Nicaragua: Observations or Fallacies?

John Weeks

THE NICARAGUAN REVOLIJIION provides fertile ground for misunderstanding based on predilection and prejudice, particularly if knowledge of the Sandinistas is largely second-hand. Since the Sandinistas use terms such as socialism, many are those eager to measure accomplishments and failures by that abstract yardstick.

This is the case with Keith Griffin’s observations. The Nicaraguan economy has suffered a severe decline, but neither for the reasons he suggests nor during the period he focuses upon. His mistakes of analysis derive from three fallacies.

The first fallacy is that as a consequence of the triumph over Somoza and U.S. imperialism, the Sandinistas were left in control of the economy. “Central planning was introduced,” Keith Griffith writes.

The second fallacy is that subsequent to the triumph there existed a mixed economy strategy which, if it had been faithfully pursued, would have resulted in growth and relative prosperity; and, the accompanying corollary, that the Sandinistas through their actions alienated the private sector and torpedoed the mixed-economy strategy.

The third fallacy is that, as opposed to the mixed-economy strategy, the Sandinistas had an alternative strategy in which the state would dominate economic life and that they pursued this strategy with vigor in face of clear and accumulating evidence that it was disastrous. This third presumption is as false as the first two.

First, clarity requires consideration of two allegations made by Griffin: 1) that Somoza was overthrown “with relatively little difficulty as compared to the long and violent struggles that took place, for example, in Algeria, Vietnam, Angola and Mozambique”; and 2) that “the misguided economic policies followed by the post-revolution government in Nicaragua helped to make effective and sustained opposition by the contras possible.”

We have the cost of overthrowing Somoza from unimpeachable sources: according to the World Bank and United Nations organizations, the new government took over a country in ruins. Approximately 10,000 people died in the conflict (one percent of the adult population), and another 10,000 were left permanently injured. Relatively speaking, these losses exceeded those of most of the combatant countries in World War II.

The economy was devastated. Gross domestic product fell in real terms by 30% in one year (1978-79), and at the end of 1979 income per head was 30% below that of 1916. The World Bank estimated that the loss of production from the conflict over 1978-1980 equaled $800 per capita, or total national income for the peak year of 1977.

Further, the war against Somoza resulted in widespread destruction of productive assets. The manufacturing sector lost over 20% of plant and equipment, along with inventories and goods-in process. Before he left, Somoza looted the national treasury. Measured short-run capital movements were a negative $315 million in 1979 alone, and total capital flight that year has been conservatively estimated at 40% of GDP. Appropriately, the World Bank mission entitled its 1981 report, “The Challenge of Reconstruction,” for the Sandinistas had a country to rebuild.

Second, for all the mistakes and misjudgments made by the Sandinista leadership, the U.S. surrogates (“contra”) achieved limited popular support. Far from being a “civil war” or even an insurrection, the contra effort was from its outset an invasion by a foreign power. While at times the contras moved small units into the heartland of Nicaragua, in no populated area did the sun ever set and rise on contra land. If economic mismanagement was a contributing factor to the 1982-88 conflict in Nicaragua it was minor indeed.

A Strong State?

Turning to the first fallacy, the proposition that the Sandinistas controlled the economy reflects a lack of understanding of the revolution. Those who argue the Sandinistas held control over the economy, point to formal ownership relations. After 1979, the banking system and commercialization of foreign trade passed into the government’s hands.

However, in no commodity-producing sector of the economy did the state own more than 30% of assets (except in the tiny mining industry); not in export crops (18%), not in livestock (10%), not in manufacturing (28%), nor in construction (3%), all sectors overwhelmingly dominated by large capitalists, not peasants. What degree of control does ownership of the banking system and external commercialization give a government when the productive sectors are in the hands of private capital? Precious little.

In manufacturing, state control was particularly weak and fragmented. The obvious long-term strategy would have been for the state to divest itself of some enterprises and nationalize or confiscate others to rationalize the structure of ownership. As a practical matter, there was no one to divest enterprises onto, for the private sector was busily engaged in decapitalization and ill-disguised sabotage. Divestiture would have meant closing enterprises down, throwing state workers into unemployment while those in the private sector stayed at work.

