Industrialization In Sandinista Nicaragua

Policy And Practice In A Mixed Economy

Andrew Zimbalist

• Publisher: Taylor & Francis
• Year: 2019
• eBook ISBN: 9780429714108
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book explores whether the Sandinista 'mixed economy'—a 'transitional' mixed economy—could have been stable if the Sandinistas had been able to pursue their industrialization strategy for a longer period of time. It explains why Nicaragua's mixed economy was stable for almost eleven years.

1
Introduction

With the victory of the FSLN (Frente Sandinista para la Liberación Nacional; Sandinista Front for National Liberation) on July 19, 1979, Nicaragua's new government opted for a "mixed economy": state ownership of the means of production would coexist with private ownership, and the market would operate alongside state planning. The revolutionary government drew lessons from the Cuban example and avoided a premature state control of the economy.

The government began by nationalizing the property of former dictator Somoza, which brought the economic potential of about a quarter of the gross domestic product (GDP) into state hands. In addition, the foreign-owned mining companies were expropriated, and the government took control of foreign trade and the banking system. The rest of the economy, accounting for 60 percent of GDP, remained in private hands. The private sector consisted of small-scale handicraft producers, small traders, and peasants and of large-scale producers in agriculture and industry. The market was still the dominant coordinating mechanism, but the government had decided influence on the economy through its control over the allocation of foreign exchange and finance.

When the Sandinistas seized power the country's economic situation was disastrous. Of the 2.5 million inhabitants about 50,000 people had lost their lives during the liberation war and 100,000 had been wounded. Hardly any food crops had been planted, and many industrial plants were severely damaged. During the eighteen months before the Sandinista victory, an enormous capital flight had taken place: $220 million in 1978 and $315 million in the first six months of 1979 (ECLAC 1979:1026). In July 1979 there was only $3.5 million left in the banks.

The Sandinista government inherited not only the consequences of the war but a country that had developed very unevenly. During the 1950s and 1960s Nicaragua had had high growth rates based on extensive agricultural production for export. But growth had not "trickled down" to the majority of the population. The income distribution was very skewed: Fifty percent of the population earned only 15 percent of national income in 1977 (FIDA 1980:53). Social services such as health and education hardly existed.

In the 1970s economic growth slowed down. Despite a rapid industrialization process in the 1960s and 1970s, the agricultural sector accounted for most exports and absorbed half the labor force in 1979. The industrial sector was to a significant extent dependent on imports of capital goods and raw materials.

The revolutionary government's first objective was to consolidate state power. The FSLN succeeded in establishing control over domestic policies. However, from 1981 onward the country suffered from military destabilization by former members of Somoza's National Guard, the counterrevolutionaries or contras. The contras' numbers grew as US government funding for their forces increased. Although they never became powerful enough to overthrow the Sandinista government, their actions brought about severe damage to the economy and forced the government to spend heavily on defense. The need to maintain a well-organized defense was even more pressing because there always was the threat of a direct invasion by U.S. forces.

The government attempted to reactivate the economy, at the same time seeking to change the structure of production. The objective was to make the economy less dependent on foreign trade and to direct production more to the interests and needs of the "poor majority" (MIPLAN 1980 and 1981). The government developed a strategy for state-directed accumulation—that is, the use of resources to increase production—, aimed at fulfilling the basic needs of the population and achieving more international independence.

The agricultural sector was to take priority in the development strategy. The Sandinistas stimulated agricultural exports because foreign exchange was necessary to import capital goods and raw materials. At the same time the Sandinista government stimulated food production for the domestic market in order to begin to fulfill the objective of redistributing goods and services throughout the population. It fostered manufacturing only to meet basic needs, provide intermediate goods for other important sectors like agriculture and construction, and process agricultural products (agroindustry). From 1981 onward state investment projects were initiated, mainly in physical infrastructure, agriculture, and agroindustry.

Although manufacturing proper was not a high priority in Nicaragua's development strategy, I refer to this strategy as "industrial." Although most investment aimed at or supported the expansion of agricultural production in the short term, in the long term it was directed toward an agroindustrialization of the country.

Generally, the economic order—state-controlled, market oriented, or mixed—influences a country's industrialization strategy. A country's industrialization strategy also influences its economic order. This book focuses on Nicaragua's industrialization strategy, examining the relationship between the country's economic order and its opportunities for industrialization. It is hoped that the Nicaraguan experience will provide lessons to other developing countries pursuing industrialization in a mixed economy.

The Nicaraguan economy from 1983 to 1990 must be characterized as a war economy. This raises the question of the relevance of analyzing possibilities for industrialization. In spite of the war, however, the Sandinista government clearly pursued an industrialization strategy. At least until 1988, it maintained a fairly high accumulation rate (the shar of accumulation in the GDP). In addition, for a small country like Nicaragua, the war situation did not fundamentally alter sectoral priorities within the industrialization strategy. In larger and more developed countries, increased demand as a result of war can stimulate economic production in general and lead to a buildup of heavy industry in particular. In Nicaragua, this increased demand only created imbalances such as inflation and a balance-of-payments deficit, because the war also reduced domestic supply. So although the war had a negative influence on industrialization possibilities, this influence mainly related to the speed of industrialization and rarely led to changes in the allocation decisions.

One would expect the war also to limit the comparability of Sandinista Nicaragua with other countries. But in practice, all developing countries that establish a noncapitalist economic system need to defend themselves against attacks or threats of attacks of at least one capitalist power¹. Even in the context of war, then, developing countries generally design strategies for development, including industrialization.

