The UNO Economic Plan: Is There a Popular Alternative?
The official concertation forum was called to order before live television coverage on September 20. The UNO government's economic team and representatives of all labor organizations and business associations, large and small, had been invited to participate with the express goal of negotiating a tripartite agreement on the government's Stabilization and Structural Program for the 1990-93 period. The participation of political party representatives was limited to the two-day inaugural plenary, in which Minister of Finance Emilio Pereira detailed the state of the economy and Minister of the Economy Silvio de Franco explained the program and its objectives.
For reasons explained in this issue's "The Month," both the FSLN and the business and labor organizations associated with it refused to endorse what they saw as a pro forma imposition of the government plan rather than an open search for mutually acceptable solutions. They did not attend these sessions.
Unofficially and privately, however, the concertation process—the search for an accord on the future social and economic direction of the country—had already begun. It has been taking place through bilateral meetings between the government and FSLN organizations, and through grassroots pressure expressed in declarations and street protests. As this issue closes, the process continues at all levels.
envío interviewed Nicaraguan economist Arturo Grigsby about different aspects of the government's program and possible alternatives. Grigsby is currently deputy director of Nitlapán, a research, grassroots education and alternative development institute of the Central American University (UCA). The Nitlapán team produced the economic evaluation of the UNO government's first 100 days published in envío two months ago, as well as the analysis of Nicaragua in envío's special annual Central America issue in May.
envío: What is your overall evaluation of de Franco's economic plan?
Grigsby: In the first place, this plan clearly tries to distance itself from the government's discourse in its first 100 days, which was based on a triumphal and overly optimistic economic plan. UNO's excessive confidence was due to an overestimation of the grassroots support it received in the elections and on the assumption that foreign aid would be enough to overcome the economic imbalance UNO inherited upon taking power.
Now there’s a new refrain: Nicaragua has never been in such a critical situation. If something isn't done in the next three months, the economy and the monetary system will collapse. Dramatic adjustments, drastic measures and a domestic effort to pull ourselves out of the crisis are needed. We can't count on foreign aid, because it will be less and less every year. Only a national effort will stimulate the country's economy. The tone, then, is apocalyptic and biased, especially in contrast to the previous triumphal one.
In the second place, I would say that the plan presented by the government to the participating organizations in the Economic and Social Concertation is less an economic plan than a simple list of economic measures. The list includes an effort to overcome the strict monetary focus that initially predominated and an outline of programs to alleviate the social costs of the economic adjustment. It does include an industrial conversion plan and an adjustment plan for the agricultural sector, but even so, the actual concrete details, both in the social and the productive sectors, are very weak. I think this is due to the government team's ignorance of the country's realities. At times, the text gives the impression that the proposed measures are the same that the World Bank would recommend for Honduras, without any creative adaptation to Nicaragua's unique conditions.
Shock treatment means more instabilityenvío: There are differences, then, in the general tone of the two programs. Are there also changes in the program's substance?
Grigsby: No, I think there are very few substantive changes. In this sense, both in its initial expression and in this second version, the UNO program preserves elements of continuity with respect to the Sandinista adjustment plan. These elements are the reduction of public spending, the restriction and increased cost of credit, the freeing of prices and the establishment of a foreign exchange pricing policy that will benefit the export sector. It differs from the Sandinista plan in terms of the degree of privatization necessary to make the productive and state service sectors efficient.
In reality, what is new in the plan is the form and time frames it proposes for its anti-inflationary strategy and the mechanisms proposed to achieve a price structure that offers incentives to exports. The proposal is to bring down inflation before the end of the year by reducing the fiscal deficit and tightening bank credits to a level that can be financed without resorting to simply printing more money. This means that in December the central government should finance all its costs from its own income and the foreign aid it receives. In addition, for the first time the plan establishes that state industries will have to transfer their profits to finance public spending.
The impossibility of issuing new money into the economy not backed by production means that the national financial system will have to depend on the resources it obtains from deposits—which are currently scant—and the availability of foreign resources to the Central Bank.
