Envío Digital
Central American University - UCA  
  Number 155 | Junio 1994



The Economic Curtains UP: What's the Political Play?

With the signing of the structural adjustment agreement a new stage begins. With more of the same? With new consensus? With authoritarianism and repression? With total chaos? There are four possible scenarios.

Nitlápan-Envío team

"Nicaragua's difficulties result from the government's poor economic policy," argue some media commentators. "The political instability is what keeps the country on its knees," insist others. It is time we move beyond both of these one sided and diametrically opposed analyses.

With the signing of the Extended Structural Adjustment Facility (ESAF) agreement last month, the curtain went up on Nicaragua's probable economic future for the next three years. It is now essential to look at what the political future might hold, bearing in mind as neither argument above does that political and economic actions always influence each other.

There are four possible scripts, each with the same cast but different roles for the actors. The Sandinista forces and the government share the lead in all four, although the support cast is pivotal in one.

The plot lines have three main variables. One of these is the outcome of the FSLN's extraordinary Congress, to begin on May 20. Will a rejuvenated FSLN emerge? Will it be willing to work with other national forces in a search for consensus about what changes the country must make to adjust to the new international situation?
The second variable is the strategy the government will choose to support Minister of the Presidency Antonio Lacayo's 1996 presidential aspirations. Will it persist in applying the drastic economic measures it initiated upon signing the ESAF?
The third is the posture taken by the rest of the cast. Will big business continue supporting the government's economic impositions? Will other political and social forces make the effort necessary to search for consensus? Will those most adversely affected rebel?
In between these four schematized scenarios, laid out toward the end of this article, is an array of possible nuances, depending on what unpredicted events find their way into the script. But despite this potential unpredictability, it is necessary to systematically analyze the actors and their possibilities and limitations with respect to the structural changes, openly reflect on what those changes are for, and objectively evaluate what has already been done and all that remains to be done. Doing this will help us understand the schemes of power that arise from the different scripts and better evaluate how probable each one is.

The Cast of Actors

This play has no spectators, only actors. In previous issues of envío, we have already begun to characterize these actors and their roles in the current script, as well as the ones they might play if the script were to change. Some of these actors are organized in unions or business associations, others in single issue pressure groups to influence the course of the economic policies, and still others in political parties so as to acquire or at least share government power.

What is known as the "private sector" encompasses much more than just the old oligarchic business groups, financial groups, large ranchers and the new capitalist sector made up of civilians and military, Sandinistas and non Sandinistas. It also includes small manufacturers, peasants, artisans, workers, white collar employees, managers, unemployed and a gamut of either politically or criminally motivated armed groups. All have a role to play, whether guided by immediate or long term interest, and whether that interest be their capital or simply their family.

This array of actors shares the stage with the international financial institutions, bilateral aid agencies and the diplomatic corps, all of which represent a range of national and international interests. Among these actors, the International Monetary Fund and World Bank in particular are explicitly charged with organizing the transformations that could insert Nicaragua into the world economic system that these same institutions are now trying to consolidate. They are globalizing trade and creating supra regional areas for commercial cooperation that will allow these areas to more favorably deal with the 21st century's economic wars.

One more major actor needs to be mentioned: the government itself. This actor is normally disguised it appears either overdressed as a bloated consumer of the nation's wealth or in a skimpy costume made up of elementary administrative functions (public order and justice). These costumes hide the fact that a government is not a single actor, but a veritable troupe of them, each with its own repertoire. They converge through democratic representation, organized or informal pressure groups or simple kinship structures. The government's disguises also hide the fact that it never decides its economically sovereign actions decreeing taxes, spending the budget, printing money, etc. based on what is good or bad for society. Its decisions grow out of the contradictions that riddle it and help shape it.

ESAF: A Zero Sum Game?

If the foundation for more equitable economic growth is to be built with support from the international agencies and multilateral institutions, the most serious frictions and their violent expressions must be smoothed out through a consensus among the nation's social forces. According to this development concept, consensus would be the best and most practical way to achieve the transformations the country needs. It would involve fewer social costs and less risk of drifting into a more chaotic political system in the future. But there are no visible signs that this hoped for consensus will become reality in the near future.

The government, acting in the name of what it considers to be the nation's interests, has signed an accord with the IMF and World Bank that will bring little short term improvement. It could, however, help lay the groundwork for future actions and create a favorable framework for growth if a series of political and economic conditions are met. The various hypothetical scripts depend in part on whether or not the government meets those conditions. In signing the ESAF agreement, the government wagered that this outside imposition will give it a new opportunity to continue its policy without profound internal housecleaning.

While the signing sparked both expectations and rejection, it has one undeniable merit: it has helped clarify the existing alternatives, obliging government authorities to have an explicit economic plan and the organized social sectors to either support or oppose that plan.

Arguments about the economic alternatives, however, usually lack the transparency needed to objectively debate them. Some clarifications central to the structural adjustment philosophy are necessary regarding both the private sector and the government itself, as well as their respective roles in the structural transformations Nicaragua is undertaking with international financial support.

Successful Stabilization, Timid Adjustment

The stabilization process did not start until 1991, since 1990 was the transition year, marked by political realignments and pacification efforts. Stabilization was consolidated in 1992, with very low inflation due to the use of fixed exchange rates to anchor prices and of negotiation and controls to restructure relative prices.

This successful policy laid a good foundation, but little use was made of it in 1993. In addition, the isolated nature of the stabilization measures could not protect the government from losing $100 million in hard currency reserves. By the end of 1993, those reserves had virtually dried up.

A structural adjustment process was initiated parallel to the stabilization measures. Perhaps due to the complexity of combining the two logics, so distinct in philosophy and application, the adjustment measures were too timid. They were limited to:
* Privatizing most of the state companies that produce non basic goods and services. These companies, confiscated or otherwise taken over by the state in all areas of the economy during the revolution, represented 40.7% of the national product in 1988.

