Various Aspects Of The Nicaraguan Economy, 1982
IntroductionIn the October, 1981, bulletin we presented an interview with Xabier Gorostiaga concerning the state of the Nicaraguan economy. Now, seven months later, we return to that theme to present a description and analysis of various aspects of the economy. This is not intended to be and exhaustive treatment of the subject, but will rather provide the following:
I- A brief historical perspective on the economy.
II- The nature of the economic crisis throughout Central America.
III- Excerpts from the Nicaraguan government’s annual report.
IV- A brief description of the industrial sector.
V- Some notes on the Nicaraguan model of a mixed economy.
I. Economic Situation as of July 19, 1979.The new government of Nicaragua inherited at the time of the triumph an economy in an extremely depressed state. The real gross domestic product (GDP) shrank by 25 percent in 1979, reducing it to the same level as in 1962. Direct damage from the war was estimated by the United Nations Economic Commission for Latin America (ECLA) at 250 million dollars. Capital flight in 1978 and 1979 totaled another half a billion dollars. The industrial sector produced only 27.5 percent of what it had in 1978, and production of cotton and basic grains also dropped dramatically due to disruption of the war. One factor to have a long lasting impact on the economy was the growth in the foreign debt which had reached $ 1.6 billion by July 19, 1979.
In addition to the immediate crisis which the Nicaraguan economy faced in July, 1979, it also faced a more fundamental structural crisis stemming from the model of an agro-export economy which had failed to diversify or achieve economic integration with the rest of Central America. Some of the characteristics of this deeper structural problem can be seen in the following statistics:
- In the 1950’s the GDP rose by an annual average of 5.6 percent, in the 1960’s by 6.7 percent, but in the 1970’s by only 2.2 percent.
- Between 1975 and 1977 industrial production dropped by 46 percent.
- The real salary of workers in 1970 was equal to that of 1961, while in 1974 it was 14 percent lower than in 1970 and still declining.
II. A Regional Economic Crisis in Central America
Nicaragua is by no means alone in Central America in terms of the nature of the economic situation it has to confront. According to statistics from the Central American Business Institute (INCAE), all the Central American countries face serious structural problems characterized by rates of economic growth lower than the rate of population growth, large and growing negative balances of trade ($848 million in 1980), and a resulting jump in external public debt to cover the trade deficit.
Many of the reasons for these problems are externally caused. The prices of basic imports such as petroleum and industrial goods have risen faster than the prices of Central America’s principal agricultural exports. Also, due to the openness of the Central American economies, they are very much subject to experiencing the ups and downs of the world economy, and particularly its current state of recession and inflation. Internal factors of political instability over the past four to five years have caused the virtual disintegration of the Central American Common Market and have stimulated a massive exodus of capital from the region.
It is in this context, then, of national, regional, and international circumstances that the Nicaraguan economy must be viewed as it proceeds to develop a new model of a mixed economy.
Excerpts from the Report of the Government Junta of National Reconstruction, May 4, 1982.
I. The National EmergencyTwelve months after the last report of the Government Junta of National Reconstruction (JGRN), presented to the Council of State in the installation of its Second Session, the Nicaraguan people continue to confront a difficult economic situation, this time in a moment of sharpening military, political and economic aggressions…
In the context of other negative elements, the growth of the Gross Domestic Product (GDP) of 8.7% in 1981 is a victory for the Nicaraguan people.
The rate of growth reached in 1981 was the highest in Central America. The GDP in Guatemala grew only 1%, in Honduras it grew 0.5% while in Costa Rica it contracted by 1.5%, and in El Salvador it declined by 9.5%, according to estimates of the Economic Commission for Latin America (ECLA). In the rest of Latin America, only Mexico and Paraguay joined Nicaragua in the range of growth of 8%, the highest in Latin America.
The rate of inflation in 1981 was 23.9%, which, compared to the rate of 35.3% of 1980, according to the best data available, represents an acceptable decrease.
The heightened international economic crisis which fell most severely on our countries, together with other internal factors, has meant for our country a serious situation in terms of the balance of payments. In 1981, we exported goods for a value FOB of 500.3 million dollars, while we imported goods valued CIF at 995.4 million dollars.
