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Central American University - UCA  
  Number 109 | Agosto 1990
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Nicaragua

After 100 Days: Same Economic Script, New Lead Actors

Envío team

In its first hundred days, President Violeta Chamorro's administration racked up a major success and a major failure. Its success was to demobilize the contras and formally end the war; its failure was to aggravate the country's economic crisis and social instability. The expectations created by the new government of economic improvement in the first 100 days thanks to a “peace dividend” and renewed US aid have been dashed.

Central Bank president Francisco Mayorga, chief architect of the government's economic plan, blames the economic and social deterioration on both an “economic ambush” laid by the Sandinista government in its last months in office and an equally premeditated “sabotage” of the economic program perpetrated by the Sandinista unions in two national strikes.

The Sandinistas argue that the further deterioration of the crisis is due to the government's failure to base its new economic policy on a negotiated accord among all social sectors. Instead, it has unilaterally decided to go for rapid economic stabilization, and impose its high costs mainly on the popular sectors.

Our first thesis shares an element of each view. We agree that the crisis was aggravated by the effects of “freezing” the Sandinista government’s own economic stabilization plan during the first four months of the year. But as for malice aforethought, even Minister of the Presidency Antonio Lacayo acknowledged that no government in the world would continue applying such unpopular measures as devaluations in the final lap of an election campaign, or waste precious political capital doing so once it had lost the elections. We also agree, however, that the new government has been unable or unwilling to translate the end of the war and the US economic blockade, as well as the renewal of US aid, into immediate improvements of the population's living standards. It is not viable to attempt such a drastic and quick reduction of the fiscal deficit, given its high social and political costs, much less to exacerbate the situation by a confrontational policy toward the trade union movement. We would add the late and inadequate foreign aid disbursements as a third factor adding insult as well as injury.

Our second thesis is that UNO's economic plan—both its stabilization scheme and its medium-range reactivation strategy—is, in fact, a continuation of that implemented by the FSLN the past two years. Both aim at reducing inflation by contracting the economy and, for both, the centerpiece of economic reactivation is the reintegration of Nicaragua's economy into the world market, placing their highest bets on the agroexport sector.

The two programs differ primarily in how to distribute the social costs of the contraction and the productive role of the state. They are significant differences.

Because of this essential continuity, the first hundred days of the UNO government's economic policy cannot be analyzed without reflecting on the Sandinista government's final thousand days. We divide our analysis of this policy and its results into two parts. The first looks at the economy's overall behavior in the transition period as well as since UNO took office. The second discusses the adjustment plan's short- and medium-term impact on the urban and rural social and productive sectors. In a final section, we venture possible scenarios for the near future.

What's the economy doing?

By December 1989 the results achieved by the stabilization measures implemented by the Sandinista government since February 1988 showed advances in both the anti-inflationary struggle and recovery of the export sector. After an explosion that led to a 33,600% annual inflation rate in 1988, inflation dropped to 1,689% in 1989. Even more notable was the reactivation of the export sector, which translated into a 5.2% export growth in 1989 over 1987, following a 16.4% drop in 1988.

The plan, however, had high economic and social costs. The drop in inflation was mainly due to the imposition of a drastic austerity plan within the government itself. In 1989, government spending was reduced to less than half its 1987 level—from $172 million to only $81 million. This was achieved by cutting both costs and personnel in the army and Ministry of the Interior, as well as by reducing or fusing various ministries and state institutions. These two measures eliminated some 8,000 civilian and 13,000 military jobs, increasing unemployment from 24.4% in 1987 to 32.7% in 1989. The country slid into a recession even greater than in the worst years of the war; domestic production fell more than 10% in 1988 and 3% in 1989. In addition, workers' average real wages shrank 40% between December 1987 and December 1989.

FSLN suspends stabilization

These economic and social costs, in turn, had unquestionable political repercussions. In January 1990, the FSLN abandoned its policy of mini-devaluations for the duration of the election campaign. The FSLN's electoral defeat and the inability of the UNO economic team to reach agreement with its Sandinista counterpart on economic measures for the transition period led the outgoing government to also shelve the other harsh anti-inflationary measures. By doing so, many of the pre-1988 exchange rate, monetary and fiscal imbalances were reproduced.

* The official exchange rate remained virtually unchanged between January and April 1990, interrupting the cycle of weekly mini-devaluations that had acted as an incentive to encourage exports. Therefore, the gap between the official foreign exchange market and the black market price spread to more than 140% by April. This in turn led to shrinkage of the incomes producers were receiving for their export harvests, flourishing speculation in money and exchange losses for the Central Bank.

