Last week, the Daniel Ortega administration severed formal relations with Taiwan, abruptly ending what had become, in recent years, Nicaragua’s most lucrative foreign relationship. The People’s Republic of China promptly normalized relations with the crisis-stricken Central American nation. A few days later, the president’s son, Laureano Ortega Murillo, who has long served as Nicaragua’s chief fundraiser in Asia, returned from a diplomatic jaunt in Tianjin with 200,000 doses of the Sinopharm Covid-19 vaccine — Nicaragua’s first installment of an anticipated one million dose Chinese donation.

Appearing before television cameras soon after the announcement, Daniel Ortega praised the “revolutionary brotherhood” that, he said, unites Nicaragua and China. But Ortega’s rhetoric obscures the obvious pragmatism at the core of his administration’s sudden diplomatic turn.

Ortega’s developmentalist program is premised on an unstable class compromise between underemployed workers and large private investors. For about a decade, the Ortega administration managed to prop up this inherently unstable bargain by extending means-tested welfare programs to the country’s poorest households, with one hand, while lowering taxes and removing barriers to investment, with the other.

But this arrangement has fractured in recent years. A short-lived national insurrection almost removed the administration from power in 2018, and while Ortega managed to cling to his office, the country has remained sharply polarized ever since. Sensing an opportunity to shore up its own influence, the United States Congress — previously a willing, if occasionally unenthusiastic, collaborator of Ortega’s — imposed sanctions on a number of Sandinista officials under the Global Magnitsky Act. More recently, Congress passed the RENACER Act, a bundle of more socially impactful sanctions which, when implemented in the coming months, may result in Nicaragua’s ejection from the Central American Free Trade Agreement (CAFTA).

This is the context of Nicaragua’s diplomatic gambit, which comes amid a period of deep economic and political crisis for the Ortega administration.

Since he took office in 2007, Ortega’s developmentalism has always relied on foreign sponsorship. Without the political leverage to impose higher taxes on private employers, Ortega had only international aid revenue at his disposal for satisfying his electoral base’s demands for poverty alleviation programs. Upon taking office in 2007, Ortega announced Nicaragua’s enrollment in the Bolivarian Alliance for Our Americas (ALBA), an economic bloc that promoted cooperation between left-leaning Latin American administrations. Through ALBA, Nicaragua received a reliable stream of foreign aid from Venezuela, which, for a time, contributed as much as a fifth of Nicaragua’s annual budgeted income per year. But as Venezuela slipped into a deep economic crisis during the 2010s, so too did the Sandinista developmentalist project go into crisis. In the years preceding the 2018 civil insurrection, Ortega’s government tried desperately to diversify its sources of foreign aid — and in that way triage its rapidly deteriorating welfare state.

With Venezuelan support receding, Taiwanese economic cooperation became central to those efforts. While the beginning of Ortega’s presidency was marked by overtures to Chinese investors — notably the billionaire Wang Jing, who in 2013 received a massive land concession to build an interoceanic canal through Nicaragua — in more recent years, Taiwan has provided the lion’s share of Nicaragua’s foreign aid. Just this year, Taiwan contributed about 80% of an aid pledge worth almost US$30 million — substantially less than the sums in excess of US$400 million Venezuela provided in earlier years but still enough to make Taiwan Nicaragua’s single largest foreign backer in 2021.

Just in the past two years millions of dollars in Taiwanese aid have been directed to programs which provide zinc roofs and other building materials to households affected by natural disaster, as well as to emergency nutritional assistance programs for subsistence farmers facing the Covid-19 pandemic. Taiwanese aid has also been crucial for programs which seek to integrate undercapitalized small producers with international value chains. For example, Taiwan’s International Cooperation and Development Fund (ICDF) sponsored a range of “One Town, One Product” programs in Nicaragua to enhance local productive capacity in key industries, like leather-working and even bamboo cultivation.

Nicaragua Canal Protest

Photo Credit: AP / TPG Images

An opponent of Nicaragua’s transoceanic canal project defaces a mural of President Daniel Ortega, Nicaragua, June 13, 2015.

In the private sector, Taiwanese firms have proven themselves to be remarkably acquiescent trading partners, and Taiwan has become a reliable market for exports from Nicaraguan agribusiness. A free trade agreement between the two countries went into effect in 2008, at the beginning of Ortega’s tenure, and since then the value of Nicaraguan exports to Taiwan grew by more than 800%, reaching more than US$80 million in 2020.

It is still too early to say what effects Ortega’s diplomatic maneuver will have in the long term. For one thing, it is not yet clear what China may have in store for Nicaragua. The one million dose vaccine pledge is a tremendous boon to the Ortega administration and, if the vaccines are efficiently administered, to Nicaragua as a whole. Taiwan neither has the vaccines to compete nor much to gain from pandemic “checkbook diplomacy.” But so far, Ortega has given no clear indication of whether China is prepared to replace Taiwan’s previous aid contributions in a systematic way. Instead, Ortega has fallen back on old talking-points, signaling that the new relationship with China could provide funding for megaprojects and large-scale regional investment — but not, necessarily, for the kinds of targeted poverty alleviation programs upon which the poorest Nicaraguans depend. Even the previously aborted interoceanic canal, a political non-starter but an obvious personal ambition of Ortega’s, is once again “a live project,” according to the president.

Nicaraguan news outlets have already reported that the few expatriate Taiwanese investors who operate businesses in Nicaragua are expected to remain in the country. A former diplomat was granted nationality. The Nicaraguan legislature did repeal the free trade agreement, but it is likely that Nicaraguan agribusinesses will continue to export tens of millions of dollars in meat and other goods to Taiwan, even as Taiwanese manufacturers continue to find enthusiastic buyers for electronics and other assembled products in Nicaragua. (Taiwanese investors still operate more-or-less freely in Costa Rica, El Salvador, and Panama, all of which have also severed ties with Taiwan in recent years.) But official state assistance has stopped flowing.

We can only assume that Ortega and other Nicaraguan state planners lost confidence in Taiwan — understandably, considering that the U.S., Taiwan’s most important ally, is currently pursuing an aggressive campaign of sanctions against the country. Perhaps, in the context of heightened international polarization, China was in a position to make Ortega an offer he regarded as more reliable. Only time will tell.

Nevertheless, by ending its diplomatic relations with Taiwan, the Ortega administration has unambiguously, and perhaps irrevocably, disconnected itself from what was previously its single most significant source of aid revenue. For that reason, welfare beneficiaries will likely suffer the most severe short-term effects of Ortega’s turn, as funding for direct grants plummets and some programs stand to be eliminated entirely in the absence of Taiwanese cooperation. While the most powerful Sandinista supporters are far more concerned with maintaining foreign trade balances than with the continued operation of poverty alleviation programs at home, key sections of Ortega’s base depend on welfare to survive. In this context, such an abrupt end to Taiwanese financing could further destabilize Ortega’s political legitimacy and splinter his already weakened electoral coalition.

Nicaragua’s announcement seems to have come as a surprise to Taiwan, if not to China. With Nicaragua still in the throes of a political and economic crisis for which Ortega can promise no sustainable solution, the repercussions of his administration’s new diplomatic bargain remain to be seen.

Read Next: What Nicaragua’s Shift Means — And What It Doesn’t.

Editor: Nicholas Haggerty (@thenewslensintl)

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