Structural Adjustment and the Spreading Crisis In Latin America

The Development GAP, Washington, D.C.
October 1995. Copyright /c/ 1995 by The Development Group for Alternative Policies, Inc. If you would like to reproduce this document, please send an email message requesting permission to or phone us at (U.S.) 202/898-1566. Printed copies of the report are available from The Development GAP.




The Root of the Crisis


Tearing the Economic and Social Fabric


Eroding an Egalitarian Tradition


Inducing Illegal Drug Production


An Alternative Emerges



When the bottom fell out of the Mexican peso in December 1994, there was no shortage of intense reaction. Mexico's new president, Ernesto Zedillo, blamed former president Carlos Salinas for not devaluing the peso sooner. The World Bank insisted that the Mexican government, whose economic program the Bank had praised just months earlier as a model for other countries to emulate, had failed to implement the last few crucial reforms in its free-market economic program. Later, the International Monetary Fund (IMF) insisted that the economic collapse had been triggered by the selfish actions of Mexican investors.

In other countries in the hemisphere, the Mexican crisis led foreign investors to panic. Many pulled out their capital, particularly from Argentina and Brazil, and put new investments on hold. Constrictive economic measures taken in the former in order to induce investors to return and to shore up financial institutions have led to protests in most provincial capitals. But Argentina's precarious situation and popular unrest is not unique in Latin America: this year alone, citizens have taken to the streets in opposition to adjustment measures in Costa Rica, Panama, Venezuela, Ecuador, Bolivia and other nations, most notably, of course, Mexico.

The cure prescribed for Mexico and the region's other destabilized economies by the international financial institutions (IFIs) in the aftermath of this shock has been the same medicine that they have taken for as long as a dozen years. It is a prescription that has weakened them at their core and made them dangerously vulnerable to the whims of international investors. Not only have the IFIs and the U.S. Treasury continued to demand government adherence to stabilization and structural adjustment programs, they have reacted to the current crisis by insisting on the more rapid and extensive implementation of these programs and many of their key component measures.

Stabilization and adjustment programs work in tandem. Stabilization measures are short-term actions designed to bring down inflation and help countries improve their balance-ofpayments situation. They often involve deep cuts in the money supply (e.g., by restricting credit) and a large devaluation of the local currency. Stabilization is usually followed by longerterm policy changes that together constitute "structural adjustment".

Structural adjustment programs (SAPs), principally a policy tool of the World Bank, but one also utilized by the IMF, other multilateral development banks (MDBs) and bilateral aid agencies, generally entail the privatization of state-owned enterprises, the reduction of government expenditures, and the liberalization of trade regimes. They are intended to open the economy to increased foreign investment -- attracting foreign capital by deregulating markets and offering low wages and high interest rates -- and to encourage other private-sector activity, including the expanded production of goods for export.

Stabilization and adjustment programs pushed on countries badly in need of international financing have, in some cases, helped to tame inflation and effect some measure of economic growth, albeit usually uneven and unsustained. In almost all cases, however, they have depressed wages, undermined rural livelihoods, increased poverty, and further concentrated income. Nowhere have the polarization of society and the unsustainability of this economic model been so vivid as in Mexico, which became overly dependent on imports and foreign capital while sacrificing the development of its own local productive capacity.

Yet, there have been even greater economic and social disasters in Latin America, foremost in Nicaragua, which has suffered under a donor-financed adjustment program since 1990. Meanwhile, in the Andean countries, small farmers, squeezed by adjustment policies, have turned to producing coca to survive. Even historically democratic and stable Costa Rica has seen a steady deterioration of economic and social conditions during its dozen years under adjustment. Poor women, workers, small farmers and businesspeople, and many in the region's middle class, who have borne the consequences of the economic-reform programs, were warning of growing economic and social polarization in their respective countries as early as the mid-1980s.

By the '90s, investors and politicians in the region were also becoming increasingly concerned about potential crises and instability in most Latin American nations. Nonetheless, the World Bank, the IMF and Northern finance ministries have substantially succeeded in preventing an examination of the relationship between economic adjustment programs and the social and economic problems they have repeatedly left in their wake. While additional social spending has once again been proposed as a means of mitigating the effects of adjustment programs, the principal measures in the adjustment package -- trade liberalization, privatization, deregulation, credit reduction, wage suppression -- are not on the table for discussion in most official forums. Yet, to take effective action to address the growing poverty, unemployment and disintegration of societies throughout the Americas without a critical examination of the economic programs that have been in place for a decade or more and without a serious exploration of policy options is clearly impossible.

