Envío Digital
Central American University - UCA  
  Number 88 | Noviembre 1988



More on the economy—And More Needs to Be Done

Envío team

On September 30th the córdoba was devalued by 78% and the prices of imported fuels went up by a comparable amount, leading to price increases across the board. This adjustment follows on from the big economic reform packages of February and June. [See “The New Economic Package—Will a Popular Model Emerge?,” envío, Vol.7, No. 86.]

There are signs that these economic measures are succeeding in achieving their short-term goals, which include increasing agricultural production, raising efficiency levels and reordering prices so that people pay the real costs of goods and services. The overriding aim in the medium to long term is to get Nicaragua's inflation rate under control again. Such an improvement would not only mean a way out of the current crisis but the possibility of developing an economic model more in accord with Nicaragua's possibilities and more in the hands of the Nicaraguan people.

These adjustments, however, are being made at a very high cost to people's living standards. The social cost has been a serious rise in unemployment and malnutrition; the reversal of successes at the community level in education and health care due to budget cuts, high staff turnovers, acute materials shortages and very low wages; not to mention a growing spread in wages, with technicians and professionals now receiving salaries at least 15 times higher than manual workers.

The new macroeconomic profile arising from the measures includes:

* A shift in resources from the urban to rural sectors, because exporting has become profitable again. While the recession is driving down public consumption it is, at the same time, rationalizing and restructuring those sectors of the Nicaraguan economy that most represent the country's dependence and underdevelopment: urban-based industries and commerce. Thus, while agricultural production has shown improvements over last year's performance, industrial production has fallen nearly 30% and the recession in commercial activities, particularly in the informal sector, has been even stronger.

* Less dependence on imported goods and a move toward more efficient administration. This has lowered production costs for large enterprises such as the Chiltepe dairy project, as well as for peasants and medium producers.

* A much greater awareness of the real costs of economic activity since, without the subsidies of the past, national prices are closer to international prices. In this reordering, only the price of labor has fallen behind: workers' wages and the prices for peasants’ products are very low, in relation not only to international levels but also to prices in the region and elsewhere in the Third World. Despite the September adjustment, the price paid to peasants for corn by ENABAS (the basic foods organization) was equivalent to $6.87 per hundredweight, while the international price is $9.00. On the other hand, chicken producers are protesting that the price of sorghum sold by ENABAS is equivalent to $16.00 per hundredweight while the international price is only $7.00. Sorghum, not produced by peasants, is heavily dependent on costly imported inputs.

Countryside forward, city back

Exports of beef and coffee have become profitable because their production does not require a high level of imports. Beef exports in the year from August 1987 to August 1988 were 9.1 million pounds, up from 3.6 million pounds in the previous year. Domestic consumption of red meats has also increased because beef is cheaper than chicken, made dearer by the high cost of sorghum and other inputs. There has thus been a 63% increase in the number of cattle slaughtered (103,000 head in September compared with 64,000 in September 1987, with exports going from less than 10% to more than 30% of the total). The worrisome side is that the impact of the economic reforms on the peasants has forced them to sell their milk cows for slaughter because grain prices have not matched the march of inflation. Cows have gone from 17% of the total kill in August 1987 to 32% this year, which could have an impact on the future herd size.

Coffee harvest estimates for this year are 965,000 hundredweight (last year's actual harvest was 810,000 hundredweight). This 19% increase will come mainly from those parts of Region VI where little coffee has been harvested in the past few years because of the war, if access roads can be repaired in time.

In spite of the virus infestation and the effect of the too-heavy rains on the bean crop, the overall results in both corn and beans will be even better than last year's excellent crops. Corn should be up at least 12%, beans even more. Rice production is up 21%.

The good news in agriculture is in stark contrast to the recession in the cities. Between February and August, industrial production fell by 29%; between July 1987 and July this year, the drop was a staggering 47%.

Inflation and the government's economic measures have dealt hard blows to small industry, which provided 24% of the country's industrial production in 1983, and is down to 10% this year. The urban informal sector has been hit even harder: a Central American University exploratory study indicates that both the "comfortable" informal sector (traders who have a truck, craftspeople who have an established workshop, etc.) and the poor (street venders, those who produce in their home kitchens, in general those without capital) have seen the economic measures undermine their businesses and their investments.

With so many rapid changes in the value of the national currency, perhaps an easier way to look at how well or poorly these people are doing is to measure their income as it relates to the cost of a basic basket of consumer goods. In January, those in the "comfortable" informal sector were generating profits of about seven and a half baskets. In May, after the economic reforms had taken hold, those same people earned only 4.8 baskets, and after the June measures, they were down to 3.3. The poor person in the informal sector went from 2.8 baskets of basic goods in January to 1.3 in May to only .6 of a basket in June.

