Nicaragua: Observations on Economic Policy

Keith Griffin

“What is new for our revolution at the present time is the need for a ‘reformist,’ gradual, cautious and round-about approach to the solution of the fundamental programs of economic development. The greatest, perhaps the only danger, to the genuine revolutionary is that of exaggerated revolutionism, ignoring the limits and conditions in which revolutionary methods are appropriate and can be successfully employed.”—V.I. Lenin(1)

THE SANDINISTA REVOLUTION of 1979 transformed the polity and economy of Nicaragua. Dictatorship was replaced by a more democratic and participatory political system and the “repressive agro-export model” of development of the previous three decades(2) was replaced by a model based on socialist principles.

No one concerned with justice, equality or the alleviation of poverty should weep over the passing of the Somoza regime. The Nicaraguan version of an agro-export model of development resulted in peasants being forced off the land and an increasing proportion of the cultivated area being held by large estates. The process of polarization went so far that by 1910 it is estimated that the poorest 50% of the population consumed less than 1800 calories per capita per day.

Growth did indeed occur, at least between 1950 and the early 1970s, and rates of investment were in general quite high, but the growth that occurred was accompanied by impoverishment and increased inequality.

The crisis of the repressive agro-export model was precipitated not by the impoverishment of the peasantry and an intolerable increase in inequality but by a decline of the economy into a depression in the early 1970s and a sharp fall in the average income after 1976.(3) This produced conflicts within the propertied class and made it possible to form an alliance among disaffected groups of the property-owning class, intellectuals and other members of the urban elite and a majority of the urban and rural poor.

This alliance eventually was able to destroy the Somoza regime and to do so with relatively little difficulty as compared to the long and violent struggles that took place, for example, in Algeria, Vietnam, Angola and Mozambique.

The Sandinista government that followed the revolution expropriated the properties of the Somoza group and its allies, and as a result by 1980 the state owned the entire banking system, half the agro-processing facilities, one-third of the manufacturing capacity, one-fifth of the cultivated land and all of the construction, now transport, fishing and forestry industries. In addition, foreign assets in mining and bananas were nationalized and compensation agreed with the previous owners.

These changes in ownership meant that the state acquired direct responsibility for enterprises accounting for about 40% of GDP.(4) That is, the state clearly owned and controlled the commanding heights of the economy and was well poised to launch a socialist strategy of development.

The State’s Objectives

Centralized planning was introduced; multiple exchange rates were adopted; the nationalized banking system was used to guide credit to projects and sectors of high priority foreign exchange resources were allocated centrally. Other controls were used to regulate the private sector. Thus if socialism is equated with planning and public ownership of the most important means of production, Nicaragua became a socialist country. The government, however, always said that its intention was to create a mixed economy.

Looking back on the early years of post-revolution Nicaragua, it is evident that the Sandinista government intended to use state power to achieve two major objectives. The first was to re-allocate resources toward the poor, largely in the form of state-provided services. There was a considerable expansion of health, education, nutrition and literacy pm-grains. Attempts were made to foster popular organizations (although they functioned poorly), and some effort was made to liberate women arid, later, meet the specific demands of the minority Indian populations.

This “basic needs” component of economic policy certainly led to an initial improvement in the living conditions of the poor, although as we shall see, the improvement would not be sustained.

The second objective was to establish the state as the engine of growth by its assuming responsibility for capital formation, and presumably for maintaining it at the relatively high levels characteristic of the early agro-export model of development. This objective also was achieved but only in the limited sense that state investment rose sharply while private investment collapsed. Indeed in 1984-86 private sector investment amounted only to 3.4% of gross domestic product, clearly not enough to maintain the existing stock of private-sector capital in good working order.

State investment, moreover, was channeled toward projects with long gestation periods and was characterized by low efficiency.(5) The large textile combine at Esteli, the huge “Victoria de Julio” sugar refinery and the deep water port on the Atlantic are examples of large, slow-maturing, inefficient investment projects with negligible (and even negative) rates of return. As a result of projects such as these the contribution of state investment to growth was lower than it might have been.

Some may be tempted to argue that a collapse of private investment is, if not inevitable, certainly to be expected when a left-wing government takes power. The argument is suspect in principle since private investment—including investment by small peasant landowners, small businessmen, traders and merchants in the informal sector—depends largely on profit expectations and there is no reason to assume that left-wing governments inevitably are hostile to all forms of private property or inevitably damage profit expectations.

