Down the rabbit hole of development

Singapore's skyline

Wikimedia Commons

Singapore’s skyline: This Asian giant’s economy was not unlike Nicaragua’s 50 years ago.

 

Set yourself back 50 years and imagine that Nicaraguan dictator Anastasio Somoza had dug a tunnel from Managua through the center of the earth, to Asia. You would have ended up in a very different, yet very similar land.

Half a century ago, most of Asia was, by and large, just as poor as Central America. Even then, it had a significantly larger population but the per capita incomes in Asia were just as miserable as they were in Nicaragua, if not worse. If you revisit that same tunnel today, the differences now are staggering; Managua’s electric “Trees of Life” pale against the Asian skyscraper forests — and that’s just the first thing you’d notice.

The Managua skyline
Valeria Espinoza

The Managua skyline

Some things never seem to change on the Latin American side though, where another dictatorship is underway. President Daniel Ortega has carried out constitutional reforms that deeply alter the political structure of Nicaragua. Democracy, it seems, has been an unsuccessful experiment in Nicaragua. These reforms abolished presidential term limits, granted sovereign land to a Chinese entrepreneur that claims he can build a $40 billion (almost four times the Nicaraguan GDP) interoceanic canal, and changed the military and police codes, thanks to a Sandinista power grab that established complete control in the judiciary and electoral systems by subordinating them to the executive branch. It’s a package deal for dictatorship.

But before mourning the death of freedom in Nicaragua, let’s step back into Somoza’s imaginary tunnel. Fifty years ago, the East Asian political structure looked very similar to what is happening now in Nicaragua. East Asia saw the rise of authoritarian regimes all over the capitalist bloc of the region. Keep in mind this was what was identified as the “free world” at the time. It was in vogue back then for the U.S. and other western powers to support (or at the very least tolerate) these centralized, authoritarian regimes for long stretches of time.

These were the so-called East Asian tigers, which now enjoy income levels that rival those of Western European countries. Taiwan had Chiang Kai-Shek, Singapore had Lee Kuan Yew, and South Korea had General Park. They were dictators who shifted gears on their countries’ economies as they saw fit.

It can be reasonably argued that most of these individuals deserve a slap in the face, at least for their undemocratic behavior. However, they were effective leaders in their respective countries.

Just look at the numbers. At the beginning of Park’s rule in 1961, South Korea’s GDP per capita level on constant USD was about $1,500. Nicaragua at the time had a GDP around $1,300. Today, the difference is stark. In 2012, South Korea enjoyed somewhere close to 20 times the per capita income of Nicaragua. Just as an added measure of comparison, Singapore’s per capita GDP, which was twice that of Nicaragua back in 1961, has since ballooned to 30 times greater than that of Nicaragua. These figures seem to support a Machiavellian view of policymaking where “the end justifies the means”, as long as dispensing of democracy is not and end in itself.

Let’s fast forward again. Today’s citizens of the Asian Tiger economies have had better luck holding their leaders accountable than in Nicaragua, where, not quite coincidentally, structural economic transformation have proven elusive. For decades, Nicaragua’s strategy was to grow by reproducing itself on a larger scale, without upgrading to new products and processes. The result is very shallow development. Years of schooling and productivity per hectare have remained stagnate. Seven out of 10 Nicaraguans work in the informal economy, and five out of 10 are underemployed.                        

It’s not that Mr. Ortega has been sleeping on the job, though. GDP growth in Nicaragua averaged 3.5% between 2007 and 2012, and 4.3% between 1995-2006. Those numbers closely follow regional trends since 2009, with Latin American GDP growth of 4-5% per year and inflation hovered below double digits (6-8%). Economic forecasts remain stable, as sudden drops in exports, remittances, consumption or credit are not expected.

There are, however, reasons to be cautious. First of all, the observed performance levels hinge on “uncontrollables” such as continued price plateaus for international food prices, remittances from the United States, and Venezuelan largesse (which amounts to roughly 5% of Nicaragua’s GDP). Second, to a large extent these growth rates are determined by the demographic transition. Bluntly put, there’s more people of working age in every household. None of these factors, which are currently keeping the Nicaraguan economy afloat, are the results of sound, sustainable economic policy.

Without diversification in exports, its economy remains vulnerable to external drops in international commodity (especially food) prices. Consequently, while these growth rates are certainly encouraging and add political capital to Ortega’s project, the figures pale in comparison to the double-digit figures achieved at the other side of the tunnel, where they were sustained for decades. Another lesson from Asia, is that tight political power and control is not enough to avoid the volatility of the growth process.  Longer-term structural reforms and agro-industrial policy are needed; the kind that sometimes proves a tough pill to swallow to both rent-seeking elites and incumbents bargaining for perpetual power. The only sustainable type of pact is a social pact that includes the majority of Nicaraguans in the bargaining process.

The private sector elite in Nicaragua seems to believe the country is well on its way to an economic miracle akin to what has been observed in Taiwan, Korea and Singapore. Today, these parts of developed Asia consist of mostly opened market economies that have significantly improved the wellbeing of their populations. There is, however, little evidence of an invisible hand having channeled private self-interest into the social optimum. Instead, there was an active intervention in selected areas, physical infrastructure and a platform to enable the workforce to participate in productive activities in coordination with the private sector. There’s little suggesting that Ortega’s settlement with the private elite is steering the country towards a model for inclusive growth. Nicaragua’s old elites, agricultural landlords, and risk-averse bankers are not quite the captains of industry from Korea in the 70s.

So, can Nicaragua’s potential economic growth justify Mr. Ortega’s decapitation of democracy? Certainly not, but it can exonerate a dictator. President Park is still hailed as a hero, and his daughter, amidst controversies of being a dictator’s child, has been recently elected as president by those smitten with memories of the ‘benevolent’ deeds of Park.

The general common denominator throughout developing East Asia was the political and economic stability ensured by the authoritarian regime, which is where Nicaragua is now. Over half a century later, on the other side of the globe, history is repeating itself with Mr. Ortega. The thing is, if he could truly achieve that East Asian scenario, ushering in structural adjustments and transforming the economy, his authoritarian rule could become tolerable. The question is, will he do it?

At this juncture, even if cynically dismissing the importance of a democratic system and its social value, Ortega could still theoretically push inclusive growth forward. The problem with the current political arrangement between Ortega’s government and the private elites is not just that it remains committed to a static comparative advantage, but that it is heavily embedded in exclusive, extensive, unstable and extractive sectors. Just as it was on that side of the tunnel, 50 years ago.

The Economic Complexity Index (ECI) was developed by Cesar A. Hidalgo, from the MIT Media Lab and Ricardo Hausmann, from Harvard University's Kennedy School of Government. ECI is not only descriptive of current diversification, but also a predictive tool of future growth. As ECI jointly measures diversification and sophistication of exports, this graph shows a marked 50-year divergence in performance between Asia and Nicaragua. Data available at The Observatory of Economic Complexity .
JJBARRIOS based on http://atlas.media.mit.edu

The Economic Complexity Index (ECI) was developed by Cesar A. Hidalgo, from the MIT Media Lab and Ricardo Hausmann, from Harvard University's Kennedy School of Government. ECI is not only descriptive of current diversification, but also a predictive tool of future growth. As ECI jointly measures diversification and sophistication of exports, this graph shows a marked 50-year divergence in performance between Asia and Nicaragua. Data available at The Observatory of Economic Complexity .

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