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  Number 86 | Agosto 1988
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Nicaragua

The New Economic Package—Will a Popular Model Emerge?

Envío team

PART 1
THE JUNE ECONOMIC MEASURES: A PACKAGE WITHOUT PEOPLE
Thousands of Nicaraguans filled the baseball stadium in the central cattle town of Juigalpa on July 19 to celebrate the ninth anniversary of the Sandinista revolution. They gave one of their biggest cheers when President Daniel Ortega said, "The Sandinistas are socialists..., socialism has been in Nicaragua since the 19th of July 1979."

After nine years, seven of them dominated by the war imposed by the United States, Nicaraguans know well that constructing a socialist society is hard. While it’s the only alternative that can serve the majority of Nicaraguans, its creation is proving difficult, painful and demanding. The Sandinistas have met the challenge in characteristic fashion, applying firm principles with creative flexibility. Their pragmatism is not tactical opportunism. It’s a Nicaraguan virtue, an essential response to the suffering and political pressure caused by the US President’s political pathology.

A victory in the war is clearly in the wings. As a banner at the baseball stadium that day said, "Melton's gone, Reagan's going, the revolution will go on." But the military victory has brought with it a deepening of the nation's economic crisis. And, in turn, the economic crisis encourages the United States to continue its aggression against Nicaragua, whether military or political.

The cheer that greeted Daniel Ortega's restated commitment to socialism was of relief as well as support. Sandinista flexibility, a necessary skill in the face of economic turmoil and US aggression, can also be confusing to supporters: the previous month, the government had announced another package of dramatic economic reforms with a distinctly monetarist tone.

The June economic reforms follow a related package in February. Both have moved the country away from the economic model of the last eight years, a model that had stressed national unity and attempted to link large private and state producers, peasants and workers in a common economic cause.

In this article we review the June package, evaluate the results of the February reforms, discuss the political risks involved and suggest ways the package could be modified to reduce those risks and be more effective economically.

Both the February and June economic reforms represent the beginnings of a fundamental transformation in the Sandinista economic model. The measures are not in themselves a new model but instead an acknowledgement that the current one is under tremendous strain. The risk is that without additional measures to involve the people, Nicaragua's social and political unity, so far maintained in the face of war and economic aggression, will be lost. We suggest a slate of measures that, together with the current economic changes, will provide the basis for building a new, more resilient model.

The June package

On June 14th, four months after the change in the country's currency and the massive monetary reform of February 14th, the Nicaraguan government announced new economic measures. These brought even more hardship to the Nicaraguan people, the price they are paying for the attempt to stabilize the country's economy in the midst of the war.

In summary the June package:

1) Maintained the unified exchange rates established in February.

2) Devalued the córdoba by 515%, which must in itself, given the level of Nicaragua's exports, produce increases of more than 170% in home market prices.

3) Indexed the exchange rate to inflation as measured by the Consumer Price Index (CPI). The exchange rate now moves at the same rate as inflation and not according to administrative decisions.

4) Deregulated prices and wages. Combined with the removal of government subsidies, prices leapt between two and twelve times. Only central government employees will be subject to the national salary scales, which means that the state is abandoning the system of administrative microeconomic controls.

5) Raised salaries of public employees by only 30%, which eliminated any possibility that salaries might have an inflationary impact, but also meant that the average salary earner has only one sixth of his or her former buying power. Although this measure was designed to affect only salaries paid by the central government and not the productive sector, the deregulation in the latter is not expected to produce any significant increase in real salaries due to the economy's recessive tendency.

6) Strengthened the workplace commissaries while winding down the network of neighborhood basic goods stores. This will mean additional inflation in food prices for the majority of consumers.

7) Eliminated credit subsidies to the productive sector by raising interest rates and adjusting them or indexing them to the inflation rate as measured by the CPI.

8) Installed a new credit management system in which commercial or productive enterprises—both private and state-owned—will be unable to speculate with inflation as was the custom. In the new system, these recuperated credit losses can be used to stabilize the national financial system and stimulate export production.

The package will:

1) Transfer resources from internal consumption to export.

2) Accelerate the fall of real salaries, transferring resources to those who control capital.

3) Transfer resources from those who manage small amounts of commercial capital to those who manage great amounts of it, that is, from the small producers to the large.

4) Transfer income from workers, consumers, peasants and small producers, including larger non-export oriented businesses, to the public financial sector, which will then pass it on to the agro-industrial and agroexport sectors.

The long-term results are still open to question. Will there be less inflation and an improvement in the relative price structure? Will the productive sector produce more and be more dynamic?

Subsidy as a policy

Since 1983, the primary objective has been to maintain national unity in the face of external aggression. A key element aimed at that goal has been an economic policy of buying time and protecting both rich and poor from the full economic costs of the war. The solution to every problem was public spending: subsidies for consumers; subsidies for education, health and social welfare; subsidies for producers through very favorable exchange rates and credit, which amounted to a gift since it carried interest rates that were well below inflation; subsidies for public investment, especially in agricultural projects; subsidies for construction of urban infrastructure; and, above all, subsidies for the war. One effect was that as the government began organizing around defense, public spending took priority over participation and there was a reduction in the participation of workers, peasants and neighborhood residents, respectively in the trade unions, rural associations and other popular organizations generated by the revolution [see “The Right of the Poor to Defend Their Unique Revolution,” envío, Vol. 4, No. 37, July 1984].

Public spending was funded by increasing the government deficit. This forced up inflation, but that inflation also reduced the amount of the deficit in real terms. This balancing act, with the cost of the inflation being passed on as a type of tax on consumers and producers, works only until the inflation rate becomes so large as to be unmanageable and the government no longer has any control over the economy.

Nicaragua's economy passed that point in the last three months of 1987 and entered a process of hyperinflation. Monthly inflation from October 1987 to January 1988 was running at a cumulative monthly rate of 33%, almost ten times higher than corresponding figures for the same months in 1986-87. Without the adjustment package of February, inflation would have skyrocketed into the five digit category in 1988. That type of inflation would have crippled not only production but also defense.

The February package

In February of this year, then, the government was finally forced to abandon its public spending policies and bring in a set of measures which would cut deeply into the living standards of most Nicaraguans.

The February package had four main parts [see Economic Reform: “Taking it to the Streets,” envío, Vol. 7, No. 82, April 1988]. It began with a dramatic changeover of all the country's currency. In the process, 15% of the currency was withdrawn from circulation. This anti-inflationary measure struck hardest at the informal speculative sector and the contras, who were unable to change most of the old bills they held.

The second feature was a 3,000% devaluation and the unifying of a raft of different exchange rates into one. This increased the price of domestic production by 1,000% and, combined with the reduced money supply, severely restricted cash and credit supplies to agriculture and industry.

To protect working people from rising prices, basic wages were increased by 250%, on average; official prices were set for a basket of 46 basic goods and worker and neighborhood organizations were mobilized to protect these prices.

The fourth part of the package was the plan to reduce government spending by 10% and to reorganize and compact 42 state organizations into seven or eight super ministries.

Including the people

Although the June measures are technically a continuation of February's program, the reaction of the Nicaraguan people to the two packages could not have been more different.

The second half of February saw a festive atmosphere among the poor majority as they watched speculators and the country's economic problems retreat in the face of a massive mobilization. In contrast, the second half of June was marked by a big drop in confidence in the government's handling of the economy. At its heart, the difference between the two economic packages is that the first included the people, the second did not.

As was to be expected, the new economic measures drew strong criticism from almost all social strata. Representatives of the most reactionary private enterprise organization, COSEP, seized the opportunity and praised the new measures. Inside the FSLN there are doubts— perhaps strengthened by the support COSEP gave the measures—that the government can ask for such austerity at this moment. The Reagan Administration will try to use any economic dissatisfaction within Nicaragua as support for its military policies, while the US Democrats are keen to see people's unhappiness with the economy translated into votes against the Sandinistas. At such a delicately-balanced political moment, an economic package should not have left the people out.

Many people think that the government will be unable to cope with the grassroots rejection of the measures, and that the clamor of criticism in buses, public offices and markets, plus the likely increase in economic street crime, will force the government to try to buy political time by softening the measures with new salary increases and urban subsidies. Some adjustments have already begun; government employees not entitled to negotiate wage increases based on productivity have now been provided with a temporary monthly supply of rice, beans and maize which they pay for at highly subsidized prices.

There are three alternatives facing the government:

1) Give in to the wave of public pressure and return to the old economic policy of solving the problems of political and economic direction by more public spending and more inflation. This might well lead to increased economic instability followed by a system of even more rigid state control.

2) Stick to the package without significant changes and run the risk of losing more popular support.

3) Respond to the criticisms and popular demands by modifying and adding complementary measures to the new package, using the heat of the pressure from the poor majority to forge a survival defense economy. This will require not only an adjustment of prices but also an adjustment of the old economic model itself.

Popular perceptions and political pressures

The aim of the Reagan administration has been to use the war as an economic tool, creating such an economic burden on the Nicaraguan people that widespread internal opposition would develop against the Sandinista government. In this light, the economic reforms of 1988 and public reactions to them are pivotal. But it should also be remembered that the acceptance of economic hardship by the Nicaraguan people has so far been remarkable.

Compare their reactions to those recently demonstrated in Guatemala against a very different economic project. There, 10,000 people marched in the streets on July 10 to oppose the lifting of price controls on basic goods and an 8% devaluation. The total devaluation of the February and June packages in Nicaragua has been 10,000% and, as yet, people have not taken to the streets against their government.

Popular perceptions of the FSLN and the government are marked by a contradiction: there is widespread support for the Sandinista government's anti-imperialist project but serious doubts about its capacity to manage the economy. The contradiction has appeared in public opinion polls and other studies of political and social attitudes. A June 1986 analysis by the Sociology School of the Central American University (UCA) showed that grassroots Managuans doubted their government’s economic capacity but accepted that the cause of the economic crisis was US aggression and that war's costs.

They doubted the government's economic management because each economic adjustment since 1985 has brought in its wake more inflation and further deterioration in real family income. On the other hand, their own experience convinced them that it was Reagan and not the Sandinistas who were to blame for the worsening economic situation. They knew that their incomes and their standard of living had improved significantly between 1979 and 1983, the year the US aggression started to really bite into the economy.

Between 1979 and 1983, the urban poor benefited from increased public employment, vastly expanded educational opportunities and health services, access to land and increasing income that allowed them to build their own homes in the new neighborhoods that burgeoned in all the major cities. The wide array of government reforms and subsidies was met by an economic response of the poor not so much in the formal sector of the economy but rather in the tens of thousands of small family businesses that make up what is known as the informal sector of the urban economy.

