Nicaragua: from Revolution to Stabilization

Against the Current, No. 25, March/April 1990

Joseph Ricciardi

IN 1988 AND 1989, Nicaragua experienced its deepest economic crisis since the insurrection. The revolutionary euphoria of July 1979 gave way to the cold logic of stabilization as the country confronted three serious economic problems: hyperinflation, unprecedented “peace-time” levels of negative real growth and severe external imbalance.

The revolution’s 10th anniversary was celebrated while in the grips of one of the most thoroughgoing IMF-style austerity programs found in the developing world. Workers and peasants, while most certainly empowered politically, had little to show for it economically as private per capita consumption plummeted 70% from prerevolutionary (1976-77) levels and real wages evaporated to a mere 7% of 1981 levels.(1)

Why has the economy become Nicaragua’s own worst enemy, and how do we account for this trajectory from revolution to stabilization? Does the recent experience of “Nicastroika”—the restoration of market forces, state-shrinking and monetarist contraction—signal the end of the revolution? Or is this really the only available medicine to restore control over Nicaragua’s war-battered economy and to revitalize its state-led model of accumulation?

Internalist vs. Externalist Debates

Recent debate (Keith Griffin and John Weeks)(2) has focused on the relative importance of foreign aggression and domestic economic mismanagement as causal factors in the present crisis. Missing from this cloven interchange is a broader discussion of how the persistence of dependent capitalist productive relations within Nicaragua has created economic tensions inconsistent with the realization of the revolution’s social-welfare goals.

In order to grasp the tragic irony of how austerity and stabilization have now become a condition of existence for the revolution, it is necessary to reexamine the political economy of the Sandinista ‘mixed-economic strategy for revolutionary transition. Though still young, the revolution’s ten years of experience provide ample foundation for such reappraisal of the mixed economy. This analysis need no longer be confined to the purely theoretical realm.

Nicaragua’s mixed economy has clearly survived. The question, however, is whether it can continue to survive in a form that will support meaningful advances in its revolutionary agenda for improving the conditions of life for the nation’s workers and peasants.

Weeks correctly provides an informed perspective on the extent of economic havoc inflicted upon the Nicaraguan economy by U.S. military and economic aggression and properly identifies the historic task of the Sandinistas as one of national liberation. The yardstick of socialism, itself in disarray in the world arena, is hardly an appropriate measure of success for a popular revolution whose primary objective was to end the legacy of foreign domination in Nicaragua. On the other hand, it would be wrong to suggest that such revolutions of national liberation are complete and self-sustaining.

Griffin correctly argues that foreign aggression alone cannot fully explain the ills of the Nicaraguan economy. Solidarity with the Nicaraguan revolution should not preclude open criticism of policy failures in domestic economic management.

But Griffin advances a number of serious allegations that are hard to reconcile with real events. For Griffin, the Sandinistas’ fatal error was to alienate the private sector. In his view, the Sandinistas had promised the world a gradualist mixed economy program but delivered badly managed orthodox state socialism instead.

This breech of confidence with the large capitalists led to a collapse of private investment, necessitating high rates of state investment, which could not be executed productively for lack of adequate managerial talent in the public sector. Indeed, Griffin maintains that the state program was reckless, by simultaneously mobilizing high levels of consumption and investment while fighting a war without provisioning the necessary levels of domestic savings to finance this enormous campaign of state expenditure in a non-inflationary fashion.

In fact, Griffin is not far from laying blame for the contra war, itself, on the Sandinistas, suggesting that the war was endogenous—the internal consequence of statist policies pursued which “helped make effective and sustained opposition by the contra possible?

From a purely economic standpoint, most economists would concur with Griffin that fiscal and financial excess spending by the Sandinista state set the stage, on the demand side, for the hyperinflation crisis of 1988-89.

