From a Mixed-up Economy Toward a Socialist Mixed Economy

Envío team

Where is Nicaragua headed? The government's call early this year for concertation—forging a working national unity—in the economic arena has sparked heated debates and a number of widely diverging interpretations among different social sectors in Nicaragua. There is a good deal of confusion, as well as concern among Sandinista supporters and even within party ranks that recent measures will lead the revolution down an increasingly bourgeois path. For their part, La Prensa and the business interests represented by COSEP are convinced that concertation is merely a tactical maneuver by the Sandinistas, designed to divide and debilitate big business while the revolution continues down the traditional road toward socialism. Yet another interpretation sees concertation as only one important element in the ongoing readjustment of the Sandinista economic model.

It can be very difficult for the protagonists of change to fully understand the implications of their own actions. Practice jumps ahead of theory, but consolidation of the new practice slips away if there is no new theory to give direction both to the population as a whole and to political activists and technical experts.

The traditional images of urban, proletarian socialism do not respond to the realities of an agrarian economy dealing with the costs and concrete dilemmas faced by a small third world country trying to forge a unique and feasible socialism. In the midst of Nicaragua's ongoing economic debate, the seriousness of the task at hand—to forge, with no easy recipes or quick fixes, an economic project that springs from, and responds to, the Nicaraguan situation—becomes even more pressing. In an attempt to contribute to this debate, envío looks at the economic situation from three perspectives:

1) Concertation as a mechanism for development in the context of Central America's mixed economy; 2) the 1989 economic program and accompanying battle against inflation in the context of the difficult economic decisions made, and anti-inflation lessons learned, in 1988; 3) the overall debate regarding the Sandinista economic model in the context of the changes underway in the correlation of forces among Nicaragua's different social classes.

Part I The Regional Context

1. Redesigning the mixed economy

The economic concertation that the government is engaging in with the private sector plays an undeniable role in this period of negotiations in Central America. Nicaragua's demonstration of flexibility—moving forward the date for elections and pardoning the Somocista ex-National Guard prisoners, as well as entering into dialogue with the business sector—allowed Nicaragua to reach an agreement with the other Central American presidents in the Esquipulas IV meeting in February.

"Once again the Sandinistas outfoxed us," said a US State Department spokesperson of that meeting and the accords that came out of it. That remark shows that, "once again," the State Department missed the point. While the United States wastes its regional hegemony battling the chimera of another Cuban revolution, the Sandinista revolution continues, step by step, to fashion a socialism out of the clay of its own land.

In July 1979, Sandinismo was a theory and a practice, as well as a revolutionary method of analyzing national reality. But the Sandinista guerrillas did not come out of the mountains or the urban movement with a sufficiently clear idea of how to make the transition to socialism.

The key principles of political pluralism, a mixed economy and nonalignment at that time formed the broad strategic context in which the national project was defined. The revolutionary process was initially based on a series of alliances forged in the insurrectionary experience and steeped in socialist iconography. With the contra war, those hopes were soon under siege, and there was very little space in which the Sandinista project could develop and mature. Comandante Tomás Borge, member of the FSLN National Directorate, states it this way:

“From the beginning, our intent was to develop a mixed economy and foster political pluralism. The war, now nearly at an end, made both these things extremely difficult, but it didn't destroy them or fundamentally call them into question.”

Political and military defense of the revolution during the last decade has demanded a great deal of political creativity. Sandinista pragmatism began to forge a democratic path towards socialism, with pluralistic elections, a broad Constitution drawn up after much public consultation and autonomy for the nation's ethnic groups. Faced with ongoing confrontation from the United States, the Sandinistas responded with a new style of participation and negotiations in regional and international arenas. No revolution in the history of national liberation movements has been able to struggle for so long and with such success in what is essentially imperialism's own camp, indeed to make such wise use of the very forums designed to limit the right of nations to self-determination. The Sandinistas have skillfully unveiled the contradictions and hypocrisy of US "democracy" and moved Latin America to favor self-determination not only for Nicaragua but for the entire Central American region.

Nevertheless, this demonstrated creativity has not been accompanied by parallel success in the economic arena, where, in fact, there was unequal, and very sluggish, development. Instead of achieving a true mixed economy, the revolution has scarcely begun to learn a series of tough lessons about the pitfalls to be avoided in its construction.

Between 1980 and 1982 the revolution put together an economic model very similar to the transition to socialism carried out in some twelve third world countries where socialist-oriented national liberation movements have come to power. It is an adaptation of the classic model—substituting industrialization with agro-industrialization, increasing the value added to raw materials. And the Nicaraguan alliance with "an administrative bourgeoisie" merely put a label on what other national liberation governments had already done—that is, make alliances with their historically weak and deformed business sectors.

In economic policymaking, then, as envío stated in its September 1986 analysis, "Slow Motion Toward a Survival Economy," the FSLN functioned like a shoemaker limited to refitting the old, worn models. The short-term vision that prevailed due to the war worked against discarding the old designs in hopes of getting hold of the materials or designs with which to hammer out a new one, designed for the very particular needs of the Nicaraguan terrain. But the time has come to fit a new pair—a uniquely Nicaraguan economic model so urgently needed by the country.

Referring to the measures taken as part of the concertation, Borge stressed that: “In no case has the goal of these measures been to resolve the crisis. Resolving the crisis depends on one essential factor—a definitive end to the aggression and its consequences. The political measures being taken are designed first to slow the aggression and only in the final analysis to overcome the economic crisis.”

This vision of economic factors as political, and political factors as economic challenges the Sandinistas' ability to transform tactics into strategy without losing sight of the revolution's key principles. By speaking of the concertation as a series of measures aimed at stopping the aggression, Borge also defines the aggression at this point as having a principally economic and political, rather than military, nature.

Concertation among various social classes is quite different from systematic repression of the popular classes. The latter is what is taking place in the rest of the region as a result of military-oligarchic alliances and the Kissinger Commission's plans to prop up the status quo contained within the Caribbean Basin Initiative. Concertation is not a political concession but an option for economic development within the regional context, and is merely one element in a thoroughgoing revamping of the mixed economy model. It is no coincidence that the new 1989 program is emerging in a new era of regional negotiations.

In the midst of the war, Nicaragua's mixed economy became a subsidized economy, under siege and isolated from the rest of the region. With the new regional atmosphere, a mixed economy could well break that isolation. But, given the tremendous economic destruction wrought by eight years of war, Nicaragua is first having to undergo a survival period merely to recover what was lost. Needless to say, this is not a very appealing option, either inside or outside Nicaragua. The building of a true survival economy demands a thorough democratization of the country's agroexport activities and the involvement of all the country's social forces in economic recovery. This increased economic democratization is Nicaragua's strategic gamble in a region still dominated by a triumvirate alliance of oligarchic interests, military forces and US embassies. In our view, as this article details, the steps toward a survival economy reflect the first steps toward changes in the economic structure itself. These changes, in turn, are signs that the 1989 economic program could be an important milestone in the slow transition towards a socialist economy.

The only way to understand the Nicaraguan economic process over the last few years and respond to the question, "Where is the country headed?" is to look at it through two lenses—the war itself, and the effort to ease the revolution-imperialism contradiction.

2. Subsidized survival or war economy?

The ongoing debate about whether economic policy decisions or the war have led to the current economic crisis is poorly framed. Any genuine national liberation process enters into conflict with imperialism, so war is always the country's fundamental economic reality. The question is how to best balance out the military and economic factors.

One of the key goals of the US war in Nicaragua was to destroy the economy's reproductive capacity and break the country's basic economic rhythms, thus undermining the revolution itself. The government responded by maintaining a general policy of subsidies in the 1984-87 period, which kept the economy rolling without letting people feel the real costs of the war. President Daniel Ortega explained this quite openly in an address to the National Assembly at the beginning of this year:

“It's quite clear what the cause of the war is, what the effects of the war are, and what our sin has been: to pledge ourselves to keep all Nicaraguans employed, to provide services to all Nicaraguans. In other words, while resources were being cut, expenditures stayed the same. As the war intensified and defense costs went up, we began to make significant, but not sufficient, cutbacks, with the aim of striking a balance between our possibilities and the demands for work and services by the whole population, as well as the demands for investment and credits by all the producers.”

The subsidized mixed economy took shape in the early years of the Reagan Administration and was in place until the so-called monetary reform of February 1988. Already in 1985, the government took the first steps to eliminate some consumer subsidies, but only with the monetary change did it finally begin to enact systematic economic reforms. And not until the beginning of 1989 was it able to present another economic model, one President Ortega labeled "a survival economy."

