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  Number 51 | Septiembre 1985
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Nicaragua

The Economic Costs of the Contra War: Nicaragua’s Case Before the World Court

Envío team

On September 12, the International Court of Justice at The Hague will begin to hear the accusations presented by Nicaragua against the United States. Nicaragua charges the United States with openly violating the principles of international law by financing, training and organizing the counterrevolutionaries these last several years.

The Reagan administration’s aggression against Nicaragua has caused the death of more than 12,000 Nicaraguans on both sides, has wounded or disabled many thousands more, and has left 6,000 children orphaned. It has meant destruction and economic losses that are enormous for a small country already devastated by underdevelopment and the ravages of the Somozas, which had barely begun on the road to reconstruction when the aggression started.

Nicaragua is confronting this aggression and defeating it, with the military weapons of its defensive army and the daily weapons of resistance, creativity and the people’s courage. Since 1984, when its ports were mined by the CIA, Nicaragua also decided to confront the aggression in the world’s courts, with the legal weapons of international law. At the International Court of Justice, the highest legal body in the world, Nicaragua will present its witnesses, evidence of the blood spilled and the figures illustrating the economic destruction caused by this unequal war. Nicaragua’s petition to the International Court is for compensation for these losses.

envío offers an evaluation of the economic cost of this unjust war, based mainly on data from the Economic Commission for Latin America, which were the basis for the Nicaraguan Secretariat of Planning and Budget’s calculations presented in The Hague. The report published here does not incorporate the effects of the commercial embargo decreed by the United States against Nicaragua in May 1985.

The information presented below is cold, precise and sobering. An understanding of the accumulated human suffering behind these numbers requires the compassion of the reader. Nonetheless, the US has awakened solidarity within Latin America, triggering new efforts, alternatives and possibilities in response to its aggression. It is these efforts that are neutralizing the current economic destruction and helping Nicaragua survive. Additionally, Nicaragua’s own creativity in confronting the aggression will lead to a more independent economic project and a more mature, aware and resourceful population if intervention is averted and peace comes to Nicaragua.

The war: Direct and indirect impact on the economy

“Nicaraguan workers continue to have an emotional attachment to the revolutionary movement. This attachment can be expected to weaken as the economy deteriorates… There are some indications of growing broad-based support to take arms to overthrow the Sandinista government, and this support could increase as further problems develop… Economic shortcomings might provoke at least limited civil unrest by the end of the current harvest season (From the Heritage Foundation “Backgrounder,” October 1980, which served as a policy recommendation on Central America to then-presidential candidate Ronald Reagan).”

US military aggression against Nicaragua, directed for the most part by former members of Somoza’s National Guard, began as early as 1980. And as early as then, as the Heritage Foundation “Backgrounder” demonstrates, the importance of undermining Nicaragua’s fragile economy as a tactic in the aggression was clear. By late 1983 Washington recognized that a military victory by the counterrevolutionary forces was not feasible in the short run. At that point the Reagan administration’s strategy shifted to a war of attrition, in which the objective was precisely to undermine the revolution’s social base by bringing the Nicaraguan economy to its knees. Since that time the economic cost has risen at a dizzying rate, hitting the living standard of the Nicaraguan people as well as direct production.

Although the Nicaraguan armed forces reduced the direct damage in 1984 by effectively countering the armed aggression, the loss of production was even greater than in previous years. The total loss over this half decade has been equal to approximately one year’s worth of exports, half of that in 1984 alone.

The costs of this aggression must also include the value of loans for development projects blocked by the United States. This does not refer to wish figures, but to agreements that had been negotiated on their technical merits, then withheld as a result of US pressure or direct veto in the multilateral lending organizations, as well as of US interference in the decisions of sovereign governments. The total disbursement from these loans programmed for the period 1980-84 would have been $200 million—20% of investment in this period.

Obviously these losses have an indirect impact on production, in that their absence has resulted in a drop in production in categories not directly affected by the war. As a consequence, the population’s standard of living has fallen and a brake has been put on the country’s economic development.

The economic contribution that the Nicaraguan people have had to make to the defense of their country must also be added to the costs of the aggression. The direct cost of defense was close to one-third of the national budget in 1984, or 15% of the GDP. This can be termed an irrational cost in that it represents a shift away from previous expenditure levels in health, education and productive investment, the areas which make up the rest of the budget.



