'Maintenance of mixed a principal reason for crisis'

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8 SOCIALIST ACTION FEBRUARY 1989 The following are excerpts from a lengthy article on the Nicaraguan economy that appeared in the January-February 1989 issue of Dollars and Sense magazine, which is published in Somerville, Mass.

John Miller teaches economics at Wheaton College. He worked in Niquinohomo, Nicaragua. Joe Ricciardi teaches economics at Babson College. He worked at the Central Bank of Nicaragua and taught economics at the University of Central America in Managua.

With traditional government spending, such as the defense budget, already consuming more than government revenues, subsidies aimed at inducing private investment produced deficits amounting to 11.7 percent of GDP. Within the progressive community, the usual explanation of what forced the Sandinistas to adopt an austerity program [in February 1988] is U.S. imperialism. Without doubt, the economic cost of U.S.sponsored military, trade, and financial aggression has been severe. Estimates range from $1.4 billion to $4 billion-equivalent to the destruction of nearly three years of Nicaragua's Gross Domestic Product (GDP). Foreign aggression alone, however, does not fully account for the problems within Nicaragua's economy. The financial costs of maintaining the political alliance with the wealthy producers—who would gladly throw the Sandinistas out of power—are also a principal reason for the severe economic crisis.

These subsidies have been a major contributor to the nation's deficits and therefore its hyperinflation. (Over the last eight years, the Sandinistas have financed these deficits primarily by printing money, substantially contributing to inflation.)

The lion's share of these deficits (9.8 percent of GDP) arose from exchange-rate losses by government subsidies to exporters. Large producers, who control the majority of private lands tilled for export crops, were the chief beneficiaries of these subsidies. The other private-sector subsidy that has contributed to the deficit is the massive dose of free credit the state has distributed to financed 100 percent of working capital and new investments at interest rates far below the rate of inflation, while much of private capital was in flight to Miami. About three-quarters of agricultural credit went to the export sector dominated by large producers.

"Sacrificing the working class" The Sandinistas were well aware that concessions to large producers contributed to inflation and imposed additional sacrifices on the Nicaraguan people. Inflation eroded average real earnings in 1988 to less than 10 percent of 1981 levels. Tomás Borge, Minister of the Interior, observed in 1987 that the Sandinistas had "sacrificed the working class in favor of the economy as part of a strategic plan."

Hence it is even more tragic that the credit and exchange-rate subsidies financed by the people did not provide a "favorable investment climate" for large private production in the face of the contra war. Although more than 60 percent of production has remained in private hands since the