Envío Digital
Central American University - UCA  
  Number 116 | Marzo 1991



A Year of UNO Economic Policies: The Rich Get Richer…

Envío team

Last year was characterized by a resurgence of the hyperinflation that had been partially controlled in 1989 and by a new drop in the Gross Domestic Product (GDP). Inflation jumped from 1,500% in 1989 to nearly 13,500% in 1990, and the GDP fell another 3%. This meant new levels of sacrifice for the peasantry and urban poor, who were already experiencing increased inequality and social differentiation.

The new UNO government could neither control the inflation nor reverse the economic stagnation. First, it was faced with the collapse of the Sandinista economic adjustment plan during the transition period. Second, it did not know how to handle the social pressures for better distribution of the national income and, in fact, favored the unproductive urban middle sectors. Third, it did not get enough US aid. And finally, it had no strategy to promote and support the social and productive sectors capable of getting the country out of its economic crisis.

Now, in early 1991, with the government in the midst of negotiations with the International Monetary Fund, the economic situation is exacerbating the political tensions even more. Whatever agreements are reached with the IMF on the devaluation of the córdoba oro, reduction of the fiscal deficit and the privatization process will affect both the concertation between the government and the FSLN and the ongoing struggle of both political contenders to overcome their own internal divisions.

The following analysis is divided into four parts. The first deals with the overall framework in which the economy developed in 1990, focusing mainly on the factors that influenced the new hyperinflationary spiral and the drop in the GDP. The second centers on the impact of the adjustment in the countryside and the increased social differentiation between agroexporters and the small and medium growers who produce for the domestic market. The third analyzes the adjustment in the city, both in industrial manufacturing and in the urban informal sector. The industrial section underscores the differences between enterprises whose production relies on national inputs and those with a high import component; the section on the urban informal sector focuses on the growing social differentiation among its various components. The final part sketches four possible scenarios for 1991, in which the key variable is the nature of the IMF agreements.


Failure of the "Mayorga Plan"

The UNO government had five main economic objectives for 1990: 1) stop inflation and stabilize the economy by reducing the fiscal-financial deficit; 2) substitute the old currency with a new, stable one (the córdoba oro) freely convertible to dollars, so as to erase the population's "inflationary memory"; 3) get new foreign resources to support economic stabilization and reactivation; 4) encourage exports and 5) privatize the state productive sector.

"Dollarized" and deeper in debt

The economic stabilization plan, in turn, envisioned three clearly defined phases. The first—to have been accomplished in the first 100 days—consisted of correcting the strong fiscal, monetary and exchange rate imbalances that had accumulated during the first four months of the year and introducing the new córdoba oro into the financial system, at 1:1 parity with the dollar. The second phase, scheduled to last through the end of the year, would gradually introduce the córdoba oro into all economic transactions. It would also slowly phase out the printing of unbacked currency by reducing the fiscal and financial deficits to levels that could be financed by government resources complemented with foreign aid. Finally, once the necessary fiscal and monetary discipline was in place, phase three would pull the old córdobas out of circulation, replacing them with the new currency.

What really happened was quite different. The economy was not stabilized, but simply "dollarized.” People had no faith that the policies of dollar parity and free convertibility would last, so they immediately traded every córdoba oro they got for a dollar. The lack of confidence in these economic policies and the scarcity of dollars to back them up in the foreign exchange market forced the government to postpone fully introducing the córdoba oro into the economy. But this has only stimulated the dollarization process even more, since no one has any confidence in the old córdoba either. Given that it is devalued weekly and is condemned to disappear soon, people who still receive all or part of their income in old córdobas trade any that they can spare for dollars on the black market, even if only to trade them back the following week for more old córdobas. The "coyotes," or black market money sellers, thus become short-term savings banks to help prevent old córdoba wage packets from being shriveled by devaluation.

Dollar "devaluation" and inflation

By December 1990, the cumulative devaluation of the old córdoba in relation to the dollar was 5,600%, while cumulative inflation was nearly 12,950%. That means that the dollar's purchasing power dropped by more than half, since in December more than twice as many had to be exchanged than in December 1989 for old córdobas in the official market to purchase any good or service. Even on the black market, the dollar had dropped 43% by the end of the year.

At the same time, maintaining the córdoba oro parity with the dollar has spurred that inflation, since it fostered an indexing of salaries and prices to the dollar at a fictitious exchange rate. This de facto indexation has generally made national products—already high-priced because of inefficient national production—even more costly. Price rises for basic foods during 1990, for example, gradually made Nicaragua the most expensive country in Central America. A pound of red beans, which cost 23% less than the Central American average in January 1990, was priced 14% over the average by December; rice went from 16% cheaper than the regional average to 38% more expensive in the same period. Chicken, eggs, milk and sugar are all priced around double the rest of the region.

The only positive impact of dollarization has been the relative stabilization of the gap between the official exchange rate of the córdoba and the black market rate. The government presented this feat to the Donors Conference in Paris as a success of its economic policy. It went hand in hand, however, with incoherent fiscal and credit policies, given the government's inability to handle the economic and political pressures of the opposition forces. This ungovernability led to the failure of the other main economic objectives.

Ungovernable country and explosive fiscal spending

The failure of the stabilization plan and the postponement of the currency switch are linked to the government's inability to achieve its second objective—reducing the fiscal deficit. The deficit rose from 2% of the GDP in 1989 to 14% in 1990, according to Central Bank data—after having been cut from 17% in 1987 and 26% in 1988.

Ministry of Finance data indicate that by 1989, the Sandinista government had become 83% self-financing (compared to 55% in 1987 and 40% in 1988), thus drastically reducing its need to print unbacked money; but government income again covered only 43% of spending in 1990. This was due to the negative impact of inflation on fiscal income during the first half of the year, the outgoing government's increased spending during the transition period and the new government's inability to deal with the pressures of various social groups.

Fiscal income was also affected during the first half of the year by what is called the "Oliveira-Tanzi" effect—the vicious circle produced when high inflation undercuts fiscal income and thus expands the deficit, generating even more inflation. The Oliveira-Tanzi effect alone is calculated to have caused a 32% drop in fiscal income in 1990.

The government implemented a tax reform in the second half of the year to counteract its income deterioration and improve the tax system's administrative efficiency. The reform's key element was indexing both tax and public utility payments to the dollar. This was relatively successful, since fiscal income went from 8% of the GDP in 1989 to 11% in 1990, according to Ministry of Finance figures. The effects of this reform and another in customs tariffs will be analyzed in the section on the industrial sector.

The increased fiscal income, however, was not enough to finance an "explosion" in public spending, which went from 8% of the GDP in 1989 to 25% in 1990 (after having been slashed from 45% and 46% in 1987 and 1988 respectively). The social pressures that caused this explosion were forcefully expressed in the May and July strikes, when organized Sandinista public employees, workers, urban dwellers and students made a series of demands regarding salary, employment and public service tariffs. The government initially opted to confront the strikers, but was finally forced to raise salaries, give emergency credit to crisis-ridden industries to guarantee employment and partially subsidize transportation, water and electricity.

In October, the government entered into economic and social negotiations with Sandinista and other labor groups and private business organizations. The resulting concertation accords, which included maintaining existing public-sector employment and salary levels, made it impossible for the government to significantly reduce public spending for the rest of the year.

In reality, the purchasing power of public employee salaries shrank in the second half of the year. But a comparison of their salaries in the past four years shows significant improvement. Average public salaries covered 51% of the basic market basket in 1987, 15% in 1988, 36% in 1989 and 63% in 1990, according to data from the Nicaraguan Institute of Statistics and Census (INEC).

Finally, the government's efforts to cut military spending have not yet borne fruit, since it has cost more to reintegrate retired military personnel into civilian life than to keep them in the army. For example, the government had to give six-months' severance pay to 5,000 officers demobilized at the beginning of November.