The Mixed Economy

The economic order, or economic system, is the institutional structure that determines who makes decisions about production, distribution, and consumption (see also Bornstein 1989:4; Wagener 1980:70). The institutional structure is the more or less stable pattern of juridical norms and social behavior. The main determinants of the institutional structure are the ownership of the means of production (private or collective) and the coordination mechanism that links economic

TABLE 1.1 Types of Economic Order

	Ownership
Coordinating Mechanism	Private	State
Market	I	II
Planning	III	IV

Source: Author's elaboration of Wagener, H.-J. 1980. Ecortomische systemen: Theorieët, institutes en doelstellingen. Alphen aan de Rijn: Samson, p. 219.

entities (market or planning).² This classification leads, in principle, to four types of economic order (see Table 1.1):³ a capitalist order, with private ownership of the means of production and use of the market as a coordinating mechanism (I); a socialist order, with state ownership of the means of production and use of planning as a coordinating mechanism (IV); a market economy with state ownership of the means of production (II); and a planned economy with private ownership (III).

Although in type II the state is juridical owner of all means of production, decisions on production and, to some degree, investment, are decentralized and made by the enterprises. The state determines only part of investment. This type exists in Yugoslavia to a certain extent. The combination of central planning with predominance of private ownership of large-scale means of production (type III) seems feasible only in wartime.⁴

The Sandinista mixed economy is "mixed" regarding both ownership and the coordination mechanism. But in actuality, all existing economic systems are "mixed." Countries such as France, The Netherlands, and even the United States have some state enterprises, apply price regulations and (anti) monopoly laws, and have social insurance. We can call these systems "Keynesian-mixed economies," in which the state acts to correct some undesired consequences of the market system and to provide infrastructure. But private ownership is dominant and the market provides the system's dynamic. For these reasons, I classify these countries as "capitalist economies" (type I).

Examples or other economies sometimes called mixed are those of countries with a large state sector, such as Mexico, Brazil, and nineteenth-century Germany and Japan. The state undertakes initial production activities for the long-term benefit of the private sector. The state is in a better position to bear the financial risks associated with early stages of production activities, in particular large-scale ones. But the market remains dominant, and the intention is to stimulate capitalist development. When the risks are lower, the government sells state enterprises to the private sector. This type of economic system is described by Gerschenkron as a road to industrialization for "backward countries." I call it the 'late-developing mixed economy," which also is a capitalist economy (type I).

East European countries such as the Soviet Union and the former GDR were on the other side of the spectrum.⁵ But some privately owned agriculture always existed there also, and the market played a role as a coordinating mechanism in the distribution of consumer goods and in the allocation of labor, for example. However, I call such systems "socialist countries" (type IV) because state planning fulfills most of the allocative and distributive functions, and the majority of the means of production are state owned.

Contrary to the types of mixed economy described thus far, the Sandinista mixed economy is the kind of economic order adopted by most countries upon the seizure of power by a socialist party or liberation movement. In the 1970s, third world countries such as Tanzania, Mozambique, and Angola chose a mixed economic order. A defining characteristic of this mixed economy is that it is related to a period of "transition," namely a transition to socialism. So it can also be called a "Leninist-mixed economy."

After the seizure of power the new government carries out some nationalizations to achieve state control over the "commanding heights" (Lenin) of the economy: the financial sector, foreign trade, and some "basic" industries.⁶ The rest of the economy remains in private hands. Some state planning is introduced, but the market continues to be important. The government aims, in the long run, to socialize the production relations. (The exact nature of this socialization is not clear, as I will show further on.)

This mixed economic order is not equal to Kalecki's "intermediate regime," which he defines as representing the interests of the lower-middle class, including corresponding strata of the peasantry (Kalecki 1972:162). These interests are opposed to, on the one hand, those of the feudal landlords and big business and on the other, those of small landholders and landless peasants. The Kaleckian mixed economy is, politically speaking, an "intermediate" between socialism and capitalism. "My" mixed economy, however, is ultimately based on the interests of the working class or on a coalition of workers and peasants. In this political sense it is not an "intermediate regime" and in fact is closer to a socialist system. But in the short run it may well have some characteristics of the Kaleckian intermediate regime.

Why study the possibilities for industrialization in such a mixed economic order? In fact, the mixed economy of the transition to socialism is usually temporary (at least in the economic if not in the political sense of "my" economy). It lasted from one year to about a decade. In some countries the end of the mixed economy came about when the socialist-oriented party lost power, by causes ranging from a military coup (Chile) to elections 0amaica). In countries where the socialist government succeeded in maintaining its power, the mixed economy also was a temporary phenomenon. It was replaced in due course by a more centrally planned system with prevailing state ownership of the means of production. This happened in the Soviet Union and in most other current or former socialist countries such as China, Poland, and Vietnam. In Cuba, the general hostility of capitalist countries almost forced the country to establish a Soviet-type economy. In other countries political factors contributed to a centralization of the economy (and the society), and the coercive influence of the USSR often played a role.

Two more general factors led to the substitution or mixed economic orders with socialist orders in the previously mentioned countries. First, the leaders often understood the objective to socialize the production relations to imply a forced collectivization of agricultural production, a nationalization of the rest of the economy, and the establishment of central planning. Second, they assumed that abandoning the mixed economy and establishing state ownership of the means of production and central plan...

Table of contents

• Cover
• Half Title
• Series Page
• Title
• Copyright
• Contents
• List of Tables
• Preface
• 1 Introduction
• 2 The New Economic Policy
• 3 Industrialization Before 1979
• 4 The Mixed Economy
• 5 Accumulation and Sources for Accumulation
• 6 The Mixed Economy and Industrialization
• 7 Summary and Conclusion
• Epilogue
• Appendix 1: The Methodology for the Fieldwork
• Appendix 2: List of Questions
• List of Acronyms
• Bibliography
• Index