Slow Motion Toward a Survival Economy

The envio Staff

“TODAY, AFTER SEVEN years of revolution, Nicaragua’s economic order is passing through its most critical period,” concluded the August 27 communique of the Fifth Ordinary Meeting of the Sandinista Assembly, the highest consulting body of the FSLN National Directorate.

A recent public opinion survey in Nicaragua showed that more than three-quarters of those interviewed see the war of attrition as the main cause of the economic crisis. It is also common knowledge that this war will be prolonged, and that the government must therefore begin to include the attrition as a stable component of the country’s economy. A much more interesting aspect of the survey was the economic maturity reflected in the peoples’ responses. A great majority of those polled said that the solution to the crisis lies in increased production; that is, in themselves.

In 1985, the original model of economic reconstruction was adjusted through a series of fiscal and monetary policies and the economy entered a second stage. According to Nicaragua’s Minister of Planning, Dionisio Marenco, these 1985 economic measures (suspension of subsidies, salary increases, currency devaluations, and adjustments in the foreign exchange rates) “no longer respond to the needs that the nation is facing. A third stage-a war economy-is required.”

The National Directorate interrupted its Assembly, initiated in July, to broaden the discussion about the economic crisis. This, plus the fact that more time was dedicated to this annual meeting than to any of the previous ones, underscores the importance that the FSLN leadership is giving to the necessity of forging a new model, one of people’s survival in the face of the war. The fundamental problem is that the government has not yet succeeded in forging it. A real economy of resistance and survival will have to go much deeper than simple appeals to the working class and peasantry to work with more discipline. It will also require more radical measures than mere cuts in the state budget.

The Economic Costs of Contra Defeat

Throughout 1985 and 1986 the Sandinistas have dealt strategic blows to the contra forces of the FDN. These military advances do not mean that the counter-revolution will disappear, but that the Nicaraguan military structures have gained a strategic initiative in the irregular war.

Although it is too early to be categorical, the U.S. Senate’s approval of $100 million for the contras, coming as it did after the World Court’s decision to condemn the United States for its military aggression against Nicaragua, will probably mean greater diplomatic attrition for the United States.

Nonetheless, if the FDN is suffering military attrition and the U.S. government is suffering diplomatic attrition, it is Nicaragua that is paying the economic costs. In this aspect, at least, the Administration’s war can be thought of as a success for Reagan. What the congressional vote means from this perspective is that the U.S. government as a whole has decided to continue with military pressures designed to crush the Nicaraguan economy even more, so as to destabilize and defeat the Sandinista revolution.

Throughout 1986 the economic crisis has been deepening. And the perspectives for 1987 are indeed bleak.

• There is increased flight of the technical professional sector abroad or into commercial speculation and the informal sectors of Nicaragua’s economy.

• Labor indiscipline in the productive sector has grown, due to the reduction of worker repression after the triumph as well as to the elimination of basic incentive mechanisms caused by the drop in real salary levels of the laboring class.

• Inflation in June and July, extrapolated to an annual rate, was more than 1000 percent.

• It is expected that 1986 exports will be valued at less than $250 million, 20% less than last year.

• Without dollars to import productive inputs and without the ability to improve the discipline either of the productive workers or of the technicians and professionals, 1987 can be expected to usher in an even more serious spiral of scarcity and inflation.

The following analysis addresses three sets of fundamental questions:

• What is happening to the foundations of the economy? Has the revolutionary state lost control of the economy? What is causing the current inflationary spiral?

• How will today’s Nicaragua survive economically? How is the population responding to the crisis? What incentives are being used to put on track an economy so hard hit by the war?

• Why has the reorientation of the economy from one of reconstruction and reactivation to one of survival in wartime been so slow in coming? What are the perspectives for Nicaragua’s economic model?

Lost Control of the Economy?

The inherited economic structures, Nicaragua’s insertion into the international labor market, the mixed economy model, and the very social transformations of the revolution mean that the revolutionary state has never been able to gain effective control over the economy. Even during the 1979-83 period, when the reactivation project produced an expansion of the gross domestic product, this was not because the state had control over the economy.

In the first place, the government of a small country in the capitalist periphery could never control the price fluctuations for its raw material exports. It is these fluctuations and not government policies that determine growth levels in the capitalist periphery.

This is particularly true in countries as small and vulnerable as Nicaragua. Between 1980 and 1983 Nicaragua experienced a 31% deterioration in its international terms of trade. Between 1983 and 1985 the gap increased only by another 2%. In this last year, however, the deterioration has again been palpable. In 1985 Nicaragua could buy one jeep with 58 hundredweight of coffee, 128 hundredweight of cotton, or 3.4 tons of meat. In 1986 that same jeep cost 80 hundredweight of coffee, 295 hundredweight of cotton or 7.3 tons of meat.

Faced with this evolution of prices in the international market, the most efficient government in the Third World could not exercise effective control over its economy without eliminating all of its subsidies, cutting all of its social programs, drastically diminishing public sector employment, and increasing repression against the working class. Obviously the political power won by the masses in the new Nicaragua has determined that such bald IMF-style measures are impossible in any economic program of the revolutionary government.