* Eliminating domestic commerce restrictions. (State companies had controlled 50% of commerce.)
* Restructuring the financial sector by opening private banks, creating a Superintendency of Banks and freeing up interest rates.

These actions were only the first of a set of reforms needed to increase production and the productive sector's efficiency. They cannot be expected to have a very important short run impact or to deal with the major problem the incoherence between increasing supply and shrinking demand, a contradiction that grows out of the simultaneous application of stabilization and structural adjustment policies.

Export More?

To import less and spend less, the government reduced fiscal spending and credit with measures that were effective in the short run. But this affected the companies' production, since they cannot sell the quantities they need to be profitable. This lack of profitability affected their investment capacity and even their functioning, once the crisis began to worsen.

According to the adjustment philosophy, exports are the economy's pivot point: they are unaffected by shrinking domestic demand and their growth increases the country's account with the rest of the world. Both reasons are correct, but export capacity does not happen automatically, just because the national market shrinks and it becomes necessary to export.

The recovery of traditional exports, which generate the most rural, and even national employment, is facing all the difficulties that agricultural raw materials have. Cotton is experiencing an upswing in the world market, but that market has become fragile and speculative. Although coffee prices improved from their rock bottom low of two years ago, coffee is limited by import quotas. The conversion to nontraditional exports, on the other hand, is slow since the government does not have active marketing or technology transfer policies and has not created the necessary infrastructural support such as media, international market monitoring and the like.

ESAF and the Foreign Debt

This was the context in which the government signed on to a program whose policy matrixes designed to preserve stabilization and consolidate the adjustments were worked out with the IMF and World Bank. The ESAF accord implies a freely available $151 million cash credit for 1994, mainly from the World Bank and the Interamerican Development Bank, in collaboration with Japan, Taiwan and Germany. There will also be $27 million in cash donations conditioned by the ESAF, as well as another $40 million that would have come even without it.

Comparing this $218 million with the $237 million that must go to pay the medium and long term foreign debt service, the term "negative net foreign cooperation" becomes clear. And it becomes downright alarming when the prefinancing and commercial credits that compensate for the new credits are added.

But before jumping to the conclusion that Nicaragua should not have signed on, it should be remembered that the debt service would have to be paid even if Nicaragua received nothing. Over 60% of that service goes to the multilateral lending agencies which could cut access not only to their own financing as penalty for non payment, but also to financing from the industrialized countries. That bilateral cooperation, provided with very favorable interest and repayment conditions, is indispensable to the country's survival in the short run.

In such conditions, ceasing to make debt payments means becoming isolated from the international community and ending up in worse penury than during the last decade. Nicaragua no longer has a socialist bloc to fall back on or the ideological apparatus to mediate the conflicts generated by such difficulties. Such a disastrous scenario today would send Nicaragua to stand in line with the planet's most "unrecoverable" nations, and Nicaraguans have long since spent their reserve capacity for such sacrifice.

It should also be taken into account that the loans accompanying the ESAF are much "softer" (0.5% interest and 10 years to pay with 5 years of grace) than the bulk of the debt previously contracted with the multilateral agencies. Paying the service on the old debt with these new resources is like reclassifying the portfolio in much more favorable terms for the country.

ESAF's Conditions

In exchange for these resources, Nicaragua is required to meet a serious of conditions that make up the program's real objective. These conditions oblige the government to respect a timetable of actions and observe strict quantitative goals. The program's continuation will be subject to approval based on periodic evaluations.

The essential reason for such strict conditions is that the international agencies have no confidence in the government's ability to carry out the transformations deemed necessary. They consider not unreasonably that public administrations are not independent entities, beyond the reach of society's conflicts or protected from the pressures of well organized interest groups.

Underlying this concept of the limitations governments face in complying with their objectives is the idea that the private sector is endowed with the ability to smell when a government is not really going to do what it says and makes its own decisions accordingly, thus forcing the government to do what the private agents hoped. Paradoxically, according to this conception, the best way to make governments meet their objectives is to reduce their room to maneuver, which gives the private sector confidence that they will really do what they promise.

The ESAF program's reach is unquestionably linked to how it is implemented, but also to its central content and the support the social sectors give to carrying it out. Its overall content was agreed to with both the IMF and the World Bank, but the content of the separate accords signed with each institution is complementary rather than similar. The ESAF accord with the IMF imposes an increase in fiscal savings by slashing jobs in the state sector, some transfers, charging for some health and education services and improving the tax system's efficiency. It also eliminates the Central Bank's ability to provide short term credits to the public sector or the state's commercial banks.

Both these sets of measures continue the well known stabilization logic of controlling domestic demand. What is new is that many of them also tend to indirectly promote structural changes. For example, the state is required to continue cutting import duties and making them all uniform. In this economic policy conception, duties are a means of fiscal income, not a way to stimulate certain activities at the expense of others. This is the most criticizable aspect of the program, or at least its philosophy, since it makes a long list of "luxury" products duty free.

The accord also aims to speed up the administrative resolution of property disputes, strengthen the legal property framework, and establish a regulatory framework for financial supervision and the exploitation of raw materials mines, forests, marine biomass, waters, etc. And since the current labor code is seen as a brake on employment growth in the formal sector, it also wants that legislation modernized to make the labor market more flexible.

Structural Adjustment?

