Address at the World Trade Center of New Orleans

on the topic of

As U.S. Ambassador, one of my primary responsibilities is to promote U.S. businesses, trade, and exports. I am reminded of that responsibility every day when I step into our embassy in Managua. If you were to come down and visit us, the first thing you would see when you enter our embassy is our U.S. commercial library, which provides information and contacts to Nicaraguans looking for American suppliers or business partners. In the hallway right outside of the commercial library is a map of the United States that was donated by you, the business people of New Orleans. The map prominently shows all of the sea lanes emanating from the Port of New Orleans to points south and beyond. So, in a way, I've been thinking about New Orleans and its economic relationship with Nicaragua ever since I arrived in Managua a year and a half ago.

Even in my short time there, I have seen a great deal of change. Nicaragua is continuing to build a society based on democracy and free market principles. This continuing effort is creating opportunities for U.S. exporters, importers, and investors, particularly because so many Nicaraguans have family links to the United States and know and like U.S. products and technology.

Nicaragua is a country in the middle of Central America of about 5 million people. It is slightly larger than Louisiana. During the last decade Nicaragua has slowly begun to recover from the severe contraction of the 1980s. In 1979, the Sandinistas and others ousted the Somoza dictatorship. Upon consolidating their power, the Sandinistas engaged in the wholesale expropriation of people's homes and businesses. They printed money wildly to pay for a huge expansion of government. This ignited a ruinous 10,000 percent inflation. Meanwhile, an armed resistance movement, which gained United States support, rose up to fight Sandinista rule. The fighting and the economic collapse of the country caused many of Nicaragua's most educated and productive citizens to flee to Costa Rica and the United States. In 1977, before revolutionary turmoil started, Nicaragua's per capita income reached $1,100. By 1989, the year prior to the Sandinista ouster, it had shrunk down to $480.00.

In 1990, the Nicaraguan people could take no more of fighting, military conscription, and a prostrate economy. In a transparent, democratic election, they voted to oust the Sandinistas and install the Government of Doña Violeta Chamorro. Doña Violeta aimed to establish democracy and restore a market economy. Nicaragua opened up to foreign investment. Price controls were lifted. The long and costly process of returning property and compensating the expropriated began. In 1996, Arnoldo Aleman won the presidential election and continued a program of economic reform. Tariffs were further reduced to an average of 10-15 percent. Nicaragua began to negotiate free trade agreements with neighbors. The inflation rate was brought down to rates of nearly 10 percent annually during the past five years.

Democratization, the end of fighting, and the return to capitalism spurred the return of many Nicaraguans. They brought back their know-how and dollars and, along with newly welcomed foreign capitalists, began to invest. In the last half of the 90s, Nicaragua’s economy managed to grow at an average rate of 5 percent annually, creating opportunities for the U.S. exporter and investor.

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Let me turn now to some specific export opportunities:

The growth of the economy over the last five years has spurred the purchase of many used and new vehicles. Many poorer families are buying their first car. It's often a small Japanese model and dilapidated. It breaks down often. For those of you that export these kinds of spare parts, you have a market that's likely to grow. Additionally, sales of new Japanese and American larger and medium-sized sport utility vehicles are growing, so vehicle-care items and accessories, such as tire cleaners, mats, and custom equipment may present opportunities.

Sometimes when I'm going to work in the morning, I feel right at home. I see big, American-built school buses all over the roads. Except that in Nicaragua, these yellow buses are the backbone of the entire public transportation system, carrying commuters to work on a daily basis. In the United States, most jurisdictions have a mandatory retirement age for these buses, but many are still quite operable afterward. Thus, exporters of these buses have a ready market in Nicaragua. These older, used school buses, need spare parts, including items like oil filters, transmissions, and brakes.

Nicaragua has become an important site for the assembly and export of apparel to the big-name retailers of the United States. Employment has jumped from 0 in 1990 to over 30,000 in this sector in 2000. Taiwanese, Korean and some U.S. contractors use sewing and cutting machines, specialized washing and drying equipment, and ironing and packaging equipment.