In a parallel move, the government proposes to totally substitute old córdobas for the córdoba oro by the end of the year, when the Central Bank will no longer have to finance the fiscal deficit and bank credit. By then the government expects to finally tie the córdoba oro to the dollar, a project the economic team has been boasting about from the outset. Now they say they can hold the dollar price of the córdoba oro steady throughout 1991.
envío: What are the real possibilities of this anti-inflationary strategy, and what would it mean?
Grigsby: To answer that we can refer to [Central Bank president] Dr. Mayorga's comments in the concertation forum, when he noted that in September the central government required 4 million córdobas oro and the national financial system needed 31 million. How did the Central Bank fulfill these necessities? Well, they used 20 million córdobas oro financed by USAID and printed the other 16 million. Half of the AID money was used to pay the petroleum bill.
What would happen, then, if the Central Bank can't print money? According to the government, the availability of foreign resources is $25 million monthly, of which $15 million now has to go to petroleum; before the Persian Gulf crisis, oil cost $19 per barrel and it's now about twice that. In December the Central Bank will have the same $10 million it had in September, but since it won't be able to print money, it will have to drastically cut its financing of the fiscal deficit and bank credit. And December is when government spending increases because of the 13th month bonus paid to public employees and more demand for credit to harvest the export crops vital to the country.
On the other hand, even the government recognizes that exports have profitability problems because the official exchange rate of the córdoba is overvalued. That means that to sell coffee, cotton, sugar and other products on the international market in December, there will have to be a significant devaluation of the national currency before then.
Personally, I think that's the reason for the document's dramatic tone. It emphasizes the gravity of the situation to prepare people for a shock adjustment even stronger than we've experienced since 1988. Obviously, I agree that there's a real scarcity of foreign resources to finance the adjustment program, but the government has a few cards up its sleeve that don't appear in its proposal. For example, Vice-Minister of the Presidency [Erwin] Krügger announced that the state industries organized in CORNAP [the National Public Administration Corporation, which Krügger directs] have received financing from private foreign banks, which could mean a significant reduction in credit demands on the national financial system. It should be pointed out that these industries produce a third of all goods and services and have been the sector demanding the most credit over the last few years.
These extra foreign resources, however, are not enough to bridge the fiscal and financial gap. It is evident that the government is asking for more sacrifices from the people and the productive sectors to implement its program. I don't think this is either viable or responsible given the country's level of economic and social deterioration. If the government doesn't get more foreign funding, it will have to resign itself to living with inflation for longer than it had originally expected. If it refuses, it risks provoking even greater social instability than that which has characterized the country over the last months, with unforeseeable consequences.
More unemployment and more emigration envío: What are some of the foreseeable social costs to this adjustment program?
Grigsby: As it stands, the UNO program would cause even more unemployment. Minister de Franco spoke of reducing army personnel by 10,000 and that of the central government by 15,000. This is very serious, above all given that there is already a 40% unemployment or underemployment rate among the economically active population.
To prevent increased unemployment, the government has proposed an occupational conversion program that would give three work options to the newly unemployed from the public sector. The first option is to form a small business, either in the industrial or service sector. The person choosing this option would have the right to four months of severance pay and would receive bank credit for eight months. The second option is to work in the salaried private sector. In this case, the government would give the private business hiring the person a tax credit equal to 50% of a year's salary. The third option is for the person to continue working for the government, but with a 10% reduction in wages. There is also a fourth option, which would be to draw lots to decide who would continue working for the government at the 100% salary level and who would have to leave. The fundamental problem with all these options is that due to the very characteristics of the stabilization and adjustment program, the internal market is depressed and even existing private business, industrial and service sectors are in crisis. Who can guarantee that a new small business has any chance at success? Which large businesses will offer real new jobs, and which will simply take advantage of the credit and a few months later fire the workers?
Despite the Unemployment Fund, with three to four month subsidies for those who lose their jobs because of the adjustments, who can guarantee that they will find work within four months? Clearly, the country is not going to grow like lightning, and even the new Social Emergency Fund only offers temporary employment at minimum wage. In terms of training former public sector employees to open small production and service operations, the recession in the internal market will make it very hard for small businesses to survive.