In the second place, a government that only administers 30% of the country’s industrial production and 20% of its agricultural production obviously cannot control economic development through a classic system of centralized planning, Given the political power of the masses and the economic power of the private sector, the only option is to utilize market forces and the social forces within the private sector to orient the direction of economic development.

In the Nicaraguan transition, however, this type of economic influence by the state over the private sector was further limited by the clash of class interests, by the effort to create an economic climate of social well-being for the urban masses who were questioning not only the prerogatives of the capitalists but also of the artisans and peasants, and finally by the fact that Nicaragua was confronting the most powerful country on the planet, which wanted to delegitimize and put in check the Sandinista attempt to achieve economic and political sovereignty.

Finally, the process of social transformation itself makes enormously difficult any type of government control over the economy. Given the Nicaragua of 1979, no model of state intervention could have guaranteed government control over the evolution of the economy.

A model that would have eliminated the private sector, as suggested by the ultra-left groups, would have produced the greatest economic instability, together with the possibilities of U.S. intervention. A mixed economy model that would have favored the peasants, artisans, and small business and commercial interests over the large entrepreneurial groups would have produced a more radical agrarian reform, land takeovers, and a significant disarticulation of the farming sector. Instead of a reactivation of the economy and rapid growth rates in agriculture, Nicaragua would have suffered the hard economic consequences of a period of intense class struggle.

The chosen path was that of a mixed economy that attempted to protect and stimulate the production of the large capitalists, control the mobilization both of the workers and the peasants against their masters, and create a state sector capable of passing export profits on to the people in the form of schools, health centers, and subsidized food and urban services (known in Nicaragua as the “social wage”).

In this third model, the class conflict was held in check by the mediation of the state, but this made it no less real. The growth of a public sector that promoted a rapid growth of social benefits for the whole population and the tremendous burst of popular organizations was not exactly the economic climate that the business owners were demanding. The class conflict began to be registered in decapitalization by these sectors and in the increases of both the domestic and external deficit.

There are two groups in Nicaragua that believed the possibility existed for control over the economy through centralized planning by the revolutionary government. The first is made up of the progressive middle class and technocrats employed in the state sector itself. The second was comprised of the well-to-do, whom it suited to encourage the image projected by the Reagan Administration of a “totalitarian Sandinista government, which exercises total control over the life of the country.”

By profession, the technocrats and progressive middle classes are inclined to rely on schemes of rational control, on administrative efficiency, and on the capacity of government policies to change the course of history. This perspective is much less objective than the common sense perspective that thinks that government functionaries aren’t worth much at all, or the social science perspective that sees government policies more as a product of class struggles and international tensions than as a cause of them.

For their part, the working class and the informal urban sector did not believe that the state controlled the economy, but they did put pressure on the process at the beginning to increase the flow of benefits from the state toward themselves, understanding that this was a right won by a revolutionary people in the insurrection.

Why the 1985 Economic Policy?

The elimination of subsidies for basic consumption items and the currency devaluations of February and March were aimed at stimulating the supply of nationally produced consumer goods as well as exports by offering better prices to the producers. These changes were necessary to maintain the economic activity necessary to sustain the military front and pro cure basic food supplies for the population.

To understand the new measures, it is important to bear in mind that the Nicaraguan private sector is made up in the main of campesinos and small and medium farmers, artisans, and other impoverished producer-sellers. These groups in fact wield more economic power, though in a dispersed form, than the big producers grouped under the umbrella of the Superior Council of Private Enterprise (COSEP). By 1985 the class struggle was leading to profound adjustments in the character of the mixed economy in which these groups were beginning to take the dominant role within the private sector.

The new policies, then, were not intended to strengthen either planning or government control over the economy, but were concessions to the demands of this productive sector in specific and the rest of the productive sector in general. They were a recognition of the need to use market forces to stimulate both state production and private initiatives.

These concessions regarding production dealt a serious blow to salaried workers who did not have family members involved in commerce or small mercantile production. The official prices of essential goods such as sugar, corn, rice, chicken, and cooking oil rose some 400% while salaries increased less than 200% on average. The situation of public employees was even worse than that of industrial workers, since wages for the latter increased between 160% and 180%, while for the former the increase was only 120%.

This explains the current preoccupation of public employees that the state is incapable of controlling the economy. It also explains their constant pressures since early 1985 for higher salaries and increases in different aspects of the social wage.

Leaving aside the technocratic myth about the possibilities of state planning as well as the pessimism of the middle sectors whose disposable income has been drastically reduced, there are positive signs. Economic adjustments and movements among the popular sectors independent of state initiatives offer the possibility of creating a more stable survival economy. Before turning to these tendencies, though, it is useful to analyze in greater detail the results of the 1985 economic package.

What Caused the Inflationary Spiral?

As Table 1 shows, the inflation rate was stable until mid-1985. For this reason, many people believe that the 1985 governmental measures caused the current inflationary spiral. In reality, however, a whole series of problems were crumbling the foundations of the economy without the population realizing it. In particular, it was sagging under the weight of strong subsidies to both consumers and producers. When the government eliminated the subsidies and devalued the currency, the problems provoked by an increasing external deficit fell full force on the population.

A further factor was the new increase in the military budget, which grew from one third to nearly one half of the national budget between 1984 and 1985.