The accord also encompasses direct structural transformation measures in the whole public sector. The goal is to liquidate the state's non financial business sector all together, thus putting the final touches on the process that began with the privatization of many but not all state companies. In its financial sector, the accord requires a thoroughgoing reform to improve the state banks' loan recovery capacity, which presupposes dealing with their discretionary loan policy. The most indebted sector which thus also limits the state banks' ability to provide new loans is big business, since small and medium businesses have received no important credits for some years now. Because state banks are prohibited from recapitalizing with public funds (that is, with taxpayers' money), they will have to choose between not responding to the demand from producers or applying pressure on the portfolio of those in arrears.

The basic services sector is ordered to rationalize the use of its few resources, stressing preventive medicine and basic health attention, and primary education. Finally, an administrative reform is imposed to make central administration more efficient, particularly in tax collection.

The institutional aspects of the conditions agreed to with the World Bank do not go much further than those of the IMF. This is paradoxical since the division of labor between the two agencies assigns the IMF more responsibility for budget and financial aspects aimed at controlling spending, while the World Bank focuses more on the structural transformation aspects needed to get the country on the road to viable development and stop generating the deficits accumulated in the past. It is also strange in that the World Bank has made good diagnoses of Nicaragua's structural weaknesses and the efforts required to reshape its institutions according to a market economy logic.

Philosophical Dogmas...

The content of the reforms, which are inevitable, is not at issue so much as the ability and the means to make them. Neoliberal philosophy the theoretical underpinning of structural adjustment assumes that the private sector always behaves as it would if it were perfect. In other words, it will always do what is best to achieve its own interests and correct any errors it might make, always investing where it can make the best profit and saving just enough to make the investments that will provide future benefits, denying itself more income for the moment in order to do so. This philosophy also assumes that the only thing that could detour the private sector off this road is the state's devious or, at best, useless intervention.

But the private sector is obviously not as perfect as the neoliberal utopia would like; if it were, it would not have produced such bloated bureaucratic states to guide it. In turn, if the state were completely useless, this same private sector would vote for its disappearance. But the state is not perfect either. If it were, it would be able to implement all the transformations necessary to put the country on the path to sustainable and equitable development and its leaders would be assured of holding power indefinitely.

...And Real Absurdities

In Nicaragua, both the state and the private sector have increasingly supported themselves with foreign aid. During the Sandinista decade, a model was attempted that was based on the belief that the state was more capable of organizing production and distribution then the private sector. It became almost a dogma that foreign aid would fall forever like manna from heaven.

This erroneous belief that the state was fully capable of planning and leading the whole economy, together with the illusion of sovereign power over the currency ("the córdoba is ours; we will do what we want with it") ate away the pillars of economic policy. And the private sector did not err in gauging the huge weakness behind this authoritarian appearance. When the government could no longer continue rationing goods and justifying long lines, the hyperinflationary spiral began. This phenomenon is, above all, the product of a loss of confidence in one of the symbols of state power: the country's currency.

The fact that neither the government nor the private sector are as perfect as the textbooks make out justifies the need to improve them through structural changes, but this means recognizing that their ability to implement these changes is not perfect either. In fact, this ability is often so limited that the most conservative scenarios "more of the same" always prevail, unless, of course, major political upheavals occur that shake society to its roots.

What space really exists to deepen the changes? To evaluate the real possibilities of the different paths, it is necessary to know more about the actors and institutions that could implement them and about the political conflicts into which they are inserted and which they themselves determine.

Our Private Sector

The physical and financial decapitalization of the country's private enterprises is no myth. The main causes of its physical decapitalization are the destruction and abandonment of the farms and ranches in what were war zones, successive changes of ownership, pillage, and state led technological conversions and mechanization patterns inconsistent with any logistical ability to repair or maintain them not to mention various natural catastrophes. The financial decapitalization was due to the hyperinflation and the many unanticipated currency devaluations.

The nation's savings capacity is negative, which is another way of saying that national consumption is greater than the gross domestic product. But this phenomenon is not distributed equally among all sectors. Given that consumer credit cards are not a very developed mechanism in Nicaragua, the only way that low and medium income sectors can consume more than their part of the national income is if they receive remittances from family members living abroad.

The excess consumption of public goods is not totally responsible for this situation although it is certainly the easiest variable to adjust to reduce national consumption since the public sector's savings have been negative in the past four years while the private sector's savings have not been. The rest of the negative domestic savings must thus be attributed to the higher income sectors, who have a greater tendency to import consumer goods and more money to do so. In fact, the poor sectors in the countryside have had to decapitalize their productive patrimony to finance production or, worse still, family consumption.

At the same time, domestic private savings has been growing, particularly in foreign currency (a $1.08 billion increase in commercial bank deposits), even though private investment has dropped from 11% of the Gross Domestic Product to 7% during the 1990 93 period. This drop, counterbalanced by a growth of public investment from 9% to 12% in the same period, shows that the financial system is not thoroughly fulfilling its intermediation function, despite its transformations in recent years.

Our Entrepreneurs

During the Sandinista decade, interest rates were lower than inflation. This "financial repression," made possible by a nationalized financial system, put a brake on savings and promoted an irrational use of financial resources.

But it is significant that the real price of credit was also negative in the 1960s and 70s, even though that system was dominated by a few private banks. The explanation is that those banks were the financial nuclei of dominant business groups who benefited from the low interest loans. The novelty of reconstituting the private banks in a economic setting so convulsed by economic and political crises does not allow the financial system to again play this role. It is now in a position, however, to pull in abundant private financial resources attracted by the risk free remuneration of rates set for the public, which are indexed to the value of the dollar.

The essential problem is that the tremendously unequal distribution of income and holdings is linked to the incipient and compartmentalized character of Nicaraguan capitalism. Few businesses are incorporated, and the shareholders of those that are do not go beyond a few family members and friends. Alongside those companies is a huge mass of small and medium single family businesses whose capital needs get tangled up with the family's personal savings limitations.

