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Central American University - UCA  
  Number 143 | Junio 1993



Reactivation: The Last Chance

The alliance of high-level state, military and political bureaucracies resists changing the direction of the eoncomy. The dominant group in the FSLN is an essential part of this alliance and this resistance.

Oscar Neira, Adolfo Acevedo and Angel Saldomando

Except in a very small orthodox and officialist circle, all Nicaraguans speak today of the unbearable economic crisis and the need to find alternatives. Only a year ago, this apparent consensus did not exist. At that time, conditions for change seemed more favorable, due to the government's success in stabilizing the currency and the promise of some social compensation to those affected by the structural adjustment plan. Only a few isolated voices were predicting the magnitude of the crisis that was to come without an urgent change of direction in economic policy. Those positions were considered alarmist and unfounded. For this reason it is astonishing that in just one year some of the staunchest defenders of official economic policy have distanced themselves from the government and criticized the results of that policy. What's behind this rapid change of opinion?

Everyone Agrees?

This change is partly due to the government's serious loss of credibility for its many unfulfilled promises to reactivate the country and generate jobs. All promises of reactivation have failed, while unemployment and poverty have soared to unprecedented levels.

The recession is so deep that it no longer affects only the popular sectors, as it did just a short time ago, but also big business. All of this has led to a generalized pressure to change economic policy, which is reflected in the apparent consensus around the need for the country's productive recovery. As if by instinct, the political class has smelled the winds of change and yielded to the new signals coming to it from virtually all sectors of public opinion. Thus, the search for alternatives until recently scorned has become a political necessity to win legitimacy with the people.

But the consensus regarding the crisis and its solutions is still superficial. Alternatives can be sought to find an authentic solution, which could also reduce some of the tensions currently undermining the country's political system.

Economic Change = Profound Political Changes

If a solution is to be found, it would imply significant changes in the political system and in the convergence of interests that sustain it. For this reason, the dominant power groups strongly resist any change in direction that would mean a redefinition of the current balance in the correlation of forces. When this balance is supported by a narrow social base in a country that is for all practical purposes destroyed, preserving it at all costs becomes an enormous barrier to finding constructive solutions.

A real change of path would force the government to recognize the failure of its stabilization policies, which are today the core of the cabinet's cohesion and its only element of legitimacy with international financial organizations.

For the dominant group within the Sandinista forces, a change of path would mean the recomposition or rupture of the thick network of ties and commitments that the FSLN has acquired in the distribution of power quotas. What do the government and dominant group within the FSLN gain by preventing the search for real solutions to the crisis? That is the key question.
In the convergence of interests between the government and the Sandinistas, inertia plays a key role. In the government FSLN case, the material basis upon which their alliance was born were the foreign resources to be used in the commercial and financial sectors for stabilization along with promised social compensation. This alliance was made among the state, military and political bureaucracies and some business sectors.

It was presumed that this alliance would be enough to force those resisting the stabilization policy to yield. The expected winnings were the guarantee of quotas of power and influence among those integrating the dominant group (the Lacayo group and the dominant sector of the FSLN). The supposed utility of this arrangement was to help stabilize the country, neutralizing extremists from both right and left. Any price would be paid to achieve political stability.

The FSLN in Alliance with Lacayo

Nevertheless, political stability is not an element independent of the population's social and material stability. For the sake of the stabilization scheme, the dominant groups supported the application of a package of neoliberal reforms that have undermined the possibilities for a sustainable stabilization with a broad social base. The losers in this arrangement are the sectors that have been excluded: the low level state, military and political bureaucracy; middle class sectors; small and medium producers; workers; peasants; the informal sector; women; and former combatants from both the Sandinista army and the contra forces. The deepening of the economic crisis in 1993 has meant that even the big business sector is beginning to be affected, making the alliance and sustainability of these policies even more fragile.

The FSLN accepted this stabilization scheme because it could envision no other possible scenario. It saw this top down political stabilization as its best ticket to legitimacy, to international recognition and to entering the 1996 election campaign attired in new clothing.

It also accepted this arrangement because it prevents the replacement of the group headed by Antonio Lacayo with extremists from the far right. It also prevents the opening of spaces within the FSLN for critics who want to change the party's direction and policies.