It is probably true that the Sandinistas attempted “to do too much at once,” though it is also true that much of this excess was simply beyond political control. Popular revolutions characteristically seek to realize pent-up consumption demand when victory is won, and the financial burden of defending such a revolution under the sustained siege of a foreign-financed mercenary war is entirely involuntary.

Certain Sandinista excesses were totally inexcusable, such as the behemoth investments in highly centralized $100 million urban-biased projects that were simply too big for Nicaragua’s meager $2 billion economy. Much of this investment, contracted in the heyday of the 1979-81 economic reactivation, was conditioned on the seemingly boundless availability of foreign assistance.

The Sandinistas can be faulted for not anticipating that external sources of funds would soon dry up as foreign debt trebled (from $1.1 to $3 billion, 1979-82) and the country’s external balance fell into disarray with U.S. maneuvers to block capital inflows.

Nonetheless, Griffin’s suggestion that private investment would have been forthcoming had the Sandinistas simply been less socialist in their economic policy is totally without foundation and reflects a basic misunderstanding of the dynamics of the mixed economy.

Social Costs of Mixed Economy

The fact of the matter is that the Sandinistas went to enormous lengths to provide a “favorable investment climate” for the private agroexport producers. Through price guarantees, exchange rate concessions, direct subsidies, do incentives, and cheap credit, the state paid dearly to induce this powerful group of capitalists to invest their resources and stimulate production, but to no avail.

Intransigent medium and large agroexport producers effectively waged an investment strike that began in 1980. This corresponded politically with the resignations of Alfonso Robelo and Violetta Chamorro from the National Assembly that began the trajectory towards contra mobilization.

For this segment of the national bourgeoisie the only condition for investing their own capital was the relinquishment of political power by the Sandinistas. Short of that, cooperation from the private sector would require 100% financing of investment projects by the state, as well as profit guarantees secured by state protection against exchange rate and terms of trade losses, financed through the Central Bank.

In its 1982 Country Report on Nicaragua, The World Bank was quick to identify the dilemma of the mixed economy–that class tensions arising from the struggle for political control of the state may have damaging economic consequences:

“Although the new leaders openly espouse a Marxist/Leninist ideology… (t)he mixed economy… has left most productive and commercial enterprises in private hands… As was to be expected, the private entrepreneurs reacted negatively to their loss of power … The net result has been a deferral of much private productive investment and a sluggish economic recovery … The Sandinista Government has given the private sector some economic incentives (cheap and, at limes, abundant credit, low wages) but no longer-term assurances or political power.”

The Nicaraguan “mixed economy” is distinct from its counterparts among the European social democracies, such as Sweden, where the business class exercises substantial influence in the state.(3) In Nicaragua,, the private sector remains in control of its property and, consequently, production, but has been stripped of its exclusive political control of the state. This poses a unique set of problems.

First, such an economy obstructs efforts to plan economic activity. When socialist goals are joined at the hip with private control of production, economic performance is left at the mercy of unstable and finally antagonistic class alliances.

This vulnerability is particularly acute in small foreign exchange constrained agricultural economies where the agroexport sector represents the country’s primary source of foreign exchange earnings. These earnings make possible the necessary purchases of imported machines and raw materials vital to the continued functioning of the economy.

In the case of Nicaragua, with the lion’s share of foreign exchange generating production in private hands, plans for state-led economic reactivation could not be executed without major uncertainties and giveaways to the private sector. The resulting web of subsidies, credits, and guarantees came at an enormous expense to the state sector.

Second, the concessions offered to the private sector in exchange for popular control of the state typically produce deficits that end in inflation. During the early 1980s, the Sandinistas successfully orchestrated a temporary reprieve from the inevitable inflationary consequences of such spending compromises through recourse to foreign borrowing.

After 1985, however, the rapid decline of Soviet assistance in conjunction with the mounting spending pressures of the contra war pushed public sector deficits as high as 25% of GDP—more than double the 12% figure that is customarily associated with triggering hyperinflation. The component of these public sector deficits that went solely to foot the bill for the exchange rate subsidies granted to the private agroexport producers ran as high as 8% of GDP in 1986.

