An interview with Dr. Paul Oquist Kelly, Minister Private Secretary to the President for National Policy
Tortilla con Sal via toni solo
Tortilla con Sal : Nicaragua’s 2007 development plan worked out by the government had various aims, principally promoting economic growth, promoting employment, reducing inequality and reducing poverty levels. Here we are now towards the end of 2011, nearly five years on. What have been the results?
Dr. Paul Oquist: Well, the result is that the economy has grown. Nicaragua had the least hit from the great world depression. Our economy decreased by 1.5% in 2009 which compares with 1.9% for Central America in general. And Nicaragua has had the best recovery, 4.5% in 2010. As a matter of fact, Nicaragua in 2010 has the highest growth rate in Central America. 4.5% as compared to 4.2% in Costa Rica, 2.8% in Honduras, 2.6% in Guatemala and 0.6% in El Salvador. Nicaragua has done that with single digit inflation.
Exports and investments
And this has been driven by an enormous increase in exports. We’ve had our exports increase by 32% last year and through the 31st of August they’ve increased by 28% this year. So exports are growing over the last two years on average by 30% a year. In fact, this economy is completely different to what it was in 2006 because exports have doubled.
There was US$1,043,900,000 exported in 2006. But through August 31st of this year we had US$580 million more exports than in the entire year of 2006. So our exports are going to be more than double this year.
So this has been accompanied now also by an investment boom on top of the export boom. Before 2007, foreign direct investment in Nicaragua never reached US$300 million. After 2007 it has never dropped below US$300 million. Last year it was US$508 million which was an increase of 17%. This year it’s going to be about US$850 million which is an increase of 67% in foreign direct investment.
So we have exports and investments driving the economy when the biggest investments are still not on line. So next year investments will reach the level of a billion dollars and stay there for several years at least. That’s due to the 150,000 barrels a day refinery in which US$190 million is being invested this year. But this project is worth between US$4 billion and US$5 billion and that will be executed in the next five years. Then in electrical energy we have US$2.6 billion of approved projects that are going to more than double generating capacity in the country.
Datcom Mobile from China is going to invest US$3 billion to US$4 billion in Nicaragua and begin its Central American manufacturing operation in Nicaragua. There’s a lot of talk about Chinese investment only being in natural resources, but in Nicaragua it’s going to be in manufacturing.
Andrade Gutierrez a Brazilian construction firm has signed a Memorandum of Understanding that it will undertake the feasibility studies for the port on the Caribbean Coast because Nicaragua doesn’t have a port there.
There’s a US$250 million tourism project Guacalito de la Isla in Rivas. Then Walmart which already operates here is expanding its operations by US$54 million. Cargill which is in the chicken business here will expand by US$28 million. Sucarne which is a Mexican firm is going to be investing US$50 million and then US$50 million in a second phase to export Nicaraguan beef to Mexico. And so on …..
We have this enormous 67% increase this year in investment and this is in an election year in Latin America which is not supposed to happen. There’s supposed to be a lot of trepidation and uncertainty, which is not the case in Nicaragua because there’s a great expression of confidence in the leadership of Comandante Daniel Ortega as President of the Republic, in the policies the government has been following, in the good relations with the private sector and in the great alliance between workers, the business sector and government. This has allowed the country to agree over the last two years by consensus on the minimum wage increase.
More employment, lower poverty
Now you asked whether this growth is producing results in terms of increasing employment and reducing poverty. Between 2006 and the 30th of June this year the number of people employed has gone from 2,089,000 to 2,833,000an increase of 744,000 more people employed than in 2006. That’s an increase of 35%.
Now a lot of this is in the informal sector. It’s people who are self-employed. It’s people who are small subsistence farmers., because that’s the structure of the Nicaraguan economy. But it’s not true that what’s called formal employment with social security, with full benefits has not increased. That has increased from 420,000 in 2006 to 581,000 through June 30th this year. So that’s an increase of 161,000 or 38.5%, even more than the increase in employment in general.