Although the industrial recession has caused problems in the cities, there are some positive sides to it: the least productive parts of the informal sector have been eliminated, as have the worst inefficiencies in large and medium-sized industry.

Toward more peasant production

Agriculture is shifting toward more peasant production, which is much less dependent upon imported inputs. Dry rice, for instance, has grown by 60%, displacing the large producers' more technified irrigated rice. Sesame seed production, another peasant activity, has held to 1987 levels despite the very wet rainy season. Sorghum, on the other hand, was affected by those very same climate problems, but because it is dependent on "green revolution" imported technology, the area planted went down by down 52%.

Peasant plans to plant millet in Region I plus more corn and cassava should balance out this huge sorghum shortfall. There was a 35% drop in cotton production, also highly dependent on technology, while banana production is down 24% and tobacco down 25% because of administrative problems and the high costs of imported inputs. This clearly demonstrates that the most profitable products—coffee and cattle—are indeed those that are more "peasant" in nature, not those that are more modern and business-based.

Possibilities for milk exporting

Pasteurized milk production has fallen this year from 13.2 to 8.2 million liters, meaning malnutrition for urban poor children. This does not mean, however, that milk production is down in Nicaragua, because what has been cut is imported milk powder, thus increasing the proportion of Nicaraguan whole milk in the final product. This is an important step, because the price to a country of accepting powdered milk from the World Food Program is that it is not allowed to export its own production. If Nicaragua can free itself from dependence on milk powder donations, the national firm PROLACSA could begin to develop its own capacity, and could eventually export powdered milk.

Milk products and derivatives in the Matagalpa, Boaco and Chontales basins are showing positive signs and national production could well be able to support increased production of infant formula powdered milk for both export and home consumption. In this scenario, city parents will have to depend more on cheese for nourishing their children, at least for now, while the government strengthens infant protection programs.

Gradualism at last?

There are also signs that economic management is becoming more flexible and responsive. As Chart I, below, shows, the time lapse between packages has steadily decreased, thus reducing the devaluations or added burden of hardship imposed by each new package.

The gap between the legal price to producers of a US dollar and the black market price has fallen from 5.5:1 in February to 1.8:1 as of early October. While it reached 12:1 in early June, that lasted a very short period, and the trend is significant and consistent. The government is beginning to adjust the economy's lever's more often and more gradually, with fewer violent jerks, an indication of its growing mastery of the economy.

Uncontrolled inflation: From salaries or from costs?

While the layer upon layer of economic packages have succeeded in changing the overall, or macroeconomic, framework, they have not reined in hyperinflation. Inflation this year is rising seven times faster than it did last year. The country is in a vicious cycle of inflation-recession-more inflation-more recession.

No one argues about whether hyperinflation exists; the debate is about its cause. One view has it that inflation is fed by the demand of salaried workers and money in the hands of producers. It's a weak argument, because from February to August both areas were very tightly controlled but the inflationary spiral continued heedless. As Chart I shows, the really worrying jumps in inflation were immediately after the February and June economic packages, when the monthly inflation rates were way over 50%, a level considered to be totally out of control. While inflation did go up from 21% to 48% between August and September, that amount can be laid at the door of the inflationary push from the 125% devaluation. There's no sign of additional inflation from the August wage increase.

One of the aims of the economic reforms was to place such restrictions on salaries and credit to producers that government spending would be cut back enough to reduce the fiscal deficit (the gap between what the government spent and what it took in) by 7 or 8%. The deficit, however, stubbornly grew from 17% last year to 18% this year. The main reason was a drop in state income from tax collected. That in turn was caused by the very low demand caused by low salaries and the cash squeeze on producers. As a result there was a substantial drop in the sales of rum, cigarettes and other products that make up the principal base of the government's tax income.

There are those who believe that the state's inability to control inflation and its fiscal deficit shows that the economic adjustments were ill conceived, and that instead of controlling its internal deficit the state is only throwing wood on the roaring fires of inflation while the Nicaragua people pay a high price in an economy that grows worse daily.

That may have been the case before, when the deficit was financed by printing money unbacked by production growth. But it is not the case now. For the first time since 1982, the Nicaraguan fiscal deficit is being financed with hard cash. In other words, with the money the Central Bank is earning through selling imported inputs to domestic producers for devalued (more expensive) córdobas and through the drastic price increase for fuels and some state-produced goods.