Power Quotas for the FSLN

Everything indicates that the alliance will be tenaciously defended. The cost of opening the political game with changes in the economic arena is seen as too high. It would lead to a complete redefinition of the relationships between social and political groups. This explains why Minister Lacayo's attempts at making changes in current economic policy at the end of 1992 have not been successful. In the end, the "reactivation solidarity" measures announced in early 1993 were nothing more than the same old measures, now adorned with the fig leaf of scant social compensation. More recently, in March, the debate regarding government policy undertaken by some members of the FSLN, reflected in the document "For a National Solution to the Crisis," was reduced, in the end, to nothing more than a minimal 18 point plan of action. This was done so as not to affect the relations and power quotas established between the Lacayo group and those dominating the FSLN. Once more, the excuse for not promoting serious changes in economic policy was the government's weakness, and the fragility of the stabilization achieved so far. These very arguments recognize the failure of the scheme employed. The most serious element is the fact that the widespread poverty and social decomposition wracking the country weigh so little in the political balance.

A new factor has recently been introduced to the political arena: UNO leaders, who have always been interested in changing the current political alliance but without questioning the economic model, have begun to ride the growing tide of discontent, hoping to appear as the standard bearers for changing the path of economic policy. With this demagogy, they are trying to capitalize on the population's dissatisfaction in order to weaken their adversaries' electoral possibilities.

Political Will to Change?

The position of those in power does not accurately measure the political cost of continuing things as they are. The dominant alliance, particularly the government, is weakened by the narrowing of its social base. The repeated failure of economic reactivation policies creates fissures and divisions within the cabinet itself. With things going so badly, the need to make changes in government and seek alternative programs is increasingly the issue of the day. With more or less weakness, the magnitude of the crisis makes it impossible to maintain political "stability" without the increasing use of repression and without ignoring, more and more cruelly, the population's demands.

Though it seems incredible, the Lacayo group and the dominant group within the FSLN seem to be convinced and try to convince us that the current situation is the best one possible and that there is no option but to navigate between the reefs, preserving this stabilization scheme. The truth is that, with time, this becomes increasingly difficult. Ungovernability thrives, and the number of those wholly excluded by the measures multiplies fast. Conflicts accumulate, and the country as a whole loses opportunities to rehabilitate and reactivate its economy, at least to the levels that the other Central American countries, also with serious problems, have reached.

On the Edge of Collapse

1992 ended in a climate of general rejection of the government's leadership. The recession continued. Social conflicts and interminable political quarrels, aggravated by corruption scandals, and the more than uncertain prospect regarding foreign assistance resulted in a situation of political and economic crisis so desperate that it has resulted in cynicism. Social decomposition in the form of crime, prostitution and drug trafficking is the daily bread resulting from the economic policies applied by the government and approved by the dominant group within the FSLN. In the first five months of 1993, there has been no indication that this panorama will change; in fact, it is more likely to worsen to intolerable levels.

Several things explain the severity of the situation. In 1993, the total amount of foreign assistance and, above all, the percent of foreign exchange, or dollars, not allocated to specific ends has dropped. The situation is so serious that if the government does not obtain, or if it takes a long time to obtain, the $150 million it needs in foreign exchange to close the trade gap, the logic of current economic policy will lead to 1) an even greater concentration of credit, 2) deeper cuts in public investment and social spending, 3) less currency in circulation and 4) increased recession, with new hikes in unemployment and underemployment.

The drop in foreign aid, and particularly foreign exchange, has restricted the government's ability to maneuver. In addition to the four above mentioned disasters, the economy's operating needs are still not assured. In 1993, only petroleum imports and debt payments the government's priorities are guaranteed. Under these circumstances, if the expected foreign resources particularly the $50 million withheld until recently by the US do not reach the country quickly, the economy will be on the verge of collapse. But even if they arrive soon, they will not put a dent in the recession, offering only a respite, and not a real change.

A Worn Out Policy

The false expectations created by the government after the meeting with financial organizations and donor nations in Paris in April illustrate its need to appear optimistic about the viability of its economic policy. Nevertheless, it is unable to hide key elements. First, what it obtained in Paris does not solve its problems, because it did not get the financial resources needed to close the gap in foreign exchange needed for this year. Even less was it able to improve the perspective of future financing. Second, its economic policy is already worn out and has not achieved the proclaimed reactivation objectives.

Economic policy is worn out precisely because it depends totally on the continuity of flexible foreign aid and the relief of that by the rapid inflow of private investment and the accelerated recovery of exports. This formula is the basis of the government's irresponsible attitude, and is why it sat and waited for a miraculous reactivation instead of actively promoting it.