In this type of drastic adjustment program, the rhythm of employment shrinkage in areas considered inefficient and unproductive is much faster than the generation of new jobs in areas where the economy should expand. There is talk of industrial conversion, but that takes years while firing workers takes just a minute. The same thing happens in agriculture, which this year alone has seen close to 8,000 agricultural workers laid off with no other job alternatives.
What we will see, therefore, is a continued deterioration of people's income and living standards and increased migration to the United States. Migration has increased significantly this year and will increase even more with this adjustment program. Exportation of labor is the logical escape valve for the crisis. Most Nicaraguan migration to the US took place after 1987. A just finished study for the UN Economic Commission on Latin America about family remittances clearly demonstrates this. We are now talking about $70 million of family remittances annually, making it the country's second "export product," surpassed only by coffee. This is the road taken by all Central American economies subjected to similar neoliberal plans.
Many more people will also get involved in the informal commercial and service sectors, all competing for the same limited market. There will be more migration to the city from the countryside and more poor peasants who must hire out as farm laborers. The commercial sector is experiencing a significant drop in sales, although it has benefited from reduced import taxes and the virtual disappearance of the state "dollar" stores.
It's not all roses for the bourgeois sector either. Certain capitalist producers are severely affected by the crisis, especially rice and cotton growers. Cattle ranchers and coffee growers continue to benefit, meanwhile, because their export products bring a good price and don't need expensive imports. The industrial bourgeoisie is losing sales to imports due to the lifting of protections. Because they haven't invested at all over the last decade, they are no longer competitive in Central America. The government has given them two years to "get it together," which means making risky investments.
The bourgeois sector is very worried right now, despite the hopes of divvying up the state sector. They know they won't earn as much as they did under the Sandinistas' subsidized economy. Those heavy subsidies allowed capitalists who took the risk of operating within the revolutionary mixed economy to make huge profits. Ask any private producer and you'll see that he or she is not satisfied with the current measures. De Franco noted in his presentation that no one went bankrupt in Nicaragua during the revolution because the state financed and subsidized them. They milked the cow but did not invest.
In Nicaragua, curiously, forcing the private sector to play by free market rules is to ask them to make sacrifices because it is very inefficient compared to its counterparts in other countries who have already been functioning in the free market and who can also depend on government repression of the labor force. "Efficiency" in other underdeveloped countries is based on the low cost of labor and on the ability to sacrifice the working class without thinking twice. Between union pressure and free market laws, the bourgeoisie here is in a very tough spot, which is why they're complaining so much. This is not to deny that a small circle of high-level state officials and their allies are rapidly and very happily piling up fortunes in the export trade, a phenomenon that will flower under this government.
The rural alternatives: Continue agrarian reformenvío: Moving beyond the theme of reducing inflation, do the Sandinistas have an alternative program to UNO's, one that deals with more fundamental issues to get out of the crisis and reactivate the economy without such a high social cost to the people?
Grigsby: I would say that the FSLN doesn't have an alternative and that, up to now, what they've questioned in the UNO plan has been the privatization of state enterprises and the high social cost of the adjustment. Minister of the Presidency Antonio Lacayo has recently shown sympathy for the second concern. The FSLN has fought for a more gradual anti-inflationary plan, obtaining more aid from the US and the international community. The first step of this gradual process would be to "freeze" the adjustments for the next six months, as the FNT requested in the concertation forum. This implies maintaining the financing level for the productive sectors and the same employment level in the public sector. These are short-term proposals, however, that don't address an alternative plan over the long run.
envío: Are there really any alternatives?
Grigsby: I think so. The focal point of any alternative development model in the medium term has to be the deepening of the agrarian reform. This country depends on agriculture and that's where there are opportunities to expand the economy and employment. There is currently tremendous acreage of unused or poorly exploited lands, mostly in the hands of large private producers and the APP [state sector], although also in some cooperatives. There are estimates of over 2,000,000 acres of underused land, which could mean at least 100,000 new productive jobs. A massive program to give out land would not demand great capital investment and would alleviate the social instability and unemployment in the countryside, responding to the demands of former contras and landless peasants. In addition, these types of programs can garner financing from the international community with relative ease.