Nicaragua does not have many households with a small financial surplus to invest in company stocks or in financial groups that provide resources to third companies. Such textbook cases are based on industrialized countries, not ones like Nicaragua, whose sector of family businesses in need of financial resources is huge and whose savings are concentrated in the hands of small financial groups. These groups, furthermore, consider it less risky to speculate in the international money market than to finance the small and medium productive sector's attempt to deal with the transformations imposed by the national crisis.

Our Imperfect Market

In addition to the private productive sector's decapitalization and the financial system's inconsistencies, Nicaragua's crisis also shows up in its commercial system, which is undergoing a disorganized transition from being controlled by the state and by its private counterweights, contraband and a black market to being a free system. There is evidence that private commercial capital has been invested much more in supplying urban sectors with imported finished goods than in circulating national goods.

Large interests are also consolidating around the supply of agricultural inputs and traditional exports, creating oligopolies that are very dangerous for production. Even though small and medium sized intermediaries would be much more competitive, they are having serious operating difficulties because the middle classes to which they belong are being financially decapitalized.

The big industrial enterprises are supplying their own equipment and spare parts, but small and medium sized manufacturers cannot do this due to the obvious scale problem. They have to depend on intermediaries. They are actors in a very imperfect market, which seriously aggravates their profitability and limits their reactivation potential.

Government Contradictions

The reduction of both the state's size and its spending is at the core of the government's real and financial contradictions. Since it is harder to reduce private sector consumption than that of the government, the imbalances are being corrected the easy way. The state's reduction is justified by mixing together two elements that belong to very different logics. One logic is stabilization ("we must spend less to reduce the imbalances") and the other is structural change ("we must be more efficient to adapt to the new national and world economic circumstances"). Both elements are true, but the problem comes when they are linked into a cause and effect relationship: "we must reduce the public sector to become more efficient."
This linkage is not a simple case of semantic confusion. While it may be true in some cases, it has not yet been empirically proven that it is true in all. It is thus still a philosophical supposition, one that neoliberal thought shares with anarchist thought although to reach different conclusions. The state should not disappear, say the liberals, but should limit itself to guaranteeing public order: making laws, overseeing their application and punishing those who disobey them, all with the goal of protecting each citizen's individual liberties from the potential for aggression by the individual liberties of others.

The lack of demonstrations to back the position that shrinking the state's size and budget automatically makes it more efficient permits pragmatic stabilization criteria to prevail over those of administrative reform, which are harder to implement. The objective of reducing state spending is clearly drawn up in the ESAF accord, but that of reforming it administratively to make it more efficient is barely touched.

Pragmatic arguments are used to justify selling public assets to the private sector: it must be done so the state can pay its foreign debt or because it does not generate much savings and at times even spends more than it gets in income, and thus cannot make the necessary investments. The justification for trading public companies for promissory notes on the foreign debt are along the same lines. But the sale of public companies is really a short term and nonrenewable way to obtain income. Increasing investment capacity with private capital is an unquestionably desirable objective, but it could be accomplished by creating mixed ventures.

There is no reason to think that turning public monopolies into private ones will increase consumers' well being, since monopolies are known to favor irrational resource use. Nationalization and reprivatization experiences in the industrialized nations in the past few decades show that the state never hesitates to bail out private capital threatened by bankruptcy, then sells the revitalized assets at low prices, even though both ends of the transaction are at the taxpayers' expense. The public sector is always be the loser in this kind of pragmatism. The principle of greater participation by the private sector is not what merits criticism; it is rather the way transferences in the property system are made.

Inflation and Public Spending

Cutting public spending supposedly reduces national consumption, by shrinking both the excess of domestic demand over production and the demand for imports. Behind this seemingly common sense argument, however, is a more complex macroeconomic backdrop.

Financial logic prevails in economic policy, by which any increase in available credit not backed by outside resources will cause a loss of international currency reserves. The Central Bank would have to sell its dollars to the public or devalue the domestic currency to protect them. Either case increases the price of the dollar, both officially and in the street, which translates into inflation. This happens even more quickly when vendors increase their sales prices according to the new dollar prices even if their products contain no imported components.

Increasing the offer of credit, however, really translates into a greater negative imbalance only in proportion to the supplementary imports generated by this credit. If it goes to sectors that use it to increase their productive capacity instead of running to the exchange houses to save it in dollars, there is no reason for it to be inflationary. Some sectors of society obviously consume more imported goods than others, just as government spending contains some budget lines that consume more dollars than others.

In other words, fiscal spending is not inflationary per se; it depends on its composition. The same can be said of credit to the private sector. The inflationary impact of credit does not depend on being "backed" by dollars, but on its short term productive use and its effects on both imports and exports.

In the short run, an increase in public or private demand usually only causes price rises when businesses see that they can earn more by selling at higher prices than by producing more and earning less for each good produced. The quantity of goods and their sale prices can obviously both increase, but which one rises faster depends on two factors: whether producers can increase production volume without making new investments, and how monopolized the market is for the particular good. Generally speaking, the greater the monopoly, the higher the price.

Seen from this perspective, credit to the private sector can also be inflationary, while fiscal spending need not necessarily be. This strengthens the argument for the country's need to know more about macroeconomic interdependencies so as to evaluate the structure of public spending and get it more in line with the objectives of productive reactivation.

Weak States?

It is often argued that the state should not only stop participating in economic activity, but should stop intervening in it, because it lacks the capacity to "surprise" the private actors. They will always anticipate its actions and make decisions as a result that would annul the effects of the government measures.

The international agencies strongly embrace this argument, particularly when applied to underdeveloped countries. With good reason, they emphasize the administrative and organizational weaknesses of our states even though this in no way prevents them from being powerful. These weaknesses would appear to punch a hole in the argument for a market regulating mechanism, since such a mechanism requires major technical capacity to be efficient. The need for regulating mechanisms, however, is even more urgent when the market is imperfect and underdeveloped. Another logical flaw inherent in the adjustment processes is that they aim to reduce the role of the state, but the state is needed in order to actively carry out these very processes.