In his National Assembly speech the President described the heavily subsidized economy in place from 1981 to 1987 as the only way out for a mixed economy in time of war. He said that a survival economy, with different policies for the various social classes, was not an option at that time as it would have jeopardized national unity and forced a true war economy. According to President Ortega, only two options existed: continue the subsidized mixed economy or impose a war economy: “It should be said that the conditions for a survival economy did not exist. It would only have been possible to implement a war economy—total rationing and total state intervention in the production and distribution of all resources.”

There’s no way now of knowing whether a survival economy, based on strict austerity, as envío called for in 1986, would have been politically feasible. The facts are that national unity was maintained, the Reagan Administration left office after two terms without destroying the revolution and, according to the 1988 opinion poll carried out by the Itztani research center in Managua before the June measures, the FSLN still enjoyed the same relative support it had in the 1984 elections.* With the 1989 economic plan, the revolution is really beginning to take the path of a mixed survival economy, so that, as peace finally comes to the country, social and economic reactivation can take place.

*See Encuentro, No. 35, December 1988, for more detailed analysis of this poll.

Part II: The 1989 Economic Plan

1. New governmental coherence

The battle against inflation is the key element of the 1989 economic plan, and takes place in the wake of a series of particularly difficult economic decisions. These in turn grew out of advances in two key areas: 1) new coherence and unity in government decision-making, and 2) the beginning of a profound readjustment in the alliances which formed the base of the original Sandinista economic model.

Barely five months after the conflictive June 1988 measures, when we spoke of growing disagreements within Sandinista circles around the economic model, a fresh breeze of economic consensus could be felt in the government. In year-end internal debates, the three positions which were largely reconciled were: the monetarist one represented by the Central Bank; that calling for guaranteed production whatever the cost, advocated by the Ministries of Agriculture (MIDINRA) and Business and Commerce (MEIC); and the one emphasizing popular demands and maintenance of defense programs, taken by regional and local FSLN representatives.

The growing disintegration of the counterrevolution, the end of the Reagan era and an easing of tensions in many problem spots around the world have all allowed Nicaragua more space to attend to its economic problems. At the same time, the burden of hyperinflation which the 1988 measures had been unable to lift, and which resulted in a dangerous year-end annual inflation rate of more than 20,000%, forced greater coherence in the government's 1989 plans.

2. Six difficult decisions

To synthesize the 1989 program, we can use as a guide six sets of alternatives identified by the envío economic team in mid-1988 as key nerve points of the economic crisis. The alternatives were put forth in areas where, due to a lack of decisive action, the government's economic policies had stalled.

At the beginning of 1989, the government broke through its inertia in five of the six areas, strengthening the 1988 package of abrupt economic adjustments which envío had characterized as necessary, but incomplete, since it took little heed of the consequences for the majority of the people. This has produced new tendencies, which, if the government continues to strengthen these new initiatives and is prepared to pay the necessary costs, could mean a transformation of the 1988 package into a more popular economic model. One of the most serious obstacles to this could well be confusion on the part of many middle-level Sandinista cadres, springing primarily from a facile identification of socialism with statism.

Alternative one: Investment programs

Continue the long-term agroindustrial project or recover the simple reproduction of the economy? In the 1983-87 period, the revolution's investment rate averaged 22% of the GDP annually. With the 1988 measures, the rate dropped to roughly half that. There was not, however, any corresponding structural change in the composition of the investment programs. Long-term, large-scale investment projects continued to take priority over investments for the simple reproduction of the economy.

In 1989, as Comandante Henry Ruiz, Minister of External Cooperation, admits, there has been a "change in the development scheme used in investments." It is the first year since the revolution in which the budget for peasant projects and agrarian reform is more than that allocated to state agroindustrial enterprises. There is no better proof than that of the government's decision to restructure its public investment program to favor the simple reproduction of the economy.

There were deep cuts in large-scale state projects, such as the sugar refinery at Timal; the mechanized dairy industry, including the huge Chiltepe project; and the vegetable processing plant at Sébaco. Timal alone suffered a 90% cut. Table 1 shows the general shift in investments from 1988 to 1989.

It should be pointed out that the original 1988 investment plan was very similar to that of 1989, but did not turn out as planned, mainly because the revolution did not have sufficient credit to offer the small and medium coffee producers and cattle ranchers. This could well happen again this year. Furthermore, in spite of the National Planning Council's long-term investment prioritizing of cattle and coffee, this has not yet reached deep into the Nicaraguan countryside, where such investment is most urgently needed.

In addition, reports from various parts of rural Nicaragua indicate that, due to institutional problems, the new policies, as a matter of fact, are not stimulating small-scale coffee and cattle production. For example, in WiwilI in early March, regional state agencies sent out signals to producers that completely contradicted what was being said at the national level. Peasants in that region had asked for long-term credit to buy mules to haul their coffee to market, as well as short-term credit to expand the area under more high-tech coffee production. The bank in Wiwilí said credit was only available for technified coffee production and that traditional methods had to be replaced with more modern ones. This vision is in direct conflict with the national government's directive to reduce imported inputs and sends a message to small producers, above all those in remote regions, that the revolutionary government is not interested in their future. To let another year go by without developing the administrative ability necessary to recover the productive capacity lost in traditional coffee and cattle production due to the war would be a far too costly error at this time.

The transformation in the investment programs represents a restriction of the large-scale agroindustrial projects more than a decision to reallocate sufficient resources for the recovery of these two prioritized sectors—coffee and cattle. Some 51,000 acres of small-scale coffee production have been lost in the war zones and very little renovation of technified or semi-technified coffee lands has taken place in the last 10 years. Coffee production assures Nicaragua of a steady income of foreign exchange (currency convertible on the international market) without increasing its dependence on imported technologies, yet it is in crisis. Only significant investments and the mobilization of large numbers of workers can save it. And cattle production is in much the same situation.

The entire national investment program represents, in the wake of the last round of budget cuts, only 8% of the GDP. This is insufficient for any economy, but is particularly dangerous in Nicaragua where a recession is in full swing and economic recovery is imperative. If the recovery of cattle and coffee, and the new stability those exports will bring, is not achieved, there is no future. They are essential for reinitiating agroindustrial development and beginning an export diversification program.

Recovery of what has been lost can spring from only three sources: more cuts in the military budget; increased restriction of consumption, principally among the middle sectors; or the introduction of a new foreign aid package. It is very likely that inflation will not be braked without simultaneous actions on all three fronts.

Alternative two: External financing

A diversified and autonomous international aid package or a road to socialism different than the desired one? This is the only area of economic policy in which the government has done very little. Its strides in national economic concertation have not been matched by parallel successes in the international arena. It is partly a question of principle, since the government has never accepted international negotiations that would attach strings to its national sovereignty. But it is also partly an adjustment problem between the two rhythms of negotiation. Although the new concertation process is not a concession to the international community, the government still has not had the time to take on the difficult task of linking it to negotiations for a financial package with the EEC, the Soviet Union, third world countries and multilateral financial institutions.

Until March of this year, the only link between national and international negotiations regarding economic policy was Daniel Ortega's implicit threat that the country will be forced to turn to a virtual war economy if the concertation is not effective. It is no idle threat, because without a "cushion" of international funds, any austerity program is destined eventually to fail.

The last hope of Nicaragua's big entrepreneurs to be part of the country's mixed economy is in the Bush Administration's hands. Only serious dialogue between the United States and Nicaragua could assure them a stable position in the new private sector forming as part of the adjustments. But whether or not there are negotiations with the United States, Nicaragua will need a solid financial package to effectively deal with its hyperinflation.

Perhaps Nicaragua's biggest challenge to shaping some sort of international package will be trying to break the double standard used by multilateral lending institutions such as the International Monetary Fund (IMF), the World Bank and the Inter-American Development Bank (IDB). These institutions have violated their own charters in their dealings with Nicaragua. The IMF, created to assist countries willing to pay the price for stabilizing their monetary systems, denied assistance to Nicaragua, even though its economic measures have been more austere than any other country's. Even humanitarian concerns were unable to break the double standard operating against
Nicaragua. While Jamaica received about $500 million in donations and credits from the World Bank and the IDB within 24 hours after Hurricane Gilbert, Nicaragua received only $50 million in international assistance in the wake of Hurricane Joan, even though its damages—$824 million—were far greater than Jamaica's. Nicaragua would have to maintain a 3% annual growth rate until at least the end of the century simply to recover those losses. Hurricane Joan also forced the Nicaraguan government to issue more currency, which effectively thwarted the economic measures it introduced earlier in the year. The inflation rate, less than 50% monthly before the hurricane hit, more than doubled in the last quarter of 1988.

