American University International Law Review Volume 16 | Issue 3 Article 2 2001 Foreign Direct Investment in Latin America: Nicaragua - A Case Study Hunter R. Clark Amanda Velazquez Follow this and additional works at: http://digitalcommons.wcl.american.edu/auilr Part of the International Law Commons Recommended Citation Clark, Hunter R. and Amanda Velazquez. "Foreign Direct Investment in Latin America: Nicaragua - A Case Study." American University International Law Review 16, no. 3 (2001): 743-807. This Article is brought to you for free and open access by the Washington College of Law Journals & Law Reviews at Digital Commons @ American University Washington College of Law. It has been accepted for inclusion in American University International Law Review by an authorized administrator of Digital Commons @ American University Washington College of Law. For more information, please contact [email protected]. FOREIGN DIRECT INVESTMENT IN LATIN AMERICA: NICARAGUA - A CASE STUDY HUNTER R. CLARK' AMANDA VELAZQUEZ- I. INTRODUCTION: NICARAGUA-A BEAUTIFUL AND BRAVE LAND ................................... 744 II. FOREIGN DIRECT INVESTMENT (FDI) IN LATIN AMERICA ......................... ............ 749 A. NEW OPPORTUNITIES .................................. 749 B. Is LATIN AMERICA DOOMED TO FAIL? ............... _.753 1. The distance between the rich and the poor........... 753 2. Hoiv free trade helps ................................ 756 C. RELUCTANCE TO INVEST IN NICARAGUA ................. 759 1. Nicaragua is desperately poor ....... ............. 759 2. Lack of confidence in Nicaragua'scourts .............. 760 III. REFORMS UNDERTAKEN BY NICARAGUA ......... 762 A. FREE TRADE AND ECONOMIC INTEGRATION .............. 762 B. ATTRACTING FDI ................................... 763 1. StructuralAdjustments and Reform Initiatives ......... 763 2. Fightingpoverty ...................................... 766 3. Tax refonn................................. 767 4. Electoral reform ............................... 767 5. The property question......................... 768 6. Nicaragua'sdebt ............................ ...... 769 7. Strengthening the legal and regulatorvfrainework ..... 773 8. UpgradingNicaragua's infrastructure ................. 774 * Hunter R. Clark, Professor of Law. Drake University Law School; J.D., Harvard Law School, 1979; A.B., ctwn laude, Harvard College, 1976. ** Amanda Velazquez, J.D., Drake University Law School, 1999, is associ- ated with the law offices of Ta-Yu Yang in Des Moines, lo%%a. 743 744 AM. U. INT'L L. REV. [16:743 IV. THE BURDEN OF THE PAST: FAILED ECONOMIC PO LIC IES ............................................... 774 A. LATIN AMERICAN PERSPECTIVES ON FREE TRADE AND FDI. 774 B. THE FALSE DICHOTOMY: REGIONAL ECONOMIC INTEGRATION VS. FDI ..................................... 775 C. WHY DEMOCRACY MATTERS .............................. 778 V. A BRIEF HISTORY OF MODERN NICARAGUA ........ 781 A. NICARAGUA AND THE UNITED STATES ..................... 781 B. THE SOMOZA DICTATORSHIP (1937-1979) ................. 784 C. THE SANDINISTA REGIME (1979-1990) .................... 789 D. THE CHAMORRO PRESIDENCY (1990-1996) ................ 794 E. THE ALEMAN ADMINISTRATION (1997-2002) .............. 795 VI. NICARAGUA'S CHANCES OF SUCCESS ................ 796 A. THE CURRENT POLITICAL SITUATION ...................... 796 B. DEMOCRACY AT STAKE ................................... 798 VII. WHAT THE REST OF THE WORLD CAN DO TO H E L P .................................................... 80 1 A . THE U .S. R OLE ........................................... 801 1. Humanitarianassistance ................................ 801 2. Debt relief .............................................. 803 3. The U.S. -CaribbeanBasin Trade PartnershipAct ....... 804 B. THE ROLE OF THE INTERNATIONAL COMMUNITY ............ 805 VIII. CONCLUSION ........................................... 806 I. INTRODUCTION: NICARAGUA-A BEAUTIFUL AND BRAVE LAND Nicaragua's landscape rises, lush and tropical, from the Caribbean coast into a cooler, mountainous interior.' From there, it descends majestically2 onto a narrow, Pacific coastal plain punctuated by vol- canoes. The country's approximately 4.5 million people inhabit an area slightly larger than New York State, bordered by Honduras and 1. For a discussion of Nicaragua's climate, economy, geography, government, history, and people, see generally U.S. DEP'T OF STATE, BACKGROUND NOTES: NICARAGUA, MARCH 1998 [hereinafter U.S. DEP'T OF STATE], available at http://www.state.gov/www/background-notes/nicaragua0398-bgn.html. 2. See id. 2001] FOREIGN DIRECT I.V'ESTMENT Costa Rica on the north and south, respectively. Theirs is a legacy fraught with adversity. Nicaragua did not become an independent re- public