The situation of the negative balance of payments obviously implies a great shortage of foreign exchange and the absolute necessity of using it exclusively for products of utmost necessity and the inputs needed for production, as well as for the implementation of new investment projects which will allow us to overcome the economic crisis and move towards the economic, social and cultural development of our people…
The Financial SectorIn terms of imports, the necessity of guaranteeing the supply of consumer goods for the people and of the inputs, as well as the machinery and equipment, for the operation of the productive apparatus made the level of imports CIF increase from $887.2 million in 1980 to $995.4 million in 1981 which signified an increase of $108.2 million or 12.2%. Contributing in an important way to this change were the higher prices which have to be paid for the imported products, especially those energy-related, as well as the larger volume which were demanded by the productive sectors.
By the date of the report of the fourth of May of last year, Nicaragua had obtained a total of foreign aid, from July 19, 1979, of $1135.2 million of which $206.1 million were donations and $929.1 million were in long- and medium-term loans. One year later, the total of foreign aid had increased to $1495.7 million, corresponding to $1235.5 million in long- and medium-term debt and $263.2 million in donations, for a total increase of $360.5 million, of which $206.4 million consists of loans and $154.1 million of donations.
The distribution of the external debt contracted at medium and long term since July 19, 1979, has the following breakdown: Multilateral Organizations, 39.4%; AID, 5.9%; Western Europe, 9.4%; Socialist Countries, 16.9%; Latin America, 18.1%; Libya, 8.1%; Italy, 2%; rest of the world, 0.2%.
III. Agricultural ProductionAgricultural exports represent 70% of the value of all exports. The agricultural sector is also the principal motor of industrial development, feeding it with raw material, constituting approximately 75% of the industrial area of the manufacturing sector and offering employment to more that 300,000 agricultural workers and peasants.
Agricultural and livestock production registered a significant increase in volume of production, not only in relation to the past year, but also it surpassed the production of the Somocista year of 1977-78. The goals that we set were reached 90% in terms of area planted, the difference being fundamentally due to the decrease of area planted by the largest sector of the country, the private enterprise sector, which decreased its area from 218,755 in the ’80-81 year to 176,507 in the ’81-82 year, in other words a reduction of 20%.
Following the tendency which is apparent in all of Central America, due to high costs internally and low prices externally, cotton and sesame have declined appreciably in relation to the last year (15.7% and 25.5% respectively). Cotton production is 88% of what it was in 1977-1978.
On the other hand, almost all the basic agricultural products for the economy of the country have higher levels of production this year than in the past year and significantly higher levels than during the period of Somoza. Coffee has increased 6.6% from last year and 9.4% compared to the last year of Somoza. Sugar cane production has increased 21.4% compared to last year which is also 18.7% more than production in 1977-78. The production of corn in 1981-82 is 9% greater than last year and 10.5% higher than 1977-78. Rice production has risen 45% from last year and 88.7% compared to the last year of Somoza.
In the agricultural cycle of 1981-1982, the National Financial System provided credit for a total of 559.000 manzanas, of which 46% were for products of domestic consumption and 54% were for export products. All of the sectors of the national economy benefited from the credit: of the total area covered, 20% corresponded to the People’s Property Area (APP), 36% went to large private enterprises, and 44% to small private farms, that is, to the peasants and organized cooperatives.
IV. IndustryIn the industrial area, the process of reactivation begun last year was continued, achieving in real terms 98.5% of what had been programmed for 1980. Positive results were obtained fundamentally in the areas of textiles, paper and printing, clothing and food products.
The Ministry of Industry, during this critical period, is maintaining close ties with the private sector and with the small industrialists. In this respect, it can be said that of the total amount of foreign exchange granted to industry, the private sector received 60%, as well as 70% of credits.
V. The Industrial SectorIn general, the reactivation of the industrial sector has proceeded more slowly than that of the agricultural sector. In 1980, industrial output was 78 percent of the 1978 level and manufacturing production was only 62 percent of the pre-war level. Ministry of Planning estimates place the growth in the industrial sector in 1980 at 7.3 percent above 1979 compared to an overall growth rate for the economy of 10 percent.