For exports the impotence of the state was greater still: for every dollar of foreign exchange earned, eighty cents came from the private sector. Export policy involved an annual struggle to prod the private landowners to plant, harvest and market. Soon after the triumph the Sandinistas discovered to their chagrin that the main export that the private sector had in mind was capital. A liberal credit policy to private agricultural producers during the first two years of the revolution resulted in fueling the black market and swelling bank accounts in Miami.

In brief, the Sandinistas lacked effective control over the economy because they were minority holders in the productive sectors. Credit policy is a limp tool if there are no borrowers, or if the borrowers have currency speculation in mind. A state monopoly on external trade values counts for little if the major exports are in private hands and the landlords view each sale of coffee and cotton as invigorating their enemy.

Capital Versus The Revolution

Passing to the second fallacy, the powerful large-scale private sector was an adversary of the revolution from the outset This was the consequence of four factors: the historical tendency of the Nicaraguan elite to seek succor from Washington; the inherent tension of a mixed economy when capital is out of power; the conscious policy of the Reagan administration to sabotage cooperation between the private sector and the Sandinistas; and divisions within the FSLN over an alliance of convenience with private capital. There is space to consider only the last two of these.

By late 1981, Washington offered the old Nicaraguan elite an alternative to cooperation with the Sandinistas: armed overthrow of the government by the mercenary army. On the domestic front, the economic power of private capital was an integral part of the contra strategy. Far more debilitating than the terrorist attacks of isolated ex-guardia was the daily decapitalization and withholding of production by the large-scale private sector.

The extent to which the capitalists had crossed over to the contra side is shown by the attempt of the government to distribute a loan from the World Bank earmarked for the private sector in manufacturing.

In 1981 the government received $30 million for replacement of capital lost during the 1978-79 conflict. From the point of view of the private sector the money was a gift—firms could receive dollars, which they would pay back in local currency at an interest rate far below the rate of inflation. It quickly became obvious that the private sector had no interest in these loans, and the money went undisbursed for lack of takers.

The reason was clear the rehabilitation of plan and inventories would revive the economy. As the economy revived, the staying power of the Sandinistas would increase. The viability of the mixed economy could not be based on the cooperation of the capitalists, which had been lost irretrievably when they fell from power. The problem of the mixed economy was that the capitalists, abetted by the Reagan administration, were sabotaging economic recovery.

Equally important is the third fallacy that the Sandinistas had a coherent economic strategy. Within the FSLN there was considerable ambivalence, arising from ideological and practical considerations, about the viability of a mixed-economy strategy. Some members of the National Directorate were from the outset opposed on ideological grounds to striking an alliance with private capital.

More important than this was the obvious reluctance of the private sector to cooperate and its intimate relations with the Reagan administration and the contra. As counter-revolution grew in strength, policies that fostered the capitalists appeared to some Sandinista leaders as near madness, for they strengthened the weaker enemy within (domestic capital) that was allied with a stronger enemy outside (U.S. aggression). It is quite amazing the extent to which the Sandinistas accommodated large-scale private interests, in face of gathering evidence of decapitalization and sabotage.

It is hardly surprising that economic policy lacked apparent coherence Each measure to provide incentives to the private economy invariably benefited the capitalists and landlords more than the peasants and artisans, since large- scale operators possessed greater economic power in the competition over credit and other resources and controlled what the Sandinistas wanted produced (exports, for example). Each pro-private sector policy had to be followed by damage control, as the government repeatedly discovered the ingenuity of capitalists and landlords in finding avenues of decapitalization and capital flight.

Never in control of the economy, the Sandinistas were in continuous struggle to prevent the capitalists and landlords from reconsolidating their control. It is quite appealing to argue, as Keith Griffin does, that the Sandinistas could have constructed a mixed economy based at the small peasant and urban artisans. Indeed, the Sandinistas have done this, but these groups hold little economic power and their role in the export sector was slight Such a mixed economy has provided a peasant base for the revolution, but done little to solve its over whelming need for foreign exchange.

