APRIL, 1985 - VOLUME 6 - NUMBER 4
Trading With Multinationals
MANAGUA, Nicaragua--In a moment of candor, the late dictator Anastasio Somoza's brother, Luis, once confided to a newspaper reporter that his homeland was not a Third World nation. "We are economically, politically, and militarily dependent on the United States," he said.
That prophetic observation reflected the position in which Nicaragua has all too often found itself. It was under the watchful eye of Uncle Sam that the international business and banking community first began to invest vigorously in Somoza's small kingdom, transforming the country's economy into one of the healthiest in Central America. Indeed, during the 1960's and early 1970's, Nicaragua's trading partners comprised a diverse lot for an underdeveloped nation. Belgium, Germany, the Netherlands, China, Costa Rica and El Salvador were among its international clients.
But, the U.S.'s endorsement of Nicaragua did not guarantee prosperity. Economic conditions changed for the worse, starting with the earthquake of 1972, and followed by the 1973 oil crisis. General Somoza's subsequent manipulation of the nation's economy for personal gain, and the insurrection in 1978-79 combined to destabilize Nicaragua's economic base and to undermine foreign investment.
The antagonistic actions of the Reagan administration since 1981 also have had a severe impact on the Nicaraguan economy and made the international community wary of investing.
In search of new commerce, the Sandinistas have been forced to look for new trading partners and diversify their trading base despite a deteriorating balance of trade deficit that amounted to $375.6 million in 1983. (Its exports that year were $431.3 million and its imports $806 million.)
The United States remains Nicaragua's leading trading partner, taking 18 percent of the country's exports and providing 19 percent of its imports in 1983. The American share of the Nicaraguan export market declined from $155 million in 1977 to $98 million in 1983. With the United States working aggressively to boycott Nicaragua's sugar and meat industries, the Sandinistas have countered a policy of economic asphyxiation by relying increasingly on exports to other nations.
Exports to Japan have increased by 46.2 percent since 1982 to $65.8 million. Moreover, the European Economic Community (EEC) increased its purchases of Nicaraguan exports by 16.5 percent over 1982 levels to $110.8 million in 1983, for 25.7 percent of total exports. The Netherlands accounted for the greatest EEC market share increase of 41.5 percent, followed by the Federal Republic of Germany (29.9 percent), France (9.5 percent), and England (7.4 percent). The majority of exports to EEC nations went to West Germany ($49.8 million) and France ($23.8 million). Meanwhile, Western Europe accounted for 24 percent of Nicaragua's total 1983 imports, a 6.3 percent decline from the previous year.
The reluctance of Nicaragua's traditional trading partners to continue offering trade credits may force the Sandinistas to look more to Eastern Bloc nations, especially since these countries provide liberal credit arrangements. During the last five years, Nicaragua's trade with the Eastern Bloc has increased from under 5 percent to nearly 15 percent. To Cuba, Nicaragua increased its exports from $1.2 million in 1980 to $18.3 million in 1983. Exports to new trading partners like Algeria ($36.4 million), Libya ($1.7 million), and Iran ($3.6 million), have increased 9.7 percent.
Despite increased sales to the Eastern Bloc nations of the Council for Mutual Economic Assistance (CMEA), this trade amounted to only 12.7 percent of Nicaragua's 1983 export total, while imports were 16.6 percent. Trade with the Eastern Bloc remained substantially below the 25.7 percent EEC share and the 19.4 U.S. percentage of the export market.
While Nicaragua has been able to increase trade with a number of nations - most notably Japan, Germany and France, commerce with its Central American neighbors has deteriorated substantially. Honduras, El Salvador, Guatemala and Panama were once large purchasers of Nicaragua goods, but their imports decreased by 35.7 percent to $23.5 million from 1982 to 1983, leaving the former members of the Central American Common Market with only 7.8 percent of Nicaragua's total exports. Imports from Central America increased slightly to 15.3 percent from 15.1 percent in 1982, which is the first turnaround since the decline in market shares from 33.9 percent in 1980. Regional trade in 1984 is projected to decline below 1983 levels, when those figures are released.
Increasing U.S. pressure on international lending institutions (see chronology) and Nicaragua's bloated balance of trade deficit have also frightened away potential traders.
While some nations decry the Sandinista's left political leaning in private, most point toward the nation's rising debt as their public rationale for not investing here. Consider the trepidation of some English companies. Their nation's Export Credit Guarantee Board only insures British exports to Nicaragua if the companies can produce a confirmed and irrevocable letter of credit from the government. This may explain why British exports to Nicaragua in 1983 totalled only $3.96 million - mainly in milk products, medicines, hospital equipment and spare parts for machinery.
