Nicaragua: Remembrance of growth past

in "Growing Pains: Binding Constraints to Productive Investment in Latin America and the Caribbean"
Manuel Agosin
Rodrigo Bolaños
Félix Delgado
Inter-American Development Bank

Nicaragua has the lowest per capita GDP in Latin America after Haiti. This has not always been the case. In 1960, Nicaragua’s per capita income almost matched that of Costa Rica, which was the most economically advanced country in the Central American region. Its GDP per capita in purchasing power parity (PPP) terms was about one-third the U.S. level. By 2006, Nicaragua’s GDP per capita had dropped to just 10 percent of the U.S. level.1

In the early 1970s and the late 1990s, Nicaragua had to cope with two huge natural disasters: the 1972 earthquake and Hurri- cane Mitch in 1998. In between, the country experienced a socio- political catastrophe: much of the backwardness of Nicaragua can be accounted for by the events that took place during the 1980s, when the country underwent a civil war and a very traumatic at- tempt to change the economic and social rules of the game on a grand scale.

However, even after the reestablishment of democracy and a full market economy in 1990, the rate of growth has continued to be unsatisfactory. The average annual growth of per capita GDP in the 1994–2006 period was scarcely 2 percent, and it has proven impossible to go back to the per capita output growth of the 1961–77 period (3 percent).

In order to explain the country’s poor growth performance, this study uses the decision tree approach of Hausmann, Rodrik and Velasco (2005, HRV), while modifying it in some ways to take into account Nicaragua’s specific characteristics and problems. Given the paucity of data, the use of sophisticated statistical or econometric techniques is not very plausible. Consequently, the study is supported by economic intuition and interpretation of the scant information available. Though the study looks at the most important prices, which indicate where the most important distortions are, the focus extends beyond price data, since there are constraints that are not related to any observable market price.

The chapter addresses the main candidates to be considered binding constraints. The sections that follow analyze the costs of, and access to, credit, macroeconomic risks, governance problems, self-discovery (in the terminology of Hausmann and Rodrik, 2003) and the problems of coordination, human capital, and infrastructure. But before each of these potential constraints is discussed, the study examines what Nicaraguan businessmen have to say about the prob- lems they face when making investment decisions. The last section presents the conclusions.