Nicaragua
A New National Accord: Another Pact Between Leaders?
Nitlapán team
After months of conflict between various popular organizations and the Nicaraguan government, there is talk, once again, of concertación and the need for a "national accord." Does this mean another pact between leaders behind the people's backs? Or is there a real possibility of incorporating popular interests into a new concertación? This article, written by the economic research institute Nitlapán, observes the issues behind the debate over a national accord.
The last time Nicaragua experienced such economic, social and political instability as today was mid-1990. At that time, public employees and industrial workers affiliated with the just-formed umbrella of Sandinista union confederations called the National Workers' Front (FNT) shook the newly inaugurated Chamorro government with an onslaught of strikes.
This time, however, now that unemployment and hunger have brought former contras and former members of the Sandinista military together in a common front, the rebellion is more rural than urban. The armed takeover of Ocotal, in which these two groups joined to demand land, credit, fair prices and housing, is the most outstanding symbol of this convergence. The same thing is happening with union members of differing political orientations, as illustrated in this month's Nicaragua analysis. But while the unionized workers' positions increasingly converge, their leaders have not been able to overcome their mutual distrust or form a common urban front that could more effectively pressure the government in their demands for employment programs and better wages.
The government, on the other hand, upon celebrating the first anniversary of its implementation of the structural adjustment plan, boldly announced the success of its economic policies and the beginnings of an economic "takeoff' in 1992. The concrete results that demonstrate this success, it says, are the end of hyperinflation and the renegotiation of the foreign debt. These achievements have allowed Nicaragua to become eligible again for credit from the international banking system. According to government criteria, other examples of success are the rapid privatization of the country's economy and the deregulation of key sectors, such as foreign trade and banking.
In a March meeting in Washington between the government and the consultant group of donor nations and multilateral institutions, the World Bank and International Monetary Fund (IMF) fully backed the government's evaluation of the adjustment plan. The government recognized that their approval was decisive in accelerating the disbursement of foreign aid already conceded, in order to finance the structural adjustment over the next two years.
If the government can obtain the immediate disbursement of about $100 million, it could use those funds to quell current brushfires and avoid a larger blaze, also thus safeguarding its accord with the FSLN. Former president Daniel Ortega's participation in the Washington meeting, as well as the recent Sandinista Assembly decision to promote a "national accord," indicates that the rapid provision of aid could quickly eradicate recent outbursts of belligerence among FSLN leaders in defense of the popular sectors, in spite of growing rural instability.
The contradiction between the official discourse heralding stability and economic growth and the rapidly growing popular mobilization against the government's economic plan can be explained by the accelerated restructuring of Nicaraguan society resulting from the application of neoliberal policies. These policies have been developed by a new elite made up of the big capitalists and technocrats who control the government and enjoy the support of the World Bank and IMF. It is the same recipe being applied in other Central American countries, and is based on two key ingredients: electoral democracy and economic authoritarianism.
Throughout this article, we will examine this economic, social and political restructuring in Nicaragua. In the following three sections, we analyze the policies promoted by the stabilization and structural adjustment plan, evaluate the economic and social impact of those policies and, finally, take a close look at the "negotiated" solution currently being proposed.
The end of hyperinflation: Monetarism and a social pactIt cannot be denied that the end of hyperinflation has lent significant credibility to the government's economic policies, both in and outside Nicaragua. Hyperinflation, which battered the country's economy from 1986 to 1991, reached a peak of 14,316% in 1988. (Even higher inflation rates have been reported when calculated for non-calendar years. For example, inflation from January 31, 1988 to January 31, 1989 peaked at 43,000%.) Throughout the world in the last 30 years, this situation is comparable only to Bolivia in 1985, when inflation reached 12,807%. Table 1 shows the evolution of inflation in recent months, which virtually came to a halt with the implementation of the "Lacayo Plan," as the current package of policies has been called, in March 1991.
The monetary and fiscal policies that stopped Nicaragua's hyperinflation are similar to those used in Bolivia, as well as those implemented in Europe in the first half of this century. According to Thomas Sargent, one of the most famous economists who has studied this issue, "The essential measures that put an end to inflation in Germany, Austria, Hungary and Poland were: first, the creation of an independent Central Bank that was legally committed to rejecting the government's requests for additional unbacked credit; and, second, the modification of fiscal policies. In each case that we have studied, once the broad public understood that the government was not going to turn to the Central Bank to finance itself, inflation ended and the exchange rate stabilized."
