Nicaragua
Economic Takeoff: The Little Train that Couldn’t
Envío team
The political paralysis caused by continuous disputes between the far right, the government and the FSLN has not interfered with the implementation of the Chamorro government's economic stabilization and structural adjustment program. Conflicts over the armed forces and property contrast with the implicit backing that both the far right and the FSLN have given the government's economic program. All the major political forces appear to agree that there is only one solution to the country's current economic crisis. This consensus has only been clouded in recent weeks by the Sandinista leadership's timid and contradictory criticism of several aspects of the economic program and its proposal for some very general changes. The government, in fact, has not even responded, nor has the FSLN pressured it to do so.
The basis of consensus has been the government's ability to obtain foreign aid and to control the hyperinflation that thrashed the country for several years. Nevertheless, the recent suspension of US aid has revealed the fragility of these achievements. If the suspension is prolonged, the government will be unable to sustain its anti-inflationary policies, since it will inevitably be forced to devalue the currency, with unpredictable inflationary consequences.
The government has been announcing since last year that 1992 would mark the beginning of the country's economic reactivation.
But with only four months left to this "year of reactivation" virtually no economic indicator shows any sign that the country is coming out of its economic depression. On the contrary, economists of all political stripes agree that current levels of unemployment and poverty are unprecedented in Nicaragua's history.
Why has the economy not "taken off"? Is it because the transition to longer-term sustained economic growth is simply going to take more time than foreseen? Or are we at the gates of a prolonged period of low inflation and economic stagnation?
A strategic failure?
The government's reactivation strategy was first implemented at the end of 1991, based fundamentally on two key factors: the expansion of public investment in infrastructure and the growth of the export sector. Both areas would have sufficient financing since the government had enough foreign aid commitments to support them. According to the government, the Gross Domestic Product would grow between 4% and 5% in 1992, marking the beginning of the economic "takeoff." Nevertheless, economic indicators from the first half of 1992 show that this is not happening; even Minister of the Presidency Antonio Lacayo recently announced that the "revised" goal is 1% GDP growth this year.
In practice, the basic incongruity in the government's economic policy lies is trying to maintain a very low inflation rate while simultaneously achieving reactivation. Monetary and fiscal policy has clearly been designed to give priority to the former, over any consideration of the latter. The recessive character of these policies is apparent both in the new government spending cuts and in the maintenance of high interest rates and severely restricted access to credit for the productive and service sectors.
The economic results in the first half of this year are as one would expect of such policies. Inflation has averaged less than 1% monthly, and in February and June was even negative. As a counterpart, government spending dropped 17% in relation to the previous semester, while net credit to productive and service sectors represented barely 27% of what the government itself programmed.
The economic and social consequences of these policies have been disastrous both in the city and countryside. The drop in formal sector employment between 1990 and May of this year is almost 18%. Table 1 shows the evolution of employment in the past three years based on the number of employed urban and rural workers registered by the Social Security Institute (INSSBI).
Sacrificing social services for public investmentThis continual drop in employment shows that the reactivation strategy is not working. One key factor in this is the poor performance of the public investment program. According to the Ministry of Finance, only 20% of the $135 million programmed for direct investment was used in the first half of this year. The problem is even more serious than this statistic indicates, since this period is precisely when the vast majority of construction works should be implemented in order to take advantage of the dry season.
Various factors contributed to these poor results. For example, the Minister of Construction and Transport says there were delays because new project designs were not ready. But even these "delays" are related to fundamental decisions the government made with respect to this program. First, the government discriminated against state enterprises in the bidding process, even knowing that they had both the experience and installed design and construction capacity to implement the projects. The contracts were given instead to private companies, some of which had been inactive for many years, while others were only recently formed. They were thus unable to respond adequately to the government's investment demands. Second, if the government was aware that additional time would be needed for project design, why did it not choose to give top priority to investments in hospital and school rehabilitation instead of throwing itself into new projects?
The program has also suffered serious financial difficulties. The majority of the resources for the public investment program were to have come from foreign donations and loans, with the remainder provided from the government's own income. But the disbursement of foreign donations and loans appears to have been delayed, while the government's capacity to provide counterpart funds has been reduced by its own tax reform policies and by the recession itself. Table 2 compares the evolution of government income and spending.
These data show that, despite a decrease in both ordinary income and donations, the government has financed an expansion in capital spending, or public investment. What, then, is the source of public investment financing? Simply even greater cutbacks in other government spending, as the table shows. Part of this was achieved through massive layoffs in the state apparatus in 1991.
Sacrificing current spending in order to maintain the public investment program means opting for increased poverty in the short run in order to invest in creating conditions for long term development. The benefits of better infrastructure are obviously important, but the private sector generally takes a relatively prolonged time to respond positively to the new opportunities that this presents. Meanwhile, the short-term consequences of these policies are disastrous. The recession has deepened and the coverage and quality of social services for the popular sectors have declined.