Impact on the balance of payments

Relative to the size of the Nicaraguan economy, the economic costs of the aggression are truly enormous. The most direct impact on the macro-economy (national levels of production, investment and consumption) is on primary production even more than on the destruction of capital assets. Table II illustrates the collapse of forestry, fishing and mining activities, all of which are in war zones. This loss is almost 14% of primary production and most heavily affects the economies of the regions richest in these resources.



Table III quantifies the direct effects of the aggression resulting from a) direct export losses in coffee, lumber, gold, fish, etc.; b) increased imports resulting from lost national productions of grains, etc.; c) lost capital goods resulting from destruction of plants, buildings, stocks, etc.


Table IV summarizes the direct and indirect effects on the balance of payments, in that the greater availability of foreign exchange would have permitted a higher level of economic activity through the import of production inputs. This establishes that there would hypothetically be a different equilibrium in the balance of payments “without aggression.” For the purposes of analysis, it has been assumed that the lost resources would have been distributed in the same proportions as those that were available; in particular this would have allowed greater industrial activity, but also a positive balance in the basic balance of payments, permitting greater payment of the foreign debt service. For example, in 1984 exports would have been $505 million instead of $382 million, or 32% more. This would have permitted greater imports and an increase of $84 million in the basic balance of payments.

To the military aggression against the economy must be added the impact of the financial aggression, which has impeded access to “soft” loans with low interest rates and long-term amortization. These loans would have been used for infrastructure, agricultural development, social services, etc., since without military aggression there would have been a positive balance in the balance of payments. They also would have eliminated the need to turn to “hard” commercial loans, allowing a more balanced level of accumulation.

If one adds the direct effects of the military aggression on the balance of payments (Table IV) to the effect of the financial aggression (Table V) year by year, one can appreciate the magnitude of their impact on Nicaragua’s few resources, already hard-hit by Latin America’s economic crisis. In 1984 alone, the total was more than $213 million, or 56% of the year’s export income. The five-year total is $521 million.



These losses have made it impossible, both economically and morally (since it would imply an unacceptable sacrifice by the people), for Nicaragua to fulfill in total its foreign debt service obligations. In the first instance this refers to the debt with the US government inherited from the Somoza period ($223 million), and in the second to the debt with foreign, principally US, banks. The amount of this “inherited” debt of ($1.6 billion in 1979 plus $400 million in interest by 1984) has had to be renegotiated several times. A measure of the Nicaragua government’s good will is that it has not cancelled its debts with nationals of a country that has unleashed such an illegal aggression against it. On the contrary, it has paid $234 million in services to the private banks and $209 million to the multilateral banks between 1980 and 1984, despite the lack of a positive response to requests for new funds. The government has even had to fall in arrears on debts contracted with friendly governments since 1979. Furthermore, the lack of liquidity has made it impossible to pay Nicaragua’s more than $300 million open balance with the Central American Compensation Board.






The macro-economic impact

The impact of the categories already noted on the economy’s domestic product is due to two factors:

- Direct production losses, particularly in the primary sector (agriculture, fishing, mining, etc.);

- The reduction of productive activity resulting from the lack of foreign exchange particularly but not exclusively in the secondary sector (industry and construction).

Referring first to the primary sector, Table VII demonstrates the differences for 1983 and 1984, the years of greatest impact, between actual activity and what would have been normal activity. It is clear that the impact is proportionately larger in the fishing and lumber sectors, although in absolute terms the greater impact is in agriculture. Were it not for the aggression, the primary sector would have produced 7% and 11% more respectively in these two years.

When direct production loss it translated into reduced foreign exchange availability through the balance of payments, an impact on secondary production is generated as well, since it affects the importation of inputs.

Table VII summarizes the calculations of the Planning and Budget Secretariat, using the macro-economic planning models employed in constructing the country’s annual economic program; these in turn are based on the methodology recommended by the Economic Commission for Latin America.

In 1984 secondary production would have been 10% greater without the US aggression. This would have included a greater capacity for paying the foreign debt service. Table VII also estimates the impact on the components of macro-economic expenses. As was discussed above, without the aggression, 1984 exports would have been 33% higher, permitting 6% more imports as well as complete payment of the debt service.

In view of Latin America’s commercial and financial crisis, production would not have been as great as desired, but as Table IX shows, it would have resulted in a 6% annual growth rate of the GDP, and not the 2% that occurred. The real achievement is that the economy managed to remain stable even under this attack.

