Nicaragua
The Economic Plan’s Feet of Clay
Envío team
In our first analysis of the Lacayo Plan, the central issue was whether the Nicaraguan economy, both rural and urban, would find itself at a dead end after the defeat of hyperinflation. We concluded that the magnitude of the monetary contraction and commercial liberalization upon which the stabilization strategy was based would lead to the decapitalization and bankruptcy of urban and rural productive and service sectors, with the consequent denationalization of the Nicaraguan economy, a greater concentration of capital and the deterioration of the popular economy. We predicted a high human cost of the measures due to the drastic increase in unemployment, which, in turn, promotes social instability, delinquency and migration to the United States. We anticipated that public health and education services would also deteriorate substantially as a consequence of the drastic national budget cuts. (See envío May 1991 for our detailed analysis of the UNO government's economic plan, named after Minister of the Presidency Antonio Lacayo and officially implemented on March 4, 1991.)
Eight months after the implementation of the Lacayo Plan, there is no sign that these negative tendencies will reverse, nor is there any indication that the government will change the course of its economic policy. On the contrary, open unemployment and underemployment, according to the Ministry of Labor, rose from 45% in 1990 to 58% in 1991. Average salaries, which just before the plan's implementation covered 92% of the basic market basket, now only cover 72%. In a seminar organized recently by the United Nations and the government, studies revealed that 70% of the population lives in poverty, and 40% must be classified as indigent.
Nevertheless, this accelerated economic and social deterioration has not served to modify the government's economic policy in the slightest. From its point of view, this deterioration is the cost the country must pay in order to restructure the economy and make it internationally competitive. The decapitalization and bankruptcy of important sectors of industrial and agricultural production are thus seen as the natural and inevitable result of their inefficiency and inability to compete on the international market. From this perspective, the role played by the trade liberalization that accompanies the stabilization measures consists precisely in contributing to the free market's promotion of "good" productive sectors and elimination of the "bad." The government also argues that the measures' high social cost is also inevitable, though claims it is promoting initiatives such as the Social Emergency Fund (FISE) (envío, July 1991) and Social Action Fund for Oppressed Sectors (FASO) to soften the blow.
Minister of the Presidency Antonio Lacayo and his Cabinet seem more convinced than ever that the International Monetary Fund (IMF) and World Bank recipe is right and have confidently announced to the world that 1992 will be the year of Nicaragua's economic "takeoff." Their optimism is based on the success of stopping hyperinflation and significantly reducing the country's fiscal and financial deficits as well as on the foreign financial backing upon which the government is counting.
In spite of this optimism, we still maintain that the government's economic policy has feet of clay. The degree of monetary contraction being applied to the national economy, combined with the accelerated rhythm of trade liberalization, has led to a disproportionate recession with consequent social instability, instead of encouraging reactivation and economic growth. This negative economic and social environment, in turn, is not enticing to national or foreign private investors, even if the government offers all the state enterprises formed under the Sandinista government for sale at ridiculous prices.
The government hopes that this contraction of economic activity in the national market will be compensated by growth in exports. But this hope is not rooted either in a realistic assessment of the export sector's current situation or on the tendencies of the international market.
The traditional agroexport sector is mainly affected by the inability to restructure and/or replace cotton cultivation in the country's most important agricultural zone. For decades, cotton was Nicaragua's principal export product, but it has not been able to recover from the crisis brought on by its lack of profitability since the early 1980s. Coffee and beef—the other two key traditional exports—are just now beginning a slow recovery process, and international prices show no indication of improving, while the development of new agroexport activities is still only a notion in the minds of some government officials and business interests. The same is true with the boastful announcement about Taiwanese investment in maquila industries—the materialization of such assembly plants for export has not gone beyond the journalists' pen.
The "record" quantity of foreign aid has been used to finance a boom in imported consumer goods and not to develop national production. At the same time, the use of part of these resources to cancel Nicaragua's arrears with the multilateral banks is the definitive step toward the country's reinsertion into the international financial system and the premature end of the concessionary aid—donations or low-interest, long-term loans—that the country received during the past two years.