Therefore, as part of the now broad-based citizen effort in the hemisphere to highlight this ever-deepening economic and social crisis that is characterizing the last years of the 20th century, we offer the following brief case analyses of structural adjustment programs and their economic and social effects in five Latin American countries. In the cases of Mexico and El Salvador, we have incorporated the incisive grassroots analysis of close local partners, updating a jointly published, prophetic report by Equipo PUEBLO in the former and summarizing FUNDE's extensive recommendations for change in the latter. Field-based research also provided the core of the analysis in the Nicaragua, Costa Rica and Bolivia studies, and we thank our colleagues in those countries, as well, for their assistance in the preparation of this document.

We hope that, in making our own contribution, we have done justice to the dramatic and distressing story of the Latin American people struggling under structural adjustment.

Doug Hellinger
Karen Hansen-Kuhn

The Root of the Crisis

by Carlos Heredia and Mary Purcell

The economic and social crisis gripping Mexico today began some thirteen years ago when the Mexican government, confronted with a massive foreign debt, implemented a set of structural adjustment measures promoted by the World Bank and the International Monetary Fund. Those policies, intended to control inflation and generate foreign exchange to help pay off the debt, resulted in increased unemployment, poverty and economic polarization. By steadily tearing away at Mexico's economic and social fabric -- and particularly at the well-being of its small rural and urban producers -- they set the stage for the economic collapse of December 1994.

Even then, the Clinton Administration, the IMF and the Mexican government refused to address the failure of the economic model. To the contrary, they designed a US$51 billion bailout package that, by further entrenching the very policies that caused the collapse, has plunged the country into an economic depression.

The further tightening of credit, suppression of wages, cuts in social spending, and liberalization of trade and financial markets have intensified the decline of local productive capacity, deteriorated the welfare of the vast majority of Mexicans, and increased the country's dependence on foreign capital, imports and markets. Social and political tensions, manifested most dramatically in the Chiapas crisis, threaten to tear the country apart as its economy founders.

Since the onset of the crisis in December, the Mexican stock market has fallen 35 percent and the peso has lost half its value vis-a-vis the dollar. Annual inflation will reach nearly 50 percent this year. With consumer interest rates at 80 percent, businesses and individuals are finding it impossible to pay back loans, and major banks are going under. Nearly two million workers have lost their jobs as factories and other businesses fail or severely cut back production. Sales of basic goods in supermarkets are down by 25 percent, construction has fallen by 35 percent, department store sales have dropped by 40 percent and sales of new cars are down 67 percent.

The Crippling Effects of Structural Adjustment in Mexico

From 1982 right up to the economy's collapse in late 1994, the Mexican government implemented virtually all of the adjustment policies promoted by the World Bank and the IMF: reductions in public expenditures (including social services); elimination and/or targeting of subsidies; tax reform; restriction of credit; privatization of most state enterprises; trade liberalization; devaluation; removal of barriers to foreign investment; and "competitive" wages. Privatization and deregulation contributed to a steep concentration of income and wealth, a trend that ran counter to the imperative of creating a strong domestic market as a factor in ensuring sustained economic growth. In what analysts term a "trickle up" process, there was, in Mexico, a massive transfer of resources from the salaried population to owners of capital, and from public control to a few private hands.

Health and Nutrition. One of the first adjustment policies implemented was a drastic cut in public spending. In general, adjustment suggests the cutting of "non-productive", or primarily social, spending so as not to affect output or revenues. Thus, during the decade of the eighties, the health budget as a percentage of overall public spending fell from 4.7 percent to 2.7 percent. The World Bank acknowledged in a 1990 staff appraisal report that the Mexican government "...may be underspending on health care," but because of the need to control public spending the Bank argued that it was necessary to look for alternative sources of financing, "...including the possibility of privatizing health sector activities such as curative services." The poor who rely on these services are hardest hit by such cuts, since they cannot afford private alternatives. One result was that between 1980 and 1992 infant deaths due to nutritional deficiencies almost tripled to rates higher than those in the seventies. In September 1995, the Salvador Zubiran National Institute on Nutrition reported that 80 children under the age of one die each day in Mexico due to malnutrition. With 30,000 such deaths each year, Mexico is near the bottom of UNICEF~s rating of countries~ efforts to address malnutrition. The only countries with a greater rate of infant mortality are at war.

Squeezing Small Producers. Meanwhile, trade-liberalization and restrictive-credit policies were undermining many domestic small industries and agricultural producers who were unprepared for the dropping of trade barriers and unable to compete with cheap imports. Many of them went out of business or turned into retailers for U.S. manufacturers. This situation has been exacerbated as interest rates have skyrocketed in 1995 and priority access to the limited credit that is available is given to producers with export potential. This credit structure has reinforced monopolies in the Mexican economy and is now devastating micro, small and medium-sized businesses, more than a third of which have not survived the current crisis. Sixty percent of these smaller enterprises, which historically employ 80 percent of the country's labor force, have laid off workers in 1995. Even before the peso crash and the bailout program, those who could get credit faced extremely high real interest rates, maintained in an effort to attract foreign investment and prevent capital flight.