The agrarian reform could also generate employment by stimulating small rural industry to produce simple goods like plows and carts, as well as the small basic consumer industry, such as the shoes and clothing produced in the smaller provincial cities. It could also spark rural industrialization, in which already organized peasants could start one of the small-scale and highly efficient agroindustrial processing units that currently exist in the international market.
A National Agrarian Reform Commission has been formed recently, not because of Sandinista pressure but as the result of pressure by former contras and landless UNO peasants who have invaded cooperative and state lands to illustrate their desperation. UNAG [the National Union of Farmers and Ranchers] has come out in favor of resolving the problem of the 70,000 landless peasants and ex-contras. The ATC [Farm Workers' Association] has as well, although it wants the land to be given from the agricultural frontier and from large private landowners, since it argues that the APP is efficient and should not be dismantled. The ATC asserts that if the state farms are privatized, they should be given to the workers currently on them.
It should be remembered that the first step to development in advanced countries was land redistribution. European countries did this as they emerged from feudalism. In other countries like Japan, Taiwan or South Korea—today developed countries— the US occupation army distributed land massively after World War II to eliminate the landed gentry, who were the heart of the defeated power, enemy of the United States. Although there is debate around this issue, it is perfectly defensible from a strictly economic viewpoint that better land distribution would solve the problems of rural unemployment, rural-urban migration and the need for an expanding internal market to be able to develop industry, and would permit a fairer redistribution of income.
The FSLN was caught up in a development strategy that reinforced the position that large-scale modernized agriculture—in this case state-owned—is the only way out of underdevelopment. One has only to look at Soviet agriculture to see some results of this strategy. This legacy plays a big role within the FSLN, as it does in other third world countries and in what used to be the socialist bloc.
envío: Are there possibilities that the FSLN can throw off this legacy?
Grigsby: The Sandinista line after its electoral loss was to defend the APP as APP, without any dismantling. Sandinista leaders explicitly stated then that they were against privatization and the dividing of state lands. It should be remembered that in 1988 the Sandinista government froze the agrarian reform, considering it completed. At the end of 1989, Comandante Wheelock [then agriculture minister] declared that he could not respond to any existing agrarian conflicts in the country with land grants in the Pacific or interior of the country, and that available lands were on the agricultural frontier. The FSLN's concept of economic development thus has a lot of ideological baggage, so it's not easy to articulate an alternative plan. Today we often hear Sandinista leaders talking about the peasants’ suffering, but extreme poverty and hunger among the peasants didn't begin with the change of government. The FSLN became a bureaucracy and now that the Sandinistas have to win back popular support, they find that the people's most deeply felt needs contradict the postulates they held before. There are profound and logical contradictions in this juncture, so unexpected by the FSLN.
For years, many Sandinistas had said that the APP is the highest form of production, that state property guarantees the best form of organization. They even spoke with contempt of the "primitive" peasant land parcels and the peasants’ production methods. It's not easy for this same group of people to change their thinking now and even harder for them to come up with plans that contradict their own earlier ideas. This is why the FSLN economic line appears diffuse and contradictory. On the one hand is the Sandinistas' dominant economic view, especially in the last two years, and on the other the need to meet people's demands. This raises real questions about all the old dogmas.
envío: Can such a large distribution of land as you propose work, given the strict credit policy the government plans? What level of credit would be necessary to carry out the plan?
Grigsby: To begin with, we have to note Sandinista economic policy mistakes in the financial area. The policy created a dependence on credit in peasant production that did not exist before. It also encouraged forms of production that are highly dependent on credit, and today are causing big problems for the peasants. The paternalistic credit policy was an error—it was little more than a subsidy. To give one example; a few days ago I was in Tisma in a workshop with 13 cooperatives held in one of the "model" Sandinista cooperatives. They have 13 tractors, an irrigation system, a 5-ton truck and a completely built community. And what does one find there? Of the 13 tractors only 7 work, the truck doesn't work, the irrigation system is no longer used because energy costs too much. Of course, the cooperative had accumulated a huge debt, and was totally dependent on credit. What happened to it during the two years of the Sandinista adjustment program? Both years the debts were condoned. This is a structural problem of dependence created by a concrete economic transformation project. So when we speak of credit needs, we're often thinking of the type of development and credit policy encouraged earlier, which created a peasant population heavily dependent on large credits. But we've been promoting new experiments in the same Tisma area, with peasants who have developed alternative production forms and are now free of the credit cycle.