Credit for bureaucrats—dollars for traders

The shortage of foreign aid meant that barely half of the $344 million fiscal deficit could be financed with foreign resources. The government had to turn to Central Bank credit to finance the other half, thus bringing on the aforementioned inflationary effects.

Not only was US aid skimpy under the circumstances, but also the $313 million finally approved in May 1990 has come through the pipeline slowly, due to both the political strings attached and the government's limited ability to administer the funds. By the end of the year, only $147 million had been disbursed. The Persian Gulf war has further aggravated the problem. Nicaragua's annual oil bill soared from $90 million to $170 million, forcing the government to use more US aid to buy petroleum than had been budgeted.

Unable to reduce fiscal spending or finance it with foreign resources, the government opted to further restrict credit for production and services, to prevent hyperinflation from spiraling completely out of control. In addition, credit was indexed to the dollar and charged at the highest interest rates in all of Central America. At least theoretically, this was done to eliminate the previous decapitalization of the financial system through subsidizing the productive and service sectors. Harsh loan restrictions reduced credit by a third, according to the Central Bank, from $493 million in 1989 to $342 million.

The córdoba oro's fictitious dollar parity has aggravated these credit restrictions, since a) the limited foreign funds could not be converted into expanded credit in devalued national currency, and b) the costs of national production, including salaries, were inflated. Determined to back its exchange policy, the government even channeled $127 million of its scant foreign aid through the exchange houses in 1990, which are mainly used by importers.

Since inflation cut the dollar's purchasing power in the official market in 1990, the fictitious parity also hurt export profitability and encouraged the purchase of imports, including contraband. Given that exports are mainly cyclical agricultural products such as coffee, cotton and sesame, the negative impact of this dollar inflation has not yet been reflected. Growers made their decisions about producing these crops based on the foreign exchange incentives in effect in 1989, when the real exchange rate was higher. Given that, exports grew almost 11% over 1989.

Though that was all to the good, imports climbed 8%, thus annulling the positive effect of the export growth and again increasing the trade deficit. While this increase in imports is partly due to the higher oil bill, it does not include all the illegally imported merchandise. The expansion of contraband has been obvious in the local markets, particularly in Managua where informal contraband trade has grown considerably.

Since the growth of exports also could not compensate for the recession in production for the domestic market, the GDP dropped for the sixth consecutive year. Basic food production fell considerably because of the drought and the credit restrictions. The crisis in manufacturing was intensified by both contraband and the reduction of customs tariffs. The lack of financing for public investment projects seriously affected the construction industry. The only growth was in services, due to the boom in import goods and contraband trade.

In summary, the government's priority has been to assign domestic resources to the state bureaucracy and foreign resources to the importers, thus sacrificing the productive sector. This tendency is provoking increased migration from the countryside to the cities, particularly Managua.


Same adjustments; different rhythm

For the agricultural sector, 1990 has brought a continuation of the structural adjustments to production within the macroeconomic framework defined by the Sandinista government in 1988. Three key differences with 1989 can be identified, however.

First, the counterpart to export reactivation has been a greater contraction of production for the domestic market, with consequent recessive effects overall. This is illustrated by the fact that the agricultural GDP decreased by 4.8% in 1990 after having grown in 1989.

Second, this necessary readjustment in crops and technologies has advanced much faster among peasants, who have had to sacrifice their income and capital levels, than among the entrepreneurial sectors (cotton, sorghum and rice growers), whose efforts to make the necessary conversions in their production systems are simply stymied.

Third, rural social differentiation, reactivated by the Sandinista adjustment plan, has accelerated significantly. Although the 1990 plan to dismantle the state sector and return lands to their old owners is still hobbled by legal entanglements and top-level negotiations, the old network of commercial, usury and productive capital has begun to silently weave itself back together, auguring serious difficulties for the peasant economy.

Three key elements have taken their toll: 1) adverse climactic conditions in large parts of the country during last year's first planting; 2) the overvalued córdoba oro, which meant relatively low prices for imported goods and services over national ones, thus discouraging the greater use of national resources that had been seen since 1988; e) the economy's lack of liquidity, resulting from restricted production credits and high inflation, which has affected producers' cyclical investment capacity, particularly that of peasant farmers.

For the agricultural sector, then, 1990 can be viewed as “a transition year,” a continuation of the Sandinista adjustments, but with a different rhythm: slightly slower agroexport recovery and a much stronger contraction of production for domestic consumption. Technological conversion has slightly stagnated in the capitalist sectors and, in contrast, the peasant economy has been forced to decapitalize to make adjustments.

Exports vs. home market

In productive terms, the recessive character of this year compared to 1989 stands out. The agricultural area in use dropped by approximately 10%, and both agriculture and livestock production fell. The drought during the first planting and heavy rains during the second planting’s maturation period seriously affected cotton, coffee and basic grains, particularly corn, in the Carazo region. But performance was very unequal. Agroexport production recovered while production for domestic consumption contracted, with both phenomena reflecting a continuation of trends observed over the past two agricultural cycles.

Agroexport production was dynamic; with an 11% increase in area planted, production volume increased 16%. Nonetheless, this growth reflects decisions producers made in 1989, since the harvest period falls in the year after the crop is planted and maintained. Increased export income in 1990 was due both to the greater volumes exported and to more favorable international prices over 1989 for cotton, sesame, meat and sugar, given renewed access to the US preferential market, even despite a drop in coffee prices.

Export growth in 1991 may experience a slight leveling-off, first because of the 1990-91 drop in coffee production, the main export crop; and second, because international price trends are not very favorable given the world recession. The only exception is cotton, whose price will be benefited by the rise in petroleum prices and the consequent effect on synthetics.

The shrinking production for the home market, particularly in basic grains, translated into a 15% reduction of the area planted over the year before, mainly in corn and non-irrigated rice. Although the climactic conditions (resulting in seed scarcity, unseasonal sowing, etc.) cannot be dismissed, two other factors played a key role. One was the marked lack of liquidity of the peasantry, who produce a high percentage of the country's basic grains (excluding industrial sorghum and irrigated rice, which are typically large-scale activities). The other was that these crops weren’t profitable, given very depressed prices due to the policies of freeing up the market and allowing massive imports since 1988.

Technology patterns

Alongside this differing evolution of domestic and export crops has been a continuation of the tendency to replace imported capital-consuming technologies with those that use primarily national resources, especially labor. This substantially improved the 1990 agricultural trade balance for the second consecutive year: agroimports dropped 40%, with agrochemicals and machinery showing reductions of 68% and 85%, respectively.

Nonetheless, this, too, was an unequal process last year. While small producers introduced major technological changes to lower their costs and deal with their acute lack of cash, some large producers tended to maintain technological patterns reliant on a high level of inputs and mechanization. They thus benefited from the overvaluation of the córdoba, which made the cost of imports less painful. Despite this generally unequal process, some other large producers admittedly did rationalize their technologies, not only for cash reasons, but also through the cumulative influence of two years of adjustments.

Credit vs. production

Agricultural credit contracted over 1989, while the process of eliminating subsidies continued by indexing credit to the dollar and establishing 13-15% annual interest rates. Given the overvalued córdoba and the rising production costs that accompanied it, the 9% drop in the dollar amount of credits financed 16% less in terms of acreage. Agroexport crops, however, particularly cotton and sugarcane, received even more favorable treatment from the bank than in 1989 (almost 13% more in amount and 5% more in terms of acreage financed), while those for domestic consumption received 19% less in amount and 26% less in acreage financed.

From the perspective of social sectors of production rather than crops, the portion of rural credit provided to small and medium producers dropped compared to 1989. Both state and large private producers benefited from the shift.

This extremely restrictive credit policy has forced producers to use their credit more rationally and finance much more themselves than in the past decade. That prevented an even bigger drop in production, but the cost of these efforts has been unequally distributed among the different productive sectors.