Unemployment. Mexico had been cited by the World Bank as a successful example of a country where adjustment has included a real wage reduction in order to prevent massive unemployment. However, in a 1991 study, the Labor Congress (CT) indicated that, out of an economically active population of 34 million, 15 percent were openly unemployed, and over 40 percent -- some 14 million people -- were underemployed. According to the United Nations' Economic Commission for Latin America and the Caribbean (ECLAC), Mexico is the rare case in which the economy is marked by an inverse relationship between investment and employment. While the former has increased by nine percent from 1992 to 1994, the creation of new jobs went down. Furthermore, every day since January 1995 an average of 7,933 people have lost their jobs. The government only measures urban unemployment, while the problem is thought to be greatest in rural areas. But even by government figures, unemployment has risen by 106 percent since the start of the Zedillo administration in December 1994.

Declining Wages. Mexico witnessed a steep and continual decline in real wages during the eighties alongside massive layoffs and high levels of unemployment. By mid-1994, the minimum wage in Mexico was the equivalent of US$4.42 per day. According to a study by researchers at the Faculty of Economics of the National Autonomous University of Mexico (UNAM), from the initiation of the government's Pact with business and labor in December 1987 until May 1994, the minimum wage had increased by 136 percent, while the cost of the Basket of Basic Goods had grown by 371 percent. Official government figures show the minimum wage lost 53 percent of its purchasing power between 1982 and 1988, another 28 percent from 1988 to 1994, and an additional 13 percent during only the first four months of 1995.

Growing Poverty. The World Bank estimates that the number of Mexicans living in poverty grew by an average of 660,000 during each of the past fifteen years. The United Nations Population Fund says that the number living in poverty is growing by 1.2 million annually. According to a 1992 study commissioned by the government's primary anti-poverty agency, Pronasol, about one half of all Mexicans lived in poverty in 1990 (42 million) and 18 million lived in conditions of extreme poverty. The study goes on to say that "... if the poverty figures are frightening, their consequences should be even more frightening... Malnutrition has become the normal condition of society..." A recent study by the newspaper El Financiero revealed that the intensified adjustment program of 1995 had caused the ranks of those classified as "extremely poor" to swell by 2.193 million by August of this year.

Skewed Income Distribution. Over the past decade, the already large gap between the rich and the poor in Mexico has widened. The richest 20 per cent of the population received 54.2 per cent of national income in 1992, against 48.4 per cent in 1984. The income of the poorest 20 per cent fell from five per cent in 1984 to 4.3 per cent of national income in 1992. To illustrate the extreme concentration of wealth and income, the wealthiest Mexican, Carlos Slim, the owner of Telefonos de Mexico, is said by Forbes magazine (18 July 1994) to be worth 6.6 billion dollars. At the other extreme, about 20 percent of the population -- 17 million people in extreme poverty -- subsist on incomes of less than $350 per person per year. In other words, the assets of the richest man in Mexico total more than the annual income of the poorest 17 million people combined. Slim is not an isolated case: during the Salinas Administration the number of billionaires in Mexico rose from two to 24.

These effects of structural adjustment have been felt in urban and rural areas throughout Mexico. The plight of peasants and food producers in Chihuahua and of women in the San Miguel Teotongo slums of Mexico City are but two of the many examples of how profoundly these economic policies have affected the lives of Mexicans at the community level.

Structural Adjustment in Rural Mexico: The Case of Chihuahua

Bordering on the United States, Chihuahua is one of Mexico's largest states, with a population estimated in 1990 to be 2,441,873. Its rain-fed agriculture is dedicated primarily to the cultivation of corn and beans, two staples of the Mexican diet. Peasants generally grow these crops for their own consumption and to supply the urban population in the city of Chihuahua.

Although adjustment has proceeded more slowly in the agricultural sector than in other areas, by 1992 the Salinas administration had utilized a variety of adjustment policies to transform the agricultural sector into a more efficient producer for the international economy. Mexico received an Agricultural Sector Loan (ME-2918) from the World Bank in 1988 that guided agricultural reforms for two-and-a-half years. The overall objectives of the program were to:

  1. remove global food subsidies and target remaining food subsidies to the poor;
  2. reduce government intervention in agricultural markets, in part by moving from guaranteed prices for grains (corn and beans excluded) toward market-determined pricing;
  3. abolish export controls and quantitative restrictions on key products;
  4. reduce the role of agricultural parastatals;
  5. liberalize agricultural trade;
  6. cut the subsidization of inputs;
  7. increase the efficiency of public investment in agriculture in real terms; and
  8. decentralize and cut staff of the agriculture ministry.