The- government’s attempt to save the working class from the impact of the inflation through wage increases only aggravated the inflation, since the nominal increase in purchasing power to the workers was not matched by a real increase. The revolution could have realized a transference of real purchasing power if it had limited this transference to the productive workers, but it could not resist the political pressure exercised by its own militants who represented nonproductive sectors.

The history of the CATs (Centros de Abastacimiento de los Trabajadores), low-priced supermarkets in which, according to the plan, only workers tied to production could shop, exemplifies how political pressure subverted the state measure. At the beginning, 100,000 CAT cards were given out. By August 10, 1986, the moment in which an effort was initiated to reduce the number of CAT cards in circulation, there were 350,000 CAT card holders. Even retired national lottery sellers had gotten cards.

This sort of expansive policy, not limited to the productive sectors, meant that with each nominal raise in salaries, the working class suffered a new deterioration in its living standard. After the third experience of this, the workers began to criticize any new plan to raise their salaries. This seemingly surprising rejection of more wages was a natural reaction to the enormous expansion of money in circulation, in which some income was channeled toward the producers, but much more toward speculators in the commercial sector.

The City-Countryside Readjustment

The 1985 economic package was not a total failure, as some are inclined to think. It succeeded in beginning to readjust the terms of trade between the city and the countryside and to distribute more productive inputs among the peasantry.

During the congress of the National Union of Farmers and Cattle Ranchers (UNAG) in April 1986, Comandante Jaime Wheelock, Minister of Agricultural Development and Agrarian Reform (MIDINRA), noted that “the campesinos have not only been incorporated actively into the revolution, they now constitute an unfailing dynamic influence, a real power, one of the pillars of the revolution.”

That was not always the case. In fact, until the beginning of 1985 economic policy was skewed against agricultural producers and workers, to the benefit of the urban population. As can be seen in the graph, prices for agricultural products rose in relation to prices of industrial goods and the remuneration of services in the last years of Somoza, owing to the increase in raw materials prices in the international market.

The graph also demonstrates how the revolution reversed the terms of trade, drastically lowering the prices of agricultural products in relation to those of industrial ones. Not until 1984 did the prices of rural products begin to rise again, a result of the scarcity of foodstuffs that the cities began to experience.

The peasantry did not succeed in becoming “one of the pillars of the revolution” in those years because it was not included in this modernization project. The technicians promoting the agrarian policy had little confidence in the peasants, characterizing them as dispersed, backward, and unable to incorporate modern technology and increase production. Between 1979 and 1982 these technocrats oriented their modernization efforts toward the state agricultural sector, where they could control a rapid infusion of capital and new technology on the big lands confiscated from the Somocistas.

Beginning in 1983 the same patterns of modernization were applied in the production cooperatives. Again, the technicians controlled the production plans and guaranteed a modernization of production. There was no real effort to assure that the great bulk of the peasants got the traditional inputs they needed to produce.

In addition, the Ministry of Domestic Commerce’s (MICOIN) distribution project in the countryside succeeded in eliminating the small merchants who exploited the peasantry but did not manage to replace them with state or cooperativized distribution channels to supply the peasantry with the productive inputs they needed.

The result of all this was that proportionally the peasants suffered the reversal in their terms of trade much more than the wealthier producers. For example, cotton and sugar production is fundamentally in the hands of the big producers and the state. In 1984 these producers received 19 and 20 cordobas respectively for each dollar received from the export of their product.

Some 42% of coffee and 95% of sesame cultivation, on the other hand, is carried out by small and medium peasant producers. In 1984 these producers received only 15 and 10 cordobas respectively for each dollar obtained from their harvests.*

With respect to the production of grains for domestic consumption, the prices were equally low. In 1975 a peasant could buy 13 radio batteries through the sale of a hundredweight of com. In 1984 this same hundredweight of corn could not even purchase two batteries.

The new economic policy of 1985 had as a central goal to correct these problems in the agricultural pricing policy. Urban consumer subsidies for basic grains were lifted, and a certain liberalization was permitted in the commercialization of these products in the countryside.

Increases in the prices for their products were correct measures to benefit the peas­ ants, but in the early months of 1985 they did not work as planned, On the contrary, they hurt the peasants even more for the simple reason that they were implemented just as the harvest had been turned over to the merchants, leaving this unproductive sector with windfall profits as the fruit of a policy designed precisely to transfer income from the unproductive sector to the productive one.

In short, during the first months of the 1985 economic adjustments, the peasantry was not only not a revolutionary pillar; it was a social force barely in communication with the technocratic strata that directed the economic policy. In the following harvests the peasants began to benefit from the new policy and from the new terms of rural-urban trade, and their situation improved substantially.

This readjustment between city and countryside has still not borne all its fruits, but it is the key ‘to provisioning the cities and to the way out of the inflationary spiral. Without the support of peasant production and an adequate supply of basic goods, the revolution will never be capable of controlling commercial speculation.

In conditions of scarcity such as Nicaragua is experiencing, the speculators are not a small group of well-off people, but an enormous sector of informal merchants. A majority of these merchants also produce the goods they sell, and do not have enough stock to really engage in anything other than a kind of micro-speculation. They sell what they have at high prices in order to be able to buy productive inputs whose prices are likewise escalating.

Without adequate supplies a vicious circle is created. Industrial workers tend to leave their jobs and move into these micro-speculative activities where they can earn enough to be able to buy the increasingly costly provisions they need, thus lowering industrial production even more.