On the contrary, an improved distribution of income and other measures introduced by a left-wing government might in some circumstances raise the rate of return in, say, that part of the private sector producing wage goods and hence might actually stimulate private savings and investment. More important in the present context, the argument was never made by the post-revolution government in Nicaragua, which always claimed that its policies were designed to build a mixed economy with a significant private sector.

Failures of State Control

The 40% of GDP represented essentially by Somocista property proved to be more than the state could handle efficiently, and it was foolish of the government to take on the additional responsibility for virtually all investment in the country. Much would have been gained by being more conciliatory toward non-Somoza property owners. At the very least, state-acquired agricultural land should have been redistributed to the peasantry rather than organized into state farms, and incentives to save and invest in agriculture should not have been destroyed.

While in the event the state did assume responsibility for maintaining a high level of investment, it appeared to take no responsibility for generating the high level of savings necessary to finance that investment. This was a fatal error. Gross domestic savings fell from 18% of GDP in 1965, during the expansion phase of the agro-export model, to -2% in 1986. This is to say, in 1986 Nicaragua was dependent on foreign aid and loans to finance 100% of its investment program (equivalent to 19% of its GDP) plus a portion of expenditure on private consumption and government services (which together accounted for 102% of GDP).

It is no excuse to blame the decline of savings on unanticipated and unavoidable happenings—the emigration of sections of the capitalist class, capital flight, and the like. Such problems could in fact have been anticipated and at least partially avoided by the leadership; they should, for example, have learned from the fatal errors of Allende’s Chile as well as from the experience of Cuba, which at least succeeded in “forcing” households to save and in “suppressing” inflation, although at considerable coat in terms of a misallocation of resources.

Financial mismanagement in Nicaragua was so serious that by 1984 the government deficit was about a quarter of total output. Not surprisingly, by 1985 inflation was running at 300% a year, rising to 600% in 1986.

The two objectives of government—increasing the volume of state-supplied services and gaining control over investment—were achieved at very high cost. The terms of trade were deliberately turned against the peasantry. As a result, food supplies in the towns declined and overall food and total agricultural production per head declined. Credit, input allocation and capital investment policies discriminated against small-scale producers, be they peasant farmers or small urban establishments engaged in petty commodity production.

Conversely, there was a pronounced bias in favor of large-scale production, be it in the state or even in the private sector. There was also a bias against private commerce; the government preferring instead to create a state monopoly of trading in rural areas combined with state supermarkets, food rationing and factory commissaries in urban areas.

The net effect of these policies was adverse to the poor. The bureaucratic style of economic management also resulted in enormous inefficiency. Exports were penalized while imports (for use by the government) were subsidized. As a result, exports fell from 29% of GDP in 1965 to 14% in 1986. Indeed, the volume of exports declined in absolute terms. Prices became so seriously distorted that at one time “the street-price of unobtainable tractor tyres was higher than the official price of a tractor” (Irvin and Croes 1988, 38).

To be fair, economic policies were modified in late 1988; largely because the war against the contras forced a change in approach. The war of course increased the pressure of demand on resources and put the economy under even greater strain. Spending on defense and security rose from about 6% of GDP in 1980 to 21% in 1967 (FitzGerald 1988, 22). Had these additional resources been available to finance investment rather than armaments, domestic savings would have been a respectable 12%-14% of GDP rather than negative.

The challenge to the regime by the contras thus severely aggravated the economic situation, but it must be stressed that poor policies and the consequent poor performance had made it much easier for the contras and their foreign backers to challenge the revolutionary government. The war, in a sense, was partly endogenous: a political consequence of the economic policies that were pursued.

I do not seek to minimize the effects of the civil war on the economy, nor to absolve the United States of responsibility for conducting a campaign of economic sabotage and financing the military adventures of the contras. No one who lived through the era of the Vietnam War can have any Illusions about the devastating consequences of external intervention on poor countries struggling for development.

My point is a more limited one, and undoubtedly highly controversial, namely, that the misguided economic policies followed by the post-revolution government in Nicaragua helped to make effective and sustained opposition by the contras possible. It is also likely, incidentally, that the opposition by the contras accounts in part for the changes in policy introduced in 1983.

The modified policies adopted in 1983 included price and credit policies less unfavorable to peasant producers, diminished emphasis on state farms (which actually declined to 13% of the arable land) and greater emphasis on redistribution of land to cooperatives and individual households, and more favorable treatment of urban trading and industrial cooperatives. Thus some of the bias against small and poor producers was removed.