Alternative three: Economy and defense

Put the army's economic potential to work within the survival economy or suffer continued hyperinflation? In mid-1988, nobody could have imagined that the economic crisis would force the government to substantially cut defense spending. Definitive military victory had long been considered an indispensable precondition both for such cuts and for waging a real battle against inflation and beginning to reactivate the economy.

The government deficit jumped from 14% in 1987 to 31% in 1988, mainly due to the ongoing córdoba devaluations, which touched off price increases for all imported goods and thus fueled hyperinflation even more. Defense ate up a good part of the national budget. Since about 35% of total Defense Ministry spending goes toward fuel and vehicle maintenance, defense costs are particularly inflationary, not only because they constitute the single biggest chunk of national spending, but also because they are most sensitive to devaluations.

By cutting the Ministry of Interior (MINT) budget by 40% and that of the Ministry of Defense by 29%, the government took a very important step in the fight against inflation. The MINT completely halted its construction programs, and the army (EPS) cut its own drastically. Although imported materials were the main target, personnel were also cut, particularly civilian workers and MINT support staff. To date, cuts in EPS combat personnel have been minimal; instead there is now a slow process of transferring troops to productive tasks. While the EPS played an important role in the 1988-89 coffee harvest, cleaning out some 50,000 acres of abandoned coffee lands and recovering nearly 700,000 acres of cattle pasture, the steps taken to date are still limited.

Obviously, armies are designed for defense and combat tasks, not production. But throughout the world they have also cleared roads, built highways and colonized virgin lands. In Nicaragua, particularly in the recovery of coffee and cattle production, where unskilled labor is needed, the EPS could well be not only the most efficient force but the only one capable of mobilizing
thousands of workers to the areas essential to national recovery. Moreover, perhaps the best way to confront the contras—who are rapidly unraveling back into the small bands of cattle rustlers they were in 1980—is to lend a large disciplined workforce to the thousands of small and medium producers in Nicaragua's interior.

In the first months of 1989, Nicaragua exported $7 million of beef. If this trend continues, the annual total will be some $30 million, twice that of 1988. This has been due, more than anything, to the drop in domestic consumption and the new profits possible with recently introduced incentive plans. This is a positive sign, but the fundamental problem is how to increase production, not merely to shift income distribution to the exporters. The specific case of the beef industry underscores the problems of monetarist approaches without well-defined administrative actions.

Beef production could be rapidly expanded in three key ways: 1) recover lost pasture land, using the army as an available labor force; 2) develop price incentives that would encourage ranchers to fatten their cattle instead of killing them at lower weights; and 3) improve the supply of medicines for livestock. The best solution would seem to be to combine all three.

A new era of defending the revolution has begun, in which the EPS could serve Nicaragua economically in the zones most affected by the war, without military demobilization. Although the military's involvement in distribution, repair of productive infrastructure and the like could present administrative problems and would require a certain degree of training, there is no excuse for postponing the assigning of troops to recovering cattle and coffee production. It is also a palpable example of compliance with the Esquipulas accords, since it undermines the argument that the Sandinista revolution is a military threat to its neighbors. The government has broken through its inertia in this area of economic policy, but much remains to be done.

Alternative four: The planning system

Bureaucratic control of resources or hegemonic economic planning? The announcement of the unification of the exchange rates (i.e., bringing together the parallel and official rates) is an important step. By unifying these two rates, the government is using the market as a reference point for the first time. This move towards the market does not mean less hegemony over it, or the end of the socialist project in Nicaragua, as many people have mistakenly charged. Rather, it is a sign of the government's new ability to guide the economy.

By taking the black market as the reference point for the movement of the official exchange rate, the government gives its own import package (some $800 million) value vis-à-vis those in
private hands (about $200 million), which come in through family remittances, small-scale international traders, nongovernmental organizations and the like. Paradoxically, by moving the official rate closer and closer to the parallel exchange rate, it has begun to determine the black market. The reverse had long been true, as the government essentially allowed the $200 million of goods that circulated in the country's black market to carry a higher value than the $800 million of state imports. This not only fueled inflation, it also permitted black market agents to make use of undervalued public resources.

By selling imports at an artificial, devalued price, the state lost income that could have been used to finance some of its costs. At the same time, the devalued official exchange rate discouraged export production—a net loss for the state. The unified exchange rate thus means new control over the informal sector and the black market and the placing of more resources in state hands.

At the beginning of 1989, the government abandoned its policy of infrequent large-scale devaluations for that of frequent mini-devaluations. This change has been successful and there is a resulting sense of increased confidence in government policies. The government will have to continue its flexibility, as bringing the exchange rates closer together does not mean that inflation has been done away with or economic equilibrium achieved. By the same token, another policy—high interest rates for savings—should be continued, although the rates should be carefully adjusted on an ongoing basis so as not to swell the profits of those who are in a comfortable enough position to be able to save large amounts of money. It is clear that reducing the inflation rate requires a reduction in interest rates both for savings and for producers. Above all, the changes must be gradual, avoiding abrupt moves that could evaporate people's tentative confidence in the country's currency.

In sum, the 1989 plan has broken with microeconomic administration and a price-control scheme in favor of a macroeconomic plan. Unification of exchange rates should produce a considerable transfer of resources from the black market to the state. This surplus gained through market levers could be important enough in the future to not only decrease the deficit and spark investments, but also begin to recover the "social wage" with renewed government financing of health and education programs.

Alternative five: Economic information

Public debate and popular participation or closet bureaucracy? Since June 1988, a tremendous opening has taken place in terms of economic information, as well as increased public debates among economists, union activists, rural workers, businessmen and others. For the first time in ten years, public discussion of the economy has taken precedence over that of the war and the ongoing confrontation with the US. But even though much of it takes place in the country's mass media, it is at an elite, intellectual level, and uses indicators that make sense to economists but not the populace. What is still lacking is a more popular explanation of and open debate about the economic changes and their goals in accessible economic language, with clear information about, for example, credit distribution to each sector of production and what percentage of the market basket used to adjust average wages can actually be bought with those wages each month.

This "democratization" of economic information goes farther to strengthen democracy in Nicaragua than any potential electoral reforms. Without sufficient economic information, the market simply cannot function as a useful indicator of where resources should be invested. More information is needed so that people have the tools to analyze the economic process. An information policy that is systematic and serious, without being boring or overly technical, would do much to diminish the importance of rumors and false scandals that threaten the government's efforts.

Alternative six: Prices, wages and credits

Stimulate production through prices, wages and credits or guarantee the state's financial stability? This last area of economic policy is the most complex and difficult. It includes the almost impossible task of reducing inflation rate without drastically increasing unemployment or causing a recession so profound as to provoke worse inflation. The government this year has opted for a new formula to balance its accounts. Rather than try to improve its financial and monetary situation through profoundly depressed wages and low profit levels for producers, as it did in 1988, the government decided to slash its own costs, particularly in the defense and interior ministries. Wages have not jumped and credit programs still do not elate producers, but a process has begun which prioritizes production over the nonproductive state apparatus. In other words, the state is applying its austerity program to itself with the same force as it is being applied to workers and producers. This is the economic foundation of the tripartite concertation between the government, the working class and the producers announced to the popular forces on January 28 and to the National Assembly two days later.

Price Guarantees for Basic Grains. Throughout 1988, the main goal of economic policy was to eliminate distortions in relative prices caused by years of multiple exchange rates, letting them rise to Central American levels. The government was quite successful, with the exception of wages for labor and basic grains prices, which remained far below those in the rest of the region.

Although corn and beans are peasant crops, they are particularly key for those who plant them to augment their wages as seasonal wageworkers in the coffee, cattle and cotton sectors. When President Ortega spoke of "workers' lack of faith in some enterprises or in some directors of state agricultural and industrial enterprises," the point of reference for these poorest peasants was not only wages but the price state trading agency ENABAS offered them for their grains and its commercial policy.

In mid-September 1988, for example, these peasants got the córdoba equivalent of $3.50 a hundredweight for corn from ENABAS. A month and a half later, ENABAS was selling that same corn at $6.50. In other words, through ENABAS, the state was speculating with the peasants' grains, as it has been doing since 1985. Since that period, the strongest devaluations were always made between February and August, after the peasantry had already sold its grains and turned them over to the state silos.