Contradictions Without Resolutions

The essential feature of the conflict over development models within the leadership was that it could not be resolved. As long as the private sector was intent on sabotage and the Reagan administration hostile, the mixed- economy strategy was doomed to failure. Without substantial aid from the Soviet Union and its allies, a “Cuban” model remained a non-starter.

Resolution of the debate would have required the ascendancy of a part of the Sandinista leadership over the rest, implying an open split in the revolution. Once external aggression gathered force, the leadership forged unity around the principle upon which all could agree resistance to counterrevolution and U.S. domination. This unity required that the differences over economic policy remain unresolved.

When a house is burning there is little opportunity to debate the optimal manner in which to extinguish the blaze The Reagan administration pursued a policy of pyromania in Nicaragua, and this successfully undermined the ability of the Sandinista leadership to focus upon any issue other than national defense.

The most surprising aspect of Nicaragua’s economic performance during the 1980s is that it has not been worse. During the 1980s, the country has been continuously at war with the world’s greatest power via the surrogate contra force, suffered from a trade embargo by the United States, and lost access to borrowing abroad. On the other hand, assistance from the Soviet Union and Eastern Europe, except for military aid, was noteworthy by its sparseness.

Despite this collection of maladies, per capita income in Nicaragua fell less over the period 1980-87 than in El Salvador or Guatemala, and about the same as in Honduras. These are precisely the years of the extensive market interventions that Griffin criticizes. The massive contradictions of the Nicaraguan economy occurred in 1988 and 1989, after the government had abandoned most of the interventionist policies that he finds so foolish.

Critics of the Sandinista government have tended to make much of the country’s allegedly chaotic economic conditions during the last two years. The ‘chaos’ as such is largely limited to inflation and the balance of payments.

Inflation in wartime is probably an unavoidable phenomenon without price controls or the type of extensive balance of-payments support received by El Salvador from the United States (which allows imports to absorb excess monetary demand). The continuation of the high inflation into 1989 was the result of deregulation and liberalization of markets, which iii retrospect may be judged of questionable utility.

With regard to the balance of payments, Nicaragua has suffered from three difficulties in comparison to which domestic policies are largely trivial. First, there is the U.S. trade embargo, a measure which the World Court de-dared in violation of international law. Second, Nicaragua has lost virtually its entire export market in Central America Nicaragua’s share of regional exports has declined much more than for any other member of the Central American Common Market, and this has been due to regional politics not domestic economic policy. Finally, much of the fighting within Nicaragua occurred in areas important for export production, and the contra made economic disruption a key element of strategy.

The three fallacies about the Nicaraguan revolution relate to a fourth. Contrary to Griffin’s fundamental assumption, the Sandinista leadership never embarked on a concerted plan to eliminate capitalism and “launch a socialist strategy of development.”

To recognize this is not a criticism. Indeed, to measure the efforts of the Sandinistas against the yardstick of socialism, either by critics or friends, is both unfair and a historical The Frente Sandinista para la Liberacion Nacional initiated the great historical task of liberating its country from neo-colonial domination. That task did not end with the fall of Somoza, and through ten years of rule the leaders of the FSLN have remained true to the creation of an independent Nicaragua.

The period Griffin reviews should be seen as a phase in national liberation, not a period of socialist construction or great policy coherence. He would seem to have missed the message in his quotation from Lenin and “ignored the limits and conditions in which revolutionary methods are appropriate.”

The Sandinistas took power to free their country from U.S. domination. They have done so. To attribute the economic ills of the Nicaraguan economy to ‘foolish’ policies is to brush aside the class conflicts inherent in national liberation. It is also rather like condemning a victim of a mugging for not adopting a healthier diet. If the United States government stopped mugging Nicaragua, Sandinista economic mismanagement would become an issue worthy of serious debate. Until then, it involves blaming the victim.

November-December 1989, ATC 23

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