As with the rest of the economy, the industrial sector faces the challenge not only of reactivating production, but also of overcoming structural problems which limit its growth in the context of Nicaragua’s national development plans. According to the Minister of Industry, Emilio Baltodano, the industrial sector was developed during the 1960’s, and until July 1979 not so much to meet Nicaragua’s basic needs as it was to meet those of the Central American Common Market. As a result, the industrial sector at present lacks integration with other productive sectors within Nicaragua, it runs a negative trade balance, it has great difficulty competing on the international market, and it utilizes little labor relative to capital. For these reasons, Baltodano explains, it will be necessary to close some factories this year in order to reorient the sector, despite the costs that this will have in terms of jobs and lost production.
The new criteria for industrial development in Nicaragua will focus on industry that fulfills basic needs of the population, such as foodstuffs, medicines, clothing, shoes, and other basic consumer items. In addition, industrial development will be oriented towards integration with agricultural production, both for production of agricultural inputs and in processing agricultural outputs. Increasing employment and diversifying sources of technology are other goals of the reorientation the industrial sector.
The composition of the industrial sector and the respective share of different groups is shown in Table I. In the manufacturing sector, production is fairly evenly divided between a state-run sector, large capitalist firms and small cottage industries. At the time of the triumph, the government nationalized the mining sector so it is 100 percent state-owned. In construction, the government has also assumed most of the burden of new construction through public works projects since private sector construction activity has been among the slowest to revive.
According to Baltodano, some private firms have responded positively to the difficulties they face by trying to maintain production and employment, while others have closed operations or are converting their facilities. To some extent, state-run enterprises expropriated from Somoza have had the same experience. Last fall, for example, the government was forced to close down a number of fish-processing plants on both the Pacific and Atlantic Coasts because they were running well below capacity due to a lack of fishing boats. Several hundred workers were put out of their jobs as a result of the fact that the government could no longer keep the factories running at a loss. Nicaragua’s efforts to resolve the problem through obtaining a $30 million loan from the Inter-American Development Bank (IDB) for purchase of fishing boats and modernizing plants have so far been frustrated by U.S. pressure blocking the loan at the IDB.
VI. The Mixed EconomyThe creation of a mixed economy composed of both a public and private sector has been one of the central tenets of the Nicaraguan revolution and the FSLN since the time its first political platform was established. In this section we will attempt to describe the nature of the model of a mixed economy, how it is understood by various parties within Nicaragua, and we will try to assess some of the major constraints facing the mixed economy in Nicaragua today.
In one of the earliest statements of economic policy, the Movement of Popular Unity published a platform in 1978 that was endorsed by what were at that time all three factions of the FSLN. The platform stated that the new government would create “a National Economic Plan to coordinate the private and state sectors of the economy with the goal of initiating economic development that corresponds to the social necessities of all Nicaraguans… The participation of private interests in the economy will be promoted and directed toward those productive sectors that require a technology obtainable under more favorable terms by private companies and whose production will not be in contradiction with the collective or national interests.”
Sergio Ramírez, a member of the Government Junta, provides a more current perspective on the model of a mixed economy. In a presentation given in March, 1982, he states, “The revolution continues to favor the project of a mixed economy. The mixed economy should consist of a harmonious and defined insertion of the private sector into the strategic wealth of the state sector which through the combination of the two would have the political responsibility of managing the entire national economy towards change, production and distribution of wealth”.
At present, Nicaragua’s mixed economy can be broken down into three major categories: the public sector, the capitalist sector and the sector of small producers including campesinos (See Table II). The state sector controls 25 percent of directly productive activities and 41 percent of total GDP.
The distinction within the private sector between the large entrepreneurs and small producers is a crucial one since the two groups have distinct economic, social and political characteristics. The role of the small producers is roughly equivalent to that of large producers in terms of material production, although the capitalist sector controls a higher share of overall GDP due to greater participation in commerce. These two groups combined, as opposed to the state sector, still control certain key aspects of the productive economy, including 88 percent of coffee production, 85 percent of cotton, 92 percent of meat and 91 percent of chemical production.
One of the key problem areas in the mixed-economy model being developed now in Nicaragua is the lack of clearly defined sectors where the state will operate and where the private sector will operate. The logic of the government’s take-over of economic enterprises has only to a limited extent been defined by the need to achieve strategic economic objectives. This is the case, for example, with the nationalizations of the banking services, foreign commerce and the country’s key mineral and natural resources. The majority of government holdings, however, are the result of expropriations either of Somoza’s properties or of properties which were, under Nicaraguan law, abandoned or deficiently worked. This has led to a less than optimal distribution of government enterprises in a broad range of different sectors where there is often inadequate managerial capacity.