Neither Nicaragua nor Bolivia has Central Banks independent of the government. Nevertheless, both countries' dependence on foreign resources coming from and/or channeled through the international banking system has meant the transfer of control over monetary policy from government authorities to the IMF, which acts as the equivalent of an independent Central Bank.
For this same reason, the IMF has had decisive influence in substantially modifying fiscal policy; public spending severely contracted in both countries. In addition, in Nicaragua's case, the nationalized banking system's financial deficit has been eliminated, which, at the same time, has meant an acute contraction in credit available to the private sector. On the other hand, these policies were backed in both countries by relatively plentiful foreign aid, which played a key role in reestablishing the public's confidence in the national currency and stabilizing its exchange rate. Nicaragua received approximately $505 million in aid last year—almost double its annual export earnings.
In Nicaragua, this stabilization or "anchoring" of the exchange rate came about after a 400% maxi-devaluation that broke the vicious cycle of inflation-devaluation-inflation-devaluation that had characterized economic policy since 1988. It did so by breaking down the expectation of inflation that had developed during this prolonged period of hyperinflation and continuous devaluations.
One factor that played a decisive role in changing expectations in Nicaragua, and distinguishes this experience from that of Bolivia, was the negotiation of a social pact in which the government, the country's main union organizations and other worker associations and, above all, the principal opposition party, the FSLN, agreed to back the structural adjustment plan. The government was able to successfully negotiate this pact by offering to control prices on basic consumer goods and promising worker participation in the privatization of public enterprises. The pact allowed the government to obtain a one-year "truce" and thus hold the popular sectors' demands in check, in spite of the adjustment measures' high economic and social costs.
In synthesis, the combination of contractive monetary and fiscal policies and this social pact succeeded in halting hyperinflation. This same strategy, however, had been used by the Sandinista government and failed. The key difference lies in the substantial foreign financing received by the Chamorro government, making it possible to anchor the exchange rate.
The economic and social impact of structural adjustmentThe application of contractive monetary and fiscal policies since the Sandinista government can be seen in Table 2, which shows a drastic reduction in the fiscal deficit in 1989.
Table 2 clearly shows the severe drop in public spending since 1987 and, at the same time, a substantial increase in taxes over the same period. The change was especially dramatic between 1990 and 1991. Current government spending dropped 40% while taxes increased 33% in just one year. In other words, the fiscal adjustment was "successful" because people paid more for public services and received less.
The combination of a sharp drop in spending and an increase in taxes produced a surplus in the government's overall budget in 1991, for the first time in many years. This surplus was also made possible by foreign donations almost double those received by the Sandinista government, though they decreased in relation to 1990.
More for a few, less for manyIn addition to proclaiming its success in "cleaning up" public finances through paid ads in the media, the government is also congratulating itself for the structural adjustments that these changes have produced in Nicaraguan economy and society. According to the government's interpretation, the income that the state previously received and spent has been transferred to the population, as shown by the sharp 19% drop in state consumption and the spectacular 20% jump in private consumption in the past year, according to the Central Bank's preliminary estimates.
The truth, however, is that the drop in state consumption reflects drastic cutbacks in government spending that have adversely affected the quality and coverage of basic social services like health and education, which benefit the popular sectors. This grassroots majority is losing its "social wage," because it now has to pay for these services. For example, people who use public health centers and hospitals must now pay for their medicine. And if this were not enough, taxes also disproportionally affect popular purse strings, since state tax income depends more on indirect taxes (on soft drinks, beer, rum and cigarettes) than on direct income or property taxes.
So how could there be such a spectacular increase in private consumption? One possible explanation is that this increase is a result of the influx of both private and official foreign resources in 1991. Another is that the government is exaggerating figures in order to minimize the contracted demand in the domestic market and its recessive effects on the Gross Domestic Product (GDP).