In addition, other sectoral loans making up part of the adjustment "package" directly affected Chihuahuan corn and bean producers. For example, the Bank, through a financial-sector loan, sought to reduce subsidized credit from development banks; a trade liberalization loan was linked to a reduction in tariffs on agricultural imports; and a fertilizer sector loan required the internationalization of fertilizer prices. Together, these loans have led to a comprehensive restructuring of the agricultural sector.

The loan programs have reduced credit to small grain producers, eliminated farm-input subsidies, reduced or eliminated guaranteed prices, and further liberalized trade. Their effect has been to stimulate the large-scale production of export crops and reduce support for the production of basic foods, with import-tariff reductions resulting in a surge of cheap imported basic grains with which the farmers cannot compete. While increasing the cost of farm inputs, they have at the same time decreased the price of basic grains.

Faced with such drastic cuts in credit, the peasants of Chihuahua have been forced to seek various forms of supplemental financing. This may entail the selling off of livestock, though, more commonly, family members are forced to work in the cities, in the maquila industries, for large landholders, or in the United States, creating more financial problems on the farms because of the loss of free family labor. In fact it is becoming more and more difficult to find a family that does not have at least one relative working in the United States and sending money home. The situation of Martha Hernandez de Gonzalez is typical:

     My husband is always here during planting season, but
     the rest of the year he spends working in the United
     States.  He and four children in Texas, Florida,
     Colorado and New Mexico take care of all the family
     expenses and they take turns helping with the planting.      
     When we are short of money, my husband and my children     
     are contracted to work in the apple orchards or to do
     some other work in the countryside.
     The adjustment policies have thus resulted in decreased

peasant production and productivity and a further concentration of land ownership. A vicious cycle of decapitalization, low productivity, decline in incomes, deterioration of living standards, and migration is repeating itself. The overall quality of life in the state has deteriorated.

It is clear to many that the government is attempting to slowly force small farmers out of corn and bean production. However, no practical alternative has been offered. Officials at the World Bank recommend that these producers move on to more productive activities or to crops "like strawberries". Aside from the fact that strawberries cannot be competitively produced on these lands, such a transition would require financing, training, and technical and marketing assistance, and very little government support is available in any of these areas. Without comprehensive programs to assist in the restructuring of economic activity, current economic policy will only lead to increased poverty and migration to the cities.

The Impact of Adjustment on the Urban Poor: The Case of San Miguel Teotongo

As opportunities have diminished in the countryside, Mexicans have increasingly moved to the cities in search of a better life. Although poverty is most severe in rural areas of Mexico (due largely to decades of an urban bias in public policy), it is broadly believed that the urban poor have been hit hardest by the adjustment process. They constitute the group that relies most heavily on wage employment, consumer subsidies and public services -- all of which have declined under adjustment.

The community of San Miguel Teotongo is located in the Iztapalapa district on the eastern outskirts of Mexico City. Iztapalapa is the largest and one of the poorest districts of the metropolitan area. San Miguel was settled in 1972 by poor families that left the center of the city because of high rents and overcrowding. Since then, San Miguel has grown rapidly to a population of close to 80,000 today.

Three sets of adjustment policies have had the greatest impact on the residents of San Miguel Teotongo: the reduction of real wages and reduced public investment; cuts in subsidies and the liberalization of prices; and cuts in public services. The effects of these policies include: a reduction in real income and purchasing power; an increase in the importance of the informal economy and family labor; an increase in the relative price of many basic goods and services; and a reduction in the quality of public services while their costs increase.

Declining real wages and job opportunities are the most serious problems faced by families in San Miguel Teotongo. A central feature of the government's stabilization and adjustment program has been the reduction of real wages, while declining investment, the growing privatization of the economy, and publicsector cutbacks (all part of adjustment) have led to fewer employment opportunities. In general, families in San Miguel are working harder and longer for less income today than 12 years ago.

Nationally, decreases in wages have occurred at all salary levels, but losses have been greatest among the lowest wage earners. Considering the 67 percent loss in purchasing power of the minimum wage between 1982 and 1991, workers should be making three times the minimum wage just to stay even. With only 5.7 percent of the workers surveyed in San Miguel in 1993 earning more than twice the minimum wage, it is clear that there has been a substantial decline in overall family and community purchasing power. According to national poverty indicators, 67.9 percent of the population of San Miguel Teotongo lives in poverty.