During the first four years of the revolution, activities in the informal sector were the major source of increased income for the poor. As real wages plummeted with the war and the deepening economic crisis, the informal sector began to act as the sole escape valve for working class families whose salaries during the 1985-87 period accounted for less than a fifth of their income. Government subsidies and inflation had kept the informal sector working as an escape valve, but it was clearly an economic bubble with no foundations. During 1986-87 the income gap was growing rapidly between families with a small corner store, a pickup truck, or certain capital goods needed for providing small-scale services or products and those families that made their living as street vendors or provided services that needed little capital infrastructure.

The February measures, and the June measures even more so, burst the bubble. Other researchers from the UCA have studied the impact of those measures on the different segments of the informal sector. The February ones bankrupted the strata of poorer family businesses, forcing members of those families to look for jobs in the formal sector of the economy. Although there were few jobs to find, the percentage of family income coming from salaries increased because of the drastic drop in income from informal economic activities.

Those informal activities, instead of generating employment as they had done before February, were rapidly being transformed into the type of disguised unemployment that characterizes contemporary Latin American cities. The better-off segment of the informal sector fared much better with the February measures and in many cases the gap between their businesses and those of poor families grew as did the wage gap between professionals and unskilled workers.

The June measures equalized matters; incomes of the better-off family enterprises were drastically reduced. Families that had made the equivalent of fifteen minimum wages in January were making only three in late June. Poorer families whose small enterprises had been generating two minimum wages in January were only making half of one in June via those activities. For these families, the June measures made salaries all the more important, but the June wage hike of only 30% came as a slap in the face when prices of key consumer items such as food and medicine went up three- and six-fold and the costs of intra-urban transport shot up by more than a 1,000%.

Although the middle class, including salaried professionals and owners of better established family concerns, were hard hit by the June measures, the wealthy were not.

Because of the June measures, many Managuan workers who live in the green belt that surrounds the capital or in "bedroom" suburbs can no longer afford to go to work. From the city of Masatepe (25 miles south of Managua), for instance, the round-trip fare is about 90 córdobas a day which, when multiplied by the working days in a pay period, is more than the monthly salary of those on the lowest rungs of the public administration salary scale.

Because of this, the praise by wealthy business owner Ramiro Gurdián, head of the conservative farmer organization UPANIC who said, "I support and applaud the new measures of the Sandinista government," has done more damage to the government than all his former criticisms. The perceptions of the middle strata and producers from the small business-owning class, and especially workers' perceptions of their falling incomes, are all different, and represent political pressures the government will have to deal with.

The vast majority of Nicaraguans have demonstrated that they are willing to make sacrifices for national dignity, but it is to be expected that they will now pressure their government to again charge more equally for the right to be Nicaraguan. Even though production from efficient businesses will eventually stabilize their workers' salaries, it is difficult to ask sacrifices from the bedrock of the revolution's social base if they see big business owners purring with pleasure over the economic package. In a situation where the inefficiency of the big companies continues to be a weight on the backs of the poor, and in an economy of scarcity, grassroots agitation is to be expected.

The most recently-published public opinion poll was taken on June 4 and 5 by Itztani, a research center associated with the UCA. It again showed the familiar sharp dividing line between political and economic attitudes, but also revealed some new economic perceptions which mean that the political costs of the new economic package are going to be higher than the government may have imagined.

The poll showed that 71.7% of Managua’s population supports President Ortega and roughly the same percentage supports the Sandinistas’ political positions and voted for the FSLN in the 1984 elections. Yet, although 65% of those surveyed believes that the government wants to solve the economy's problems, only 19% believes that the main cause of those problems is US aggression in any of its forms. According to 36% of those questioned, low salaries, production deficiencies or bad government are the main economic problem. (The remainder gave a variety of responses or did not answer.)

That fewer people now think the war is cause of the economic crisis may well be the fruit of the government's own propaganda that the contras have suffered a "strategic defeat." People may have concluded that either they've been misled and the contras aren’t defeated as they've been told, since the war spending goes on, or they are defeated in which case there’s no reason to continue spending so much on defense. Under the hypothesis that the contras are in a strategic decline, one glimpses the view—from the most reactionary minority among the poor majority— that both sides need the war to continue financing their armies.

The process of Sapoá and the temporary cease-fire have added to the popular perception that the military budget can be cut back, thus other factors must be at the heart of the economy's deterioration. Nevertheless, at a geopolitical and military level, the problem remains that the war has not ended, the cease-fire is precarious (31 civilians and 8 military personnel were killed in contra attacks in the month up to July 20), and during Reagan's final months everything could get much worse.

President Ortega says Nicaraguans tend to think about the war and the economy as separate events. "When we tackle our economic difficulties, we have a bit of a tendency to forget the war," he said on the day the June measures were announced.

Nicaraguans are not moving to support the opposition parties—the opposition party that received most support in the Itztani survey after the FSLN's 28% was the Independent Liberals (PLI) with only 3%—but 60% of those surveyed said they didn’t identify with any party. A rising level of dissatisfaction with the government combined with the nightmare vision of an armed people assaulting milk trucks in the barrios is powerful political pressure on the government.

In the grassroots view, the central weakness of February's measures was that the government didn’t know what it was doing. This conviction, which opinion polls also began to reveal after the February 1985 package, tends to grow with each new package, because the standard of living continues to deteriorate.

The majority perspective is colored with a powerful egalitarianism and is critical of any measure that disproportionately affects the income of the poor, particularly urban dwellers. It is critical of the decision to decontrol prices for basic goods and of any new incentive for producers or those on higher wages. This means that the poor are against any devaluation of the córdoba.

President Ortega's speech of June 14th, announcing the new package, was an excellent attempt to make it understandable to those in his audience, mostly representatives of the grass roots. But the great gulf that has been allowed to open up between the consciousness of the poor majority and the government's economic team was more than obvious in the weeks following the June measures. The President spent those weeks moving from factory to factory, and schools, hospitals and neighborhoods listening to opinions filled with the type of confusion, discontent and egalitarianism that have demonstrated that only new forms of grassroots economic mobilization can re-close the gulf that separates the economic technicians who develop the policies from the people who have to live them.

The evaluation of most Nicaraguans—"the measures didn't do anything"—has both the wisdom of grassroots judgments and their weaknesses.

Differing evaluations of February's reforms

Up to late 1987, most Sandinistas habitually took into account three different needs: 1) the needs of the poor; 2) the need to maintain an alliance with the wealthy producers and provide them a series of incentives to keep production up; and 3) the need to maintain a strong state able to regulate the economy and mediate between these two sectors. With the advent of the February and June measures, however, this unified Sandinista political-economic model began to unravel into its three strands. Previously, the government had used massive subsidies to keep those strands woven together. The measures of the first half of 1988 are the government's recognition that the resources are no longer there to maintain those subsidies. As the supports have been withdrawn, three distinct perspectives have emerged in Nicaraguan economic debate. The perspectives don’t represent opposing groups as much as increasing confusion about how to parcel out scarce resources for the three needs mentioned above, with most leaders, technical personnel and intellectuals combining ideas from two or three of the viewpoints and coming up short with the resources needed to carry forward their suggested solution. In addition to the poor majority's perspective discussed in the previous section, the monetarist and producer views must be considered.

The monetarist perspective: Lower deficit/stop inflation

From the monetarist perspective, the number one enemy is inflation and the central task of the February package was to reduce the money supply and the government deficit.

This perspective has a double objective: 1) to reestablish the government’s ability to direct the economy, which it was on the verge of losing at the end of 1987, and 2) to create the market conditions necessary to rebuild production. In the monetarist view, these two objectives are the only way out for the country and the working class in the medium term. The logic is that without defending the monetary system, the revolution’s power is undermined, and, put simply, "If everyone doesn’t get it through their head that the only way out is to increase production, we’re only fooling the people."

Although this perspective differs from orthodox monetarists in that monetarism in this country is being used to reestablish the power of a revolutionary state, the program for putting the economy back on its feet is orthodox in its general outlines. The aim is to increase export profitability through devaluation and lowering of workers' real salaries. To defend the monetary system from the inflationary effects a devaluation always brings in its wake, those stressing this view seek to restrict credit to producers and businesses. With these two measures, the monetarists aim their blow at the speculative sector so as to redistribute scarce resources to those enterprises that are more efficient and profitable.

The producers' perspective: The danger of recession

The producers are not so much one viewpoint as a common front of different interests opposed to monetarist policies. Their camp includes: 1) those who want to prepare the foundation for a more socialized and modernized state sector through the public investment program and development of state-owned agriculture and industry; 2) those from private industry and agroexport businesses; and 3) the small and medium producers, cooperatives, peasants and those who favor a more sweeping agrarian reform and improvement in state services to small independent and cooperative producers along with consolidation of the alliance between these groups and the revolution.
The differences between producers and monetarists can be seen most clearly in the way they answer the question: "How do we stimulate production?" The monetarists argue that market conditions must change in such a way that if you don't work you don't eat, and in that way, production will rise.

The producers' central argument runs as follows: once the state ends subsidies to producers, production will fall. Our costs have risen and people can’t afford our goods. There is thus a danger of recession and increased inflation.

Producers want the government to lower production costs by having lower exchange rate for imports. Monetarists say the exchange losses resulting from that would be borne by the state and would be factionary. Other economists say the inflationary effect would be more than compensated by increased exports and the extra foreign exchange that would be controlled by the government.

In Nicaragua after World War II, production was always driven by the Keynesian mechanisms of public finance, indispensable when international terms of trade turned against the country. During the Somoza years producers were encouraged to depend on the financial system. Somoza made sure there was lots of cheap credit, financing it with a growing external debt, and then was able to manipulate producers and in some cases confiscate agricultural land. The result was a productive sector that had no capital from its own work and was dependent on subsidized credit. Breaking this long and heavy addiction must be handled very carefully indeed. According to producers in general and ranchers in particular, the reevaluation of long-term debts in the new package means that once again they are unable to pay their debts.

The fundamental economic problem facing producers right now is not, however, the injustice of the international market, i.e., deteriorating terms of trade. The problem is a shortage of food, foreign currency, national production and basic inputs, which distorts everything.

The price of coffee on the international market this year, for example, isn’t bad. In the Carazo plateau, where the agrarian reform has given coffee-producing land to the peasants, there were food and other articles in the small rural markets before June. But now, in the hills south of the plateau, where the peasant population is semi-salaried, there’s no activity in those stores because their owners have nothing to sell and the peasants have no money to by anything. For the first time since 1979, one hears of hunger in this region.

This pattern, in which devaluation stopped commercial activity in an entire sector, can only happen in an economy of acute shortages, where neither producers nor salaried workers have enough liquidity—the former to restart production, the latter to eat.