This analysis examines to what point and for how long the economic stability achieved by the government up until now is sustainable. We review the contradictions generated by the government's "repression" of prices, reduction of the fiscal deficit and contraction of credit. The impact of the maxi-devaluation of the córdoba on the economy's export sector is also examined, with special attention to the role of foreign aid. Finally, while the government insists there is no other way out, we provide the outline of an alternative course for economic policy in Nicaragua.
Economic stabilization: Is it sustainable? The government has continued to apply the anti-inflationary policies begun in March of this year, based on price controls for basic products, the reduction of the financial and fiscal deficits and the maintenance of a stable exchange rate. The results of this policy show that monthly inflation has dropped significantly compared to the first months of the year (Table 1). On this basis, the government has undertaken an intense propaganda campaign to convince the population that inflation has been relegated to history.
Nevertheless, inflation, which was controlled in such a short time, could climb again due to the contradictions created in the national economy by the government's economic policy itself. First, the control of basic food prices has depended on food imports and subsidies to state service industries that will be difficult to maintain in the medium term. Second, the fiscal and financial deficits have been reduced at the cost of a profound recession in economic activity, with disastrous social consequences. Finally, a stable exchange rate cannot be maintained indefinitely without diminishing the profitability of exports and cheapening imports, thus contributing to an even greater gap in the balance of payments.
Price controls: How much longer?The control of basic food prices has depended primarily on the government's repression of the market by using foreign resources to import foods and the national budget to finance subsidies of state service industries. The most scandalous cases of food imports are poultry and rice, while the largest single subsidy to a state service industry is to ENABUS (the state bus system), to maintain low-fare public transportation in Managua.
The state is gradually turning over food imports to large private merchants, and price increases were quietly authorized in June. Parallel to this, the government highly publicized a new drop in the gasoline tax to counteract any inflationary expectations that might have arisen.
How long will the government be able to maintain this price "repression"? Some disturbing signs—increases in chicken and rice prices—appeared in the last weeks of October, due to a decrease in imports of these products. This government import policy has generated its own vicious circle since low-priced imports lead to the bankruptcy of national producers. At the same time, it makes the country increasingly dependent on food imports, which can only be financed with foreign exchange given the enormous balance of payments deficit. A policy to keep inflation under control in the medium term, then, does not exist; this would involve financial and technical support to national producers to make them more competitive.
As part of its strategy to reduce the fiscal deficit, the government plans to substantially decrease transfers from the national budget to finance subsidies. This will come about through the privatization of state service enterprises that are currently subsidized. ENABUS, which plays a key role in public transit in Managua, is one of the enterprises included in these plans. The immediate consequence of its privatization would be the freeing up of bus fares, with a significant impact on the emaciated pocketbooks of urban popular sectors and unpredictable political consequences.
Fiscal deficit: Can it shrink more? The government's anti-inflationary policies are also limited by its capacity to continue reducing the fiscal deficit. In our first analysis of the Lacayo Plan, we explained that the initial impact of the March "shock" had been a growth of the deficit, increasing dependence on foreign aid to finance the national budget.
The government has been able to partially reverse this tendency, financing 69% of its spending through taxes between March and September 1991, compared to only 49% during the same period last year. A look at this tendency during the latter months shows that the proportion of the budget self-financed actually reached 80% (Table 2), but this is due, in part, to a natural increase in tax collection common to this time of year. Foreign resources have covered the remainder of government expenses.
The key to this "success" has been an impressive 30% increase in tax collection over last year. This increase has been possible due to the government's fiscal reform, which altered the country's tax structure. This reform resulted in a 25% drop in revenue from direct taxes (income and property taxes) and a 29% increase from indirect consumer taxes, particularly those of the so-called fiscal industries (products to which the government applies substantial selective consumer taxes; in Nicaragua, cigarettes, beer, rum and soft drinks). In other words, the higher-income sectors of the population now pay less taxes and the lower-income sectors pay more.
How has the government increased its income from indirect consumer taxes if the economy is in recession and the population's buying power has dropped? First, controlling inflation stabilizes tax collection and value. Last year, rampant inflation ate fiscal income and prompted people to postpone tax payments until the face value was almost worthless.
