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4. Chapter 4: Findings and Discussions
This chapter describes the findings from inclusive growth diagnostics (IGDs) as they relate to the country risk analysis for Nicaragua (NI), which has two dimensions:
transfer risks and political risks. Subsequently policy recommendations to resolve the problems are then identified.
Debt literature reveals that sustainability assessments consist of two separate analyses: one of transfer risk and one of political risk. Transfer risk analysis analyzes the evolution of different economic and financial variables as they pertain to the financial burden of a country's indebtedness and repayment capacity. Political risk analysis assesses policymakers' willingness to repay debt. It also assesses what political actions may negatively impact macroeconomic stability and normal behavior among economic agents.
The items chosen in this research show that transfer risk and political risk significantly limit countries' repayment capacities, changing core variables of debt dynamics and increasing default probabilities. Political activities have repercussions on transfer risk. The cost of economic transactions can modify economic agents' behavior, affecting economic activity and aid effectiveness.
The Paris Declaration of Aid Effectiveness, the ACCRA Agenda for Action, and other high-level Aid Effectiveness meetings show that the presence of HR can potentially increase aid effectiveness, and therefore lower probabilities of over-accumulating debt. Conversely, HR violations might increase political risk and lower repayment capacities by hindering economic growth and aid effectiveness.
By comparison, a decrease in HR violations could decrease political risks and increase repayment capacities by increasing economic activity and aid effectiveness.
The level of respect for HR seems to dictate the assessment somewhat, as respect for
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HR would measurably decrease public expenditure in socioeconomic programs.
Indebtedness levels also seem to dictate the availability of resources that provide public services promoting HR. The relationship between political risk and indebtedness is exemplified in NI. Frequent HR violations (mainly civil and political) in NI have been found to be a direct source of political and macroeconomic instability. This has impacted NI's capacity to honor its financial obligations, as its governments' unsustainable policies were used to preserve power. Indebtedness was simply a symptom of HR violations, bad governance, and institutional problems.
Our historical analysis has shown how NI experienced political instability that turned a sustainable economic course unsustainable. High debt levels made NI unable to finance its social programs and repay its debt. The adjustment programs which aimed to diminish that debt involved a reduction in the satisfaction of economic, social, and cultural rights. NI's current status is fraught with issues: electoral fraud allegations, partisan governmental behavior, and the approval of an unconstitutional Law 840.
The study showed that restrictive fiscal and monetary policies on adjustment programs, those meant to resolve debt-related risk and macroeconomic imbalances, could advance economic performance, but produced negative externalities on the realization of HR. Structural adjustment policies reduced public (government) spending, lessening provisions for socioeconomic programs that protected those citizens most vulnerable to rights violations. Rising unemployment and poverty rates, as well as lower respect for fundamental workers' rights, led to demonstrations, riots, and rebellions amid NI's structural adjustments. Note that strengthening institutions through adjustment programs sought strengthen governance and institutions through legislation, but this ignored counterproductive partisanship within NI's state agencies.
The IMF´s and WB´s methodology to evaluate debt sustainability, the DSF, is
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no guarantee to measure appropriately Nicaragua’s debt sustainability given the result of HR violations have had on Nicaragua’s repayment capacity and conditioned its political stability. In the case of Nicaragua empirical evidence discloses that the real repayment capacity is the result of complex interactions between politics and economics that determines economic activity.
The review of the DSF discovered that the framework ignores HR issues in its methodology which inhibits the framework to: accomplish its mandate to provide guidance to multilateral and bilateral lenders that have incorporated HR elements in their development aid interventions ii) to consider HR violations, specially civil and political rights as a factor that undermines the quality of governance and institutions;
iii) ignores HR impacts of the policies which reduce debt related risks.
The indicators that Debt Sustainability Framework (DSF) and the Country Policy and Institutional Assessment (CPIA) use to evaluate governmental and institutional functionality is incomplete. It does not account for local power dynamics, politics, violence, and exclusions that shape states' economic policies. According to the research, integrating HR elements and principles into the DSF is feasible. Following successes from the UN and OECD, the integration of HR elements in development cooperatives is not only is feasible, but also improves development outcomes. Section Two explained how respect for HR promotes economic growth and builds quality governance and institutions. Similar findings regarding aid effectiveness exist in the Paris Declaration on Aid Effectiveness and the Accra Agenda for Action.
Analysis of the HR-based approach (HRBA) on development can shed light on how to improve governance and institutions with HR elements added, while still following basic premises shared by governments, donors, and recipients. The most comprehensive integration of HR into development is the HRBA that sets forth four
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basic principles—nondiscrimination, participation, inclusion and transparency, and accountability—into all development processes. An alternative approach would incorporate the ten guiding principles for integrating HR in development, which are:
• To build a shared understanding of the links between HR obligations and development priorities through dialogue,
• To identify areas of support to partner governments with HR,
• To safeguard HR in state-building processes,
• To support the demand for HR,
• To promote nondiscrimination for inclusive and stable societies,
• To consider HR in decisions on alignment and aid instruments,
• To consider mutual reinforcement of HR and aid effectiveness principles,
• To do no harm, and
• To take a harmonious and graduated approach to dissolving HR issues,
• To ensure that the scaling-up of aid is conducive to HR.