Those who defend the producers’ viewpoint argue that the force behind inflation in Nicaragua is shortage, not the exchange rate or the wage-price spiral or excess liquidity among producers and workers. Without complementary measures to stimulate production, they say, the packet’s effectiveness will be very limited indeed.


PART TWO
AFTER FEBRUARY
To understand the June economic package, we first need to review what happened after the announcement of the February reforms.

In our April evaluation of the first five weeks of February’s monetary reform, envío cited three phases of the new economic package: 1) the monetary reform and political mobilization against speculation, 2) the institutional reform and reduction in the size of the state agencies, and 3) popular economic mobilization aimed at encouraging productive efficiency.

On the whole, it could be said that the government conducted the monetary reform part of the first phase successfully. But the popular mobilization against retailers and speculators faltered and the government was unable to move on to the two following phases.

Phase 1: Monetary reform
and the anti-speculation campaigns

After the devaluation and issuing of new currency, public campaigns to hold prices at the new official levels were begun immediately. But these faltered in March, as some prices broke through official levels. Inflation was not checked and, despite a 250% increase in salaries, workers’ real incomes fell. Neither did the reforms shift producers from domestic to export production. The Central Bank kept tight control on credit until early May, when fears about the reduced area of land to be planted at the beginning of the rainy season led to a rapid freeing up of credit.

Political mobilization. February’s mobilization was popular in both senses; it involved the poor majority and was widely supported. The objective of the campaign was to regain what the state had lost: the ability to control prices and, in so doing, protect the buying power of salaries. Workers and the neighborhood organizations took up the task, principally in the country's two biggest cities, Managua and León. The job was clear and the results were immediate. The bitter pill of the devaluation was sugar-coated with the very short-term positive effects of the changeover to the new money, the big rise in salaries and the blow to speculators. In February, there was clearly more than individual interest at stake: there was a feeling that the people had regained control and put energy back into the Sandinista economic model.

The sugar coating quickly dissolved. With low production and scarcities of goods, official prices could not be maintained. Prices of goods from highly-concentrated sectors of the economy such as rice and oil quickly broke through the established ceilings.

By the end of the first month the buying power of workers' salaries fell to worse than before the February reform, despite the increase in wages, and goods were in short supply in the country stores of the National Union of Farmers and Ranchers (UNAG), which supply basic goods cheaply to the peasants, because the stores had been decapitalized by the economic changes.

People were saying, "The government can't recover the economic model, they've tricked us with the slogan that the new córdobas are more valuable than the old ones and by saying that we can defend salaries." Just as in 1985, the new economic measures only succeeded in worsening their standard of living.

The anti-speculation campaign was also hampered by its urban bias, a key weakness of Sandinista policy since 1980. When UNAG began to mobilize its base to sell their goods directly to the urban consumer in farmers’ markets at official prices, it ran into opposition to the price controls from its members, because they reduced peasants’ incomes .

Inflation. The inflation rate in Nicaragua peaks each year in July and August, just before the first harvest goes to market. Then it drops back dramatically from October to February and begins to rise again only in March-April. The signal that Nicaragua was on the verge of hyperinflation came late in 1987 when the monthly inflation rate stayed high at a time when it should have been dropping rapidly. In January of 1987, the monthly inflation rate was -8.25%; in January of 1988, it was +40.82%.

The government had postponed its economic reforms until the last possible moment. As a consequence, even with the measures in place, it was estimated that inflation in February and March would remain at a cumulative monthly rate well above 40% because the 3,000% devaluation would cause a sharp rise in the cost of imported inputs. The good news was that, according to the new CPI, the rate of cumulative monthly inflation in February and March was only 33%. This indicated that the February package was succeeding in its fundamental objective of lowering inflation. In April and May, however, inflation in the CPI jumped by 32% and 65% respectively, bringing the overall cumulative monthly rate between February and May to 43%, still comparable to the cumulative rates for the same period in 1986 and 1987 (38% and 39%), but showing a dangerous rising tendency. Inflation in early June was running at 70%.

The hyperinflation in May and June was pushed not by excessive demand but by problems in the availability of productive inputs and basic goods.

Inflation in the basket of 46 basic goods was even higher, reaching 113% just during the five weeks following the February measures. This is another clear signal that the central cause of inflation is the acute shortage of basic goods. It’s also a sign that the adjustments were weighing most heavily on the poor.

As the chart below shows, prices for the most basic goods—crucial in the diet of the poor majority—rose much faster than those for meat and milk products, which are more accessible to the middle class.

Timing. The chart shows that the power of wages to buy a minimum of basic goods fell in June. Things would have been worse without the February measures. Although workers and peasants have been extremely critical of the government's measures between March and May because their standard of living continued to fall, their criticism would have been more apt had they accused the government of waiting until the economy was in a complete shambles before bringing in the economic changes.

Exchange Rate. Another common criticism of the February and June measures was, "Why didn't they do it all at once? Why a double devaluation inside a few months?" Doubtless a single stronger devaluation in February, taking advantage of the mobilizations, would have been a better course. In the first two weeks of February, there was criticism from the economic technicians that the calculations for the devaluation were flawed and a rate of 15 or 20 to the dollar instead of 10 would have been enough to improve the economic situation.

From day one, most economists felt that the 10:1 rate chosen in February was unrealistic. They agreed that it would be of little use in putting the brakes on inflation because the rate on the black market rose to 600, 800 and then 1,000% above that official rate. This unrealistic rate was, however, held until June.

The government didn’t act on these criticisms partly for a series of operational reasons, but above all for fear of the harmful effects on the poor and the political impact of such a powerful devaluation.

Promoting Production. One of the main goals of the February package was to guarantee that exports would be more profitable than sales to the internal market. Nonetheless, prices on the local market were generally much higher than export prices in industrial production. In March, April and May, the same held true for the prices of meat, sugar, cotton and even coffee, whose export potentials were threatened by the high inflation levels in the domestic market.

The second devaluation in June has largely overcome the problem of profitability. At the end of June, the profitability of coffee, meat and sesame had improved substantially, while tobacco, sugar and cotton continued to run at a loss despite a total devaluation of 10,000% since February. The signals are very clear: only competitive producers, i.e., small and medium farmers and ranchers and peasants—particularly those producing coffee, cattle, sesame seed and basic grains—are profitable. Those sectors that are heavily concentrated, or oligopolistic, like sugar, or high-tech industries such as cotton and tobacco, represent a burden for the people.



______________________________
* The salaries in the chart are the nationally regulated salaries of Nicaragua’s 80,000 teachers, health workers and public servants, and the 130,000 army members. Wage and salary controls were lifted in June for the other 205,000 workers, who work in directly productive enterprises,. While they ostensibly have the chance to get more than the 30%, these increases are only available to the 25,000 industrial workers in this productive group, which are only a fraction of the total 80,000 non-agricultural wage earners. The 125,000 agricultural workers have salaries that are largely set by the amount the farm owner gets from the bank in credits and their incomes have probably dropped even further than those whose salaries are covered by the National Salary System (SNOTS), because of problems with transport and basic supplies in rural areas. The chart reflects the reality not only of public sector workers, but also of the great majority of salaried workers in Nicaragua.


Credit. Short-term credit, necessary to restore the liquidity lost because of the currency change, was far below forecast levels for the industrial sector. During March and April credit was not getting to the agricultural sector. Protests from rural producers freed up the credit in May and June, permitting a 44% increase in the area planted this year over last even though credit for this sector of the economy did not exceed planned levels. Between February and May it was not rural producers but rather urban consumers who broke the established credit ceiling. An enormous credit was given to one enterprise, CANSA, which really amounted to a subsidy to sugar consumers. There were also subsidies for electricity, urban transport and rice in the cities. With subsidies, the Industry and Commerce Ministry was able to maintain basic supplies to the army and health and social welfare sectors, along with other nonproductive sectors, while subsidies were cut in the national network of neighborhood basic goods stores.

Long-term credit, especially to coffee and cattle producers, who are crucial for increasing production, fell far short of what was expected. Long-term public investment showed the same recessive tendency. The payouts to large-scale Ministry of Agrarian Reform (MIDINRA) agro-industrial projects were cut back between February and May, although less than the agroexport credits to small and medium producers.

Between February and May, the government's fiscal deficit was 20% higher than had been forecasted. The tax take was badly eaten away by inflation. In envío’s April analysis, credit subsidies were described as the only escape route the package offered to producers for stimulating production and controlling inflation. But according to the monetarists, cheap credit was one of the central causes of inflation and the increase in the government's deficit between February and May. They hold that the credit level is intimately linked to the inflationary spiral and that cheap credit, instead of stimulating production, is actually destabilizing it. With such cheap credit, borrowers can afford to use some of their funds for speculative purposes, which then contributes to the inefficiency of production. In other words, you can be a good client for the bank without being a good producer, as Planning Minister Alejandro Martínez Cuenca, put it. As a result, credit was drastically reduced for the second half of 1988 as the government slashed credit subsidies to producers.

Phase 2: Restructuring the state

The state became bogged down in its efforts to reduce the budget and combine various administrative departments, stopping short of real qualitative improvements, though some government heads say this is still pending. Some steps were taken to improve the banking process and simplify other administrative procedures, but the result of the February to May period was a government which was less agile and less capable of acting incisively on the economy because it was so absorbed by its own internal reform.

The cutback in the government's budget will begin to have a positive effect on the economy in June as planned, and it looks like it will surpass the goal of 10%. This benefit has been deferred because the 10% cut in government spending, won through a reduction in the size of government agencies, was neutralized by three months worth of severance pay given to the government workers who lost their jobs.

Phase 3: Efficiency campaigns

As the anti-speculation campaigns failed, people began to realize that the only solution to their problems was more production. The government, however, didn’t take advantage of these new seeds of popular consciousness. The angry mobilizations against speculators were not transferred into concrete production opportunities, although some efforts were made among industrial workers, who represent only a small percentage of the economically active population of the country. The impulse toward production and efficiency did not leave roots in the urban or rural cooperative sectors, and had no impact on small industrial and rural production sectors, which represent more than 60% of working people.

For a whole series of reasons the government was unable to retain the links between the grassroots movement and the monetary reform. Tied up in the administrative reforms and distracted by the unprecedented military campaign of March 1988 (Operation Danto) and the diplomatic horizon that opened in Sapoá, the government's economic team couldn’t maintain the rate of mobilization it had embarked on in February. And as the anti-speculation campaign faded, it couldn’t convert the energies to a less dramatic but more effective productive mobilization. Most people remained inactive and increasingly critical spectators of government economic management.

