Nicaragua - ECONOMY

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Nicaragua - The Economy

THE NICARAGUAN ECONOMY has seen no "business as usual" for almost twenty years. From the mid-1940s to the mid-1970s, high rates of growth and investment changed Nicaragua's economy from a traditional agrarian economy dependent on one crop to one with a diversified agricultural sector and a nascent manufacturing component. Beginning in the late 1970s, however, more than a decade and a half of civil war, coupled with a decade of populist economic policies, severely disrupted the Nicaraguan economy. Extraordinary expenses to support the constant fighting, with its incalculable burden upon the population, the environment, and the country's infrastructure, rendered most economic indicators largely meaningless. Add several catastrophic natural disasters-- an earthquake in 1972, a hurricane in 1988, and a drought in 1989--and five years of a total trade embargo by the United States to the effects of the fighting, and it becomes clear why Nicaragua in 1993 vied with Haiti and Guyana as the poorest country in the Western Hemisphere.

Finding solutions to address the human costs of Nicaragua's wars is the economic challenge facing the government of President Violeta Barrios de Chamorro (1990- ). Those human costs are numerous: the diversion of resources from social programs to the military, loss of agricultural and industrial production, increased misery and widespread hunger, destruction of natural resources and infrastructure, the uprooting of families and communities, and demands for land and resources from internal and returning external refugees. Getting Nicaragua's national economy in order may be the easier part of the challenge. Controlling inflation, adjusting exchange rates, and setting new agricultural and industrial prices and priorities are only first steps. The government faces the even larger problems of endemic poverty and widening environmental deterioration.

The relative optimism of 1990, stemming from the February 1990 election of a politically moderate president and the reconciliation of most armed conflict soon after, seemed to offer a rare opportunity for Nicaragua to build almost from scratch a better future. However, continued political problems and natural disasters in 1991 and 1992 dimmed that initial optimism. The goal of revitalizing Nicaragua's economy in an era of fragile democracy and increasingly scarce resources remained the country's greatest problem in 1993.

Nicaragua

Nicaragua - The Economy - HISTORICAL BACKGROUND

Pre-Columbian and Colonial Era

The first Spanish explorers of Nicaragua found a welldeveloped agrarian society in the central highlands and Pacific lowlands. The rich volcanic soils produced a wide array of products, including beans, peppers, corn, cocoa, and cassava (manioc). Agricultural land was held communally, and each community had a central marketplace for trading and distributing food.

The arrival of the Spanish in the early 1500s destroyed, for all intents and purposes, the indigenous agricultural system. The early conquistadors were interested primarily in gold; European diseases and forced work in the gold mines decimated the native population. Some small areas continued to be cultivated at the end of the 1500s, but most previously tilled land reverted to jungle. By the early 1600s, cattle raising, along with small areas of corn and cocoa cultivation and forestry, had become the primary function of Nicaragua's land. Beef, hides, and tallow were the colony's principal exports for the next two and a half centuries.

The Coffee Boom, 1840s-1940s

Coffee was the product that would change Nicaragua's economy. Coffee was first grown domestically as a curiosity in the early 1800s. In the late 1840s, however, as coffee's popularity grew in North America and Europe, commercial coffee growing began in the area around Managua. By the early 1850s, passengers crossing Nicaragua en route to California were served large quantities of Nicaraguan coffee. The Central American coffee boom was in full swing in Nicaragua by the 1870s, and large areas in western Nicaragua were cleared and planted with coffee trees.

Unlike traditional cattle raising or subsistence farming, coffee production required significant capital and large pools of labor. Laws were therefore passed to encourage foreign investment and allow easy acquisition of land. The Subsidy Laws of 1879 and 1889 gave planters with large holdings a subsidy of US$0.05 per tree.

By the end of the nineteenth century, the entire economy came to resemble what is often referred to as a "banana republic" economy--one controlled by foreign interests and a small domestic elite oriented toward the production of a single agriculture export. Profits from coffee production flowed abroad or to the small number of landowners. Taxes on coffee were virtually nonexistent. The economy was also hostage to fluctuations in the price of coffee on the world markets--wide swings in coffee prices meant boom or bust years in Nicaragua.

Diversification and Growth, 1945-77

The period after World War II was a time of economic diversification. The government brought in foreign technocrats to give advice on increasing production of new crops; hectarage in bananas and sugarcane increased, livestock herds grew, and cotton became a new export crop. The demand for cotton during the Korean War (1950-53) caused a rapid increase in cotton production, and by the mid-1950s, cotton was the nation's second largest exportearner , after coffee.

Economic growth continued in the 1960s, largely as a result of industrialization. Under the stimulus of the newly formed Central American Common Market (CACM; see Appendix B), Nicaragua achieved a certain degree of specialization in processed foods, chemicals, and metal manufacturing. By the end of the 1960s, however, import-substitution industrialization (ISI) as a stimulus for economic growth had been exhausted. The 1969 Soccer War between Honduras and El Salvador, two members of the CACM, effectively suspended attempts at regional integration until 1987, when the Esquipulas II agreement was signed. By 1970 the industrial sector was undergoing little additional import substitution, and the collapse of the CACM meant that Nicaragua's economic growth, which had come from the expanding manufacturing sector, halted. Furthermore, the manufacturing firms that had developed under the tariff protection of the CACM were generally high-cost and inefficient; consequently, they were at a disadvantage when exporting outside the region.

Although statistics for the period 1970-77 seemed to show continued economic growth, they reflected fluctuations in demand rather than a continued diversification of the economy. The gross domestic product (GDP) rose 13 percent in 1974, the biggest boom in Nicaragua's economic history. However, these figures largely represented the jump in construction as the country struggled to rebuild after the disastrous 1972 earthquake. Likewise, the positive growth in 1976-77 was merely a reflection of the high world prices for coffee and cotton.