Under the system of multiple exchange rates and guaranteed prices adopted in 1982, the state targeted subsidies to agroexport producers by offering a preferential exchange rate (above the official rate) for dollars earned on foreign sales. The preferential exchange rate increased cordoba profits to the export producers, while the Central Bank was left to absorb the exchange rate losses from printing the additional currency necessary to make up the difference from the official rate. While the preferential rate increased the cordoba yield from foreign sales, the private producers also reaped hefty reductions in the costs of imported inputs as a result of the overvalued official rate. Again, the private bonanza was billed to the Central Bank.

Growing exchange rate losses compounded the already burgeoning red ink from deficit finance of the contra war, swelling the consolidated public sector deficit In the absence of developed capital markets, these deficits had to be financed through the monetary emissions of the Central Bank—printing money—which then translated into inflation.

The Poor Pay

With the onset of inflation, the state offered yet another subsidy to large producers by extending credit at fixed nominal interest rates. By 1987 the state was, in effect, giving away credit at negative real rates of interest approaching 900%. This, as well, added to the growing financial burden of the state.

In the final analysis, the gains of the agroexporters were borne on the backs of the urban and rural poor who were unable to defend their earnings from the erosion of inflation that inevitably exploded as the Central Bank was forced to cover an expanding matrix of losses through money emission. The ensuing hyperinflation and economic chaos forced the Sandinistas to retreat from the revolution’s social welfare goals and set the stage for a protracted period of austerity and stabilization.

Lastly, the tensions of the mixed economy spawned a host of enduring productive inefficiencies and financial distortions that contributed to structural damage and later required painful medicine to correct Overvalued exchange rates fostered an even greater dependence on imports by making it cheaper for producers to import new capital goods (such as tractors) than to undertake normal maintenance on the existing capital stock. Over time this produced a dramatic misallocation of capital as producers adopted overly capital intensive imported production techniques that were out of line with the country’s scarce foreign currency reserves.

The vicious circle of monetization, induced by the permanent exchange rate gap between exports and imports designed to subsidize agroexporters, placed upward pressure on the black market rate. This boosted profits for black market operators, drawing foreign exchange away from the state sector.

Growing price differentials between black markets and controlled markets for goods and foreign exchange gave rise to substantial opportunities to reap speculative arbitrage profits in informal sector petty commerce. This instigated the proliferation of a rising class of buhoneros (petty traders) who received as much as 360 times the average salary of waged workers in the state sector.

Labor migration to the informal sector accelerated to the point where 60% of the economically active population was outside the purview of state planning—and for the most part engaged in non-productive activities.

Thus, not only did the Sandinistas go to great lengths to accommodate the national bourgeoisie, but it could be argued they did so at the expense of economic efficiency and at a high cost to workers and peasants. Cmdt., Tomas Borge was aware of this when he argued,

“The bourgeoisie has not resigned itself to losing political power and is fighting with all its weapons … It is no accident that the bourgeoisie has been given so many economic incentives … we ourselves have been more attentive in giving the bourgeoisie economic opportunities than in responding to the demands of the working class. We have sacrificed the working class in favor of the economy as part of a strategic plan.”(4)

What Borge perhaps did not anticipate was the extent to which these sacrifices might serve to undermine the very foundations of the revolution.

For example, policies which targeted redistributive social goals were debilitated when juxtaposed with those intended to benefit the private sector, producing highly regressive distributional results. Wage goods subsidies and price controls aimed at protecting the incomes of workers and the urban poor served, instead, the profit motive of merchant intermediaries while hurting domestic foodstuff producers.

The artificially lowered prices of imported spare parts and productive inputs, instead of promoting increased production, served to enrich black market operators and speculators who diverted resources into contraband trade. The hope of socializing productive relations by means of a growth in public sector employment was diminished by the flight of skilled labor from formal sector state employment into petty commodity and mercantile enterprises which fed off the growing arena of profit opportunities associated with the macropolicy price distortions. These are only some examples of the policy inversions that occurred in the Nicaraguan case.