The construction industry has become a big mover of the Nicaraguan economy. On the government side, numerous roads have been built and are being built, mostly through donor financing. This is creating a need for new and used earth moving and road-grading equipment as well as spare parts.

Through the year 2000, the retail and wholesale industry has grown quickly, leading to construction of many shopping centers. Foreign investors have built a series of medium and small-sized hotels to accommodate an increase in both business and tourist travel. Developers have built housing developments to accommodate families returning from the United States. Investors are building and refurbishing houses to the ubiquitous international aid missions and their employees. This private sector construction has fostered demand for building materials, tools, plumbing supplies, electrical, and ventilation equipment.

While the private sector was investing in hotels and restaurants to accommodate a correctly forecasted increase in travelers, the government moved to further spur this industry by enacting a tourism promotion law. It provides a series of tariff and domestic tax exemptions for hotel, restaurant, resort and entertainment projects. The attractive features of the tourism law should serve to keep construction and refurbishment of hotels, restaurants, and small resorts moving, even as the general economy slows in 2001 due to financial system problems and the uncertainty of an election year. Best prospects include specialized air conditioning and ventilation systems, and linens. Glass and flatware, as well as commercial stove, refrigerators, and freezers would also have potential.

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Exports are but one set of opportunities. For those of you looking at expanding your businesses into Nicaragua or to make a direct investment in an emerging market, there are several prospects, including tourism and real estate.

In addition to the fiscal incentives of investing in the tourism sector in Nicaragua, there are other reasons why a tourism-related investment may be a very good prospect. Nicaragua has various natural attractions to serve as a magnet for eco-tourism. It has several active volcanoes. In Lake Nicaragua, it has the largest fresh-water lake in Central America, which even boasts the existence of rare fresh-water sharks. Moreover, Nicaragua has many hundreds of miles of undeveloped and unspoiled ocean coastlines. Good property, even ocean view, is still available and relatively cheap, even in comparison to the rest of Central America. The climate is balmy year-round and there’s a very pleasant dry season that lasts from November to April, just when the harshest weather affects the Northern United States, Canada, and Europe. Public safety is quite good.

While you may encounter attractive opportunities in this sector, you also must carefully weigh the risks. Perhaps the most serious is the problem of shaky property titles. As we noted earlier, the Sandinistas engaged in wholesale confiscation of private lands. Laws were enacted to legalize some of the confiscation, but the government has yet to compensate many of the original owners, many of who may pursue legal action to recover their property. A title search by a reputable local attorney, which extends at least back through the 70s, is a must to avoid untold grief later.

Light export manufacturing to the United States is another area of potential. Nicaragua has the lowest labor costs in Central America. Rentals of industrial property are competitive. Buying property to build on is also relatively inexpensive. Nicaragua’s relative closeness to the United States creates a short transit route for inputs and finished goods. It’s easy for executives and managers to travel back and forth. Moreover, the United States has extended to Nicaragua and the Caribbean Basin nations similar duty-free privileges on textiles that Mexico enjoys under the NAFTA. Apparel made from U.S. yarn or cloth can enter the United States duty-free. Footwear and watches, previously excluded, now can enter duty-free also.

However, the light manufacturing investor must also overcome obstacles. Worker productivity is generally lower than in surrounding nations such as El Salvador and Honduras. The apparel assembly industry is more established there. Workers have more experience in factory employment. The rate of absenteeism is higher than in the United States, but near par for the region. Severance pay requirements, of one month compensation for each year worked up to five, create a higher level of turnover than employers would like. In the last couple of years, U.S. and international labor activists have made allegations of union-busting and illegal working conditions. This has led many major U.S. retailers to carefully audit their contract suppliers. Most of these charges have been disproved and, in most cases where abuses existed, corrective action has been taken. U.S. retailers remain confident their vigilance will keep contract manufacturers adhering to local law.

Electric Power Generation presents some big opportunities. Last year, the Nicaraguan Government -- after years of effort -- finally privatized the distribution part of the state-owned electric-power monopoly, Enel. Next on the block for privatization are Enel’s two hydroelectric facilities and four thermal plants. The transmission line grid will remain in state hands. Once the privatizations are complete, there may be room for U.S. investors to sell new generating capacity to the distributor. U.S. geothermal enterprises have actively explored the market. Two U.S. companies already generate electricity for Enel.