In 1993, it became apparent how much time had been lost, as well as how inefficiently foreign assitance had been used for promoting the rehabilitation and productive reactivation of the country. The picture is not the one the government expected: 1) foreign investment has not relieved foreign aid, 2) national investment is insufficient, 3) exports have fallen, 4) the recession is already intolerable for almost all business and labor sectors, 5) the country's growing desperation and ungovernability is a consequence of enormous unemployment levels and the social marginalization of the majority, and 6) the model is totally incapable of resolving the situation of the 780,000 un and underemployed and the 45,000 young people joining the economically active population every year.

In this scenario, neither promises of reactivation nor pressure for jobs and production have any basis in reality if the same government policies continue. In April, a key month for the agricultural cycle, indications were unfavorable. Not only was there still less money in circulation, but the alternatives offered by the producers themselves were falling on deaf ears. Even the sectors benefitting from commercial import fever are beginning to feel the burden of the currency shortage and the recession.

Climbing Out of the Well Increasingly Difficult

The deepening of the recession not only compromises perspectives for 1993. It also shatters the possibilities for future recovery. Because as the well of recession deepens, ever greater force is needed to climb out. In order to recover 1990's per capita Gross Domestic Product (GDP), Nicaragua would have to have an annual average growth rate of 4.4% beginning in 1993. Any delay will only increase the growth rates needed to climb out of the well to more than a 5 or 6% annual average.

The margin of error left by the government is little or none. This is seen in the government's agenda for 1993 and beyond, which is none other than the expansion of its economic and institutional reforms. This program blocks any attempt to develop an agenda that puts the social sphere and economic reactivation first.

The government's agenda is already defined, independent of any National Dialogue or other national negotiation process, and it is not the program the country needs. The government is wholly dependent on orders from the international financial organizations, and the program is designed around foreign debt payments and a commercial opening that does not favor Nicaragua. National priorities do not count. They are not even taken into consideration for a possible renegotiation scheme that would support reactivation.

Economic Reactivation: The First Step

The fist step for developing a more expansive economic policy is to determine the internal economic margins for productive growth that is, to determine whether there exists productive potential that is simply idle and could, therefore, be easily reactivated with an influx of capital. If there is room for growth, it is possible to initiate productive recovery by adapting domestic credit to and providing integral assistance in the areas of production and marketing. This depends more on socio political than technical factors. If there is no internal growth margin, an expansive policy would only lead to greater inflation, the loss of financial reserves and total economic collapse. This is the government's position.

But in reality, this margin exists. Our point of view is that the current super contraction of demand (no one is buying) and illiquidity (there is no money) have resulted in the underutilization of resources, productive capacity and labor. And this is so serious that it has already begun to result in the destruction of productive capacity. In this situation, and given foreign aid levels, the first step toward reactivating production is recovering the economy's liquidity: putting more money in circulation to provide producers with working capital. Then, the government should concentrate on implementing direct actions for the rehabilitation and promotion of production.

This means generating a coherent portfolio of sectoral and local investment plans, as well as productive reconversion plans, all as part of a coherent national development strategy. It is obvious that this solution would imply a change in the direction of current economic policy, with the consequent political costs.
The government position is that greater liquidity more money in circulation will only result in inflation, and that activities to support production are already included in the purely institutional reforms for supporting markets.

This market option has already demonstrated its limits and ineffectiveness as a path toward development. We have to explore another solution. It is possible that the additional expansion of internal credit would result mainly in the additional expansion of production and employment, if there exists:
1) an important un or underutilized potential for growth in production, with the effective capacity for immediate recovery;
2) an appropriate amount of foreign resources that, selectively used to this end, make possible additional indispensable imports, both of intermediate and basic consumer goods, which would compensate for bottlenecks created in domestic demand;
3) the possibility of avoiding a situation where the expansion of demand resulting from the increase in jobs and income as a result of reactivation primarily generates a greater demand for the import of non basic consumer goods.
Key internal maneuvering room, therefore, is defined by the effective potential of immediate productive recovery.

Criteria for Setting Priorities

Since resources especially foreign resources are limited, a recovery program should be implemented selectively and with clear priorities. Reactivation efforts should be concentrated on those activities that best fulfill these criteria:
1) the possibility of immediately recovering prior production levels;
2) greater absolute weight in the satisfaction of the demands of the domestic and foreign markets;
3) greater generation of, or net savings of foreign exchange;
4) greater generation of absolute capacity of aggregate value (jobs and income), either directly or by indirectly reactivating other sectors.

