Can Ortega’s Economy Finance a Dynastic Succession?

Interview with Nicaraguan analyst Manuel Orozco

The increase in remittances, tax extortion, and exports to the US are not sustainable in the medium term in the face of corruption and internal unrest

By Carlos F. Chamorro (Confidencial)

HAVANA TIMES – DIn an essay published in CONFIDENCIAL, political scientist and researcher at the Inter-American Dialogue, Manuel Orozco, described the economic model of the Ortega regime based on four pillars: the massive expulsion of migrants and family remittances; the growing “informalization” of the economy; tax and customs extortion against private companies; and exports to the United States under the CAFTA treaty.

In this interview with Esta Semana and CONFIDENCIAL, Orozco explains that this economic model is not sustainable in the medium term, given public employees’ growing discontent with corruption and a general rejection, even within the Sandinista Front itself, of a potential “dynastic succession” from Daniel Ortega to Rosario Murillo in 2026.

In the analysis you published in CONFIDENCIAL on the economic model of the Ortega dictatorship, you state that this year Nicaragua will become the Latin American country with the highest rate of dependence on family remittances. This means a big change from 2022 to 2023. What is the data?

It is a big change, especially since 2021. But, yes, this year the projection is $5 billion, which in an economy of $15 billion, essentially represents 33% of the country’s gross domestic product. This reflects a 50% growth in relation to last year. Last year remittances had already increased by 50%. Now, just between January and June 2023, we’re talking about $2.5 billion. And in general, the trend is continuing in a similar direction, to get to at least $5 billion.

Massive expulsion: 750,000 Nicaraguans since 2018

How do you explain this growth? Are migrants sending more remittances or has the number of migrants increased in the last year?

The average number or amounts of remittances sent per person has not grown substantially. What has grown is the relative share, with regards to earlier periods, of migrants who have gone to the United States and are sending remittances.

What it reflects is an increase in the number of people who have left. Between 2018 and 2023 almost 750,000 people have left. This year it will be around 125,000 people. Last year more than 350,000 people left and that block of 350,000 people is the one that is explaining the increase in remittances this year. Obviously, for next year the growth rate will not be the same, and this raises questions as to how the regime is going to deal with this situation.

Are the main reasons for this massive emigration since the 2018 crisis political in nature, or is there also some economic factor of attraction of the United States that favors emigration?

It’s a combination of reasons. In the case of Nicaragua, in particular, the main determinant that drives people out is political. We have seen a statistical correlation between the intention to emigrate and the political situation. For example, the greater the dislike of Daniel Ortega, the greater the intention to migrate. The greater the rejection of the 2021 electoral fraud, the greater the migration. The greater disapproval of the incarceration of political prisoners in 2021, the greater the intention to migrate.

In fact, in practical terms, when you look at the statistics about the number of Nicaraguans leaving Nicaragua for the United States, starting in April 2021, you basically see that it coincides with the political repression in the country. There is a gradual trend that went up to December 2022, when the United States introduced parole. Irregular migration was reduced from 35,000 people in December 2022 to 5,000 in January of this year. That has been the trend: 5,000 people, plus those who are entering through parole.

The power of migrants

What is the impact on the national economy of this flow of remittances, of the $3.3 billion dollars in 2022 and this projection of $5 billion in 2023? How does it impact on consumption, on taxes, on the functioning of the economy?

The economic impact can be measured at several levels. First, the microeconomic level, the number of households that receive remittances. Second, the amount of money this inflow represents in relation to total household income. Third, the effect it has on intermediation on the payment of money transfers in the local economy, which has an effect on tax contributions, the Value Added Tax and the selective one in particular. And fourthly, the macroeconomic impact as such, in terms of the increase of inflow of dollars into the country.

By December 2023, almost one million households in the country will be receiving remittances. And Nicaragua, which is a country of less than 7 million inhabitants, has approximately 1.6 million households. So we are talking about more than 70% of the households in Nicaragua depending on remittances, where the income they receive from remittances allows you to cover the cost of living.