The FSLN, and some sectors in UNAG, have an antiquated view, continuing to advocate the same policies they did during the Sandinista government. What were UNAG leaders in Tisma suggesting? That they invite UNO government officials to an assembly so they can show them how bad off they are and once again get their debt pardoned. This is a serious problem. I think, though, that it is not beyond our ability to get the foreign funding necessary to support a huge distribution of land. I'm sure that this type of project would attract a lot of interest internationally, because it generates direct productive employment. International aid organizations generally back these projects.
envío: How do you think the government's decision to import basic grains to lower domestic prices could affect us?
Grigsby: There will be a negative effect. Unfortunately in the last decade, at times because national production was insufficient and often simply to finance the fiscal deficit, the government requested food donations. The clearest case is that of the 25 tons of rice we've received annually from the USSR in recent years. But, meanwhile, there was no program to encourage rice production here. The result today is a much higher dependence on foreign food donations than in the 1970s.
The same thing happened in the rest of Central America with the famous PL-480 program, which offers huge US food donations to friendly governments. The donations solve both the governments' deficit problem and the immediate needs of the population. The UNO government has decided to follow that policy, which is not much different than the Sandinista policy. It suggests that if national production can't compete with international prices, it will import food using the PL-480 donations. It has already begun importing rice and corn with this program. This is regrettable, especially for the peasants, who will suffer both unemployment and hunger.
The real fallacy is price competitiveness. The US uses part of the meager funds that it assigns as aid to third world countries to buy US farmers' excess, benefiting those farmers and destroying third world production. There are documented cases in Africa showing how the perpetual famine is related directly to international food charity. Only a few domestic foods, like cassava, have not suffered, because developed countries do not produce them.
I think the government is committing a grave error for short-term results, concentrating too much on lowering inflation, while the more serious problem is that there are no concrete programs to increase productivity of peasant basic grains production to feed the urban population. Real alternatives must be developed that make national peasant production possible at low prices. In the case of beans and non-irrigated rice, peasants can produce at lower cost than the international market price. The biggest problem is corn. In part, even though this sounds repetitious, this is because of Sandinista government policy, which encouraged the "green revolution" of subsidized modern technology at extremely high costs. Today it costs more to produce corn than it did 15 years ago, so the problem ahead is to modify expensive technology. Some peasants are already trying to do that, but they need concrete support from the state.
Urban alternative: Artisan industry envío: And for the city, what would be a truly popular alternative?
Grigsby: Two urban sectors have emerged in debates in recent months: public employees and industrial workers. The adjustments begun in 1988 severely affected these two sectors. The next year, there were approximately 20,000 layoffs in the public sector and industrial production was the lowest in a decade. The tendency is for both sectors to suffer even more. On the one hand, the UNO program anticipates a severe shrinkage of the state and on the other it plans privatization and conversion of state industry. What would be a grassroots development alternative to benefit these two sectors? It's very hard to find one. The industrial workers would have more alternatives if they do get the state factories privatized in their favor and the resources to carry out industrial conversion of what would be workers' property. Conversion, however, is neither easy nor inexpensive. The technological gap between our industry and the rest of Central America is huge, and there isn't even a word to compare it with the rest of the world.
Because of this, I think that the most important alternative for the city is the conversion of small industry, which is so rarely mentioned. Everyone talks about the large industrial sector; many people are worried that the government will turn El Caracol or Camas Luna over to the bourgeoisie, while at the same time 500 to 600 small businesses employing 3-4,000 people have shut down. We have official statistics indicating that Nicaragua had over 9,000 registered cottage industries in 1984 and that by 1989 there were only about 4,000. What happened to the others? They disappeared. Why? The Sandinista government directed all financing and materials to large industry. There was no program to support small manufacturing in the Ministry of Industry. The result? During ten years of Sandinismo very little was done with cottage industry. It was considered in a class with the peasants: an obstacle, backward, without a future.