Limits of the Mixed Economy

The persistence of dependent capitalist production relations in Nicaragua has generated a policy matrix antithetical to the original goals of the revolution. Indeed, much of the financial mismanagement alluded to by Griffin was not accidental, but a politically driven consequence of the class configuration of the mixed economy.

The mixed economy strategy limited socialization of the economy largely to the spheres of commerce and finance The country’s productive apparatus remained predominantly capitalist with nationalized productive assets limited to Somoza’s holdings. While this reduced the initial extent of conflict between the slate and private sector, it has resurfaced to become a source of bitter friction.

The Sandinista objective was to challenge the rule of capital not through the appropriation of private property, but by gaining control over the flow of dollars. By regulating international trade and nationalizing the banks, the Sandinistas sought to plan economic activity with redistributive justice by instrumentalizing control over credit and foreign exchange that was to be achieved by decoding the domestic and world economies.(5)

Substantive economic planning never materialized, however, because the strategy presupposed that private producers would respond positively to domestic profit opportunities with further investment instead of decapitalizing their operations to accounts in Miami in retaliation for the loss of political power at home.

Indeed, so long as agroexport producers view direct control over the state as a necessary condition for investment and retain the vital foreign exchange producing sectors in their hands, it is unlikely that the Sandinistas will be able to achieve lasting redistributive justice.

The Scourge of Stabilization’s Cure

With the onset of the 1988-89 crisis, Nicaragua’s transition from revolution to stabilization was complete. The vicious cycle of distortions had run its course to the point where the Sandinistas had effectively lost control over the economy. Production was paralyzed, imports out stripped exports four to one, and the country was under the siege of a hyperinflation that ranked among the worst ever in world history.

Growing distortions in relative prices incapacitated planners as input prices bore no relation to resource scarcities and overvalued exchange rates distorted beyond calculation the relation between imported and domestic resource costs. if there were to be any hope of avoiding the grossly regressive distributional impacts of hyperinflation (if not a complete unraveling of the revolution itself) the Sandinistas had little choice, in the short run, but to adopt thorough-going monetarist stabilization measures to wring out price distortions and the deficit driven sources of money emission.

If not corrected, these distortions would extinguish all prospects for a transition to socialism and exacerbate the perverse scenario where it is workers and peasants who pay most dearly for the costs of foreign aggression and the failed attempts to rally national capitalists to produce without political control of the state.

While difficult to accept, stabilization became a necessary condition to regain control over the economy—to correct for the country’s accumulated excess demand for inflationary finance driven by state spending on the contra war and costly attempts to manage the policy “knife-edge” of the mixed economy.

Stabilization is by no means, however, a sufficient condition to restore control and reignite the gains of the revolution. Liberalized prices have put basic foodstuffs back on the shelves, but increased reliance on market forces has also raised the spectre of an increasingly divided Nicaragua as market allocation prices the poor out of the economy into subsistence production.

The Sandinistas have most certainly made Herculean strides in damage control and have pulled the economy back from the abyss, but substantive advances towards socialism will require a closer look at restructuring the productive relations of the mixed economy.

Notes

  1. Lance Taylor, Ocampo, et al. Transition from Economic Chaos to Sustained Growth (Stockholm: Swedish International Development Authority. SIDA, May 1989).
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  2. See Keith Griffin and John Weeks in ATC 23, November-December 1989.
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  3. John Weeks, “The Mixed Economy in Nicaragua: The Economic Battlefield,” in Rose Spalding, The Political Economy of Revolutionary Nicaragua, George Allen & Unwin, 1987.
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  4. Tomas Borge, quoted in New Left Review, July/August 1987.
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  5. Bill Gibson, “The Break Up of the Mixed Economy in Nicaragua,” unpublished manuscript, August 1989.
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March-April 1990, ATC 25

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