Second, the 400% devaluation in March substantially increased the córdoba price of imports, and thus increased the sales taxes collected from Nicaragua's considerable commercial sector. The government has also played a key role in authorizing credits for imports, which facilitates tax collection. In addition, the government took repressive measures against contraband and considerably decreased import duties, stimulating merchants to process their imports through legal channels.
Third, tax collection from the fiscal industries increased because of expanded consumption of nationally produced products, displacing imported products that had generally been entering the country as contraband. This substitution was possible because the devaluation raised the price of imported products and because the government reduced taxes on the national substitutes when it implemented the economic plan, somewhat improving their competitiveness. After the March maxi-devaluation, the average price increase for domestically-produced cigarettes, beer and soft drinks was only half the price hike for similar imported products.
The increased sales volume of these products more than compensated for the drop in taxes per unit sold, thus increasing the government's total tax income. In addition, the government provided the Coca-Cola factory with $2 million in low-interest loans to rehabilitate its industrial plant, while the owners of the Flor de Caña rum factory successfully pressured the government not to authorize credits for rum imports.
But the deficit reduction has also been the result of a 6.4% drop in fiscal spending in relation to the same March-September period last year. This reduction would be even greater if we subtract the new, one-time occupational conversion program, which represents 9% of this year's fiscal spending. In addition, an IMF memorandum indicates that the Nicaraguan government has reinitiated its interest payments on the public debt, which represents another 7% of fiscal spending up to September. Excluding these two categories, the result is a 22% contraction in resources available for normal central government operations compared to last year.
Daily reports in the national media about the disastrous condition of the national health and education systems should, then, come as no surprise. It is also not surprising that judiciary employees have decided to go on strike, or that the police are unable to deal with the increase in crime due to the lack of minimal operating resources, or that there are so many other on-going signs of social disintegration.
Increased unemployment rates resulting from the occupational conversion program must be added to this. According to government propaganda, this program would facilitate the transformation of thousands of public and military employees into small businesspeople. More than 11,500 public employees—3,000 of them from the national banking system, 2,700 from institutions providing basic public services (water, power and communications) and about 5,000 members of the armed forces—have participated in the plan.
These employees, workers and soldiers were attracted by the relatively large indemnification they were offered in exchange for leaving low-paying jobs. Government propaganda dangled promises of becoming small business owners overnight: "I can already see myself with my own beauty parlor," swooned one woman in a television advertisement. But, in reality, the majority of those who accepted the plan invested their indemnity in micro-projects within the already overcrowded small commerce sector—and roundly failed in a short time due to the depressed internal market and increasingly fierce competition.
In conclusion, the "bill" for reducing the fiscal deficit has been paid by the popular sectors. On the one hand, they are paying more taxes and, on the other, receiving poorer services and losing their jobs. Nevertheless, despite its disastrous social effects, the government plans to make additional cuts and privatize public services.
Reactivation—by credit contraction? Reports from the IMF and World Bank missions forebode the continued contraction of public spending and credit to productive and service sectors, even if this leads to a deeper recession. The government's anti-inflationary policies have also been supported by a substantial net reduction in state bank credits available to productive and service sectors. The total net credit to these sectors (loans provided minus repayments received) during the first semester of 1991 dropped 47% in relation to the first half of 1990 (Table 3). A contraction of this magnitude has obviously caused a serious currency shortage.
The contraction of net credit is explained in part by the enormous increase in loan repayments from the previous year. This happened because the national bank applied stringent norms and procedures common to private commercial banks in the authorization of credits. The Sandinista government, while it had formally begun to take steps in this direction as part of its adjustment program, continued in practice to use credit as a subsidy to producers. Under a credit policy that promoted the expansion of agricultural production, farmers would repay their debts but would receive larger loans to finance the upcoming planting cycle.
The impact of these strict credit policies on different productive and service sectors has varied widely, congruent with the government's anti-inflationary strategy. Credit has been redistributed to benefit fiscal industries and state and private commerce to the detriment of agriculture and state-owned foreign trade houses (Table 4).