The government tried to break this vicious circle by increasing workers’ wages, but with insufficient supplies, this only threw kindling on the inflationary fires, increasing the monetary mass without simultaneously increasing the supply of goods.

By raising salaries without being able to guarantee the access of the working class to extremely basic products or to control the political demands coming from the other popular sectors, the 1985 economic measures were too naive. The slogan of equality for the urban population out-shouted the more necessary slogan of prioritizing production and guaranteeing an increased flow of inputs.

In moments of transition, the contradiction between social justice and production of goods does not disappear and can even become more acute, especially in a country suffering a battering war of aggression.

In summary, the government’s lack of boldness in prioritizing the productive sectors leads back to its inability to create a new economic model for survival in wartime. It is the absence of such a model and not some isolated errors in policy which have generated the economic problems since 1982, when the need for a new model was already becoming evident.

Popular Initiatives

Over time, the popular sectors have reacted in three very marked ways to the conduct of the economy by the revolutionary state.

1) Between 1979 and 1982, people were under the illusion that the revolutionary state would be an inexhaustible fountain of benefits. It was a period in which Nicaragua had access to sufficient liquid foreign exchange-that is, dollars not linked to projects or to commercial credits-and did not suffer the weight of the military aggression or the exorbitant military budgets it had to contend with later. The economic model of national reconstruction and national unity was based on the stimulation of strong public spending for a reactivation that benefitted multiple sectors within a very broad class alliance.

2) With the military aggression and the economic crisis in the 1983-85 period, this popular illusion turned into frustration and into strong demands on the revolutionary state to solve the problems.

3) Since 1985 the inability of the state to direct and make compatible the demands of the diverse popular sectors has been provoking the latter to disregard the state and search for effective solutions to economic survival on their own.

While the public opinion poll mentioned above showed that political sup&port to the FSLN has held and has even grown, the same poll revealed a serious criticism of the economic decisions of the revolutionary government. It shows once more that in Nicaragua there is no direct correlation between this economic criticism and the FSLN’s political support.

Although the Reagan Administration dreams of another Chile in Nicaragua, the model of political and economic attrition that preceded the overthrow of the Salvador Allende government is not being repeated in Nicaragua. Unlike Chile, the weapons in Nicaragua are in the hands of the people and there exists no significant political or other civic force that challenges this popular power or is capable of crystallizing the discontent into an anti-Sandinista political movement. The population, then, instead of politicizing the economic crisis in a counterrevolutionary manner, has been looking for its own solutions to it.

These shifts in attitudes have been determinant in the unplanned recomposition of the economy that the population is beginning to carry out. The recomposition does not represent a political mobilization to defend the revolution’s economic flank as much as it does a conglomerate of individual and local initiatives with which to satisfy vital necessities. These initiatives are much more widespread than the examples of worker consciousness that fill the pages of the daily papers: testimonials to having worked more than eight hours, to the creativity of the innovators in creating spare parts, etc.

Meeting Inflation — with Barter

For the past year and a half, while the state was talking about its plans to cut the fiscal deficit and control inflation, the quantity of money in circulation was, in fact, expanding enormously. In response, people began simply to demonetarize the economy to the extent that they could.

At the neighborhood level, an increasing number of transactions are taking place on the basis of barter. Often a seller will not offer his or her product to someone who does not have other products to offer in exchange. In Managua, where more than 45% of the economically active population works in the informal sector of production, in services, or in commerce, nearly half of the population has something to exchange. To assure their own supply of goods, families with access to some type of merchandise or service will simply contract a regular exchange with producers or sellers of other scarce products.

The ones who have trouble with this mechanism are obviously the public employees and workers with families not tied to the informal sector. But even in these circumstances there is a way out.

For example, the wife in one working-class household has managed to construct her own supply network for scarce goods at affordable prices with a series of sellers based on long friendships, constant conversations, and pleading. The Managua markets, which seem so impersonal to the eyes of the outside inspector, are crossed by multiple family and friendship networks.

Meeting State Rigidity: People’s Agility

A second feature of the people’s recomposition of the economy is a series of new forms of popular control over the commercialization and distribution of products.

The old system has been characterized by multiple interventions by the state, by popular organization, and, particularly by merchants and middlemen. The latter have a big advantage over the state, because the size of their operations permits them integral control and a greater flexibility over the negotiation.

On the other hand, the state system has continued to be so inflexible and bureaucratic that it cannot take advantage of the commercial power that its large scale could give it.

There are two reasons for this lack of commercial agility on the part of the state: (1) a centralization of decisions in the ministries which impedes adequate responses to local market conditions, and (2) an exaggerated disarticulation of the multiple commercial functions among the different ministries. In many cases the state system only serves to pass the subsidies on to the merchants who buy at official prices and then resell to the public at exorbitant ones.

The population is very critical, and inclined to give much more weight to illegal sales to merchants by corrupt MICOIN functionaries than the number of cases merits. Such corruption is in fact insignificant compared to the widespread micro-speculation in food by the myriad producer-sellers or by consumers themselves, who, given their own desperate situation, often resell for a profit at least part of the foodstuffs they get, at MICOIN-set prices.