Institutional Adjustment

The correct choice is undoubtedly to accept the structural adjustment's objectives, not only because the financial crisis obliges us to but also because they give our society the chance to repair some major pitfalls along the road to development.

Development requires a reformed and better administered state, which knows how to predict the impact of its actions and can program its investments according to a development plan rather than to the fluctuating and one sided criteria of the cooperation agencies. We need a state that can organize economic harmony among the social and political forces. This negotiated harmonization is necessary to more equitably distribute the costs and achievements of the adjustment, which is the only way to make it viable. We also need a private sector that finds more benefits than costs in the process, and will thus support it.

The lack of personnel sufficiently trained to carry out the public function, which is conceived of as an intervention to regulate the market economy without replacing private initiative, is a serious obstacle. For this reason, the financial agencies which know perfectly well that this is one of the main keys to development merit strong criticism for not insisting more on these deeper and unquestionably more complex aspects of structural transformation. These aspects could make way for a genuine structural adjustment program.

This inattention probably reflects their pragmatism. A country's structural changes cannot come from outside, yet when a country tries to implement them itself it runs smack up against the incapacity that these changes mean to resolve. The same thing happens when transforming an educational system, since the very teachers who must transform it were also trained by it.

A weak state, subject to contradictory pressures from the different power groups and unable to channel those pressures into a common project, cannot change by itself. Democratic institutions have an important role to play in this, but their role presumes an effective and coordinated administration that overrules traditional ministerial feudalism which in Nicaragua's case was strengthened during the Sandinista decade when quotas of power were distributed at the core of the party state.

Crisis of Political Power

After the 1990 elections, Nicaraguan history can be summarized by the dynamic of realigning the spinal column of political power. It had "slipped a disk" with the political division among the traditional power blocs: economic groups, government and armed forces.

An effort has been made to massage it back into shape through consensus at the top levels: an alliance between the modernizing fraction of the traditional oligarchy and the new Sandinista business class. But this therapy has not worked, because it is forcing Sandinistas to define themselves or divide. The appearance of a "co government" also puts a strain on the most rightwing vertebrae of power, particularly with regard to US support.

Putting a brace on this new backbone one made up of new social forces traditionally isolated from national leadership, such as the rural middle classes is an untested possibility. So far none of the upper echelons have fought for this idea. The main cause of confrontation, in fact, is the interests of the upper echelons themselves. Participation in the arenas of political power is a way to increase personal wealth, but the pie is too small for many different interest groups to get a slice.

Political instability and economic crisis reinforce each other, contributed to by a hierarchy of various factors. The crisis of political stability and expectations of order and security are currently at the top of the list. They economically immobilize the national and foreign capital potentially attracted by the investment opportunities. Land and labor are cheap in Nicaragua compared to other countries in the region, but the risks linked to social instability deter investment.

If there were political stability, the economy would grow even in the framework of the ESAF policies. It would grow despite the ESAF's pragmatism and even without dealing fully with the structural problems of Nicaragua's human capital, its public institutions, its labor market, its financial mediation system, its low level of technology generation or the ecological sustainability of its economic activity. The essential problem is that, with the ESAF now signed, this backbone of power still shows no signs of genuine realignment, so it cannot provide the basic operational norms of the political game and economic functioning. It does not have enough legitimacy with a critical mass of citizens to exercise effective authority and impose "normal" order, thus lowering the conflicts to a manageable and tolerable level.

Disintegration Predominates

The fact that this backbone of power is still not integrated means a vacuum of the necessary set of political, cultural, juridical, military and religious institutions that share an essential consensus and are organized with enough functional coherence that they can put order back in citizens' lives. The state is paralyzed by this lack of a vertex from which to impose a general logic of governmental principles and norms.

In this vacuum, Sandinistas committed to the broad sectors affected by the economic measures control sources of power that allow them to veto or distort the government's economic measures. But they lack the ability to design and apply any other set of measures. To a lesser degree, the other forces that contributed to UNO's electoral victory suffer from this same contradiction, although it does not have the same impact in their case since all the parties in UNO combined save the Liberals represent few social forces.

Alemán, Lacayo, Ortega

If the way out of the economic crisis and political instability implies creating a backbone of power, it becomes necessary to understand the dynamics that lean toward its configuration and those that tend to exclude it. This backbone begins to have the power to integrate and order the life of the citizenry only when consensus emerges around a person or party who crystallizes the aspirations of the majorities, and enough people confer on that person or party the ability to do what they hope for and want.

One example of this is what many imagine would be a government run by Managua mayor Arnoldo Alemán, a figure who has accumulated significant political capital in these four years. Many would give him the legitimacy to organize a strong regime if he were to politically smash the Sandinista and Chamorro forces in the elections.

But it is also possible that Minister of the Presidency Antonio Lacayo could win the support of the business elite for his decisiveness in going forward with the ESAF, backed by the big business organization COSEP. The multilateral lending agencies and the US Embassy would also support his project.

Although there is no consensus in Lacayo's group about how to deal with the "piñata," the Sandinistas did it in such a way that grassroots interests and those of people who took advantage of the situation are tied into the same legal framework. This has forced the government to try to untangle it in a slow administrative way, which is a source of great discontent. But the issue is slowly ceasing to be a polarizing factor, since most of the elites are now much more interested in strategically recovering their power, safety and status than in this fight. In this new climate, the mechanisms of revaluing the compensation bonds will probably suffice to isolate the more recalcitrant individuals whose property was confiscated.

