Envío Digital
Central American University - UCA  
  Number 138 | Enero 1993



Nicaragua's New Economic Measures: Reactivation Solidarity?

The economy continues at the center of national affairs. On January 10th the government began a new phase of its adjustment plan, baptizing it “solidarity reactivation”. Is there any reactivation or solidarity in the new measures?

Nitlapán team

Again, the Chamorro government has asked Nicaragua's poor to make sacrifices in return for the promise of a better future, this time incorporating into its discourse the need to more evenly distribute the social costs of the economic adjustment measures. Thus, at the same time that the government decreed a 20% devaluation (up from 5 córdobas to 6 per $1) and a freeze on wages, it also announced a tax increase for some luxury consumer items such as vehicles, whiskey and certain household appliances.

The devaluation caused a generalized price increase, which, given the wage freeze, immediately affected the population's standard of living. The government forecasted holding prices to a 7% average increase but, even by its own estimates, they rose almost 10%. The devaluation also generated a considerable transfer of resources toward the country's handful of exporters, putting the popular sectors, once again, at the bottom of the totem pole.

One notable difference between these and prior, equally anti popular economic measures is that the habitual protests of political organizations, unions and other organized groups did not go beyond media communiqués and pronouncements. Has the government finally achieved a "tacit consensus" to develop its economic program? Or is this just the apparent calm before the next social storm?

Truce, Weariness or Pre Storm Calm?

The relative calm could be explained, in part, by the growing strength of the political alliance between the government and Sandinismo in order to confront the far right (see "The Month," this issue, for details). It could also be explained by the high levels of rural and urban unemployment, which has weakened the unions, and by the wear and tear of the privatization struggle, in which the unions have been fighting to obtain the greatest possible share of state enterprises for the workers. Union leaders have been dedicating their energies both to this battle and to the difficult task of organizing a new property model for the enterprises already under worker control in the Area of Workers' Property (APT).

The energy of leaders in the National Union of Farmers and Ranchers (UNAG) has also been absorbed by other priorities. UNAG's strategy has been to negotiate with the government to consolidate its own group of businesspeople, oriented toward marketing export products and supplying rural areas.

Finally, the armed peasant movement known as the revueltos, made up mainly of former members of the counterrevolutionary Nicaraguan Resistance and the Sandinista Popular Army, has given way to the formation of a group calling itself "3 80," the "third generation of armed people." This political military group, together with dozens of less organized armed bands, lives mainly on cattle rustling and other crime.

Given this panorama, the lack of organized social protest against the advance of the neoliberal plan is not surprising. The question is: will the FSLN government truce and the new economic measures really promote economic reactivation, attracting private national and foreign investment?
With or without a truce, the logic of the government's economic policy has not really changed with these economic measures. It is still recessive and, thus, cannot stimulate reactivation.

The goal of the new measures is only to adjust the country's consumption level to the drop in foreign aid, this time distributing the costs more equally by increasing taxes that affect the population's most affluent sectors. But if the domestic market remains depressed and exports cannot grow or diversify significantly soon, it is hard to imagine a generalized economic reactivation.

Why the new measures? The key to understanding them is none other than the failure of the government's 1992 reactivation plan, the centerpieces of which were its public investment program and export growth (see envío, October 1992). But the promised goals of 4.5% growth in the gross domestic product and the creation of 80,000 new jobs did not make it beyond the lips of the minister of the presidency.

Last Year's Ills Two Diagnoses

In public, the government has interpreted last year's economic failure politically instead of economically. It claims that labor instability promoted by Sandinista unions together with the property problem created by Sandinismo created an inappropriate climate for reactivating private national and foreign investment. It also argues that its own minimal implementation of the public investment program was because the funds were diverted to indemnify victims of two natural disasters the eruption of the Cerro Negro volcano and the tsunami. And finally, it attributes the export sector's poor showing to the drop in international prices for Nicaragua's principal export products.

While there may be some truth in all of that, the key to understanding measures that contradict the government's logic, followed up to now, of indiscriminately opening the country up to trade, was left unsaid. In truth, the government's most serious economic concern coming out of 1992 is the accelerated expansion of the nation's trade deficit (exports minus imports). In 1992, consumer goods imports grew more than 30%, causing the trade deficit to almost double the $323 million projected by the International Monetary Fund (IMF): the actual deficit is over $600 million.