The decline in real wages has been accompanied by an increase in prices. Studies show that the prices of basic foods have risen even faster than those of many other consumer goods. Since food is the primary expense of poor households in San Miguel, the latter are severely affected by such price rises. Increases in food prices are the result of the reduction or removal of subsidies and the liberalization of the basic-foods market. Both of these policies were mandated under adjustment. The "canasta basica" (the basket of basic goods deemed necessary for a family of five) cost 46 percent of the minimum wage in 1983, 81 percent of the minimum wage in 1988, and 61 percent more than the minimum wage in 1992. Today, the same "canasta basica" costs four times the minimum wage.

The trends in education in San Miguel reflect what is happening nationally. Most children complete primary school, but increasing numbers of secondary-school-aged children are dropping out. One of the stated goals of SAPs regarding education is the transfer of government resources from higher education to primary education. However, between 1982 and 1990, the education budget fell from 5.5 percent of GDP to 2.5 percent. As public spending declined, the cost of books and materials increased. As a result, the cost of sending children to school is often prohibitive for poor families, and economic crises frequently force even young children to work. The impact has been felt by many in San Miguel, including Gloria Bautista:

     I have six children.  My two oldest dropped out of
     secondary school after the first year.  We couldn't
     afford to buy the books and they got bored.  Now they
     help with family expenses by doing odd jobs in the
     street... It's a problem because they aren't old enough     
     to work legally, so they are paid almost nothing...
     In 1970 the Mexican government adopted the goal of providing

health care to the country's entire population by the year 2000. Adjustment, however, caused sharp reductions in overall healthcare spending during the eighties. Subsequent spending increases have been significant, but they still have not compensated for the earlier cuts. In theory, all Mexicans are covered by some type of health care program. In practice, however, very poor or non-existent service, exacerbated by budget cuts in the 1980s, has meant that many poor Mexicans do not have access to adequate health care through public institutions. They either go to private physicians or they do not go at all. This is the case in San Miguel, which, like so many other communities, is lacking in health centers.

Today in San Miguel, families must work harder and longer hours to make less money and to purchase more costly goods and services. Items such as books and health care are cut out of their budgets under these circumstances. Food consumption is cut back and consumption patterns change, with a variety of nutritional foods being replaced with less expensive, and often less nutritional, foods.


The economic collapse of December 1994 generated headlines around the world, but the problems associated with the economic course chosen by Mexico were apparent well before then. While the World Bank and the IMF were applauding Mexico's economic performance under adjustment, one half of the population was living in poverty and their ranks were swelling daily.

The removal of government from most areas of economic planning left the future development of the country principally in the hands of the market. This change has helped generate even greater profits for a relative few, but it has not addressed structural problems blocking long-term participatory and sustainable development. The case of Mexico is a clear lesson that success in the achievement of some macroeconomic indicators of "success" does not necessarily translate into the improved social well-being of the population. The pursuit of economic efficiency and short-term profits overrode concerns about greater equity, leading to an increased economic polarization of society.

Even before the current crisis, structural adjustment in Mexico had resulted in:

  1. high unemployment and underemployment;
  2. a worsening of the already steep concentration of wealth and income;
  3. a deteriorating physical and social infrastructure;
  4. a continued disequilibrium in the trade balance and in the current account of the balance of payments;
  5. a greater dependence of the economy on external financing; and
  6. the absence of an authentic political consensus around the consolidation of adjustment policies.

The distribution of the costs of adjustment was very unequal. The Salinas government deliberately chose to compress salaries, with the supposed purpose of maintaining the competitiveness of Mexican exports. This policy led to the overexploitation and a deterioration in the quality of the labor force. Furthermore, even with extremely low real wages, unemployment and underemployment remain high.

The net effect of the adjustment program on the population groups that are the focus of this study is extremely negative. Not only has adjustment not contributed to laying the groundwork for an improvement in their standard of living, but it has threatened their very livelihood. Small farmers in Chihuahua have seen the prices of their products go down while the prices of their inputs have increased substantially. The residents of San Miguel have seen prices rise much faster than wages, while social services decline in quantity and quality. Many have been cut out of subsidy programs and forced to supplement family income in any way possible.

What has been lacking throughout the adjustment process in Mexico is a social and economic policy that truly puts people first. Needed in particular is an income-generation policy that more fully incorporates the poor into the national economy. Nevertheless, both the Mexican government and the IFIs continue to support an economic program that has more to do with bailing out commercial banks and foreign investors than with addressing the people's needs.