When the economic mobilization faded away during March, April and May, the state lost control of the real energy of the economic reform, maybe the most crucial economic development since 1979, and in doing so lost a significant benefit of the currency change. That recourse is now a spent economic cartridge. The February mobilization could have been the beginning of an "economic insurrection" against the culture of subsidized consumption for the rich and administrative inefficiency, an insurrection within the government apparatus as well as among the workers. Having lost this opportunity in February, it will be much more difficult to restart it, but it’s crucial to do so.

There were also structural reasons why the government was unable to maintain the pace of popular mobilization: 1) it does not yet have a production strategy designed to meet the needs of a wartime economy and incorporate the urban and rural poor and 2) it doesn’t have sufficient staff to implement a really popular economic strategy, because defense has caused a notable depletion in personnel and resources and the government's political staff has left the economy in the technicians’ hands.

Reintroducing the rural and urban poor into the economic strategy will demand a shift of attention and staff to the economic battle.

Protecting the state

The monetarist perspective won out over that of producers and the people in general when the new June package was hammered out. This gave priority to restoring the state's ability to influence the economy over the immediate needs of large sectors of the population.

Although most Nicaraguans accept these priorities when they are defending their national dignity, it’s doubtful they will accept this formula in the economic camp. This is especially true when, even before the 1988 reforms, the state had become such a large economic consumer at the expense of the grassroots sectors. While the state was losing control of the economy it was also consuming a larger share of the country’s resources. In 1980, 84% of GDP was consumed by the people and 16% by the state. The costs of the war and the public investment program shifted the balance so drastically toward the state that in 1987 the public's share of the GDP was only 48% and the state consumed 52%.

The make-up of state spending has also changed significantly since the beginning of the decade, when it was responding to the population's immediate needs, through 1983-84, when defense began to demand more and more of the public budget, and into 1985, when inflation began to wipe out the benefits of increased public spending.

From February to April 1987, the needs of the poor majority won out over the monetarist prescription by getting salary hikes, and won out over what export producers wanted by blocking a progressive devaluation of the córdoba. But all of that is nothing compared to the June victory of the monetarists and export producers in having the value of the córdoba indexed (tied to the inflation rate). This change of perspective is not because there has been a shuffle in the decision-making group, but because there has been an evolution in the government's economic thinking.

The need for a new model

The biggest difference between the reforms of February and June was that in June there was no mobilization; the government decided to dismantle a large part of the system of supplying basic goods to the public at cheap prices without involving people in any new tasks in the economy while it was being reshaped to deal with a period of increased scarcity.

June 1988 marked the Nicaraguan government's recognition that there were simply no more resources to be able to follow the economic model designed in 1980, and that it was time to search for ways to reconstruct it so it could serve the grassroots majority through a very difficult period.

A new model isn’t going to fall from the sky, and the current reforms aren’t enough on their own. The alternatives of either scrapping the measures altogether or sticking with them unchanged aren’t impossible but are very unlikely in today's political and military situation.

Without including the Nicaraguan people and the thousands of committed political activists in developing economic projects that will quickly relieve the shortage of basic goods, the new measures will meet the same fate as those of February 1985 and February 1988.

The danger of this incomplete package is not the devaluation and control of the fiscal deficit—which were highly necessary—so much as the loss of political and economic time if complementary measures aren’t added to address the deeper problems that have weakened the economic model designed in 1980.

A futile patch-up job?

The new June package is not the draft of a new model but rather a fundamentally monetarist attempt to patch over the structural problems that are emerging in the old one. Both it and the February package were the culmination of adjustments that had been taking place in the Sandinista model since 1985. Although they aim to eliminate the public-spending-and-subsidy style of economic management characterizing the original, they continue to put priority on state control of current economic activity in order to insure a brighter future. The original model emphasized long-term government investment projects in new technologies to the detriment of traditional technology and production schemes. The recent attempt to adjust that model emphasizes government controls over credit resources in order to create market conditions that will in the medium and long run expand the nation's exports to the detriment of existing production in the home market.

Even though the core of the model hasn't changed, however, the costs the people must pay to maintain it have. In its high-tech version, credit was cheap and subsidies plentiful; public spending was the path to a brighter future. In the monetarist version, austerity and public control over scarce resources is the prescription for the future of a revitalized agroexport sector. In neither variant does people's creativity in using existing technologies to satisfy their immediate needs play a significant role.

Although the February and June measures have done a great service by gaining more time and keeping the inflation rate from hitting five figures, the attempt to readjust the model without going to the roots of the problem will only increase tensions in the relationships between the oligopoly producers, the producing population and the revolutionary state.

It was absolutely essential to devalue the córdoba to assure the profitability of Nicaragua's exports and to continue trying to correct the distortions in relative prices. It is indisputable that sooner or later the interest rate would have had to be adjusted to ensure that the producers use credit resources more frugally and efficiently. No one questions the need for the June package, but there is much dispute about the austerity of the package and the lack of compensatory programs to neutralize a possible recession stemming from harsh restrictions on consumer purchasing power and the depressed profit levels for non-export productive enterprises.

The measures were necessary but the package is incomplete. Without the quick introduction of other changes to compensate and complement the reforms, their positive effects could again be lost, and have too high a political cost.

As envío argued in its April issue, adjusting the economy without relying on the creative energies of all producers and newly formed cooperatives is simply impossible because Nicaragua lacks the minimal resources, market conditions and international support needed to embark on such a severe adjustment of the economy. What Nicaragua lacks to be able to stabilize its economy is:

* International hard currency reserves for consolidating the devaluation.
* The ability to guarantee an adequate flow of productive inputs through production or external credits.
* An ordering of relative prices and a climate in which weeks of economic activity and national productivity are not lost because economic agents are incapable of imagining the price impact of such powerful devaluations.
* Most importantly, the ability to escape from the inflationary spiral by reducing the military budget. This is what’s truly responsible for the gigantic deficit and the serious imbalance between an enormous and unproductive public sector and the slender resources that can be dedicated to production.

With the people

Since Nicaragua doesn’t have these material conditions for stabilizing the economy, its most important asset is the support of an aware public that has confidence in the management of its government.

Without the people, the economic adjustment is simply not possible. This is at the very heart of the country's economic situation. The government has the political support of the people for the project of national unity and political pluralism. But turning to the economic project, it needs a more diversified package of measures that involves the grass roots and meets people’s needs better. The government will have to do this if it wants to improve its chances of successfully carrying out the fundamentals of an economic adjustment, maintain national consensus and reduce political costs to a minimum.

If the problems at the deepest levels of the economic model are not addressed, the conflicting perspectives will move further apart, and the balance that the government has maintained between them could be destroyed. Monetarists tend to treat the economy's problems as if they were only a matter of sorting out the state's finances. Producers fight every measure as if profit levels were the only things that counted. Workers and peasants defend their own interests without realizing the enormous restrictions faced by the state.

The international press reported on the June measures as if the government had decided to compromise with the private sector, accepting its models as a necessary step to begin negotiations with the United States, and as if the revolutionary process had essentially run its course. Yet only three weeks later, after the nationalization of the large San Antonio sugar mill, the international press again portrayed the Sandinistas as hard-line socialists.

But the situation is neither as stable as the monetarists think, nor as unstable as the international commentators imagine. Rather, Nicaragua has entered a period when events are outstripping the government's ability to analyze them, as two major devaluations in less than four months have shown.

The situation is not as unstable as the press thinks because it won’t be the United States and COSEP that define the new productive strategy and new model of accumulation in Nicaragua, but the people and their leaders. It’s not as stable as the monetarists think because deep cracks have appeared in the revolution's economic model. Current debates between bankers and producers over interest rates do not touch on the fundamental cause of the model's weakness: poor distribution and inadequate allocation of resources to the different producer classes who support the revolution. This combined with the war has made the original model increasingly unworkable. The priorities given to the state sector and high-tech segment of the private sector must be replaced with a new model emphasizing the role of the less sophisticated technology of peasant farmers and small- and micro-scale manufacturers in the task of recovering production.

Redesigning the model

For the reasons we’ve set out, the new measures are bound to increase criticism of the government's economic management. The grassroots criticism will go on building like a wave of pressure. It will break on a government that has been too slow in restructuring the productive strategy to meet the demands of the war. If the government is able to respond to that pressure, it may be able to restructure the class alliances underpinning the current economic model and thus find its way to the new model that the country so badly needs.

To fundamentally restructure the Sandinista economic model, the first enormous task is to reclaim for production the land that has been lost to the war. Doing that would release the great majority of Nicaragua’s potential for recovering and increasing livestock and coffee production, two areas where Nicaragua could expand its exports. In fact, the coffee and meat exports that have been lost because of the war have been a crucial cause of the scarcity of foreign exchange for productive inputs. This has weighed the economy down tremendously and thus limited the government’s ability to maintain its social program and protect the real incomes of workers and peasants.

The war has certainly been the main reason that Nicaragua lost much its production for export and basic national products. But they were also lost because the medium-sized producers and peasants in the hinterlands were not part of the largely urban class alliance that was such a priority of the economy in the early years. As many Sandinistas say about the rural areas in the interior of the country, “The revolution never got there.”

The February and June measures produce the right monetary context for retaking the economic terrain devastated by the war, but they won’t be enough in and of themselves to mobilize the immense and complex production of corn, beans, pigs, cattle and coffee from the interior of the country, though production of the latter two brings in exactly the hard currency Nicaragua needs to adjust its economic model.

The restructuring and broadening of the economic model can be described under seven basic headings.

1. A model that is more rural than urban. This would, for instance, demand a reorientation of the metallurgy industry toward production of goods for the coffee and livestock sector, instead of being the construction arm of MIDINRA’s big projects. Now that the construction phase of those factories is ending, it is uneconomical to continue importing agricultural processing machinery that could be produced in Nicaragua. It should also be possible to reactivate and encourage small rural industry.
2. A model that is in less of a rush to transfer to newer and more complicated technologies and that begins from and trusts in the existing lower-level grassroots technology.
3. A model that changes the priorities that have existed for eight years inside the economy’s informal sector, where commercially-oriented, non-productive segments of the informal sector have received more benefits than its productive segment. This would mean investing resources in, and helping to organize better, the small-scale manufacturers and that part of the informal sector that provides essential services for production.
4. A model that uses the agrarian reform to deal with the terrible congestion of the cities, particularly Managua and others on the Pacific plain, by providing non-essential state lands near them for the creation of cooperatives, using technologies less dependent on imported goods.
5. A model that places its emphasis on watching over productive efficiency instead of futilely attempting to control speculation in a scarcity economy. Instead of negative mobilization against merchants, what is needed is positive productive mobilization of cooperative members and the independent peasants and small manufacturers.
6. A model that strengthens traditional production in both the city and rural areas, thus creating an economic basis that in turn will allow technological transformation to be speeded up at a future date.
7. A model that broadens and restructures the alliance of the groups that support it, giving more importance to peasants and to small and medium rural and urban producers and small industry, changing the nature of the alliance with the urban poor from a policy of subsidized consumption to one of productive mobilization. And a model that controls inefficiency better in the big concentrated industries, be they public or private.