The tendency toward greater consumption of imported products has been modifying Nicaragua's structure of imports. Consumer goods account for an increasingly larger portion of imports while those destined for production (inputs and machinery) are decreasing. As of November, consumer goods already accounted for 33% of 1992 imports, compared to 29% for all of 1991 and 24% for 1990.

To this highly skewed trade balance problem must be added the significant drop in Nicaragua's capacity to pay its import bill: export income financed barely a third, and the remainder had to be covered by loans and foreign aid. Exports were indeed affected by falling international market prices for coffee, cotton, beef and bananas if coffee and cotton prices, for example, had stayed the same as in 1991, Nicaragua would have received another $21 million in export income but they were also hurt by the lack of programs for promoting exportable production.

Increasing imports, falling exports and a shocking truth: the "exceptional" foreign aid obtained by the Chamorro government during its first three years has financed the consumption of foreign goods by Nicaragua's upper and middle classes. This is a more realistic diagnosis of the country's economic ills.

Foreign Aid Down, Debt Payments Up

In 1993, it will no longer by possible to maintain last year's trade deficit. Nicaragua is the most indebted country in Central America and one of the most indebted in the world, but the flow of foreign aid is slowing and interest payments on the debt are growing. According to figures from the Ministry of Foreign Cooperation, total foreign aid will drop 30% from last year, while debt service will increase 36%.

This will make foreign debt payments equivalent to Nicaragua's total current export income ($230 million), obliging the government to renegotiate payment terms. This negotiation will be key to the country's future, because the weight of the debt will soon become even more unsustainable as previously negotiated grace periods expire.

The flow of foreign aid will tend to slow even further in coming years, since the exceptional status granted for the post war period by the countries and international organizations that have supported the Nicaraguan government has now ended. The clearest example of this tendency is US aid, which has played a key role in backing Nicaragua's balance of payments in the past three years.

The new Clinton administration does not appear inclined to change Bush's policy of halving annual aid to Nicaragua, from $200 to $100 million. The new US government will probably also assign its funds to development programs that favor the population's poorest sectors instead of supporting the balance of payments. This policy also appears to be shared by European countries, who are unhappy with the Chamorro government's use of foreign aid to finance the consumption of luxury items.

The government is fully aware of this change in the orientation of foreign aid and, along with its new measures, created a new Social Action Ministry, putting a Nicaraguan former AID official at its head. Its goal, logically, is to discourage the drop in aid and channel funds more effectively toward social compensation programs. The new minister's first task is to implement an emergency program, for which it already has the necessary foreign resources, that will create 20,000 jobs in the municipalities most affected by unemployment.

The municipal offices implementing this new emergency job program, however, have already criticized its limited scope. The monthly "wage" to be paid for community project work is equivalent to $42, and the goal for employment generation is far below what is needed even to provide temporary relief to the existing army of unemployed. No justifiable explanation has been offered as to why this program's goals are not substantially broadened, given that it is low cost and locally implemented.

1992: A "Lost" Year

The truth of the matter is that the government lacks a defined social policy to stay the advance of poverty, which today affects almost three fourths of Nicaragua's population. According to the United Nations' Human Development Index, just between 1991 and 1992, Nicaragua dropped from 85th place to 99th on the list of the world's poorest countries. Last year was "lost" in growth and development terms.

But 1992's dreadful results have not been enough to convince the Chamorro government's economic Cabinet to alter the recessive logic of its policies. In January's package of economic measures, the government announced still more spending cuts and taxes, as well as new price increases in basic transportation, electricity, water and telephone services all at the same time as the devaluation and wage freeze.

Also like last year, it announced the implementation of a public investment program, simultaneously replacing the minister responsible for its administration. The 1993 program, in fact, is almost identical to last year's; it seems that the government diagnosed the cause of its failure as the incompetence of former transport and construction minister Jaime Icabalceta.

Financing for this public investment program will come not only from foreign aid but also from cuts in current government spending. In other words, the government will sacrifice the social services budget in order to finance public investment. This amounts to opting for a short term increase in poverty so as to invest in creating conditions for long term development. This policy's immediate consequences are disastrous: the recession will deepen and the breadth and quality of social services for the popular sectors such as health and education will suffer even further. And while the benefits of better infrastructure are obviously important, the private sector generally takes a relatively long time to respond positively to the opportunities those improvements offer.