National defense has required considerable budget increases, involving painful reductions in the portion of the budget dedicated to social services as well as new taxes. Despite this, the fiscal deficit has reached highly inflationary levels. Since defense is based primarily on a massive infantry mobilization, direct import expenses are minimal and therefore do not have a major impact on the balance of payments. The deficit increase is entirely a reflection of internal demand, and the macro-economic impact, in a situation of restricted supply, has inevitably been inflationary. In other words, the population is paying an inflationary war tax.



In light of the fact that, without the aggression, the difference between the fiscal deficit and the GDP in 1984 would have been one-third of what it actually was, it is reasonable to assume that the inflation rate would also have been proportionately lower. Assuming that the monetization level of this deficit would have been similar in both cases, the result would have been as is shown in Table VIII. If, on the other hand, one takes into consideration that without the aggression the GDP itself would have been higher and foreign financing greater, the monetary deficit as a percentage of economic activity would have been even lower.



Impact of the war on the population’s living standard

The consequence of the war for the Nicaraguan population has been even more serious than these aggregate accounting figures indicate. This is because it is precisely the new social services and provisions systems which have been the major target of contra attacks. When these achievements are lost, it is the poorest sector of the population, the peasant farmers and workers, who are forced to bear the burden of the aggression. Those with more stable and protected living standards due to their higher incomes are naturally in a better position to defend themselves economically.

The war zones such as Regions 1, V and VI and the Special Zones (the Atlantic Coast departments of Zelaya and Río San Juan) have been hardest hit. These areas include one-third of the national population, or one million people, and one-fourth of them have been displaced by the war. They have abandoned their small plots and simple homes for the security of the towns, the resettlements or simply the roadsides. The government has made tremendous efforts to provide health care, housing, education and food for these people, at the cost of necessary social projects in other parts of the country.

The effect has been similar in health care, as counterrevolutionary bands purposefully destroy government works such as new health facilities, and assassinate anyone who cooperates with the government. To date, the Ministry of Health has been obliged to abandon 50 health units in these regions, including one hospital, four health centers and 45 health posts. One-fourth of the population (225,000) in the war zones can no longer be attended in a stable fashion, and health workers have had to adopt a variety of new methods so as not to leave these people completely bereft of health services.

The war has also impeded the extension of prevention services and mobilizations putting a brake on the epidemiological advances that have been the pride of the revolution. In the war zones the elimination of malaria has been halted, and poliomyelitis, done away with through a massive vaccination campaign in 1982, reappeared in 1984.

The destruction of housing, electrical and telephone systems and public transportation have all set back the advances in rural living conditions. Nevertheless, apart from the incalculable human suffering caused by deaths, disablement and kidnappings, the peasants have been most affected by the chipping away of their traditional economy. Most visibly, the aggression has resulted in the loss of up to one-third of the coffee and basic grain production in these areas, for the most part that of small producers. This loss is less a result of destruction than of the impossibility of planting or harvesting due to the constant risks involved. Two other effects are less obvious but even more serious, in that they affect the very structure of this economy.

The first of these is the growing scarcity of labor power, owing to the flight of families or the incorporation of their men into the war itself. This has lowered the commercial production of grains, coffee and livestock in particular, since many peasant families have retreated into subsistence planting or have migrated to the cities. In Managua alone, the population has climbed from 600,000 before the overthrow of Somoza in 1979 to nearly one million today.

The second effect is the break up of the small farmers’ commercial exchange networks, since the merchants or state agencies that store the crops, provide credits and sell industrial products cannot go into the areas. As a result, the peasants are left without either means of production (machetes) or a market for their corn, or else they just stop producing, thus endangering both their own standard of living and that of the general population.

For the other two-thirds of the population, found mainly in Regions II, III and IV in the Pacific, the economic impact of the war has been less direct, although many of these families too have personally suffered the pain of having a son killed. At an economic level, the aggression has been experienced in these regions in the following ways:

- Scarcity of foreign exchange for imports;
- Rerouting of budget resources to defense;
- Reassignment of provision quotas.

The shortage of foreign exchange, resulting from the aggression and leading to a slowdown in normal economic growth, has had a serious effect on the economy. In fact, average per capita basic consumption (food, clothing, etc.) in 1984 was 20% less than in 1982 due to the stagnation of industrial production resulting from the lack of imported inputs, the difficulties of importing food to replace what could not be supplied by the countryside, and the reassignments to defense.

