Against the Current, No. 23, November/December 1989
Keith Griffin
“What is new for our revolution at the present time is the need for
a ‘reformist,’ gradual, cautious and round-about approach to the
solution of the fundamental programs of economic development. The
greatest, perhaps the only danger, to the genuine revolutionary is
that of exaggerated revolutionism, ignoring the limits and
conditions in which revolutionary methods are appropriate and can be
successfully employed.”—V.I. Lenin(1) <#N1>
THE SANDINISTA REVOLUTION of 1979 transformed the polity and economy of
Nicaragua. Dictatorship was replaced by a more democratic and
participatory political system and the “repressive agro-export model” of
development of the previous three decades(2) <#N2> was replaced by a
model based on socialist principles.
No one concerned with justice, equality or the alleviation of poverty
should weep over the passing of the Somoza regime. The Nicaraguan
version of an agro-export model of development resulted in peasants
being forced off the land and an increasing proportion of the cultivated
area being held by large estates. The process of polarization went so
far that by 1910 it is estimated that the poorest 50% of the population
consumed less than 1800 calories per capita per day.
Growth did indeed occur, at least between 1950 and the early 1970s, and
rates of investment were in general quite high, but the growth that
occurred was accompanied by impoverishment and increased inequality.
The crisis of the repressive agro-export model was precipitated not by
the impoverishment of the peasantry and an intolerable increase in
inequality but by a decline of the economy into a depression in the
early 1970s and a sharp fall in the average income after 1976.(3) <#N3> This produced conflicts within the propertied class and made it possible
to form an alliance among disaffected groups of the property-owning
class, intellectuals and other members of the urban elite and a majority
of the urban and rural poor.
This alliance eventually was able to destroy the Somoza regime and to do
so with relatively little difficulty as compared to the long and violent
struggles that took place, for example, in Algeria, Vietnam, Angola and
Mozambique.
The Sandinista government that followed the revolution expropriated the
properties of the Somoza group and its allies, and as a result by 1980
the state owned the entire banking system, half the agro-processing
facilities, one-third of the manufacturing capacity, one-fifth of the
cultivated land and all of the construction, now transport, fishing and
forestry industries. In addition, foreign assets in mining and bananas
were nationalized and compensation agreed with the previous owners.
These changes in ownership meant that the state acquired direct
responsibility for enterprises accounting for about 40% of GDP.(4) <#N4> That is, the state clearly owned and controlled the commanding heights
of the economy and was well poised to launch a socialist strategy of
development.
The State’s Objectives
Centralized planning was introduced; multiple exchange rates were
adopted; the nationalized banking system was used to guide credit to
projects and sectors of high priority foreign exchange resources were
allocated centrally. Other controls were used to regulate the private
sector. Thus if socialism is equated with planning and public ownership
of the most important means of production, Nicaragua became a socialist
country. The government, however, always said that its intention was to
create a mixed economy.
Looking back on the early years of post-revolution Nicaragua, it is
evident that the Sandinista government intended to use state power to
achieve two major objectives. The first was to re-allocate resources
toward the poor, largely in the form of state-provided services. There
was a considerable expansion of health, education, nutrition and
literacy pm-grains. Attempts were made to foster popular organizations
(although they functioned poorly), and some effort was made to liberate
women arid, later, meet the specific demands of the minority Indian
populations.
This “basic needs” component of economic policy certainly led to an
initial improvement in the living conditions of the poor, although as we
shall see, the improvement would not be sustained.
The second objective was to establish the state as the engine of growth
by its assuming responsibility for capital formation, and presumably for
maintaining it at the relatively high levels characteristic of the early
agro-export model of development. This objective also was achieved but
only in the limited sense that state investment rose sharply while
private investment collapsed. Indeed in 1984-86 private sector
investment amounted only to 3.4% of gross domestic product, clearly not
enough to maintain the existing stock of private-sector capital in good
working order.
State investment, moreover, was channeled toward projects with long
gestation periods and was characterized by low efficiency.(5) <#N5> The
large textile combine at Esteli, the huge “Victoria de Julio” sugar
refinery and the deep water port on the Atlantic are examples of large,
slow-maturing, inefficient investment projects with negligible (and even
negative) rates of return. As a result of projects such as these the
contribution of state investment to growth was lower than it might have
been.
Some may be tempted to argue that a collapse of private investment is,
if not inevitable, certainly to be expected when a left-wing government
takes power. The argument is suspect in principle since private
investment—including investment by small peasant landowners, small
businessmen, traders and merchants in the informal sector—depends
largely on profit expectations and there is no reason to assume that
left-wing governments inevitably are hostile to all forms of private
property or inevitably damage profit expectations.