Positive GDP growth rates in the 1970s masked growing structural problems in the economy. The 1972 earthquake destroyed much of Nicaragua's industrial infrastructure, which had been located in Managua. An estimated 10,000 people were killed and 30,000 injured, most of them in the capital area. The earthquake destroyed most government offices, the financial district of Managua, and about 2,500 small shops engaged in manufacturing and commercial activities. About 4 percent of city housing in Managua was left unstable.

Government budget deficits and inflation were the legacies of the earthquake. The government increased expenses to finance rebuilding, which primarily benefited the construction industry, in which the Somoza family had strong financial interests. Because earthquake reconstruction generated few new revenues, except through borrowing, most of the resulting public deficits were covered by foreign loans. In the late 1970s, Nicaragua had the highest level of foreign indebtedness in Central America.

Most of the benefits of the three decades of growth after World War II were concentrated in a few hands. Several groups of influential firms and families, most notably the Somoza family, controlled most of the nation's production. The Banam�rica Group, an offshoot of the conservative elite of Granada, had powerful interests in sugar, rum, cattle, coffee, and retailing. The Banic Group, so-called because of its ties to the Nicaraguan Bank of Industry and Commerce (Banco Nicarag�ense de Industria y Comercio--Banic), had its roots in the liberal families of Le�n and had ties to the cotton, coffee, beer, lumber, construction, and fishing industries.

The third interest controlling the nation's production was the Somoza family, which had wide holdings in almost every segment of Nicaraguan society. Financial dealings for the Somozas were handled by the Central Bank of Nicaragua (Banco Central de Nicaragua), which the Somozas treated as if it were a commercial bank. The Central Bank made frequent personal loans to the Somozas, which often went unpaid. Although the other financial groups used financial means primarily to further their interests, the Somozas protected their financial interests by controlling the government and its institutions. The Somoza family owned an estimated 10 percent to 20 percent of the country's arable land, was heavily involved in the food processing industry, and controlled import-export licenses. The Somozas also controlled the transportation industry by owning outright, or at least having controlling interest in, the country's main seaports, the national airline, and Nicaragua's maritime fleet. Much of the profit from these enterprises was then reinvested in real estate holdings throughout the United States and Latin America. Some analysts estimated that by the mid-1970s, the Somozas owned or controlled 60 percent of the nation's economic activity. When Anastasio Somoza Debayle (president, 1967-72, 1974-79) fled Nicaragua in 1979, the family's worth was estimated to be between US$500 million and US$1.5 billion.

Legacy of the Sandinista Revolution, 1977-79

By the mid-1970s, the government's economic and dictatorial political policies had alienated nearly all sectors of society. Armed opposition to the Somoza regimes, which had started as a small rural insurrection in the early 1960s, had grown by 1977 to a full-scale civil war. The fighting caused foreign investment to drop sharply and the private sector to cut investment plans. Many government expenditures were shifted to the military budget. As fighting in the cities increased, destruction and looting caused a large loss in inventories and operating stock. Foreign investment, which before 1977 had been a significant factor in the economy's growth, almost stopped. As the fighting intensified further, most liquid assets flowed out of the country.

Although the anti-Somoza forces finally won their struggle in July 1979, the human and physical cost of the revolution was tremendous. As many as 50,000 people lost their lives in the fighting, 100,000 were wounded, and 40,000 children were left orphans. About US$500 million in physical plants, equipment, and materials was destroyed; housing, hospitals, transportation, and communications incurred damages of US$80 million. The GDP shrank an estimated 25 percent in 1979 alone.

The Sandinista Era, 1979-90

The new government, formed in 1979 and dominated by the Sandinistas, resulted in a new model of economic development. The new leadership was conscious of the social inequities produced during the previous thirty years of unrestricted economic growth and was determined to make the country's workers and peasants, the "economically underprivileged," the prime beneficiaries of the new society. Consequently, in 1980 and 1981, unbridled incentives to private investment gave way to institutions designed to redistribute wealth and income. Private property would continue to be allowed, but all land belonging to the Somozas was confiscated.

However, the ideology of the Sandinistas put the future of the private sector and of private ownership of the means of production in doubt. Even though under the new government both public and private ownership were accepted, government spokespersons occasionally referred to a reconstruction phase in the country's development, in which property owners and the professional class would be tapped for their managerial and technical expertise. After reconstruction and recovery, the private sector would give way to expanded public ownership in most areas of the economy. Despite such ideas, which represented the point of view of a faction of the government, the Sandinista government remained officially committed to a mixed economy.

Economic growth was uneven in the 1980s. Restructuring of the economy and the rebuilding immediately following the end of the civil war caused the GDP to jump about 5 percent in 1980 and 1981. Each year from 1984 to 1990, however, showed a drop in the GDP. Reasons for the contraction included the reluctance of foreign banks to offer new loans, the diversion of funds to fight the new insurrection against the government, and, after 1985, the total embargo on trade with the United States, formerly Nicaragua's largest trading partner. After 1985 the government chose to fill the gap between decreasing revenues and mushrooming military expenditures by printing large amounts of paper money. Inflation skyrocketed, peaking in 1988 at more than 14,000 percent annually.

Measures taken by the government to lower inflation were largely wiped out by natural disaster. In early 1988, the administration of Daniel Jos� Ortega Saavedra (Sandinista junta coordinator 1979-85, president 1985-90) established an austerity program to lower inflation. Price controls were tightened, and a new currency was introduced. As a result, by August 1988, inflation had dropped to an annual rate of 240 percent. The following month, however, Hurricane Joan cut a devastating path directly across the center of the country. Damage was extensive, and the government's program of massive spending to repair the infrastructure destroyed its anti-inflation measures.

In its eleven years in power, the Sandinista government never overcame most of the economic inequalities that it inherited from the Somoza era. Years of war, policy missteps, natural disasters, and the effects of the United States trade embargo all hindered economic development. The early economic gains of the Sandinistas were wiped out by seven years of sometimes precipitous economic decline, and in 1990, by most standards, Nicaragua and most Nicaraguans were considerably poorer than they were in the 1970s.