The Limit: Little Cash for Imports

Economic recovery with credit expansion, however, could increase the trade imbalance by increasing the demand for imports. Given that foreign resources are the most restricted element, their availability to insure the import of necessary inputs constitutes the main barrier to immediate productive recovery and, therefore, to the decision to increase domestic credit.

This means taking steps to modify the composition of imports. To be consistent with reactivation, and given the critical situation of foreign exchange, certain measures could be taken to allow for an appropriate selectivity. Among them would be the introduction of a system of selective assignment of those scant dollars, in order to direct them toward the import of inputs needed for immediate productive recovery. In addition, measures that assure a selective control of imports could also be introduced, so that, at least in the short term, non essential items are the ones that are reduced more.

At the same time, in order to reduce the risks of recession, cutbacks in demand should focus on all those products that have a larger imported component, at the same time that demand for national products broadens, increasing the possibilities for reactivation. In order to guarantee that reactivation policies result in the effective reactivation of production for the domestic market, measures should be taken to reduce the importation of foreign consumer goods that are produced domestically.

Reducing and Reorienting Consumption

With all this, two important factors are introduced that reactivate the economy:
1) To the degree that non essential imports decrease, foreign exchange is freed up which can then be redirected toward production priorities, infrastructure tied to this domestic production and basic social services.

2) To the degree that there is a drop in ordinary consumer goods imports, which are already, or could be, produced in Nicaragua, not only are dollars freed up but also domestic consumers redirect their demand toward domestic products, increasing possibilities for an even greater recovery in domestic production and in inter sectoral productive chains.

The selective reactivation of production for the domestic market requires its protection, to a degree and for an appropriate time period that allow for its recomposition, reactivation and increased ability to compete with foreign production. That protection would insure that the increase in domestic demand would result, above all, in an effective reactivation of domestic production, instead of in a greater demand for the import of non essential and non productive consumer goods.

The Government: No Foreign Aid, No Options

Reactivation means that the government's extremely restrictive use of foreign aid must change. For the government, foreign exchange (non allocated dollars) is the only aid that counts, and is the only aid that serves to back the domestic credit supply and the córdoba, Nicaragua's currency.

Reactivation means that foreign exchange, together with the aid allocated to specific projects or the purchase of products, must provide the capacity to import inputs needed for immediate productive recovery. The government's emphasis, therefore, which is restrictive and incompatible with the country's productive reactivation, must change. From the government's perspective, if it does not have foreign exchange, it has no way to respond to real needs for financing or to the most urgent domestic illiquidity (shortage of money in circulation). This extreme illiquidity impedes the possibility of recovery, hampers the normal operation of the economy and breaks down the chain of collections and payments. This is what is happening now.

More Credit for More Producers

This perspective must be rejected if there is to be leeway for financing immediate productive recovery. Reactivation means that domestic credit must expand, in order to selectively finance, with that money, areas needed for productive recovery. Issuing that money should not depend on having its immediate "backing" in cash in hand, because credit for national producers does not expand in dollars but in córdobas. It is the national currency that releases the potential for recovery.

This, however, does not in any way mean that there is no connection between internal financial expansion and foreign resources, between córdobas in credits and aid dollars.

Foreign resources, both foreign exchange and allocated resources, play, above all, the role of assuring the imports needed to activate the sectors that have the possibility of immediately expanding production. From this perspective, credit is seen as an advance on production. In addition, increasing the release of gross credit, indispensable for recovery, does not necessarily mean an equivalent expansion in net domestic credit ceilings. If selective credit expansion results in an effective recovery and an improvement in the pocketbooks of economic agents, loan repayments will also increase. Thus net expansion of domestic credit would be less than gross expansion.

The Use of the "Little Machine"

If an excess of demand persists among economic agents, there is another non inflationary margin for expanding domestic credit. If the current illiquidity crisis is real, it means that there is a high demand for money, resulting from the drastic drop in velocity of circulation that follows price stabilization. This margin is sufficient to allow for the use of "the little machine" of the state's sovereign right to issue more national currency to finance a significant additional expansion in domestic credit.
The Nicaraguan Central Bank has prevented the remonetization of the economy in order to forestall a hyperinflationary process. In 1991, the International Monetary Fund (IMF) and the government conservatively estimated that the economy's global coefficient of liquidity the ratio of liquid assets to the GDP would reach 17.5% (in our estimate, 23%). Given the rigidity of the imposed monetary rules, the coefficient that year barely reached 13%. After the appreciable contraction in liquid assets resulting from the January 10, 1993 devaluation, that percentage dropped even further. When a too restrictive monetary policy is imposed, the result is the sinking of the economy into a recession that, if prolonged, becomes intolerable. That is what is happening today in Nicaragua.