Antonio Lacayo could possibly use this issue as a weapon in the negotiations to pressure Sandinista moderates to help isolate the "senseless" struggles of Daniel Ortega and the National Workers Front (FNT) since the FSLN's real or virtual division would make it more vulnerable. He could also pressure the army to maintain order and give clear signs of how far protest can legitimately go and still be tolerated.

Why is General Humberto Ortega not a potential leader of this backbone? The crisis of governability has left him in a poor position; he is a controversial figure and those who demand governability blame him for its absence. People perceive him as disliked by the US, as well as by other funders and the bosses who could give them jobs.

The Four Plot Lines

Four possible scripts emerge from this analysis of today's economic and political forces, some more probable than others. Our intention is not to make prognoses, an even more risky task in politics than in economics, but to help clarify the visible tendencies, in the hope that this will modify their course. The agricultural cycle is getting off to the same bad start as last year, but the country as a whole is moving into a pre electoral phase that makes this perhaps the last chance to improve its economic crisis.
Plot One: Lukewarm opposition to ESAF. In this script, the organized grassroots forces do not firmly oppose the application of the government's new economic program. The central element in this script is: more of the same. The tendencies experienced between 1990 and now would be prolonged without major changes and the inadequacies of the current consensus at the top would remain visible.

This is the script the government is betting on, although it harbors some uncertainties. In its favorite version, repression would be unnecessary, either because the population is tired or because the FSLN would lack the strength to call or even abet such protests. The support for Lacayo's administration would be enough to make it unnecessary to issue this coup de grace to the wounded bull. The consensus that would emerge out of this would not be participatory, but rather totally passive.

The economy would grow because a small group of privileged business interests is enough to create the impression that things are on the move. National business would see a more secure future, since rural banditry would be contained, even if not wiped out. This would encourage the largest capitalists to risk investing in production, which would also attract foreign investment. Over the long haul, the dynamism of these big companies would improve the setting for small and medium production.

In such a case, the results of the program could be encouraging enough to get the government re elected in 1996. That does not mean that the indicators will be impressive, probably far from it, but even a timid turn around would allow the government to argue in its campaign speeches that "our valiant administration has proven that there is light at the end of the tunnel. If re elected, we can reach that light."
Plot Two: Violent opposition to ESAF. The government's wager could be a losing one if the expected narrow growth margins do not materialize and the political situation grows even tenser. In this script, the application of the ESAF program would increase economic crime in the rural areas and spark uncontrollable protests by the FNT unions, forcing the government to make some concessions. The FSLN would head up these negotiations to avoid losing its electoral base, but no definitive solutions would be reached. It would not use the situation to create total chaos, since that would go against its own business interests.

The elites and middle classes would become convinced that the government is not putting a real stop to the causes of instability. The indirect effects of social agitation and spontaneous rural violence even if the potential for large scale social convulsion remains latent would put a halt to business recovery and the arrival of foreign capital. This would increase unemployment and social exclusion which are inadequately compensated for in the ESAF program even more. Everyone would become fearful of even greater chaos and skeptical of any harmonious way out of the mess.

This would erode the government without improving the FSLN's popularity, thus opening the way for Arnoldo Alemán's election. The classic fascist elements of his self projection law and order, populism, an essentially anti oligarchic party base, vitriolic anti communism and effective (if corrupt) government are already increasing his popularity. A majority would see him as their savior, since he is so outspokenly opposed to both the FSLN and Violeta Chamorro's weak and chaotic government.

The risk of this script prevailing is great, even if grassroots protest does not grow significantly, because betting on big private domestic and/or foreign investments is simply to bet on instability. The fragility of the country's productive base requires diversifying activities and generalizing technical and social activities that do not undermine environmentally sustainable growth. Both of these objectives are murky to the speculative and retrograde mentalities of much of Nicaragua's business class and to the ecologically insensitive transnational companies.

Plot Three: Government repression of opposition. The chaotic script above could get even worse. If grassroots urban protests and rural banditry reached a critical level, the government would be obliged to take repressive measures to impose order, hoping that the elites, the middle class and even many of the poor want order, governability and strong leadership more than anything else. A sizable part of the silent Sandinista sympathizers perhaps unconsciously prefer this and would entrust this solution to Antonio Lacayo, preferring it to Arnoldo Alemán's revanchism.

Army officers would be forced to back Lacayo because he would have strong support from the elites, the Church, the international community and multilateral funders, who have probably not demanded further military budget cuts, despite their technical necessity, precisely to have a lever in just such an eventuality.

The government would have even more reason to respond with repression if it calculates that the Sandinista union protests could be easily broken. The "street" Sandinistas are tired, and not particularly feisty anymore, and the majority would back off at the first sign of repression, knowing they would be offered something and have no possibility of total victory. Antonio Lacayo could strengthen his hand even more with the traditional anti Sandinista forces by removing General Ortega before his retirement date, thus giving clear signals that his control over the army is at an end.

This script could also possibly be played out as a joint venture between the government and some highly placed army officers. The latter could think that their security around the issue of military autonomy and the piñata would prosper more by participating in "saving the country" than by continuing their commitment to protect organized grassroots Sandinistas. With this attitude, they would win prestige and a closer relationship with traditional capital and other current adversary forces.

The army officer class is part of the Sandinista current that sees no alternative to the ESAF and the government program, or to the institutional order that it is creating. In this situation, the army would support the solution that is best for big business. Lacayo's approaches to friends and relatives in the top army levels could facilitate this script, since they would seriously block Alemán's road.