Yet, despite such reservations, there is some hope on the trade front for Nicaragua. The Sandinistas are drafting a new foreign investment law in hopes of winning back wary investors. In a discussion with Vice-President Sergio Ramirez, I was told that the new foreign investment laws, which were drafted in part by New York lawyers, would be "modern, flexible and liberal." Most important of the new provisions is a guarantee on repatriation of profits. In addition, foreign-owned companies may hold a majority interest in a native Nicaraguan firm. Favorable tax treatment and a guarantee that a foreign company's property will not be nationalized are also integral to the foreign investment law. The Nicaraguans do insist, however, that foreign nationals obey their labor codes.
Ramirez is keen on attracting foreign investment in forestry and the agricultural/industrial sectors. He says the foreign investment law also will encourage joint projects between the government, private Nicaraguan capital and foreign investors.
Under this law, Ramirez expects to convince the international financial community that his government is committed to a mixed economy and to economic stabilization. He knows foreign investment has been sluggish here since 1978, because of the perceived instability of the economy and an uncertainty in the Sandinista's commitment to a mixed economy.
Such perceptions are slowly changing. Mexico, for example, is currently exploring prospects for building several large timber and paper mills in the northern part of Nicaragua. Foreign nationals based in the U.S. are examining expansion possibilities in Nicaragua's fishing industry, among others.
Confidence in future growth still exists. The Intercontinental Hotel chain, formerly owned by Pan American Airways and now run by a British conglomerate, has a 21.5 percent interest in the Managua Intercontinental. The government owns the rest. The Intercontinental chain has a management contract with the government to essentially run the hotel. This contract expires in 1989, but according to Intercontinental Hotels President Hans Sternik, "We expect we'll sign another contract with the Sandinistas at that time. There should be peace in the region by then."
According to another Intercontinental Hotel spokesperson, the Sandinistas have permitted them to run the best hotel in the country without interference. Though "we're not making a lot of money," the spokesperson added, "the Government supports us."
Another multinational, Tanic, which is a 60 percent owned British-American Tobacco (BAT) subsidiary, is embarking on a major tobacco development scheme in Nicaragua. Since Nicaragua's climate and soil is most suited for "blond tobaccos," which are increasingly popular on the world market, Tanic intends to increase its tobacco planting from 840 hectares to 6,000 by 1988 in Nicaragua. At present, Tanic processes cured tobacco, but also plans to expand its research and laboratory facilities to refine its product line. Tanic is also considering a joint venture with the Nicaraguan government on a new processing plant, involving tens of millions of dollars.
Ian Imrie, Tanic's managing director, told Latin American Monthly recently, that "we have excellent relations with the Nicaraguan government at all levels. The tobacco project will be a major source of employment and income for the government. They would rather not be involved in the complexities of running and managing the processing side of the industry."
Tanic, like IBM and Exxon, and several other large multinationals involved in Nicaraguan industries, has negotiated an arrangement for repatriation of profits.
"We are not the first corporation to have reached such an agreement with the Nicaraguan government and I think there will be more," Imrie added.
Even assuming the adoption of the foreign investment law, however, the successful completion of these capital ventures, and the prospects for future investment will depend on the resolution of the government's war with the Contras. This war has unquestionably retarded Nicaragua's economic growth. The war restricts exports, thereby reducing foreign exchange earnings. This in turn limits the private sectors access to dollars.
The war's direct costs to Nicaragua's agriculturalbased economy can be measured in production losses of $150 million in each of the last two years. Despite high crop yields in coffee, for example, Contra attacks on state farms, cooperatives and privately held plantations, have reduced Nicaragua's coffee exports by nearly 40 percent this year. A critical reduction considering that coffee accounts for 30-35 percent of Nicaragua's foreign exchange earnings.
Attacks on Nicaragua's infrastructure have been costly and debilitating as well. The mining of Nicaragua's ports last year cost an estimated $15 to $20 million dollars in direct and indirect damages. According to Martinez Guenca, Nicaragua's former trade minister, products like seeds, insecticides and fertilizer were delayed in delivery, and sales of cotton were either held up or carried out on the futures market instead of the more profitable spot market. Even port facilities had to be rebuilt because of the attacks. Delays in export earnings obliged Nicaragua to exhaust nearly all of its bilateral credit during the first half of 1984.
A resolution to the armed conflict here is integral to restabilizing the national economy.
Congressional withdrawal of U.S. funding for the Contra's activities would limit their financial strength. More importantly, however, it would make other Central American nations less likely to support the war effort. The resulting improvement in the political environment, and the reallocation of Nicaraguan capital previously budgeted for the military - 40 percent of the 1985 budget, would likely stimulate foreign investment and multinational participation in the economy. Appropriate tax incentives and joint ventures would allow the Sandinistas to direct these investments.
The possibility still remains that even if the Sandinistas yield to some private sector demands, and Congress does not appropriate the Contra funding, the Reagan administration may try to undermine these reforms by appealing to Nicaragua's private sector to hold back investment. Should the United States continue to move toward a full-scale economic embargo of Nicaraguan goods and encourage its allies to do likewise, the Sandinistas would be forced to severely limit its trading options. Nicaragua's ability to establish a diverse trading base depends on its own actions, the external perceptions of the international business community and the United States government.