of the 1979 Sandinista Popular Revolution: political pluralism, international non-alignment and a mixed economy. President Ortega's realization of that historic program has transformed Nicaragua in just 8 years