The big winner in this redistribution has been the state and private commercial sector, precisely because of the orientation of the government's anti-inflationary policy. State enterprises involved in domestic trade have played a key role in controlling basic foods prices through imports, while private trade has benefited from the drastic drop in import tariffs.
At the other extreme is the agricultural sector, which, for the first time in the country's history, registered a negative flow of resources; the recovery of credits from the previous year well surpassed those provided for this agricultural cycle. In other words, national agriculture is being decapitalized. Cattle ranching is the exception, with slightly greater credit flow than last year, probably because it is less risky and more profitable.
State foreign trade enterprises, which used to purchase export crops produced by peasants, have also been dealt a hard blow; they have been haphazardly privatized, promoting speculation by private traders. These enterprises received more than half of the credit given out last year, while they are currently receiving only little more than a quarter.
In conclusion, net credit from the National Financial System has contracted significantly, at the cost of decapitalizing national agriculture and dismantling state export enterprises. The current tendency in credit allocation is toward prioritizing commercial over productive activities, with the exception of the fiscal industries.
Exports—reactivation miracle?The government has tried to compensate for the recessive effects of reductions in the fiscal deficit and bank credit by modifying the price structure to stimulate exports. The maxi-devaluation in March cheapened labor costs and increased the price of exports in national currency. In this way, the government hopes to base economic reactivation on the growth of the agroexport sector.
Nevertheless, during the first half of 1991, exports fell 37% with respect to this same period in 1990. Of the four principal export crops—coffee, cotton, beef and sugar—all but sugar dropped in total export value (Table 5). Coffee production dropped due to adverse climatic factors, as did international prices due to a world surplus. Though cotton production increased, its value dropped due to low international market prices. The contraction in beef exports is linked more to over a decade of structural problems. Particularly since the Sandinista government's 1988 economic adjustment policy, too many cattle were slaughtered to take short-term advantage of incentives the policy offered, thus diminishing the national herd.
Sugar is the only export crop that increased in volume and whose international market price improved. The volume increase is due to large investments by the Sandinista government in the past few years in the country's two principal sugar refineries, San Antonio and Timal. The price increase is due to Nicaragua's reentry into the US sugar market; the US sugar preferential quota price is double that of the international market.
The drop in the value of exports cannot really be attributed to the failure of the Lacayo Plan's economic measures. The behavior of exports, due to their agricultural origin and cyclical character, reflects the effects of climatic conditions and policies in place during previous agricultural cycles. Since the response of exports to economic policy stimuli is somewhat delayed, export income from the first semester of 1991 largely reflects 1990's economic policies and climatic conditions. The other key element is international prices, determined, of course, by factors completely outside the country's control.
The problem lies in the neoliberal "naivete" of endowing an exclusively export-based economic reactivation strategy with the ability to produce miracles, even while fully aware of the depressive tendency of international raw materials prices and the instability of the world market. The drop in international prices for Nicaragua's principal export products over the past 10 years can be clearly seen in Table 6.
Agricultural Production for the Domestic MarketWestern Nicaragua and the central drylands have shown the first signs of a severe recession, due both to the drought and the peasantry's credit crisis and to the lock of economically viable alternatives for large producers, especially cotton. In the more mountainous interior, there are focal points of economic reactivation in coffee and cattle production, which have still not borne fruit, and vast areas experiencing a boom in peasant production of basic grains, a growth rate which will not be repented in the future.
The harvest from the first planting cycle of 1991-92 shows an almost 15% expansion in agricultural area in domestic production, according to official statistics. Overall, the growth in the interior was able to compensate for the contraction in the Pacific and central drylands.
The expansion of basic grains in relation to 1990 is not a result of the Lacayo Plan. The primary reasons for it are the rural economy's new work force of demobilized contras and repatriates, who have returned to the former battlefields to plant; a broad redistribution of rural lands in the interior, exacted from the government by poor peasants, particularly in the last 18 months; and a drought this year that affected production in those zones less than last year's.
More than a million acres have passed to the hands of some 23,000 families of demobilized contras or army members, agricultural workers and landless peasants through the privatization of the three largest state corporations— Hatonic (cattle), Cafenic (coffee) and Agroexco (cotton)—end the occupation or negotiation of private or cooperative farms. Two thirds of that land is in the country's interior. If we add the peasants who have returned to lands they abandoned during the war or who are recolonizing the agricultural frontier, some 40,000 families more than last year have land and are planting basic grains.