Mexico is one of many cases worldwide where adjustment and the free market have not only failed to alleviate poverty, but have further polarized the country and led to disaster, economic and social. World Bank and IMF officials continued to say -- right up to the current crisis -- that adjustment's attack on poverty would take time, but, after more than a dozen years of adjustment in Mexico, things have never been worse than they are today, and there is no light at the end of the tunnel. There must be a point at which these institutions acknowledge that their strategy has failed and needs to be abandoned, and that a new, more democratically determined approach to the country's development has to be taken.

Sources include: Aguilar, Ruben, and Roelfien Haak, Informe de la Mision Evaluadora: Projecto de Autodesarrollo Integral de San Miguel Teotongo, June 1993, p. 14; Bautista, Gloria, interview in San Miguel Teotongo, March 1993; Corbo, Vittorio and Stanley Fisher, Adjustment Lending Revisited: Policies to Restore Growth, The World Bank, 1992, p. 11; Crevoshay, Fay, "Perjudica a Mexico la tendencia a la concentracion del ingreso: BID," La Jornada, 22 April 1994; El Financiero, 12 October 1992, p. 12; Forbes, 18 July 1994; Fraser, Damian, "The poor make their presence felt," The Financial Times, 17 February 1994; Garcia, Fernando, "Mexico en la OCDE: mas desempleados al club de los ricos", El Financiero, 30 April 1994; Gutierrez, Elvia, "En punto critico el empleo manufacturero," El Financiero, 27 April 1994; Hernandez de Gonzalez, Martha, interview in Ranchos de Santiago, Municipality of Guerrero, March 1993; La Jornada, 6 September 1992, p. 1; Lysy, Frank, interview at The World Bank, Washington, 23 February 1993; Oswald, Ursula, Estrategias de Supervivencia en la Ciudad de Mexico, Universidad Nacional Autonoma de Mexico, Cuernavaca, 1991, p. 108; and Becerril, Andrea, 1992, p. 4; Ramirez, Carlos, "Archivo Politico", El Financiero, 22 May 1994, p. 29; Salinas de Gortari, Cuarto Informe de Gobierno, Instituto Nacional de Estadistica, Geografia, e Informatica, 1992, p. 401; The World Bank, "Mexico: Agricultural Sector Adjustment Loan (2918-ME): Project Completion Report," 10 November 1992, p. ii and 11; The World Bank, "Mexico: Basic Health Care Project: Staff Appraisal Report," November 8, 1990, p. 45.

Tearing the Economic and Social Fabric

by Karen Hansen-Kuhn
The Development GAP

The 1990s have been a time of transition for Nicaragua. With an end to the contra war and the U.S. economic blockade, a new government took office in 1990 with very different goals than those of the previous, Sandinista administration. While the government of President Violeta Chamorro has actively promoted programs of political reconciliation and reactivation of the wartorn economy, it has also committed itself to the promotion of free-market economic policies that have undermined the achievement of these goals. The evidence to date is that, instead of promoting reconciliation through economic development, the structural adjustment policies insisted upon by the World Bank, the International Monetary Fund and the U.S. Agency for International Development and implemented by the Chamorro government since 1990 have increased poverty and unemployment and deepened political rifts in the society.


Nicaragua entered the nineties with an economy in crisis. The Sandinista government had attempted to establish a mixed economy, balancing production by the state with that of the private sector, including small producers, while placing a heavy emphasis on improving the social and economic conditions of the poor. The results of the Sandinista program were similarly mixed: there were some impressive achievements, such as improved literacy rates, but there were also significant problems, including an overemphasis on large state-run projects and a price-control program that generated tensions between urban and rural workers. By 1987, with decreases in international coffee prices and skyrocketing military costs associated with the contra war, the Sandinistas felt compelled to introduce a series of stabilization measures to reduce hyperinflation and restore macroeconomic balance.

This program, not unlike stabilization plans promoted by the IMF, involved substantial cuts in government spending on social services and on public employment and investment. Unlike standard stabilization programs, however, the Sandinista plan was implemented without funding from the international financial institutions. While it initially succeeded in lowering inflation rates, by the time of the 1990 presidential elections hyperinflation had returned and general economic prospects were bleak.

Foreign Management of the Economy

Upon assuming the presidency in April of that year, Violeta Chamorro implemented a new stabilization program that included the introduction of a new currency, further cuts in government spending and a restriction of credit. Over the next year, this program was intensified and expanded as a condition of IMF shortterm financial support to the government (through a Standby Agreement), an Economic Recovery Credit (ERC) from the World Bank, and bilateral funding from the United States and other Northern governments.