The government saw its dilemma as whether to assign resources to combat short term poverty or create conditions for future development, but the two are not incompatible. The government could use Central Bank credit to maintain public spending levels that would allow for future investment while simultaneously developing effective programs to combat poverty and unemployment.

Everything indicates, however, that the IMF has imposed a drastic reduction in Central Bank credit to the government, to avoid any expansion in public sector economic activity. The effects of this requirement can be seen in recent Central Bank figures: credit to the government dropped 56% from December 1991 to September 1992.

Nicaragua is thus suffering the worst of all possible combinations: a dogmatic monetarist focus together with the extreme tendencies of neoliberalism.

Credit: the Same Old Story

Despite official promises made in early 1992 to expand credit to the productive sector, Central Bank data show that it remained at the same level as in 1991. While the government claims that there is no real demand, former Central Bank president Francisco Mayorga argues that there is, but that the high interest rates (15% 24% annually) and legal restrictions for qualifying as a recipient stifle its expression.

There is no change in this credit policy for 1993: the high interest rates and legal restrictions continue. As part of the "solidarity reactivation" package, the government announced an increase in credit available to the productive sector, but the total is only slightly more than the inflation caused by the currency devaluation. Available credit this year, therefore, is practically the same as last year.

The maintenance of this virtual fiscal and credit strangulation is thus likely to result in weak if not insignificant economic reactivation. The official 1992 economic growth figure was 1%, and the official 1993 projection is 2.5%. Such growth rates do not even compensate for population growth, estimated at 3.5% annually.

The basic contradiction in the government's economic policy persists: trying to achieve reactivation while simultaneously maintaining very low inflation rates. The design of fiscal and monetary policies for 1993 once again stress low inflation over the need to promote reactivation.

From Unemployment to Social Breakdown

These devastating policies have resulted in a considerable increase in urban and rural unemployment. In two years of stabilization and structural adjustment, 53,000 people lost their jobs, affecting the productive sector far more than commerce and services. (Of every three people newly unemployed, two are from the productive sector.) How many more will there be in 1993? The table below shows the evolution of employment in the economy's "formal" sector over the past three years, based on urban and rural workers registered by INSSBI, the state institute overseeing workers' insurance.

The counterpart of recession and unemployment in the formal sector is the "informalization" of the economy, with different characteristics in rural and urban areas.

Rural informalization. This is perceived mainly in the over exploitation of forest resources, which has two different geographical dynamics. In the mountainous interior, the peasantry in crisis finds a temporary solution in growing basic grains, migrating in search of land to plant and inexorably destroying more and more of the Atlantic region's tropical rainforests. In the dry mountains in the country's center and on the Pacific plains, there has been a dramatic rise in the number of people exploiting firewood and charcoal to sell in the cities destroying what is left of the dry tropical forests. Rural unemployment is thus equivalent to creating deserts.

Other forms of rural informalization include the multiplication of cattle rustling groups and bandits of all kinds. Hundreds of unemployed former contra and Sandinista soldiers have opted for forming armed groups that mix political actions with such banditry. Cattle ranchers in Camoapa surveyed by Nitlapán UCA estimate they have lost 15% of their herd in the past couple of years.

The temporary migration of farmworkers to neighboring countries, particularly Costa Rica, has also increased considerably. Nicaraguans find work on Costa Rican banana plantations and other farms because they are much cheaper laborers and do not qualify for the social benefits required for local workers.

Urban informalization. This is seen mainly in the increase of small commerce. The markets and streets of the country's principal cities are packed with merchants selling all kinds of products and in Managua a sizable number of children beg at all the traffic lights. And, as in the countryside, crime in the urban areas has become a social disease, while prostitution is one of the main income earning alternatives for young unemployed women.

Finally, illegal emigration to the United States is also increasing, despite the obstacles. This migration tends to be more permanent than that of agricultural workers who cross the borders to Costa Rica or Honduras. Remittances from family members living in the United States are now the country's primary source of foreign exchange, greater than the total income from coffee exports.

Production at a Snail's Pace

These discouraging tendencies toward rural and urban informalization will continue, because the country's productive sector remains prostrate. The crisis in the agricultural, manufacturing and construction sectors has deepened, and signs are few that the government will introduce new policies or programs to reverse it.

The recession in production has meant the loss of over 36,000 jobs in large scale agricultural, industrial and construction enterprises from 1990 to 1992, according to INSSBI statistics. If key sectors for rural and urban employment generation such as small industry, artisan production and peasant agriculture were also taken into account, the figure would be significantly higher.