PART 3
ECONOMIC MOBILIZATIONS: POLITICAL ESCAPE VALVES
Since 1985, government planners have adjusted the original Sandinista economic model over time from the top down to maintain it in the face of economic deterioration caused by the war. After the June 1988 measures, the model will most probably undergo complementary and compensatory changes due to pressures arising from the grass roots in much the same way that public pressure deepened and increased the pace of the agrarian reform. These changes will be shaped by the tension between the new monetarist measures and public pressure for greater economic equality. If they are creatively executed, they may be able to serve not only as political responses to public anger but also as forms of economic mobilization that are badly needed to stabilize the economy.

The options the government has at hand to stem public economic discontent while simultaneously setting the economy on its feet again are not only few in number but will also be extremely difficult to put into practice. In the following section we discuss six measures, each of which could strengthen and complement the June economic package and permit the development of a survival economy with increased popular participation.

1. Increase salaries and free up credit

There are good reasons to raise salary levels. First, the revolution must respond to the demands of the poor who are once again facing the type of economic misery that they knew under the Somoza dictatorship. The Reagan administration strategy of "rollback" has worked not so much against the Sandinista government as against the Nicaraguan people's standard of living. Second, leaving salaries at their current depressed levels runs the risk of dragging the country into a productive recession: if no one has the money to buy anything, stockpiles build up, prices are driven below the actual costs of production and producers stop producing. Third, leaving salaries of those who work for the government at their present low levels would undermine the country's health and education services and give the package a distinctly IMF odor. Fourth, low salaries will increase problems with the government deficit since the overwhelming majority of government income depends on sales taxes. If workers are forced to lower their consumption of rum, beer, soft drinks and tobacco, all the efforts of the June package to cut the deficit in order to stem the tide of inflation will have gone for naught.

Perhaps the clearest signal that the new economic package was politically quite risky has been that the conflict has not developed in the classical way, in struggles between workers and employers, but rather between the government and workers on the one hand and between the government and owners on the other.

It is important to be clear from the outset that giving workers more money would not be a problem for the Nicaraguan economy, because salaries are already so low that they simply are not a determining factor in inflation. Inflation is not being caused by the wage-price spiral but rather by the acute shortages of hard currency and the productive inputs it buys, by spending on the war and by a long-term public investment program that has not yet begun to result in significantly increased production.

The problem of credit is much more complicated than the wage issue. Credit is a crucial piece of the June economic package, at the center of current policy debates and, as mentioned above, an inherited problem from the previous regime.

Since the monetary reform of February 1988, the government's credit policy has been quite erratic. In February and March, the country's banks clamped down hard on the availability of credit, and in April newspapers were full of stories about the pressures producers were putting on the financial sector because of cash-flow and credit problems. In May, the policy gave way, and more money was pumped out for agriculture than ever before. The response was visible in June, when the area planted was significantly more than last year for every crop except cotton (see chart below). A worrying aspect of the planting, however, is that the area planted for internal consumption increased more than planting for export—despite February’s 3,000% devaluation. If this pattern continues, the monetary measures will clearly have failed.





There are several reasons for the increase in planting this year. First, the February changes hit farmers at a very hard time, when they had no harvest in the barn or the field. Most of them didn’t have enough cash to buy productive inputs after the severe devaluation. Their only choice was to find the credit they needed to plant their crops. Their response is a confirmation of one of the monetarists' basic points: take money away from producers and they’ll be forced to produce more.

But there's another element in the agricultural credit picture that explains increased spring planting. Credit was made available in May and June at giveaway interest rates, in that the rates weren’t tied to the galloping inflation rate, so the money producers paid back to the bank was actually worth a lot less than the money they borrowed. The giveaway credit was important: while farmers were hurt because subsidies on imported inputs had been eliminated, this subsidized finance provided an escape valve. The combination of cheap credit and better prices was enough to offset the increased costs of inputs, which was clearly a second and perhaps decisive reason for the increase in planting.

Third, the rainy season started late and looked promising. The rains happily coincided with the late arrival of money from the bank.

The good news of spring planting may be quickly replaced with the bad news of a coming recession because of the new credit policies announced in the June package, which did away with the cheap interest rates. From credit being a gift that amounted to a negative interest rate of 900%, producers are being asked to pay back at 3% real. Three percent doesn't sound like much, but it's a very large shock for farmers who have built up such a free credit addiction. For this year's second agricultural cycle, they are likely to threaten the banks with not producing unless they get what they're accustomed to. The country may be facing a recession in agricultural production.

Demand is the problem

In industry, consumer demand is the problem, not credit. The state dairy enterprise (PROLACSA) decided to cut its production by a third because people simply didn't have money to buy its products. The beer factory had to shut down because people didn't have enough money to buy beer. The cracker factory warehouse is crammed with unsold crackers.

With Nicaragua balancing on the brink of a deep and dangerous recession, credit is one way to keep the economy moving. While economic overhauls that include devaluation, credit restrictions and salary cuts don't normally lead to recessions in countries beleaguered with productivity levels as low as Nicaragua’s, the country is a special case, for several reasons.

First, we know of no successful economic overhaul in a country where more than half the national budget and over a quarter of the gross national product is being spent on a war.

Second, this economic crisis has been going on so long that some of the traditional "cushions" that protect an economy against recession are no longer available. Wages have been strictly controlled since 1982; the informal sector, for instance, which is a cushion against monetarist policies for workers in many third world countries, has already reached the saturation point. The February economic measures have, in fact, provoked a recession in the informal sector.

Third, while importing rice, beans and potatoes does help the urban poor by keeping prices down, those same low prices discourage the country's farmers from planting.

In simple terms, the big jump in interest rates is like a salary rise for the financial system. Monetarists argue that workers can't have a raise without more production because more money chasing the same goods means the money will just devalue again. Using the same logic, it’s only fair to ask whether the "wage hike" the banks are getting will mean anything at all without prior increases in production.

If there’s no increase in production, producers will be slow paying their debts to the bank, the tax take will be below what's been budgeted, and consolidation of the financial system will have been in name only. If you can't pay workers what you don't have, neither can the banks accumulate profits that don’t exist.

There’s no question about the June package’s objective: recover production to better protect the living standards of the poor. But it is unlikely that production can be raised quickly with policies of cutting back workers’ salaries, restricting credit to producers and increasing the financial system’s resources, unless this is all accompanied by complementary measures to encourage producers.

One of those complementary measures would be to use a finer tool when giving out credit. There are powerful economic reasons for having different credit policies for different groups; June’s hard line could be held for the big and inefficient producers, for instance. They have room to improve their productivity and the prod of having to pay real interest rates wouldn’t be a bad thing.

On the other hand, small and medium producers of basic grains and of export crops like coffee and meat where the economy could get a quick return could have their interest rates raised much more slowly. Those rates could be indexed to half the inflation rate now, for instance, and then moved step by step toward real interest, i.e., a rate higher than inflation.

2. Shift investment to rapid recuperation of exports

A second complement to the June economic package would be to shift some of the state's $300 million annual investment in long-term big projects into areas where production can be increased quickly. With a shift in priorities, this $300 million could provide a breathing space where a burst of production could ease the acute scarcities that are at the root of so many of the economy's problems. The mistake of the February package was to reduce the flow of investment into the big projects without redirecting those funds to the small and medium producers in such agroexport areas as coffee and cattle, and staples like beans and non-irrigated rice.

The past: No popular survival strategy

The country has always lacked coordinated and funded efforts to bolster peasant production. For eight years, economic thinking in Nicaragua has put a heavy emphasis on subsidies and social services for the urban poor, combined with long-term investment in the state sector. There has been internal criticism of that investment policy since 1981, charging that it puts too much emphasis on the state sector and the Pacific side of the country, leaving inadequate resources to maintain the peasant economy in the interior. Skewed priorities helped the contras by giving them a social base in some areas.

Choosing to put the country's resources into modernizing cotton, sugar and milk production on the Pacific plain has had a completely unintentional but nonetheless real negative effect on small-scale production in the export sectors of coffee, meat and sesame seeds. The momentum achieved in the peasant push of the seventies was lost in cattle-raising in 1981 and in coffee in 1983. Meanwhile, the subsidies in the cities drew heavy migration, and led to an expansion in speculation in the urban informal sector (especially by merchants who had previously supplied peasant agricultural production).

There were ripple effects: with the loss of momentum in coffee and cattle, the corn, beans, cheese and pork production that had been associated with them also suffered. The peasants who should have been competition for the oligopoly sectors grew weaker and weaker. Although the peasants should have been able to support the revolution by bringing in more foreign exchange with their exports from 1985 to 1988, they did not and probably could not. The government never gave them the tools they needed.

The past: Small-producer momentum lost

The big state projects are aimed at modernizing agriculture, at increasing industrial processing of the raw materials that Nicaragua produces. Paradoxically, the revolution now has to postpone this long-term investment strategy because it overemphasized these investments while neglecting simple maintenance of the existing economy in a period of low-intensity warfare. The resources that are now dedicated to long-term growth are the only ones available for stabilizing the economy, and the economy is now the main US target.

The attempt to modernize agriculture has ignored those who are doing the producing in the country's interior. Financing came from abroad, instead of being based on profits generated inside the country. That meant that when the external financing was cut back, there was no domestic source for funds. The only options were to cut the projects or deficit-fund them. In other words, by not supporting the coffee and meat producers so that normal levels of foreign exchange earnings could be maintained, the investment program was caught short and the technological transformation project has had to be slowed.

The big state projects have always been part of the revolution's goal of increasing control by the poor majority over the country's economy. Nicaragua would be able to process its production, and control over that new technology and value added would be in the hands of the people. It's important to recognize that postponing the big projects or scaling them down does not mean halting all progress towards this goal. Technological progress is only one and perhaps the least important of the instruments available for consolidating an economy with a socialist orientation. Technology and whether property is publicly or privately owned is not what defines socialism in its initial stages. In the first phases what counts is the building of a democratic base where peasants and workers gain increased power over resources and the freedom to develop them. Without that base, technological development and the creation of a powerful state sector is a risk.

If the speed of technological transfer in Nicaragua is too fast, it could undermine the traditional productive base as well as the political support the revolution needs to continue building the socialist character of the economy. It's a question of doing things in the right order and at the right speed.