With Nicaragua ineligible for new loans from the IFIs in 1990 due to debt-payment arrears, USAID became intimately involved in the design of an expanded economic adjustment program. USAID's second Stabilization and Recovery package, granted that September, committed the Nicaraguan government to begin the process of privatizing the economy and adopting other adjustment measures in advance of IFI financing, which came a year later along with an intensification of the country's stabilization program. The new structural adjustment program also included a further reduction in public-sector employment, as well as trade and financial-sector liberalization. These measures were intended to hold inflation to single-digit rates, to save foreign exchange so that the country could resume payments on its foreign debt, and to substantially reduce the role of the state in the economy by selling off state-owned enterprises and reducing government spending.

Policy-Induced Depression

The major achievement of the stabilization and adjustment programs to date has been the reduction in inflation, which fell from over 13,000 percent in 1990 to 12 percent in 1994. Other macroeconomic indicators, however, reflect the heavy cost of those policies. In effect, the inflation rate dropped because of a deep, policy-induced economic depression. GDP per capita in 1993 fell to 71 percent of the 1985-1989 average, while investment decreased to 63 percent of the average during the late 1980s. While real GDP did increase 3.2 percent in 1994, the highest rate in the last ten years, growth in GDP per capita was flat.

As part of the stabilization and adjustment program, credit to the agricultural sector was slashed by 62 percent. New bureaucratic requirements and very high interest rates have meant that small- and medium-scale farmers have been especially hard hit by these cuts, with many small farmers forced to produce subsistence crops using environmentally unsustainable "slash and burn" practices. The high interest rates have also led many large producers to shift to low-risk cattle production. Industrial production has also dwindled since the adjustment program began. High interest rates have favored speculative short-term investments, particularly in imports of luxury consumer goods, over productive investment. Average industrial production since 1990 is 14 percent less than during the 1985-1989 period, which itself was a time of economic slowdown.

The trade deficit increased from US$304 million in 1989 to US$433 million in 1994 as imports increased after trade liberalization, while production for export has grown more slowly, despite a sharp increase in coffee prices and prices on a few non-traditional exports. This burgeoning deficit, which could grow even more rapidly in the future if coffee prices fall once again, has been financed not by new investment but by extraordinary foreign aid flows totaling over US$3 billion in grants, new loans, and debt cancellations and rescheduling. These resources are now rapidly dwindling, but between 1990 and 1993 over one-third of the aid received in cash was used to pay foreign-debt service, and nearly all of the rest went to finance the trade deficit. In 1994, 73.4 percent of the foreign exchange entering the country was used to service the foreign debt. Nicaraguan economist Oscar Neira explained, "The profound defect of the adjustment program has been its favoring of disproportionate debt payments at the cost of productive use of foreign resources."

Nicaragua continues to have one of the highest per capita debt burdens in the world. In 1994 its foreign debt totaled nearly US$11 billion. Despite the clear need to redirect resources to the local economy rather than to foreign creditors, Nicaragua was granted only debt rescheduling at the March 1995 Paris Club meeting of many of the country's creditor governments, with no reduction in the stock of debt, along with lectures on the virtues of continued adherence to the structural adjustment program and the need to resolve the property-rights problems. While this rescheduling will in fact alleviate some balance-ofpayments pressures, continued adherence to the adjustment program, which has produced high domestic interest rates and limited credit availability for local production, makes it unlikely that the Nicaraguan people will reap any benefits from this concession in the foreseeable future.

A Social Disaster

While Nicaragua's economic performance during the 1990s under adjustment has been dismal, the deterioration in social indicators has been more distressing. As a result of massive public-sector layoffs and economic slowdown, over two-thirds of the population is either un- or underemployed, and the problem only continues to grow. Over 285,000 public-sector workers have lost their jobs since 1990, forced to enter the private sector just as employment opportunities were at their lowest.

Women have been especially hard hit by adjustment policies. Over 70 percent of those laid off from government jobs during the first year of the program were women. According to a study by economist Nan Wiegersma, women were also hurt disproportionately by the privatization of state-owned enterprises. In addition, the poorly capitalized garment and textile industry, which alone employed nearly ten percent of Nicaraguan women working outside the home, has been replaced for the most part by maquiladora factories operating in free-trade zones. There are increasing reports of poor working conditions in the maquiladoras, as well as an age-bias in hiring decisions, with many of these new factories refusing to hire women over 35 years old. Hence, women who have lost their jobs because of privatization are often forced to turn to employment in the already overcrowded informal sector. The Nicaraguan research center, FIDEG, found that 75 percent of salaried women have experienced job losses or cuts in wages, benefits and work hours compared to 65 percent of men.