The Chamorro Era, 1990-

The economic policies of Violeta Barrios de Chamorro (president, 1990- ) were a radical change from those of the previous administration. The president proposed to revitalize the economy by reactivating the private sector and stimulating the export of agricultural products. However, the administration's political base was shaky. The president's political coalition, the National Opposition Union (Uni�n Nacional Opositora--UNO), was a group of fourteen parties ranging from the far right to the far left. Furthermore, 43 percent of the voting electorate had voted for the Sandinistas, reflecting support for the overall goals of the former administration although not necessarily the results.

The Chamorro government's initial economic package embraced a standard International Monetary Fund (IMF) and World Bank set of policy prescriptions. The IMF demands included instituting measures aimed at halting spiraling inflation; lowering the fiscal deficit by downsizing the publicsector work force and the military, and reducing spending for social programs; stabilizing the national currency; attracting foreign investment; and encouraging exports. This course was an economic path mostly untraveled by Nicaragua, still heavily dependent on traditional agro-industrial exports, exploitation of natural resources, and continued foreign assistance.

Inspired by the IMF, Minister of Finance Francisco Mayoraga quickly put together an economic "Plan of 100 Days." This plan, also called the "Mayoraga Plan," cut the deficit and helped to lower inflation. Loss of jobs and higher prices under the plan, however, also resulted in crippling public- and private-sector strikes throughout the country. Mayoraga's tenure in office barely exceeded the 100 days of his economic plan. By the end of 1990, the government was forced to abandon most of its freemarket reforms.

A series of political problems and natural disasters continued to plague the economy in 1991 and 1992. The need to accommodate left- and right-wing views within its ruling coalition and attempts to work with the Sandinista opposition effectively prevented the implementation of unpopular economic measures. The government was unable to lower government expenditures or to hold the value of the newly introduced gold c�rdoba stable against the United States dollar. A severe drought in 1992 decimated the principal export crops. In September 1992, a tidal wave struck western Nicaragua, leaving thousands homeless. Furthermore, foreign aid and investment, on which the Nicaraguan economy had depended heavily for growth in the years preceding the Sandinista administration, never returned in significant amounts.

Nicaragua

Nicaragua - NATIONALIZATION AND THE PRIVATE SECTOR

Nationalization under the Sandinistas

Despite initial fears that the Sandinista government would nationalize the economy as was done in Cuba after the revolution, the Sandinista administration pledged to maintain a mixed (privately and publicly owned) economy. All property and businesses owned by the Somoza family or their associates were immediately taken over by the government. Farm workers were encouraged to organize under cooperatives on appropriated land. However, private businesses not previously owned by the Somozas were allowed to continue operations, although under stringent new government regulations.

The Sandinista administration held the right to further nationalize any industry or land that it deemed was underutilized or vital to national interests. Exercising this right, the government made a few "showcase" nationalizations, such as the takeover of the Club Terraza, a nightclub in Managua. In general, however, nationalization was concentrated in the banking, insurance, mining, transportation, and agricultural sectors. During the eleven-year tenure of the Sandinistas, the private sector's contribution to the GDP remained fairly constant, ranging from 50 percent to 60 percent.

Privatization and the Private Sector

To win the February 1990 election, Violeta Barrios de Chamorro promised to represent all sectors of Nicaraguan society, including the small but powerful private sector with which she was closely identified. Nicaragua's private sector, mostly organized under the Superior Council of Private Enterprise (Consejo Superior de la Empresa Privada--Cosep), was instrumental in President Ortega's electoral defeat. Private industry had suffered heavy losses during the struggle to overthrow the Somoza regime and then fared even worse during the decade-long administration of the Sandinistas.

Nicaragua's private sector also was gravely affected by the five-year United States trade embargo directed at destabilizing the government of President Ortega. One year after the trade embargo began in 1986, the government had already shifted much of its economy away from dependence on trade with the United States. The private sector, which in 1985 produced 56 percent of the GDP and 62 percent of Nicaragua's most important exports, suffered from diminished credit and from cost increases and delays for essential supplies.

The private sector had led the political and military opposition to the Sandinista government. By election day 1990, the Nicaraguan private sector held high expectations that it would benefit from a change in government and that it would be compensated for the injustices it felt it had suffered during the Sandinista years. Privately owned factories and land had been confiscated, abandoned, or shuttered or had suffered war damage during the Sandinista era. Private industry looked to exercise the political and economic power it had enjoyed under the Somoza administrations. The private sector also hoped for a return of nationalized property and privatization of government assets still dominated by representatives of the Sandinista government.

In some cases, rehabilitation of the factories and firms required only reactivation of idle capacity; other assets, however, including both agricultural and industrial machinery, had frequently deteriorated beyond repair. In some cases, assets had been deliberately destroyed or sold. Much of the Nicaraguan private sector remained on the sidelines in 1990, waiting for the government to lure it with promises of security for its investments and of repair of private property at public expense. The Nicaraguan industrial sector showed only a mild 3 percent recovery by the end of 1990, mostly as the result of renewed access to overseas markets. Threats of urban labor unrest, renewed hostilities in the countryside, poor infrastructure, political tensions, and delays in passage of property laws returning private property to previous owners continued to discourage most investment. A leery and still belligerent private sector stood ready to turn its political struggle against the new Chamorro government and to do battle with labor unions and other groups identified with the Sandinista revolution.

In 1990 the government initiated a privatization effort to transfer more than 100 of Nicaragua's 350 state-owned companies to private ownership. The process included the outright sale, devolution, or liquidation of assets. The government holding company established to privatize state-owned assets initially identified forty companies to be sold within six months and an additional fifty to be returned to their previous owners or liquidated at a later date. Industrial workers would later negotiate retaining 25 percent ownership of enterprises sold, based on a claim of value added, or "sweat equity," during the Sandinista period.