Peasants, whose access to financing was particularly restricted, were able to produce only at the cost of a drastic income reduction and clear signs of decapitalization of their production unit—for example, selling their animals. They also resorted more than in the previous two years to alternative forms of financing, which cost even more than bank credit (futures sales, usury credit, tenant farming, etc). Their future ability to continue adjusting their production system was set back, and a greater deterioration of their economy cannot be avoided without long-term financing.

The large producers, on the other hand, were able to finance much more themselves, even though they, too, lacked the cash to pay salaries or to invest. Like the peasants, big farmers were sometimes forced to raise the cash by selling animals, but did so without putting the very future of their farms in danger.

The abrupt increase in the cost of credit (high interest rates and dollarization) suggest that there will be low levels of loan recovery overall. Although the Central Bank moved rapidly to eliminate subsidies, this low recovery means less ability to finance production for the 1991-92 cycle. This is aggravated by the fact that the dollar moved slower than inflation, so that real interest rates remained negative in 1990.

Privatization of commerce

In the trade sphere, the increased role of private buyers stands out. They are increasingly substituting the state trade monopoly inherited from the Sandinista period, taking advantage of the state enterprises' financial restrictions on storage and export.

This "silent" privatization of the market in the face of the economy's serious lack of liquidity and depressed domestic market has translated into especially low prices for harvests. The clearest example is sesame. Credit cuts to the Arlen Siu enterprise—in the past a warehousing and export company—have meant that private merchants accumulated the bulk of sesame production at very low prices. Similarly, ENABAS, the state grain distributor, has drastically cut its grain purchases relative to last year, leaving the field open to private commerce and jeopardizing prices. Some private commercial networks have also reorganized in the coffee-growing mountains of the north.

These seem to be first signs of a return to previous patterns of domination over the peasant economy by commercial and finance capital—which had given way to state intervention in the markets in the first years of the revolution. It signifies an important redistribution of income from the peasantry to intermediaries.

Crop performance

In the reactivation of traditional agroexports, two categories stand out: sugarcane, which has grown in area planted for the past two years, and cotton, now expanding after a period of progressive contraction. Coffee also shows renewed investment.

Cotton. With a 32% increase in area sown, cotton leads the export crops in area growth over 1989, despite being lower than the new government's projection by almost exactly the same percentage. In spite of the government's interest in this crop, given increased world market prices and its ability to generate foreign exchange in a short time, its structural problem of profitability put a brake on further expansion.

It was notable that a small peasant sector, including some Sandinista Agricultural Cooperatives (CAS), planted cotton again after several years of having abandoned it. So did some big farmers who had substituted it with sorghum or non-irrigated rice in the past two years with little success.

Nonetheless, the expected results are not very encouraging. Yields are below the average of recent years, due mainly to the early drought and the prolonged rainy season that affected maturity. To make matters worse, production costs remained very high, even with the undervaluing of cotton's significant import component and a more rational use of inputs.

This implies that the crop will be 57% less profitable for producers than last year. We estimate that only a maxi-devaluation of the córdoba oro by some 110% in relation to the dollar will up the crop price enough for producers to avoid losses and thus be able to pay back their loans.

Coffee. The coffee harvest dropped by more than 100,000 quintals (hundredweight) in 1990, mainly due to climactic problems in Carazo, which caused the loss of about half the yield. To this must be added the bad condition of the region's back roads and the producers' lack of cash to pay pickers, both of which caused supplementary losses.

Nonetheless, plantations continue to be renovated and planted with new bushes, given the likelihood of long-term profitability. The recovery of the big coffee plantations received a new push this year, thanks to the greater political confidence the new government has brought to the large producers.

The recovery of small coffee production, on the other hand, appears to have been much more hampered this year by the general lack of cash. Particularly in the mountains, small and medium coffee growers have been unable to get very far in recovering their coffee plots, abandoned during the war years.

With regard to technological patterns, more important changes can be observed in small production than in the large capitalist sectors. The latter still use herbicides, which are cheaper this year than manual cleaning. The small producers, who had no available cash, drastically reduced their use of fertilizers and pesticides.

Despite the price rise from $60 to $70 a quintal, the overvalued córdoba cut the price to the producer almost in half. Consequently, profits were 60-80% lower than 1989—and lower still in Carazo given the low yields. Even so, there were still profits, as Table 4 demonstrates. This means that with an appropriate devaluation policy, coffee has development potential for both the peasantry and the large producers. It is to be expected that, after the 4-5 years necessary for the bushes to mature, there will be significant increases.

Sugarcane. This crop has made one of the strongest comebacks in agroexports. The increased production is due to heavy investments in the refineries in recent years, and to the expansion of the area planted on large adjacent private farms, as a substitute for non-irrigated rice and cotton. The increased sugar price (by $10 per hundredweight) with the reappearance of the US sugar quotas make this crop very attractive.

In the country's more remote regions, where transport costs raise the price of refined sugar, cane cultivation is also increasing. It is bound into bundles for local consumption of sweets.

Sesame. Small peasant production of sesame continues expanding, at the expense of corn. To a lesser extent, it is a substitute for cotton or rice on the larger farms. With two bad rainy seasons hurting corn production, sesame, which is more drought resistant, has been an advantage for producers. But most important were the positive price effects of the 1989 devaluation policy, which functioned as a stimulus to its production in 1990.

Although there was a 10% increase in the area sown, that is a drop from the previous years' 60% growth rhythm, showing the peasants' response to the new market signals. Credit restrictions and lack of liquidity partly explain why the growth was not greater.

In 1990's second planting, a drop in international prices, combined with the privatization of the sesame trade, caused the price to the producer to fall by up to $18 a quintal; in the first planting of 1989, it had sold for $35. Producers' income could be 60% less than 1989, which could lead to a dangerous reduction of area planted in 1991. This is not good for the country given sesame's high net generation of foreign exchange.

Basic Grains. The basic grain sector has dropped in terms of both area sown (by 15%) and area harvested (by 20%). This mainly reflects a marked contraction of corn and rice planting (17% and 38% less, respectively), since production of sorghum and beans was relatively sustained. In general, the recent years' trend toward stagnation or even contraction of the sector destined for the home market is now acute.

The negative influence of 1990's climactic conditions is notable in this sector's recession. In addition to the drop in area sown and even greater drop in area harvested, the yield was generally lower in all crops. Two other factors, however, played a key role. We already mentioned the serious cash crisis of producers, particularly peasants. The second, more determinant, factor was the unprofitability of these crops in a context of very depressed prices.

The tendency of basic grain prices to fall intensified, first because of ENABAS' decision to reduce its purchasing and storage role, thus depressing the market. The private traders took full advantage of this policy, benefiting from the peasants' acute cash flow problem. Second, the new government continued the previous policy of massive food imports, rice, for example. While grain imports were previously donated by the USSR, they are now donated by the United States. In both cases, they provide fiscal income and are part of a short-term anti-inflationary strategy.

Prices in general have been much lower than in 1989, despite the government's announcement of supposed "guaranteed prices" above the Central American market level. Seasonal patterns were also very marked: for example, at $60 per quintal, the price of beans before the first 1990 harvest was almost triple the international price; at the time of the second harvest it fell to $24.

In 1991 the country will again have to turn to important imports or donations, since total corn and rice production will be much lower than the previous period, and insufficient to feed the whole population. Without correcting economic policy, prices will continue to be one cause of the profound recession in production for the domestic market. The drop in profitability has already implied geographical, social and technical adjustments in production.

Cattle. The cattle sector was characterized by efforts to reconstitute the national herd after 10 years of progressive shrinkage. This is corroborated by the 30% reduction in the number of breed cows slaughtered in 1990. In past years, in contrast, the slaughter and export of beef grew significantly, given this activity's profitability.