It is this very recovery of the financial system, which was previously also in the red, i.e. behind inflation, that is behind inflation, since the producers pass on their increased costs to the Nicaraguan people by charging higher prices. The scarcity of hard currency and of certain imported inputs—supply side—has been one of the basic causes of inflation in Nicaragua.

The other new factor in inflation is the rise in prices of goods that the state used to heavily subsidize. Between 1982 and 1987, the government used inflation to redistribute income from producers to salaried workers. That is to say, it printed money to hire teachers and nurses, subsidize bean prices, etc., thus creating inflation, which, at high levels, hurts producers. Starting in 1988, it began using inflation to clean up the financial system and stimulate the activities most useful for rebuilding the economy—an economy badly treated both by the war and the high levels of inefficiency permitted by the subsidies.

The salary struggle

The August salary rise, which was more than the inflation rate, and the córdoba devaluation (see Chart I) were not foreseen in the June economic package, which in fact set out to control inflation by holding wage increases below inflation. As far as wages were concerned, the austerity of the June package was insupportable because since February salaries had not operated as "the motor of inflation" and because the government would be unable to resist the pressures from within its own institutions for a greater wage increase.

Even though the government agreed at the end of June to supply a subsidized package of beans, rice and sugar to state employees, by late August a salary increase could no longer be postponed. The salaries of the most qualified public professionals, those called "vital," had already risen by more than 250%, with even larger increases in the case of those referred to as "extraordinary."

The Farm Workers Association (ATC) is the union that has fought hardest against the notion that wage increases cause inflation. According to studies by the Center for Research on the Economy and Agrarian Reform (CIERA), an agricultural worker's wage covered 43% of the basic necessities of a rural family in February, 28% in May, 8% in June. This spurred the ATC's wage claim and collective bargaining, backed by occupying farms (which they continued to work). The demand was for wages tied to the costs of eight basic goods. Acting first in cotton and then in the coffee sector, the union defended workers' rights in the face of widespread "economic confusion amongst the militants" who still associate a struggle for wages with actions by the Right to destroy the economy.

The agricultural workers won a wage in August that would cover 31.6% of the basic basket of goods and established a new minimum agricultural daily wage of 222 córdobas without fringe benefits. In spite of their effort, the rural workers lost ground in relation to inflation, although by less than other workers. At the official dollar exchange rate at that time of 320:1, the basic agricultural wage only equaled 69 cents a day, still three to four times less than that earned by rural workers in other Central American countries.

This year the government has set out to establish a new "transparent" economy, a world without subsidies where all can see and feel how much things really cost. In this new world, the enormous distortion between the prices of products, already equal to or more expensive in Nicaragua than the rest of the region, and much lower salaries than the other countries, is a political problem. But it also an economic problem, which will cause much more recession than necessary to achieve the desired adjustment in the country's overall economic framework.

When salaries only make up 6% of the total costs of industry and 9% of the state's costs, it becomes obvious that a salary increase will not have an inflationary impact. In these conditions, it is doubtful whether, in the coming months, the state will be able to maintain February's strategy, in which salaries fall well behind inflation and the rate of devaluation.

Water, light and transport

With basic services, the state's policy has been much more favorable to the poor majority than its salary policy. The better-off are paying much more for water and electricity than the poor in Managua because, in the case of electricity, the tariffs rise rapidly after the consumption of 300 kw hours. At the same time, the subsidy has been maintained on public bus service in Managua.

September tax reforms

Tax reforms were also implemented at the end of September, adding to the confusion over the economy. When the Ministry of Finance announced that the value of fixed goods and industrial plant would be multiplied by up to 258 times, it provoked fears that the state would increase taxes on capital. The ministry, however, gave assurances that it would not mean more taxes because the inheritance tax would only be applied to 13% of the new values and the ceiling on profit tax would be lowered from 60% to 50% of profits. On the other hand, the ceiling for individual income tax was raised from C$20,000 to C$35,000.

In fact, the new measures led to an even greater drop in inheritance and profit taxes because at the same time that capital was revalued, so were the córdobas representing capital goods, plant and facilities. To calculate new capital value, three zeroes were eliminated from the existing values before being multiplied by the new coefficients.*

*The dropping of three zeros corresponds to the February monetary devaluation, which is only now being calculated on paper for property.

What was the reason for these revenue changes if the state will receive less revenue? It is difficult for the state to charge to charge capital or profit taxes when it is already charging an indirect tax via the inflationary process working on the costs of the goods it sells. The industrial companies are unable to pay more taxes because their warehouses are full of products or their production is stagnating. The biscuit manufacturer Nabisco recently closed its plant for two weeks because of the high cost of production and the lack of demand for its products.