We can appreciate this in a study by the Economic Commission for Latin America and the Caribbean (ECLAC), the United Nations agency based in Santiago, Chile. This shows that in regard to the increase in formal employment, employment covered by social security between January 2008 and March 2011 in countries that stimulated their economies, that took counter-cyclical measures, Nicaragua is the country that had the highest increase in employment. Higher than Chile, Brazil, Mexico, Uruguay and Costa Rica.
So employment has increased. What about poverty? The official poverty data comes from the Household Standard of Living Survey which was conducted in 2001, 2005 and 2009. And what this shows is that general poverty decreased from 48.3%. After having increased between 2001 and 2005, it decreased from 48.3% to 42.5%.
With regard to chronic malnutrition, that has also been reduced. Extreme poverty which increased from 15.1% in 2001 to 17.2% in 2005 has decreased to 14.6% in 2009. According to FIDEG, a private think-tank, in a study financed by the Netherlands and Switzerland with technical assistance from the World Bank, their study shows that extreme poverty has been reduced by even more, to 9.7%. And they did a follow-up study this year which says the drop continues. It went down to 9%.
There are three ways to measure poverty, consumption, income and basic needs. All three measures show that poverty has decreased in Nicaragua and this is so in the official figures and in the unofficial figures. In fact, the unofficial figures show a greater drop in the levels of poverty. Why did that happen? How did that happen in the midst of great financial and economic crisis in 2007, 2008 and 2009?
Well, it happened because in Nicaragua there were policies that redistributed income, Christian, socialist and solidarity based policies as we call them here that redistributed income. Here we see Nicaragua has had an extremely unequal society – in 2005 the top 20% consumed 47.2% of all goods and services compared to 6.2% for the bottom 20%. We can even add another 20%, make it the bottom 40% and their consumption still only comes to 16.5%, very far from the 47.2% of consumption by the top 20%.
Let’s add on another 20% to make it the bottom 60% of the population. Even adding that this group’s consumption still only comes out at 31.2% still far away from the 47.2% of the top 20%. An extremely unequal society within the most unequal region in the world, Latin America and the Caribbean. International organizations like ECLAC and the United Nations and like the International Labour Organization and the UNDP, all point out that inequality is one of the reasons why the Latin American economies cannot grow faster and develop faster is because wealth is too concentrated.
But in 2009 the percentage of consumption by the top 20% had been reduced to 44.5% while the bottom 20%’s consumption increased from 6.2% to 6.8% and that’s also the case if we look at the bottom 40%, 60%, even if we go to 80% there’s an increase, although a smaller increase. So there has been a reduction of poverty in Nicaragua due to redistribution via government policies which have led to redistribution in this society.
And we can see the result of this based on information also from ECLAC. Venezuela is the country that has most decreased inequality by 15% between 2005 and 2009. Nicaragua was the second country in the region, decreasing inequality by 9.8%. Then came Brazil due to President Lula’s policies, with over 6%. Then Ecuador another ALBA country by 5.8%. Whereas by contrast our neighbour Costa Rica unfortunately came out of the recession with more inequality with 6.6% more inequality.
So Nicaragua is one of the two leaders with Venezuela in reducing inequality so as to reduce poverty. And this inequality is not only inequality in terms of consumptions and income, but also in terms of gender. That increase in employment we spoke of before between 2010 and 2011 the increase in employment was 19.6% for women as compared to 9% for men. Women in Nicaragua have a lower level of economic participation than men. But that inequality, that gap, is being closed by these redistributive policies.
Successful policies and programmes
And two reasons for that are the programmes which explicitly target increasing women’s economic participation like the Zero Hunger program in which poor rural women are given the means to produce, inseminated cows and pigs, chickens. They’re given agricultural implements, materials to build corrals for the animals. So now 100,000 women have become producers through this programme. And in the cities 217,000 loans have been made to women formed in solidarity credit groups in which all the women members are responsible for all the loans to the group and they use these loans for small commercial or artisan activity.
Another factor in this poverty reduction has been the use of subsidies for the poorest people. For example the people who use the bus in Managua have a two córdoba (US$0.09 cents) subsidy every time they ride the bus. For a family of five using the bus twice a day that’s a 600 córdoba (US$26.60) subsidy each month. People get a 100 córdoba (US$4.44) subsidy for people making minimal use of water.