Nonetheless, the herd is being "reconstituted" by transferring animals from the decapitalizing peasant strata to the medium and large ranches. It is rooted in the cash crisis of the peasant economy and, more specifically, of breeding and dairy production, which is forcing small cattle ranchers to sell their animals at very low prices. This not only affects the traditional cattle areas in the interior of the country but also the Pacific, where cattle-raising represents an alternative to cotton and agriculture for the domestic market.

There was a 20% drop in cattle slaughter over 1989, although increased contraband and rustling must be considered. A 50% growth in beef exports in 1990 indicates that the counterpart has been a strong contraction of beef available for the domestic market. As in the case of coffee, the big landowners and medium cattle ranchers reacted positively to the signs of an adjustment favoring the private sector and exports. This reinvestment process is also explained by their expectations of a rapid recovery in cattle raising at a time when international beef prices are rising and more lands are available due to the war's end.

Nonetheless, this expansion comes largely at the cost of the peasantry and shows signs of concentrating in a few hands, as does the bourgeoisie's growing control over beef processing and export with the privatization of the slaughterhouses. There is a danger that the stagnation of peasant and small-farm breeding activities in the interior will block the growth of the national herd and prevent more sustained recovery throughout the sector.

"Silent" privatization—
More social differentiation

Economic policies in 1990 considerably accelerated the social differentiation set in motion by the Sandinistas' 1988 economic adjustment plans. The differences with respect to the tendencies already observed in 1988-89 are based on a new agrarian reform process and the bourgeoisie's growing role in agriculture, even though there has not yet been any formal or massive reprivatizing.

Land conflicts and changes in land tenure were marked in 1990. Most notable were the reactivation of the agrarian reform, in which a fraction of state lands were given to former contras, and the first steps were taken in privatizing the state sector. The latter began with the Sandinistas' "piñata"—as its give-away of properties is referred to in Nicaragua—just before leaving office, and continued with the new government's return of farms to their old owners.

During 1990, nearly half a million acres of state land, part of which had been abandoned because of the war, were either given to or occupied by peasants. They took advantage of the space opened by the end of the war. After the 1988-89 freezing of the agrarian reform in the wake of the Sandinista alliance with the bourgeoisie, the area assigned to or taken by the peasantry grew in one year alone to 25% more than what had been redistributed at the time of the change of government.

This agrarian reform took place mainly in the center of the country. Worth underscoring even more than the political origin of the beneficiaries—mainly, but not only, demobilized contras or their relatives—is the vigorous mobilization and the subdividing of state farms into individual plots in place of production cooperatives. At the same time, lands deep in the mountains that had been totally abandoned during the war began to be resettled. This could be the first stage of reactivating old territory that provided national capital accumulation in the 1960s and 70s—the agricultural frontier. This area was deeply affected by the war and by policies that favored the Pacific as the only focus of national development.

This movement is taking place amidst a wide-sweeping fight over state lands, involving not only the peasantry but other social sectors as well. The fight is highly politicized and, at times, violent. On one side is the bourgeoisie whose properties were confiscated by the Sandinistas; they are looking to "reconstitute" themselves through the privatization of the state agro-industries. On the other are the state farm workers who, after first opposing the dismembering of these state properties, now demand that the lands be transferred to them.

While the legal wheels moved slowly forward to return the confiscated farms and top-echelon negotiations were quietly held between power groups, the correlation of forces at the local level largely determined the changes in land tenure that took place. Old landowners took their lands back from the state, and in some cases from cooperatives, while landless peasants occupied private farms and cooperatives. Nonetheless, the changes were not very significant, beyond the lands that went to demobilized contra peasants.

With respect to the road the negotiations might take, the clearest example so far is the privatization of Hatonic, the state cattle corporation, announced by the government at the end of 1990. With their 730,000 acres, the 26 enterprises that make up Hatonic represent more than half of all state lands. In the first negotiations, the government proposed dividing Hatonic three ways: one third each for the bourgeoisie, state workers, and former army officers and demobilized contras.

The changes in land tenure that have already occurred, and the many more still in gestation, must be seen from the perspective of where the adjustment is heading with respect to agriculture and its varying impact on distinct social sectors.

Pauperization of the farm workers

Both the peasantry and the agricultural proletariat have suffered a rapid drop in income due to galloping inflation—which shrank their monetary income and ballooned the prices of most national consumer goods—and to the drastic cut in subsidies. This does not even include the relative price fall for agricultural crops, particularly those for the home market.

The poorest peasant strata. Those with little or no land of their own are among the hardest hit by the adjustment program. They have been extremely impoverished by price increases for basic consumer goods, the elimination of subsidized transport and cuts in health and education services. They have thus had to reestablish or deepen their dependent relations with the more affluent strata (turning to them for usury credit, for example), take more wage work during the harvests and, occasionally, migrate to the cities. The drop in their own productive activity and the inability of wealthier sectors to absorb them as a labor force has obviously meant greater unemployment.

The economy of those with small plots on the outskirts of cities in the Pacific, and thus more linked to the urban informal sector, has also been strongly affected by the contraction of urban employment and the domestic market, as well as by competition from low priced imports. Joining the small informal commercial sector—in recent years an option that has swollen its ranks considerably—is now a much less viable solution given the greater competition.

The "average" peasantry. These are the small producers of grains, root crops, perishables, breed cattle and milk for the domestic market and, at times, some export crop like coffee or sesame. While they fared somewhat better than the poorest peasants, they also mortgaged their future to do so. They experienced a recession their productive activity due to their cash problem, depressed prices for their product, the elimination of credit subsidies and bad weather. Their income and accumulation levels thus eroded badly during 1990, since they were forced to sell their animals, lower their investments, offer their crops at risky futures prices, save less grain for seed and pull their children out of school to work on the farm.

This has also been the case for the peasants on the agricultural frontier, and even for the better-off small farmers in the mountains. The recovery of their farms based on grains, coffee and cattle has been relatively limited. They still have not benefited from the end of the war or from the newly available labor force that the demobilized contras represent.

Peasants benefited by the Sandinista agrarian reform. This is one of the sectors most dependent on subsidies, mainly subsidized credit. Yet these peasants are speeding up their production changes much more now than over the past two years, basically because of the drastic reduction in bank financing, its total dollarization and the fear that the bank will not pardon or roll over their debts, as was common during the Sandinista years. Their adjustments have centered on greater crop diversification, greater use of family labor instead of machinery, less use of inputs and a "cautious" use of credit combined with clear efforts at self-financing. These changes have followed the partial or total subdivision into plots of lands on the Sandinista Production Cooperatives (CAS)—an answer to the demands of the adjustment. It is both a return to traditional peasant structures and a real democratization of organization. In reality, the survival of the cooperative sector does not lie solely in legal proceedings about land tenure, or in political resistance to the old owners' efforts to recover their farms. It depends on the economic viability that the adjustment program demands, which becomes even more relevant with the new legal regulations regarding the sale or purchase of lands given out through the Sandinista agrarian reform.

Full-time farm workers. Their standard of living has been reduced more by the reduction of their subsistence parcels and social services than by the drop in salaries. In addition, unemployment has increased, even in such important focal points of reactivation as the big coffee plantations (Matagalpa), cattle ranches in the interior (Camoapa) and cotton. Layoffs have been accompanied by a lengthening of the workday, explained by the lack of credit to pay salaries and by the limited substitution of mechanized labor for manual labor.

State sector farm workers, only a fraction of the class, have been demanding that state lands be privatized to them. Even if this happens, their survival will be difficult in the current market conditions if production is organized according to a self-management scheme that still uses the enterprises' bulky administrative and technical apparatus.

In the short run, the abundant labor supply, which cannot be absorbed by large production, could generate an even greater drop in wages for the rural proletariat, and their subsistence plots may even disappear.