Considering the period as a whole from 1980 to 1986, there can be no doubt that economic performance left a great deal to be desired. General government expenditure (presumably including spending on armaments) increased a year in constant price terms. Private consumption in contrast declined 9% a year or by 114% per year per head of the population. Gross investment increased only 0.2% a year, net investment also certainly was negative and the growth of investment per capita was heavily negative.

Food production per head was 24% lower in 1986 than in 1979. Real earnings per employee in manufacturing fell 9.2% a year (1980-85). Output per head declined in agriculture, industry and in services, so that the aggregate rate of growth of GDP per capita from 1980-86 was -3.2% a year. The high promise and good intentions of the Sandinista revolution evidently remain unfulfilled.

The revolutionary government tried to do too much at once. It was too ambitious, indeed reckless. It attempted simultaneously, first of course, to fight a wax; second, to take over responsibility for maintaining a high rate of investment; while third, shifting consumption in favor of state-supplied basic goods and services for the poor. The resources the state could command clearly were inadequate to achieve these three objectives simultaneously and even with substantial foreign assistance, two of the objectives were only partially achieved.

The contras have been defeated on the ground and in the international political arena,(6) thus the first objective has been largely attained, although it is not impossible that at some point the United States will renew its military support for the contras. Gross investment has remained quite high, but the efficiency of investment has been terribly low and hence the contribution to output has been meager. Consumption was shifted from the private to the public sector, but the initial gains to the poor were soon eroded and thereafter living standards have fallen precipitously.

The specific economic policies adopted were in practice anti-peasant, anti-trader and anti-private, a common but unholy trinity in many socialist countries. Viewed another way, economic policies were pm-urban, pro-state and pm-large scale production. The resuits, sadly, were negative growth rates of production per head, a decline in exports and an acute shortage of foreign exchange, a collapse of domestic savings, soaring inflation, a precipitous fall in private household consumption and increasing hardship for all members of society, including of course the poor, the initial beneficiaries of the revolution.

No one, to be sure, would want to turn the clock back and impose again on the people of Nicaragua the repressive agro-export model of the Somoza era,, but present policies, for very different reasons, are equally unsatisfactory. Nicaragua’s difficulties are not an inevitable consequence of the attempted transition to socialism; they are a consequence of serious errors committed admittedly under extraordinarily difficult circumstances.

But the outcome could have been different as indicated by the experience of Lenin’s “new economic policy’ in the Soviet Union, by the rapid economic recovery enjoyed in the immediate post-liberation period in China and by the relatively smooth transition in Algeria from a colonial to a socialist economy.

Nicaragua can perhaps learn from the history of other countries that have passed through similar episodes in their national life—and from Lenin’s words of 1921, quoted at the beginning of these observations. Now that peace or something approaching peace appears to be just round the corner, the reconstruction of the country’s economic policies has become an urgent task I wish the people and their government well.

Notes

1. V.I. Lenin, Collected Works, Vol. 33 (Moscow: Progress Publishers) 109-11, cited in Roy Medvedev, The October Revolution (London: Constable, 1979) 186.
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2. Solon Barraclough, A Preliminary Analysis of the Nicaraguan Food System (Geneva: UNRISD, 1982).
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3. The depression was so severe that during the fifteen years from 1965 to 1980 the average rate of growth of Gross Domestic Product per head was .0.5% a year. Output per head rose in agriculture (0.2% a year) and in industry (1.1%), but the decline in output in the services sector (-1.7% a year), reflecting in part the expulsion of the peasantry from the land and migration to the cities, was so great that the average for all sectors fell. (Data in this paper, unless otherwise Indicated, are World Bank, World Development Report 1988 (New York: Oxford University Press, 1988).
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4. FitzGerald, E.V.K., “State Economy in Nicaragua,” IDS Bulletin, Vol. 19, No. 3 (July 1988).
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5. George Irvin and Edwin Croes, “Nicaragua: The Accumulation Trap,” IDS Bulletin, Vol., 19, No. 3 (July 1988).
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6. Moreover, In July 1986, in an action brought against the United States by the government of Nicaragua, the International Court pf Justice In The Hague ruled that U.S. aid to the contras was against international law. The ruling, predictably, was ignored by the United States.
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November-December 1989, ATC 23