Business leaders state that the entrepreneurial sector is affected by the absence of a clear definition of where the state will be dominant and where there is room for private-sector investment and growth. According to Ramiro Gurdian, vice president of COSEP (Superior Council of Private Enterprise) and president of the Union of Agricultural Producers (UPANIC), “We do not know what model (of a mixed economy) the government is considering. It would be interesting for the government to define specifically what they mean by a mixed economy with exact numbers or by determining areas, because we view (the situation) with great uncertainty.”
According to private-sector representatives, this lack of a clear definition of state and private domains for development is one important factor affecting private investment within Nicaragua. According to the World Bank, private investment in 1980-81 was only 3.4 percent of GDP, while in 1970-78 it averaged 12.2 percent. Of this, only 1 percent in 1980-81 was in directly productive activities, compared to an average of 8.9 percent in 1970-78. To some extent public investment has picked up the slack left by the lack of private investment, but due to the important role of the private sector in directly productive activities, the World Bank estimates that private investment should reach 10 percent of GDP for the economy to grow satisfactorily.
The successfulness of the mixed-economy model depends partially on direct economic incentives offered to the private sector to produce and invest as well as on many other intangible factors affecting what is loosely referred to as the “climate for investment”. These same factors affect decisions by managerial and technical personnel to work either in the state or private sectors or, for some, to leave the country altogether. Restrictions of government wages, for example, have caused a number of management personnel to work in the private sector. In addition, many managers and technicians either did not return to Nicaragua after the war or have left since that time. The dimensions of this flight of human resources are extremely difficult to judge, although the short-term effect could be substantial until new managers and technicians are trained.
In February, 1982, the government decreed a new law of economic incentives for the private sector and specifically for those involved in agro-exports. Whiled it is still too early to assess the economic impact of the law, there is a good deal of diverse opinion concerning its potential effectiveness. Gurdian, of COSEP, believes that the law will not be successful in stimulating increased production due to the existence of other decrees which increase taxation and the government’s inability to provide foreign exchange for inputs. The government, on the other hand, believes that the decree provides sufficient economic incentives and that the private sector’s decision not to increase production will be based not on strictly economic grounds but rather political ones.
The part of the private sector that has benefited most from government policies is the small-scale producers. Government policies of lowering land rents, increasing credit availability, and promoting cooperatives have been directed primarily at benefiting small-scale campesinos. While this sector is not of great importance in terms of investment because of a lack of capital accumulation, it is important in terms of production.
Often the private sector is viewed as one monolithic force whose only mouthpiece is COSEP. This is, however, an oversimplification of what is a more complex reality. In the agricultural sector, for example, the government’s policy is one of supporting three distinct sectors. One, comprising approximately 20 percent of the land, is the state sector. The second is the cooperative sector, made up of either credit and service or production cooperatives of small farmers. It is estimated that these will comprise 40-50 percent of production. Finally, the individual small, medium and large-scale farms will comprise the remaining 30-40 percent of production.
Given the internal state of economic depression and physical destruction that Nicaragua faced as of July 19, 1979; given the regional economic crisis facing all of Central America in recent years; and, finally, given world-wide economic conditions that have caused price declines for exports and price increases for imports, the challenge of simply keeping an economy running is tremendous. Nicaragua has attempted not only to revitalize the economy, but also to do that in the process of developing a new economic model. In many respects then, the decisions facing Nicaraguans are not strictly economic in nature, but they also involve opting for a model of a mixed economy in which private enterprise is guaranteed so long as it plays a useful social function of providing efficient production and gainful employment. The government, on the other hand, is faced with the responsibility of both managing its own economic enterprises and developing a series of policies that will give clear and consistent signals to the private sector in terms of what the new “rules of the game” actually are. The decisions made by both the government and the large capitalist sector, as well as by the small producers, will determine not only the nature of the mixed economy in Nicaragua, but also much about the nature of political power and social relations within the society.
May 30, 1982
Original Text in English
Structure of Industrial sector - 1980