* The outgoing government decreed substantial salary increases in response to a flurry of strikes in March and April, doubling average salaries and tripling those of some public employee sectors. This was the decisive factor in the doubling of government spending between December 1989 and April 1990. The central government's sources of income were not enough to finance this increase; in April, they barely covered a third of total spending. The remainder was covered by Central Bank financing (see table 5).

* The Central Bank also had to finance increased subsidies to the public service companies—urban transport, water, electricity and telephones—since their rates were frozen at the beginning of the year.

* The Sandinista government pardoned or generously restructured the debts contracted by the productive and service sectors, thus decapitalizing the National Financial System. This was followed by a strong demand for credits for the new agricultural cycle and for industrial and commercial activities. This demand on the National Financial System also had to be financed by the Central Bank.

The extraordinary demand for financing by the central government, public utilities and National Financing System forced the Central Bank to print money not backed by production. This was the straw that broke the back of the monetary discipline successfully implemented during 1989, thus refueling inflation.

Do what in 100 days?

During the electoral campaign, UNO economic adviser Francisco Mayorga had promised that inflation would be halted in the first 100 days of UNO government. Even after taking office the new government initially believed that it would be feasible to overcome the imbalances that had occurred and achieve economic stabilization in short order. Its confidence was based on the political support UNO had received in the elections and the US aid that would supposedly allow it to execute drastic measures, finance the fiscal and financial deficit and thus rapidly reduce inflation.

The new government's economic stabilization plan, presented to a conference of donor countries in Rome in June, had three clearly defined phases. The first, covering the first 100 days, would be dedicated to correcting the strong imbalances that had built up. During this period, a new currency (the córdoba oro) would be introduced—initially only as a reference point for the financial system—at a 1:1 parity with the dollar. The second phase, which would continue until the end of the year, included the gradual introduction of the córdoba oro into all economic transactions in the country. Finally, once the necessary fiscal and monetary discipline had been guaranteed, the old córdoba would be withdrawn from circulation, fully substituted by the new money.

The Exchange Rate Gap. The exchange rate disequilibrium has been rapidly corrected through frequent mini-devaluations aimed at closing the gap between the official exchange rate and that of the black market.



Over the first 100 days the córdoba was devalued more than 100% a month, reducing the gap to some 25%; at the moment of the UNO inauguration it was more than 140%.
The frequent mini-devaluations, particularly the first devaluation of 100% right after UNO took office, is explained in part by the government's urgency to stimulate the export sector, linchpin of its economic reactivation plan. The cotton producers, whose last harvest was still pending payment, were the major beneficiaries of the strong devaluations.



These twice-weekly mini-devaluations, however, have obviously had a powerful and uneven effect on the economy: while the prices of imported products such as gasoline have hit the sky, salaries lag far behind. The populace has felt the blow even more because the new government has also eliminated the subsidized prices of medicines, electricity, water, telephones and urban transport in place during the Sandinista government.

The Fiscal Gap. The elimination of these subsidies is part of the UNO strategy to reduce government spending and thus the budget deficit. In the plan presented in Rome, the new government estimated that it could cut government costs and reduce the deficit to the same levels achieved by the Sandinista government in 1989, when income covered 90% of spending. The Rome plan calculated that, upon reaching this goal, the fiscal deficit would be approximately $10 million a month, which could be financed with foreign aid. Nonetheless, the fiscal deficit has not been significantly reduced over the first 100 days, and is the key difficulty with the Rome plan.

Various factors have prevented its reduction, among them continued military spending, trade union pressure from public employees, additional demands for resources to form the new government and reduced tax income due to the high inflation levels. Military spending has not yet been drastically cut due to delays in contra demobilization and in formulating job alternatives for military personnel who will be laid off. The reduction and restructuring of the army will not be completed until 1991.

Civilian spending was to have been reduced through massive layoffs and by holding salaries far below inflation. But the government's inability to either neutralize or negotiate with the union movement resulted in confrontations with public employees; two national strikes blocked the possibility of significantly reducing the state bureaucracy and prevented an even greater deterioration of real salaries.



New demands on budget resources included the creation of state institutions such as the Institute of Repatriation and another for the Atlantic Coast, as well as far larger salaries to top government officials than those earned by their Sandinista predecessors.

The government's financial problems have also been aggravated by the negative impact of inflation on its sources of income. To avoid even greater losses, the government de facto decreed the "dollarization” of taxes: as of July they are being charged in córdobas oro, payable in old córdobas at the official dollar exchange rate (supposedly the same as the córdoba oro) on the day of payment. The same measure has been applied to payment of public services such as water, electricity and telephones.