State-owned enterprises contributed about 40 percent of the gross national product (GNP) in 1991. Most state- owned enterprises were former Somoza properties, although some had been confiscated under agrarian reform from absentee owners or from the Contras. The government also agreed to give back 50,000 hectares of fifty-six rural properties provided that owners pay for improvements made during the revolution. Another 70,000 hectares went to workers, former army officers, and demobilized Contras.

By mid-1992, the government of Nicaragua had also returned two slaughterhouses to their previous owners and sold a third. The government privatization company tendered bids for the administration of two of the largest shrimp processing plants in the country, one located in Corn Island and the other in Bluefields. A bid was also sought for the sale of a ship manufacturing and maintenance plant in Bluefields.

The Issue of Land Ownership

The expropriation of lands owned by the Somozas in 1979 left the new Sandinista administration holding about 20 percent of the country's arable lands. At first, these holdings were turned into state farms. In 1981 the administration passed the Agrarian Reform Law defining the process of nationalization and stating what could be done with expropriated land. The law guaranteed property rights to those who continued to use their property, but land that was underdeveloped or abandoned was subject to expropriation. Land could also be declared necessary for agrarian reform and purchased from its owners at a price set by the government. The Agrarian Reform Law gave free title to land, mostly in eastern Nicaragua, that was occupied by homesteaders. Bank foreclosures in the event of default on a bank loan were prohibited.

Farmland that had been bought or expropriated could be turned over to agricultural cooperatives. The farmers who constituted a cooperative were then given title to the land. These "agrarian reform" titles could be inherited, but the title or any part of the land could not be sold. The process of turning state farms into cooperatives with the transfer of title began slowly at first. The process picked up steam in 1984 when rumors began circulating that the government would use a lack of clear title on state farms as an excuse to remove farmers from state farms. In 1985 it was estimated that 120,000 families were farming lands redistributed by the Agrarian Reform Law, half on state farms and half in cooperatives.

In its last months in office, the Ortega government awarded additional land to Sandinista supporters as payment for government service. Nicknamed the Pi�ata, after a children's game in which a hollow papier-m�ch� animal filled with candy is broken open and the candy falls out, the property giveaway consisted of more than 5,000 houses and hundreds of thousands of hectares of land.

The new administration of President Chamorro promised to compensate the large landowners whose land had been taken over by the Sandinista government. President Chamorro also issued two controversial land decrees: one provided for temporary rental of idle state farmland to those willing to work the land for a year, and another established a commission to adjudicate more than 1,600 claims on land confiscated by the former government. Bank foreclosures were allowed again, and the government indicated that it favored changing the titling provision of the Agrarian Reform Law to allow for sale of property.

Combined opposition forces would soon force the Chamorro administration to ease some of its new policies. The critical issue of land ownership would, in fact, prove to be the most contentious issue confronting the new government. The Sandinistaled opposition derided the rental decree, which primarily benefited former Contras, as a return of land to supporters of the Somoza family. Threatened by a major strike, President Chamorro agreed to suspend the rental land decree. Former President Ortega called the revocation of the degree a major victory, while critics assailed it as an abrogation of power. Because Chamorro's plan did not take back property given away in the pi�ata, the powerful private-sector umbrella group, Cosep, refused to participate in her economic plan. Henceforth, Nicaragua's private sector would prove to be an intractable opponent.

Nicaragua

Nicaragua - FINANCE

Banking

Prior to 1979, Nicaragua's banking system consisted of the Central Bank of Nicaragua and several domestic- and foreign-owned commercial banks. One of the first acts of the Sandinista government in 1979 was to nationalize the domestic banks. Foreign banks were allowed to continue their operations but could no longer accept local deposits. In 1985 a new degree loosened state control of the banking system by allowing the establishment of privately owned local exchange houses.

In 1990 the National Assembly passed legislation permitting private banks to resume operations. In 1992 the largest stateowned commercial bank was the National Development Bank (Banco Nacional de Desarrollo--BND), originally established by Chase National Bank. Other state-owned commercial banks were the Bank of America (Banco de Am�rica--Bamer) and the Nicaraguan Bank of Industry and Commerce (Banco Nicarag�ense de Industria y Comercio--Banic). The People's Bank (Banco Popular) specialized in business loans, and the Real Estate Bank (Banco Inmobilario-- Bin) provided loans for housing. Three foreign banks continued operations: Bank of America, Citibank, and Lloyds Bank.

The Inter-American Development Bank (IDB) was instrumental in restructuring Nicaragua's technically bankrupt banking sector. In December 1991, the IDB approved a US$3 million technical cooperation grant to restructure the Central Bank, and in March 1992, it approved a US$3 million loan to a new commercial bank, the Mercantile Bank (Banco Mercantil). The Mercantile Bank program was expected to make loans available to small- and medium-sized private-sector enterprises and to finance investments to bolster fixed assets and create permanent working capital. The Mercantile Bank was the first private bank to be established in Nicaragua since 1979. Three additional new commercial banks were scheduled to open in 1992.

Restructuring of the National Financial System (Sistema Financiero Nacional--SFN) was one of the key elements of the government's economic reform program. According to an agreement between President Chamorro and the World Bank, Banic was to be merged with Bin. The BND would handle only rural credit operations, and the People's Bank was to take over all credit operations for small- and medium-sized industry. International operations, which had been managed exclusively by the Central Bank since 1984, were transferred to the BND and Banic. The Central Bank would continue to handle operations pertaining to the central government, while the newly merged banks would be responsible for letters of credit, imports, transfers, and dollar checking accounts.