The average Nicaraguan’s income is less than $250 a month. The $300 you receive in remittances substantially increases your income and allows you to cover basic needs, but it doesn’t allow you to save.

And here comes the third element. The money is actually spent. More than 95% is spent because life in Nicaragua is much more expensive, relatively speaking, than in a country like Guatemala, for example, where you have money left to save. In Nicaragua you have no money left over.

The tax contribution is around $750 million, representing 25% of the total income tax of the country, which is around $2.2 billion dollars this year. So there is substantial impact, and at a macroeconomic level remittances represent 33% of the gross domestic product.

Do migrant workers have any decision-making power over the final destination of the remittances they send to their relatives in Nicaragua? I ask because somehow these resources are also serving to finance the economy of the dictatorship.

It is a hard pill to swallow. Really, migrants don’t have a very clear idea of the impact they are having indirectly on the same government that is responsible for having expelled them. That is the perversity of the dictatorial system.

However, in general, a migrant doesn’t have decision-making power because he or she leaves the administration of the money to the receiving household. Out of respect for the management of the household of the family member you are sending money to, you place your trust in your family member to use the money responsibly. And secondly, it’s a very big responsibility to manage two households – the migrant’s household and the remittance recipient’s household. You are aware of the economic needs of the household, you know that people are not going out partying every day to spend money on other things, and your relatives recognize that you are sweating it out in this country, because here, if you don’t work you don’t eat.

Migrants are realizing that this money is also feeding the regime. And I believe that this reality may have effects, not necessarily on the amount of remittances, but on the message about how to manage the remittance so as not to contribute to the oxygenation of the regime.

Tax extortion and corruption

What is the significance, within the economic model of the Ortega dictatorship, of what the business sector denounces as a system of tax extortion, or the famous Value Doubts applied by the Customs Administration?

From 2018 to 2023, the percentage of tax contribution represented by income taxes, which are predominantly taxes paid by the business sector, increased from 40% to 50%. That percentage, apart from other essentially political measures, is a kind of punishment on the business sector against those who participate in COSEP [the Superior Council for Private Enterprise] – to increase tax collection as a punishment. 

But there is also an important element associated with this extortion. How much of this extortion is actually captured in tax collection? That 10% of taxes –we’re talking about more than $500 million being generated by way of that increase–, it may be half, it may be a third, but there is a fundamental significance, especially in a context not only of political crisis, but also the fact that the number of formal businesses in Nicaragua has fallen. Before there were 170,000 formal companies and today we are talking about less than 140,000 formal businesses, because they cannot operate. They have gone bankrupt and many of them have gone bankrupt because of tax extortion. They charge you $2 million dollars in fines and then they tell you that if you give us a third of that then we’ll be square. But this extortion really reflects the absence of legal certainty, because you have nowhere to turn in this situation when this kind of injustice occurs.

Businessmen say that they are working for the government to avoid going bankrupt or closing down. Can public corruption undermine the very economic foundations of the government?

That is the direction in which we are heading. Corruption is weakening the most important source of productivity in the country, which is the private sector. It works to create jobs, generate wealth, and generate production. We are reaching a limit where businessmen have few options other than to keep paying. It is a medieval, mercantilist model, where you find yourself facing a State that is charging you day by day.

This situation is becoming unsustainable, not only because fewer businesses are working, but also because many public officials realize that this extortion and the income that is entering the country is not being invested in education, in health. Instead, it’s being invested in feeding the clientelism, but the regime’s clientele is being reduced. So, there is an enrichment of a kleptocratic nature that is causing a lot of discontent within the sector of public employees.

Exports to the U.S. and international sanctions

In your analysis, you speak of export enclaves, economic sectors that are exporting primarily to the United States, taking advantage of the benefits of the free trade agreement. Exports of gold, textiles, sugar, seafood, and other products. Is this relationship and the dynamism of the CAFTA economy invariable and will it continue indefinitely?