In reality, the contradiction between assigning resources to combat poverty today and creating conditions for future development is not unresolvable. The government could turn to Central Bank credit to maintain a public spending level that would allow for the development of effective programs to fight poverty and unemployment. But this would mean modifying its economic policies and abandoning the goal of maintaining a zero inflation rate. It would also mean renegotiating the terms of the government's accord with the International Monetary Fund.
Urban unemployment up, production down The recessive impact of the contraction in public spending is already having a multiplier effect in other economic sectors. A survey conducted in Managua by the economic research institute FIDEG shows that in 1991 the majority of unemployed had had central government jobs (in education, health and other public services), while in 1992 the majority came from the productive sector (see Table 3). According to the same source, the number of unemployed in Managua has increased to almost 80,000, or 19% of the workforce, of which 56% are men and 44% women. FIDEG also reports underemployment at 45%, bringing the total to 64%.
The negative employment tendencies in Managua's productive sector are confirmed by the monthly surveys conducted by the Ministry of Economy and Development in the most important enterprises of the manufacturing industry. A comparison of statistics from the first semester of 1991 with the first semester of 1992 shows that employment in these factories has dropped 11%, while production has dropped 5%. This difference indicates that the factories are adjusting to the recession by cutting jobs. A similar phenomenon is happening in small industry and crafts, though the tendency is reflected by a considerable increase in underemployment.
Nevertheless, the drop in employment and production levels in the large manufacturing sector has slowed significantly and, in fact, appears to have stabilized since the second semester of last year. Has the recession in industry bottomed out? If so, will industrial reactivation soon begin, or are we entering a prolonged period of stagnation?
The recession and the recent liberalization of trade are forcing a restructuring of industry, mainly characterized by the concentration of production in a limited group of enterprises that produce basic foods such as cooking oil and flour, and "fiscal" goods—in other words, rum, beer, soft drinks and cigarettes (see envío, March 1992). Some large plants that produce cement and its derivatives, such as Nicalit, the factory that produces cement-asbestos roofing, can now be added to this special group; they have been stimulated by the modest increase in public investment in infrastructure.
These companies are increasing their production, and there is evidence that they are investing in plant renovation to improve their market competitiveness. One indicator of this is the increase in capital goods imports for industry, which grew 18% compared to last year.
But on the other side of the coin are the factories that are continuing to cut production levels and jobs, and they account for a larger portion of the industrial sector. There the tendency is exactly the opposite, and, if a program supporting industrial conversion is not implemented quickly, they will be condemned to bankruptcy. Key factories employing more than 500 workers, such as INCA and METASA in metalworks, FANATEX in textiles and ENAVES in clothing, are in the throes of a sustained crisis with no sign of reactivation on the horizon. The productive conversion of these enterprises is made difficult not only by the absence of a policy supporting it but also because a considerable number of them are state-owned and are currently in the process of privatization.
The absence of an industrial conversion policy has also aggravated the crisis in small manufacturing and in the crafts sector. Credit has been dispensed penny by penny, and training and technical support programs have had very limited coverage.
Without an industrial conversion program, there is no prospect in either the short or medium term for a solution to the crisis affecting the majority of large industrial enterprises, small industry and craftspeople. Industrial production will probably thus stagnate for several more years, because the reactivation of a minority group of enterprises around the production of food, fiscal goods and construction materials cannot compensate for the inactivity or complete disappearance of productive and social sectors that have played a key role in the country's industrial structure.
The rural crisis deepensRecession and unemployment have also plagued the rural economy, and have become even more acute in this agricultural cycle.
Particularly affected are big cotton farms—and their workers—on the Pacific coast due to low international prices and high production costs, and peasants who benefited from the agrarian reform due to large debts and no access to credit. In addition, the expansion in basic grains in the "mountains," or areas that were formally war zones, has been curtailed due to low prices and the relative shortage of remaining idle lands.
Nevertheless, as in the industrial sector, there are also agricultural sectors that are being reactivated and farmers who are investing. Focal points of reactivation have emerged around large-scale coffee and cattle production in the interior, and other such points are appearing in the Pacific around cattle and the sorghum-poultry industry.
The disappearance of cottonThe drastic fall in international cotton prices dealt the final blow to what was Nicaragua's principal export crop for decades.
This year less than 8,800 acres were planted—barely 10% of the average area dedicated to cotton in recent years. The myth that the government promoted since 1990—when then Central Bank president Francisco Mayorga predicted that Nicaragua would once again cultivate 350,000 acres of cotton—has finally been laid to rest.