During these first 100 days, government income did not cover even half of its spending, as can be seen in table 4.



As a consequence, the financing needs for the fiscal deficit far exceeded the $10 million ceiling that the plan had calculated could be covered by foreign aid, and the Central Bank had to print more money, fueling inflationary pressures even more.



The aid that the new government has received from the US and Europe has been used only minimally to support the stabilization plan, since most of the aid that has been approved is linked to specific projects that have not yet been initiated. The $300 million US package includes only $73 million for balance of payments support. Since this is not sufficient to cover the fiscal and financial deficits, the government has opted to continue its painful stabilization plan “without anesthesia,” reserving the few foreign resources it has in hand to back the introduction of the new córdoba oro.

The Financial Gap. The credit policy for the productive and service sectors was substantially modified by a government decree that all new credits would be charged in córdobas oro at positive interest rates. In practice, this has meant dollarizing loans and substantially increasing in interest rates, making Nicaragua the country with the highest interest rates in Central America following a decade of subsidized credit. (During most of the Sandinista administration, loans were not indexed to inflation, and thus shrank to virtually nothing by the time of payment.)

By counteracting the negative effects of inflation, this change in the credit policy has prevented the short-term decapitalizing of the National Financial System. But it will surely be at the cost of many debtors in the productive and service sectors; unable to pay, a significant proportion will be forced into bankruptcy.

Production Results. The first production results of the UNO policy are largely linked to factors originating in the economy’s overall behavior during the two years of Sandinista adjustments and in the conditions prevailing in the first four months of 1990.

In agriculture, most notable is a 32% increase in cotton planted over 1989 (110,000 acres compared to 85,000), although this is still far below the 170,000 acres projected by UNO economists. Despite the government's interest in this crop, given its capacity to earn hard currency in a short period and the fact that the world market price is going up, it has structural profitability problems (depleted soil, increasing need for imported pesticides, etc.) that act as a brake on expanding the area planted. Even providing a subsidy to cotton growers through preferential interest rates and returning taxes on petroleum at the end of the harvest—to say nothing of renting state lands to them—were insufficient motivations to get them to plant more.

In general, the area planted with basic grains fell. Corn, mainly planted only once a year, suffered a 20% drop and non-irrigated rice fell by half, due to a drought, the low prices both crops earned last year and caution toward the new credit policy. The area sown with beans dropped 30%, although the bulk of this crop is planted in late summer, when Nicaragua experiences a second rainy period.

The urban population's increased purchasing power during the first half of the year, due to the substantial salary increases conceded by the outgoing government, encouraged a relative reactivation of industrial dairy, pig and chicken production. Industrial manufacturing experienced a 6% reactivation during the first half of the year compared to the same period of 1989, also in response to this increased urban demand.

In synthesis, the new government has thus far advanced unevenly in correcting the macroeconomic imbalances left by the Sandinista government, and its successes were strongly influenced by the impetus that same government had established. While UNO's monetary and financial policies have been quite successful in reaching their set objectives, the hardest nut to crack has been the fiscal deficit. At the same time, foreign aid has been insufficient to compensate for the continued high level of fiscal spending. All this has limited the effectiveness of the stabilization efforts.

By attempting such rapid stabilization, the UNO government relied too much on the national and international political support it received in the elections. It also far underestimated both the trade unions' ability to respond and the possibilities the US had for applying political pressure through control over the flow of aid. Only the relative immobility of the peasant and informal sectors has limited the government's political deterioration.

So what’s the plan?

The goal of UNO's “100-day” economic stabilization plan is to lay the foundation for a “new” economic reactivation model, based on the agroexport sector and the economy's reintegration into the world market. Both external and internal conditions now favor this development model.

External conditions. The main advantages at the international level are the lifting of the US commercial embargo and the new government's access to multilateral financing.

With the lifting of the embargo, Nicaraguan exports are again welcome in their "natural" market. This means better prices for traditional export products—sugar, beef, tobacco and bananas—as well as the possibility of developing nontraditional exports. The end of the embargo also lowers the cost of US machinery and production inputs, which the Sandinistas had to import through "triangular" trade with third countries, or substitute with European products at higher cost.

Improved relations with the United States also allows Nicaragua to again turn to multilateral lending agencies—the World Bank, Inter-American Development Bank (IDB) and International Monetary Fund (IMF)—for financing. These agencies have now joined forces to promote this agroexport development strategy throughout the Third World.

