How to Get Foreign Aid: Making the Poor Pay Isn’t Enough
For the third time in nine months, the Chamorro government went before the international lending agencies—most importantly, the powerful International Monetary Fund—and donor countries, this time in Washington on March 25-26. For the third time, the government, the opposition and the Nicaraguan people as a whole fervently hoped to get a green light for the resources Nicaragua so desperately needs to begin its economic reactivation. But as envío predicted in its March issue, the light stayed yellow: the accord was once again postponed.
The US government, always willing to give political and economic support to the contras for almost ten years and to back Violeta Chamorro's electoral campaign, is now noticeably dragging its feet in disbursing even aid already approved. The US attitude and the results of the Washington meeting with the IMF indicate that the Nicaraguan people's long wait for a better life will be even longer.
Not even drastic measures do the trickOn March 3, the Nicaraguan government put a drastic anti-inflationary plan into effect. It slashed the buying power of the majority of the population with one blow and, with it, economic activity, above all that linked to the small and medium producers of goods and services. The measures sought to send the necessary signals to the participants in the donors' meeting that Nicaragua was now a country with optimal internal conditions to make good use of the aid they would give us.
The government's decision to carry out the adjustment before the meeting with the IMF also had political wisdom, in that it put the FSLN between a rock and a hard place. Nonetheless, the IMF, always willing to finance governments committed to executing stabilization programs, moved with caution when it came to Nicaragua, even though this country had just implemented its fifth program in three years by its own initiative and without a prior accord.
In June 1990, the potential donor countries and the international lending agencies, meeting in Rome, had demanded the restructuring of the Nicaraguan economy as a prerequisite for the aid the country needs so much. But neither the Mayorga plan nor the concertation process nor the economic shock program were enough to win the international seal of approval.
In the December 1990 meeting in Paris, the government, accompanied by Sergio Ramírez, who heads the Sandinista bench in the National Assembly, presented the progress made in restructuring the Nicaraguan economy. In all three meetings, including the one just held in Washington, the government only received promises that aid in the quantities needed would materialize.
Why the new delay?Despite the government's negotiations with the international agencies and donor countries and the earlier government and FSLN indications of willingness to sacrifice, the US State Department seems ready only to grant its aid and encourage others to do so if the Nicaraguan government pushes to redistribute political power within the country. The US government presents itself as the main foreign ally of Chamorro's government, but seems unwilling to help consolidate a political model of reconciliation in which Sandinismo is acknowledged as a powerful force.
The United States spent about $9 billion in the last ten years for a counterinsurgency program in Central America that had Sandinismo as its main target and supported UNO to defeat the Sandinistas at the polls. It makes little sense to the US to permit the latent possibility that these same Sandinistas could eventually return to power.
The signs could not have been clearer than with the first post-electoral US aid package to the UNO government. The delay in congressional approval of the aid and later delays in disbursing it are inexplicable without accepting this hypothesis. Of the $335 million approved for 1990, at the date of writing we can account for only some $147 million actually reaching the country. Bush's rejection in May 1990 of Chamorro's request for a bridge loan until the disbursement of the aid began, as well as the small amounts of aid acquired in the 1990 donor meetings in Rome and Paris, were other indicators of the price being demanded from Nicaraguan society for aid from an international community controlled by the United States.
The argument to justify not disbursing the remaining $188 million of the US aid package was the Nicaraguan government's insufficient management capacity. This, however, did not stop AID from selectively financing areas controlled by UNO "hardliners"—the mayors, for example. Financing municipal projects reinforced State Department signals to the government about the political direction in which the US wants the country to move. Foreign missions that have met with US Embassy representatives in Nicaragua have been surprised by their open support of Vice President Virgilio Godoy, an indication of the direction of US policy.
The US controls the Inter-American Development Bank (IDB) and has tremendous influence over the IMF and the World Bank. It also has the capacity to neutralize the donor countries. With this, it is consolidating its position as arbiter of Nicaragua's political destiny. In February 1991, fulfilling an agreement made in the December donors' meeting, a delegation from the international lending agencies visited the country and produced a confidential report about the economic situation. In the introduction, the authors emphasized that "not only economic affairs were examined, but also aspects related to the country’s political situation." It was a rather strange statement for a report written by an international financial organization, but clarifies what is being demanded from the government in exchange for economic aid. The document underscored the concern in many circles about the difficulty of guaranteeing " property rights given the nature of the current political difficulties and the control exercised by supporters of the previous regime over legal offices, including the police."