In contrast to this spectacular increase in grains production that began in the mountains last year, the peasant sectors in the Pacific and dry zones are becoming increasingly weary. The high level of decapitalization due mainly to a credit drop of 46% in terms of area financed and more than 60% in terms of real amounts have caused a liquidity crisis even more serious than last year, which resulted in a reduction in area planted. In addition, due to the scarcity of capital, peasant farmers chose to plant crops such as tubers and sorghum; while they do not bring in as much money, they have lower production costs. The drop in investment capacity also affected crop management (pest control, fertilization), which, added to the drought's adverse effects, resulted in generally low yields.
Better off peasants, who still had something to cut from family consumption in order to finance the new planting cycle, were able to avoid this recession. Business sectors on the Pacific plains also escaped it; with bank financing, traditional sorghum and irrigated rice producers, as well as cotton planters who recently converted to those crops, maintained the same production area as last year. These producers, forced to make adjustments given their lack of competitiveness in an open market, now have the possibility of getting good prices for their harvests. Sorghum producers also negotiated with the government to artificially maintain the sorghum price, and at least temporarily reduce imports of yellow corn (which competes for the same market). Rice prices have also risen due to a temporary drop in imports; but prices may fall again before the national harvest, since additional imports have recently begun to arrive.
In addition, the government has not even been consistent in its pro-export logic. No export promotion programs provide investment credit at reasonable interest rates, nor training or technical assistance to increase productivity and improve market strategies. It seems that the government believes that the "magic" of a free market and privatization is sufficient to develop the country's export capacity. This contrasts significantly, for example, with Costa Rica's export strategy; for decades that government has promoted subsidized credit programs and training and technical assistance to diversify and increase the country's export capacity.
On the other hand, it has been impossible to obtain statistics about the level of imports since the implementation of the Lacayo Plan to calculate its impact on the balance of payments. The tendency in the first quarter of the year, according to Central Bank statistics, showed a drop in the value of imports, with a severe contraction in intermediate (inputs and petroleum) and capital goods (machinery and equipment) for industry and agriculture. This is congruent with the recession in domestic production. The only area that registered expansion was that of durable consumer goods observed since the drastic reduction in customs tariffs.
Few changes are foreseen in these tendencies in the final months of the year, since national production is still in recession and the policy of reducing tariffs on consumer imports has expanded. In addition, the government shows no sign of terminating its price control policy with the help of massive consumer goods imports.
In conclusion, the country's trade balance (exports minus imports) could be improving, not because of the hoped-for increase in exports but because of the decrease in the import of inputs and machinery caused by the recession in national production. On the other hand, this "improvement" could be going up in smoke with the increase in consumer goods imports financed with the relatively plentiful foreign aid the government has received.
The Urban RecessionIn September and October, the deterioration of real Wages and the drastic increase in unemployment brought a wave of, strikes and factory and office takeovers by workers. Tensions have also arisen between industrialists and traders within the business class. The Nicaraguan Chamber of Industry (CADIN) has entered into open conflict with government policies of reducing tariff protections and opening the borders to competition with foreign industry, which benefits trade and harms industry. CADIN is asking that protections be reinstated and demanding tax breaks. But neither tax breaks nor strikes are the solution to the urban recession.
The government's position on industry, also held by a sector of Sandinista technocrats, including some leaders, is led by Minister of Finance Emilio Pereira and maintains that reactivation—let alone conversion—of the industrial sector is impossible. They argue that only those enterprises capable of competing internationally should survive. The key question is, should we allow these industries to continue going bankrupt, trusting that foreign investors will respond, or should we seek a national alternative that does not cut off our future options?
The Impact of the PlanThe recession is concentrating capital and affecting industry unequally. As a general tendency, it favors large industry and punishes small and medium. Its adverse affects are greater on jobs for the working class than on levels of production for big business interests. As in previous adjustments, these recessive effects are restructuring the industrial sector in favor of certain branches of production and to the detriment of others, drastically reducing industrial diversity. Production is concentrating in a few areas, which are not necessarily those with multiplier effects.