Between February and December 1988, nominal production costs for corn and non-irrigated rice shot up at least a hundredfold; for beans they increased 75 times. Nonetheless, prices lagged far behind. The nominal price of corn and beans only went up by 30 times, and rice by 40 times. In other words, there was a 70% real drop in basic grain prices.

The 1989 economic plan is an attempt to remedy this situation. On February 6, Agricultural Minister Jaime Wheelock announced that the government was considering price guarantees for domestic consumption items, based on Central American market prices, corrected for import and storage costs and exchange rates at the time of sale. This formula would double the price peasants are paid for their corn. For the first time, basic grain prices are likely to become a topic of much public discussion, which would be very healthy for the peasant sector. This new policy could make the profitability of grains almost the same as the exports that the state wants to prioritize over production for domestic consumption. It is expected that if the peasants do not get international prices for their grains they will at least get some level of guarantee. To maintain that price level, grain export is being proposed as a mechanism to encourage increased production.

This new pricing policy will transfer considerable profits from ENABAS accounts to these campesino-workers, an important step in restoring their confidence in the economy. It should also do so without hurting the interests of urban consumers, as the state stands to lose, not the consumers. ENABAS' loss of commercial earnings and the higher interest rates that the financial system plans to charge all trading companies will diminish their purchasing power at guaranteed prices and will make economic management of ENABAS' network of agricultural silos harder. To respond to the first problem, only a policy of exports can guarantee the adequate purchase of grains. As for the second, ENABAS will probably have to turn the administration of its local network of silos over to the organized cooperative movement. If this new pricing policy is carried out, it will effectively challenge any hypothesis about turning the revolution over to the bourgeoisie.

Credit Tensions. In spite of the persistence of an exaggerated monetarist policy in certain areas, new flexibility and differentiations that are more careful can be noted in the 1989 credit policies. It will be important to continue this flexibility to not affect planting in the first agricultural cycle this year.

These policies, designed to spur export and basic grain production, have very clear limits in that they work against the anti-inflation program that the Central Bank is trying to carry out. The key variable is the strict control the Central Bank wields over credit, which could easily touch off conflicts between producers and the bank.

The clearest tensions are those between the bank and the large cotton growers. Along with sugar, cotton has been one of the country's least efficient agroexports. Nonetheless, the need to maintain a minimum amount of cotton in cultivation to avoid large import costs for cooking oils makes cotton a net producer of foreign exchange. Self-sufficiency in cooking oils and the fact that cotton means dollars for Nicaragua have been the justifications for huge córdoba subsidies to cotton growers. Estimates for the next cycle indicate that these subsidies could roughly equal all investments slated for agriculture as a whole, or 5% of the gross domestic product. Following anti-inflation logic, the bank refused to restructure the debts of the cotton sector or offer flexible credit conditions. If these measures are held to and the subsidies substantially cut, a number of large growers will stop producing and the country will lose millions of dollars. In addition to needing cooking oil, it is also important to avoid too drastic a recession in the cotton-growing region of Nicaragua's northwest, where some of the best agricultural land and infrastructure in the country is found.

The problem is not the profitability of cotton per se, but the efficiency levels of its growers. In the Pacific region, particularly León and Chinandega, cotton can be profitable, as demonstrated by the lower production costs and higher yields enjoyed by small cotton growers. The Central Bank on March 7 stipulated that credit lines for cotton be offered only to those growers who have turned a profit during the last four harvests. This clearly demonstrates the logic of the new governmental move towards reliance on the market as well as the fact that it does not particularly benefit the national bourgeoisie, given that the large cotton growers of the Pacific region are perhaps this class's most important group. The large Pacific dairies and the state’s large-scale production of sugar are experiencing similar problems compared with the small producers who sell cane to the refineries. But, in the latter case, the bank is still not offering special conditions to stimulate production by these small growers.

The government began a program this year to cultivate some 42,500 acres of sesame, an essentially peasant crop which could begin to replace cottonseed as the country's key source of cooking oil. The point is not whether the producers are large or small; the criterion on which the move from a political agrarian reform to an economic one is based whether they are efficient.

The Central Bank's flexibility with respect to basic grain producers is also linked to the battle against inflation. On February 6, Central Bank Vice President Roberto Gutiérrez announced a policy of restructuring their debt along lines that make repayment feasible. The Central Bank also announced that the basic grains program would be more extensive than last year: 770,00 acres with 82% financed by rural credit.

To promote basic grain production, the Central Bank announced on March 15 a program of preferential treatment for basic grain producers with interest rates 20% below the normal one for agricultural production. This differential rate is not a "gift" to the peasants, but rather a recognition that they have been the most efficient users of credit to date. The differential rates are meant to further stimulate peasant production and forestall further rationing of the import package for the big producers.

Wage Policy. Wages for the agricultural and urban working class will not be increased as substantially as incomes for peasants who plant basic grains. Someone has to pay the costs necessary to get out of the crisis and normally that someone is the working class, as has been the case in Nicaragua. But the government now recognizes that their wages cannot continue to bear the brunt of the economic adjustment. This is not only for political reasons but also because the hyperinflation before February 1988 had already reduced wages to an insignificant proportion of production costs.

The wage policy for 1989 is based on a system in which minimum wages are going to be indexed to 50% of a new subsistence market basket of 25 products, and will rise monthly to the degree that inflation affects this list of items. It is a commitment by the government to protect wages, as low as they are, from further inflation. Furthermore, the new policy permits wages to rise above the minimum of 50% according to increases in productive efficiency at the factory level and the negotiating capacity of the unions. The salary rise for professors and teachers was 40% in February and 20% in March. The new policy has thus already meant a 100% increase in the real buying power of state salaries with respect to December 1988 and a 25% increase in wages for the productive sector, as can be seen in Table 2.

The problem of increasing the wages of productive workers is not viewed from the perspective of inflation at this point, but from that of the profitability of production. Neither productive wages nor government salaries represent a significant proportion of the total costs of production and services. In November-December 1988, for instance, government salaries only represented 7% of total central government costs. Increasing wages does influence inflation, but not as much as do the inefficiencies in other spending categories of the enterprises. According to the new policy, as resources unwisely spent in inputs and other administrative costs are cut, making production more efficient and profitable, those resources can be immediately transferred to the workers.

The Farm Workers Association (ATC) and the agricultural workers themselves have been more aggressive in their wage demands than urban workers. Two positions have emerged in union discussions. The Sandinista Trade Union Confederation (CST), representing urban workers, says that wages must remain low because the factories are not profitable. The ATC argues that the struggle for higher wages forces the enterprises to improve their efficiency levels. The ATC's more feisty stance comes largely from the greater profitability of agroexport production, and the fact that quality depends largely on wage incentives to workers. Wage increases in this year's harvest resulted in a marked improvement in the quality of the product harvested and, therefore, in the prices obtained in the international market. The CST has been less demanding because increased efficiency in industrial production is more complicated than in agroexport production.

The CST struggle will have to focus on increasing its participation in factory management so that production and productivity increases are shared with the workers. The aim should be at restructuring, such as has already been done in the metalworking industry. There a decision by management to reorient production toward both exports and domestic sales to the agriculture sector has meant that neither employment nor wages have shrunk.

Most other enterprises have not even returned to their more rational past policies much less made the effort to restructure. At Nabisco, for example, the factory had stopped packaging its cookies and crackers for export given that popular consumption had expanded due to government subsidized prices. Today, even though demand has again dropped, management has not developed a strategy to combine export and national sales, and both wage and employment cutbacks have been the result.

The battle against inflation is still too monetarist; it is not enough just to eliminate unqualified office workers and cut the irrational use of imported inputs. Given the lack of competition within Nicaraguan industry, workers must pressure administrators to think more creatively if they ever want to reach, let alone surpass, income levels in El Salvador and Guatemala. Without such innovation by productive workers and administration alike, the industrial sector will never develop to its full capacity.

The excessively monetarist focus of the Central Bank and the Ministry of Finance negatively affects production in an even more direct form in the revenue-producing industries (rum, cigarettes, bottled soft drinks and beer). In these, worker pressure must be directed toward the state. In the soft-drink industry, for example, demand fell from 8,500 cases daily to 3,500 due to high new sales taxes. Coca Cola workers proposed lowering them somewhat to increase sales and improve the enterprise's profitability.

The state, too, loses income by charging such high taxes. By selling more soft drinks with lower taxes the state would maintain its income, and at the same time reduce the productive recession. The decision to not raise the price of petroleum derivatives at the same rhythm as the latest devaluations probably helped slow inflation. In Nicaragua, the rum, beer, soft drink and cigarette industries are perhaps second only to petroleum products in their economic importance. A selective reduction of sales taxes for these products would likely have a similar positive impact on employment and production.