Borrowing from Peter to pay PaulThe meager results of the Washington meeting indicate that the existing political model is still not judged deserving of the international community's total support, but hope remains. The IMF, the World Bank and the IDB will offer "soft" loans if Nicaragua cancels its $360 million debt arrears with the latter two lending agencies. Before the meeting, the government had $50 million earmarked for the arrears payment, part of the donation approved by the US Congress in 1990. Some European countries had agreed to provide another $20 million. After the Washington meeting, the government said Nicaragua had a total of $170 million; in other words, $100 million in new contributions.
A number of governments also promised bridge loans (which must be paid off when loans from international lending agencies are received) to cover the remainder, some $190 million. Despite this, the accord with the international lending agencies was postponed once again. In the best of cases, expectations about the amounts of credit Nicaragua could receive from the IMF, World Bank and IDB would be no more than $300 million, from which we would have to pay the $190 million in bridge loans. Therefore, the most secure income the government can count on for 1992 through this transaction would be some $110 million.
Myopic anti-inflation strategy?The anti-inflationary program recently implemented by the Nicaraguan government offers unquestionable technical coherency, a fact recognized by different national economists and international lenders. Technical coherency, however, does not mean economic effectiveness or social equity.
The government's proposal centers on very short-term objectives, with high costs for the majority of the population and is of dubious sustainability beyond its first achievements. Like the previous four packages, this one is strong on monetary aspects and weak in its productive strategy to reactivate the economy.
The program has three major focal points: 1) rapid elimination of inflation; 2) redefinition of prices with products for domestic consumption hopefully cheaper than imports and exports, so that low production costs, mainly for exports, will bring enough profits to stimulate producers to produce more; and 3) quick reactivation of agroexport production with cotton as the immediate target sector.
This plan, which is nothing new for Nicaragua, raises three sets of questions. The first is related to the causes of inflation and thus how to reduce it: If too much money in circulation causes it, from whom should it be taken away? The second has to do with the plan's price incentives: Do they benefit all kinds of producers? If not, who within the country provides the resources for them? The third has to do with the validity of the reactivation mechanism: Is cotton a viable alternative in the short run? If not, who provides the foreign resources for its reactivation and at what cost?
First attempt: Mayorga's plan failsWhat has been dubbed "Lacayo's" plan was based on a combination of elements discovered when attempting to apply former Central Bank president Francisco Mayorga's plan. It is thus difficult to understand the second plan without analyzing the consequences of the first.
In May 1990, the new government made its economic debut with a package of measures that, according to its designer, would finish off the country's economic ills in 100 days and put the economy on the road to rapid reactivation. Reality showed that the only thing the plan could do quickly was reveal its errors, and the Nicaraguan people paid a high cost for the lesson.
The new government implemented a package of anti-inflationary measures aimed at monetary contraction, reduction of the fiscal deficit and internal credit, gradual introduction of a new currency—the córdoba oro—at 1:1 parity with the dollar and maintenance of an exchange rate that would stimulate exports.
However, the devaluations only affected the old córdoba, not the córdoba oro. To accomplish this, the government made available to the public a quantity of dollars similar to the quantity of córdobas oro issued, for which the latter could be exchanged in the banks.
The logic of this plan was that prices should tend to drop in response to two elements. First, along with the devaluations, reducing the fiscal deficit and internal credit would diminish the amount of money in circulation and thus reduce internal demand; if merchants did not reduce their prices they could not sell their merchandise. Second, real salaries—raised by the Sandinista government between February and April—would drop because of increased unemployment. This would in turn diminish production costs and help reduce prices without affecting the incentives to producers who use a large quantity of labor. The Sandinista stabilization and adjustment program, which contracted state employment and diminished demand in 1988-89, had already moved in this direction with measurable results.
Unemployment would increase even more with the demobilization of the contras and reduction of the army. The resulting reduction of demand—and, with it, overall economic activity—would affect employment levels still more. In these conditions, real salaries would drop because of competition between workers. This depended on some workers being willing to receive lower pay in exchange for jobs.
The córdoba oro would be issued as soon as significant progress was made in stabilizing prices. In this way the government tried to avoid affecting the new currency with inflationary expectations linked to devaluation of the old córdoba.