Telecommunications is another area of upcoming investment opportunity. The fixed-line telephone monopoly is again due for privatization in 2001. Previous privatization efforts have fallen through, because there weren't enough bidders or the bid prices did not reach the government's minimum level for selling the company. This is a large potential market. There are three phone lines per hundred residents. In Panama there are 16 per 100. In the United States it's 66 per 100.

Of course none of these opportunities is without the kind of serious risk found in many emerging markets, in addition to the outlined sector-specific risks. While there has been no doubt about the liberalization and growth of the Nicaragua economy in the 90s, this movement has come against a backdrop of serious charges of corruption and illicit enrichment of senior officials in government and state-owned companies. This is especially frustrating to a largely poor public that struggles to simply meet life’s daily necessities. The rule-of-law is weak. Administrative decisions and judicial proceedings, which should be resolved on their merits, are often subject to political influence peddling, personal contacts, murky dealings, and graft. This builds risk into investment.

And, as the economy reels from a banking crisis last year and the low international price of Nicaragua’s chief export commodity, coffee, growth has softened in recent months. In the upcoming elections, the Sandinista Party, for the first time in a decade, has a chance to recapture the Nicaraguan presidency this year. Because of an agreement reached between the Sandinistas and the ruling Liberal party that changed the electoral law, the candidate who wins a plurality with more than 40 percent of the popular vote could be elected president in the first round. Thus, it is conceivable for the Sandinista candidate to win. Already, this possible outcome is giving pause to some Nicaraguan investors, who suffered so much under Sandinista rule in the 1980s.

Our responsibility is to be cognizant of the past, but our aim is to look forward. What happens if the Sandinistas do return to power? What should American business do? First it’s important to note that the world of the new century is different than the world of the 1980s. The Cold War is over. The Soviet Union is gone. Socialism, as an experiment, has failed. Many of the Sandinistas of the 80s are now property-holders and business people of the new Nicaragua. In fact, the recently elected Sandinista mayor of Managua is an entrepreneur who built and owns the nation’s largest water amusement park. Another prominent party member is the publisher of a business magazine that regularly espouses free market principles and the need for foreign investment to develop Nicaragua. However, the economic platform of the party has not yet been spelled out.

Nicaragua has worked hard to secure debt relief and fresh development financing from its the international financial institutions as well as its bilateral donors. Almost 25 percent of Nicaragua’s economy still depends on foreign assistance inflows. These inflows are predicated on a strengthening of democracy, the free market, and responsible fiscal and monetary policies. A return to the old-style socialist interventions of the 1980s would certainly jeopardize all of this assistance. We will carefully monitor the Sandinista Party's program. It is hard to believe the public would tolerate the kinds of inflation, shortages, and disruptions that socialist policies caused before. Still, the Sandinistas are still ruled by their old guard. We should be under no illusions, and factor the risks against the opportunities.

In closing, I’d like to let you know that what I've described here today is only a summary of the conditions in Nicaragua. For more detailed information, the embassy's economic section produces annually a Country Commercial Guide for Nicaragua. The guide can be accessed over the Internet at www.usembassy.state.gov/managua. I would also like to advise you that the Seminole investors from Florida have just opened a brand new hotel, which features the first Hard Rock Cafe in Nicaragua. The major petroleum distribution companies are continuing to open new gasoline stations and convenience stores. In the last two months, we have done briefings for two groups of American investors, who are interested in buying vacation homes and properties and starting bed & breakfasts.

Nicaragua, like most nations, whether they like it or not, has become part of the global economy of trade and investment. Many of Nicaragua’s trade links and reforms are ratified in international agreements. True, these accords will not save Nicaragua from reckless policies, but it certainly would make it difficult to turn the clock backward. Opportunities will be commensurate with the risks, and we believe the opportunities are worth exploring. We will, of course, be there to help you to honestly analyze the risks.