As we have seen, this restriction of supply in the face of a monetary expansion caused in large part by defense itself has unleashed a violent inflationary spiral. The real salary of workers (who have demonstrated a willingness to maintain their nominal salary levels as a support to the country’s more urgent needs) have fallen by up to 50% between 1982 and 1984.

The shortage of foreign exchange for spare parts and essential inputs has particularly affected health and public transportation in the Pacific. At certain points in 1984, half of the operating rooms and public buses were out of service mainly for this reason. The scarcity of dollars coming from export and available for purchase in the free market (that is, not compensated with credit lines tied to specific products) is especially critical.

The increase in military spending at the expense of the civilian budget fundamentally dedicated to health, education and consumer subsidies has meant a quantitative, and to some degree qualitative, deterioration in these services. The impact of this deterioration experienced by the population is even stronger given the enormous achievements in these areas between 1979 and 1982. In education, the quality of studies has dropped additionally due to the massive mobilization of male secondary and university level students into defense tasks.

The provision of basic goods has also been seriously affected in the Pacific. Production losses of rice and beans have amounted to 15% of total production, but the portion designated for the cities, once rural needs have been subtracted, is in the neighborhood of 30%. At the same time, industrial production in 1984 was 20% less than would have been the case without the export losses.

For all this, the effect covers even more than is indicated by the production and storage problem. First it has become necessary to reassign civilian quotas from the Pacific to the war zones, in order to sustain the civilian populations displaced or otherwise affected. For example, 60% of the powdered milk production was assigned to Region III (Managua) in 1983; in 1984 it was reduced to 40%. Second, the massive infantry mobilization requires the same consumer goods (food, soap, clothing, etc.) as the civilian population. If having a son or daughter in the Sandinista Army reduces a family’s specific needs, per capita cost of supplying those needs is nonetheless much higher, given the war situation. In fact, supplying the armed forces involves 45% of shoe manufacturing, 24% of textile and clothing production, and a general average of 10% of overall industrial production. Defense needs take up 10% of national consumption of basic necessities such as sugar, rice, corn, beans, oil, soap and salt. Obviously this is all extracted from the quotas previously assigned to the Pacific cities, since rural civilian provisioning has greater priority.

The 1985 economic program attempts to organize this forced austerity within the new model of a “defense economy.” This implies two new principles: the war zones are prioritized in the provision of social services, infrastructure and basic supplies, and the Pacific will be left as a “rearguard economy.”

This means that as long as the war lasts, no new schools or hospitals will be constructed except in the resettlements. No more hospitals or houses will be built, streets paved or new water and electricity services provided. Food subsidies have had to be discontinued, while the provisioning of workers is being prioritized through their workplace commissaries. The planned consequence is that the urban informal sector will carry the bulk of the burden.

These indications do not even hint at the psycho-social cost of the US aggression on the population. The terror felt by the peasants confronted with the constant roaming presence of counterrevolutionary bands, the apprehension of city dwellers confronted with the possibility of a US invasion, the fear of children when a jet spy plane flies over their school—all these reflect a high, on-going level of tension that will necessarily have long-term effects even after the material effects have been overcome.

Impact on Nicaragua’s development project

It is practically impossible to put a value on the effects the war is having on Nicaraguan development. To do the topic justice would require estimations of what would have been achieved without the war in investments, production growth, the transformation of economic organization, the training of human resources, international economic relations, etc.

The development strategy of the revolutionary government grew out of an interpretation of the roots of poverty and dependency in Nicaragua. The strategy is based on transforming the agricultural sector and natural resources into the focal points of accumulation. The objective is to assure both an improved standard of living—simply the security of sufficient food production—and the accumulation of necessary foreign exchange through exports. This is realizable through the principal of a mixed economy and nonalignment, strengthened internally through the state and cooperative sectors, and externally by achieving balanced economic relations with the different economic blocs. As is evident, the war has put a brake on the material aspects of this entire project. The organizing principles, however, have not been abandoned, and efforts are going forward to consolidate the model insofar as possible.

The production losses, as we have seen, dramatically affect the scarcity of foreign exchange, and consequently the normal functioning of the national economy as a whole. Without US pressures on long-term financing, more resources would have been dedicated to production, permitting a much greater national product. The Nicaraguan government and the Economic Commission for Latin America estimate that the GDP would have grown 6% per year between 1980 and 1985. This figure does not take into account the positive effect that would have resulted had the investments planned for infrastructure development not been postponed due to the blockage of loans submitted to the multilateral lending agencies precisely for this purpose. Loans of this type are generally not available through other sources.