The Central Bank also auctioned off one of the government's largest exchange houses. This exchange house had been established in 1988 under the direction of the Financial Corporation of Nicaragua (Corporaci�n Financiera de Nicaragua--Corfin). In 1989 the Central Bank authorized the exchange house to operate a foreign money exchange office as an agent of the bank. In May 1991, Corfin voted to turn over its shares in the exchange house to the Central Bank so that the exchange house could be sold.

Opponents charged that this sale was unconstitutional. They argued that the exchange house was the property of the Central Bank and could not be transferred. The Federation of Bank Workers also charged that the new government banking policy was weakening the state bank while giving the advantage to the private banks.

Currency

From 1912 to 1988, the c�rdoba was the basic unit of currency. Relatively stable during most of that period, the value of the c�rdoba was pegged to the United States dollar. One of the last economic decisions by the Somoza administration was a devaluation in April 1979 of the c�rdoba from US$1 = 7C$ to US$1 = 10C$, a value it held until 1985.

In 1985 mounting economic problems, especially the imposition of the trade embargo by the United States, forced the Ortega administration to opt for a multitiered exchange rate, with one rate for petroleum imports, one for agricultural goods, one for capital goods, and another used at government exchange houses. Amid this confusion, a black market sprang up offering significantly more c�rdobas per dollar than any of the official government rates. As inflation increased from 1985 through 1988, the value of the c�rdoba plummeted, and by mid-1988 the government exchange houses offered US$1 = C$20,000, while a United States dollar on the black market fetched 60,000 c�rdobas.

To curb hyperinflation, the government introduced its economic shock program in February 1988. Currency stabilization was an integral part of this package, and a new currency, the new c�rdoba, was introduced. Each new c�rdoba equaled 1,000 old c�rdobas, and the new currency's exchange rate was set at US$1 = 10 new c�rdobas. By the end of 1988, however, the rate at government exchange houses had dropped to US$1 = 920 new c�rdobas.

Devaluation accelerated in 1989 and 1990. Immediately after the 1990 elections, the currency lost four-fifths of its value. By the end of 1990, it took 3.2 million new c�rdobas to buy a United States dollar on the black market. The government was unable to print money in large enough denominations to make simple transactions convenient.

To help control inflation, the Chamorro government introduced a third currency, the gold c�rdoba, in mid-1990. At first used only as an accounting device, this new currency was introduced gradually to the general populace, and for six months both currencies were legal tender, with a conversion rate of 5 million new c�rdobas to one gold c�rdoba. After April 31, 1991, the gold c�rdoba became the sole legal currency and was pegged to the United States dollar at a rate of US$1 = 5 gold c�rdobas, a rate it maintained throughout 1992. By July 1993, the exchange rate had slipped only slightly, to US$1 = 6.15 gold c�rdobas.

Inflation

In the first half of the 1980s, the annual inflation rate averaged 30 percent. After the United States imposed a trade embargo in 1985, Nicaragua's inflation rate rose dramatically. The 1985 annual rate of 220 percent tripled the following year and skyrocketed to more than 14,000 percent in 1988, the highest rate for any country in the Western Hemisphere in that year. An economic austerity plan introduced in late 1988 caused the 1989 figure to drop somewhat, but inflation jumped again in 1990 to more than 12,000 percent. President Chamorro's economic plan and the resumption of trade with the United States had a positive effect on the country's inflation. Despite the abandonment of many of the points of the economic plan, the annual inflation rate dropped to 400 percent in 1991, and was estimated to be only 10 percent in 1992.

Tax Reform

The Chamorro government instituted tax reform in July 1990. New measures included lower tariff rates, lower income tax, and payment of tax in gold c�rdobas. The reform reduced top tariff rates from 61 percent to 20 percent and top income tax from 60 percent to 38.5 percent. Collection of tax may have increased because of reduced evasion, but tax revenues, reported to be 23.5 percent of GDP in 1989, fell to only 15 percent by 1990.

To encourage investment, the government eliminated a 2 percent export tax on coffee and cotton and lowered the general sales tax from 15 percent to 10 percent. The government also granted tax incentives for exporters of nontraditional products under a new export-promotion act. Like previous governments, the Chamorro administration announced it would extend preferential long-term credit for agro-industrial development.

Nicaragua

Nicaragua - LABOR

Composition of the Labor Force

In 1989 the total labor force consisted of approximately 1,277,000 persons. Almost one-third of the labor force is made up of women, and about one-third of all working-age women hold jobs. In general, members of the labor force are relatively unskilled and have a high degree of mobility, frequently changing jobs or moving to other areas of the country to obtain work. Agriculture accounts for more than 30 percent of all employment, and workers outside of agriculture are more likely to be self-employed in small family-owned enterprises than salaried employees of larger concerns.

Approximately 40,000 new people usually enter the Nicaraguan labor force each year. Throughout the 1980s, many Nicaraguan workers were diverted from productive economic activities to the war effort. The 1990 demobilization of the military, however, added 50,000 persons to the work force.

Nicaragua entered the 1980s with a severe scarcity of skilled labor, especially technicians and other professionals. A "brain drain"--more than half a million professionals moved out of the country during the Sandinista era--further robbed the country of the expertise needed to staff its institutions. As many as 70 percent of Nicaraguan graduates with a master's degree in business administration were estimated to be in self-imposed exile in 1990.

Employment Conditions

Conditions of work are covered by several labor laws and are also spelled out by articles in the 1987 Nicaraguan constitution. The constitution specifies no more than an eight-hour workday in a forty-eight-hour (six-day) work week, with an hour of rest each day. Health and safety standards are also provided for by the constitution, and forced labor is prohibited.

The Labor Code of 1945, patterned after Mexican labor laws, was Nicaragua's first major labor legislation. Provisions of the code prohibited more than three hours of overtime, three times a week. Workers were entitled to fifteen days of vacation annually (eight national holidays and seven saint's days). The Nicaraguan social security program, passed in 1957, enumerates workers' benefits, including maternity, medical, death, and survivors' benefits; pensions; and workers' compensation for disability.