The bourgeoisie divides

At the other end of the social spectrum, large farmers and other relatively affluent sectors of the countryside continued the trend, sparked by the Sandinista adjustment, of fracturing into two blocs.

One bloc is the bourgeois fraction oriented to the domestic market, whose technologies depend on imported resources (sorghum and rice producers, and chicken and dairy farmers). Their profits have continued falling or gone into the red. Those who again joined the cotton adventure, with disastrous results, must be added to this bloc, for which the overvaluation of the córdoba has provided breathing space. While some have stopped their conversion, others have continued trying to rationalize their technologies and improve their yields. With the currency devalued and credit restricted, however, their economic viability centers on their ability to rapidly convert to alternative export crops (sesame, soybean, cane, extensive cattle raising or nontraditional crops) and to technologies that take more advantage of the increasing labor supply.

The other bloc is made up of large coffee growers and cattle ranchers, who are clearly reconstituting themselves through heavy investments. Although this process was begun with the Sandinista adjustment policies favoring exports and the private sector, the rhythm of their reactivation has grown under the new government.

The policy of devaluing the córdoba oro, expected for 1991, and the dividing up of the state sector will give these sectors an even greater push. Nonetheless, the future of the cattle bourgeoisie is also tied to the recovery of cattle breeding, historically in the hands of the peasantry and farms in the mountains.


Dumping manufacturing; opening up to imports

Industrial production shrank 8.4% in 1990, continuing the recessive trend begun with the 1988 Sandinista economic reforms. The causes of this new drop, however, are more tied to the invasion of imported products than to the previous years' contraction of internal demand.

This invasion is due to the overvalued national currency, Nicaraguan merchants' easy access to cheap dollars and the new tax reform, which cheapened imports by lowering the taxes and import duties paid to enter the national market. The overvaluation of the currency has also forced a 32.7% drop in industrial exports over 1989, particularly in categories that used more national inputs, such as food, drinks and leather. With their costs inflated by the overvaluation, these industries lost their competitiveness on both the international and local markets. Exports fell 31% for nontraditional food products, 58% for drinks and 41% for leather. Production using fewer national inputs was a different story: chemicals only dropped 4% and metal products actually grew 6.2%.

The overvalued exchange rate also increased the demand for substitute products, which favored imports over domestic goods. National industries are being forced to quickly improve production, both in price and quality. But they are seriously hampered by credit restrictions on investment and working capital (better raw materials and other inputs). This should be taken into account in order to avoid an even greater recession in industrial activity.

Tax and duty reform

In 1990 many more complaints were heard from capitalists about wage costs—a demand won by the Sandinista workers—and the lack of cash to pay electricity bills than about the lowering of customs tariffs and the invasion of imported products. Why no protest against the denationalization?

The silence was partly because no manufacturing industry can compete internationally in any case; that and its oligopolic structure are, in fact, its main problems. Another reason was that the most important manufacturing fraction strongly depends on imported inputs. The effects of the duty reform are offset for them by the devaluation of the dollar, which allows them to import cheap and sell dear.

The tax reforms, too, have modified the possibilities for national industry's future development in the short and long run. Lowering taxes and customs duties is partly aimed at eliminating the fiscal protection that national industry has enjoyed since the creation of the Central American Common Market in the 1960s.

It also aims to put Nicaragua on a par with the other Central American countries, which have all been reducing customs duties as part of the economic accords signed by the Presidents to liberalize their economies more. Only Costa Rica is lowering its tariffs gradually.

The key aspects of this tax and tariff reform are:
• The elimination of selective consumer taxes on some imported goods that are also produced nationally.
The nominal protection (duty rights and selective consumer taxes) for these products dropped from 30% to only 5%. In addition, duties were lowered for a series of items that are not produced locally.
• A general drop in customs tariffs, to a maximum rate of 20%.
• 100% exoneration of selective consumer taxes for imported raw materials.
• Elimination of selective consumer taxes for national production, with the exception of liquors, cigarettes, soft drinks and beer, which remain an important part of tax income.

Thanks to these reforms, almost half of the duties items that compete with locally produced goods end up with a nominal protection of under 30%, an effective drop in tax protection for many such goods. Some, however, are still protected almost as much as before the reduction in duties, since selective consumer taxes have been maintained on some imported goods that compete with them. But there are signs that these taxes may be eliminated in the medium and long run. This, together with the elimination of duties and lowering of selective consumer taxes for another group of goods, indicates the new rules that will govern the industrial sector. It had better be prepared to face greater competition, without a cushion to soften the blow of the undervalued dollar. It is proposed that goods produced by newly opened factories be without fiscal protection from birth, so that they will and can compete both in and beyond the local market.

On the other hand, lower import tariffs and the elimination of selective consumer taxes for imported raw materials reduced costs for industrial branches that strongly depend on imported inputs and tend to be in the hands of private entrepreneurs. According to data on the 1986 input-product matrix, branches that depend less on imported inputs are those in which small industry is important, such as food, leather, wood and furniture. In the other branches, the percentage of imported inputs in intermediary consumption is more than 45%, and in paper and printing, chemicals and metal products it is over 90%.

According to available information, electricity rates went up last July by 334% in real terms over January, and stayed there during the following months. National salary levels, also measured in real terms, rose up to 124% in June; despite having dropped again in succeeding months, they are still an average 70% higher than in January.

Since the adjustment has affected small industry even more than manufacturing dependent on imported inputs, it has spawned new inequalities within the urban informal sector.

The urban informal sector —who thinks about it?

The urban informal sector has been one of the most controversial sectors in Nicaragua. Some call it the "apron bourgeoisie"; for others, it is a grassroots sector taken into account by neither the Sandinista nor the UNO economic policies.

To better evaluate the impact of the 1990 economic adjustment on the urban informal sector, it can be divided into two strata—the well off and the low income—and three sub-sectors—commerce, services and production. Among the commercial traders, the well-off are those with more established trade—corner markets or household appliance stalls—and a vehicle. Those in the low-income stratum walk the streets selling clothes and sweets. In services, the plumbers and masons who go through the neighborhoods selling their services are low-income, while the well-off service providers are those with their own taxi, a small repair garage, or are the truckers whose old pickups are constantly blocking the streets in the Eastern Market. In production, the tortilla maker in the neighborhood or the dressmaker who works with her own machine belong to the low-income sector, while the owners of small carpentry, dressmaking or lathe shops, who hire two or three workers, are representative of the well-off informal producers.

The following typology is based on the amount of capital each has, as well as on each family's principal activity at the beginning of 1990.

Well-off sub-sectors. With between $1,000 and $6,000 in capital, they are all able to reproduce their activities. The longer their experience, the more capital they have accumulated. Commercial micro-businesses tend to have been in operation over five years. Those offering services tend to have joined the sector most recently, whereas the production enterprises are the oldest of the typology, generally with more than 10 years of existence.

Low-income sub-sectors. All with less than $1,000 in capital, none can keep both their families and their business alive through this activity alone. The popular commercial sub-sector was able to do so during 1990 not by its own coherence, but because of the general subsidies to commerce. The older micro-businesses of this type have more capital and better incomes. Service operations tend to be newer than the rest of the types in this stratum due to their high turnover. In their family survival strategy, salaried labor in the formal sector of the economy is more important. The production sub-sector tends to be older enterprises, predominantly in food preparation. This type depends the most on selling its labor outside the enterprise, even though its wage income did not exceed 30% of its total income, either at the beginning or the end of 1990.

During 1990, the behavior of both strata largely reflected the economic policy we’ve been analyzing.
• The economic adjustment and economic policy in general allowed the urban informal sector some recovery, particularly for upper-level commerce.
• A process of social differentiation and inequality was accentuated, in which the better-off businesses
went forward while the poorest ones, particularly those in production, were decapitalized.
• The informal sector's main reaction to the prevailing macroeconomic conditions was to diversify its
economic activity.
• There are signs of the beginning of a conversion strategy in informal sector activities, with changes in the quality of its products and services, particularly in the productive sub sector.
• The readjustment of its supply markets is part of the more general tendency to denationalize the economy.
• The informal sector has moved into the provincial department capitals in search of new buyer markets, indicating that the deterioration of its counterparts there could be more marked than in Managua.