Integrating HR elements into the DSF to improve development outcomes on foreign loans and aid can improve the DSF. An HRBA can improve the CPIA's current assessment of governance and institutions, as well, since the HRBA addresses power dynamics that modify the relationship between developers.
At the same time, incorporation of nondiscrimination, participation, and inclusion and transparency into all involved development processes can help donors, policymakers, and other developers take steps to see accountability and transparency issues better, and in so doing diminish risk factors and provide further protections for a sustainable debt strategy.
Such information, if made available to the public, would also be handy for increasing accountability and transparency of foreign resource usage. It could also help economic agents measure currently ignored outcomes and impacts. The policy solutions to reduce debt-related risks would demand the publication of financial and HR impacts of projects that are financed by external debt. The HRBA can be implemented in two stages: first, by incorporating HR in governance and institutional assessments, and
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assessments of conditional indebtedness with respect to HR; and, second, by introducing the HRBA to development projects to improve accountability and transparency, especially in monitoring foreign loan uses.
In addition, seeking to lower debt-related risks with the fewest externalities in HR balances any said framework. It establishes the minimum essential levels and prevents retrogression to deficient HR standards. Respect for civil and political HR could lower economic uncertainty, while increased rights to things like education and health positively impact debt-carrying capacities, as Chapter 3 has shown.
Such a policy first implies that political stability and respect for HR are key to achieving growth in economies, of loan repayment capacities, and of debt sustainability.
In this context, reactions of citizens whose HR have been oppressed have previously led to economic contraction, political instability, violence, and war, at least in the last phases of state repression. Second, it implies that the provision of civil, economic, social, cultural, and political rights are equally important to social cohesion, which fosters economic growth and maintains debt sustainability. Third, it implies that NI needs to implement a new strategy to make use of foreign resources more effective and to address the root causes of inefficiencies. Low-quality governance and institutions cannot provide good environments to meet the main goals of development aid:
economic growth and development. Fourth, it implies that the HRBA may likely improve the efficiency of these investments and address NI's problems in said areas.
The qualitative analysis links HR violations with issues of economic growth and political risks. It exposes a need to broaden the scope and depth of HR in NI’s growth dynamics and political development to evaluate its ability to repay its debts realistically.
Therefore, an econometric regression stands to assess the presence of a linear or non-linear correlation between these phenomena (as variables):
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• HR and political instability,
• political instability and debt, and
• HR and debt.
Independent institutions should conduct such assessments to eliminate conflicts of interest among duty bearers, duty holders, and donors. Additionally, a multidisciplinary team should evaluate how development aid impacts NI's economy, governance, institutions, and HR standing. Also, it should assess the externalities that such programs' reforms may produce.
Ideally, one needs only to build upon the current DSF to more accurately assess a country’s ability to generate resources and to evaluate its institutions. Subsequently, the external environment would serve to assess how loans assist or hinder economic growth, as well as assess public spending of those finances. Strengthening the preventive capacities already contained within the DSF would require a more detailed review of macroeconomic assumptions, governance, and institutions.
The study advises the inclusion of respect for HR in institutional analyses by addressing power dynamics around which governmental and institutional quality pivot.
Conducting an in-depth study of NI’s governmental and institutional functionality, as well as its respect for HR, will improve how the DSF monitors political instability in its debt sustainability analysis. Thus, the research proposes the adoption of the UN's HRBA to NI's economic development, and that the debt sustainability framework use a CPIA which includes HR assessments.
Elaborate HR indicator which can take into account violations of HR related to governance, institutional functionality, and aid effectiveness, thereby enabling to monitor important sources of political instability in NI. These indexes must be able to address key issues like these:
• Inflicted detriments due to poor governmental or institutional functionality, and also
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• Periods of concentration of power and partisan behavior.
Robust reforms are needed to encourage aid effectiveness and accountability, as well as to decrease NI's constraints on growth. NI has to shift towards self-sustaining projects, which can increase future revenues and maintain debt sustainability over the long term. This will require a shift from existential programs to productive programs for the poor. It has to address issues regarding the following:
• A stimulus of economic growth and productive initiatives,
• The promotion of agro-industrialization,
• New methods of investment, such that investment programs explicitly reveal their financial sustainability, beneficiaries, and the accountability of citizens and government,
• Reduced information costs, transaction costs, and
• The provision of basic infrastructure to promote economic activity.
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