People who consume less than 150Kw of electricity each month get a 300 córdoba (US$13.30) subsidy. If they buy their food at private stores supplied by the government food distribution company for just trade, they save another 375 córdobas (US$16.67) and the people on the lowest incomes working in the public sector get a 700 córdoba (US$31.11) bond, called the Christian, Socialist, Solidarity bond to supplement their income.
All those add up to 2075 córdobas a month, which for a family of five people represents 41.5% of their income at the 5000 córdoba a month income level. So these subsidies are very significant also in terms of redistributing wealth. Another very significant redistribution of wealth has been that in the previous 16 years governments got into cost recovery for health and education, violating the Nicaraguan Constitution. Because Article 121 of the Constitution states that Nicaraguans have the right to free universal primary and secondary education.
Article 105 of the Nicaraguan Constitution says that Nicaraguans have the right to free universal health care. In previous governments they started charging different fees. In the health system they charged for lab exams, they charged for medicines, they charged for the materials used for operations and now those things are no longer charged for. So poor people who were excluded from education, the poorest people, and excluded from health care due to those charges, now not only have access, but people in general have that income at their disposal because government is now covering those costs which people were previously paying.
So in sum one has the situation where growth has been achieved, employment has increased while inequality and poverty have been reduced. And this is what leads to the situation in Nicaragua now in which there is great optimism and great hope in the country, in contrast to the situation in much of the world in 2011 where people feel trapped by their economies and don’t see any way out of the trap of their economies, for example in Greece or Portugal, Ireland, Spain, Italy and even in teh United States where one has a high unemployment rate, growth without employment creation. And many people do not see a way out of that morass.
Low serious crime rates and stability
Tortilla con Sal. Especially over the last two years, Nicaragua has indeed attracted a great deal of investment, as you have pointed out, in terms of direct investment in the economy. And Nicaragua has also attracted record levels of tourism. One of the reasons Nicaragua has been able to achieve that is because it is in fact one of the safest countries in Central America and the Caribbean, if not the safest country, certainly in Central America. What factors do you think have contributed to that reality.
Paul Oquist : Let’s look at the data. On average on any given day in Guatemala there are 18 homicides, in Honduras 17, in El Salvador 12 , in Nicaragua 2.1, in Costa Rica 1.3. A total of 44.8 homicides, of which just 2 take place in Nicaragua. And the homicides in Nicaragua are quite different from those in other countries, in the northern triangle as it is called. Because they don’t have to do so much with the Colombian or Mexican drugs cartels, with organized crime or with the maras.
And these other countries unfortunately have serious problems in that regard, so serious that the international community had a meeting in Guatemala in June on the issue of security in Central America. Because at the level of 18 homicides a day, that’s 500 a month and even if you had the best police force in the world 500 cases a month, accumulating month after month are very difficult to deal with. So there’s a fear that impunity is setting in with these types of crimes as well as with extortion and kidnapping.
There’s only been 6 kidnappings in Nicaragua in the last five years and all of those cases have been cleared up. There hasn’t been a bank robbery in Nicaragua since 2007. So we have a completely different situation than in the other countries. We like a second indicator for citizen security apart from homicides and that’s vehicular theft.
Any theft on the street or shoplifting or burglaries a lot of the time is not reported for lots of reasons. There’s an under-registration of those types of crimes, an under-reporting of them. But it’s very rare that someone loses their car or their motorcycle and doesn’t report it immediately because they hope to get it back while it’s still on the street and because it could be used in a robbery, so you have to report its theft to defend yourself.
Let’s look at last year’s figures in terms of vehicular theft. In Guatemala, there were 8,095 thefts, in Costa Rica 5,222, in Honduras 3,130, in El Salvador 1,035 and in Nicaragua 387, which seems like a different continent. In Costa Rica over 5000, this is our southern neighbour, Honduras our northern neighbour with over 3000 and Nicaragua sandwiched in the middle with 387.