To alleviate the massive unemployment in the Pacific due to the cotton crisis, the government was forced to announce a plan to expand its banana plantations to 12,000 additional acres. But it did not implement that plan this year, partly because of labor conflicts which affected production, and partly because the banana farms were in the process of privatization. In fact, there was a 25% drop in the quantity of crates of bananas exported by the end of the first semester of this year compared with the same period last year. In addition, banana prices on the US market dropped significantly, and the fight with the European Community, which wants to impose quotas on Central American bananas entering the European Common Market, remains unresolved.
Something similar has happened with sugar cane. Its production had been reactivated in recent years thanks first to Sandinista government investments and more recently to the reopening of the US market. But the harvest this year registered considerable losses as a direct consequence of conflicts between the unions and the state entity in charge of privatization, over low salaries and government non-compliance with accords concerning the privatization of the sugar refineries. The incentive of good US market prices has declined because the US has cut Nicaragua's sugar quota. It is thus hard to imagine any significant expansion of sugar cane into the former cotton zones near the refineries.
Other alternatives remaining to the former cotton growers, such as incorporating soybeans, peanuts or melons on a large scale, present technological and marketing difficulties. Soybeans, for example, could feed a broad domestic market if used to make cooking oil, but imports of semi-processed oil preclude that option. The principal restriction to producing melons—highly publicized by the government as a nontraditional export alternative—is that it requires irrigation. In fact, only a small group of former producers of irrigated rice have switched to cultivating melons. It is worth mentioning that a considerable proportion of the country's irrigation systems are currently inoperative due to the lack of basic investment in replacement parts and maintenance. Only the sugar refineries and a sector of rice growers adequately maintain this irrigation infrastructure.
Reactivation for agribusiness, recession for the peasants The majority of large cotton farmers have responded to the crisis by switching to cattle. There are two main reasons behind this decision: the opening of the US market to Nicaraguan beef exports, and the relative technical and economic ease of converting from large-scale cotton cultivation to cattle ranching. It is a kind of return to the 1940s, before cotton was grown on a large scale. The difference today lies in the existence of a business sector that is intensifying cattle production, combining ranching with the cultivation of sorghum, for example, to use the stalks for forage. Other sectors, especially medium-sized producers, have combined ranching with rice production for the same reason.
The main obstacle to this return to ranching is precisely the scarcity of cattle in Nicaragua; the national herd shrank drastically in the 1980s. This problem is aggravated by the fact that the majority of production systems are oriented toward providing pastureland for fattening young bullocks for short-term profit instead of toward developing the herd.
Another focal point of productive conversion in the Pacific is the poultry industry, where production has increased more than 30% over last year. Large poultry producers organized in the National Association of Poultry Producers have obtained credit to import technology and equipment, which has allowed them to quickly reach productivity levels comparable to their Central American equivalents. Nevertheless, the restructuring of this industry has also bankrupted small and medium poultry producers, who have been totally deprived of credit and technical assistance.
But, at the same time, the recovery of large-scale poultry production is generating the reactivation of large traditional sorghum producers in Masaya and Granada, who are becoming increasingly tied to the industry through big business. The technological capacity of these sorghum producers allows them to compete successfully against yellow corn imports. Some of them are expanding by renting lands from Agrarian Reform cooperatives, whose farmers do not have either credit or sufficient technological knowledge to cultivate sorghum themselves.
In synthesis, Pacific agribusiness is undergoing a slow productive conversion, mainly to cattle production systems, with more dynamic focal points in sorghum, poultry and possibly bananas. The sluggishness of agribusiness in general is tied to the absence of state-supported diversification programs that would allow it to overcome the technological and marketing restrictions it currently faces.
This problem is forcing a migration of capital from the Pacific to the country's interior, where there is an accelerated process of accumulation around cattle and coffee production. These producers have experienced the most dynamic reactivation, because they have benefited significantly from the sustained devaluation of the national currency since adjustment measures were begun in 1988.
In addition to being exportable, Nicaraguan coffee and beef have low production costs relative to other Central American countries because they apply an extensive, instead of intensive, technology. This is viable in Nicaragua because labor is cheap and land relatively abundant. Both factors make these exports profitable even with the current depressed prices on the world coffee market and, to a lesser degree, on the beef market.
Investment in coffee has increased enormously this year because of a credit program, financed by the state banks, for the renovation of coffee plantations. By the end of the first semester, more than 14,000 acres had been financed, equivalent to the area renovated with bank credit in the past four years combined. Almost all of this credit has gone to the big export growers, to the neglect of the majority of small coffee farmers.
This policy is counterproductive since "mountain" coffee is currently more profitable for the country: it is more labor intensive and demands minimal financing for reactivation and expansion.
The situation is similar with cattle production. Large ranchers, whose production systems in the interior are also predominantly oriented toward cattle pasture and fattening, are taking more than 90% of the credit authorized this year by the state banking system. They are hoarding not only credit but also land, since they are recovering privatized farms and purchasing land from poor peasants without capital—including some former contras who recently received land from the government—who opt instead to move into the mountains.