The central economic task of this period of struggle for peace and a new social equilibrium in Central America is recovering the momentum in coffee and cattle, using policy levers to establish the economic dominance of the working class, peasants, artisans and small competitive business owners over the large enterprises working in heavily concentrated industries. That has to be step one.

There has been internal pressure since 1981 to control those heavily-concentrated or oligopoly sectors, with calls for greater efficiency, higher interest rates and more austerity. The state, however, didn’t do any of those things for fear of stifling economic activity, undermining national unity and thus weakening the country's defense against US aggression. Debates existed inside the government but never came to a head about whether to maintain the mixed economy, to threaten oligopoly producers with expropriation if they didn't improve their efficiency or at least stop pulling their capital out of Nicaragua. The government simply didn’t have enough international reserves to seriously challenge the oligopoly sectors without damaging the economy. It would have had more room to bring pressure to bear on those inefficient sectors of the economy if the nation hadn’t lost the economic fruits of peasant coffee and cattle production in the hinterlands. The war, the attention given to cities and to investment projects on the coastal plain ate away at the government’s alliance with the peasants and small producers in the interior of the country. Those peasants and the foreign exchange they produced through their exports should have been the pivotal social and material forces for both maintaining the government's urban programs and controlling the speculative activity of the more privileged classes.

It is essential that any investment plan concentrate on areas where there are relatively ensured fast results in the Nicaraguan economy’s most traditional and basic goods: corn, beans, rice grown without irrigation, large and small cattle ranching, and coffee above all, bringing back into production coffee plantations in the mountains that have been abandoned because of the war. Such a program should also include providing the basic industrial inputs needed to recover agricultural activities.

The economy's idle capacity and the chance to recover lost exports lie with the small- and medium-scale farmers and peasants whose increased coffee and cattle production are the only products whose world prices make them really profitable for the national economy. Recovery of these exports is not just a matter of monetary measures—while these are necessary—but of administrative and operational changes to put more resources into the agroexport sector that lives and produces in the interior of Nicaragua.

In spite of the priority given to production based on higher technology, most factors still stack up in favor of increasing production through the small, poor producers. The same measures that now favor a small group of agricultural entrepreneurs who control only a quarter of the area that receives financing could instead favor the medium producers, cooperatives and peasant farmers who together control 60% of the area financed this agricultural cycle (see chart).

The peasants are even more important to Nicaragua's agriculture than is immediately obvious in the chart, because they are the only group to manage a significant proportion of their production without financing from the bank. The chart also shows that they and the medium producers control as much or more agroexports as the capitalist growers, considering the area they worked without credit.





Some have responded to these tough times by producing more, and this has been one of the few cushions against the hard blows of the recent economic packages. Peasants, artisans (the term used for are the urban informal sector’s productive members as opposed to service providers) and small formal-sector businesses—not the wealthy rightwing forces like COSEP’s—have responded to hard times with more production. Unlike COSEP, they have no time to worry about optimum profit levels. They produce or go hungry, and while many are indeed going hungry, some have increased there production impressively. The small corn producers, for instance, turned in a record harvest in 1987, despite all the difficulties.

Much of the current public investment package is giving the country no more efficient and rational production than the small producers. An example: the small and medium dairy producers near Matagalpa are producing milk at C$21 per litre, the big private dairy farmers of the Pacific plains at C$30—and the large state Chiltepe dairy project at C$40. With the inevitable future devaluations that raise the cost of imports, the comparative figures will only get worse since their high-tech production makes them very dependent on imports. For simple productive efficiency as well as for political reasons, it’s clear that economic resources must be redirected from the state and large private producers into the hands of small and medium producers.

The strategy has an urban side as well. Managua has been more affected by the new measures than anywhere else in the country. The devaluations have forced many people out of their informal commercial activities, which in most cases is only disguised unemployment. With some help from the state, this could make the prospects for small industry and urban cooperatives brighter as peer artisans and others from the informal sector look for other work. International nongovernmental organizations could fund projects for basic urban production, and with careful planning this could complement the effort to increase efficiency in large- and medium-scale industries.

A new investment program:
Transform, don't reduce

Transforming instead of reducing the rate of investment or overall accumulation in the economy will be the most difficult task and the highest priority for the coming economic year.

The February economic plan calls for reducing investments by 30%. This would mean that there would be only a 14% global accumulation rate—the amount the economy uses to maintain itself and grow. Simple maintenance is usually considered to take about 20%, and most Latin American economies aim for 24%-25% overall. Fourteen percent simply isn’t enough to keep the country going, particularly at a moment when Nicaragua’s economy is so vulnerable to recession because of the recent monetary reforms.

The solution doesn’t lie in just trimming public investment, which is important as a motor of the economy, but in changing who has access to resources and making certain that each investment delivers returns in the shortest possible time.

An investment mix of 80% short term, 20% long term would be the most that the Nicaraguan economy could stand. It would be dangerous, and welcomed by Nicaragua’s enemies, for the country to put more that 20% of its investments where the returns are a long way off, or for that matter to put less than 20% into investment for real growth. People are coping now because they believe in the revolution—otherwise, the economic changes of February and June would have sparked massive demonstrations and other protests as living standards were cut yet again. But it’s dangerous to expect that they will continue to accept cuts in their basic consumption in the name of a very remote future.

In the chart below, we’ve suggested how investment among the different productive sectors and social classes might be redistributed to restore production and slow inflation.

In this program, the countryside would receive 60% of the investments and the urban sector 40%. In sector terms, the peasants, medium producers, artisans, small industry and other informal industry would get 60% of the package, while the large private owners and the state would receive 40%.

Compensatory productive packages

Any economic adjustment that tries to eliminate the chaos in prices, devalue the national currency, eliminate productive subsidies and cut the fiscal deficit will have a devastating effect on people with low incomes. It is an iron law of economics that the shoulders of the poor carry the great weight of any devaluation. The reasons are clear: the poor depend on wages and have no capital; devaluations lower the value of cash and raise the value of capital.





The revolution’s only option to avoid undermining its main social base is to design a package of compensatory measures. The gravity of the Nicaraguan economic crisis demands that these measures center on production rather than on consumer subsidies like those that followed the February economic package. The survival economy means survival in order to eventually be able to reinstitute a development program. To continue with a premature and inorganic investment strategy, one not based on a healthy foundation of traditional exports and production for internal consumption at the same time that a war is going on, could wipe out the benefits of the new economic program and even provoke the collapse of the whole economy.

Carrying out a series of productive compensatory packages will demand that groups of Sandinista activists be assigned not to state offices but to Managua’s poor neighborhoods and the parts of Region V (the highlands of Chontales and Juigalpa, east of Lake Managua), where the revolution is being defended. It will require creating flexible mechanisms and efficient services for redistributing the material resources that have been siphoned off into long-term investments for far too long.

For eight years, economic thinking in Nicaragua has followed the logic of urban consumption and long-term investment. The February and June measures have put Nicaragua on a track where the only sane alternative has become an economy based on production, with a priority on investments that will increase production immediately, an economic model that is increasingly managed for and by the poor.

3. Get international funding to sustain reforms Another escape valve in this economic crisis is financial assistance from other countries, which is crucial and needed quickly to prevent economic tensions from damaging national unity.

The economic adjustment Nicaragua is carrying out is as tough as any International Monetary Fund reform. It is being done, however, without the benefit of the financing cushion the IMF provides. The Nicaraguan program differs from IMF reforms in three essential respects: 1) education, health and social welfare programs are not being radically dismantled, as the IMF demands; 2) the state continues to control the exchange rate, import policies and the investment market; and 3) there is still financing for the army and defense of the revolution.

The second and third differences prohibit comparison of the Nicaraguan measures to the IMF's programs and the economic adjustments of other Latin American countries. Those who compare the adjustment here with those of Argentina, Brazil and Mexico are wrong because they fail to grasp the central phenomenon of Nicaragua’s entire process of economic crisis and readjustment: the conflict between a new nation and imperialism. The IMF does not support countries that are spending 60% of their budget on an anti-imperialist war.

Comparisons between Nicaragua’s situation and that of other Latin American countries also exaggerate the tensions between capital and labor, between the needs of the national financial system and capital, and between the demands of workers and the needs of the state. In Nicaragua the national defense project provides a profound symbiosis between the people, the government and the private sector. The economic crisis strains this symbiosis but hasn’t broken it.

Nicaragua has attempted to create a unified state with an anti-imperialist but non-aligned economic policy. This approach has allowed it to attract substantial international financial assistance from the Western world other than the United States. For many countries and many nongovernmental organizations, Nicaragua provides the possibility of an alternative to the East/West struggle. With the evolution of the world economic crisis and thus the inability of many who originally came to Nicaragua's aid to continue their strong support, help from socialist countries has played a more important role. And in this period of particularly powerful economic tensions with such important political ramifications, revolutionary activists expect more help from the socialist camp, and with good reason.

Cuba's positive image with most Nicaraguans continues to grow as Cuba continues to help out even when it has its own scarcities. In the public opinion poll mentioned above, Cuba was perceived as the country that has the most solidarity with Nicaragua by 30% of those questioned. The Soviet Union came second, with 26%.

Many Sandinista activists are now wondering whether the Soviets will provide enough help to build the best solution to the current crisis. Does the current Soviet financial policy (no added aid to face the deepening economic crisis), they ask, reflect the future of "Perestroika" in the Third World, with less international help as the USSR concentrates on economic efficiency at home? Or does it only reflect difficulties in adapting to the conditions of small, tropical Nicaragua, conditions very different from those of a country as huge and complex as the USSR?

Maintain non-alignment

Nicaragua needs international financial help, and needs it now, from a wide range of countries and nongovernmental organizations. Without such help it will be difficult if not impossible to stabilize the value of the córdoba; repair the energy infrastructure, whose deterioration has meant enormous losses in industry and agriculture; import basic agricultural inputs; and provide the support necessary for the survival of the poor in the cities and the countryside.

The Esquipulas accords offer the possibility of winning peace. They have also created an international movement that offers possibilities for an economic aid package, not only for all of Central America (United Nations Resolution 24-1, Acapulco Accord on the Relation of the European Economic Community and Central America), but especially for Nicaragua.

The prospects are good if a program for international financing is prepared that fits a survival economy. Nicaragua has to present a coherent package to international funding sources for 1989, one that is attractive and pragmatic, and sets out what Nicaragua wants to and can do economically through 1992 if peace is won and the nation can set out on a path of post-war reconstruction.

The package needs to specify the revolution’s non-alignment and the roles that the different countries—particularly the socialist countries, Europe and other Latin American nations—will play in Nicaragua’s reconstruction. It needs to clearly set out the Sandinista reconstruction model, indicating how the financing will help with the rebuilding of the Central American Common Market, and detailing the possibilities of foreign investment and exceptions to the standard exchange rate for nongovernmental organizations and other donors of social capital to help with productive projects for the poor in the city and country. Such a package would have enormous chances of success and would play a crucial role in stabilizing the economy.

