NICARAGUA: RHETORIC VERSUS REALITY

UNCLAS SECTION 01 OF 03 MANAGUA 001268 SENSITIVE SIPDIS STATE PASS EEB/CDA E.O. 12958: N/A TAGS: ECON EINV ETRD NU SUBJECT: NICARAGUA: RHETORIC VERSUS REALITY REF: A. MANAGUA 0763 ¶B. MANAGUA 0254 Summary -------------- ¶1. (SBU) On September 18, 2008, the Embassy and local business associations hosted the second Nicaraguan Competitiveness Forum, with financial support from the EEB/CBA Business Facilitation and Incentive Fund (BFIF). More than 120 government officials and business leaders attended this event, which was a follow-on to the Americas Competitiveness Forum held in August 2008. Ambassador Callahan opened the event with a call for cooperation between the private sector and government to identify and eliminate bottlenecks that raise costs and reduce competitiveness. Government officials voiced their opinion that President Ortega's rhetoric is not detrimental to investment, but evidence suggests the contrary. End summary. EEB/BFIF Funding for Second Forum on Competitiveness -------------- -------------- ¶2. (U) On September 18, 2008, the Embassy, Nicaraguan Federation of Business Associations (COSEP),and American Chamber of Commerce of Nicaragua (AmCham) hosted the second Nicaraguan Competitiveness Forum, with financial support from the EEB/CBA Business Facilitation and Incentive Fund (BFIF). More than 120 government officials and business leaders affiliated with COSEP and AmCham attended the event, which was a follow-on to the August 2008 Americas Competitiveness Forum hosted by Secretary of Commerce Carlos Gutierrez in Atlanta. The event was the second of a two-part series of BFIF-funded forums in Nicaragua (Ref A). This one involved a general discussion on competitiveness issues, summarized here, as well as detailed analysis of issues related to electricity generation and distribution, summarized Septel. Ambassador: Nicaragua Falls in Competitiveness Rankings -------------- -------------- ¶3. (U) In his opening remarks, Ambassador Callahan warned participants that the relative decline of Nicaraguan competitiveness, as measured by the World Economic Forum and other groups, threatens the country's ability to attract new investment. He emphasized the importance investors place on political stability and strong democratic institutions, in addition to financial market stability, respect for property rights, and the willingness of the government to fight corruption. In an indirect response to President Ortega,s frequent criticism of what he terms "savage capitalism," the Ambassador told attendees, &Governments that have opened their borders to trade and investment are more successful in improving the standard of living for their people.8 ¶4. (U) The Ambassador provided examples of companies that have proven it possible to compete internationally from a base in Nicaragua. He cited U.S. textile company ITG/Cone Denim and Mexican-Japanese manufacturer of automobile wiring harnesses Arnecom, as well as Nicaraguan businesses exporting fresh fruits and vegetables, dairy products, and other agricultural goods to overseas markets. He reminded participants that companies such as these required an active dialogue with the government to identify and eliminate bottlenecks that raise costs and reduce competitiveness. USAID Consultant: Policy Stagnation and Rhetoric to Blame -------------- -------------- ¶5. (U) Eric Miller, an international consultant working with USAID project ProCAFTA, emphasized the positive benefits of Nicaragua's free trade policy. For example, Nicaraguan exports increased from $895 million in 2001 to $2,313 million in 2007. Foreign investment, which averaged $115 million a year during the 1990s, tripled to $345 million in 2007. Nonetheless, Miller warned that success can be short lived. He called for more collaboration between government officials and the private sector on issues such as trade facilitation, infrastructure, and other doing-business issues that could improve Nicaraguan competitiveness. For example, businesses rely on Nicaraguan Customs to clear shipments promptly. Recently, Customs implemented 100% cargo inspection to increase revenue collection, but as a result businesses cannot deliver their goods on time. ¶6. (U) Miller also warned that the perception of Nicaraguan risk is worsening. In reference to President Ortega's inflammatory statements against the United States and capitalism, he told the audience, "Potential investors are not interested in the subtleties of politics; to them, rhetoric does matter." Miller added that legislative and judicial uncertainty also contribute to country risk. For example, uncertainty