Sunday, February 15, 2009

Discussing Latin America (II): Where is Nicaragua Headed? Part Two

Several days ago, Mr. Trend pointed out a couple contrasting interpretations about Nicaragua's economic future from Foreign Policy and World Focus. I won't rehash what was already said in the previous post, but I do want to make a few observations. 

First, the Foreign Policy article really has nothing useful to say about Nicaragua's future. The comparison with Iceland, as pointed out in the comments in the previous post, is absurd. Iceland is an industrialized nation with major connections to the global economy. The financial collapse in Iceland could not even possibly take place in Nicaragua largely because of the nature of Nicaraguan economy. Nicaragua is already incredibly poor, right up there with Haiti as one of the poorest countries in the western hemisphere. The connection between the health of financial institutions and the well being of most Nicaraguans is fairly tenuous; any collapse of financial institutions in Nicaragua would have an impact on the daily lives of people, but since they are so close to subsistence levels as of now, it is hard for me to imagine how a collapse would in any way be comparable to what happened in Iceland. 

Moreover, the reasons why Nicaragua's economy might be on the verge of collapse as stated by Foreign Policy make little sense. They first suggest a drop in remittances from the U.S. will affect the Nicaraguan economy. While the role of remittances from the US to Nicaragua does matter to a certain extent, it is much smaller than in other countries such as Mexico and El Salvador. There just aren't that many Nicaraguans living in the U.S. compared to other Latin American populations. Nicaragua also depends a lot on remittances from Costa Rica, so the extent to which the U.S. financial crisis affects the Costa Rican economy will matter just as much for the health of Nicaragua's. Maybe Mr. Trend has some insight on how Costa Rica is doing economically? I really have no idea. 

Foreign Policy also points out the fall in coffee prices as a sign of pending financial ruin in Nicaragua. Please. First off, Nicaragua exports other agricultural goods, as well as textiles and apparel. The economy is not completely dependent on coffee prices. Second, the fluctuations in coffee prices is basically a constant throughout Central American history. While they have an impact, governments and economies do not rise and fall with the price of coffee.

The World Focus piece seems a little over optimistic and sugar coats a lot, but I do tend to agree Nicaragua has the potential to grow economically. However, the key word here is 'potential.' What the article does not mention (because it primarily focuses on just Managua) is that there is a major lack of basic infrastructure in Nicaragua. This lack of infrastructure, such as paved roads, sewage, water, electricity, and development of  communications networks, is a major stumbling block for encouraging capitalist investment in the country. Tourist infrastructure is still fairly basic, and nonexistent in many parts of the country. As a result, tourism is likely to remain limited to those who enjoy a more rustic experience. 

The other major stumbling block is the political situation, and I don't mean just Ortega. Political and legal institutions are generally not respected, and have been in a constant state of flux since 1990. From an foreign investment standpoint, the fluidity of the rule of law may not be particularly attractive since the political situation is unpredictable. 

I want to make clear that my particular criticisms of the Nicaraguan economy and the state, are not a result of anything unique to Daniel Ortega, or the Sandinistas more generally. These are historical problems that I would argue go back to the beginning of the 20th century, and maybe before. Generally, I think recent governments, including Ortega's, have been making attempts to promote economic growth, but the problems they face are so huge that its hard to be optimistic about anything that happens in the short term.