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Cablegate: Nicaragua: Government Decrees 18% Wage Hike

VZCZCXRO6321
RR RUEHLMC
DE RUEHMU #1213/01 2751700
ZNR UUUUU ZZH
R 011700Z OCT 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 3215
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 MANAGUA 001213

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ELAB ETRD EINV PGOV KTEX NI
SUBJECT: NICARAGUA: GOVERNMENT DECREES 18% WAGE HIKE

REF: MANAGUA 01187

1. (U) Summary. On September 24, Labor Minister Jeannette
Chavez ended the latest round of Nicaraguan minimum wage
negotiations by decreeing an 18% increase for all
occupations. Dean Garcia, Executive Director of the
Nicaraguan Association of Apparel Manufacturers (ANITEC),
called the most recent increase "catastrophic for the
sector." During the past 16 months, the Nicaraguan
Government has increased the minimum wage by 60%. Gustavo
Porras, an FSLN Deputy and President of the National Workers
Front (FNT), expressed support for the government's
announcement, despite having to settle for far less than the
53% he originally demanded. End summary.

2. (U) On September 24, Labor Minister Jeannette Chavez ended
the latest round of Nicaraguan minimum wage negotiations by
decreeing an 18% increase in the minimum wage for all
occupations beginning October 1. Ministerial Decree
JCHG-010-09-08 ended two months of negotiations among the
private sector (represented by the Federation of Nicaraguan
Business Associations, COSEP), labor unions (represented by
rival FSLN-dominated trade unions and opposition unions), and
the Nicaraguan Government (represented by the Ministry of
Labor). Unable to reach an agreement, the Ministry of Labor
unilaterally declared the wage hike, as allowed by the
Minimum Wage Law (625/2007). Reftel describes the
negotiations in detail.

3. (U) Representatives of the private sector have criticized
the government's decision and warn that the wage increase
could have a negative impact on employment and inflation.
Among the most vocal critics is Dean Garcia, Executive
Director of the Nicaraguan Association of Apparel
Manufacturers (ANITEC), who said that the most recent
increase, after previous increases of 15% in January 2008 and
18% in June 2007 (for a cumulative increase of 60% in 16
months), "would be catastrophic for the sector." Garcia said
that although most apparel assembly workers earn more than
the previous minimum wage of $103 a month, many manufacturers
would need to increase wages to meet the new minimum of $121
a month. He said that to maintain worker productivity, wage
increases would have to be passed on to those who earn $150
to $200 a month as the result of incentive pay.

4. (SBU) In addition to rising wages, Garcia told Econoff
that apparel manufacturers in Nicaragua will need to deal
with a 12% increase in electricity rates (at 17 cents per
kilowatt, already the highest in the region). Garcia added
that customs delays are further eroding the competitiveness
of the sector. The cost increases occur at a time when price
competition has become fierce as a result of the economic
slowdown in the United States and strong Asian production
growth. He said that apparel buyers are looking elsewhere to
place new orders, and as a result manufacturers in Nicaragua
will begin to cut their work force. Nicaraguan exports of
apparel to the United States, which increased by 35% from
2005 to 2007 (since CAFTA-DR implementation), are up only 2%
for the first six months of 2008. About 70,000 Nicaraguans
are now employed in apparel manufacturing jobs.

5. (U) COSEP President Jose Adan Aguirre called the wage
increase "dangerous and unsustainable." He predicted that
employment would suffer as a result of the increase. Local
economist Nestor Avendano explained that the wage increase
does not reflect productivity growth but instead tracks the
consumer price index for food and beverages, which was up
17.5% during the past six months. He cautioned that the wage
hike could contribute to further inflation. Even without the
wage increase, a number of local economists forecast 25%
inflation for 2008.

6. (SBU) The decree also increases the minimum wage by 18%
for government employees. Ministry of Finance Secretary
General Ivan Acosta argued that the wage increase will have
little impact on the national budget, because only about
5,000 government employees earn the minimum wage. The
increase in the government's wage bill would be about $70,000
a month.

7. (SBU) Labor leaders were divided in their reaction to the
decree. They initially demanded a much higher increase,
arguing that inflation had eroded purchasing power and
prevailing wages were no longer sufficient for basic needs.
Gustavo Porras, an FSLN Deputy who is also President of the
National Workers Front (FNT), put a positive spin on the

MANAGUA 00001213 002 OF 002


announcement in support of the government's position.
Despite settling for much less than the 53% increase he
originally demanded, Porras concluded that 18% was
"reasonable and within the parameters we had calculated."
Non-FSLN labor leaders complained that the private sector and
the FSLN manipulated the minimum wage negotiation, to the
detriment of Nicaraguan workers.

8. (SBU) Comment. With municipal electoral campaigns in full
swing, resisting the temptation to increase the minimum wage
would have been too much to expect from a government driven
by populist propaganda rather than economic fundamentals.
The apparel sector is especially sensitive to wage increases.
Over the past 12 months, the sector has shed more than
10,000 jobs. The situation is compounded by apparel
manufacturers' inability to source fabric from the United
States so that they can take full advantage of CAFTA-DR
provisions that allow the use of inexpensive third-country
fabrics. Nicaragua is losing competitiveness and along with
it, sorely needed jobs. The government is likely to ignore
this perspective, preferring a socialist explanation that
blames capital for leaving when it can no longer exploit
labor. End comment.
CALLAHAN

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