The peasants and workers have taken the lead in pushing against the rigidity of the state system and increasing their own participation and control over the distribution channels. For example, UNAG has created a series of “Campesino Stores” to distribute agricultural inputs to the peasants and to receive their harvests.

These stores are replacing the not-very-well-integrated efforts at rural supply and commercialization by the diverse state institutions such as the National Development Bank, MICOIN, ENABAS (the basic grains storage and distribution system), and PROAGRO (a division of MIDINRA, the agricultural development and agrarian reform ministry). The integral service offered by the Campesino Stores in Regions V and VI have permitted an increase in peasant production of corn and beans and better commercialization of these basic grains toward the city through official channels.

UNAG, urged to respond to peasant needs not satisfied by the state during the past seven years, developed this whole system outside of state efforts. With financial assistance from Sweden, UNAG has been able to create the kind of integrated system of supply and commercialization that was recommended in the first documents and programs of the state project called PAN (National Food Program–Programa Alimentario Nacional). The state was never able to overcome the lack of integration of the various ministerial “fiefdoms” involved in the distribution of the products and the original PAN program was thus never put into practice.

The Campesino Stores are based on a popular dynamism that is really directed at territorial control of all commercial movement. In some places such as San Dionisio (Matagalpa), the Campesino Stores are pushing to integrate the supply channels of MICOIN called PARs (Poles of Rural Supply–Polos de Abastecimien to Rural) into the UNAG organization. This would avoid costly duplication of such services as transportation and storage and would assure that the consumer products in the PAR arrived directly to the peasants instead of being channeled through the multiple circuits of small rural commerce.

At the end of August, cooperatives that produce vegetables on the Carazo mesa began to promote meetings between themselves and other small vegetable growers of Jinotega and Matagalpa and with retailers from Managua, Leon, Chinandega, Granada, Matagalpa and Jinotega, in an effort to rationalize the commercialization of their produce.

This kind of popular effort is born from the base, which is ignoring the state and seeking solutions to its problems through people-to-people contacts. Sandinista militants whose base is made up of peasants and retailers act as mediators bet­ ween the two groups instead of public functionaries.

In Matiguas, an organization of campesino Delegates of the Word has consolidated an organization of supply and commercialization in its municipality. As with UNAG, the campesinos received foreign funds for their organization. When Envio asked the directors of this project which involves more than 8,000 people-if their members wanted higher prices for their beans in order to stimulate production, the response was: “We are contracting with the factories to get clothes in exchange for beans. We don’t want money. We want products.”

The economy as a whole cannot function based on this kind of barter, but at this moment it is one of the basic mechanisms of economic recomposition. Particularly when barter is based on popular organization and efficient transaction bonds appear between the city and the countryside, these new expressions of popular participation can be seen as positive steps in the struggle to gain a new equilibrium in the Nicaraguan economy.

The demand of industrial workers to receive part of their wages in kind is another sign of this same tendency of the bases to insist on more direct control over the process of supply. The state responded to this pressure because it wanted to stimulate direct productive work and stop the stampede of the working class toward the informal sector of the economy.

Although the same workers resell the products that are given to them as wages, it is one way to prevent their real wages from deteriorating so rapidly. It is a step toward the recomposition of minimum conditions for the salarization of work. The efficacy of this policy was somewhat undermined because it was rapidly extended to other, not directly productive, sectors, always in the name of equality. As we saw before, this diminished the desired prioritization of productive labor.

The Association of Rural Workers (ATC) is testing out other mechanisms of popular control over the distribution of inputs. For example, when there is a delay in getting agricultural inputs out of customs at the port of Corinto and such bureaucratic hobbles set back production, ATC sends a commission to Corinto to pressure the customs officials and then mobilizes its cadres throughout the distribution chain, from the port to the farm-whether state or private-to assure that the inputs arrive in time.

The “Dollarization” of the Economy

Nicaragua’s acute lack of foreign exchange for the import of productive inputs and consumer goods has resulted in an illegal dollar market in which the exchange rate for the dollar keeps pushing inflation upward. Given this situation, Nicaragua’s numerous buhoneros have had to compete in the very narrow market for dollars to keep their import operation going.

Buhoneros are licensed individuals who travel back and forth between Managua and Miami or Central American capitals to purchase small quantities of anything from eye shadow to car parts, usually for specific clients such as small retailers, auto repair garages, or even neighbors, friends, and relatives. They pass along the inflated dollar prices to the producers and merchants who are their clients, which enables them to once again compete for the same dollars at even higher prices. In tum the producers and merchants tack on to the final consumer price the exorbitant costs they have incurred in getting these inputs or goods.

The expansion of the money supply in 1985 and 1986 resulted in a continuing upward spiral in the prices of the dollar and of imported goods.

In early 1986, the government deauthorized some 2,000 buhoneros and began assigning dollars to 200 others who sell basic inputs to cooperatives and other formal production units. Since the buhoneros had exercised the key influence over inflation in the illegal dollar market, this measure brought a certain stability to the price of the black market dollar, which has oscillated around 2,100 cordobas for the past six months.

The controls, however, create a new problem because these import peddlers provided an endless variety of inputs to the informal production sector-small industry and household production. On the other hand, many of those who are not authorized now smuggle their imports across the borders, which increases their costs. These factors have counteracted the positive effects, acting as further stimulus to the raging inflation.