Though not put widely in circulation, the córdoba oro was introduced in May 1990 as the currency of reference for defining most banking transactions and later for tax collection and state utility rates. In other words, the amounts were defined in stable córdobas oro, then recalculated at the time of payment into the weekly-devaluing old córdobas.
The level of currency in circulation fell by at least 50% between January and December. This, added to persistent public distrust of the new currency and an increased dollar supply in the exchange bureaus (aimed at sustaining the córdoba oro's parity with the dollar) and in the streets (because of increased family remittances from abroad), dollarized the economy. Without this dollarization, the new plan would not have stabilized prices.
However, the reduction of currency in circulation resulted not from reducing the government deficit but from drastically decreasing credit for production, which affected the level of economic activity. Resistance from the union movement prevented real salaries and employment from decreasing in the state sector. This, combined with the creation of new institutions to attend to the demobilized contras, actually increased the fiscal deficit from 2% of the Gross Domestic Product in 1989 to 14% in 1990.
The Mayorga Plan also did not win internal and external support from those allies of the government most concerned with finishing off Sandinismo and getting quotas of economic and political power. Because of this, the goals of the devaluation were not reached. The myth of the córdoba oro was belied by an annual inflation of 13,000%, far above the old córdoba devaluation, resulting in an overvaluation of the córdoba oro. Though inflation was decreasing in August, it was still high. The increase in oil prices induced by the Gulf war created even more pressure, provoking increased prices in dollars. In sum, the Mayorga plan was unable to control inflation according to the goals proposed by the government, but it did contribute to reducing economic activity even more, resulting in continued inflation.
By January, inflation was still growing, though slower. The amount of old córdobas in circulation had dropped, partially replaced by dollars in diverse sectors of the population. The immense majority of prices had been pegged to the dollar, and productive activities were being replaced with commerce and services, which once again became the refuge of the unemployed. Meanwhile, real salaries had not significantly dropped.
The second attempt: Lacayo's plan for a fewThe new anti-inflation measures announced on March 3 took advantage of the economic conditions created by the Mayorga plan and attempted to bring some of its inconclusive aspects to fruition and correct some of its errors. One element that needed to be dealt with immediately was what is known as inflationary psychology. Knowing that the currency would devalue each week, merchants were tacking an additional profit increment onto their prices to permit them to replace inventory the following week at the new prices. They had to be persuaded that they could let the air out of their prices.
The dollarized economy inherited from the Mayorga plan implied that the population did not expect real prices to keep rising, just their equivalent in constantly devaluing old córdobas. Eliminating the old córdoba, along with setting a new exchange rate for the córdoba oro and freeing it from future devaluations for a period, would create a climate for people to trust that prices wouldn’t rise anymore.
The government devalued both córdobas by 400% and announced that the old córdobas would be fully replaced by the córdoba oro by the end of April. This should help end the dollarization of the economy, recover confidence in the córdoba and eliminate the distortions arising from the circulation of three currencies.
Reducing the currency in circulation even more, thereby introducing a coercive element, supported this psychological effect. The penalty for merchants who did not lower prices would be an even greater drop in their sales than foreseen in the recession implied by the plan.
Billing the poor for ending inflationThe government stated that, despite the plan's high social cost, it was designed to distribute the costs equitably among the diverse economic agents. This pro-free market government even intervened in the market to prevent the prices of basic goods from rising equivalent to the devaluation. It did this by both increasing domestic supply through imports and controlling distribution to and even fixing prices in the supermarkets. While this was partly aimed at justifying the reduction in state workers' salaries, the government also hoped to create the impression that, if there’s a cost, we all pay.
That impression was short-lived. One reason was that most córdobas in circulation were in the hands of the poor. (The rich had their money in dollars, córdoba savings accounts or inventories, none of which devalued.) Overnight the poor became paupers. They woke up to discover that their already small money supply had shrunk by about 70%.
Furthermore, the loss of sales due to this drastic shrinkage and a reduction in state workers' real wages blocked workers in the private sector from demanding wage increases and eliminated producers with scarce resources from the competition. The poor were clearly paying the bill. A month after the announcement of the plan—at the end of Holy Week, which traditionally involves a more dynamic internal demand—local markets showed unequivocal signs of reduced economic activity and increased unemployment. The slowed economic rhythm meant a sad Easter week vacation for the population.