The first six months of the Lacayo Plan have reinforced the concentration of industries in food, beverages and tobacco and the progressive destruction of textiles, metal-works, non-metal construction materials and chemicals, which, as of August 1991, still represented 37% of industrial production and in 1988 was the most important group of industries. The stabilization process is reducing and deforming Nicaraguan industry towards cigarettes, beer and rum, pushing the country further toward the degenerative colonial model of tobacco and booze stands. These products provided the taxes that maintained the colonial bureaucracy and continue to be the most important—and growing— source of government tax revenue today.
There are two main reasons for the success of certain branches of industry. In addition to the growth in these “fiscal” industries, described in the main text, US aid has artificially promoted certain products. Under Public Law 480, the US Agency for International Development (AID) has provided loans for the import of cooking oil and wheat, to the benefit of the cooking oil and bread industries. The "expansion" of the oil industry, then, is actually fictitious, because a substantial part of production is simply bottling imported oil. The key feature of the Lacayo Plan is merely more commercial imports instead of the reactivation of production.
There are also two main reasons for the recession in other branches of industry—the contraction of demand and the increase in imports and removal of tariff protections. Demand includes both private demand—what the population can buy—and public demand—what the government decides to buy or to invest. The impact of demand on industry, according to our analysis, is as important as the effect of removing tariff protections and opening the borders to foreign competition, if not more so. If our analysis is correct, large and medium industry could be reactivated by stimulating demand through public investment programs that differ from current ones, expanding employment in health and education and implementing a more selective and rational policy of removing tariff protections.
The unemployment problem is at the center of the urban crisis. Bankruptcy and recession in almost 60% of the different branches of production have resulted, in just one six-month period, in the greatest loss of jobs ever experienced by medium and large industry in Nicaragua. State enterprises account for 76% of these losses, primarily duo to the bankruptcy of state-owned textile and metal-working factories, but also to political factors.
Perhaps the most important factor to consider for the reactivation of the urban economy is that the branches of industry growing must, such as soft drinks and beer, have far fewer multiplier effects than those that are declining, like construction materials. In addition, labor productivity in the areas in recession is not any lower than productivity in the expanding group.
Foreign aid: Used for what? The government received some $504 million in foreign resources in 1991, primarily from the US (38%), Western Europe (29%) and Taiwan (12%), and the real availability of funds has been even greater this year. Almost half of the aid already received is being used to finance imports to back the stabilization strategy. With this amount of aid, the government can finance its balance of payments deficit, even if it were to increase for the reasons previously mentioned.
Foreign aid has a relatively diverse structure. On the one hand, European countries (Sweden, Finland, Norway, Denmark, Spain, Italy) that aided Nicaragua during the Sandinista government have continued to do so. On the other, the UNO government has been able to reestablish aid from the US and West Germany and considerably increase aid from Taiwan and, to a lesser degree, Japan. The cooperation of the former socialist countries, as expected, has almost completely dried up after playing a predominant role during the second half of the 1980s.
The government has also canceled the country's arrears with the multilateral banks (World Bank, IMF, International Development Bank and others), thus reinserting Nicaragua into the international financial system. The cancellation includes the payment of $444 million with the help of "bridge" loans from various countries. In reality, these loans are an artifice of the multilateral lending agencies. The first step is to pay the debt arrears with them. Once done, Nicaragua becomes re-eligible for credit from the lending agencies and receives loans to pay back those same bridge loans to the different lending countries. In the end, what has actually happened is that Nicaragua's debt to the multilateral banks has simply been reprogrammed.
In conclusion, the "normalization" of relations with international financial institutions means that, starting next year, the majority of foreign aid will come from them and will be conditioned to the observance of economic policy guidelines that they deem appropriate. At the same time, the extraordinary amount of concessionary foreign aid—donations and soft credits—available this year has been used to finance an import boom instead of facilitating the recovery of national industry and agriculture.