A Tolerable Inflation Rate

The country's recovery should be consistent with the management of tolerable inflation rates. The rate of immediate productive recovery should not lead internal financial expansion to intolerable inflationary levels. Thus it should be determined what level of inflation, consistent with reactivation goals, is acceptable for our economy. Foreign aid with the capacity of increasing the foreign debt should be tied to that, and the payment of the foreign debt should be conditioned on the goal of reactivation with stabilization.

In a first scenario (A), where the economy would be rehabilitated in order to lay the foundations for sustained reactivation in 1994 and beyond, the economy should grow 3.4% in 1993. Per capita, this means barely maintaining 1992 levels. And to do this, agricultural and forestry activities should expand 2 percentage points with respect to last year. This also implies sustaining the public investment program in order to promote an upturn in the construction sector. With the reactivation of agriculture, construction and domestic demand, industry could recover almost 6%. To improve the balance of payments, and with agricultural growth, exports would increase 19%, and imports would drop 23%.

Austerity, Jobs and Reactivation

All of this implies an austere reactivation scheme, based on job generation and the rehabilitation of productive capacity. The expansion of internal demand is selective, in order not to put pressure on external imbalances. Public spending, as a percent of the GDP, would be slightly less than in 1992, but the economic recovery would help to reduce the public deficit by 4% of the GDP in relation to 1992.

In this scenario, the political shortsightedness of maintaining an inflation rate tied to the floor would not be sustained. The gradual recovery of liquidity, to levels that would not affect price stability, would imply an annual inflation rate of about 38%. This would lead to an annual devaluation of the nominal exchange rate that would have to be 50% in order to maintain a situation favorable for exports.

In any case, just laying the foundations for future reactivation in 1993, with unfavorable international prices and a drop in foreign aid, implies a superhuman productive effort. This involves not just producers but also the government: to cover the unsatisfied demand for investments, to recover liquidity, to selectively protect the domestic market and to improve the country's export capabilities. All of this requires an institutionality different from the current one and distinct policies, as well as a change that allows for the ongoing development of a framework for long term growth.

Debt Payment: Greater Crisis

The second scenario (B) maintains a goal for growth similar to that proposed by the government at 2%. Even if the government reaches its goals in agricultural production, what it will actually achieve is maintaining 1992 productive levels. And even supposing it is able to implement its original public investment program, such that there is reactivation in construction, growth would still fall per capita by almost 2%. In order to improve the economy's position externally, it would have to recover what was lost by the drop in exports in 1992 and reduce imports even more drastically than in scenario A. In addition, if it maintains the strategy of making foreign debt payments, the economy's foreign liquidity will worsen in 1993, decisively affecting future growth possibilities.

Even if there were a drop in public spending relative to 1992, since income is not recovered to the same degree, the portion of the public debt over the GDP would only drop 2%. In any case, this cut in spending to improve fiscal conditions, given the goal of a nominal devaluation, would barely maintain annual inflation near 30%.

A Great and Useless Sacrifice

In summary, even with success in the agricultural cycle and in reaching the growth rate expected by the government, the overall position of the economy in scenario B is more difficult and costly than in the reactivation scenario we propose in A. Not even the precious goal of maintaining a zero inflation rate can be sustained, such that the sacrifice of greater cuts in demand would be large and useless. It would also be cruel, because of the immense needs of the majority of the population.

Most serious of all is that by not creating the basis for reactivation in 1994, this year is virtually lost, and the efforts for recovery in the future will become less feasible and more costly. The consequences of continuing with current economic policy are much more profound and devastating than anyone is willing to admit. Losing the current agricultural cycle alone, due to lack of credit for producers, reduces the possibilities of reaching the government's 2% goal for growth. If this is accompanied by greater restrictions in demand and illiquidity continues, the country will be at the bottom of a well of recession so deep that it will be extremely difficult to climb out.

The consequences and social costs of opting to sink into that economic well are high and unpredictable. It will certainly make the precarious democratic process even more fragile. There will be no material basis for democracy. Nor will there be a basis for Nicaragua's economic viability as a nation.

The challenges we are facing cannot await the electoral calendar, nor will they be effectively dealt with through spurious deals or talks among high level leaders. They need an intense national effort, based on an authentically participatory and democratic strategy. What is not done today to promote economic recovery will be paid for tomorrow as the country collapses.

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Foreign AID: Where have all the Dollars Gone?

Reactivation: The Last Chance

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