Internal conditions. At the domestic level, the favorable conditions are the end of the war and the advances in economic restructuring, both of which are due to the prior work of the Sandinista government.

The end of the war and demobilization of the contras permits a recovery of agricultural lands, abandoned in some cases since 1983, and a significant increase in the rural labor force, particularly in the central part of the country.

The Sandinista government laid the groundwork through its own economic adjustment and restructuring program, which generated an incipient "market culture" after eight years of subsidies. The new government is thus saved the costs the Sandinista government had to pay for its efforts to reinsert the economy into the world market.

The private sector—fulcrum of reactivation?

UNO's program also envisions reaping advantages for economic reactivation merely by re-privatizing the state agricultural, industrial and service enterprises, returning the leadership role to the private entrepreneurial sector. In this aspect, the UNO model differs significantly from that of the Sandinista government, which viewed the state sector as the centerpiece of economic reactivation, buttressed through an alliance it hoped to reach with the big capitalists by finally accepting “market rules of the game.”

The focus of this alliance was to have been bourgeois participation in economic reactivation. The Sandinista government hoped to encourage them to reactivate their capital in exchange for property ownership guarantees and the private re-privatization of certain areas of the economy, for example the state monopoly of foreign commerce would ease up to encourage private-sector export of nontraditional products and some agricultural and industrial production units would be returned to private hands.

Contract the domestic market and compensate the losers?

In both the UNO and Sandinista models, the emphasis on exports has as a counterpart the contraction of the domestic market, and thus the stagnation of the bulk of small industry, urban cottage production and peasant production for domestic consumption. During the implementation of the Sandinista government's adjustment plan, these sectors had access to subsidies that, although easing the negative effects of the new rules of the game, did not in themselves create much possibility for them to adapt to the new economic context. The subsidies included pardoning and restructuring peasant debts, tax exemptions for small industry and the sale of vehicles at subsidized prices to small-scale transporters.

To compensate the urban popular sectors somewhat for the drastic income reductions, the Sandinista government absorbed part of the cost of their basic consumption items (public transportation, public utilities, medicines, basic foodstuffs). These protection measures for the most vulnerable population also constituted indirect subsidies to large private and state producers, in that they took some of the burden off the producers for the cost of reproducing their labor force, thus increasing their profit margins.

These mechanisms for transferring the costs of adjustment from the shoulders of the country's entrepreneurial sectors to those of the rest of society only added to the advantages in obtaining subsidies that some production centers, whether state or private, already had as monopolies or oligopolies. For example, the state sugar monopoly subsidized its fluctuating export income by increasing the price of lower-quality sugar sold on the domestic market.

These first hundred days have already shown that UNO's economic policy aims at eliminating many of these subsidies. It appears that financial help will only be given to a minority among these sectors, generally the ones already most well off. To compensate for the high social costs of the adjustment, the plan has special programs for the creation of temporary employment for the most impoverished sectors.

Central Americanize Nicaragua

Despite these major differences in who the model’s subjects—and objects—are to be, both lead to the "Central Americanization" of Nicaragua along the lines of the stabilization and structural adjustment programs promoted by the IMF and World Bank in the other Central American countries. This will be even more favorable for UNO than it was for the FSLN.

The Sandinista shift toward this regionalization occurred in 1988, when the possibilities of continuing its economic survival policy based on subsidizing military defense, production, consumption and investment were disappearing. The symptoms of this were growing inflation, shrinking foreign aid and export levels, and a gross domestic product that had been on the decline for the previous four consecutive years.

The FSLN had three economic options at that moment: Cubanization, Vietnamization or Central Americanization. The first meant strengthening the state's role as the sole administrator of the economy, what President Ortega called a "war economy.” The second consisted of radicalizing the changes in the economic structure by redistributing resources to favor the grassroots sectors while introducing market mechanisms as Vietnam has done in recent ears. The third was to modify the mixed economy scheme by basing it on an alliance with the bourgeoisie and much more free rein for market mechanisms.

The FSLN adopted this third option with the hope of improving its political legitimacy in the regional negotiations, finding new sources of foreign financing and persuading the United States to lift its commercial embargo. Opting for this model substantially modified the country's economic structure and reactivated a rapid process of social differentiation, as demonstrated below.

What changes hath been wrought?

The impact of the Sandinista government's adjustments on the productive structure is characterized in general terms by notable export growth as production for the domestic market stagnated or shrank. The agricultural sector in general was revitalized while national industry entered its death throes. The urban informal sector managed to survive thanks to "exporting” many of its members to the United States as a labor force.