To lower internal demand even further, more currency was taken out of circulation. One way to do that was the maxi-devaluation of the exchange rate. The other was to reduce the main sources of excess demand—the fiscal deficit and the deficit in the banking system.
The Maxi-Devaluation. By devaluing the córdoba oro, the government hoped to eliminate the overvaluation that had accumulated during the Mayorga plan and to stimulate exports through prices. It should be noted, however, that the government pegged the nominal devaluation at 400%, hoping the real devaluation would level off at approximately 30% once salary and other cost adjustments, anticipated at between 200% and 300%, were subtracted.
If the government was indeed preparing to intervene in the markets and control prices, it could have achieved a real devaluation similar to what it got with a much lower nominal devaluation and without affecting the country's economic activity so drastically. But it had two other basic objectives: to profoundly reduce demand in the popular sectors and to transfer resources to the cotton sector.
Reducing the Fiscal Deficit. Government salaries nominally increased an average 200% over those of February, with higher increases for health workers, on strike at the time of the announcement, and education workers. In real terms, salaries shrank by over 40%. With the reduction of state expenditures resulting from this salary drop and a relative de-dollarizing of prices, the government hoped to maintain internal demand at desired levels.
The state budget, fixed at the beginning of the year at some 499 million córdobas oro (at par with the dollar), would now be worth some $406 million, a reduction of approximately 20%. This expenditure level is compatible with the projected income the government hoped to receive in the original budget: some $347 million in taxes and $91 million in donations and foreign loans, totaling $438 million. This would leave a positive fiscal balance at the end of 1991.
This, however, will depend on how much the measures reduce economic activity, since lower demand means less taxes collected by the government. The fiscal balance could even be negative, especially if there is an effort to cut back on loans.
In addition to cutting state salaries, the government hopes to reduce state employment levels. Through an occupational conversion plan the government is offering, workers who voluntarily give up their jobs will receive a payment of up to 10,000 córdobas oro. The government hopes that the low state salaries will encourage up to 8,000 workers to take advantage of the plan. The government also announced that community maintenance and development projects would be executed with donated funds to generate temporary urban jobs for the new army of unemployed.
According to the initial state budget, the overall portion assigned to payroll represented just under 26% of total expenditures, while the purchase of goods and services needed to keep the state functioning—which depends largely on the employment level—represented nearly 50%. It is to be expected, then, that the government will seek to cut expenditures not only by getting rid of workers, but also by thus reducing the need to purchase some of these goods and services.
Reducing the Bank Deficit. To improve the state banking system's fiscal balance, the plan eliminated the transfers the Central Bank was making to the commercial banks. These transfers had covered the difference between the level of credit granted and its recovery. Stopping them meant eliminating the subsidy granted during these years to credit users, mainly the agricultural sector. Now commercial banks can only grant the amount of credit permitted by the level of funds they can attract from the public in the form of savings.
On the other hand, it was announced that all outstanding producer loans coming due no later than May 31 would be revalued by only 240%, whereas debts that were in arrears as well as those for long-term loans would be revalued 400%, equal to the devaluation. Needless to say, there was no compensation for any farmer who had been unlucky enough to pay up at the previous dollar parity price just prior to the measures.
The government's intentions were clear: most debts that had already come due were those of the basic grains producers. Those affected by last year's poor rainy season were in arrears; others had already sold their crop cheap, paid their debt dear and were left holding the bag.
The poor demand a lighter burdenIn summary, the strategy is the same as the Mayorga plan's: to attack real salaries and employment. This was done in subtle ways as well as frontally. First, the new córdoba prices were much higher than before the measures, but the government insisted they would drop once the "air" was let out. This created a period of confusion in the fixing of prices that gave state workers time to accept their salary cut. That, along with a guarantee that there would be no forced layoffs, made it more difficult for the union movement to unite around its demands.
Second, the plan took up Mayorga's idea that the market would determine other workers' salaries based on the profitability of the enterprise in which they work once the maxi-devaluation and state salary reduction were accepted. The drop in sales would prevent salary increases.
Nonetheless, wage workers and small producers of goods and services are not fooled. While some are still willing to give the measures a chance, to see if they really do reduce inflation, many are angrily demanding that the share of the burden they are forced to shoulder be lightened. The failure to fulfill the promise that the plan's cost distribution is equitable is provoking social tensions and throwing the plan's logic and arguments into question.