Differential impact of the adjustments

The 1990 economic adjustment has undermined the urban informal sector’s activities much less than the 1988-89 Sandinista adjustment did. As can be seen in Table 7, total family income of the sector's two distinct strata contracted much more under the impact of the Sandinista adjustments. The 1988 impact hit all strata severely and indiscriminately. In 1990, the well-off strata still improved their purchasing power with respect to the basic market basket by 54%, while the low-income strata faced real survival problems given a 6% real drop in their income. Taken together, the incomes of the urban informal sector increased 31% in 1990, compared to a 75% deterioration in 1988. Perhaps the greatest difference between the two adjustment years is the level of social differentiation and inequality generated by the new government's adjustment.

The Nitlapán survey used for Table 8 revealed a slight tendency for all sub-sectors to lay off employees from their micro-businesses and incorporate unremunerated family labor during the 1988-89 adjustment. A tendency was also noted in those years for family members to seek work in the formal sector of the economy.

With the 1990 adjustment, employment has been more stable. The survey reveals a slight tendency to substitute family labor power with employees and reduce its participation in the formal labor market. This is due both to a less brutal adjustment and to the reduced labor supply.

While 40% of the enterprises surveyed in 1989 were forced to seek high-interest informal credit to supplement their deteriorated working capital, in 1990 only 17% turned to such credit.

Disjointed adjustment

The upper strata of the urban informal sector benefited from two features of the 1990 adjustment—the first, the struggle of the public sector workers, and the second, incoherencies in the government's economic policy. When wages rise, the urban informal sector benefits; when they fall, it suffers shrinking demand for its activities. Thus the wage increases that state workers in government and industry won through their May and July strikes had a chain reaction in this sector.

Given the new government's incoherent and disjointed economic policies, the urban informal sector benefited from an economy with three distinct currencies throughout the entire year. It bought imports in devalued dollars and sold them in inflated old córdobas. In other words, the fact that the inflation of the old córdoba was greater than its devaluation relative to the dollar provided a cushion for the well-off informal sector.

The expansion of the fiscal deficit, which was bad news for the economy as a whole, also stimulated the informal sector, and was a particular relief for its commercial sub-sector. As happened during the first year of the Sandinista administration, with its subsidized economy, the urban informal sector recovered in 1990 due to a policy that effectively subsidized its activities.

The informal sector also took advantage of the growing quantity of family remittances from abroad which, according to a recent Nitlapán study, was more than $80 million in 1990—higher than the earnings from coffee, Nicaragua's chief export. In terms of a net generation of foreign exchange, these foreign remittances can also be understood as export earnings, in which the exported product is the family labor force, which enters the formal sector of the US economy. The dollars they send home strongly increased the demand that stimulated the informal commercial strata in Nicaragua's cities.

And finally, the avalanche of almost $140 million sold through the exchange houses also stimulated the economy's cumulative demand, and trickled down to this sector.

Commerce coddled; production punished

The 1990 economic policy favored commerce even more than before. The growth of street trading was even more notable than the expansion of large and medium commerce, which was fed by those returning from abroad—Miami, in particular—with a certain amount of capital. The word "cholutequita" has become part of the national vocabulary. (Named for Choluteca, the Honduran border city, it refers to all contraband merchandise coming in from Honduras). Another term that has crept into Nicaragua's vocabulary is "Eastern Bank," referring to the vast amounts of black market money and goods traded in the Eastern Market.

This general tendency offered far greater advantages for the commercial sub-sector than for services, and meant a significant deterioration for the production sub-sector. The table below analyzes the three different activities in strictly economic terms, independent of the enterprise's size and capital or its weight in a specific family's survival strategy. In fact, families combine different activities from the three sub-sectors, while some members even work for salaries in the large formal sector enterprises.

As can be seen, the commercial sub-sector got the lion's share in 1990. Its clear advantages over production are due to the disarticulation of the Sandinista adjustment during the post-election transition period, and, afterward, to the new government's policy of denationalizing the economy. Given an economic policy that facilitates the cheap purchase of imported goods to be sold dear nationally, stimulates the inflationary spiral and weakens the production of goods and services for domestic consumption, particularly those with a low import component, how could the commercial sector not be favored over production?

Table 8 also shows the weight of the undervalued dollar. For the urban informal sector, as for other sectors of the economy and the Gross Domestic Product itself, increased dollar income is not the same as increased purchasing power. The demonstrated difference is 100% for the whole of the urban informal sector. The productive sub-sector, for example, increased its dollar income 63%, but could only buy 2% more with it.

Not a single worker fails to understand the dwindling of his or her purchasing power, whether a wage increase is in dollar-pegged córdobas oro or in old córdobas. Since merchants get a lot of dollars and thus can increase their real incomes a little, their case is harder to understand. The most important thing to understand is the incoherent logic of the 1990 adjustment, which is: overcharge to stay equal. Since the merchants' earnings would otherwise shrink substantially in the three-currency game, they overcharged to keep up while the economy shrank by almost 3%.

How does the mechanism that devalued the dollar work? The three-currency game is played as follows: the inflation rate for services and merchandise as a whole is higher than the devaluation rate for the old córdoba, which is linked only to the inflation rate of goods and services measured by the Consumer Price Index. But the old córdoba is also linked to the córdoba oro, which is fictitiously wedded to parity with the dollar. In other words: $1 = 1 córdoba oro = ever more old córdobas, according to the rules of this game. But the dollar, by being tied to the córdoba oro, constantly loses its purchasing power because the inflation rate climbs continually, given the lack of supply, productivity increases or economic rationality. Without production and economic reactivation, the inflation problem cannot be solved. Without rationality in the economy, the córdoba oro functions both as the currency for calculations and the dollar's devaluator as long as the dollar remains tied to it.

Businesses with more goods and capital win this game, then, independent of their efficiency or economic rationality, because they benefit from the undervaluation of the dollar and the lack of goods and services in a hyperinflated economy.

This has been one of the main reasons why the 1990 economic adjustment did not fully achieve its objectives. It denationalized and dollarized the Nicaraguan economy with a devalued dollar, opening the door to earnings for the large capitalists, while demanding that they rationalize their production and services. As the analysis of the agricultural sector shows, the pressure to rationalize production has come mainly from the producers’ lack of liquidity. What cash there was in the economy last year left the productive sphere and entered the commercial sphere.

More social differentiation in the informal sector

The level of inequality in the urban informal sector rose throughout 1990. As Table 9 shows, income from services and production in the popular stratum has deteriorated. These are precisely the two sub-sectors whose employment contracted, both in their own family businesses and in the formal labor market. In that stratum, only commercial activity increased its income, and only enough to maintain its purchasing power of the basic market basket. It has been able to stay afloat because of an economic policy so favorable to commerce. The well-off commercial sub-sector, on the other hand, converted its 116% increase in dollars into a 51% increase in purchasing power.

All the well-off sub-sectors had increased income from their main activity, but, even there, the increase in the production sub-sector was well below that of commerce. What these tables mainly show, however, is the increasing inequality. The impact of the 1990 adjustment on the urban informal sector has been the same as in the countryside, in that the popular urban informal stratum has suffered as much as the poorest peasants, and has been similarly decapitalized.

In the well-off commercial and services sub-sectors, 69% of the businesses capitalized their operations, with new locations, machinery, tools, inputs and merchandise. Only 8% of the entire popular stratum managed a certain level of capitalization, while 72% had to decapitalize (selling domestic articles, clothes, jewelry and the like) to be able to maintain their activity.