The constitution provides for the right to bargain collectively. In addition, the Labor Code of 1945 was amended in 1962 to allow for sympathy strikes, time off with pay when a worker has been given notice of an impending layoff, and the right to claim unused vacation pay when terminated. The minimum age for employment is fourteen, but the Ministry of Labor, which has the responsibility of enforcing labor laws, rarely prosecutes violations of the minimum-age regulation; young street vendors or windshield cleaners are a common sight in Managua, and children frequently work on family farms at a young age.

A National Minimum Wage Commission establishes minimum wages for different sectors of the economy. Enforcement of the minimum wage is lax, however, and many workers are paid less than the law allows. Labor groups have argued that the minimum wage is inadequate to feed a family of four, and in 1992 the country's largest umbrella group of unions issued a statement demanding that the government index the minimum wage to the cost of living.

Organized Labor

All public- and private-sector workers, except the military and the police, are entitled to join a union. The estimate of the number of workers in unions varies considerably, but some labor leaders place the number as high as 50 percent. Unions are required to register with the Ministry of Labor and must be granted legal status before they can bargain collectively; however, some labor groups complain of intentional delays in this legalization process. Unions are allowed to freely associate with each other or with international labor organizations.

The country's two largest unions, the Sandinista Workers' Federation (Central Sandinista de Trabajadores--CST) and the Association of Agricultural Workers (Asociaci�n de Trabajadores del Campo--ATC), are associated with the Sandinista political party and are also a part of the umbrella group for all Sandinista unions, the National Workers' Front (Frente Nacional de Trabajadores--FNT). Three smaller unions, the General Confederation of Workers--Independent (Confederaci�n General de Trabajadores Independiente--CGT-I), the Federation for Trade Union Action and Unity (Central de Acci�n y Unidad Sindical-- CAUS), and the Workers' Front (Frente Obrero--FO), are affiliated with leftist political parties. The Social Christian Workers' Front (Frente de Trabajadores Socialcristianos--FTS) has ties with the Nicaraguan Social Christian Party (Partido Social Cristiano Nicarag�ense--PSCN). Workers in various sectors of the economy, including health care, transportation, coffee, livestock, and agriculture, have their own unions.

Unemployment and Underemployment

Reliable labor statistics are difficult to obtain, but nearly half of Nicaragua's work force was estimated to be unemployed or underemployed in 1990. Many Nicaraguan workers eke out speculative incomes in the burgeoning informal sector, which encompasses about 55 percent of the economically active population. After several years of hyperinflation in the late 1980s had eroded conventional salaries, thousands of Nicaraguans chose to cast their lot as black marketeers, street vendors, taxicab drivers, and other persons earning their livings on the streets. Almost everyone sought some means to augment or replace inflation-ruined salaries.

Wages

As fixed salaries became increasingly meaningless in the late 1980s, high annual turnover, as much as 100 percent for urban industrial workers, was also typical of the Nicaraguan labor force. By 1988 real wages in Nicaragua were less than one-tenth of those in 1980, reflecting the impoverishment of the middle class as well as increasing numbers of the poor. Nonwage incentives instituted by the Sandinista government in the early 1980s for public-sector workers were abandoned during the period of extreme economic adjustment of the late 1980s. By inauguration day 1990, it was not uncommon for skilled office workers to earn the equivalent of US$10 per month, augmented in some cases by dollar-denominated bonuses for workers in the private sector.

Labor Unrest

By 1990 labor unrest was rampant. Urban workers vied with their rural counterparts to protest deteriorating economic conditions. The workers' protests, however, were soon drowned out by demands by the business class for government trade subsidies, preferential investment, and credit, particularly in the historically dominant agricultural sector. Drought in several food-producing areas in 1990 decreased the amount of food available, increased prices, and exacerbated already severe poverty. In addition, as many as 500,000 refugees returned to Nicaragua, including thousands of former Contras. They, along with thousands of former private- and public-sector workers, further swelled the ranks of the unemployed and underemployed, and increased the burden of grievances with which the new government had to deal.

One of the most troublesome problems for the Chamorro government was ongoing support for the Sandinista revolutionary ideals from a large segment of the population and high expectations for government help to address the needy. The Sandinista administration had permanently altered the "psyche" of the Nicaraguan poor. From inauguration day onward, President Chamorro was confronted by a strike-ready labor force motivated by pressing needs and a suspicious, foot-dragging private sector.

Nicaragua

Nicaragua - INDUSTRY

Historically, Nicaragua's small industrial sector has consisted primarily of food processing. Except for one cement plant and one petroleum refinery, agro-processing industries (slaughterhouses, meat packing plants, food processing plants, cooking oil plants, and dairy facilities) and the manufacture of animal by-products (candles, soap, and leather) have been the backbone of Nicaragua's urban industry. The 1960s was a period of rapid growth of the industrial sector, as new external tariffs established by the CACM allowed the growth of import-substitution plants in Nicaragua. Formation of new import-substitution plants slowed in the 1970s, however, and the percentage of GDP derived from industry dropped to only 23 percent in 1978.

Political and economic problems caused the industrial sector to shrink in the years after 1978. The civil war caused manufacturing output to decrease by one-quarter in 1979 alone. In the agro-industries, which represented 75 percent of the total industrial putout, idle capacity became a serious problem after the Sandinista victory in 1979. In the early 1980s, food processing plants were operating at only 50 percent capacity; sugar mills, 49 percent capacity; animal feed processing plants, 70 percent capacity; fruit canning plants, 94 percent capacity; and vegetable oil refineries, 42 percent capacity. The Sandinista government maintained a monopoly on beef processing facilities, but here, too, idle capacity rose from 30 percent in the period between 1977 and 1979 to 85 percent by 1981. Idle capacity in this industry averaged 60 percent in subsequent years. This phenomenon resulted mainly from clandestine slaughter houses, an illegal network of beef distributors, and the withholding of food products by producers.