Both hypotheses are consistent with the country's current reality. Statistics and daily life show that the former is true. On the one hand, the flow of private foreign resources has increased with the return of middle and upper class sectors from Miami, the growing exodus of urban popular sectors to the United States and the consequent increase in foreign remittances, and the increase in drug trafficking. On the other, a significant portion of official foreign aid has not been channeled to the state but to finance private commercial and banking activities.
In other words, part of the population does, in fact, have the possibility of consuming more. Consumer goods imports increased 10% over 1990. This is consistent with what anyone can see in Managua: new restaurants, supermarkets and stores selling products from all over the world.
The second hypothesis, however, can also be demonstrated by the government's own statistics, as well as by the obvious increase in unemployment, poverty and hunger throughout the country. The Minister of Labor recently stated that there is only 13% unemployment in Nicaragua because, according to its criteria, the rest of the labor force works "for themselves," in the urban informal sector. The last IMF evaluation report, for 1991, makes the same assertion.
The veracity of their words can easily be tested by analyzing the evolution of the GDP and the labor force from 1979 to 1991. During that period, the GDP contracted 35%, while the labor force grew at least 30%. Combining these two figures shows that the employed proportion of the work force has fallen 65%! This tendency can also be verified by the only dependable official statistics on unemployment, provided by the Social Security and Welfare Institute (INSSBI), which show a 15% increase in unemployment from 1990 to 1991.
In addition, also according to official figures, the number of families living under the poverty line has now risen to 70% of the country's population, up from under 50% five years ago. Official statistics also show that, in the past five years, daily per-capita food consumption has dropped from 2,090 to 1,378 calories, far below that recommended by the Nutrition Institute for Central America and Panama (INCAP). Such overwhelming evidence clearly demonstrates that it is impossible for consumption to have increased for the vast majority in 1991.
In summary, the structural adjustment—which is heading in the "right" direction according to official propaganda—masks the reality of an accelerated process of social differentiation and economic stagnation. This stagnation has affected all sectors of production and services in the country, except for a small minority of agricultural, industrial and commercial businesses.
The crisis in rural productionBetween 1990 and 1991, the recession hit agriculture hardest; production dropped 6%. It is not, then, surprising that the most energetic popular rebellion against the structural adjustment plan has originated in the countryside (see Table 3).
Policies implemented under the structural adjustment plan have been decisive in provoking the plunge in agricultural production.
The contraction of credit together with its inefficient allocation and the drop in prices for agricultural products has caused illiquidity and a significant reduction in income for peasants and agricultural workers. The business sector has not escaped the crisis either, since its profit margins have also dropped due to falling international prices on agricultural exports.
Net credit to the agricultural sector in 1991 was barely one third of what it was in 1989, generating an acute lack of capital that halted the recovery of idle agricultural lands in the country's Pacific and interior regions. This cutback affected different rural social and productive sectors unequally. Small and medium farmers not only received less credit than in the past, but also their relative weight in credit distribution dropped from 52% of the total authorized in 1989 to only 36% in 1991. In that same period, the proportion authorized to agribusiness rose from 31% to 55%.
This distribution does not correspond to each sector's respective contribution to national production. Small and medium producers account for two-thirds of production but only one-third of the credit. They are also more reliable debtors: they have repaid a percentage of their loans three times higher than the large business sector, despite the crisis.
Prices on agricultural products for domestic consumption were also severely depressed due to the structural adjustment. The government promoted the full liberalization of the domestic basic grains' market, eliminating the regulatory role played by the Nicaraguan Basic Foods Company (ENABAS) with respect to wholesale buying prices. The result was a plunge in prices to a level far below international rates. Peasants in Nueva Guinea, for example, are selling their recently harvested beans at $7 per hundredweight, barely one-third the international price.
At the same time, vegetable, fruit and plantain producers saw their prices crash due to measures that totally and indiscriminately deregulated the import of those same products from other Central American countries. Plantain producers took the Pan-American Highway and forced the government to partially modify its policies.
Falling prices have affected not only products for domestic consumption but also exports. International prices for coffee, cotton and sugar have suffered their greatest drop in recent years. For cotton, this drop was its coup de grace; the area cultivated in the next few months will drop to less than half the area planted last year. The government has promised to somewhat alleviate the unemployment problem in the Pacific by expanding banana cultivation. But this will have very limited short-term effects due to the large investment that it would require and the former cotton workers' lack of technical knowledge about banana production.