Manufacturing is the productive sector hit hardest by the adjustment; it has had to lay off a third of its 1990 labor force (16,000 workers). Recession and trade liberalization have unleashed an industrial restructuring process characterized mainly by the concentration of production in a small group of enterprises that produce basic foods (cooking oil and flour) and "fiscal" goods (rum, beer, soft drinks and cigarettes) (see envío, December 1991 and October 1992). A few other large enterprises tied to the production of cement and its derivatives can now be added to this group, since they are being stimulated by the modest increase in public investment in infrastructure.

On the other side of the coin are the enterprises that keep cutting production and employment levels; they still make up the greatest portion of the industrial sector. Among those, the tendency is exactly the reverse, and, if a program of support and industrial conversion is not soon implemented, they will be condemned to bankruptcy. Key enterprises with more than 500 workers such as INCA and METASA in metallurgy and FANATEX and ENAVES in textiles and clothing have been subject to a prolonged crisis with no outlook for reactivation.

The situation is similar for small industry and the crafts sector, hard hit by the invasion of imported products and by the population's drop in buying power. According to Ministry of Economy data, the number of such shops registered in 1992 (3,025) is barely a third of the total registered in 1989 (10,849). The productive conversion of these shops is made difficult not only by the absence of a policy to support it but also because a number of them were state held and are just now reaching the end of the privatization process.

One decisive question is whether or not there will be policies and programs to support industrial conversion once this privatization is completed. Will the government support the enterprises that have become the workers' property? Will small industry and the crafts sector be included in such programs?

Crisis on the Plains

Productive conversion is needed not only in manufacturing but also in agriculture. Large scale agriculture on the Pacific plains has been affected by the virtual disappearance of cotton, due to plummeting international prices. Only 8,500 acres were planted with cotton in this agricultural cycle, barely 10% of the average area in recent years (envío, October 1992).

The resulting unemployment will be even more serious between February and April, the cotton harvesting period. Even with the depression in the past few years, cotton picking generated about 70,000 temporary jobs. The situation is still more critical given that more than half of the former cotton land was left completely idle and the other half planted in sorghum, sesame, rice, soy and peanuts. (Apart from sesame, all these crops are highly mechanized and generate far fewer jobs than cotton did: only 3,500 in 1992).

Production and job levels have also fallen on the banana plantations and sugar refineries, also located in the Pacific. The main cause there has been the struggle between big business, government and labor over worker participation in the privatization of these enterprises. Banana exports fell in 1992 to almost half of 1991 levels, and recovery is expected to take at least two years. Losses in sugar production have still not ended because the disputes continue. At the beginning of February, the Benjamín Zeledón Refinery stopped in mid harvest for lack of financing. Two months earlier, during a strike at the San Antonio Refinery, the country's largest, the army took over the installations and presidential minister Antonio Lacayo himself had to intervene in the negotiations.

Coffee and Cattle: Only for Large Producers

The difficulties incurred by large agroexporters in the Pacific contrast with the boom experienced by large coffee producers and cattle ranchers in the country's interior. The government actively promoted investment in these activities through credit and technical assistance programs and their export profits grew with the currency devaluation. The government has already announced that the credit program for coffee renovation will continue, with a fund of more than $23 million and lower interest rates than for other productive activities. It is also offering a new $20 million credit program for the reactivation of cattle ranches, with favorable conditions similar to those for coffee.

But last year, the coffee renovation program used only half of the resources available. The main reason is that access to credit is conditioned on the rigid adoption of a technological package appropriate only for large scale production. This stipulation has thus sidelined small and medium producers, whose technical management differs because their land and labor resources differ. This rigidity in technological policy was what caused Sandinista coffee renovation programs to fail. It is incredible that the Chamorro government maintains this same technocratic absurdity.

In addition to this major hitch, legal obstacles also prevent access to credit for many producers who do not have their property duly legalized. These obstacles are blocking the majority of the country's coffee farmers from economic reactivation, thus squandering their potential to generate thousands of rural jobs.

Something similar is happening with credit for cattle reactivation. Large ranchers, whose production systems are oriented primarily to pasture and cattle fattening, are taking more than 70% of the investment credit authorized by the state bank system. And they are hoarding not only credit but also land, recovering ranches through privatization and by purchasing them from farmers without capital who opt to sell out and move further into the mountains. The ranks of such capital strapped farmers who cannot make a go of it without credit include many former contra members who were recently given the land.