Plot Four: All forces hammer out a consensus. In this script, clearly the most utopian one, the major political forces pro Chamorro government leaders, the army, the various FSLN currents and even the Liberal parties negotiate a pact for the physical and social reconstruction of the country. The support of the middle sectors would be won through economic policies and programs that benefit them and by giving more recognition to the organizations that represent their interests and cultures. The reconstruction package would thus have to involve the socioeconomic integration of medium sized rural and urban productive sectors not currently represented in the national institutions, and provide jobs and social services to the disadvantaged sectors.

The integration of this mass of citizens, social sectors and groups or entities of power, would necessarily modify substantially what was agreed to with the financial agencies, although within the neoliberal framework already established. That framework would be used to weaken the monopolies (sugar, agricultural inputs, etc.), and foreign financing would be used to direct credit far less selectively. An active import duty policy would be established that favors the majority of producers by declaring temporary exceptions. Agreements would be negotiated on public and private investment programs to make more efficient use of foreign aid, and on the implementation of a bolder structural change program, but with more compensatory elements for these same disadvantaged sectors.

There is no reason why this script would weaken the leadership of the current government higher ups or opposition parties. They could be given a role that goes beyond the narrow oligarchic circle and the newly rich who want to be inside of it.

The initiatives that would open the way to this script would have to start from an appreciation of the rural and urban middle sectors' economic potential, and the conviction that they would give a new bill of health to the national political system. They would strengthen the role of the representative mechanisms, particularly the National Assembly, as a counterbalance to the executive branch's autocratic logic.

At issue is removing the elitist taint of public administration, above all in its symbols and appearances. This would reduce the tensions with middle class parties and social forces: Christians, Liberals, the Catholic Church and the former Resistance. Leaders from the interior of the country, from small and medium sized business, manufacturing and farming organizations, as well as members of the professional circles would have to be included in high governmental administration posts. Consensus about all this would have to be reached with big business and the traditional elites, but since all demand stability and governability they would perhaps recognize that this is the best way to achieve it.

And the FSLN Congress?

Given the FSLN's weight in national life, it is important to ask how the results of the Sandinista Congress would affect one or another of these scripts and how a renewed FSLN might contribute to building this consensus script, recognizing that the majority of party members and base level Sandinista sympathizers probably belong to the sizable group of those in neither current.

Whatever the results of the Congress, the FSLN will necessarily influence the course of the future toward one or another of these scripts. It will do so whether the current favoring consensus at the top levels (script 1) wins or the radical current (script 2) wins, or because the party leadership and army come together to support the repressive way out (script 3). FSLN support for the consensual approach (script 4) could be as utopian as the script itself, since the party is going through the same contradictions as Nicaraguan society as a whole.

Medium Term Growth?

Independent of what happens in the FSLN Congress and of the script that gets played out from here to 1996, it must be kept in mind that the country's ecological, technical, institutional and cultural limitations to development impose serious restrictions in the medium run. The social and political forces that are genuinely worried about the nation, those who want to maintain their political capital in the future and not only their status in the short run, should be concerned about these limitations.

The government has based its hopes for economic growth from the ESAF framework on the wealthiest business class and on foreign capital. Yet that framework lacks defined sectoral actions to orient economic efforts and investments. The country's comparative advantages are presumed to lie in its ecological wealth as well as its low land and labor costs, yet any economic growth in the coming years may well not go beyond extractive activities.

Fishing, for example, is now only extractive, even though shrimp farming could be a reproductive activity. The problem is that it is cheaper to capture shrimp larvae from Nicaragua's mangrove swamps thus destroying this habitat than to raise them. Lumbering could also be a cultivation project instead of simple extraction if there was enough interest in it and a favorable legal framework. Cattle ranching, which has traditionally been extensive and very destructive, will go on being so until the entire agricultural frontier and swamps are gone, unless programs are created to stabilize rural property in the country's interior regions and stimulate private reforestation efforts on the Caribbean side of the country.

Coffee will continue to be an interesting and employment generating crop, unlike peanuts, which will become totally mechanized and ruin soil fertility unless managed within a crop rotation scheme that forces growers to sacrifice some of their short term profits to protect possible future income. All this is put in doubt by the speculative and short term strategy of many large capitalists.

In industry, Nicaragua's only advantage outside of agroindustrializing lumber and leather will be the maquiladora plants, which leave very little income in the country and only come in numbers if the norms for repatriating profits are favorable and there are enough jobless unskilled workers to replace those hired first in case of strikes.

National or foreign investments that could be made in foodstuffs, leatherworking or furniture manufacturing face the absence of a sectoral policy and the tiny national market. Only the construction industry appears able to move many other activities and generate income, but it needs a long term financing policy for housing and a more consistent and structured public investment program.

A Risky Model

Little thought is being given to forming and "repairing" human capital, because education and health are directly affected by the contractive policy, which only plans to stress basic levels. This policy does not take into account that health and education are complex systems that need a set of balanced actions at all levels. If this is not done, future development is seriously compromised, as the World Bank proclaimed in its most recent report. By stressing only the most basic levels for the population as a whole, both in its living conditions and its incomes, the economic scheme's future sustainability is put at serious risk in exchange for an immediate growth that is not even guaranteed.

The ability of Nicaragua's institutions and systems of norms and values to promote development is seriously deficient. But destroying them would only create a social system even more dominated by the "law of the jungle." What is needed is to strengthen and transform them into a system based more on the fundamental notion of public service.

Utopia or Necessity?

Structural transformation and democratic consensus must go deeper. Dealing with these two challenges is not an easy or quick task. It is worth considering which of the possible scripts really tends to improve the country's structural country and which only tend to sink it deeper.

A careful analysis of the country's economic and political situation shows that the space for the structural changes that are desirable and necessary for sustainable development is very small. This is not because there is no way out of the economic situation; on the contrary, many favorable perspectives can be glimpsed and plans could be proposed to move toward them.