Problems caused by lack of credit and inadequate prices are further aggravated by the government's inability to legalize land ownership for thousands of peasants and former Sandinista and contra combatants, feeding a climate of economic, social and political instability. The problem will become even more acute as unemployment, caused by the cotton crisis, pushes jobless agricultural workers to carry out more and more land takeovers.
Finally, the country's so-called dry interior zones—encompassing Las Segovias, Matagalpa, Boaco and the northern parts of Chinandega, León and Managua—suffered a prolonged drought for the third consecutive year, with disastrous consequences in food production for poor peasants in these areas. Local authorities of all political and religious stripes are urgently calling on the government to declare a state of emergency and distribute food to help alleviate hunger.
The cities: Reactivate whose industries? The crisis has not affected only the countryside; the cities, though less intensely, have also suffered its consequences. The increase in remittances from family members in the United States, however, is the key element that gives urban popular sectors a greater ability to resist the crisis. The exodus of thousands of Nicaraguans from these sectors to the United States has made this "product" the country's most important "nontraditional" export. According to a survey carried out by Nitlapán in coordination with the Economic Commission on Latin America, family remittances already total more than $100 million annually, a third of the country's total export earnings. The survey also showed that one out of every three Managua homes receives remittances, and the proportion is even greater in cities on the Atlantic Coast, such as Bluefields.
Industry, concentrated primarily in Managua, registered positive growth for the first time in four years (see Table 3). The government has widely announced this fact as a first, clear sign of the country's economic reactivation. Government spokespeople herald this as a palpable example of the benefits of slashing the import tariffs that previously protected national industry from foreign competition. The removal of these barriers, they say, has promoted increased efficiency and national competitiveness.
The origin of this growth, however, is the spectacular expansion of almost 50% in "fiscal" industries, which produce drinks and cigarettes and represent approximately 25% of all industrial production. These industries comprise half a dozen large factories and are protected by the government, since they are one of its principal sources of fiscal income. This protection has included authorizing low-interest, long-term credits to reactivate production, such as a $2 million loan to Coca Cola.
But, while this oligopoly of fiscal industries in Managua has expanded under the government's protection, hundreds of small industrial shoe and clothing workshops in Masaya have been ruined by the invasion of foreign products and people's drop in buying power. Little more than half the number of such shall shops existing in 1987 still survive; according to a Ministry of Economy study, more than 2,500 have disappeared.
Finally, it is worth mentioning that the 1991industrial "reactivation" has lifted production levels to barely two-thirds of their 1987 levels, just before the Sandinista government initiated the first structural adjustment policies.
Parallel to the reactivation of industrial "enclaves," there have also been enclaves of reactivation in commerce, banking and urban services. In Managua, for example, new and old supermarket chains have notably expanded and six new private banks have opened, as have a myriad of new restaurants, stores and all kinds of service establishments to serve the middle and upper classes—all, of course, in stark contrast with the grave crisis affecting the traditional popular markets.
In those markets, thousands of former military personnel, public employees, industrial workers and artisans are trying to survive the crisis by selling ice water, used clothes from the US or food, unleashing fierce competition against already-established small merchants. The Eastern Market has expanded several blocks, and the Roberto Huembes Market has spilled into and filled the adjacent public plaza. These popular markets are full of sellers but void of buyers because of the drastic contraction in popular consumption.
Foreign aid: A lost opportunity? At the same time, the expansion of big retail marketing and the severe drop in import tariffs have generated a boom in consumer goods imports, which grew 25% over 1990. In contrast, imports of production inputs and machinery decreased (12% and 8%, respectively) for the third consecutive year because of the recession in national production and the sharp drop in public and private investment.
As for exports, the tendency toward recovery observed over the previous two years reversed; export income for 1991 dropped 20% over 1990. This decrease was caused primarily by the terrible 1991 coffee harvest due to drought, a significant reduction in the slaughter of cattle, which affected beef exports, and the sustained drop in international prices for the majority of Nicaragua's traditional export products.