4. Involve the army’s economic potential

There's an oft-quoted slogan in Nicaragua, "Un solo ejército," which literally translated is "Only one army" but means that all the people of Nicaragua are part of the country's defense. Perhaps that slogan should be expanded to "Only one army, only one economy." The defense of the revolution is as much economic as it is military, and if the military war winds down, as seems likely, the aggression will shift focus to the country's economy. It is already clear that those in the United States who want to remove or fundamentally change this revolution are targeting the economy, hoping to use economic erosion as the main weapon to undermine the government and thus eventually return to military pressure to seal its demise.

The challenge is to maintain Nicaragua’s military defense while integrating the armed forces into its economic defense. The army controls 62% of the central government's budget and the economic development ministries only 14%. In these circumstances the state cannot stimulate production without very close coordination between defense and production.

Work has already begun to build this coordination. Since the February and June cuts in all the government ministries (including Defense and Interior), projects have been launched to develop self-sufficiency and build coordination among the army, the Ministry of the Interior and cooperatives. There are very promising pilot projects around Managua such as the cattle herds near Tipitapa, the farm at the July 19 Plaza that produces vegetables, corn and bananas, and the MINT cattle project in Malpaisillo. These experiments should be multiplied.

While negotiations with the contras go on, the military half of the military/economic equation has to take priority, but a gradual process could be begun, building economic functions into the army's work without interfering with its crucial military tasks. It will be a slow process because of the enormous difficulties constructing a compatible relationship between military organization and the rhythms and needs of production. While the geopolitical situation remains so delicate, economic rationalization of defense cannot in any way diminish the army's central job.

Here are some suggestions for how the coordination could be developed in various economic spheres:

1) The Pacific plain is the area where the army could most easily combine defense and production. The army could use some of the resources it now receives as a subsidized consumer to produce its own food. Some of its labor power could be used to grow grains and vegetables, and raise cattle. This could ensure significant self-sufficiency for the armed forces at the same time as reducing the state's costs, and thus inflationary pressure.

2) In the country's interior, armed brigades could take on a triple role:

* control the territories where ever-smaller groups of contras still operate,
* lend labor to the agroexport program, helping to recover some of the coffee and cattle production lost because of the war, and
* thereby change the army's image with the mountain producers who have seen all soldiers as an obstacle to being able to produce and thus to their economic well-being.

These brigades would need good communication equipment so they could rapidly concentrate and coordinate their forces against the enemy, allowing them to hold it at bay while reclaiming and holding productive economic territory.

3) The armed forces could help with distribution from cooperatives, regional state enterprises and businesses in war zones. Their vehicles could carry harvests from the rural areas to the cities, exchanging it for the cities' produce. Attacking an army truck with food for the people of Chontales is not the same as attacking an army truck carrying soldiers and guns, though it may look the same in The New York Times.

4) The country's infrastructure has been devastated by the war both directly and indirectly. The armed forces could form productive brigades coordinated with the ministries of construction, housing, energy, water and communications to help rebuild and to give social services to the people. Instead of being a traditional army of and for the wealthy with no relationship with the poor, Nicaragua's army should be a conscious and integrated part of the revolutionary project.

5) Finally, it is essential to involve the Ministry of Defense and specialists from the army's General Staff into the National Planning Council to design the defense of a survival economy, knitting together the military and economic defense. A ministry that controls some 60% of the national budget cannot be absent when the economy is being planned.

5. Use the market in planning, not just the bureaucracy

Another step that could improve the effectiveness of the new economic package would be to transform the government's economic planning and service programs. Although this was one of the central objectives of the February measures, few steps have been taken so far.

Since 1979, the government has tried to control production, both through its administration of the state-owned lands and enterprises (APP) and through a cumbersome system of bureaucratic controls over prices and salaries. Nevertheless, the system has never worked to guide the mixed economy efficiently. The system shared many of the characteristics of command-planning organization, which simply doesn't work in a mixed economy. Planning systems that don't work mean in effect that there is no plan. Contradictory as it seems, the new policy with its increased use of market forces will mean more rather than less planning, but it will have to be hegemonic, indicative planning with a guiding and encouraging style of management, not top-down, centralized planning.

The change required is not of goals but of methods. Economic planning has to move from trying to control the economy directly towards creating the conditions where the actors in the economy do what the majority needs them to do. The market is one mechanism for doing that, but it must be guided through flexible handling of the exchange rate and credit rates and through improving the efficiency of government institutions whose purpose is to target priority groups for rapid distribution of scarce resources.

The past:
Change by daring leaps

You can't move towards more economic planning without first dominating and controlling the market. Regulating or guiding market forces, however, requires a very different approach from the rapid and audacious political style that allowed the Sandinistas to take political power in Nicaragua and to have won a series of political and diplomatic battles against US imperialism, successes unparalleled in the history of Latin America. That fast and daring style that has been so effective in the political order is capable of destroying the economy, whose planning and control require very different methods and rhythms. Economic transformation demands gradually-paced, structural changes.

One of the outstanding economic management problems in Nicaragua has been a reluctance to introduce big changes progressively. The tendency has been to bring down changes in one fell (and brutal) swoop. The economy staggers as massive changes appear with each new annual plan, letting the economy run as if it were on automatic pilot until the next annual plan—or after a period of several months, as happened with the economic package implemented in February, which should have been readjusted long before the June measures.

More than a week after the announcement of the June measures, the economy was still in deep shock. No one was selling anything, because no one knew how to calculate the value of their merchandise after such an enormous devaluation. And because no one was selling, no one was buying. Three or four days of economic activity— of Nicaragua's GDP—were lost as a result.

The managing of the exchange rate is another case in point. One of the main causes of hyperinflation in Nicaragua has been that the revolution didn’t decide on a process of gradual devaluation during its first six years. The lack of that policy has forced the government to play its last card (the change of the national currency) at a very delicate military and political moment. In 1981, a devaluation of the (old) córdoba from 10 to 12.5 to the dollar was proposed; the proposal was rejected.

One of the arguments for the proposal at that time was that an open economy must have "shadow prices" that are indeed like shadows—mirroring as closely as possible the prices in the rest of the region. Insofar as the córdoba is overvalued, Nicaragua will be obliged to finance the inefficiency of its producers because low córdoba prices for export products will lead exporters to demand subsidies to entice them to produce. It also finances those who speculate with their products, those that will be imported cheaply into Nicaragua and will likely end up being resold in Costa Rica and Honduras.

If the government doesn’t have some method of keeping Nicaraguan prices in line with those in the rest of the region, "informal" price systems grow up almost automatically. Between February and May, the government, despite its insistence on a unified exchange rate, was obliged to concede semi-official exchange rates of 30 and 40 córdobas to a dollar to the producers in the oligopoly sectors of the economy, while the official exchange rate stayed at 10:1. The black market rate (60:1) also functioned as a key price—one entirely out of the government's control. The exchange rate implicit in the dollar prices in the government-run diplomatic store during February and March was even higher than the black market. For example, at the beginning of March, one dollar used at the "Diplo" bought 60 crackers, while the same dollar changed on the black market only bought 28 crackers.

In addition, as a shadow-pricing structure no longer existed, thousands of "islands" where the dollar was the unofficial currency inevitably appeared, and the demand for dollars in the black market actually increased. The black market price shot up, encouraged by the drop-off in family remittances after Christmas and the US freezing of funds in Panama.

The government set up a tremendously complicated system of administrative controls in 1980 in order to maintain a pricing scheme that was so different from everyone else in the region. There was no gradual or cumulative rhythm, and no recognition that you can't use administrative control over economic process where the private sector has a free hand.

The unifying of the exchange rates in February provides another example of the need for more flexible and responsive economic decision-making. The new single exchange rate was supposed to eliminate a complicated system of administrative controls that had caused three problems: it had weakened the state through large foreign exchange losses, led to an illogical set of prices that made it impossible for producers to make sensible decisions, and let loose the most negative, anarchic, "let's make a million córdobas," attitude, characteristic of capitalism.

But the February exchange-rate measures did not have the hoped-for effect because they were administered very rigidly. The problem lay in believing that the measures in and of themselves would free market forces, adjust relative prices and bring equilibrium to the economy. But Nicaragua's problem is not figuring out how to free up the market, which is already anarchically free within the limits set by the government-controlled investment and import markets and vast health and education programs, but rather to find the most efficient way to regulate the market so that production is increased in the short term—the only way to stabilize domestic prices.

Between the two economic packages, administrative price controls reappeared in a number of ministries because the unified exchange rates were so rigid and because administration did not become more efficient and flexible. In other words, the February package was not able to cut the red tape of administrative controls and replace it with a more flexible style. The kind of management we’re proposing, where you give signals and set environments to get your economic actors to behave as you want (hegemonic planning) doesn’t depend on making one good decision but rather on developing efficiently-administered public services directed towards production, as well as on adequately managing the key levers of economic policy (public services, the make-up of the investment package, the exchange rate, the interest rate, salaries and other "key prices" in the economy) and their daily adjustments.

Index, but do it flexibly

One of the most positive parts of the June economic package is the decision to index the economy's key prices—i.e., pegging them to the real movement in the market, adjusting them monthly to the inflation rate, etc. This is the first step in an indispensable change in Sandinista economic management and means moving from a style where there is an annual rhythm of planning/assessing/changing to a more frequent, gradual and responsive style.

If the decision to use indexing is really going to be a change toward a coordinated market management style, which is complicated, the process should not be rigidly applied. If the government sticks rigidly to a monthly timetable, for instance, it could actually increase speculation instead of help curb it. The economy could well enter into a "menstrual" cycle, in which at the end of each month everyone begins to hoard things and waits for the new (monthly) exchange rates before beginning to sell again. More incremental (for example, weekly) changes may well be necessary to avoid this problem.

In addition, the new interest rates for savings accounts will have to be flexible, especially if the economy's inflation rate continues to be higher than inflation in the black market dollar price. For the first time in years, the córdoba could become an attractive investment. What could happen is that dollars would be sold for córdobas on the black market, which would then be put in the bank for the real interest rate of 18% and later changed back into dollars on the black market.

What is important is the principle of indexation, not some absolute commitment to the consumer price index (CPI) or the date of the adjustment. Obviously, the CPI is not an adequate index for the productive sector. The government could use the Ministry of Construction's inflation index or other indices of inflation in the productive sector's costs, especially when credit is being given to the productive, rather than commercial, sector.