Although the government-controlled distribution system created shortages, a black market thrived for milk, cheese, chicken, and eggs, as well as livestock by-products such as soap and shoes. In the mid-1980s, Black-market prices soared, and essentials became next to impossible to obtain through legitimate channels. As basic grains and other food became scarcer, beef consumption in Nicaragua rose to the highest level in Central America. Unable to buy corn, Nicaraguans ate beef. Immediately before the imposition of the United States trade embargo in 1985, many ranchers instituted the wholesale slaughter of beef and dairy cows that they were unable to shift across the borders to Costa Rica or Honduras.

The industrial sector, which had grown only sporadically in the early 1980s, declined in the mid- to late 1980s as the Contra war escalated and United States markets dried up. Industrial production dropped an average of 5 percent each year from 1984 to 1989. By 1989 the industrial sector contributed only 19 percent to the nation's GDP and construction accounted for only 4 percent.

By President Chamorro's inauguration in 1990, only about 10 percent of the pre-Sandinista era work force was still employed in the skeletal industrial sector. A few larger-scale industries, including a cement production plant, a chemical plant, a metals processing plant, and a petroleum refinery, were geared toward domestic consumption. Even these suffered badly from shortages of essential imports and the lack of skilled labor, however.

<>Mining

Nicaragua

Nicaragua - Mining

Mining is not an important sector of the Nicaraguan economy, although the small amounts of gold and silver that are extracted provide much-needed export income. The country's two principal gold and silver mines are the Bonanza and the Siuna mines, located in northeast Nicaragua about 100 kilometers west of Puerto Cabezas. A small gold mine, the El Lim�n mine, operates north of Le�n. All mines were nationalized by the government in 1979, and state control, combined with the fact that the two largest mines are in areas where the Contras operated, caused production of gold and silver to drop in the 1980s. The 1988 production figures of 875 kilograms of gold and 500 kilograms of silver were less than half the 1983 production figures. Small amounts of copper, lead, and tungsten have been mined in the past, and the country has unexploited reserves of antimony, tungsten, molybdenum, and phosphate.

Nicaragua

Nicaragua - AGRICULTURE

Ironies abound in Nicaragua's historically dominant agriculture sector. The country's relatively low population density and its wealth of land resources have both held the promise of solutions to poverty and been a major cause of it. The importance of one or two crops has meant that the country's entire economy has undergone boom-or-bust cycles determined primarily by worldwide prices for agriculture exports.

Coffee became the country's principal crop in the 1870s, a position it still held in 1992 despite the growing importance of other crops. Cotton gained importance in the late 1940s, and in 1992 was the second biggest export earner. In the early 1900s, Nicaraguan governments were reluctant to give concessions to the large United States banana companies, and bananas never attained the level of prominence in Nicaragua that they reached in Nicaragua's Central American neighbors; bananas were grown in the country, however, and were generally the third largest export earner in the post-World War II period. Beef and animal byproducts , the most important agricultural export for the three centuries before the coffee boom of the late 1800s, were still important commodities in 1992.

From the end of World War II to the early 1960s, the growth and diversification of the agricultural sector drove the nation's economic expansion. From the early 1960s until the increased fighting in 1977 caused by the Sandinista revolution, agriculture remained a robust and significant part of the economy, although its growth slowed somewhat in comparison with the previous postwar decades. Statistics for the next fifteen years, however, show stagnation and then a drop in agricultural production.

The agricultural sector declined precipitously in the 1980s. Until the late 1970s, Nicaragua's agricultural export system generated 40 percent of the country's GDP, 60 percent of national employment, and 80 percent of foreign exchange earnings. Throughout the 1980s, the Contras destroyed or disrupted coffee harvests as well as other key income-generating crops. Private industry stopped investing in agriculture because of uncertain returns. Land was taken out of production of export crops to expand plantings of basic grain. Many coffee plants succumbed to disease.

In 1989, the fifth successive year of decline, farm production declined by roughly 7 percent in comparison with the previous year. Production of basic grains fell as a result of Hurricane Joan in 1988 and a drought in 1989. By 1990 agricultural exports had declined to less than half the level of 1978. The only bright spot was the production of nontraditional export crops such as sesame, tobacco, and African palm oil.

Agricultural Policy

In 1979 the new Sandinista administration quickly identified food as a national priority in order that the country's chronically malnourished rural population could be fed. The government planned to increase production to attain selfsufficiency in grains by 1990. Self-sufficiency in other dietary necessities was planned for the year 2000. For a variety of reasons, however, including the private sector's retention of 60 percent of arable land, the Sandinista government continued to import food and grow cash crops. In 1993 the goal of selfsufficiency in food production was still far from being achieved.

To generate essential foreign exchange, the Ortega administration continued to support an upscale, high-tech agroexport sector, but returns on its investment diminished. By 1990 only one-quarter of the pre-1979 hectarage planted in cotton, one of the leading foreign exchange earners in the 1970s, was still under cultivation. Despite an established priority for food production, food imports to Nicaragua grew enormously from the mid-1970s to the mid-1980s.

In general, the Sandinistas made little progress in reducing economic dependence on traditional export crops. To the contrary, faced with the need for food selfsufficiency versus the need for essential foreign exchange earnings, the Ortega administration, demonstrating scant economic expertise, continued to prop up the country's traditional agroindustrial export system. They did so despite expensive foreign imports, diminished export markets, and a powerful opposing private sector. However, revenues from traditional export crops continued their rapid decline throughout the 1980s. Despite this drop, agriculture accounted for 29 percent of the GDP in 1989 and an estimated 24 percent in 1991. Agriculture still employed about 45 percent of the work force in 1991.

