Nicaragua’s Economy is Near Collapse

by Paul Martin

If the Nicaraguan government continues on its present course, the Instituto Henry George predicts that Nicaragua will soon experience a major economic crisis, which will manifest itself as a total paralysis of the economy in almost all sectors (transportation, commerce, government, etc.), rationing of basic utility services and essential products, and violent social protest. The apparent cause of this meltdown will be spiraling price inflation in the face of stagnated local wages, diminished family remittances, hold-ups in international monetary aid and credit, and economic sabotage instigated by right-wing political interests to discredit Nicaragua’s leftist government. Inflation is predicted to reach an annual rate of 21% by the end of 2008 (up from 16% last year and 9.4% in 2006). Nicaragua may well see hyperinflation as the crisis deepens, especially if the government continues to subsidize prices and raise nominal wages by decree.

Under the current regime, the crisis can only be forestalled by increased and ongoing international loans and charity, for which Nicaragua is becoming increasingly dependent on Venezuela and other ALBA (Alternativa Bolivariana para las Américas) pact countries. If those and other sources are not willing nor able to continue bailing out the Nicaraguan economy, it will collapse.

Vacant land in Managua, Nicaragua’s capital city

Municipal Workers vs. Garbage-Pickers. Nicaraguans who earn their living scavenging in Managua’s municipal garbage dump blocked the entrance to the site in March to protest against the local authorities who, they claimed, were extracting the most valuable garbage from the trucks’ loads before they reach the dump. There are over 1,600 people who live near or in Managua’s largest garbage dump who work daily collecting recyclable materials, and another 400 or 500 who wash and sell the materials. Of the 1,600 garbage pickers, over 500 are between the ages of 7 and 18. Over 30% of the children who pick trash in the garbage dump are contaminated with lead, mercury and DDT. As a result of the protest, the Ministry of Health warned that the city was on the brink of an outbreak of disease due to the presence of over 3,000 tons of waste on the streets. One proposed solution was to raise the wages of the garbage truck crews so they would not pre-pick the trash, thus solving the problem by “dumping better quality waste.” Another proposed solution was to “get the workers out of there, train them and employ them in something healthy and productive.” In the end, the municipal government couldn’t afford either alternative, but somehow they did manage to agree on where the better quality trash might be shared between all scavengers. How long will this “solution” work before the trash pickers are back on strike?

Depending on Money from Abroad. The remittances that Nicaraguans living abroad sent to their family members in Nicaragua reached $739.6* million in 2007, according to the Central Bank of Nicaragua. This was the highest figure in the last two decades. The Central Bank predicts that in 2008 the value of the remittances will reach $800 million. The remittances received each year equals approximately 60% of the value of Nicaragua’s exports, and is greater than the total amount received in official foreign aid (about $500 million in 2007). Of the $800 million expected to be received by Nicaraguan families from abroad in 2008, about $600 million will come from the United States and about $200 million will come from Costa Rica. About 20% of Nicaragua’s 5.2 million citizens live abroad, principally in the United States and Costa Rica. Nicaragua remains the second poorest country in the hemisphere, with a GDP of approximately $1000 per capita. What will happen to the Nicaraguan economy if the deepening US recession starts to diminish these remittances?

Who’ll Pay for Infrastructure? The Nicaraguan government has announced plans to increase the country’s generation of electricity from renewable sources, such as hydro and geothermal sources, from 27% to 67% over the next six years. Unfortunately, the government will be obliged to borrow, or look to private investors, if these projects are to happen. On March 7th, it was announced that Iceland offered to donate $5 million to rehabilitate Nicaragua’s geothermal laboratories and to train and advise Nicaraguan technicians and engineers on geothermal energy production. With its many volcanoes, Nicaragua is perfectly suited to geothermal energy production. On March 12th, the government announced that Iran will loan $233.4 million for the construction of a hydroelectric plant. The loan, which still needs to be approved by the Nicaraguan National Assembly, should be paid back within ten years at an interest rate of 5%. Construction of the project, which will generate 70 megawatts of electricity, will be carried out by an Iranian company, and should be completed by the end of 2011. Nicaragua currently uses approximately 490 megawatts, 75% of which is generated by burning fuel oil. (By comparison, New York City uses as much as 12.000 megawatts at peak times.)

