Reversal of fortune
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Emerging Markets

Reversal of fortune

Venezuela’s largesse might just bring Nicaragua back from the brink. But Hugo Chavez is no substitute for an economic plan


Two words seem to describe the economic programme of Nicaragua’s newly installed government best: Hugo Chavez.

Chavez, Venezuela’s firebrand president, has promised a laundry list of projects to help Nicaraguan president Daniel Ortega mend a country ravaged by decades of war, natural disaster and corruption.

Ortega, who returned to the presidency in early January, 17 years after he lost the job, has met Chavez several times, mostly recently on February 24 in Caracas. The Venezuelan turned up at the inauguration, promising massive aid, including cheap oil and money to build power plants, housing for the poor and to improve healthcare and education. The two leaders have since discussed bilateral agreements that would turn Chavez’s pledges of aid into concrete projects.

“The big question is how much aid will be offered by Venezuela, and how efficiently it will be administered by our government. Today, it would seem that the mentality of many authorities is that Venezuela is a substitute for an economic plan,” says Carlos Chamorro, editor of the weekly Confidencial and son of former president Violeta Chamorro.

Venezuela has written off $30 million in Nicaraguan debt, and Chavez has offered to provide small electricity generating plants to address chronic electricity shortages in this Central American nation. At Ortega’s inauguration, Chavez promised to install industries, build an oil refinery and finance the construction of 250,000 homes. He reiterated the pledge of an oil refinery at the late February meeting. “I’d prefer 1,000 times over to have a refinery in Nicaragua than a city in the United States,” he said at a press conference with Ortega.

Vital aid

Aid from Venezuela is crucial if Ortega’s administration is to meet its main goal of reducing poverty in Nicaragua.

Nicaragua is the second-poorest nation in the hemisphere, with well over half the population living in poverty. Average GDP growth of around 3% over the past few years and recent debt alleviation from the IDB ($984 million) and other sources has not helped improve the situation. According to the CIA world factbook, public debt in Nicaragua was 82.7% of GDP at the end of 2006.

Fighting poverty is the main mission of finance and public credit minister Alberto Guevara. He spent most of February planning the government’s budget and retooling spending to begin lowering poverty rates.

“The state must guarantee sound and sustainable public finances that are focused on combating poverty,” Guevara, who has degrees in finance and public policy from universities in Mexico and Spain, tells Emerging Markets. “Anti-poverty efforts need to be focused to ensure that they are efficient and effective.”

Aid from Venezuela would come in handy to support three of the pillars of Guevara’s anti-poverty plan – support for micro-enterprises and small businesses, improvement of infrastructure, including highways and ports, and expansion of markets to attract investment.

Yet the politics is not so clear cut: Ortega has not shunned the US in the manner of his Bolivarian benefactor, despite Washington’s vituperative attempts to overthrow him two decades ago. Nicaragua, like its neighbours, has approved the Dominican Republic and Central American Free Trade Agreement (DR-Cafta) with the US, which is also Nicaragua’s biggest trading partner, accounting for 34.1% of its exports. Another 37.8% of exports go to other Central American countries. Exports in 2006 were $1.7 billion, while imports were $3.2 billion.

Nevertheless, Ortega has made Nicaragua the fourth country to join the Bolivarian Alternative for the Americas (Alba), Venezuela’s answer to the US government’s Free Trade Area of the Americas. The idea behind Alba is to stimulate trade between member countries, which include Bolivia and Cuba and possibly Ecuador in the near future, but so far it has been a one-sided affair, with Venezuela doing most of the trading.  

Besides Chavez’s largesse, the Ortega government received the surprise news that Mexico’s Carlos Slim, Latin America’s wealthiest man, would invest $250 million in the telecom company Enitel, which he already owns in Nicaragua. Nicaraguan vice-president Jaime Morales announced in early February that Citigroup, General Electric and HSBC Holdings were also planning to make substantial investments in Nicaragua.

“There is no doubt that Slim’s announcement is important. His visit to President Ortega was a public relations coup for the government,” said Chamorro.

Zero hunger

On the domestic front, the centrepiece of the anti-poverty effort is Zero Hunger (Hambre Cero), a programme that will provide the poorest families with government transfers. Unlike the conditioned cash transfer programmes now popular in Latin America, including the Social Protection Network in Nicaragua, Zero Hunger will not provide money but in-kind support, including food assistance for children under the age of two and productive materials, specifically cows, for families.

The plan is based on a model developed by the Rural and Social Promotion, Research and Development Centre (Cipres), a non-profit organization that has been working with peasants since the 1990s. The centre’s director has been appointed as director of Zero Hunger, and the agency is still being run out of his office while it is being organized.

Zero Hunger serves a dual purpose. In addition to combating hunger among toddlers, the provision of farm materials is meant to help peasant families create micro-enterprises in the countryside where poverty is endemic. Cipres estimates that the programme will cost approximately $30 million annually. Minister Guevara said that the money freed up from IDB debt alleviation will finance the programme.

The different moves have worked well for President Ortega in his first month in office. His popularity in February was 61% in a survey by CID-Gallup, well above the 38% of votes he received when he was elected in November 2006.

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