On the contrary, an improved distribution of income and other measures
introduced by a left-wing government might in some circumstances raise
the rate of return in, say, that part of the private sector producing
wage goods and hence might actually stimulate private savings and
investment. More important in the present context, the argument was
never made by the post-revolution government in Nicaragua, which always
claimed that its policies were designed to build a mixed economy with a
significant private sector.
Failures of State Control
The 40% of GDP represented essentially by Somocista property proved to
be more than the state could handle efficiently, and it was foolish of
the government to take on the additional responsibility for virtually
all investment in the country. Much would have been gained by being more
conciliatory toward non-Somoza property owners. At the very least,
state-acquired agricultural land should have been redistributed to the
peasantry rather than organized into state farms, and incentives to save
and invest in agriculture should not have been destroyed.
While in the event the state did assume responsibility for maintaining a
high level of investment, it appeared to take no responsibility for
generating the high level of savings necessary to finance that
investment. This was a fatal error. Gross domestic savings fell from 18%
of GDP in 1965, during the expansion phase of the agro-export model, to
-2% in 1986. This is to say, in 1986 Nicaragua was dependent on foreign
aid and loans to finance 100% of its investment program (equivalent to
19% of its GDP) plus a portion of expenditure on private consumption and
government services (which together accounted for 102% of GDP).
It is no excuse to blame the decline of savings on unanticipated and
unavoidable happenings—the emigration of sections of the capitalist
class, capital flight, and the like. Such problems could in fact have
been anticipated and at least partially avoided by the leadership; they
should, for example, have learned from the fatal errors of Allende’s
Chile as well as from the experience of Cuba, which at least succeeded
in “forcing” households to save and in “suppressing” inflation, although
at considerable coat in terms of a misallocation of resources.
Financial mismanagement in Nicaragua was so serious that by 1984 the
government deficit was about a quarter of total output. Not
surprisingly, by 1985 inflation was running at 300% a year, rising to
600% in 1986.
The two objectives of government—increasing the volume of state-supplied
services and gaining control over investment—were achieved at very high
cost. The terms of trade were deliberately turned against the peasantry.
As a result, food supplies in the towns declined and overall food and
total agricultural production per head declined. Credit, input
allocation and capital investment policies discriminated against
small-scale producers, be they peasant farmers or small urban
establishments engaged in petty commodity production.
Conversely, there was a pronounced bias in favor of large-scale
production, be it in the state or even in the private sector. There was
also a bias against private commerce; the government preferring instead
to create a state monopoly of trading in rural areas combined with state
supermarkets, food rationing and factory commissaries in urban areas.
The net effect of these policies was adverse to the poor. The
bureaucratic style of economic management also resulted in enormous
inefficiency. Exports were penalized while imports (for use by the
government) were subsidized. As a result, exports fell from 29% of GDP
in 1965 to 14% in 1986. Indeed, the volume of exports declined in
absolute terms. Prices became so seriously distorted that at one time
“the street-price of unobtainable tractor tyres was higher than the
official price of a tractor” (Irvin and Croes 1988, 38).
To be fair, economic policies were modified in late 1988; largely
because the war against the contras forced a change in approach. The war
of course increased the pressure of demand on resources and put the
economy under even greater strain. Spending on defense and security rose
from about 6% of GDP in 1980 to 21% in 1967 (FitzGerald 1988, 22). Had
these additional resources been available to finance investment rather
than armaments, domestic savings would have been a respectable 12%-14%
of GDP rather than negative.
The challenge to the regime by the contras thus severely aggravated the
economic situation, but it must be stressed that poor policies and the
consequent poor performance had made it much easier for the contras and
their foreign backers to challenge the revolutionary government. The
war, in a sense, was partly endogenous: a political consequence of the
economic policies that were pursued.
I do not seek to minimize the effects of the civil war on the economy,
nor to absolve the United States of responsibility for conducting a
campaign of economic sabotage and financing the military adventures of
the contras. No one who lived through the era of the Vietnam War can
have any Illusions about the devastating consequences of external
intervention on poor countries struggling for development.
My point is a more limited one, and undoubtedly highly controversial,
namely, that the misguided economic policies followed by the
post-revolution government in Nicaragua helped to make effective and
sustained opposition by the contras possible. It is also likely,
incidentally, that the opposition by the contras accounts in part for
the changes in policy introduced in 1983.