One more case that demonstrates the importance of flexibility is interest rates for peasants. While indexing interest rates and using the CPI seems a generally good idea, setting interest rates for peasants based on the inflation rate experienced by consumers in Managua virtually expels the peasants from the banking system. The National Development Bank has been the main way many peasants in the interior of the country, especially those who have not directly benefited from the government's agrarian reform program, have benefited from the revolution. The bank is also almost the only Sandinista presence in many areas of rural Nicaragua; there are no Sandinista community organizations like the urban CDS's for instance. This means the new credit controls could have a far more negative political impact than the salary policies. Ongoing and gradual adjustments are far more flexible and realistic.

In fact, at the end of June the bank had begun to reconsider the credit measures, particularly trying to avoid having their branches impose the new interest rates on loans already given out. There are signs of new flexibility.

Another aspect of adapting the FSLN's guerrilla experience to the economic arena is responding more flexibly and efficiently to supply the services that cooperatives and other producers are demanding, instead of trying to control their productive activity administratively, through the use of financial or commercial mechanisms. That is, hegemony in the productive sector will come with the establishment of really efficient services, not through administrative controls and regulations.

Dealing with the Big Boys

Applying the FSLN's guerrilla experience to the economic arena requires not only more flexible policies (like indexation), but also the capacity to intervene in different sectors of the economy with a variety of measures. The competitive and highly-concentrated sectors of the economy perhaps need this carefully adapted treatment most.

The great paradox of the Nicaraguan economy is that despite the revolution's most important goals, the living standards of workers and peasants have been seriously cut because of the costs of the war, agricultural investment projects and other state programs. At the same time, the bourgeoisie—both patriotic and non-patriotic—continues to be the most cushioned group in the country. They are spoiled not so much in the sense of making great profits, but rather by the levels of inefficiency they’ve gotten away with. While it's true that the state takes 65% of their profits through taxation (this is true of both the private sector and state enterprises), the administrative pricing system has always made allowances for taxation, leaving these highly-concentrated or oligopoly sectors of the economy with adequate profit margins despite their terrible inefficiency.

Even though there is a mechanism—albeit cumbersome, complicated, and slow—designed to control profit levels in the concentrated sectors and defend the workers’ interests, the real buying power of base salaries at the end of 1987—excluding incentives and subsidies—was only 6% of what it had been in 1980. In contrast, the oligopoly productive sector continued to enjoy profit levels not much lower than 1980, even though they were the most inefficient business group in all of Central America, particularly in their waste of costly imported productive inputs.

While production costs for Nicaragua's 50 irrigated rice producers, 2 sugar enterprises, 70 big dairy ranchers and 2 cooking oil plants are far higher than in any other Central American country, the peasants and workers are again being asked to sacrifice more to buy at inflated prices, not these big producers. While the poor majority is clearly more willing to defend the revolution than are the oligopoly producers, it's not clear why national unity must imply a subsidy of this inefficient private sector.

The Nicaraguan problem of heavy concentrations of ownership in industry and in specific agricultural areas is one of the most common characteristics of underdevelopment on capitalism's periphery. The revolution didn’t create this problem, it inherited it. Paradoxically, with the revolution's social transformations, the power of this sector—or rather, society’s dependency upon it—has increased. The redistribution of income increased consumption across the board and the effective demand for this sector's production went up as well. At the same time, the elimination of a repressive regime, new guarantees for the working class, and the brain drain all led to a decline in productive efficiency.

Private businesses in these heavily concentrated areas have been hiding their own inefficiency behind the inefficiency of the state enterprises. As consumption and thus demand increased, the government did not opt to target this inefficiency, which largely resulted from the undervaluing of key imported inputs. Doing so would have meant a big drop in the goods being offered. Although private business was losing more and more of its influence, the state's interests did overlap at this point: the state wanted to assure a supply of basic goods to the population, while the private oligopoly producers wanted to maintain their profit levels.

Break the "inefficiency pact": Transfer resources to competition

The government's new measures were aimed at breaking this so-called "inefficiency pact," which works against the medium- and long-term interests of workers and peasants. But the measures don’t guarantee that resources will be transferred from the inefficient oligopoly industries that sell their products domestically to agroexport producers. In the latter sector, tens of thousands of coffee and beef producers are forced to be more efficient because their industries are more competitive.

Transferring resources from less efficient to more efficient producers will require ensuring that peasants in the hinterland who produce for export will have access to inputs. It will also require stricter controls on the oligopoly groups, designing measures to squeeze them even harder to make sure they compete on more equal footing with small and medium producers.

Freeing up prices and salaries in a period of such acute shortages will give the oligopoly producers even more power and benefits than they had before. The devaluation gave them enormous unearned profits merely for possessing productive inputs, machinery and inventory when it happened. Despite everything in their favor, however, they probably will not produce more or diversify their exports because their industries so heavily dominate the market in sugar, milk, oil, industrialized poultry, beer and others that there is little reward for efficiency or diversification.

This means that the government financial sector must not only try to slow inflation so that production is increased; it must also serve as the oligopoly's "competition," prodding them to improve their efficiency. It can do this through differential policies that recognize there are differences within the productive sector. There could be, for instance, incentives for the coffee and cattle producers, which don’t have the same public infrastructure (like roads and electricity) that the large industries enjoy and have much lower costs for imported inputs than the oligopoly producers. When exchange rates are unified and credit is revalued, it's also important to make certain that the new government programs force all businesses, be they big or small, to increase their efficiency.


6. Involve the people

In the June package, there was simply not enough participation by the poor majority in planning or public discussion of the choices available. Although the government consulted with the regional government heads throughout the country, it was done at the stage of gathering raw material which was then used to shape the package. There was no wide-ranging discussion of the package and how it had been drawn up. The decision came from the top down; even people working in ministries closely tied to the economy were surprised at the final figures for the salary rise, the exchange rate, etc.

Talking about the successes of the February measures, the current head of the Budget and Planning Secretariat, Alejandro Martínez Cuenca, said: "I think that one of the greatest and continuing achievements of the measures is that you gain a fundamental transparency in the economy by unifying the exchange rates in a war economy." This means that without the layer upon layer of exchange rates hiding subsidies, the economic situation comes out in the open, or is "transparent." For the first time in years, economic calculations can be based on a clear picture. And this in turn will make it possible to engage in a dialogue with workers, producers and the population at large about the measures necessary to stabilize the economy. The measures should make it possible to sort out problems that have been postponed for far too long. The challenge will be to take advantage of this opportunity to discuss concrete proposals—before they are implemented.

Knowledge and public discussion: Heart of a sound economy

The stakes are high. If there’s no discussion or shared analysis of economic policies, the three key perspectives—the needs of the productive sector, state regulation and its interests, and the demands of the poor majority—that the government has succeeded in integrating into the mixed economy will come unstuck. Without enlarging the field within which economic discussion takes place, the government won’t be able to consolidate its management of the economy.

While the complete changeover of the nation's currency in February couldn’t have succeeded without the cloak of secrecy, secrecy is a recipe for failure for more everyday economic policy questions. Secrecy is the essence of bureaucracy while open information and public discussion is at the heart of a sound and democratic economy. There could be, for instance, open public forums on economic questions where a number of policy choices could be discussed. Because the economy is so central to almost every other problem, public discussion of economic problems could drag some of the conflicts inside the state into the light of day, stripping them of claims to represent the public interest and unmasking them for what they are: defenses of bureaucratic fiefdoms masquerading as public interest.

This unmasking won't happen without a new strategy, one that takes into account right from the planning stages not only the long-term class interests of different groups but the immediate interests and organizational demands of peasants, workers, artisans and the competitive small business sector. Socialism's long-held ideal of public discussion and popular participation is hard to attain, but in Nicaragua's current situation, the ideal has become indispensable.

Prospects for restructuring and broadening the alliances that underpin Nicaragua's economic model and thus deepening its popular character will find their underpinnings in the very experiences of what Nicaraguans have already achieved in social and economic reforms during nine years of revolution.

In today's difficult situation of "economic imperatives," it is important to underline that a revolutionary ethic and grassroots consciousness is the revolution’s principal wealth and is where the possibility of readjusting Nicaragua's economy lies. People won’t be swayed by any old line—political or religious—that only criticizes or points to problems without searching for their root. They won’t be attracted by a line that merely criticizes without offering concrete alternatives in which they can take part. Nor will they respond to a call for yet more sacrifices without making similar demands of the state and the oligopoly sectors that are part of the mixed economy.

Because of a lack of participation in the planning process, the new June economic measures ended up being a package without the people. The possibility that popular discontent and pressure regarding the new measures might forge a new, more popular economic model depends largely on the government’s capacity to develop a more democratic style in planning and implementing economic measures. This new style could be one of the best new policies to confront either continued military aggression if Bush wins, or a new round of political pressures if the Democrats take the White House.


SANDINISTA ECONOMIC MODEL, 1980 AND 1985


Original Model, 1980-1985:

This economic model, based heavily on state accumulation of capital,

1) Gave priority to agroindustrialization over the export of raw materials, with the strategic goal of breaking the commercial and financial bonds that shackled Nicaragua to international capitalism.

2) Until 1987, used state control over the financial system and international trade to shift resources from traditional agricultural producers to the state agroindustrial projects.

3) Used this same state control over the surplus until 1983 to increase social services to working people.

4) Was especially marked in the first years by a high level of grassroots mobilization during the Literacy Crusade, urban reform, agrarian reform and subsidies to the rapidly growing urban population. This feature has characterized the Sandinista process and is the solid base for reforming the model.

5) Along with macroeconomic controls, it developed a cumbersome administrative system of guaranteed prices to manage agroexport production, and maintain lower prices in the internal market.

6) From 1982 on it had to coexist with the defense program, which unbalanced the internal market control system.

Readjusted Model, February 1985

In this readjustment of the model, the state has had to reduce its staff and budget while at the same time playing the unpopular role of transferring surpluses from workers, farmers, industry, peasants and artisans from the non-export productive sector to the agroexport sector. It thus,

1) Gave priority to the financial sector by eliminating subsidies to producers in order to strengthen the government’s capacity to manage the economy, provide incentives for traditional exports and oblige producers to improve their productivity levels.

2) Tried to improve conditions for traditional primary production agroexports as well as industrial and non-traditional exports without eliminating the agroindustrial projects.

3) Restricted resources for social services, particularly through controls on public servants' wages.

4) Slowed down the pace of the agrarian reform, the promotion of small production and other forms of grassroots economic mobilization because of the lack of resources and to guarantee a better climate for agroexport production.

5) Dissolved microeconomic controls and the administrative price system, leaving market forces free while maintaining control of the country’s macroeconomic levers.

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The New Economic Package—Will a Popular Model Emerge?
Envío a monthly magazine of analysis on Central America
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