These changes took place against the backdrop of a recomposition of relative prices, in which the devaluations improved export prices and made imports costlier, while the elimination of multiple exchange rates ended the subsidized prices for certain goods. This improved the assignment of resources and limited the previous squandering on imported consumer goods. No longer able to rely on access to subsidies, economic actors were forced to be more efficient in accord with national interests and the demands of the international market.

The “modern” industrialists and farmers accustomed to producing for a protected domestic market lost their economic viability; those able to compete in the Central American market or to adapt to the new relative price structure were saved from extinction. The bulk of the small and medium rural or urban producers who had previously benefited from a subsidy for uncompetitive activities and/or produced for the domestic market faced an even stronger recession.

The agriculture sector

The tendencies observed in 1988-89 indicate a growth in the agricultural gross domestic product, based mainly on the reactivation of agroexports—coffee, bananas, tobacco, beef, sugar and sesame—with the last two being the biggest growth items. Cotton was the exception.

Products for domestic consumption stagnated somewhat, as in the case of corn and beans, or contracted, as occurred with industrial sorghum, eggs, chickens and milk. With the leveling of exchange rates and the drastic reduction of subsidies for production inputs and capital goods, the first signs of reversal appeared in the technical development model chosen in the first eight years. For an important sector of producers, the "green revolution" option, with its high use of chemicals, selected seed varieties and mechanization, suddenly represented economic costs—hidden during the previous period—that were incompatible with the competition promoted by opening up the foreign market.

One of the adjustments experienced by agriculture was thus translated into an improvement in that sector's trade balance. For the first time in five years, the 1989 cycle did not show a deficit, thanks to more efficient resource use. That year, for example, this sector's use of production inputs and other imported components fell drastically compared to 1988—agrochemicals and seeds by almost 40% and veterinary products by more than 86%.

Agriculture tended to switch to labor-intensive techniques and crops, and to substitute imported technology with national resources. The extremely low cost of labor and its increasing abundance pushed large growers to use workers wherever possible, instead of relying on pricey imported technology (abandoning the use of cotton harvesters, for example). The profitability of mechanization was only assured in those production units able to rapidly rationalize their use or switch part of their crop. In other words, only through increasing the yield of irrigated rice or converting to export crops—such as melons, for example—could the large rice growers for national consumption stay afloat. This explains why national rice production in recent years has been based more on dry rice than on irrigated rice produced on large mechanized farms.

On the other hand, many of the large sorghum or cotton growers, discouraged by the high cost of their import-dependent modern technology, could not make this leap, and instead drastically reduced the areas planted.

The new economic policies also led to adjustments in the geographic and social center of national accumulation. The country's potential for economic recovery moved from the large modern production structures of the Pacific, to which the FSLN had pegged its original development model, toward the peasantry and the interior, where production depended more on family labor and the use of local resources.

Accompanied by the winding down of the war, this adjustment allowed the old latifundistas of the north and central part of the country and the agricultural frontier area to relive the boom of the 1960s and 70s. These large producers, based in livestock and coffee, even began to recover their role as the country's granary because they could grow basic grains at lower cost.

Given the crisis in cotton and sorghum, on the other hand, the Pacific region tended to move into cattle and replaced basic grains—particularly corn—with more advantageous crops such as root vegetables, bananas and plantains, sesame and peanuts.

The industrial sector

The behavior of the industrial sector during the stabilization and adjustment period was clearly recessive; 1989 registered the lowest levels of industrial production in the entire revolutionary period. The depression in the domestic market and cost hikes due to the dependency of manufacturing on imported production, inputs and machinery caused contraction.

The majority of these operations were also unable to compete in the Central American market and thus compensate for the domestic market contraction. Even in the national market, an invasion of American products has been shoving the lower-quality, higher-priced Nicaraguan ones out.

This uncompetitiveness originated in the decapitalization of industry during the 1980s, subsidized to produce basic consumption good without receiving any financing for technological improvement. In addition, the sources of raw materials and inputs during these years changed. Nicaraguan industry had to depend on credit lines from the socialist countries, which affected the quality, variety and cost of the final product.

The most acute case is the textile industry, originally destined for the Central American market. During the war years, it was used to make military uniforms and hospital wear; now it is bankrupt.

The branches that managed to survive the domestic market contraction and increase their export: to the Central American region are the chemical and metalworking industries. Both succeeded in retooling and maintained their Central American export market throughout the previous period; they thus had an existing base from which to build their sales.