The concentration of credit and land in the hands of large ranchers does not promote the development of cattle. First, the central short- and medium-term need is to rebuild the national cattle herd, and the small and medium ranchers are the ones who have historically undertaken cattle breeding and development. If current policies continue, the cattle shortage will become chronic due to the decapitalization of these small-scale cattle breeders. Second, the concentration of land will create even greater social instability in rural Nicaragua, the effects of which could be very detrimental for both the country and the large ranchers themselves.
Peasant grain production stagnates In contrast with the reactivation of large coffee growers and cattle ranchers in the country's interior, basic grains production by peasants both there and throughout the country is virtually at a standstill. According to the Ministry of Agriculture, the area planted in corn this year is 10% less than in the previous planting cycle, despite good climatic conditions.
As for beans, the same area was planted in this year's first planting as in last year's, a tendency expected to continue for the two key later plantings.
Last cycle's low prices for producers and the lack of credit have played a decisive role in discouraging these farmers from planting more. Nicaraguan producers are paid the lowest prices in Central America for rice and beans. Last year, some corn producers in interior zones were paid 40% of the international price ($2.00/hundredweight), while bean producers were paid less than a third of the international price ($7.00/hundredweight).
Clearly the peasants were paying for the government's decision to remove ENABAS, the basic grains enterprise, from its role as national grains purchaser and to totally free up the market. If this policy continues, the country will have to start importing an increasingly higher volume of basic grains, vital for the popular diet. The government can and should change this situation by financing ENABAS to again become the regulator of the grains market.
At the same time, financing for peasant basic grains producers was reduced even further this year, as it was for small coffee and cattle producers. The area financed for corn, for example, is barely 15% of the area financed in 1991. The vacuum being left by the National Development Bank, as it is transformed from a development to a commercial bank, is only partially being filled by national nongovernmental organizations and by the reappearance of traditional financing mechanisms, such as sharecropping and advance purchasing. In peasant zones in the interior, one can appreciate how the opportunity for reactivation is being lost. In corn zones such as Jalapa and Pantasma, for example, there is no credit even to rent tractors or purchase fertilizer, let alone to buy oxen and a plow. In cattle areas, like Matiguas and Río Blanco, there are cleared pastures but no cattle.
The lack of financing and level of debt are primarily affecting agrarian reform beneficiaries, given their high degree of dependence on bank credit. Only those who accumulated a certain level of cattle, coffee trees, machinery or oxen are able to diversify, incorporating plantains, sesame, yucca and other crops. In contrast, cooperatives on the Pacific plains—in Chinandega, León and Masaya—are opting to sell or rent parts of their land to pay their debts and acquire working capital.
In summary, growth in large-scale ranching and coffee farming alone cannot foster the reactivation of the agricultural sector.
Nor will reactivation occur if the government does not implement diversification programs to overcome the cotton crisis. But most importantly, peasant producers are too important in coffee, cattle, sesame and basic grains production to be excluded from the country's reactivation strategy.
The export "miracle"?The recovery of coffee and beef production seems to indicate that the maxi-devaluation in March 1991 sent the right "messages" to the country's exporters, if not to its importers. The goal of that devaluation was not only to stimulate exports but also to deter imports and, thus, improve Nicaragua's chronic trade deficit. Devaluation theoretically improves export profitability by reducing local costs, while at the same time lowering import consumption by raising the national currency price of imports.
The available statistics, however, indicate that this year's trade balance is moving in exactly the opposite direction.
There is no simple explanation for this depressing growth in the country's foreign trade gap. One reason is related to external factors such as the world recession and low prices for raw materials on the world market. Nicaragua's traditional exports, for example, have been paid at average prices significantly lower than last year's: coffee prices dropped 17%; cotton, 28%, and beef, 25%. In contrast, the import boom provoked by the liberalization of foreign trade continues, registering a spectacular 74% increase during the first quarter. The resulting widening of Nicaragua's commercial deficit could make the current córdoba exchange rate unsustainable.
Problems in the economy's export sector are aggravated even further by the constantly increasing amount owed in interest on Nicaragua's enormous foreign debt. According to International Monetary Fund projections, the total interest owed in 1992 comes to $451 million, almost double what the country expects to receive in export income this year. Will Nicaragua be able to pay this? The reality is that the country is paying a very high price for its "reinsertion" into the world market.
Finally, the prolonged delay in the disbursement of US foreign aid could tip the balance of the current precarious economic situation, especially in relation to expectations about the country's future economic stability. The government has already announced that it will reduce public spending and increase taxes even further to compensate for the delay.
And, as we have shown above, public spending cuts have a significant recessive impact and create social and political instability. Unemployment and poverty do not create the appropriate environment for private national or foreign investment. It seems that Nicaragua is just beginning a long night of economic dormancy.
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