Productive strategies: The real debateGenerally, the goals related to price increases for imported and exported products, as compared to others for domestic consumption, are being met. Nevertheless, just one month after the measures were announced, prices for basic products have increased more than the 300% hoped for by the government. Some estimates show increases between 350% and 370%, which affects grassroots buying power and reduces the plan’s initial success.
As has been analyzed, the plan reduces demand in certain sectors of society, causing a national recession. It would be paradoxical for this kind of recession to be part of a plan presented as egalitarian, affecting all Nicaraguans equally. This is where the plan's underlying objective becomes apparent: the economic revival of the big business class that is currently governing Nicaragua.
The country's two major political rivals—the government and the FSLN—appear to agree that this revival is Nicaragua's only alternative. In the end, both propose economic measures that focus on contracting demand. The government proposes that it be drastically reduced, while the FSLN, for political reasons and moral concern, contemplates a smaller reduction. In spite of good moral intentions, putting the debate in these terms weakens the people with respect to the government's anti-people goals.
It is obvious that the population cannot live on rhetoric, particularly not such fatalistic rhetoric. A real alternative model depends on carefully analyzing both UNO's and the FSLN's productive strategies. The goal of this article is not to outline an alternative, but to analyze the productive strategies of the country's fundamental political forces and the effect of the agreed-upon plan on different sectors of the economy.
One element of an alternativeBefore beginning this critique, it is worth introducing one element of an alternative that arises with respect not to demand but to the supply side of the national economy and challenges the logic of the stabilization plan being promoted. This element is not limited to the possibilities of the business class now in power, nor is it exclusive to them.
At this time, production in Nicaragua is not concentrated in the hands of large capitalist enterprises. On the contrary, the market has developed with the harmony of a multitude of small and medium urban and rural producers. Logic leads us to reason, then, that the tools of reactivation lie in the hands of peasants, artisans, the small service sector and small and medium manufacturing. These majority sectors could be supported with financial measures, technical assistance and macroeconomic conditions that would stimulate production. Under this plan, a stimulus to production would result in an immediate stimulus to demand due to this sector's dual character as producers and consumers. It is obvious that this scheme is less profitable for the bourgeoisie and requires greater effort in selling it to the international community, which is currently imposing its criteria on Nicaragua's domestic economic policies.
The Lacayo plan opts not to recognize the country's productive map, but to marginalize small production even further, in favor of increased concentration of capital. This is the same error committed by the Sandinista government, which tried to reorganize the productive structure to benefit large state production units.
Remaking the mapAn evaluation of the economic measures' effect on different productive sectors—in spite of the short time that has passed—allows us to affirm that the government's short-term goals favoring big business production are being met. Labor is clearly cheaper now and will tend to become even cheaper.
The medium-term perspectives for reactivation do not look as good: the much-touted resources for reactivation have still not been acquired, and cotton, elected again to be the center of that reactivation, will have difficulty meeting expectations.
The urban informal sectorThe UNO government, unlike the Sandinistas, recognizes the importance of the urban informal sector. According to the Lacayo plan, this sector—and large state industries in crisis—should generate the first unemployed, reinforced by a new labor pool that will arise from the need to sell more family labor at a cheap price for survival. This excess labor supply will help reduce real salaries and strike a blow to the union movement's negotiating capacity.
The informal sector, which benefited most in 1990 from the overvalued córdoba and increased real salaries, particularly of the state sector, served, at the same time, as a refuge for the unemployed from other sectors. Now it has to confront diametrically opposed conditions.
The measures that dried up the economy's money supply hit this sector particularly hard, given that, in the majority of cases, its working capital represents the full amount of available assets and its poorest members do not make enough to have savings.
The drop in sales, which tended to include commercial activities in family production systems, affected the diversification of activities observed last year in the urban informal sector. Current economic policy contains no foreseeable elements that would alleviate the measures' overall damage to this sector.
The informal commercial sector, specifically those who took up this activity most recently, have already felt the first symptoms of bankruptcy. Just as the plan intended, commerce is no longer a refuge for the unemployed from other sectors and is now generating its own unemployed.
Small production units of goods and services, those that still use only family labor, will have to adjust their income strategies to conditions in which the market, at least for some time, will not provide enough for subsistence. Families will tend to increase the number of members who need to work and to export labor through emigration to the US, as has already happened in recent years.
In the well-off urban informal sector, producers of goods and services with greater flexibility and higher accumulated capacity to resist economic changes can take advantage of the demand generated by the community projects the government announced, though this will not prevent an overall drop in their income.