The reason underlying the new measures is exactly that announced by the Minister of Finance: to start a capital revaluation process so that managers of enterprises will have accurate estimates of their capital resources. With that they will be better able to assess the profits they should be aiming for and just where their inefficiencies are. Behind all of this is the sad reality that industrial capital cannot be more heavily taxed because most plants are so inefficient that a real tax on capital would break them completely.

Petrol prices rise

One of the heaviest new "taxes" applied to the economy is the price of fuel. Petroleum arrives in Nicaragua from socialist countries as a donation, so the price the government charges is all revenue for the Nicaraguan treasury. Since June, petrol prices in Nicaragua have been at the level of European prices, twice as high as those in the rest of Central America. This policy has lead to a 25% reduction in the use of gasoline.

Danger of a counter reform?

Economic debate in Nicaragua used to involve such terms as the social wage and the maintenance of secure channels for the supply of basic consumer goods. Not any longer, and the rapid change in the debate has caused confusion among Sandinista militants.

This confusion has concerned government leaders. August and September saw many seminars on the political economy in all the FSLN's mass organizations, as part of an enormous effort to both better understand what was happening in the economy and to explain the government's economic measures.

Without such a broad-based educational effort, widespread discontent could lead to an economic counter-reform, a march back towards the past. Or, in the best of scenarios, the government could squander its capacity to get the most economic benefit out of the bitter medicine it has had to administer.

A necessary package—but still incomplete

As Minister for External Cooperation Henry Ruiz put it, "We may have made mistakes, but the logic of the political economy is correct." It was absolutely necessary to change the country's overall economic framework, but a new framework is not enough. There have been errors in the design and implementation of the new programs—especially seeing holding down wages as key to controlling inflation—and the program is incomplete. Changes in investments are still needed and support for small- and medium-scale agricultural producers should be increased.

These weaknesses have meant the reforms have had an unnecessarily high social and political cost. The same macro effect could have been achieved without such a dramatic industrial recession and without such suffering among workers. Two of the reforms' main goals—restoring the buying power of salaries and closing the gap between the price of labor here and in the rest of the region—have been sacrificed for the sake of the new framework for the economy.

There is now a growing realization, not only among the poor, that salaries have to rise, and more clarity within the government that it is politically and technically possible to do. Because of Nicaragua's harvest cycle, the best time to do this is between October and February, when the inflation curve always tends to flatten out, and not between March and July, when basic grains and imported goods are scarce. The municipal elections coming up in spring will bring added political pressure for economic changes at just the wrong time.

Economic debates continue in Nicaragua, about the rhythm of the reforms, about credit policies—how to distribute scarce resources and balance the imperatives of the moment. But these debates, though important, are not the keys to relieving the very broad discontent of Nicaragua's poor or the economic confusion of the FSLN militants. Production is. Once the new economic framework has been created, it must be used to produce more, because that's the only way to stop inflation.

And getting production moving again, breaking out of the pattern of inflation-recession-more inflation is the only way to meet the complaints of the poor and clear up the confusion about the reform's goals that exist among so many party militants.

Lagging investment—getting the goods to the peasants

The new monetary/financial framework is only that—a framework. It will not by itself work miracles. If the investment program is not improved, for instance, it could undermine the new ground rules, won with such suffering. Only 39% of the Public Investment Program for 1988 has been spent—and that program started out as only 80% of last year's. This drop in state investment, which continues to be largely investments in projects that will yield little export income in the short and medium term, would not be so worrying if the state were using the new economic situation to shift some of that investment to coffee and cattle. Coffee has received only 10% of the resources programmed for plantation renewal.

Coffee's new profitability will do little good if backwoods roads are not opened and repaired so that the product can be got out. The country still lacks targeted sectoral programs to point production in the same direction as the economic measures are heading.

The development of new programs to support coffee and cattle production is creeping along at a snail's pace. Going further with the agrarian reform can further enhance the new boom in peasant production. Merely eliminating high levels of inefficiency does not of itself mean an economic gain. It may just mean doing less. The new economic framework won't help Nicaragua's economy if people aren't mobilized to support it. What is still missing is consolidation of the alliance of peasants, small artisan producers and cooperatives, based on a real survival economy for the poor. Monetary and fiscal reforms are not enough to eliminate speculative profits.

The government is creating a new framework that makes it possible to turn a profit in agriculture, but the rich don't seem to be rushing to take advantage of the new climate. If the government does not find a way to further stimulate the production of small and medium producers and improve the efficiency of its own supply of goods and services, it could fail to capitalize on the new economic framework it has created at such a high cost to the urban poor.

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