<>Crops
<>Livestock
<>Fishing and Forestry

Nicaragua

Nicaragua - Crops

Coffee

Large-scale coffee growing began in Nicaragua in the 1850s, and by 1870 coffee was the principal export crop, a position it held for the next century. Coffee is a demanding crop, however, because coffee trees require several years to produce a harvest, and the entire production process requires a greater commitment of capital, labor, and land than do many other crops. Coffee also grows only in the rich volcanic soil found on mountainous terrain, making transportation of the crop to the market difficult.

In 1992 more land was planted in coffee than in any other crop. The actual amount of land devoted to coffee varies somewhat from year to year, but averaged 210,000 hectares in the 1980s. Production is centered in the northern part of the central highlands north and east of Estel�, and also in the hilly volcanic region around Jinotepe. Although production of coffee dropped somewhat in the late 1980s, the 1989 crop was still 42,000 tons. Nicaragua's poor transportation system and ecological concerns over the amount of land devoted to growing crops on volcanic slopes in the Pacific region limit further expansion of coffee cultivation. These limitations have led growers to explore planting other crops in undeveloped areas of the country.

Cotton

Cotton was Nicaragua's second biggest export earner in the 1980s. A latecomer to Nicaraguan agriculture, cotton became feasible as an export crop only in the 1950s, when pesticides were developed that permitted high yields in tropical climates. Cotton soon became the crop of choice for large landowners along the central Pacific coast. As the amount of land under cultivation grew, however, erosion and pollution from the heavy use of pesticides became serious problems. Lack of credit for planting, a drop in world cotton prices, and competition from Chile discouraged cotton production in the mid-1980s. Production of cotton dropped significantly in the 1980s, and the 1989 crop of 22,000 tons was less than a third of that produced in 1985.

Bananas

Unlike in other Central American countries, political squabbles over who would control the plantations and shipment of the crop prevented bananas from becoming the major export earner in Nicaragua. Bananas, a native fruit of tropical Asia, were introduced to Nicaragua early in the colonial period. Initially, until a market for them appeared in the United States in the 1860s, bananas, like other fruit, were destined mostly for local consumption. Small plots of the Gros Michael variety of banana were planted for export, but political turmoil and difficulties in establishing secure transportation routes hampered export. Because United States companies developed banana production in neighboring countries, Nicaragua's large potential for this crop remained underdeveloped.

Politics and outbreaks of disease in the 1900s kept banana production low. During their time in power, the Somoza family, who had discovered that coffee and cattle were more profitable, than bananas, refused to give United States banana companies the free rein that they enjoyed throughout the rest of Central America. In addition, an outbreak of Panama disease, a fungus that kills the plant's underground stem, wiped out most of the banana plantations in the early 1900s. New plants of the Valery and Giant Cavendish variety were planted, but constant use of fungicides was required to control black sigatoka disease. Although Cavendish bananas yield three times the harvest of the older Gros Michael type, Cavendish bananas are more difficult to harvest and transport, Cavendish bananas, for example, bruise easily and must be picked at an earlier stage and crated in the fields for transport. Most banana production is in the Pacific lowlands, in a region extending north from Lago de Managua to the Golfo de Fonseca. In 1989, banana production amounted to 132,000 tons.

Other Crops

Although much of lowland Nicaragua has a climate conducive to growing sugarcane, poor transportation has limited production to roughly the same area in northwest Nicaragua where bananas are grown. Most sugarcane is processed into whitish centrifugal sugar, the raw sugar of international commerce. Some plants further process the sugarcane into refined granulated sugar. Demand for sugar remained comparatively low until the United States-imposed embargo on Cuban sugar began in 1960. Demand then soared, and sugar production tripled over in the next two decades. Like all other agricultural products, sugar production was severely hit by the United States trade embargo on Nicaraguan products from 1985 to 1990. Production of raw sugarcane stood at 2,300 tons in 1989.

In the early 1990s, the government attempted to diversify agriculture, but had limited results. Tobacco and sesame are both produced for export. The first African palm oil plantations, which were established in the Caribbean lowlands, began production in 1990. Beans, corn, rice, and sorghum continue to be widely grown and consumed domestically.

Nicaragua

Nicaragua - Livestock

The first cattle were brought to Nicaragua by the Spanish in the 1500s, and livestock raising was a mainstay of the early colony. Drier areas on the western slopes of the central highlands were ideal for cattle raising, and by the mid-1700s, a wealthy elite, whose income was based on livestock raising, controlled Le�n, Nicaragua's colonial capital. In the late 1900s, as was true in the late 1500s, cattle raising has been concentrated in the areas east of Lago de Managua. Most beef animals are improved zebu strains. Smaller herds of dairy cattle- -mostly Jersey, Guernsey, or Holstein breeds--are found near population centers. From 1979 to 1989, the total number of cattle dropped by a third because of widespread smuggling to Honduras and Costa Rica and illegal slaughter of the animals for sale of meat on the black market.

Nicaragua

Nicaragua - Fishing and Forestry

Although fishing has long been a source of food for the domestic market in Nicaragua, the rich fishing grounds of the Caribbean began to be exploited for export of shrimp and lobster only in the 1980s. A 1987 loan by the IDB allowed the country to double the size of its fishing fleet to ninety boats. However, damage by Hurricane Joan in 1988 to the two processing plants and the United States trade embargo in 1985 kept production levels far below the potential catch. Restoration of trade with the United States in 1990 did produce a surge in exports, and the government hoped that fishing would provide a significant share of export earnings in the 1990s.

Nicaragua has extensive forests, and despite the large-scale clearing for agricultural use, about one-third of the land, or approximately 4 million hectares, was still forested in 1993. Most of the forests consist of the tropical rain forests of the Caribbean lowlands, where surface transportation is practically nonexistent. Hardwoods abound in this region, but the stands are mixed with other wood, making exploitation difficult. However, some logging of mahogany, cedar, rosewood, and logwood for dyes takes place. In addition, the large stands of pine in the northeast support logging and a small plywood industry.

Nicaragua