In this context an even more direct “dollarization” of the economy has taken place-i.e., more and more business transactions are done directly in dollars. For example, in an attempt to reduce the illegal market, the state has begun to sell certain products in dollars inside the country.

For their part, small producers and informal artisans and merchants, as a survival mechanism, are dealing directly in dollars with the buhoneros. When possible, they charge their customers in dollars, then sell these to the buhoneros at the illegal rate to both augment their income level and pay for the inputs they need to keep their enterprises going.

Purchases in dollars for a whole series of products are becoming more and more frequent. One area of the economy where this has become predominant is the real estate and housing market. The buying and selling of houses, both in the fancy residential neighborhoods and in the poorer ones, is carried out almost completely in dollars. With the present rate of inflation it is not feasible to sell a house in cordobas, because the cordoba can be devalued by 70% in the three or four months it takes to complete the purchase.

This matter of the dollarization of the economy can lead to false moralistic homilies. It is important to emphasize that the amount of dollars used by Nicaragua’s upper classes, or by diplomats and foreign journalists, does not have as much weight in the economy as those spent by the broader masses of people.

A significant amount of dollars are sent to Nicaragua through private channels by relatives living outside the country. Thousands of Nicaraguans settled in the U.S. before the 1979 triumph of the revolution, and since then the war and the economic crisis have led to the migration of many thousands more from all social classes. According to some estimates, these private remittances may amount to about $50 million a year.

In today’s Nicaragua, the $25 a month that a domestic employee gets from her aunt in Los Angeles is the lifeline that enables her whole family to survive. She earns 20,000 cordobas a month on her job, and the $25 gets changed into more than 50,000 cordobas. Another example: on a minimum salary of $4 an hour, a relative in the U.S. in one day earns the equivalent of the monthly salary of the head of a government department in Nicaragua.

These dollar injections provide the foreign exchange for a large part of the imported inputs used by the informal sector. Without this kind of dollarization of the economy, a link in the production of thousands of items and services would have disappeared, given the acute scarcity of foreign exchange evident since 1983. The dilemma, then, is that the state is trying to curb the inflationary flow of dollars outside state channels, while large sectors of the population depend for their survival precisely on that flow of dollars.

There are two ways in which the state has tried to absorb some of the dollar flow: (1) by buying and selling dollars in the official exchange houses, and (2) by selling certain luxury items in dollars.

The exchange house is an official agency which tries to compete with the illegal dollar market by offering a legal rate (now at 1400 cordobas to the dollar) that is much higher than the official government rate, though far below the illegal price (currently 2,300 cordobas to the dollar). The exchange house takes in about $12 million per year.

Although these governmental efforts have been positive, all of them taken together have not been able to take in even a quarter of the dollars circulating in the illegal market. In the final analysis, the dollarization of the economy is not an evil in itself but rather a normal adjustment to the spiral of inflation that began in early 1985. More troublesome is that the people have clearly moved ahead of the state in getting hold of prices and giving direction to other basic economic mechanisms.

Initiatives by the FSLN — and the State

The state has not been completely passive, however. One example of the coordination of state programs at the base level is the so-called “territorial enterprise.”

Pueblo Nuevo valley in Esteli, for instance, FSLN militants developed programs to take care of cattle, providing the workers in state companies, those in cooperatives, small businesspeople, and independent peasants all the services which the territorial enterprise offers for cattle raising. Another example is the Carazo mesa, where they directed state support to all coffee producers, offering supplies of production inputs, food and clothing for the workers and their families, and technical assistance for the storage and marketing of the coffee.

This kind of service is something new for the state. Given the more “enclave” nature of the state’s production program until now, in which there was a tendency to invest heavily in a few enclaves of state production or in production cooperatives where it could exercise central planning, the state affected only 30% of production. The great mass of producers-artisans, in­ dependent peasants, small businesspeople, or workers in the farms or factories of the bourgeoisie-were not included among the priorities, of the state’s efforts.

The main objective of the territorial enterprise, then, was to put together the minimal conditions so that salaried productive work can be a real survival option for the rural family. The workers’ unions pressured heavily for cooking oil, sugar, rice, and clothing as well as for access to a small plot of land for the production of corn and beans for the family. For their part the workers made a commitment to increase the workday and the quality of their work in cultivating the crop.

At the same time the territorial enterprise included peasants, businesspeople, and members of cooperatives in its pro­ gram so that they could have possibilities of expanding their coffee production. In Carazo, the same services of the enterprise were extended to the producers of fruits, vegetables, and basic grains. During 1984-85 alone, the fruit plantations on the mesa grew by 1,200 manzanas.

In these instances government action has arisen as a response to projects already begun by FSLN militants at the base level. What happens is that the party militants who have lived closer to the problems of workers and peasants are in touch with other party militants who work in local offices of the various state departments; the former manage to spark an enthusiastic response from the latter and get their support. These experiences have shown that the moral authority of the FSLN leaders at the base level can break down the bureaucratism of the various departmental fiefdoms and catalyze the development of coordinated state programs.