An economic policy alternativeThe government's litany is that it cannot modify its policies because there is no alternative. It also claims that any change would mean the loss of backing from the International Monetary Fund and the World Bank, with negative consequences for the procurement of foreign aid vital to the country. Important sectors of the Sandinista leadership agree with this point of view, which explains the principal opposition party's closet support of current economic policy. But they are mistaken; there is a real possibility of reactivating national industry and, with it, the urban economy, and a real potential for growth, wasted so far by excluding the peasantry from access to credit, in agricultural production. It is thus even more urgent to change the recessive course of current economic policy.
Official propaganda maintains that the government's economic stabilization program is creating a healthy climate for reactivation to begin in 1992, built on the foundation of private and foreign capital investment. It also systematically states that the "enormous" state sector is absorbing the savings that the private sector would invest more efficiently in that reactivation; therefore, direct taxes must be lowered and public spending cut drastically. But reality is proving to be different. It is increasingly difficult to maintain that we are on the verge of a massive influx of repatriated national capital and foreign investment. No capitalist is going to risk investing in Nicaragua as long as the climate is economically recessive and socially unstable.
The government is timidly recognizing this fact by announcing a public investment program, primarily financed with foreign resources, equivalent to 11% of the Gross Domestic Product (GDP). This program is utterly inadequate if its magnitude is compared to the public investment program after the war of liberation in 1979, which averaged 20% of the GDP; that program was able to achieve an acceptable level of economic reactivation in three years.
The UNO government's meager investment effort openly contrasts with the amount of foreign aid it claims to have available; the problem is how it is choosing to use those resources. Official economic policy continues to use foreign aid mainly to finance the high economic and social costs of moving the Nicaraguan economy rapidly into the world market. The government's basic premise is that thanks to the "free" market and privatization, the country will develop by specializing in those export products in which it has a comparative advantage and importing those in which it does not. This specialization is based on two assumptions: that we have unrestricted access to developed countries' markets, particularly the US due to our geographic proximity, and that this "comparative advantage" will stimulate the influx of national and foreign capital.
In reality, full integration into the world market alone will not stimulate the influx of capital, nor will it guarantee our products' unrestricted access to the US market; what it will guarantee, however, is the destruction of an important sector of national agricultural and industrial production. Not even traditional exports of Nicaraguan sugar and beef have free access to the US market, since both are regulated by quotas to protect US producers. In contrast, the government is using US aid to finance the free entry of US poultry into the national market, thus destroying Nicaragua's small and medium poultry producers.
The majority's protest against current economic policy is not an "irrational" reaction, as official propaganda would like us to believe. In our analysis, the need for a change in the course of economic policy not only has a socio-political basis but also an economic logic coherent with national interests. The short-term logic of an alternative proposal is based precisely on mobilizing and taking maximum advantage of the country's resources, instead of paying the extremely high cost of having more than half the population unemployed or underemployed and a significant proportion of land, factories and small shops lay idle. The national economy's idle resources and/or unemployed workers can be mobilized with an expansive fiscal and credit policy. In the short term, the state is the only economic agent capable of making the investments necessary to lead and stimulate economic reactivation. There are two principal aspects of reactivation. The first is the selective expansion of government spending and public investment; the second is increasing access to and lowering the cost of credit for small and medium agricultural and industrial producers.
More public investment, more jobs and creditSelective expansion of government spending and public investment has two key goals: maximizing employment and increasing the income or social benefits of the popular sectors. The expansion in spending should emphasize increasing the coverage and quality of basic public services in health and education, which means creating new jobs in those sectors and increasing wages for their workers. This would increase demand for basic and non-basic goods, which are in recession due to the drop in the population's purchasing power. Products that have suffered under the Lacayo Plan would respond positively to an increase in demand, reactivating a portion of national industry.
For its part, public investment should increase substantially and be oriented toward reactivating the construction industry with small infrastructure projects in the city and country. Countries affected by war have always used public construction programs to pull out of deep recessions. The construction industry has the most important multiplier effect in Nicaragua's economy, meaning that reactivation in this area stimulates economic activity in many others. While it directly reactivates factories that produce construction materials, it also increases the buying power of that sector's workers, which indirectly reactivates other industries. A public and private construction program would have a much greater positive impact on the economy than emergency programs like FISE.