Small manufacturing also contracted severely, given its dependence on the local market and poor product quality. This sector had already suffered a deep recession during the war years since it was bypassed in the allocation of scarce raw materials and inputs. As the war wound down, it found itself up against strong competition from the national and Central American business sector, even in the domestic market. In only four years, the number of licensed small workshops dropped by half, from 9,656 in 1984 to 4,979 in 1988.

This sector has the potential to adjust to the new economic context. Artisan shoe and furniture shops, even those making foods such as jelly and the like, have always had the capacity to export. But neither before nor after the adjustment did they ever receive any state support for design innovations or production technologies, much less the supply of materials.

New forms of social differentiation

The resurgence of social differentiation is a byproduct of the adjustment program. The framework for this evolutionary tendency of the different social sectors involved in production is made up of four factors: 1) their involvement in producing some good for export; 2) their relative dependence on imported technological components; 3) their relative dependence on subsidies and protection from competition during the pre-adjustment years; and 4) the relative flexibility of their productive structure.

The poor sectors with few resources, whose production of goods or services is aimed at the domestic market or was previously protected by subsidies and the lack of domestic or foreign competition, have experienced a strong recession. This translates into increased unemployment and impoverishment or migration to the United States. Similarly affected low-level state employees and unskilled industrial and agricultural workers have left as well. These sectors—which, with very few exceptions, had no short-term way to make use of export advantages or were affected by the contraction of domestic demand—were the hardest hit by the country's general economic recession.

The new economic policy has had a more varied impact on the better-situated small producers, part of the middle classes and the bourgeoisie. Those who could adapt to the relative price structure, make the shift without relying on the previous preferential assignment of resources and markets and increase or redirect their production to the foreign market have done quite well. Those whose productive structures were aimed at the recessive domestic market, or whose technologies were very dependent on imported resources and were not easily convertible, have found the new international market competition unbearable.

With this general background, we can see in more detail the differentiation processes occurring in the rural and urban areas.

In the countryside

The old social differentiation in the rural sector, which had been narrowing with the redistribution of lands from the bourgeoisie to the peasantry between 1984 and 1987, began to recur with the readjustment plan.

Permanent workers. At one end of the social spectrum, year-round workers on large haciendas, largely dependent on their salaries though they often work a small plot for food self- subsistence, have watched their real salaries decline. This has been even more marked in the Pacific, given the recession and growing unemployment there, than in country's central region, which is experiencing some recovery.

Poorest Peasants. Peasants with little or no land of their own are complementing their minuscule production as seasonal pickers or with artisan manufacturing or service activities, hooking into the urban informal sector. In short, one can observe a return to pre-revolutionary tendencies.

Their economic situation rapidly deteriorated after the relative improvement they experienced in the first years of the revolution—thanks mainly to credit subsidies, state control of food prices and distribution and the extension of health and education services. The freezing of the agrarian reform, decreasing remuneration for both their labor as salaried farm workers and their small-scale production of basic grains, and the recession in the urban informal sector, which limits their occasional complementary incomes, leaves those with no access to land only grim alternatives. They can reestablish or strengthen their dependent relations with higher strata, emphasize their role as semi-proletarians, become paupers and/or become underemployed.

Peasants producing for domestic consumption. These produce small, but saleable quantities of basic grains, vegetables or cheese and milk, or have diversified production systems in which they may, for example, produce self-subsistence quantities of grains, milk for their local market and small amounts of coffee for export. They, too, have been affected, though to a lesser degree than the poorer peasant sectors.

In the majority of cases, they have come up against strong limitations when they try to reorient their production to the foreign market and, since the terms of trade with the cities are deteriorating, they face lower relative prices for products directed to the depressed domestic market. For this sector of the peasantry, the adjustment has meant reduced income and an erosion of the small level of capital they had accumulated with the subsidy policy of the first years. They have had to sell some animals, for example, or pull their children out of school to put them to work on the farm. Some have even had to return to seasonal wage labor during the harvests.

Only the fraction with more diversified production systems and/or that historically used few inputs, as is the case on the agricultural frontier, has managed to escape the worst effects of this situation. The same tends to be true for those who have moved into an export crop or rapidly changed their production system. A few have even been able to do better than before.

The Cooperative Sector. One of the main beneficiaries of the land reform policy in the pre-adjustment period, these peasants are experiencing changes in the existing schemes of differentiation and in the forms that evolution is taking.