Up to this point, we have only analyzed the impact of the 1990 adjustment on the activity of the micro-businesses themselves. But families from the urban informal sector often complement their income by selling their labor power in the formal economy and by family remittances from abroad. Even with that, overall family incomes within the popular strata fell slightly, as Table 7 shows, particularly for the production sub-sector, while those of the more comfortable strata as a whole increased by over 50%.

Diversification strategy

Almost two-thirds of the micro-businesses surveyed complained of a contracted market for their activities. The main response has been to diversify their economic activities, both within and across sub-sector lines. Within the same sub-sector, for example, there have been changes (or expansions) in both the sales locations and the goods or services offered.

The commercial sub-sector now often combines national and imported products, with the well-off merchants including more imports. The diversification level for both strata of merchants was 60%. In services, internal diversification presents more problems but was still significant among both the well-off and low-income strata (50% and 40%, respectively), although the more common strategy for the low-income services sub-sector has been to incorporate commercial activities in their micro-business. The level of internal diversification in the productive sub-sector has been 86% across both strata. The recession in production and the process of differentiation and inequality has forced these urban artisans to diversify as much as the rural peasants.

More than 80% of the cases studied have also diversified—or at least attempted to diversify—their markets for both purchases and sales outside of Managua, the former owing to the obvious advantages of contraband. The latter indicates not only competition by new informal businesses, but also the strong contraction of productive activities in the provincial departments.

This geographical diversification has been accompanied by a less pronounced diversification toward new types of activities or new production strategies. These strategy changes show pronounced differences among the different sub-sectors of both strata. The well-off merchants, despite the advantages in commercial activities, used their commercial earnings to diversify into family service activities, increasing their income by 64%. The well-off service sub-sector, on the other hand, improved its income slightly by diversifying into production; and the well-off productive sub-sector diversified towards commerce, leaving any activity in services altogether.

Finally, in both the productive and the commercial activities of the well-off strata, their incomes increased 23% through salaries in the formal sector, where their skilled labor was revalued. The weight of salaries in the well-off strata reflects the strategy of professionals who had left the formal sector during the Sandinista government and are now returning to it without abandoning their informal activities. Instead, they are beginning to hire other labor.

The diversification toward new activities in the low-income strata responds to the logic of social differentiation. By adding new commercial activities, the popular services sub-sector managed to minimally reproduce its micro-businesses, receiving 30% of total family incomes through commerce. The popular productive sub-sector with a significant drop in demand for its main activity, did not have enough capital to diversify into commerce, its micro-enterprise went bankrupt, causing a 4% decrease in family income.

Conversion, informal-style

The shrinkage of the market since 1984 and the challenges of reproducing the micro-business and of family survival have forced an intensely rational use of capital in the urban informal sector. Its remunerations as a labor force can be seen in Table 10.

This table shows that the poorest enterprises in the urban informal sector are twice as efficient in their use of capital than those in the higher strata. The popular enterprises absorb 25% more of the economically active population, particularly through family labor, than do the well-off ones. The families in the low-income strata also use their capital more efficiently than those of the higher strata. For each dollar invested they receive 42 cents income monthly, while for the higher strata it is less than half that. Nonetheless, the monthly income per non-paid worker in the popular strata is only one third of that of the well-off strata, which indicates the importance of access to capital. The table also shows that, in both strata, capital efficiency in commerce is much higher than in services and production.

It is worth asking here if the whole of the urban informal sector is not more efficient than Nicaragua's monopolistic industries. Despite industry's higher quantity of capital per worker and another series of advantages it enjoys, it was only able to generate $153 of income per worker in November 1990, 6% below the $163 per worker in the urban informal sector.

Table 10 shows the advantages that the macro-economic conditions gave to commerce to bolster its capital more than in services and production. But with regard to labor productivity, services surpassed commerce in both strata; and production took third place in both.

These micro-businesses have converted and rationalized their use of capital throughout 1990. During the year, the conversion of activities was most prominent in the productive sector, since the overvalued national currency made Nicaraguan production more expensive than in the rest of the region. Production in the urban informal sector depends much more on national inputs than do commerce and services. Urban informal artisan producers, similar to the peasantry, suffered a process of "forced" conversion. For example, bread makers started producing rolls instead of loaves; carpenters reduced the amount of wood used, changing their furniture styles; and seamstresses and shoemakers sought out styles that used fewer inputs or entered into lines of production for children.

There was less conversion and rationalization in commerce and less still in services. Some 90% of the businesses surveyed from the productive sub-sector had begun a competition strategy based on lowering their sales prices. In this, they followed the strategy of both the popular and well-off service sub-sectors, in that order. The merchants favored by the macroeconomic conditions were less interested in reducing their prices to win a greater portion of the market. Only 40% of the popular and 10% of the well-off commercial sub-sector did so.

An uncertain future

Everything indicates that the macroeconomic conditions that permitted the urban informal sector to recover its microeconomic level will disappear in 1991.
• The International Monetary Fund will impose a devaluation of the córdoba oro on Nicaragua, taking away the informal sector's ability to buy imported products and inputs in devalued dollars and sell them inside Nicaragua in overvalued córdobas.
• At the beginning of 1991, the government began cutting the supply of dollars to the exchange houses, which will also have a negative impact on this sector's fortunes. It will particularly affect the commercial sub-sector.
• If the government fulfills its plan presented in Paris to restrict credit to production even more, the productive and service sub-sectors will face even greater contraction of demand for their activities.
• If the government continues cutting the income of public and industrial wage workers, as it did drastically during the last months of 1990, it will have a recessive effect on the informal sector, whose fate is tightly linked to demand generated by wage workers.
• During 1991 the only thing that was assured was the flow of family remittances from abroad, but a recent study of the United Nation's Economic Commission on Latin America indicates that the majority of these remittances are being absorbed by families that are not active in the urban informal sector. Furthermore, the war in the Persian Gulf, by aggravating the US recession, will reduce the quantity of remittances sent to Nicaragua.

Most likely for 1991 is a repetition of the June 1988 economic adjustment scenario and a profound recession in the activities and incomes of both strata of the urban informal sector.

The sector's micro-businesses, both low-income and relatively affluent, will experience more decapitalization and exploitation at the hands of the moneylenders.

If the government takes away the subsidies for commerce and speculation, it will increase dissatisfaction, robbery and other forms of social decomposition. Given the informal sector's low level of economic and social organization, and that the Sandinista opposition is still not seeking a social base there, this sector's dissatisfaction will probably not significantly contribute to political protest against the government, even though it represents some 45% of the economically active population.


As mentioned in the introduction, the key variable in drawing up possible scenarios for 1991 is the IMF negotiations. The country cannot begin to recover economically without foreign aid. With the changes in Eastern Europe and the war in the Persian Gulf, the only two sources of aid are the IMF and the World Bank, both of which will condition their support on the economic policy agreements established between the IMF and the Nicaraguan government. The negotiation agenda has five main themes:

Rhythm and strength of the córdoba oro devaluation. The IMF will demand more and the government will ask for less, fearing that the country will become even more ungovernable, particularly in the cities, where the devaluation will hit hardest.

Credit policy. Here the Nicaraguan Central Bank will follow the IMF's austerity line, even though new resources would allow the government to utilize credit to stimulate agroexport investments and stop the drastic drop in production for the domestic market.

Fiscal debt ceiling. The IMF will demand a greater reduction, and the government will ask for less, although in a relatively good position to reduce it.

Privatization of trade, industry, banking and state sector lands. The government needs to tread slowly and carefully through this political minefield, negotiating every step; the IMF will demand that the process be faster and more thoroughgoing.

Administration of compensatory funds. These funds for the popular sectors will come from AID or the International Social Emergency Fund of the United Nations Development Program.