The most important area for the expansion of employment today is in the coffee sector, where President Ortega has spoken of openings for some 10,000 workers. The CST has begun to promote the move of urban unemployed to the countryside, but to date has only relocated some 200 workers.

The trend in the overall program of productive wages and credits is moving slowly but progressively toward a more popular scheme in which peasants reap more benefits than big business owners and the more productive workplaces receive greater priority than the less productive. This can be seen in the advantages given to agricultural over urban workers and generally to wage earners in productive state jobs over those in nonproductive ones.

The acid test of the government's efforts to consolidate the worker-peasant alliance, strengthen its economic credibility with the populace and guarantee the socialist orientation of its program will be its ability to 1) comply with the proposal for guaranteed prices for basic grains; 2) permit agricultural workers to apply pressure against the earnings of the agroexport sector; and 3) let the industrial working class pressure management to restructure industry and increase productive efficiency so as to respond to its demand for wages more in line with Central American levels.

The Anti-Inflationary Struggle: Lessons from 1988

Responding to a question about what was new in the 1989 plan, Comandante Henry Ruiz explained that it was made up primarily of mechanisms to control hyperinflation: “The first mechanism is to control the printing of money. If money is printed, the fire keeps burning; if not, it peters out. Thus the plan is absolute. Money cannot and must not be printed until the fire is out. These mechanisms must be efficient firefighters.”

Before commenting on the various mechanisms, it is useful to review the causes of the hyperinflation that forced the government to take the road of monetary reform and economic readjustment in 1988.

Before November 1987, the government did not worry much about controlling inflation. In fact, between 1984 and 1988 inflation was essentially used as a war tax to shift resources towards the priority tasks of the revolution in wartime: defense, long-term capital accumulation by the state and social programs such as health and education. The problem was that by printing money and allocating it to these areas, the government neglected the simple reproduction of the economy. Those areas most affected by the war and the state accumulation program were the following:

* The purchasing power of working class wages. By the end of 1987 it was only 6% of what it had been in 1980. Low workers' wages in turn led to a drop in productivity and labor discipline, and encouraged workers to move into the informal sector.

* The purchasing power of peasants who produced basic grains and other goods for domestic consumption. Drops in their incomes from as early as 1980 through 1986 acted as a disincentive to production, requiring the government to increase grain imports and spend resources on irrigated grain production in the Pacific which could have been invested in maintaining export levels.

* The international currency flow from peasant and medium-size coffee and cattle production for export. The commercial policies of ENCAFE (the state coffee enterprise) and MICOIN (the Ministry of Domestic Commerce) were partly responsible for a drop in cattle and coffee production in the interior of the country, in that prices offered these producers between 1980 and 1983 were substantially less than international prices. And although imported inputs were also below international prices, supply systems to the interior were partially disarticulated by MICOIN and ENABAS. From 1983 on the war had an increasing impact on production. It is estimated that between 1986 and 1988 the country lost some $102 million annually in these two categories, compared with the years 1976-78.

* Replacement of basic infrastructure. The replacement of electrical generation systems, industrial equipment, agroindustrial export equipment and transportation services due to the economic and military aspects of the war left the country with a deficit of hundreds of millions of dollars.

But the use of inflation to redistribute national resources has its limits, i.e., the deterioration of the basic economic structure and imbalances between supply and demand provoked by printing money not backed by production. At the end of 1987, these limits had been reached; inflation no longer aided the war effort because it was exacerbating the political crisis and undercutting the value of the military budget itself. It had undermined the tax base and the state's ability to intervene in the economy.

It is thus true, as Comandante Ruiz pointed out, that the printing of money must be controlled and that more cuts in state spending are needed to accomplish this. Nonetheless, this first and most important measure is not in and of itself capable of stopping hyperinflation. To visualize how the mechanisms used the struggle against inflation work, a series of lessons learned in last year's reforms must be taken into account.

Lesson One:
The need to order relative prices, control inflation and begin the economic reconstruction of the country simultaneously. By 1988, the revolution was obliged to take up the fight against inflation. In February, however, emphasis was put only on the monetary reform and devaluation, in an effort to right the distortions in relative prices resulting from multiple exchange rates and to improve export incentives. This decision was not a product of clear economic thinking, since any attempts to order relative prices were promptly disordered by the hyperinflation itself.

The government believed that the ordering of prices through the devaluation and the monetary reform would itself slow inflation, hopefully limiting it to 100%. But when the year ended with an inflation rate of more than 20,000%, the technical teams learned, among other things, to wage serious war against inflation at the same time that the relative price scheme was being put in order through devaluations. By separating these two processes, time had been lost and the political costs of the adjustment increased.

Similarly, the battle against inflation should not have been separated from the initiatives to raise production. Without an increased supply of goods, the anti-inflationary struggle was bound to stagnate in a circular process of inflation-recession-inflation. Now, in 1989, one should not to be too optimistic about the anti-inflationary struggle unless the country can get some $300 million in hard currency for a stabilization fund or, lacking that option, put together an economic reconstruction program that will quickly eliminate nonproductive state employment and redirect these resources toward prioritized productive sectors.

Lesson Two:
Price control is impossible before stopping inflation. The second lesson came right after the February monetary reform, during the attempt to control the retail prices of products through state controls, alongside popular mobilization against speculators. The controls did not function and even deteriorated the workers' standard of living more than before the reform. They failed basically because not enough currency was taken out of circulation. As Daniel Núñez, head of the National Union of Farmers and Cattle Ranchers (UNAG), put it, the plan to control retail prices only "attacked the ants and let the elephants get away." Without controlling the size of the government and the costs of defense, prices continued to rise.

Lesson Three:
To guarantee the profitability of exports and control the black market, it is necessary to devalue boldly then continue as necessary with frequent mini-devaluations. In February, the córdoba was not devalued enough to stimulate agroexports and dissuade producers from speculating with their production in the hyperinflated national market. The only positive benefits were the beginnings of an alignment of relative prices and an unmasking of the levels of inefficiency of various oligopolic state enterprises and private consortiums (those in economic activities in which a few firms controlled all activity and thus experienced little competition). The February devaluation should probably have begun at 20 córdobas to the dollar instead of 10, and should have used mini-devaluations to maintain the power of the new córdoba instead of waiting so many months (until June) before making another maxi-devaluation.

Since devaluations increase the cost of imported goods, they create more inflation. Therefore, each devaluation demands either a new relative cutback in the printing of córdobas—which are needed in order to keep the economy moving and forestall radical recession—or an influx of liquid foreign currency to stabilize the national currency.

It is perhaps useful to envision the economy as a water tank with a certain liquidity level, or quantity of money in circulation. With each devaluation, the goal of which is to stimulate exports and reduce imports, the tank begins to fill with more money. Normally, a strong devaluation is accompanied by two safety valves to stop the water from overflowing. One is to drastically cut government spending, which drains some of that liquid back out of the tank. The other is to inject foreign currency through the IMF to cushion the blow of the devaluation. In our image, such funds have the effect of making the walls of the tank higher, preventing it from overflowing with hyperinflation.

Mini-devaluations have to continue, but if done without carrying out the state spending cuts stipulated early this year, and even cutting more than planned, they could undermine the anti-inflation program.

Lesson Four:
Wage controls and attempts to straighten out the public financial sector can unleash recession, thus stimulating inflation instead of reducing it. After the problems encountered in the first half of the year, the government managed to improve export incentives in June, through a new devaluation. To absorb the liquidity injected through the devaluation, it strictly controlled salaries and increased selective sales taxes (beer, rum, etc.), instead of significantly cutting government spending. The contradictory result was simply to lower workers' purchases of soft drinks, beer, rum and cigarettes by 30%, which in turn led to a drastic fall in government revenues, dependent on these "vice taxes" to finance 30% of its operations. In other words, the state lost more than 10% of its income and the deficit grew from 14% to 31%, which meant printing even more money and thus more inflation.

The wage restrictions had virtually no effect on inflation for reasons already mentioned. In fact, as Table 2 shows, the periods of least inflation in 1988 were those of greatest wage increase and vice versa. Starting in 1988, the main inflationary factor became devaluations without sufficient public spending cuts. The country is now experiencing inflation pushed by both the increased costs of imported inputs and the uncontrolled expansion of nonproductive employment that occurred between 1980 and 1986.