Some of those grouped into the collectively owned and run Sandinista Agricultural Cooperatives (CAS), such as the big cornstarch producers of the Pacific or those in the rich valleys of the interior such as Jalapa, have the capacity to restructure their operations and adapt to the new rules of the economic game. This is due to the previously high levels of subsidized credit they received, in turn based on the existing capital they inherited. Paradoxically, however, they are the ones hit first and hardest by the adjustment: given their reticence to abandon the "collectivist" and "mechanized" model that prevailed during the first years of their formation, their income in the last agricultural cycles was minimum and their short-term debts maximum. A few CAS with profitable agroexport production—for example, those who pasture heifers or grow coffee—have consolidated their success and their capital accumulation without going through major internal changes.

Another group is made up mainly of those benefited by unimproved land and organized either in CAS or in Credit and Service Cooperatives (CCS). They have few resources and often little land since they were not given priority in the previous period, and mainly produce basic grains. They have little ability of their own to move out of the vicious circle of strong dependence on ever more costly credit and small surplus production.

Finally, there is a small group of cooperatives, many of them CCS, with diversified production systems based on family manual labor and reasonable use of imported means of production. They have been better able to weather the subsidy cuts and new relative prices.

In these latter two groups, the land parceling process going on within the CAS is becoming a generalized response to the challenge to take more advantage of family labor and seek more "peasant" techniques such as oxen instead of tractors to lower production costs.

The Bourgeoisie. At the opposite end of the rural spectrum are the big capitalist growers, what is known as the “homegrown bourgeoisie,” and well-off medium-sized farmers. These divide into two blocs. The first is made up of those whose productive structure is oriented to the domestic market and whose technology is dependent on imported resources, such as industrial sorghum and irrigated rice farmers, and those with chicken farms or small dairies. They have been severely hit by the adjustments. So has a fraction of the traditionally inefficient big agro-exporters—those, such as the cotton growers, who are unable or unwilling to make rapid changes. The big coffee growers and cattle ranchers, on the other hand, have profited handsomely, taking advantage of plummeting farm worker salaries.

In the cities

As in the countryside, those in the cities most affected by the adjustment are the grassroots sectors that depend most on salaries for their income. There is increased unemployment and a drop not only in the paycheck but also in the social wage (subsidized health care, medicines, public transport, worker commissaries, etc.), given the gradual elimination of subsidies. Most of the laid-off military and civilian state workers come from such families. The survival strategy is to join the informal sector as street sellers or stake out an unlicensed—and illegal—spot on the sidewalk in front of the markets.

The Informal Sector. For the traditional urban informal sector, the "golden age" of significant income, when everything was scarce in the country, is over. Now there is an excess of sellers competing for the scarce purchasing power of traditional clients for their goods and services. Self-employed bread or tortilla makers, plumbers, cake decorators, garden vegetable sellers, shoe shiners, knife sharpeners, tree trimmers and the myriad others who hawk their wares up and down residential streets, are now all obliged to diversify their already meager incomes by engaging in other activities or seeking new clients.

The contraction of the domestic market has also affected those more comfortably situated in the urban informal sector, with the difference that they have more resources with which to confront it. Those who are small manufacturers face the threat of imported products the same way they do competition from industrial manufacturers—with contraband. This holds as true for lathe shops, which can no longer compete with imported spare parts as for garages that rebuild batteries, which cannot compete with battery factories. Similarly, wholesalers and transporters who belong to this sector face falling demand for their products and services. Their strategy is to find a way to assure their permanent clients by offering them price deals or credits in exchange for continued patronage.

State Bureaucracy There is also growing social stratification within the state bureaucracy. The entrepreneurial sectors of state production units benefited from the adjustment, which they use to argue for higher salary levels and greater privileges on the grounds that they account for the profit levels of quite large enterprises. In contrast, the bureaucracy that depends on the state budget is suffering from the rigors of the austerity plan and previously privileged strata, such as military officers, have suffered a considerable deterioration in their standard of living.

Three economic scenarios

Just as there appear to be three possible political roads in this polarized and unstable new period (see our analysis in “The Month,” this issue), there are also three possible scenarios for the economy in the near and medium future. Two of the three alternatives—a national accord or continuing instability—apply to both the political and economic spheres. The third—civil war and US military intervention—would signal the virtual end of economic activity and could well send Nicaragua's economy back into the 19th century. In the economic scenarios below, the third alternative thus stops short of that dire possibility, although its consequences are grim enough.

1. No national accord—socioeconomic instability. This first scenario is set against a backdrop in which the social and political instability Nicaragua has lived through for the first 100 days of the UNO government is prolonged. In this outcome, even though short-term agreements may be reached among the different social sectors, they are broken repeatedly. Without a solid social pact, the success of UNO's economic stabilization pact would be severely undermined.

