April 25, 2018 2:31PM

Nicaragua and the Irony behind its Orthodox Economic Policies

Nicaragua is in flames as the 11‐​year‐​old kleptocracy of Daniel Ortega is rocked by massive protests that threaten its continuity. The unrest began after the government announced some adjustments to its bankrupted social security system. Ironically, for a self‐​proclaimed socialist who constantly rails against U.S. imperialism, Ortega was implementing the recommendations of the International Monetary Fund (IMF).

Ortega’s second spell in power has been quite the puzzle. He was a fervent supporter of the late Hugo Chávez and continues to be one of Venezuela’s most vocal allies in Latin America. Huge billboards that portray Nicaragua as “Christian, Socialist, and Solidary” greet visitors to Managua. Yet the economic policies of the Ortega regime are among the most orthodox in Latin America: inflation is relatively low (5.7% in 2017), the projected fiscal deficit for 2018 is just 1.1% of GDP, and economic growth has averaged 4.2% per year in the last decade. Nicaragua boasts free trade agreements with the United States and the European Union. In January, Standard & Poor’s highlighted Nicaragua’s “track record of steady GDP growth and pragmatic economic policies, its low fiscal deficits, and moderate government debt burden.” Moreover, in 2016 the IMF closed its office in Managua because of “Nicaragua’s success in maintaining macroeconomic stability and growth.” Not bad for a left‐​wing populist.

Since coming back to power in 2007, Ortega kept his revolutionary rhetoric but dropped his socialist economic policies of yore. He reached an understanding with the business sector: Ortega would guarantee macroeconomic stability and a good environment for private investment in exchange for allowing him to dismantle Nicaragua’s democratic institutions and impose a corrupt dynastic dictatorship. The business community acquiesced.

That is the irony about what triggered the protests: Faced with the imminent insolvency of the social security system, Ortega had several options. The easiest for a populist would have been to make up the shortfall by printing money. That would have fueled inflation, but Ortega could have blamed it on external factors—just as Nicolás Maduro does in Venezuela. Instead, Ortega decided to follow the IMF recommendations of increasing payroll taxes and cutting pension benefits. That is certainly less irresponsible than debasing the currency.

In fairness, the adjustments to the social security system were the straw that broke the camel’s back. Nicaraguans reacted to years of widespread corruption and nepotism. The heavy‐​handed way in which the regime handled the first bouts of unrest—by suspending independent TV channels and violently cracking down on demonstrators—just fueled the protests. Nicaragua’s turmoil is no longer about the controversial adjustments to social security—which Ortega called off anyway. It is about the massive corruption of the Ortega regime and the legitimate aspiration of many Nicaraguans to live in a democratic country with more or less decent institutions.

It is quite ironic that Ortega was elected as a left‐​wing populist but rules as an economic centrist who closely follows the advice of international financial institutions. The protests in Nicaragua show that macroeconomic stability without democracy, transparency and political freedoms is neither desirable nor sustainable.