Security and investment
Now you ask the reasons for this security situation which definitely has influenced the boom in foreign direct investment and they are very explicit about this. The investors who were at the Investment Fair which was held here recently, the directors of the Pantaleon Group from Guatemala had mentioned that they increased their investments by four times in Nicaragua. They are very happy to be working in Nicaragua because they don’t have to watch their back all of the time.
Mexican investors who have arrived in Nicaragua can do things here that they cannot do in Acapulco, Tijuana, Monterey or Ciudad Juarez like walk up the street. A Mexican investor can’t think of doing that in his home country but here he can walk along the street at night, go from place to place with no problem whatsoever. And that peace of mind is worth a lot.
The reasons for these differences are that Nicaragua has the best and most effective army and police force in Central America. Why are they the best and the most effective? Because they have the largest budget? No. They have the smallest budget. Nicaragua’s defence and security spending is US$52 million this year.
Costa Rica spends over US$300 million, six times more than Nicaragua. Panama spends eight times more. The other countries all spend more than double what Nicaragua spends, in fact two to three times more. So Nicaragua has the best security on the lowest budget.
The real difference is that that army and that police force were formed out of the revolution. So the relationships with the community is completely different. The police have a community policing policy. So when they see a group of kids they see youth at risk. When they see a gang in formation they see youth at risk, not a mara. They don’t just come down with an iron fist. They try to work for the kids reintegration into the community.
There’s community counsellors, counsellors in the schools. The police get into contact with the youth, play baseball with them. They establish relationships as does the community in terms of youth. And in terms of the drugs cartels, the security forces have been very effective in keeping the drug cartel presence to a minimum in Nicaragua and so they have not been able to establish a base of operations in Nicaragua.
This is not the only factor though in relation to the investment boom to which that boom can be attributed. The growth of the economy itself is something that attracts investment. In Nicaragua we have the fastest growing economy in Central America, exports increasing by 30%. We have greater access to markets.
There’s the CAFTA agreement with the United States, there’s the ALBA agreement with Venezuela Cuba, Bolivia, Ecuador, Dominica, Saint Vincent and the Grenadine, Antigua and Barbuda. Central America just concluded an agreement of Association with the European Union. So investors in Nicaragua can export to all those areas. We just just signed a free trade treaty with Chile so we’re expanding that commerce. With Taiwan and with China economic relations are becoming stronger.
Lowest cost of living
There are other factors as well. For example, in the Mercer Cost of Living Survey – Mercer is a company based in New York that does a survey of 214 cities in the world in terms of cost of living. And Managua in Nicaragua turns out to have the lowest cost of living in Latin America. The highest cost of living in Latin America is Sao Paulo, which is number ten at the world level. Out of 214 in the world, Managua in Nicaragua is 213th. It has the lowest cost of living in Latin America. And at 214 with the lowest cost of living in the world in the Mercer survey was Karachi in Pakistan.
This has led to US News and World Report based on a highly accredited retirement newsletter saying in November of last year that Nicaragua was the best place in the world to retire on a low budget. So here you have this beautiful country of lakes and volcanoes and great tourist attractions and with the lowest cost of living in Latin America. Or if you look at Lonely Planet this year, it states that Nicaragua is one of the two best locations in the world for a low cost vacation, the other being Bangladesh. But Bangladesh is a little bit further from Miami airport than Managua and the cultural adaptation might be a little bit more difficult in Bangladesh than in Managua.
Then we have other factors like the fact there’s this great alliance, as it is called here, between workers, business people and government which is reaching agreements to strengthen our economy. So for example in the free trade zone there has been an agreement reached by consensus of what the minimum wage is going to be for 2011, 2012 and 2013. This makes labour costs predictable and provides great stability to labour costs.
And here too there is peace and security. And one of the reasons why there is peace and security is because there is social justice. There are programmes so people can see the transformation that year upon year society is becoming less unequal, poverty is being reduced, opportunities are being given to the poorest elements in society through programmes like Zero Hunger and Zero Usury which we mentioned before. These programmes are allowing very poor women to become producers, to become economically active- So there is this social justice which also leads to peace and stability which is very attractive to investors.