Nicaragua's Smashed Glass

A YEAR AGO in this space I predicted that if all went well, the government of Violeta Chomorro would bring prosperity and meaningful democracy to Nicaragua.

All has not gone well.

Asked recently whether Nicaragua's economic glass was half empty or half full, the mission chief for the U.S. Agency for International Development replied: "The glass is neither half empty nor full. The glass is smashed. There is no glass."

At the time of the election, Nicaragua's per-capita income had declined from a pre-revolution level of $964 to about $300. Inflation had peaked at around 36,000 percent. Staple crops such as rice and beans, once exported, were in short supply by last year. Corporations were taxed at a flat 50 percent rate, which helped fuel a general capital flight from the country.

The factors were multiple: a decade-long civil war, a complete politicization of the economy under Sandinista rule and a U.S. economic embargo all contributed to the situation as it existed before the February 1990 triumph of Chamorro's National Opposition Union.

This is not to say that the picture was rosy in pre-revolutionary Nicaragua. Although there may have been a relatively more stable economy and a higher per-capita income, wealth was concentrated in the hands of the Somozistas and the ruling elite that backed Somoza's corrupt and repressive regime. But the ten years of Sandinista rule undeniably increased the overall poverty of the country. This was what Chamorro--in Washington this week to plead for more aid--has pledged to reverse. This is what she has failed to do.

WHY?

The UNO platform pledged to scale down the bloated, Sandinista-controlled military, limit the sphere of government, reinvigorate respect for private property, proceed apace with privatization of Sandinista-nationalized corporations, decrease the influence of Sandinista unions and give those peasants who had been working on cooperative farms title to the land.

In the past year, although some of these reforms have been carried out, Chamorro's government has stalled in its efforts. The military has been reduced from 85,000 soldiers to 38,000, but the public sector still includes 110,000 workers, an exorbitant number for a country of only 3 million. Plans for meaningful agricultural reform are proceeding slowly, although production in staple crops has increased slightly.

Sandinista unions have fought the privatization of state-owned companies and the downsizing of the public sector at every turn. They held two bloody and disruptive strikes last year and another strike last month, just after a new austerity program was announced. They have also blackmailed the government into giving them huge pay increases when the nation owes more than $360 million to international banks.

And the smaller military has been no less greedy. Last year, the government made secret payments of several million dollars a month over its official budget to the military. The military has also helped to stall privatization efforts and continues to confiscate privately-owned farms, said the president of a farm organization in a New York Times article yesterday.

Chamorro herself must bear some of the blame for the continued economic mess as well. Post-election fears about her incompetence have been realized.

The president has surrounded herself not with experienced economic experts but with members of her own extended family. A Yale-educated economist helped reduce the government's monthly deficit from $30 million to $8 million between last April and last September, but resigned last October because of conflicts with Chamorro's family, setting the stage for the descent into free spending and renewed inflation.

Because of the stalled reform plans, five digit inflation continues, although it has been "reduced" to only 12,000 percent. Although the "gold cordoba," a new currency introduced last year, began at an exchange rate pegged one-for-one with the dollar, since its introduction into general circulation in early March it has already declined to a rate of five-to-one.

The overall picture is no better. Last year, production shrank by five percent. And the unemployment rate hovers at around 40 percent.

WHAT CAN BE DONE about Nicaragua's broken economic glass? After receiving $300 million in aid from the United States last year, Chamorro counted on expected grants and loans from other international sources to revive the economy. Because of the chaotic state of the economy, however, lenders are reluctant to cough up funds until the new reform package announced last month begins to take effect.

But relying on institutions like the IMF instead of proceeding with real reform at home would be a perilous tack for Chamorro to take. Nicaragua certainly needs to reduce its foreign debt. But as Nicaragua's current debt demonstrates, foreign aid, although an attractive idea, tends to increase countries' dependence upon foreign governments rather than building up a strong domestic economy.

In addition, such aid tends to get funnelled into government rather than private enterprise. And those private companies that do receive aid are, more often than not, chosen to please corrupt government cronies rather than to invigorate competitive enterprise.

Chamorro's plan to allow the creation of private banks, illegal since the Sandinista Revolution in 1979, could help provide needed startup capital for emerging small firms. Many foreign banks, including several from Mexico, have expressed interest in entering the Nicaraguan lending market.

But simply creating private banks will fail to address the more fundamental problems in the Nicaraguan economy. Chamorro must stop stalling on privatization efforts. She must gain the political will to defy the unions if she wants to reduce her government's $35 million-a-month deficit. She must stop extending credit to pay for union blackmail if she wants to control inflation.

Most important, Chamorro must free private businesses from the exorbitant taxes and arbitrary regulations begun under Somoza and extended under the Sandinistas. "Reform" will do little to alleviate Nicaragua's overall poverty if promised foreign aid reinforces the prerevolutionary maldistribution of wealth. If aid comes without a freer business climate, small firms and small farmers will suffer at the expense of a retrenchment of the upper class returning from exile.

Before asking for another extension of credit from President Bush, she should take another look at her own plans to pick up the pieces of Nicaragua's shattered glass.

>Five-digit inflation. Falling productivity. Not much has changed.