By early this year, the coordination of state action was consolidated under the lie. Before that happened, such initiatives at the base level tended to collide with the various state offices.
It is important to emphasize that serious local initiatives are the fruit of long years of work with the workers and peasants at the base level. In the Carazo mesa and in Masaya the movement for access to land and to state credits and technical assistance put into effect by the poor peasants is the material and organizational base of the territorial enterprise of the mesa.

While the enclave model encouraged the slogan “don’t raise people’s expectations if we can’t respond,” the militants working at the base level in Carazo put forth an explicit policy of raising expectations. Because of their friendship with the workers and peasants, they knew what those expectations would be, and they also knew what the market conditions and the real possibilities of organization were, all of which made it possible to give adequate responses to the movement.

Around the middle of 1986 MIDINRA began to launch pilot programs involving territorial enterprises in all regions of the country. It is obvious that material resources are not sufficient to allow the application of this model to the whole economy. Moreover, it is important to recognize that perhaps the greatest scarcity lies in the area of human re­ sources-leaders who are qualified politically and technically to work well with the masses. They are the key elements for the implementation of this kind of territorial enterprise.

All of these seed-experiences give reason to hope that there will be further development of a model of people’s survival in wartime. Without it, the new experiments in state action arising from the bases of the Sandinista movement cannot have their fullest possible impact. Lacking a context for these experiments within a national dynamic, the people’s initiatives, creative but very scattered, are lost to the four winds. These efforts must be channeled and put together for survival.

What Space for Maneuver?

As the Sandinista Assembly recognizes, there is plenty of room to take action within the Nicaraguan economy despite the fact that the basic problems-beginning with the war-are of outside origin. The scarcity of liquid foreign exchange basically pressures the country to ad­ minister its domestic resources better and to make the best possible use of the foreign resources it gets.

Although the U.S. government has managed to interrupt the flow of liquid foreign exchange to Nicaragua, it has failed totally in its attempt to isolate Nicaragua economically within the region. One example of this failure can be seen in the meeting held by the Central American ministers of economy this month, in which they signed contracts to renegotiate the Nicaraguan debt in their respective Central Banks and thus facilitate the continuation of commercial exchange among all the countries of the area, without excluding Nicaragua.

Structural & Ideological Obstacles

The FSLN has had to face serious obstacles in trying to develop a survival economy-e.g., the inflexibility not only of the social structures inherited from the Somoza era but also the unbending nature of the ideological models consolidated during that regime.

As analyzed above, the revolutionary movement, having overthrown the Somoza dictatorship, inherited a society with a profound imbalance between city and country. Under Somoza the idea had been to modernize the productive base and develop the productive forces for the incorporation of advanced technologies, particularly in agro-exports and agroindustry. This left the productive forces of the peasantry on the margin while concentrating development in modern enclaves, mainly on the Pacific coast.

The exploitation of the peasants and the transfer of resources from outside the country -through loans which meant greater indebtedness–had led to one of the most pronounced processes of hyper-urbanization in the whole hemisphere. This rapid transfer of population and resources to the cities created another imbalance-this one between the productive and nonproductive sectors of the cities.

After the triumph, the FSLN responded generously to the demands of its main social base, the urban poor, further aggravating the imbalance between the productive and nonproductive sectors of the cities. Moreover, the political necessities of a national alliance demanded that the agrarian reform move at a very slow pace.

Even more significantly, the national economy had to be rebuilt with technical personnel trained under the dictatorship. The economic models available in 1979 were more a reflection of the frustrated aspirations of those technocratic strata than expressions of the required structural transformation of the economy.

It is now obvious that the investment effort exceeded the economy’s capacities. Productive growth has not been sufficient to sustain such an expansive investment policy. In addition, it precluded capital replacement necessary to keep the normal movement of the economy going.

Year after year there was a sharply growing demand for all kinds of productive inputs and for the replacement of machinery, not only in the sector of small and medium industrial production but also in that of the big national industry whose physical plant was deteriorating because the priority was placed on new investment projects. This accumulated demand has been one of the main engines of inflation.

In the interior of the country, the deterioration of the peasant economy was becoming the main point of the counter-revolutionary ideology. There, certain investments would have enhanced peasant labor in projects designed to incorporate new lands into the production of grains and other foods, intensifying the use of labor instead of imported capital. But the modernization model got in the way. The Pacific coast region received 76% of the investment. Finally, this de-emphasis of the peasant sector led to a further increase in migration from country to city, aggravating even more the inherited problems and imbalances.

Only a minority of the Sandinista activists had worked among the peasants; the vast majority had been forged in the fire of the urban guerrilla experience. The technical experts in the agricultural sector had even less understanding of the peasants.

Although the Sandinista movement has very original characteristics in terms of its political, ideological, and cultural strategies, the guerrillas did not come down from the mountains or emerge from urban guerrilla warfare with a very original economic strategy. Rather, they had to work with the model the technocrats had absorbed from the way of doing things under Somoza and from dependency on the U.S.

Moreover, they themselves were attracted to the grand socialist ideals of developing the productive forces and creating a working class with a high level of technical and political sophistication. Because the inherited modernization model was superficially compatible with these ideals, it held a certain appeal even for the Sandinista guerrillas.

The revolutionary leadership’s visions of structural change and people’s participation were converted time and time again into repetitions of the old economic model of modernization, urbanization, and excessive use of technology.