The decrease in export income combined with the import boom in consumer goods widened Nicaragua's trade deficit to approximately $400 million. The government was able to cover this deficit thanks to the relatively plentiful $505 million in foreign aid received last year.
The government was also granted a four- to five-year grace period for a significant part of its debt payments in a meeting with the Paris Club nations late last year. It is interesting that this grace period coincides with the duration of Violeta Chamorro's presidential term. When this exceptional treatment comes to an end, the added weight of additional interest and debt amortization payments will be economically unsustainable, given the export crisis. Government negotiators should thus make every possible effort to extend that period on behalf of national interests and not the 1996 elections.
The historic opportunity presented by the provision of such exceptional foreign aid for the country's reconstruction has, to date, been wasted. Instead of being used to attack the roots of poverty and reactivate national production, those resources have gone primarily to financing consumption for a minority. This irrational use of foreign aid is what is bringing the country to the edge of a "social explosion," while, at the same time, jeopardizing the accords reached between the Chamorro government and the FSLN.
Framework for a solution: From the ground upIt seems that the government's solution for diminishing existing social tensions is to negotiate a new accord for "national unity" with the FSLN leadership that would not endanger its agreements with the IMF and World Bank. The FSLN, under this arrangement, would agree to respect the framework of the government's monetary and fiscal policies, in return for concessions in the social arena that would give it political legitimacy.
Concessions to the FSLN could include the immediate legalization of urban and rural properties distributed by the Sandinista government, as well as by the current government in the past two years; a greater quota of participation in the privatization of public enterprises for Sandinista unions; and greater flexibility in agricultural credit policies for the peasantry.
There could also be a moderate increase in the allocation of foreign resources for existing social programs like the Emergency Social Investment Fund (FISE) and the Fund for Aid to Oppressed Sectors (FASO). The government is already showing some signs of change with respect to social projects. For example, it is reviving the program initiated by the Sandinista government to provide a glass of milk to public school children. It has also backpedaled—at least in its discourse—on some of the most unpopular aspects of its social policy, like charging for public health and education services.
This new "national accord" would allow the government the space and time to cross what Central Bank president Silvio de Franco calls the transition period to the country's economic takeoff. According to this perspective, "the conditions are in place"; all that remains is to generate the confidence that the monetary stability achieved at such enormous economic and social cost will not deteriorate because of social conflict.
The idea is to create a "climate" appropriate for stimulating private national and foreign investment and, thus, generate economic growth. To establish this climate, the government trusts that the FSLN can play a key role in subduing current social conflicts and achieving a successful "transition" toward economic growth.
Beyond the "trickle-down" theoryThis analysis of the country's economic and social situation reflects the government's neoliberal ideology, which is based on the belief that monetary stabilization and market deregulation will resolve the problem of poverty over the long term. This is the "modern" version of the classic "trickle-down" theory, which claims that, as the large capitalist sector is able to reactivate and accumulate, wealth will filter little by little to the rest of society.
In reality, this neoliberal vision is tremendously backward and ignorant of advances in current economic thought. The dramatic increase in poverty in Latin American and African countries after a decade of applying structural adjustment programs has led the IMF and World Bank to suggest the need to integrate the problem of poverty and income distribution into the core of those programs. In February of this year, the official magazine of the IMF published a speech by the Director General, who said:
"Poverty alleviation, including adoption of appropriate social safety nets, has to become more of an integral element of any growth-oriented structural adjustment program, or any program aimed at transition to a more efficient economic system. I urge the donor countries to increase their efforts in this field and to target their assistance in ways that foster human development. And the developing countries, for their part, can help to boost public support in the donor countries for such assistance by showing convincingly that their own policies are well oriented to addressing the problems of poverty and income distribution. In many cases, this could include stronger efforts to provide the poor with education and health services."
The message is clear: there must be a substantial increase in the amount of foreign aid assigned to improving the popular sectors' living conditions and to establishing job-creation programs. The problem is that there is no sign that the Chamorro government intends to incorporate this orientation into its economic policy.
Yet, after a decade of structural urban and rural property reforms, Nicaragua presents exceptional conditions for doing so.