until 1838, after nearly three centuries of Spanish colonial rule.4 Throughout the modem era, Nicaraguans have endured more than their fair share of political and social turmoil, natural disasters, and poverty.! Nicaraguan President Amoldo Aleman has described his nation as "a beautiful and brave land that does not surrender to its sorrows."6 Now it appears that Nicaraguan perseverance may be paying off. Recent economic indicators promise a better life for Latin Americans in general, and Nicaraguans in particular. In fact, ac- cording to the United States Department of State, "Nicaragua now appears poised for rapid economic growth." The reason: free market economic reforms undertaken by Nicaraguan governments through- out the 1990s have begun to bear fruit. Consider the facts. Less than a quarter-century ago, Nicaragua was a nation that had turned to communism,' and consequently, found it- self in a perilous state of undeclared war with the United States.' To- day, however, Nicaragua is an emerging democracy in the process of 3. See id. 4. See id. 5. See id. 6. Remarks by PresidentArnoldo Aleinan of Nicaragui to Nicaraguan O/TI- cials and the People of Posoltega, Nicaragua,. Mar. 8. 1999, LEXIS, Nexis Li- brary, FED. NEWS SERV. File. 7. U.S. DEP'T OF STATE. supra note 1, at 6. 8. For a discussion of the ideology and tactics of the Sandinista regime that ruled Nicaragua from 1979-1990, see generally ROGER MIRANDA & WILLIAM E. RATLIFF, THE CIVIL WAR IN NICARAGUA: INSIDE THE SANDINISTAS (1994). 9. In 1986, the International Court of Justice (ICJ) ruled that U.S. support for contra rebels opposed to Nicaragua's Sandinista government violated customary international law. See Military and Paramilitary Activities In and Against Nicara- gua (Nicar. v. U.S.), 1986 I.C.J. 14 (June 27). According to the ICJ, illegal acts committed by the United States against Nicaragua included mining Nicaraguan ter- ritorial waters; arming, equipping, financing, and training contra rebel forces; and attacking Nicaraguan ports and other facilities. See generally Military and Paramilitary Activities In and Against Nicaragua (Ni- car. v. U.S.), 1986 I.C.J. 14 (June 27). For a discussion of the nefarious, covert op- erational link between the anti-Sandinista contras and the United States Central Intelligence Agency (CIA), see generally GARY WEBB, DARK ALLIANCT: THE CIA, THE CONTRAS, AND THE CRACK COCAINE EXPLOSION (1998). AM. U. INT'L L. REV. [16:743 transforming itself from a centrally planned to a market economy, and from a state of siege to one of peace and nascent prosperity."' Since 1991, inflation in Nicaragua has dropped from a hyper-inflated annual rate of 13,500 percent to roughly twelve percent, and the country's foreign debt has been cut in half." Between 1989 and 1998, government spending was reduced from half the annual budget to 8.4 percent of it.'2 Since 1996, the Nicaraguan economy has man- aged to maintain at least moderate growth, accompanied by increased private investment." The Nicaraguan government has privatized some 351 state-run enterprises since 1991." Current government policies should spur future growth by making Nicaragua more at- tractive to foreign investors, who lately have taken a renewed interest in Latin America.'1 Prospective investors will find that Nicaragua has much to offer. The country is rich in natural resources, most of which have yet to be widely exploited.'6 Its mineral deposits include gold, silver, zinc, copper, iron ore, lead, and gypsum.'7 Of these, only gold has been 10. See generally Memorandum of the President of the International Development Association and the International Finance Corporation to the Executive Directors on a Country Assistance Strategy of the World Bank Group for the Republic of Nicaragua, Mar. 18, 1998, WORLD BANK DOCUMENT, REPORT No. 17496 [hereinafter WORLD BANK]. 11. See U.S. DEP'T OF STATE, supra note 1, at 4. 12. See Countty Profile: Nicaragua 1998/1999, TuiE ECONOMIST INTELLIGENCE UNIT LIMITED, available at 1998 WL 19899411 [hereinafter Coun- tiy Profile: Nicaragua]. One assessment put Nicaragua's annual growth rate at seven percent in recent years. See Larry Rohter, Now Ruined Economies Afflict CentralAmerica, N.Y. TIMES, Nov. 13, 1998, at A12. 13. See U.S. DEP'T OF STATE, supra note 1, at 5; Latin American Economvs Growth Will Fall in 1999, ECLAC Says, EFE NEWS SERV., Aug. 4, 1999, available in WL 8/4/99 EFENEWSERV. 14. See U.S. DEP'T OF STATE, supra note 1, at 5. 15. For the purposes of this article, the term "Latin America" refers to North, South, and Central American nations (including the Caribbean islands), whose in- habitants speak a Romance language, such as French, Spanish, or Portuguese. See U.S. DEP'T OF STATE, supra note 1. 16. See id. (indicating