The government would encounter serious difficulties in reducing military and civilian state spending, and would be unable to correct the macroeconomic imbalances. Sooner rather than later, this would lead to the instability of the new córdoba oro.

The Nicaraguan bourgeoisie, perhaps with the exception of its most homegrown sector, would not be inclined to invest its capital to any significant degree, since the level of grassroots organization would be a permanent threat to its interests compared to other countries in the area. The privatization process would take time, and occur in a context of decaying state enterprises. Without the Nicaraguan bourgeoisie’s capital investments, economic reactivation would be even more difficult.

Foreign aid would remain limited. The UNO government would be unable to guarantee the necessary levels of foreign aid given the lack of monetary stabilization and slow privatization process, both of which would be viewed askance by the IMF and the World Bank.

US policy toward Nicaragua can be expected to use its aid as a lever to promote the progressive weakening of Sandinismo while the grassroots sectors, led by Sandinista unions or acting spontaneously under the weight of the crisis, contribute to undermining the current government’s economic viability. In this scenario there would be no real reconstruction of the bourgeois class, nor would the popular productive sector strengthen its role in the country’s reconstruction.

2. Social agreement—economic reactivation. This second scenario has as its starting point a stable social agreement that represents a continuation of the Transition Accords in the economic and social camp. Negotiations between the top levels of UNO and the FSLN form the initial departure point for this agreement, with the possibility that the popular sectors slowly gain some space of their own.

This would constitute the premise for a sustained flow of foreign aid and encourage the repatriation of Nicaraguan capitalists who demand the internal adjustment and reconstruction of the economy. Economic stabilization would be possible, accompanied by a policy of compensatory packages financed through foreign aid.

The privatization process would leave important areas considered to be of national interest in state hands. The privatization would benefit not only the bourgeoisie, but also a small fraction of the popular classes, especially those in the peasantry who are still demanding land.

One possible role for the bourgeoisie is that it would tend to concentrate in the spheres of commerce, processing, export and credit, leaving direct production in the hands of other sectors. In this framework, it can be imagined that the state banking and foreign trade monopoly would become more flexible, similar to the system in Costa Rica and El Salvador, and would possibly be backed by AID.

In agriculture, an ownership structure would be promoted that does not mean the return to large estates. It could even be accompanied by the consolidation of the reformed cooperative sector and a widening of the agrarian reform.

Coffee and cattle would experience marked growth among the country's traditional exports, but combined with a tendency toward diversification through the development of nontraditional products in which small and medium producers have ample participation.

An economic structure such as this represents a certain advance for the grassroots sectors, although the bourgeoisie's domination of the key economic levers would become the main mechanism for controlling their surplus. In a successful negotiation scheme, the grassroots sectors could, as a second possibility, also try to gain control of these key economic links, in competition with the bourgeoisie. For example, the cooperative movement could develop its own capacity for processing and exporting coffee. The relationship between the bourgeoisie and the poorer sectors in this scenario is hardly lacking in social conflicts. But, to the degree that the basic accords are upheld, the conflicts would not have to turn into acute and successive crises that affect the whole country. The country's main political forces would thus have a basic framework for legitimate struggle and the possibility of holding onto power or re-winning it in the next elections.

3. Total "Central Americanization"—retreat of the grassroots movement. In this scenario, the grassroots movement is weakened by the effects of successful UNO cooptation which, through selective policies and careful management of AID programs, provokes significant schisms within the grassroots organizations. At the same time, through clever "handling" of the Sandinista leadership, UNO manages to involve some FSLN sectors in a power alliance. In this process, the FSLN cannot prevent a split, or at the least, is severely eroded by political tensions.

The bourgeoisie would have much more freedom than in the other two scenarios to play a dominant role in the economy, in alliance with transnational companies. Privatization of state enterprises would be carried out wholly in its favor, reducing the state sector to an absolute minimum, to those operations with no immediate profit perspectives.

Foreign backing for this scheme would be greater than for the other two since it is in line with the Central American neoliberal project and conforms perfectly to the IMF and World Bank recommendations.

The progressive destruction of the popular economy would make way for an important flow of labor for the bourgeoisie and foreign companies, contributing to a significant modification of the country's productive base. Once achieved, the establishment of industrial free trade zones would be successful. There could also be a more pronounced reorientation toward productive models based on nontraditional export products, which would require a real grasp of the world market, capital mobility and flexibility and a powerful transnational network.

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