Lesson Five:
It is necessary to corral the elephants of inflation. Between August and October, the government both corrected its rigidity toward mini-devaluations and permitted wages and salaries to rise some. The result was less inflation. The smaller devaluations meant, on the one hand, that liquidity increases were less than in the February and June devaluations. On the other, cuts in long-term investments actually began to reduce the liquidity level.

In November and December, new and stronger devaluations caused the more than 100% monthly inflation rates. It was obvious that by upping the devaluation, the government needed to cut its spending in some way to stabilize the economy, but, unfortunately, Hurricane Joan in October left no option but emergency spending.

In January, having learned its lesson, the government began to drastically cut defense spending, MIDINRA's investment programs and central government spending. It will probably have to cut even more, to counterbalance its program of unifying the parallel and official exchange rates, which has meant devaluations of some 400% so far this year. Otherwise, these devaluations, along with payments to producers for export crops harvested at the end of the year and credits extended for the new planting season in May, will mean another inflationary spiral. The agricultural cycle itself cannot be discouraged, or the country will sink into even greater recession.

Two thirds of the Central Bank's resources currently go to nonproductive activities such as defense and government administration, and only a third to productive activities. After five years of rhetoric regarding a shift in priorities from the nonproductive to the productive sector, the moment has come to move from words to practice. Although this will seriously affect the FSLN's system of class alliances, as we discuss below in detail, it is the only way to stop inflation and begin to reduce the trade deficit, another major source of the inflationary cycle.

Lesson Six:
The trade deficit, which is also acting as a generalized subsidy in our economy, must be reduced. Throughout this decade, Nicaragua has gotten used to living with an annual trade deficit of more than $500 million. This has been justified by some with the mistaken argument that it serves to maintain production levels and the workers' standard of living. The idea was that costs of development could not be carried by the peasants, as was done in other socialist experiments, and that national capital accumulation would have to be financed from abroad, particularly through donations and soft credits. When these dried up, it led to the acceptance of a huge trade deficit, which essentially subsidized consumption instead of savings and national investment, and defense instead of production. In reality, the trade gap and the multiple exchange rates undermined production and the incomes of productive workers while feeding a disproportionate and combined expansion of the informal sector and the nonproductive state sector.

Unifying the exchange rates, or, in other words, eliminating the macroeconomic monetary subsidy, can not only cut the inflation coming from the subsidy contained in the dual rates, but also act to largely eliminate speculation.

The six lessons can be summarized as follows: the only way to fight inflation is to replace the subsidized mixed economy model used by the revolution to confront US aggression with a truly mixed economy that favors popular interests in the marketplace. That new model needs to be combined with the political-social project of democracy, political pluralism and national sovereignty already initiated by the revolution.

Open debate to develop a new understanding that can activate the producing population in support of the new economic model is also crucial to the search for mechanisms to break the hyperinflationary cycle. Recent speeches by President Ortega and several long published interviews with members of the FSLN National Directorate indicate that this need is beginning to be seen as vital for the transition phase from a subsidized economy under siege to a real mixed economy with a socialist orientation.

Part III:
Economic Discussion and Changing Class Alliances

1. Debate about the economic model

Ten years of Sandinista revolution have produced an accumulated experience that could serve as an economic laboratory for future national liberation processes in the Third World. In Grenada and Chile, where these processes were aborted by US intervention, there were political lessons, but teachings in the economic camp were minimal at best. The African countries offer an economic legacy, but with a significantly lower level of social and economic transformation, as in Zimbabwe, or with little experimentation with mixed economy forms and few changes in the transition model and statist development, as in Mozambique and Angola.

Though a Sandinista economic legacy exists, especially after the multiple adjustments of 1988 and the new program of 1989, there is not yet agreement about the meaning of this legacy. At least three distinct interpretations can be identified:

1. The rupture of the Sandinista economic model. The lesson of these ten years, in the view of the Harvard-linked Central American Institute of Business Administration (INCAE), is the overriding need to return to a capitalist scheme, similar to that of the other Central American countries. In this interpretation, the state has shown itself incapable of managing the Nicaraguan economy. For INCAE and for COSEP, the traditional umbrella organization of big business, the solution is to give a leadership role in the economy back to the bourgeoisie.

In analytical terms, the interpretation of the far left Marxist-Leninist Party does not differ much from that of INCAE. It, too, sees the Sandinista economic model as shattered, but instead of applauding, as INCAE analysts do, it blames the Sandinistas for having voluntarily turned toward capitalism, thus breaking with the revolutionary model and abandoning a socialist orientation. The only difference between the two interpretations is that INCAE advocates more capitalism while the MAP-ML wants to abandon the mixed economy and end the search for national accords.

2. Postponement of the economic model. This is the operative, if rarely explicit, interpretation of many Sandinistas. The conception is that eight years of Reagan's low-intensity war has required an indefinite shelving of the socialist economic model. After a period in which 1984 economic levels are regained, the same model will be reapplied.

The theoretical basis of this perspective—held particularly by middle-class Sandinistas—is the identification of socialism with state control of economic administration, large-scale economies and the search for an exclusively proletarian culture.

As a way to understand the current period of concertation, this position is very demobilizing for three reasons: 1) The 1989 program reduced the direct role of the state, which this interpretation views as reneging on socialism. 2) From this perspective the only message for the population is patience, less consumption, more unemployment and the promise that one day Nicaragua will return to its initial revolutionary project. 3) This viewpoint is implicitly urban-industrial, but Nicaragua is an agrarian country, with an urban sector that is dysfunctional in terms of developing its productive forces.

3. Development of a homegrown socialist model. A growing number of Sandinistas postulate that economic concertation is but one element in an overall program, and represents a firm step toward the construction of a truly Nicaraguan and Sandinista socialist economic model. This perspective maintains that this economic period—the ending of the war and reconstruction—and the social transformations carried out by the revolution demand an economic project that moves toward a less statist and more national and popular model.

Proponents of this position consider that the initial model is no longer viable and criticize its defenders for their lack of realism, their exaggerated defense of the state as the only focal point of capital accumulation, their judgments about the backwardness of the peasantry—which they would eliminate as a key actor in development—and their approach to a tactical alliance with the bourgeoisie, which has cost too much in production subsidy programs.*

*See "The New Economic Package—Will a Popular Model Emerge?," in envío, Vol. 7, No. 86, for a more systematic description of the initial Sandinista economic model.

This third position also considers that the state, small and medium producers and the peasantry have already essentially replaced the agroexport bourgeoisie as the dominant elements in production. This change is a result of the agrarian reform and generalized agricultural subsidies which, although they benefited large production more than small, were actually taken advantage of more by small than by large. Small-scale commodity producers and the peasantry—both of which have grown during these last ten years—can serve as the fundamental social base for a transition to socialism that gives priority to:

* slowly but extensively training the labor force;
* redistributing wealth through the national financial system, foreign trade, market-based planning and state enterprises operating in reduced but strategic sectors of the economy;
* opening new markets for nontraditional exports produced by small and medium rural and urban producers through public research and advisory services;
* mobilizing the population and the armed forces to participate in the economy as a key factor in the resolution of the crisis.

The concertation, as all Sandinista leaders underscore, is the initial phase of developing a socialist-oriented economic model. Three phases in the development of this model can be visualized.

1. A postwar and anti-inflationary phase, relying on the peasantry and small and medium commodity producers, which seeks to create the material base for survival and simple reproduction of the economy so as to assure that production can later be expanded without domestic or foreign subsidies.

2. A second phase, which reintroduces the agro-industrialization project based on appropriate technology instead of dependence on the United States as formerly stipulated by the Central American Common Market (CACM). The creation of appropriate agroindustrial technology for the region depends on intellectual and technical teams capable of "reading" European markets better than the Europeans themselves and developing quality new exports at a rhythm that permits the region to exploit international profit differentials through flexible production schemes rather than costly imported components. Without such technological and commercial think tanks independent enough to act in the international arena, the region's oligarchies will continue making agroindustrial investments that are out of date even before their new plants kick in, and technology imports will continue being, as they were under the CACM scheme, an obstacle instead of a development tool. This second phase can only be brought about through extensive training of the peasant and artisan labor force, so it can develop without subsidies.

3. A third phase of extended development of the whole gamut of technologies, be they peasant, commercial or entrepreneurial, based on the new value added as a result of phase two.

2. Adjustments in the class alliance

Among the three different interpretations of the concertation period mentioned at the beginning of Part III, the only alternative with revolutionary realism and perspective for the future is the third. But without a clear discussion of what the socialist orientation of this economy means, the revolution will have a tough time sparking the energies needed to overcome its hyperinflation crisis.