The modified policies adopted in 1983 included price and credit policies
less unfavorable to peasant producers, diminished emphasis on state
farms (which actually declined to 13% of the arable land) and greater
emphasis on redistribution of land to cooperatives and individual
households, and more favorable treatment of urban trading and industrial
cooperatives. Thus some of the bias against small and poor producers was
removed.
Considering the period as a whole from 1980 to 1986, there can be no
doubt that economic performance left a great deal to be desired. General
government expenditure (presumably including spending on armaments)
increased a year in constant price terms. Private consumption in
contrast declined 9% a year or by 114% per year per head of the
population. Gross investment increased only 0.2% a year, net investment
also certainly was negative and the growth of investment per capita was
heavily negative.
Food production per head was 24% lower in 1986 than in 1979. Real
earnings per employee in manufacturing fell 9.2% a year (1980-85).
Output per head declined in agriculture, industry and in services, so
that the aggregate rate of growth of GDP per capita from 1980-86 was
-3.2% a year. The high promise and good intentions of the Sandinista
revolution evidently remain unfulfilled.
The revolutionary government tried to do too much at once. It was too
ambitious, indeed reckless. It attempted simultaneously, first of
course, to fight a wax; second, to take over responsibility for
maintaining a high rate of investment; while third, shifting consumption
in favor of state-supplied basic goods and services for the poor. The
resources the state could command clearly were inadequate to achieve
these three objectives simultaneously and even with substantial foreign
assistance, two of the objectives were only partially achieved.
The contras have been defeated on the ground and in the international
political arena,(6) <#N6> thus the first objective has been largely
attained, although it is not impossible that at some point the United
States will renew its military support for the contras. Gross investment
has remained quite high, but the efficiency of investment has been
terribly low and hence the contribution to output has been meager.
Consumption was shifted from the private to the public sector, but the
initial gains to the poor were soon eroded and thereafter living
standards have fallen precipitously.
The specific economic policies adopted were in practice anti-peasant,
anti-trader and anti-private, a common but unholy trinity in many
socialist countries. Viewed another way, economic policies were
pm-urban, pro-state and pm-large scale production. The resuits, sadly,
were negative growth rates of production per head, a decline in exports
and an acute shortage of foreign exchange, a collapse of domestic
savings, soaring inflation, a precipitous fall in private household
consumption and increasing hardship for all members of society,
including of course the poor, the initial beneficiaries of the revolution.
No one, to be sure, would want to turn the clock back and impose again
on the people of Nicaragua the repressive agro-export model of the
Somoza era,, but present policies, for very different reasons, are
equally unsatisfactory. Nicaragua’s difficulties are not an inevitable
consequence of the attempted transition to socialism; they are a
consequence of serious errors committed admittedly under extraordinarily
difficult circumstances.
But the outcome could have been different as indicated by the experience
of Lenin’s “new economic policy’ in the Soviet Union, by the rapid
economic recovery enjoyed in the immediate post-liberation period in
China and by the relatively smooth transition in Algeria from a colonial
to a socialist economy.
Nicaragua can perhaps learn from the history of other countries that
have passed through similar episodes in their national life—and from
Lenin’s words of 1921, quoted at the beginning of these observations.
Now that peace or something approaching peace appears to be just round
the corner, the reconstruction of the country’s economic policies has
become an urgent task I wish the people and their government well. Notes 1. V.I. Lenin, Collected Works, Vol. 33 (Moscow: Progress Publishers)
109-11, cited in Roy Medvedev, The October Revolution (London:
Constable, 1979) 186. 2. Solon Barraclough, A Preliminary Analysis of the Nicaraguan Food
System (Geneva: UNRISD, 1982). 3. The depression was so severe that during the fifteen years from 1965
to 1980 the average rate of growth of Gross Domestic Product per
head was .0.5% a year. Output per head rose in agriculture (0.2% a
year) and in industry (1.1%), but the decline in output in the
services sector (-1.7% a year), reflecting in part the expulsion of
the peasantry from the land and migration to the cities, was so
great that the average for all sectors fell. (Data in this paper,
unless otherwise Indicated, are World Bank, World Development Report
1988 (New York: Oxford University Press, 1988). 4. FitzGerald, E.V.K., “State Economy in Nicaragua,” IDS Bulletin, Vol.
19, No. 3 (July 1988). 5. George Irvin and Edwin Croes, “Nicaragua: The Accumulation Trap,”
IDS Bulletin, Vol., 19, No. 3 (July 1988). 6. Moreover, In July 1986, in an action brought against the United
States by the government of Nicaragua, the International Court pf
Justice In The Hague ruled that U.S. aid to the contras was against
international law. The ruling, predictably, was ignored by the
United States.
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