The social differentiation affecting all economic sectors is particularly intense in the informal sector, since demand for its products comes mostly from the poorer strata of the formal sector, which are already in a difficult situation and in the best of cases—those that keep their jobs—are taking a salary cut.
In summary, the goal of the government's plan was to increase the supply of cheap labor by bankrupting the majority of the urban informal sector.
IndustryThe maxi-devaluation did not affect large industrial production since the weekly devaluations promoted by the Mayorga plan and the expectation the government created of an imminent maxi-devaluation led them to opt for an operating system in which their income in national currency was rapidly converted to inventory. This illustrates what the director of ENABAS, the state basic grains agency, meant when he said that the government had "previously carried out a process to agree on prices with different productive business sector, which guaranteed that prices of basic goods originating from this sector would not increase more than salaries."
Prominent representatives of industry and national commerce that belong to COSEP have said that, at the time of the devaluation, their money was "in raw materials and long-term bank deposits," so they, too, came out unscathed.
The expectations of salaried workers in private industry, on the other hand, do not appear to be higher than those of the rural or state sector. Contrary to the government's claims, the private sector has been unable to keep up with state salaries for various reasons, including 1) increased unemployment since 1988, which grew even more with the Mayorga plan, 2) the country's serious economic recession since 1984, and 3) the relative fragmentation of the union movement in this sector.
The measures announced on March 3 caused a relatively greater drop in overall wages in the industrial sector. The only workers' wages that do not show significant deterioration are those of construction workers tied to projects being implemented by the Managua mayor's office with AID funds.
Competition with imported products, another important problem for this sector, will decrease because of the relative increase in the value of the dollar. This also means, however, that the competitiveness of industries with a high import component in their production costs will drop, while other branches with more local inputs, like wood, leather and some sections of the food industry, whose exports had dropped in 1990 because of price distortions, will be better off.
The elimination of weekly devaluations will facilitate large enterprises' management of operating capital and eliminate the risk of exchange losses arising from tax withholding in the days near to the next devaluation.
Nevertheless, the rise in unemployment and drop in real salaries imply a significant contraction of demand that will deepen the overall recession in national industry. Large factories that have been in crisis since 1989—mainly the state factories that were key to the union struggle in 1990—now have no alternatives.
On the other hand, large local industry admits a serious cash shortage, which has limited its use of installed capacity. Although this stagnation has opened more space for imports, it will also facilitate its recovery, but not without significant bank financing.
Small and medium industry, which has suffered a serious lack of liquidity combined with shrinking demand since 1988, got its coup de grace with the maxi-devaluation and the Lacayo plan's initial measures. This sector was unable to accumulate dollars or inventories, and its working capital dropped in value at least 75% with the devaluation, meaning many shops went bankrupt. For example, in the Inputs and Shoes Cooperative, half of its members are unemployed and production has dropped to 30% of its historical levels.
The situation is even more dramatic in the small and medium textile and apparel factories, an important source of employment for women. In addition to this industrial sector's problems in general, they have also had to face competition from the bulk importation of used clothing from the United States, which is sold in the markets at prices much lower than national clothing production costs. Small chemical plants also have to compete with large ones, which have the advantage under the new macroeconomic conditions.
Industry's other branches—lumber, metalworking, food, plastics and paper—require government support through credits and increased demand for national products. This, however, is not compatible with the economic plan's logic, at least in the short term, meaning that these activities will contract even more in the coming months.
Despite the difficult overall situation of industry, the new conditions set by the economic program facilitate the conversion of large industry and privatization of state enterprises. The reduction of real wages, the simplification of the tax structure and reduction of tax rates and import tariffs and the eventual weakening of the union movement, together with the drop in prices for basic products from the countryside clearly stimulate industrial conversion and privatization.
Given some foreign investors' prudence and the fact that an important politicized sector of national business interests maintains the elimination of Sandinismo as its condition for investing, it is unlikely that these sectors will invest in Nicaragua's economy. Nonetheless, the country's relatively un-supplied market compared with the rest of the region could, under these macroeconomic conditions, give way to a take-off of large commerce based in a group of Nicaraguan businesspeople living in the US who are already establishing this kind of activity.