The serious limitations are in the social actors and institutions that should be promoting them. For those in the upper echelons, doing so goes against their short term interests; the productive middle classes lack the political capital necessary to impose or even propose them, and the institutions are too weak and inefficient to do so.

But even if it sounds utopian, it is urgent and necessary to seek all social mechanisms possible to go forward together on the road of structural change, promoting greater administrative efficiency and not only fiscal efficiency and a reduced state. That road should promote productive development, not just financial liberation. It should support the non monopolic private sector, not just privatization. It should advance the active promotion of exports and not only a lifting of market protection. It should train human resources, not just make the labor market more flexible.

All these tasks are much more complex than the ones a traditional neoliberal adjustment program proposes, but they are not more utopian. All points of arrival to the future are possible. Utopia is nothing other than wanting to reach a point in the future starting from one in the present that does not exist. It is true that we do not have much institutional and social capacity to make structural changes in today's Nicaragua. But, by the same token, it is utopian to think that today's Nicaragua has a private sector that will behave in the best possible way to guarantee the maximum satisfaction of everyone's interests. If competition exists, space should be created for these two utopias to match strengths and show which one best serves the country.


On April 16, Violeta Chamorro signed a Letter of Intent with the International Monetary Fund to apply the ESAF accord in Nicaragua. This accord strictly conditions the entire national economy until mid 1997, and in fact hands the country's economic sovereignty over to the key multilateral financial institutions.

Among the elements imposed by the ESAF, the most debated ones are the firing of 13,500 state workers between 1994 and 1996, elimination of the constitutional mandate that 6% of the national budget be earmarked for the universities, and the executive branch commitment to the IMF and World Bank to veto or substantially modify certain legislation. Among those to be vetoed would be several articles of the revised Labor Code, currently being debated in the National Assembly.

President Chamorro tried theatrically and only right before signing the ESAF to get all national sectors to agree to its
content. She created a pluralist technical commission to study the accord, but failed to give it sufficient information, then answered its criticisms by saying that the ESAF negotiations had gone on for over a year and that what had been agreed to could not be revised in a matter of days. In its massive propaganda campaign after signing the Letter of Intent, the Chamorro government insisted that not signing ESAF would be "a return to the Sandinista war economy."
Both FSLN currents opposed the accord's contents and denounced its future consequences. "We will never accept a national budget drawn up in the World Bank's offices ," declared Sergio Ramírez, head of the Sandinista legislative bench, in response to the ESAF clause insisting that the World Bank review Nicaragua's public investment program. FSLN general secretary Daniel Ortega said that the contents of ESAF "would make Nicaragua socially and economically non viable."

We import more than we export. There is general consensus about the country's financial imbalances and their clearest expression: the growing trade gap with the rest of the world. But there is less agreement about their causes. Most underdeveloped countries export much less than they import, but Nicaragua's figures are much more dramatic, particularly in per capita terms.

Nicaragua has at least one advantage: an abundance of all kinds of natural resources relative to population size. A fundamental criterion for evaluating any solution to the crisis is whether these resources will be used in a way that guarantees their reproduction. If the lumber, minerals and fish are irrationally exploited, a small economic "boom" will result, but nothing more, ever. Nicaragua will have wasted its last shot.

We consume more than we produce. The figures are eloquent. Between 1990 and 1993, Nicaragua annually consumed $135 million more than it produced and invested $315 million most of which was financed with foreign resources. The sum of the two is an average $450 million more imported than exported each year.

We depend on foreign aid. The resources used to finance this trade deficit came almost entirely from bilateral and multilateral aid, either donated or loaned under very favorable conditions. Private capital's contribution has generally been negative. In fact, there has been capital flight, although that tendency reversed itself in 1993, leaving an almost null balance over the 1990 93 period as a whole.

In those four years, Nicaragua received an average $810 million a year, of which $165 million represents a reprogramming of the foreign debt. Of the remaining $645 million in effective aid,
$230 million went to service that debt, leaving $415 million to finance the $450 million excess of imports over exports. (The other $35 million came out of hard currency reserves.)
We have an unpayable debt. Nicaragua's foreign debt has grown about $800 million a year due just to accumulated arrears in debt service payments. This dramatic tendency of the debt to grow all by itself, rooted in the country's past inability to make all of its interest payments, is responsible for 15 cents of every dollar Nicaragua owes. On top of this is almost $200 million in interests calculated annually on the previous year's arrears.

We suffer unequal exchange terms. What Nicaragua sells on the world market is worth less and less, while prices for what we buy continue to climb. The steady drop in prices for our exports since 1980 reached its worst point in the 1990 93 period, with annual losses of some $70 million 25% of our exported goods.

We are like the rock of Sisyphus. On top of all this, Nicaragua has suffered natural catastrophes, cyclical destructions and wars. To this must be added the deterioration of its physical plant due to lack of maintenance and the fact that a large part of the revolution's investment effort incorrectly concentrated on inappropriate large scale projects.

We are no longer an "exceptional" case. An even more critical international future looms large on Nicaragua's horizon: the generous foreign aid we received under varying conditions between 1990 and 1993 will not be repeated. It was political aid to "consolidate democracy," and its main achievement was to permit the execution of a stabilization program to end hyperinflation. These aid levels will not be maintained, particularly if no profound transformations are made to stop the situation from deteriorating further. We are thus ever more dependent on foreign aid medicine whose dosage will continue to be cut.


Print text   

Send text

<< Previous   Next >>


Nicaragua's Caribbean Coast: New Government, Old Problems

The FSLN Congress: What's at Stake

The Economic Curtains UP: What's the Political Play?

El Salvador
New, Complex Challenges Every Day

The Rich Don't Want to Pay Taxes


The Goverment Turns on the Church of the Poor
Envío a monthly magazine of analysis on Central America
GüeGüe: Web Hosting and Development