The World Bank’s last report before it suspended loans in 1981 noted encouraging prospects for the Nicaraguan economy. Actions to overcome certain problems were recommended—the stabilization of the Agrarian Reform, the reduction of the budget deficit and guarantees to producers—and in fact have been implemented. It is therefore appropriate to cite the 1980 projection of this prestigious international institution as a reasoned opinion of what Nicaragua’s economic development would have been were it not for the foreign aggression. As Table IX indicates, production between 1980 and 1985 would have increased some 30%, compared to the 9% increase obtained even despite the war.



The World Bank report also indicated that in 1984 exports would amount to $1.1 billion. Due to the war, that figure was only $382 million. Additionally, the report previewed a net flow of $424 million from the multinational institutions between 1980 and 1984. In fact, Nicaragua received only $336 million in total disbursements. In exchange, in the same period it paid $234 million in interest and amortization on the debt contracted by Somoza with these institutions. The net inflow then, amounted to only $102 million.

Projects blocked in the World Bank and the International Development Bank are precisely those that the World Bank had identified as essential for the stable development of the Nicaraguan economy, especially in agricultural production and social infrastructure. Ironically, the principal beneficiaries of these funds would have been the private sector producers, both in large-scale production (the IDB project of industrial rehabilitation, for example) and in small (the World Bank project).

The process of overcoming poverty and underdevelopment necessarily involves different sectors of property and does not depend solely on the efforts of the state. The project of the Sandinista revolution is that of a mixed economy, in which both the patriotic entrepreneur and the peasant farmer or small producer can strengthen their contribution to the economy of the society as a whole. Within this perspective must also be included the project of autonomy for the Atlantic Coast.

Perhaps the most serious impact of the war on the future development of Nicaraguan will be on human resources. In the first place, the flight of the rural population toward the cities, and the military mobilization of one out of every five teenage or adult men, seriously affects agricultural production, which is the basis of development in Nicaragua. This affects production not only in the short term, but in the future as well, since it will be difficult to reintegrate these people into agricultural production.

In the second place, a large number of professionals and technician have left Nicaragua through fear of the war of because they do not want to see their sons drafted into the military service. This exodus, combined with the necessarily military mobilization of other professionals, has affected and continues to seriously affect industrial production, health projects and other tasks of the technical sectors.

In the third place, entire generations of young people are being mobilized without having completed their secondary education or are unable to start university. This situation affects up to half of the males between 17 and 25 years of age. Although to some degree these men are replaced by women in the work force, the future impact on the technical and professional resources could be serious. Furthermore, from the leadership to the last worker or peasant farmer, all are dedicating the majority of their intellectual, organizational and physical efforts to the defense of their country instead of to its development. Even if the aggression were to stop right now it would take many years to recover from the material and social damage caused by this cynical war.

The World Bank study mentioned above predicated that the existing balance of payments problems would be overcome by 1990. It also predicted a stable growth rate, with an 36% higher GDP than in 1980. The current tendency indicates a level only 15% higher, and therefore a notable deterioration in the per-capita income. The prospects of much lower per-capita income than anticipated imply a necessary redistribution of income among the different social strata in order to guarantee basic necessities to the whole population. This will necessarily change the current social structure.

Despite all the difficulties and limitations, the majority of the Nicaraguan people consider this war to be a continuation of the liberation initiated by Sandino. They have demonstrated this by their support for the current revolutionary leadership in the recent elections and their acceptance of the human and economic cost of the aggression. They have also seen that international solidarity is guaranteeing the minimum support necessary for survival. While they believe in the ultimate victory of what they see as a just struggle, the immoral US aggression has forced a tremendous cost on them. It has blocked their expectations of a dignified level of existence at last, and impedes their aspirations for economic development and a future for their children. It has also caused internal social tensions which, just as in any other democracy, make the full development of political pluralism and other liberties more difficult.

The US government has the moral and legal duty to compensate Nicaragua, at least for the material destruction its aggression has caused. Human lives and the suffering of Nicaragua’s people, on the other hand, cannot be reduced to monetary terms, and can only be redressed by the unmediated recognition of Nicaragua’s dignity and national sovereignty.

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