Rural productionThere are numerous signs that the Mayorga plan's strategy of centering reactivation on cotton is also the centerpiece of the current plan. The reasons for this decision lie in the possible short-term agricultural results and the multiplier effect of cotton production on the economy—the reactivation of installed burling capacity, the production of cooking oil, animal foods and cloth, and reactivation of the ports.
It is worth emphasizing that the economic measures, especially those relating to credit, clearly benefited cotton growers, who by the end of January had only paid the bank 3% of the credit authorized for the 1990-91 cycle. This meant that their debt increased only 240%, while the price for their product increased 400%.
Export crops, however, are showing significantly improved profitability. Cotton had a 57% negative profit rate at November prices; but at March 1991 prices, it showed a positive profit of 1%, implying that cotton benefited enormously from the new price structure.
Nevertheless, this profit margin is still hardly attractive, given that this crop is dominated by large production units, requires huge imported capital inputs for each cycle and depends heavily on unpredictable climatic conditions. Cotton, which was also repeatedly subsidized by the Sandinista government, has serious structural problems in its cost-income balance, which inhibits its reactivation. For example, at constant 1970 prices, the international price of required production inputs has increased, while the cotton price has dropped to less than half.
The current international market conditions for this crop are still not clear. The tendency of international prices to rise observed last year could stagnate due to the US economic recession and the drop in the price of synthetic fibers tied to the price of oil, whose increase has been neutralized by the sale of crude reserves.
The only justification for insisting on cotton as the focus of economic reactivation is its probable macroeconomic benefits and the fact that the government is insisting on a short-term solution to national economic problems that implies extremely high risks for the majority of the population.
All these factors bring us to the conclusion that new macroeconomic adjustments will be required to make cotton reactivation possible—more real devaluation or reduction in labor costs, or both. Improvements must be also be made in the technological patterns of cotton crop management, and the use of manual labor will have to be increased. These measures create advantageous conditions for the producers, which, along the way, would benefit all agroexport crops.
If these changes are not made, what the government is proposing is to subsidize cotton, "justified" by its overall benefits. The cotton producers themselves strongly expect these subsidies as they appear to be increasing the area in production over last year. They seem confident that, in the end, the government will not leave them profitless.
It would be very difficult to sell this subsidy in the medium term to domestic sectors that would provide the resources to make it possible or to the countries from whom resources will eventually be solicited to maintain the plan.
Crops like sesame and coffee, as well as beef cattle, show impressive increases in their profit rate. These producers are benefiting from a policy aimed at reactivating cotton, the slowest of the group.
The improvement in profitability of these productive activities was actually higher than cotton because, while their income had been down, they were in a better financial situation. In addition, unlike in cotton, the biggest part of their production costs is labor.
Nevertheless, the natural cycle for beef and coffee reduces their short-term development possibilities. Both require three to four years for investments to mature. And sesame, in addition to the problems of growing it in large expanses, thus making it unattractive for large producers, presents foreign marketing difficulties. All these factors relegate it to a lower position than cotton in the economic program's short-term vision.
Export profitability improved through a drastic reduction in real wages—to approximately $2.00 per day in 1990 and to $1.00 after the recent measures—and a significant domestic price increase resulting from the maxi-devaluation.
On the other hand, large-scale production of grains, such as irrigated and mechanized rice and mechanized industrial sorghum, have shown a notable decrease in profits, which went from being positive in November 1989 to negative after the measures. Meanwhile, peasant production systems are still operating in the black.
In rural areas, then, the goal of the current economic policy as a whole is to increase the labor supply—which was already high in some zones due to the end of the war—by reducing real salaries and peasant income. The latter has been done through the "silent" privatization of rural trade and financing under conditions advantageous to intermediaries. Wage workers and the poorest peasants will be obliged to employ more family members, like school-age children and women who until now have worked in the home.
Peasants who received land under the Sandinista agrarian reform, those still in cooperatives producing basic grains, have been affected by the relative drop in the price of their crops, restrictions on bank credit and a jump in the imported component of their production costs. They will have to make greater changes in their technological patterns and diversify their crops.
The dividing up of cooperative lands already observed will most likely accelerate, reducing the strength of cooperative organization with respect to credit and marketing. The clearest and most fundamental criticism that can be made of the Lacayo plan is that it tries to stimulate export production only in the productive sector with the greatest economic possibilities—the large landowners and agrarian bourgeoisie—and apparently seeks to change the relation between the different social strata such that the poor are transferring resources to the rich.