The government's economic Cabinet has designated agriculture as the centerpiece of the country's economic reactivation. "Let's go back to the land" is the maxim of official propaganda, but what does it mean? Is the government simply referring to a new version of the "savage" capitalist development of the 1970s that the right-wing business association COSEP so longs for, merely substituting and/or diversifying the products to be exported?
We agree with the government that the agricultural sector must be the highest priority. The basic difference is that we do not believe that national development depends on large landowners and capitalists going "back to the land." Much to the contrary, the country's agricultural reactivation is in the hands of thousands of agricultural workers, peasants, former contras and discharged members of the Sandinista Popular Army (EPS) and the Interior Ministry, who are now working their own land. There lies the greatest potential for generating jobs, and foreign resources should be allocated to those social sectors.
The country must first take advantage of the conditions offered by peasant zones in the interior where production can respond immediately and at low cost, and which has the possibility of providing growing volumes of basic grains, coffee, milk, beef and other products. This is also the zone of greatest social and political conflict due to the presence of thousands of former combatants. The large-scale producers in these areas, though affected by reduced profit margins due to low coffee and beef prices, also have the capacity to invest and expand production.
In contrast, the cotton crisis in the Pacific is not going to be solved in the short run. The government plans to replace its now-depleted "white gold" with bananas, thinking it has found another "miracle" crop. But as already pointed out, bananas are a limited short-term alternative because of the huge investments required for expansion and the lack of technical knowledge about their production, which is not acquired overnight. There are no "miracle crops"; there are, instead, multiple solutions for diverse social and productive sectors.
The traditional peasant sector has the greatest potential to respond quickly, because it has been already begun to diversify, incorporating export crops like sesame and yucca. The peasants who benefited from the agrarian reform have also been diversifying, though more slowly, and, unlike the traditional peasants, are deeply in debt. They need a strategy that promotes diversification and creative alternatives to their debt problem.
Finally, the past two years' experience of privatizing the farms that made up the state cotton enterprise AGROEXCO shows that agricultural workers and former contra and EPS combatants who received farms began producing immediately. This effort at reinsertion, which contributes to the country's production, must be supported. This concrete experience also provides an indication of what might be the answer to the severe unemployment problem in the Pacific: more agrarian reform.
A real national concertaciónAn effective reactivation strategy for agricultural production must also include a new institutional framework of concertación between the government and the new National Peasant Coordinating Council. The recent report of the joint mission of the United Nations' Food and Agriculture Organization, the Inter-American Development Bank and the World Bank includes among its recommendations the formation of an autonomous agricultural technical institute that would support productive transformation in agriculture and concentrate the country's agricultural technicians.
This institute could be the implementation branch of policies supporting the peasantry. It would have to negotiate the administration of foreign resources for agriculture with the Peasant Coordinating Council, with respect both to promoting production and improving living conditions in the countryside.
In the cities, the government has the ability to promote a massive improvement program in the numerous existing urban settlements. This could include installing sewage and potable water services, building schools and health centers and providing construction materials for improving popular housing. In this case as well, the government would have to negotiate with neighborhood organizations for the administration of these resources, without conditions of political submission like those established by the mayor of Managua.
The impact of improving the quality of life in the city and in the countryside would also bring about an expansion in demand, which would alleviate the crisis in popular commerce and small industry. Nevertheless, the problem of small industry can only be effectively addressed by allocating foreign resources and technical assistance for the productive conversion of this sector. As in the other social sectors, this would have to be negotiated with organizations of small industry, such as the National Chamber of Small Industry (CONAPI).
In synthesis, a new "national accord" cannot repeat the past experience of pacts between leaders that put more emphasis on obtaining quotas of power than on the popular sectors' demands. A new national accord must be based on using the nation's resources to satisfy society's basic needs, with the active participation of its different social and productive sectors. There is no reason to repeat history. The beginnings of a new understanding should be built on directing the resources still available for 1992-93 toward economically reactivating small and medium producers and improving the people's living conditions.
Otherwise, the beneficiaries of popular discontent will not be the leaders who sign a pact behind the peoples' backs (or even those on just one side, contrary to what the FSLN leadership might think), but the very reactionary forces, past and present, that both the government and the FSLN hope to sideline as political contenders in the next elections.
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