Nicaragua’s inflation is under control, and the economy has been growing at a steady 4-5% pace in the last few years. Why?
Andrés Velasco, Professor of Professional Practice in International Development at Columbia University’s School of International and Public Affairs, reports on The Sandinista Shell Game (h/t JC)
The Dominican Republic-Central American Free Trade Agreement has provided only a weak boost for new exports. Unlike neighboring Costa Rica, Nicaragua has no high-tech industry. And maquila (assembly and re-export) activities are much sparser than in El Salvador or the Dominican Republic, let alone Mexico. In the Atlas of Economic Complexity compiled by Harvard Kennedy School researchers, Nicaragua ranks 106th out of 124 countries.
That is one reason to be skeptical about the sustainability of Nicaragua’s recent economic growth. Another is the disappearance of Venezuelan aid. No one is sure how much money the Venezuelan regime pumped into Nicaragua, but one hears estimates from reputable sources of around $500 million a year for nearly a decade.
That is a lot of money in a country with a GDP of barely $13 billion. It allowed Ortega to stimulate the economy while buying support from key constituencies. But with Venezuela’s economy in free fall and the country sliding into political chaos, such largesse has ended.
Nicaragua’s recent economic growth plausibly owes much to a phenomenon that would be familiar to the Vietnamese: low-income countries that achieve a modicum of macroeconomic stability often experience a growth spurt. In relatively backward economies, where “everything remains to be done,” it is easy, early on, to spot profitable investment opportunities.
But the law of diminishing returns eventually kicks in. Once the basics of a consumer economy are in place, sustaining high returns requires developing new products, building new sectors, and penetrating new markets.
All of which Nicaragua lacks.
In case you wondered, the Canal remains an illusion.
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