Nicaragua provides a textbook example of what happens to economic growth when institutions and economic policies are taken for granted. In 1977 income per capita in Nicaragua was $1,930, about $500 higher than in Chile; in 1993 Nicaragua’s income per capita was about one-fourth of Chile’s ($550 vs. $2,150).
Chile embarked on an ambitious market-oriented reform program that greatly reduced the role of the state in the economy and eventually led to democracy. Nicaragua, on the other hand, suffered through a revolution against the odious Somoza regime in the late 1970s, a Marxist dictatorship and civil war in the 1980s and, in the 1990s, six years of a government that was more concerned with appeasing the rejected Sandinistas than with market reform. Today Nicaragua is the second poorest nation in the Western Hemisphere.
On January 10 Arnoldo Alemán assumed the presidency from Violeta Chamorro—the first time in the country’s history that one democratically elected civilian president transferred power to another. Nicaragua now has another chance to recapture its status as Central America’s breadbasket. If that is to happen, however, Alemán needs to adopt a radical reform program in his first months in office.
Former secretary of state James A. Baker III said recently, “The new government has about 18 months, and if they don’t have the policies in place by then, investors will go somewhere else.”
The following policy measures will help attract investors.
1. Register property titles. The lack of clearly defined property rights is Nicaragua’s most pressing problem. During the 1980s the Sandinistas confiscated many properties that belonged to individuals opposed to their regime. After the 1990 election, the Chamorro administration promised restitution and compensation, but it left 24,000 claims unresolved. Thus, the new government will have to settle the title-to-land issue if it wants to attract investment to Nicaragua. Given its complexity, this issue does not have a clear solution. However, any solution adopted must include the restitution of property to its rightful owners where possible, and, where not possible, there must be compensation for the property taken. That amount of compensation should reflect the resources available to the government so as to avoid placing an undue burden on the Nicaraguan people. Finally, the government must register new property titles to the de facto occupants of those properties so that they gain value.
2. Adopt a currency board. A sound and stable currency is just as important to a well-functioning market economy as are clearly defined property rights. Unfortunately, Nicaragua has lacked both in recent years. The average annual rate of inflation during the 1980s and early 1990s was over 1,500 percent. Since 1994 that rate has been around 12 percent. Despite that improvement, institutional uncertainty and the lack of independence of the central bank suggest that Nicaragua will greatly benefit if it adopts a currency board to ensure sound money. By permanently fixing the value of the domestic currency to a reserve currency (such as the dollar), a currency board shields the central bank from political pressures, provides credibility to the reform process, and makes the domestic currency stable and fully convertible.
3. Introduce pension reform. More than half of Nicaragua’s labor force is unemployed or employed in the informal economy. Establishing a pension system along the lines of the successful Chilean model would provide workers with an incentive to join the formal economy and with a source of income in their old age. In addition, a private pension system would increase the domestic savings rate, thus creating an internal pool of capital and making the country less dependent on foreign capital.
4. End dependence on foreign aid. Since the Sandinistas lost the 1990 elections to the coalition led by Chamorro, Nicaragua has received over $3 billion in foreign assistance. That aid has not set Nicaragua on the path to self-sustaining economic growth. In fact, much of the aid money has disappeared without a trace. If Alemán is committed to reform, foreign aid is unnecessary, and, worse, it could provide an incentive to delay reform. If he is not committed to reform, any foreign assistance that Nicaragua receives will perpetuate the misery of Nicaraguans.
5. Retire the military. Since 1990 the military has been reduced from about 100,000 members to 14,000, which means that the military still has about 14,000 members too many. Given the army’s history of intervening in politics, a better idea would be to follow the example of Costa Rica and eliminate the armed forces altogether, leaving a police force and a coast guard to secure domestic order.
Those five steps will go a long way toward curing Nicaragua of the statist dogma that has afflicted the Central American nation for most of its history. They will also produce a surge in growth and employment and draw foreign investors to Nicaragua again.