What will happen now with an adjustment program even more drastic than the Sandinista one? The possibilities for cottage industry are even more limited. Essentially, the sector has to improve the quality of its product. This wouldn't require huge investment, just training. A good example is the shoe industry. Our cobblers aren't familiar with the styles that could be competitive internationally, and don't have the materials either. But if there was a policy directed to small industry, there could be more employment in a short time. Small shops could even export, as they once did. Hand-made Nicaraguan shoes were well known in Central America and even the US, but if this process continues, the shoe industry itself will soon be extinct.
The government's economic program talks about a fund for small businesses, which includes cottage industry, but it's one thing to have a fund—which is already functioning—and another for people to be willing to borrow money—which in fact they are not because of the expensive credit policy. Without a complementary training, advisory and marketing program, without a program that allows the industry breathing space, the fund will remain untouched. No one wants to go into debt with credit knowing their own limitations and those of the recessed market.
In truth, UNO's proposal for the city is much more developed than for the countryside, because in addition to the cottage industry fund the program also plans housing, street construction and urban infrastructure, which requires lots of labor. Construction is a good short-term labor option.
I think if internal demand can be increased a little bit—and it could be done through short-term construction employment and medium-term stimulation of peasant demand by continuing the agrarian reform—it would be enough to reactivate small-scale food processing with a concrete program of credit and technical support. That in turn would reactivate other cottage industries such as shoes, furniture and garment making. A small increase in demand could give space to all these people.
Small informal-sector service shops and small urban commerce would also benefit from increased domestic demand, although the latter face the threat of a resurgence of large commerce. The decapitalization they've suffered under the adjustment programs since 1988 and the influx of many small merchants has impoverished this sector. Now there are also informal lenders who take a large cut of their earnings. To top it off, the government is trying to force them to "formalize"—to pay taxes. There are now conditions for organizing small informal merchants in cooperatives around credit issues.
envío: AID has given funds to promote infrastructure projects at the municipal level, but the truth is that the municipalities, except Managua, are totally without funds and have huge political problems. What possibilities does the plan have in these circumstances?
Grigsby: AID is complaining that the funds they've given aren't being used. And that's because the UNO government doesn't trust the distribution apparatus set up by the former government. The municipalities are now totally decentralized and autonomous, but they're inexperienced and suffering from local political rivalries. When AID gives us $10 million for municipal projects, there's no way to distribute it; the government is unable to design and implement projects. This has a lot to do with a marked attitude of political vengeance at all government levels.
envío: Is a program that supports the smallest rural and urban sectors compatible with reinserting Nicaragua in the international market as the government program proposes?
Grigsby: Yes, because in this country the small producers are the most competitive. If you put a huge cotton producer alongside a small sesame seed producer, the sesame seeds will do better than the cotton, which needs huge subsidies to be able to survive. Why does the small producer do better? At what level can our country really compete? In labor, which is much cheaper than in developed countries. And what is more labor-intensive—the big capitalist or the small producer? Unquestionably, the small producer makes better use of labor, which is often family labor, than large production. If we want to be competitive internationally, small production is better than big.
The same thing happens in industry. Rolter [a national shoe manufacturing company] can never compete internationally with its shoes. It would need huge investments to modernize its equipment to be able to compete in Central America, much less in the US. At what level is Nicaragua competitive? In quality hand-made shoes. In that market, we can compete and win, just as we did before.
envío: Can we expect Sandinismo to suggest a concrete alternative plan or will it just settle for adjustments to the UNO plan?
Grigsby: One Sandinista sector—which was part of the Sandinista bureaucracy—only criticizes the UNO government's bad management of the adjustments. Another sector has the opposite position: it advocates resisting all change. Then there are those who are looking deeper for alternative solutions. Sandinismo includes all these positions and others in between. There is not yet enough clarity to bring together the Sandinista masses around a concrete economic program that is both revolutionary and grassroots. That is currently the great challenge.