The possible accords that could be reached on these five themes are already creating tremendous economic tensions. Another source of tension is the impact they could have on the stability of the concertation agreements. And the third is the effect they will have on the ability of both the FSLN and UNO to overcome their own internal divisions and present coherent national economic projects. The divisions within each bloc could either diminish or deepen, depending on the outcome of the negotiations.

On this basis, we offer four possible scenarios:
Scenario 1: Violeta in Never-Never Land

In this first scenario, a broad accord with relatively flexible conditions is reached with the IMF, permitting the government to implement a gradual economic stabilization program. The gradual aspects consist of a limited devaluation of the córdoba oro, which would send a clear signal to exporters, and a transfer of credit from the public to the productive sector. This would become possible by reducing the fiscal deficit, based on cutting military spending by more than half, as proposed in the 1991 budget approved by the National Assembly. Privatization would be carried out according to the Hatonic model, in which the bourgeoisie is favored but the Sandinista petty bourgeoisie and the grassroots sectors, including former contras, get a quota. This unlikely scenario is rounded out with the 5% growth rate projected in the Paris document and a great leap forward in government coherence and administrative efficiency.

Who gets hurt in this scenario? For one, the urban informal sector does, as there are no cheap dollars to make commerce flourish. The commercial and industrial capitalists are also affected, since they also depend on cheap dollars. But urban housing and infrastructure construction projects could help reactivate urban employment and demand. There could also be compensatory packages supported by AID that offer credit subsidies for micro-businesses and neighborhood food distribution programs for the urban poor. In the rural sector, the effects of a "gradual" stabilization would benefit the big agroexporters and the fraction of the more affluent peasantry that produces exportable crops. The poorest strata of the peasantry, which produces basic grains, will get poorer. But it is even possible that AID could develop credit subsidy programs for this sector, particularly those in the agricultural frontier, where support for the former contras is strong. This scenario is obviously premised on a significant flow of foreign aid to help reactivate national economic activity.

At the political level, the conditions would exist to strengthen the concertation process, consolidate the social democratic option within the FSLN and intensify the division between the government and COSEP, the reactionary business association. In this scenario, the grassroots movement would have space to develop their alternative experiences in popular economy, as long as they avoided becoming clients of the national political actors and were able to use the resources offered in the compensatory economic packages not as subsidies but to build the base for their own economic autonomy.

Scenario 2: Violeta Bites the Poison Apple
In this scenario, the IMF forces the government to implement a conventional IMF "shock" adjustment program, which includes a hefty devaluation of the córdoba oro, even greater credit restrictions to producers, a drastic reduction of the fiscal deficit—even greater than agreed to in the National Assembly—and a privatization process that includes not only production and service enterprises (even including utilities), but also the banking system. The bourgeoisie would benefit almost exclusively.

The recession among the productive and social sectors oriented toward the domestic market—the urban informal sector, the peasant basic grain producers and even the capitalists linked to domestic industry and commerce—would worsen. Wageworkers in both the city and countryside would see their income shrink even more and unemployment would increase substantially, creating attractive conditions for foreign investment in projects like the free-trade zone. Big agroexporters and well-off peasants would get an economic shot in the arm, accelerating social differentiation both in the countryside and the cities.

As with the previous scenario, the strong social impact of these measures could be mitigated through the reactivation of the construction industry in the cities and the transfer of subsidies to the urban informal sector and the peasantry through outside-financed compensatory programs.

Politically, the UNO government would consolidate, with COSEP's support. The economic project of COSEP and AID would win out over the concertation project with the FSLN. The economic tensions among the grassroots would in turn push the FSLN to abandon the social-economic concertation, thus aggravating the tensions between its moderates and radicals, whose views were overridden through most of the 1980s. With the breakdown of the concertation, the grassroots movement could get lost in merely reactive activities, uselessly seeking signs of change in the adjustment and a return to the recent past. While the moderate leadership in the FSLN could wait out this reactive period until the 1996 election contest, the grassroots organizations do not have that luxury; they run the risk that the economic conditions could provoke either spontaneous social explosions or social decomposition and political apathy—both undercutting their reason for being. Economic organization of the popular classes will be particularly difficult in this scenario.

Scenario 3: Violeta at the Mad Hatter's Tea Party
The accord with the IMF is rejected and agreement on a program is postponed. In this scenario, the rejection could come from either side. The IMF, which also represents the World Bank, could walk away from the negotiating table because the government lacks a sufficiently coherent economic program, making the country too ungovernable for the IMF to risk giving it a green light. Or the government could abandon the negotiations because it would be political suicide to accept the magnitude of the adjustments the IMF wants to impose. The economy would continue its slow deterioration and economic policy would remain as incoherent as it is now, based on indexing the economy to the dollar, with restricted credit to the productive sectors, the same level of fiscal deficit and a privatization scheme that, like scenario 1, would follow the Hatonic model.

The main beneficiaries would still be the urban informal sector and the entrepreneurs linked to industry and commerce. The countryside would still be affected, since agroexporters are harmed by the overvalued currency and the poor peasantry by the strong credit restrictions. Wageworkers in the countryside and the cities would suffer a slow erosion of their income rather than a drastic drop.

Since the flow of foreign aid would remain blocked, special programs for economic reactivation or subsidy transfers could not be financed, thus increasing social pressures. In this context, instead of accepting a strict accord with the IMF in April, the government would be forced to ask for a "shock" program in the second half of the year.

Politically, the government would be weakened by pressures from UNO's right wing, while in the FSLN the different positions would remain, but unity would be maintained. This scenario opens the possibility for authentically national proposals. But a development alternative requires more than proposals and ideas. It needs an accumulation of popular economic experiences "from below" in the government.

Scenario 4: The People in the Land of Oz
An adjustment program is achieved with grassroots participation. In this last scenario, the government, with a view toward medium-term national development and pressured by strong actions by organizations of peasants, artisans, national small industry and the urban and rural cooperative movement, reaches an agreement with the IMF that includes the interests and production potential of the peasants, artisans and small national industry.

There is limited foreign aid, which is used mainly to reactivate the grassroots economy, but without excluding the contributions of business sectors able to rationalize and convert their enterprises without the advantages that a conventional program offers them to de-capitalize production: growing proletarianization, unemployment and low salaries that increase their profit levels.

This scenario is actually an improved version of the first one, in which the basic difference is that the fulcrum of the adjustment program is support for the conversion of the productive and social sectors. It has advantages over the first because it guarantees the recovery of domestic production, a crucial component in any economic reactivation plan. The first scenario only treats this problem in compensatory fashion, and as a political mechanism to undermine the opposition; it thus creates political clientele instead of a social base whose medium-term economic interests are represented in the stabilization and adjustment program.

In this scenario, the debates within the FSLN about whether or not to co-govern will disappear, and the FSLN will be rejuvenated, mobilizing the grassroots sectors around their own alternatives and pressuring the government to go further along this road.

This scenario, in reality, is what Nicaragua needs most in economic and social terms. Nonetheless, it is not viewed as possible in the short run. It is a scenario for the medium future and a focal point of hope for the grassroots movement. It is a scenario to be built from below, inasmuch as there are still no alternative national proposals rooted in the practice and experience of grassroots organizations, particularly with respect to non-subsidized economic self-management, that could oppose the slow or accelerated denationalization generated in the other economic policy options analyzed. Since these alternatives do yet not exist, the FSLN's concertation process with the government will continue having three faces for the rest of 1991: reactive from the grassroots side, rational from the institutional side seeking to maintain the transition protocol, and self-serving from the side of the emerging Sandinista entrepreneurial class, which will be seeking its own benefits.

The most likely scenario for 1991 is a combination of 2 and 3, with a glimmer of hope for a slightly gentler program than the IMF would prefer. Nonetheless, some important fractions from the base of the grassroots movement can be expected to come up with creative adaptations to the international and national panorama.

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