This program would include self-help construction materials banks for grassroots housing improvement and construction. These banks would sell basic, primarily pre-fabricated materials, which currently represent 11% of industrial production—all of which would be reactivated. It would also include rural and urban campaigns to build latrines, improve and expand potable water services, improve roads and rehabilitate health centers and schools. These projects could be implemented during the dry season to mitigate the economic problems of large sectors of the populace during the period of least productive activity. This would reactivate a part of the same 11% mentioned above, as well as providing jobs to those most impoverished by the Lacayo Plan. In addition, the program would include the construction of new houses to address the serious housing shortage for the poor. This would generate more jobs than the materials bank and would require additional kinds of construction materials, representing another 7.33% of industrial production. This kind of public investment program should prioritize increasing employment and popular income in a much faster and effective way than other kinds of contemplated public investments, such as increasing the country's electric power supply or telecommunications network, which are also needed.
The second aspect—selectively increasing access to and lowering the cost of credit for small and medium agricultural and industrial producers—means that the Central Bank would have to fix interest rates at a level substantially lower than current ones. This would mean postponing indefinitely the government's plans to fully liberalize the financial market.
At the same time, increased access to credit also supposes that debts of the peasantry and small and medium industry will be restructured under favorable conditions, and that these sectors will again receive credit. The new enterprises of the Area of Workers' Property (APT), which generally face a difficult financial situation, should also be subjects of this credit expansion.
Selectivity in increasing access to credit means that the state banks should be strengthened in order to efficiently administer programs for directed credit, accompanied by training and technical assistance in production and marketing strategies. Strengthening the state banking system means that a significant part of foreign resources will have to be used in order to recapitalize it.
Another economic concertaciónFiscal and credit expansion could generate inflationary pressures and an increased demand for imports. Increasing the tax obligations of the country’s middle class and wealthy sectors can combat inflationary pressures. This reform could include measures such as reestablishing the gasoline tax, taxes on luxury goods and a new tax on agricultural properties larger than 700 hectares. Those taxes would also have a beneficial effect in reducing the demand for imported goods by these sectors, which have benefited most from the import boom financed with concessionary foreign aid resources.
The demand for imports could also be reduced through restrictions on the free convertibility of the córdoba, similar to those used for the Costa Rican colón for the past several years, which have survived several adjustment programs. Yet another mechanism would be to halt the indiscriminate and rapid dropping of tariff barriers on imports that has been carried out in recent months. A flexible tariff system should be implemented instead, to protect the country's industrial and agricultural conversion and its less abrupt insertion into the Central American regional market.
The country's long-term alternative development strategy is tied to its integration into this regional market. Such integration is what can provide it with economic space for the development of productive sectors, not only Nicaragua's but also those in the rest of the region's countries. The problem is that the neoliberal project, now dominant in the region, prioritizes integration into the world market over the building of regional economic space.
Finally, this alternative, expansive economic policy is the only basis upon which a real concertación between the country's social and productive sectors can be developed. The enormous efforts by the government and opposition to achieve a negotiated political agreement are falling apart for lack of an economic equivalent that takes into account the interests of the nation and a whole gamut of economic agents in escaping the recession. This concertación must be based on a policy oriented toward recovering production and employment levels, which the Sandinista opposition will push to the limit, while the government should try to preserve its basic economic goals of controlling inflation and reducing the balance of payments deficit.
While the IMF has its firm policy position, the UNO government does not. Instead of negotiating from the solid foundation of its own alternative proposal, the government simply accepts the IMF's mandates. Alternatives to the multilateral banks' strict guidelines have, in fact, been implemented in other countries. Vietnam, for example, received IMF backing for its own adjustment program. And Costa Rica's program has at least been more gradual and varied than Nicaragua's. In addition, workers' protests in that country recently forced President Calderón to freeze a program to lay off state employees and cut the budgets of the four state-run universities; the Finance Minister, committed to strict implementation of IMF guidelines, resigned. Yet the IMF has not responded by cutting off funds.
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This article, which appeared in shortened form in the December 1991 envío, is reprinted this month in its entirety.
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a monthly magazine of analysis on Central America