We believe that an analysis of the tendencies in the class alliance, and of which classes can make best use of the trends in the 1989 program, is one of the more fruitful approaches for the development of this debate. As a contribution, we offer the following reflections about the readjustment of the system of class alliances that sustain the Sandinista project.

In the subsidized economy, all classes benefited from the generalized subsidies, but some more than others. Generally speaking, the subsidy model benefited:

* urban classes more than rural;
* the middle classes through state employment and the oligopolic sectors through the subsidy policies more than the peasantry and small and medium producers in general;
* the working class as an agent of the urban informal sector more explicitly than as wage workers.*

*See "Managua's Economic Crisis—How Do the Poor Survive?," in envío/, Vol. 5, No. 66, December 1986, for a detailed explanation of how members of working-class families have been forced by the economic situation to leave their factory jobs and sell goods and services on the street in order to supplement family income.

Identification of this distribution of resources as a good scheme for the transition to socialism is slightly lacking in objectivity, as is criticism of the 1988 economic adjustment and 1989 concertation as reneging on a socialist orientation.

To the degree that the 1988 program eliminated microeconomic subsidies and bared the inefficiencies of the oligopolic private or state enterprises, it strongly hit the working class—particularly the incomes of those in the informal sector—and began to affect the middle classes. The 1989 cuts did more of the same.

But the fact that those who are salaried are sacrificed the most, as Comandante Ruiz bluntly put it, does not mean that the bourgeoisie is taking over the reins of the economy again. While it is true that the union interests of the working class are being sacrificed, their class interests are not.

As a tendency, and to the extent that the rules of the market are maintained, there will be a slow but real basic readjustment of the system of class alliances that will benefit:

* the rural classes more than the urban;
* the peasantry and small and medium producers more than the oligopolic entrepreneurs and the middle classes;
* the working class as wage workers more than as an agent in the informal sector.

The adjustment program, insofar as it favors agroexports, favors the countryside over the city. It also favors small and medium producers over the bourgeoisie, given that the latter's control over agroexport crops had been seriously eroded even before the adjustment program began. The agrarian reform, the focus on state enterprises and the treatment of the business sector as a mere administrator of state resources have created a situation in which the peasantry and smaller producers are beginning to be the main social force, not only in numerical terms but also in terms of economic power.

UNAG, which includes some large patriotic producers as well as most small producers and peasants, controls 52% of national coffee production, 43% of cotton, 95% of sesame and over 60% of livestock. Table 3 shows the current relative weight of the different socioeconomic sectors in agriculture as a percentage of the gross value of overall production.

Information sufficient to analyze the distribution of the value added or the real contribution of the different classes of producers to the GDP still does not exist, but it is clear that peasants and small producers contribute more than the table suggests because they use far fewer imported inputs than the big state enterprises and the agrarian bourgeoisie. Insofar as the new policy is making these inputs more costly, the small producers and peasants tend to benefit even more. At this point, this benefit still has not reached the peasantry, but the logic of the adjustment places them in an advantageous position with respect to the bourgeoisie in the medium term.

Given this economic structure, assistance to agroexports does not, as many erroneously think, favor the bourgeoisie, but rather the state sector of agriculture and the small and medium producers and campesinos, where more than 83% of agroexports are concentrated.

Where Are We Heading?

What do these changing tendencies in the correlation of forces between the different social classes and in the FSLN's system of alliances with each of these classes mean? How is the concertation process inserted within an economy increasingly dominated by the state, the peasantry and small and medium producers?

We will approach these questions from the economic demands by and possibilities of advances for the bourgeoisie, the peasantry and small and medium producers, the working class and the urban middle sectors.

The underlying logic of the 1989 program is the search for concertation with the bourgeoisie on the basis of a recomposition of the popular alliance with workers, peasants, small and medium producers and professionals. Although political support for the revolution by some 30% of the population has so far proven invulnerable to the economy's vicissitudes, the economic consolidation of this fundamental alliance is urgently needed to reach fruitful agreements with the most efficient and progressive sectors of the national bourgeoisie. That does not mean that it is an issue just of the political moment; the popular alliance is key to the revolution's very economic project—to reestablish the basis for the transition to a more just and egalitarian society.

The bourgeoisie: Property, resources and participation

The bourgeoisie is asking for three major concessions from the state: 1) Guarantees for its properties and an end to the agrarian reform; 2) equal access with the state to economic resources; and 3) participation in management of the enterprises where it has capital invested and in international commercialization channels where possible.

La Prensa calls the concertation concessions to date insubstantial. Although discussions have resulted in some positive steps for the bourgeoisie—contracts for street maintenance in Managua, taxing of goods sold in the "dollar store" so large private importers can compete with it, and discussions about an arrangement that will allow rice and sorghum exporters to compete with the APP—envío basically agrees with La Prensa that they are only partial.

We do not agree, however, that these concessions were made as a "cunning invitation to division," as La Prensa puts it. The fact is that the business bloc is already divided into two major fractions, represented by COSEP (Superior Council of Private Enterprise) and CORDENIC (Commission for Recovery and Development in Nicaragua*). COSEP, which La Prensa supports most, has historically been the organization of all private entrepreneurs, but small and medium business interests, such as members of UNAG and nonpolitical sectors organized into CORDENIC, have moved away from COSEP given its involvement in party politics as a member of the far-right umbrella organization, Nicaragua Democratic Coordinating Group, or "Coordinadora."

*CORDENIC is a recently formed group of Nicaraguan entrepreneurs and intellectuals institutionally linked to INCAE. It defines itself as apolitical and independent, and is trying to constructively contribute to a resolution of the country's grave economic problems. It carries out three types of activities: 1) preparing independent studies that propose solutions to the crisis; 2) organizing forums and seminars with diverse social, political and economic (including state) actors to push forward a national reconstruction project; 3) encouraging economic agreement between the state, private enterprise, workers and political parties.

It appears that CORDENIC, although still with fewer members, is supplanting COSEP, which represents a group of business leaders whose productive inefficiencies do not permit them to work within the new rules of the market. For this very reason COSEP is demanding a political negotiation with the Sandinista government before entering into an economic agreement. For their part, CORDENIC's members tend to be more efficient producers, capable of working with the market rules now, just as they were able to invest in the 1984-88 period, when COSEP members complained that they could not. CORDENIC, given its real entrepreneurial capacity, is willing to enter into an economic agreement as a basis for future political negotiations.

Thus it is not the concertation that is dividing the entrepreneurial groups but rather the market itself. The new rules force efficiency and this hits hardest at the uncompetitive high-tech dairies and growers of sorghum, irrigated rice and cotton. This is producing divisions between the more efficient and competitive members of the bourgeoisie, who accept the process of concertation with the government and those who prefer to hide behind La Prensa and the US Embassy rather than having to work in a market that offers them neither the privileges of a capitalist market nor the copious subsidies of Nicaragua's war period.

The policy of alliances with the national bourgeoisie never offered them the possibility of regaining a leadership position in economic policy-making. But just as before the concertation, space exists for reformed capitalism, one subordinated to popular interests. This is why Comandante Borge declared that concertation with the business sector does not imply substantive change in the national unity policy of alliances: "...rather I would say that they are of a tangential character. What is changing is the form and the context of the alliance."

The new form, according to Borge, is negotiation within a market and a mixed economy that serves as a frame of reference for the various socioeconomic sectors; the new context is the transition toward peace.

At bottom, the shift to the market does not benefit the entrepreneurial class in a privileged way because after ten years of revolution and US aggression there is no capital market as such. There is no stock exchange, and there are no great concentrations of private finance capital beyond that of the Pellas family, owner of the San Antonio Sugar Refinery before the government took it over because they were decapitalizing it. There is also no Nicaraguan capital market other than the state. The shift is rather the opening up of a petty commodity production market, which, given the conditions imposed by the current international crisis, could not evolve into a capital market even if there had not been a revolution.

This distinction between the two types of markets is a key theoretical point in Marx's Capital, and is crucial in understanding what is the point of departure for agreements in Nicaragua today. The logic of a capital market is the accumulation of money in the money-commodities-money cycle, while that of a petty commodity production market is the circulation and exchange of goods in the commodities-money-commodities cycle. In the latter, money is a means and not an end in itself. As Comandante Borge points out: “From early on, the theory of scientific socialism moved beyond the idea of associating mercantile relations only with capitalism, as if they were alien to socialism.... It is a question of employing them in a conscious way and not allowing them to operate blindly. Capitalism employs market mechanisms to reproduce the dominant groups and the system itself, just as socialism employs them for its own ends.”