I believe that it is not invariably maintained… First of all, the Nicaraguan economy – and this is one of the paradoxes of the rhetoric and misinformation of Daniel Ortega, who says he works for the people but his strategy, his economic model, is highly exclusionary. The free trade zone in particular, and the export sector in general in Nicaragua reflect the characteristics of an oligarchic model, where ten export products account for 90% of the country’s total exports. Sixty percent of Nicaragua’s exports are in textiles, which are managed by less than 100 businesses throughout the country. These are businesses that are operating in the Free Trade Zone, many of which are responsible for labor rights violations.

Gold works in relation to the performance of the global economy. If the health of the global economy increases, the value of gold decreases. Nicaragua has benefited from the changes in the global economy from the pandemic era and that is why people have been investing in gold. But as soon as we find global economic stabilization, the value is going to go down.

The free zone, in particular, has not been able to increase its employment rate. In fact, from 2018 to 2023 the number of employees has only grown by 15 000 workers. Rather, it has shrunk this year and export capacity is slowing down. So, in the long term, I believe that Nicaragua’s competitive capacity will be reduced and that will also represent a challenge for an eventual economic and political transition in Nicaragua because, in a span of three years, this model is unsustainable.  

Ortega’s economic model and the “dynastic succession”

In summary, you say – Ortega’s economy is not generating dynamism and economic growth, it is not generating quality employment, nor social inclusion, but it is expelling thousands of people. It is exporting to the United States, it is extorting companies and it has even managed to have record international reserves. So, can it continue to finance this dictatorial political system in the coming years?

The regime has the resources to sustain itself economically for at least two more years under these conditions. At this moment Nicaragua is paying the equivalent of 75% of what it is borrowing. So it would not have the capacity to fiscally sustain itself the way the model was operating. Remittances have come to solve the problem and in a way what they are doing is extending a capacity for sustainability. Still, we are talking about the sustainability of the regime, of the State, not of the country.

What you are seeing is different changes within Nicaragua, and on the other hand, we see that the international community is putting the regime more in the corner. First, dissidence within the regime has grown to a level of contempt for Rosario Murillo, and she knows it very well. She knows that no one wants her and that she also has to assume the role of president two years down the road. Secondly, the economy is not working to generate wealth in the country but is sustaining it up to a certain period of time. And thirdly, the international community is going to continue to apply pressure.

In fact, we are entering a new wave of democratization where the international community is taking a more proactive role in pushing for political reforms in many countries. So, yes, there is a continuity of sustainability of the regime, but with the limitation that sustainability will become more difficult from 2026 onwards. 

But in other countries, including Venezuela itself, the possibility of an opportunity for elections is being contemplated. In Nicaragua, the only thing that is being talked about is a “dynastic succession.”

That is the most important point in the case of Nicaragua. That is to say, the nature that is going to develop during a “dynastic succession,” when there are sectors within the circle of power that are against that succession. When the economy is not going to sustain you enough to guarantee clientelism and corruption for all within the circle of power, and when the international community keeps applying pressure. So I believe that what is developing and that is why the purges have increased more, is that the dissatisfaction within the regime is creating certain conditions of rupture that generate opposition to that succession. And this is where some kind of negotiation is going to take place between reformists inside the regime and an interlocutor voice from the Nicaraguan Civic Democratic Movement.

But we have never seen any sign of reformism within the regime. On the contrary, what we have is a submission to the family and presidential leadership.

It is a submission under fear. What we see, and what sources from within are telling you, is that the level of dissatisfaction is growing. I believe that this dissatisfaction will not become visible, but there will be changes in the balance of power within the circle of power that will weaken or begin to isolate Rosario Murillo later on. As this succession scenario approaches, because time is forcing it, the level of dissatisfaction will continue growing and that is where we are going to see the changes.

The Nicaraguan Civic Democratic Movement is in a stage of reorganization, of building mutual trust, to the extent that they are recognizing that they have to operate as a unified group, an organized critical mass and it is consolidating inside and outside Nicaragua. Obviously, it is a process that is occurring more slowly than the changes that are occurring at the other three levels, that is, in the economy, in the circle of power, and in the international community. The fundamental question is what would happen if in nine months there is a transition within the regime and the civic interlocution is not prepared? I believe that this is one of the considerations that some of the Nicaraguan civic leaders are studying.

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