surrounding pending legislation governing coastal property has stopped tourism development in its tracks. Private Sector: Dialogue is the Solution -------------- ¶7. (U) Jose Adan Aguerri, President of the Nicaraguan Federation of Business Associations (COSEP),who participated in the panel discussion that followed Miller's presentation, told the audience that COSEP continues to aggressively pursue its "Development Agenda" with the government. (Ref B). COSEP remains committed to an export-led growth strategy emphasizing industry-specific initiatives as well as cross-cutting issues, such as public-private investment in energy and transportation infrastructure. He acknowledged the need to include government priorities such as housing and education. ¶8. (U) Aguerri called for a public-private commission to tackle bottlenecks in the economy such as bureaucratic red tape, lack of transportation infrastructure, and inefficient customs processing. The immediate challenge is to save the jobs of thousands of apparel workers who face unemployment as a result of declining competitiveness. Niels Ketelhohn, Dean of the INCAE Business School in Managua, also called on the government to include the private sector in policymaking. Arce: Look at Cuba -------------- ¶9. (U) Bayardo Arce, President Ortega's Chief Economic Advisor, voiced agreement with Eric Miller's recommendations for improving Nicaraguan competitiveness. He asserted that the government is exploring all options for infrastructure investment, including private sector participation in a deep-water port on the Atlantic Coast at Monkey Point, and in hydroelectric, wind, and geothermal energy projects. ¶10. (U) The rest of Arce's remarks were political in nature. Arce complained that government officials were not invited to the event, unaware that at least 25 government officials had declined to attend. He criticized the gridlock in the National Assembly for hampering the government's performance. He argued that the financial crisis in the United States demonstrates that the private sector is not the answer to all economic challenges. Justifying government scrutiny of tax returns and customs transactions, he resurrected false charges that ExxonMobil had not paid its taxes. He dismissed concerns that Ortega's rhetoric has a negative impact on the investment climate, arguing that "no single speech is ever going to make an investor run." He cited Cuba as an example of a country that attracts investment, despite strong rhetoric from its leaders. Rebuking criticism from an audience member that country risk is increasing, Arce confused the concept of country risk with physical security, quipping, "Nicaragua is one of the safest countries in Central America." VP Morales Carazo: Rhetoric on Rhetoric -------------- ¶11. (U) Vice President Morales Carazo, who spoke in Atlanta at the Americas Competitiveness Forum, identified major themes from the forum including transportation, marketing, tourism, and education. Morales called for better coordination between the private sector and government, such as he had witnessed in Atlanta among other Latin American countries. Carazo said he preferred to concentrate on education, especially technical education for agriculture, as a means to improve competitiveness over the long term. ¶12. (U) Morales tried to rationalize Ortega's rhetoric toward the United States and free markets, saying, "Sometimes I have been called upon to explain that rhetoric does not always result in action; fortunately, they are not linked.8 Later, however, he admitted that rhetoric can sow doubt in the minds of potential investors. He also explained, disingenuously we think, that some low-level government officials had misinterpreted political rhetoric to justify harassing businesses at the operational level. Comment: Rhetoric Matters -------------- ¶13. (SBU) In recent months, we have seen that the greatest concern of potential investors in Nicaragua has been President Ortega's rhetoric against the United States, free markets, and the private sector. This shows that the claims of government officials that Ortega's rhetoric is irrelevant are not true. While foreign investors looking at prospects in Nicaragua can easily focus their attention elsewhere, local investors with sunk costs have no place to go. Many local businesses seem resigned to coping with the Ortega government as best they can. COSEP's renewed interest in pursuing its "Development Agenda" reflects an awareness that Nicaragua's competitiveness is eroding. Between a stagnant legislature and a hostile executive branch, the agenda appears to be going nowhere. End comment. CALLAHAN