This concentration of both credit and land in the hands of large ranchers does not favor the development of cattle ranching for two reasons. First, the key short and medium term need in cattle is to reconstitute the national herd, but small and medium ranches are the ones that have historically undertaken breeding and development activities. If current credit policies continue, the decapitalization of breeders will make the cattle scarcity a chronic problem. Second, the concentration of land will cause even greater social instability in the countryside, the effects of which could do short term harm to the country and large ranchers themselves. One example is the recent case of the "retaking" by former contras of well over 14,000 acres of ranch land in Matiguás they had decided to sell to two large ranchers. The ranchers have now lost their investment in the purchase as well as in improvements.

Basic Grains: At a Standstill

In contrast to the reactivation of large coffee farmers and cattle ranchers, peasant basic grains production is at a virtual standstill throughout the country. Low crop prices and lack of credit have played decisive roles in this. For two consecutive years, average corn and bean prices during harvest season in the country's interior have been less than half their later sale price in Managua. The peasantry is paying the price of the government's policy to totally free up the market by excluiding ENABAS, the state basic foods agency, from purchasing grains, while the grains merchants are benefiting from it.

The government can and should change this situation by financing ENABAS to play its role as price regulator in the basic grains market. For the near future, this would be the most efficient mechanism for improving the extremely low income levels of peasant families, especially in the agricultural frontier zones. The government already has resources from Denmark to finance ENABAS purchasing at an interest rate lower than that established by the government a project that, incredibly enough, some government officials oppose.

Peasant grains production has also been virtually excluded from bank credit. The area financed for corn is barely 15% of that financed in 1991. The vacuum left by the National Development Bank, when it transformed itself into a commercial bank, is being insufficiently filled by national nongovernmental organizations. Traditional financing mechanisms such as sharecropping and advance purchasing have thus reappeared.

Lack of financing and indebtedness are primarily affecting peasant agrarian reform beneficiaries, due to their strong dependence on credit. A growing number of cooperatives have opted to sell and/or rent part of their land to pay debts and get some working capital. Underemployment and unemployment are once again thrashing those who benefited from land ownership in recent years.

In summary, the prostration of the country's productive sector is intimately tied to the absence of government policies and programs to support its reactivation, and, with it, the generation of rural and urban jobs. Examples exist, however, of what could be achieved with active government intervention. Coffee renovation and cattle reactivation programs, though insufficient because they exclude small and medium producers, provide a model for the kind of government intervention needed to reactivate production.

Finally a New Turn?

There is, however, one new development: the need for more active government intervention to stimulate the economy is beginning to be accepted in government circles. In his annual meeting with foreign aid organizations, Lacayo expressed his doubts about the "invisible hand" of the market as sole generator of economic reactivation. "We want to examine our errors and those of the international financial institutions' advisers," he said.

Lacayo's doubts coincide with growing worldwide criticism of the stabilization and structural adjustment policies of the IMF and World Bank. In his recent book, Adjusting to Reality, Harvard economist Robert Klitgaard quotes the conclusions of one of the World Bank's own key experts:
The links between policies and objectives are complex, with large gaps in knowledge on both theoretical and empirical grounds.... It has to be recognized that the analytical basis for some micro policies in an adjustment program is relatively weak.... Even on the macroeconomic front, some serious theoretical and empirical issues are still unresolved.... For example,...the effects of fiscal policy on demand are ambiguous.... Finally, and perhaps most important, there is still much to be learned about what drives growth in developing countries and in particular about the relationship between short run stabilization policies and long run growth.

The Japanese government, a key World Bank funder, has also heavily criticized stabilization and adjustment packages. It is no coincidence that the United States, England and Canada, after being firm partisans of reducing the state's role in the economy during the 1980s, are suffering the greatest recessions in the developed world. Nor is it a coincidence that the European Community is now considering massive public spending increases to stimulate its own economic reactivation. Lacayo's public doubts, international theoretical and economic policy tendencies and, above all, the desperate reality of thousands of Nicaraguans subject to poverty and unemployment all lean toward change in the recessive policies followed up to now.

The government and the international organizations supporting it should face the reality that economic development and overcoming poverty are impossible with monetary and fiscal policies aimed at maintaining monthly inflation rates close to zero. The risks of modest inflation are not comparable to the risks and costs of greater unemployment, greater poverty and greater violence of greater uncertainty for all.

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