In our view, the displacement of entrepreneurs and urban middle sectors by peasants and medium producers represents an advance toward socialism in this society. This shift, together with the new and less direct role of the state, and the slow but wider socialization of the means of production shows that the Sandinistas, spontaneously and by means of their own pragmatic method, are moving toward the Lenin and Bukharin of the 1920s more than the Preobrashenski and Stalin of the 1930s.* Although Gorbachev's rehabilitation of Bukharin in the Soviet Union represents little more than a recognition of past errors and the need to use economic calculus more adroitly, in Nicaragua we could be initiating a transition to socialism of the type dreamed of by Bukharin and the most creative forces of the first socialist revolution.

*Stalin assassinated Bukharin and Preobrashenski, but used the essential elements of the latter's theory to convert the democratic agrarian reform initiated under Lenin and Bukharin into the forced collectivization of Soviet agriculture that today is weakening the Soviet Union's socialist economy as a whole.

The Peasantry: Prices and Socialist Agrarian Reform

The peasantry and the smaller producers represented by UNAG are also asking three things of the state: 1) that they be able to export their basic grains so that the prices of these products for domestic consumption as well as for export reach international levels; 2) that the rules of the market apply equally to all; and 3) that the state change its entrepreneurial agrarian reform model in the Mexican, Chilean and Peruvian style for a more socialist one. This third point is a particular
demand of the peasantry.

In all past revolutions, the first stage of agrarian reform was the parceling of land and the democratization of the agrarian structure and mechanisms of state control over the peasantry. In the Soviet Union during the first ten years of its revolution, there was massive parceling. In China, the first stage was the same. In Bulgaria, Czechoslovakia and all the other countries of Eastern Europe the initial mechanism was to parcel lands and form credit and service cooperatives. In Nicaragua this was not the case and now the peasantry is demanding that the barely begun process of democratization be fully realized. In fact, peasants are asking not for expropriations in the private sector, but access to and, increasingly, the parceling of idle or underutilized state lands. They are demanding democratic access to credit and an end to the power of technicians who, instead of strengthening the peasant labor force, are obliging them to become either workers or members of production cooperatives which have the same technology levels and inefficiencies as the state sector or the bourgeoisie.

The peasantry is demanding more flexible organization of the Sandinista Production Cooperatives (CAS). This demand is reflected within some of the CAS units themselves by the idleness of their lands and reduced membership. Many peasants prefer Credit and Service Cooperatives (CCS), which have individual parcels, to the CAS, with their collectivized land and labor force scheme and greater dependence on the banks. Given this, laid-off urban workers are the main beneficiaries of MIDINRA's new program to expand the membership of CAS units with idle land.

Parceling, in fact, is increasingly taking place in the CAS; in effect, a number are becoming CCS with high levels of socialized capital and services. This tendency will only affect part of the CAS units since many others have become well established along the original lines.

Advances in peasant organization depend largely on ceding state lands to them and on making state services available equally to the cooperative sector and the unorganized peasantry. Their demands to democratize the agrarian reform and pay international prices means that the government has maneuvering room both to consolidate its fundamental alliance with them, by satisfying those two demands, and to reach agreements with the bourgeoisie, by guaranteeing that the agrarian reform will not touch their lands.

In a debate among the "fundamental forces" of the revolution regarding the concertation on February 9, UNAG president Daniel Núñez asserted that there is no need to expropriate private producers because there are hundreds of thousands of acres of idle state lands, particularly in the remote interior, where the economic future of the Nicaraguan people lies.

MIDINRA Vice Minister Alonso Porras agrees: “If a peasant is without lands and people are needed to consolidate cooperatives, why not reinforce the cooperatives instead of affecting a landowner? Or, if the state enterprises need to be compacted more to make them more efficient, then let's give an answer to those peasants, by giving them state areas that are not being worked to their full capacity.”

The new direction of the agrarian reform means consolidating its political phase with a new, more democratic, economic phase. As we will see below, this new focus, the concertation with the bourgeoisie and the new policy toward the peasantry as the principal agent of change all permit a refining of the socialist character of the Nicaraguan process.

The working class: Break-up of the urban-industrial model

The working class is demanding stable employment and the recovery of real income levels at a moment in which there is a very strong recession in the country's largest and most important industries, not to mention the bankruptcy of thousands of small shops.* These factories, large and small, depend on imported inputs and cannot maintain their profit levels given the revaluing of these inputs as a result of the multiple devaluations and the serious fall in domestic demand. The government position of linking salaries to profit levels demobilizes the working class since, in reality, no factories are in a position to become very profitable.

*Recent research shows that in Latin America as a whole, factories of from 20 to 50 employees are more efficient than larger-scale industrial factories. In Nicaragua, with its lower level of development, this is dubious.

With the breaking up of an urban-industrial model dependent on subsidies and unequal terms of exchange with the countryside, there is serious confusion among the working class. Its only realistic avenue of pressure is for greater decision-making participation in the enterprises, particularly with regard to restructuring the productive processes and controlling the technical strata in the factories. In both the urban and rural enterprises, wages for productive workers could be increased beyond 50% of the subsistence basket by cutting the inefficient use of inputs and laying off office workers whose productivity leaves much to be desired.

Above all, what is lacking is a new image of an agrarian transition to socialism that could facilitate the relocation to the countryside of unemployed workers. It is a process that will take a decade and will not be possible without immense ideological work within the trade unions and the FSLN itself.

The demands of the Frente Obrero union and its party affiliate, the MAP-ML, that the state guarantee employment in the industrial sector and the state itself, miss the point. Not only are they unrealistic for all the reasons pointed out above, but they are based on the erroneous premise that the principal tension is still between the working class and the bourgeoisie. In fact, the central problem right now is the basic readjustment of the revolution's whole system of alliances, in particular with the urban middle sectors.

The Urban Middle Sectors: Those with Most to Lose

The most important class tensions are erupting between the peasantry and the non-producing urban middle sectors. This group can be roughly divided into five large fractions:

* middle-level state technicians and business managers;
* the technocrats in private enterprise and the informal sector;
* middle-ranking military officers;
* teachers, professors, health workers and other professional and nonprofessional white-collar workers, in the state institutions;
* the upper-middle ranks of the informal sector.

All these groups depend on the public budget—including the last one, given that incomes received by the others represent the demand that stimulates price inflation of the informal sector's goods and services. The continuing imbalance in the distribution of resources, which favors these groups, means that they are still eating a disproportionate slice of the Nicaraguan pie.

Recent cuts in the nonproductive section of the state budget have hit these groups hard, but not all equally so far. Throughout 1988, those hit most were teachers and health workers and, to a lesser degree, the middle levels of the informal sector. In the January 1989 cuts, material resources for technocrats and the military were more seriously affected. Since still more drastic cuts look increasingly like the only way out of hyperinflation, they will be hit even harder. But the resources still controlled by the institutions are increasingly disproportionate, given that their own numbers are dropping. The denunciation by a member of the Conservative Party in the National Assembly that there are 1,200 vehicles available to only 4,000 MIDINRA workers is common to the public sector as a whole.

At the beginning of the 1980s, the revolution stood up to the bourgeoisie. At the beginning of the 1990s, to continue being a revolution, it will have to stand up to these urban middle sectors to a certain degree. This will mean, in part, the possibility of a clash with a very substantial part of its own political base.

Standing up to these sectors has two aspects: transferring resources from them to other classes and deepening their socialist and revolutionary consciousness. Without a leap in that consciousness and in the managerial capacity of public administrators, the restructuring of industry and the streamlining of state services for production—necessary for incorporating the hegemonic bloc of peasants, small producers and workers into a mixed economy—will not be possible. Ideological debate will be crucial during this transformation of class alliances. These middle sectors will have to accept the readjustment based on popular hegemony and the inclusion of a nationalist bourgeoisie.
To date the revolution has been unable to develop a coherent mixed economy scheme, without subsidies, that clearly benefits the peasants and workers. The productive strategy that must accompany the reordering of relative prices and the anti-inflationary efforts is still not visible. Nor is there yet an ideological message capable of activating the population.

The changes discussed here are only tendencies; their full development will take not months but years. The 1989 economic concertation is thus not a short-term tactic but a mid-range testing out of a mixed economy model that can serve as a strategic instrument for Central American economic integration on a new note of self-determination and social justice.

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