Losing the “Race to the Bottom.” On April 22, Nicaraguan President Daniel Ortega admitted that nine Free Trade Zone Factories (maquilas), owned by Taiwanese companies, are to close during the course of the year. Ortega said that companies which are leaving have decided to do so for “purely economic reasons,” and will install new factories in countries like China and Vietnam where wages are lower than in Nicaragua. Approximately 16,000 workers will lose their jobs. Currently a total of 112 factories owned by multinational companies operate within Nicaragua’s Free Trade Zones. Most produce garments and accessories which are exported to the US. The President of the “Superior Council of Private Enterprise” said that the 33% increase in the minimum wage which the government introduced during 2007 “alters the operational costs” of free trade zone factories. The Sandinista Workers Central Union called on the government to introduce “urgent measures” to guarantee employment for the workers of the nine companies. But what would these measures be? Most of the best land is held out of production. If the 16,000 unemployed workers stay in Nicaragua, they will simply increase the competition for low-paying quasi-jobs in the informal sector.

Depending on Government Subsidies. During a government rally on May 1st, the Nicaraguan Labor Minister listed labor rights achievements of the government during the last year and a half, including the signing of 47 collective bargaining agreements benefiting 91,000 workers and a 33% minimum wage increase. She also mentioned that the government programs “Zero Hunger” and “Zero Usury” have created over ten thousand new sources of employment, mainly for women. On top of this, she said, 1,169 new cooperatives have been created during the last year. But union leaders questioned the government’s commitment and called for resolution of 60,000 cases of workers’ claims against employers pending in the labor courts. “We need a strong, capable Labor Ministry with a bigger budget,” they said. They pointed to rising food prices as the most critical problem for Nicaraguan workers and demanded that the Administration either significantly increase wages or freeze the prices of basic products. Unfortunately, either option will only further distort the economy and accelerate the inflation rate.

Not Jumping through the IMF’s Hoops. On May 14th, the Nicaraguan Central Bank revealed that the International Monetary Fund (IMF) had decided to retain the first loan disbursement of a three year (2007-2010) economic program, primarily due to the Nicaraguan National Assembly’s failure to pass legislation, required by the IMF, to criminalize electricity theft. The three-year program contemplates a $111 million loan, $39 million of which was scheduled to have been disbursed during the first few months of 2008. These kinds of loans, at the cost of increased national debt payments, just barely cover the cost of the existing government operations.

On May 16th, transportation cooperatives called off their 11-day strike when the government raised its offer of a fuel subsidy to $1.30 per gallon. Nicaraguan bus, taxi, and shipping cooperatives will now enjoy the cheapest fuel in Central America. In Honduras a gallon of diesel is currently $3.79, while in El Salvador is it priced at $4.31. The additional $1 discount was the result of conversations with Venezuelan President Hugo Chavez in which it was agreed that the additional $1 discount will be covered by the collective ALBA fund. How long will they be able to keep subsidizing the cost of oil? The transportation cooperatives are already complaining that they need the subsidy to be increased along with rising gas prices. If government subsidy is the answer to Nicaragua’s economic problems, why doesn’t the government just subsidize everything?

It’s only too likely that this strike, and the band-aid solution, was just a rehearsal for what is in store for Nicaragua. It is utterly crucial for Nicaraguans to understand that beneath all the symptoms and apparent “causes” lies the institutionalized private monopoly of the public domain, the private property of land and all things natural, which causes ever-increasing poverty in the face of any and all manifestations of material progress. Only new economic policies which move the public tax burden off of private production, and onto the value of land and natural resource values, can reverse the current inexorable trend toward total economic collapse, deeper political tyranny, and dangerous social strife in Nicaragua.

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