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Cablegate: Nicaragua: Rhetoric Versus Reality

VZCZCXRO8579
RR RUEHLMC
DE RUEHMU #1268/01 2912200
ZNR UUUUU ZZH
R 172200Z OCT 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 3266
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RHEHNSC/NSC WASHINGTON DC

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

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