The FSLN has worked creatively, like a shoemaker who keeps patching up an old pair of shoes. It is not that the FSLN has a dogmatic interest in the old paradigms and models but rather that, as in the case of the shoemaker and his patchwork, it still does not have in hand the materials and design to make new ones. Furthermore, the short-term perspective imposed by the war clearly works against any bold project of throwing out the old shoes in the hope of quickly finding a new pair.

Despite the fact that both the 1985 and 1986 economic plans recognized the need to put a priority on investment in repairs, in equipment maintenance, and in productive inputs for the peasantry, for ex&ample, still more than 80% of the state investment program was for highly sophisticated and long-term projects. This slowness in adjusting the government investment program to the new conditions brought about by the war can be synthesized into two causes:

1. Many of the foreign credits are already designated for a certain use within the old investment model. A campaign of international economic diplomacy would be required in order to be able to convert projects financed according to the old model into projects of economic resistance for wartime.

2. Although Sandinista leaders, both at top levels and at the base, are aware of the need for a new strategy of economic resistance involving a greater degree of people’s mobilization, the masses’ criticism has had a slower impact on the technical and administrative strata of the state. In their hands the new project of wartime resistance ends up being a carbon copy of the old models with solutions that involve modernization, high costs, and enclaves.

A survival economy means above all the capacity to move food supplies to the army and to the cities without spending vast sums on imports. It means consolidating the alliance with the peasants. The challenge of overcoming the main barrier to the creation of this model-the structures and ideology inherited from the old society that favored agro-exporters and city-dwellers over the peasants-involves a profound transformation of the structure of economic power. It involves the kind of new styles and programs of action that are taking place in the Carazo mesa, where the new people’s organization and the new organizational designs have been making it possible to displace the better-off classes without any loss in the level of production.

The Economic Challenges of the Process

The economic challenges for the revolutionary process at this time are of two kinds: (1) structuring public expenditure to be able to finance the war without adding to the deficit, and (2) refashioning the economy according to a new pattern of people’s resistance and survival.

1. Any project to restructure public expenditure means passing along a greater share of the costs of the war to someone-some class, social group, or sector of the government. The fiscal deficit must be reduced even further by eliminating subsidies, cutting back on public spending, or eliminating investment programs. Only in that way can the printing of new cordobas be reduced, the expansion of the money supply controlled, and inflation reduced.

It is technically possible to substantially reduce the deficit and to begin a real fight against inflation. The problems that get in the way of making these reductions are basically political.

There are various options for making these cutbacks. The first would be to restrict the investment level, especially in long-term investments. Investments, amounting to 17% of the gross domestic product, exert heavy pressure on the economy. Cutting back investment by one third would have an enormous impact (6% of the gross domestic product) on the ability to reduce the fiscal deficit. Even with such a cutback, the country would still enjoy a 12% investment rate, which is very high.

The main challenge is to be able to reduce the fiscal deficit and to keep up military defense, without cutting back even further on people’s consumption.

When people criticize the state functionaries as privileged persons or as a new class, there is an objective basis to this to the extent that high levels of investment are maintained at the cost of people’s consumption. It has become clear that raising salaries in order to avoid cutting back on investment levels ends up having an even more negative effect on the standard of living of the people as a whole.

Government planners looking for ways to reduce costs are also taking an approach whereby the army may begin to produce for its own basic food needs. This project could reduce the military budget by 10% (meaning a 5% reduction in the total government budget).

There are still very heavy subsidies for sugar, milk, cotton, etc. In some cases, like that of sugar, the subsidies are more of an incentive for the producers in a hostile international market than a real defense of the consumer. At present it costs 12 (U.S.) cents to produce a pound of sugar. People buy that pound at 4 cents, and the state pays the subsidy of 8 cents, while the same pound of sugar could be imported at 5 cents. Part of the solution would be greater flexibility in adjusting to the changes in prices on the  international market. Sugar has gone down, for example, but sesame is now getting a good price. It should be possible to use the equipment and labor of the sugar companies to produce and export sesame and then import the sugar. The U.S. war which seeks to put the Nicaraguan economy flat on its back does not allow the luxury of maintaining production structures that are inefficient in international terms and with high-cost subsidies that only fuel inflation.

Much thought has been given to a more coordinated administration of productive systems, such as that of sugar or cotton. The activity would be administered like a company, in order to avoid the splintering of production and marketing by the involvement of several governmental departments.

3. The second challenge facing the economy at this point is as important as the first. Just cutting back on the public spending in order to pass those resources along to the productive sector which can respond in the short run with profitable production is nothing other than the basic program of the International Monetary Fund for restoring the economies of the Third World. It means asking the working people to go hungry until the producers increase their profits and production levels go up. This prescription works against the people.

4. To overcome it, perhaps the most important challenge is to put into effect on a wide scale a new model in which the workers become the active force in the transfer of resources from the non-productive and inefficient sectors within the state toward programs of production of basic goods which allow the people to survive a war against the economy. What is needed is the mobilization of the people for their own survival, and nothing less.

The key economic challenge for the revolutionary state is to know how to give direction to all the disparate efforts of the people in their effort to rebuild an economy so sorely affected by the war.

*Information from the Nicaraguan Bank and the Ministry of Foreign Commerce, elaborated by CIERA.

January-February 1987, ATC 7