The purchasing power of wages for those people fortunate enough to find employment has also fallen. In 1993, real wages were just 59 percent of their level in 1980. In early 1991 the average wage covered 92 percent of the cost of a "basket" of food and other basic necessities; by 1993 it covered just 70 percent of those needs. According to the United Nations, 75 percent of Nicaraguans now live in poverty.

The severity of this social impact is due in good part to the tremendous contraction in production. Increasingly, workers unable to find work in either the agricultural or industrial sector are forced to turn to the swelling informal sector for employment. With wages and employment declining, many families throughout the country have simply been forced to eat less: percapita consumption of corn was down 16 percent in 1993 from 1990, and bean consumption dropped 14 percent during the same period.

The Public Responds

Nicaraguans have not reacted passively to these changes. Since the first stabilization plan in 1990, there have been a series of public strikes and demonstrations protesting the measures. An August 1994 transportation strike protesting hikes in fuel prices, for example, effectively halted the distribution of goods within the country for eight days.

The economic recession and high unemployment rates have also contributed to increasing political polarization in Nicaragua. As the war ended, the contras were demobilized and the Sandinista army was cut from 96,000 in early 1990 to less than 17,000 by the end of 1992. The ex-combatants on both sides were promised access to land, credit and other resources so that they could reintegrate themselves into productive life. Unfortunately, due to the economic contraction and cuts in government spending under the adjustment program and to continuing conflicts over land titles, these promises have been largely unfulfilled. Many former
combatants have taken up arms again to demand that the government honor its commitments. In April 1992, ex-contras and exSandinista soldiers even joined together in these actions.

More often, however, the two groups have separately invaded farms, cut off transportation in and out of cities or taken prisoners to publicize their demands. For example, the Frente Norte 3-80 (FN 3-80), a group of former contras, launched a military offensive in February 1994 that resulted in more than 50 deaths. While the group has called for political changes regarding the country's military structure, most of the FN 3-80's demands have centered on the need for social and economic assistance for ex-combatants. A peace accord was reached in late February, but some of these ex-combatants, skeptical of new government promises, continue to fight for what they consider to be their rights. In a public declaration issued two months later, the rebels stated, "We are not asking for charity; we only want to be equipped to be able to work. We have a right to this... We favor a peaceful solution, but if the army wants war, they will get it."

Political instability has taken other forms in rural areas, as well. During the first half of 1994, police reported that over 400 agricultural producers in the north of the country had been victims of kidnapping by armed groups. This violence, combined with increasing crime throughout the country, has further depressed economic activity.

The Government Reacts

In response to these actions and the growing public outcry against the continuing economic crisis, the Nicaraguan government has attempted to construct a consensus around its economic program. Several rounds of negotiations have been held with excombatants, unions and other groups. In early 1994 several nongovernmental organizations and academic groups were included in a series of consultations on the second adjustment loans from the World Bank and the IMF.

These consultations, however, have generated more cynicism and distrust than consensus. NGOs, many of whom came to the sessions with their own analyses and alternative proposals, reported that the meetings on the adjustment package were little more than briefings on the programs planned by the Bank and the Fund with scant opportunity for constructive dialogue. Whatever the
government's intentions in organizing the meetings, in reality it had little latitude to change the nature of the adjustment program, given the loan conditions of the international financial institutions and its own desperate need for foreign exchange.



About four blocks from the main street there was a raging fire burning on one of the abandoned lots. The neighborhood was pitch black and quiet since the power had been cut again. I had seen small fires set near the road curbs to burn garbage but this was different, it was a real blaze. It looked like someone's house was burning down.

After reaching the street corner I saw a man sitting on a wooden box staring into the blaze. He didn't look worried. He was sitting very close to the blaze, the heat of the night combined with the heat of the fire didn't seem to affect him. There was something non-threatening and tranquil about him, so I approached and asked if he was ill. He looked at me with an expressionless face. He said that over the last two weeks he hadn't brought any money home to his family and that his children were going hungry.

The year before he had been working for the state-owned airline Aeronica, but when the company was privatized he lost his job. Since then he had looked for work but had found nothing. As a last resort he was selling brooms door to door. Now these were not even selling.

Not knowing what to say I asked if I could buy some of his brooms. He turned away, looked into the fire again, but this time his face was different. What I had thought was tranquility was in fact hopelessness. There were no more brooms, he said. I noticed one of the broom handles sticking out of the blaze awkwardly.

"At present, the major threat to the democratic system [in Nicaragua] is not political conflict, but the deterioration of living conditions and the consequent loss of faith in democracy and its institutions."

More of the Same

Despite the continuing failure of, and public opposition to, the country's adjustment program, the Nicaraguan government last year adopted another IMF-crafted program, financed from the latter's Enhanced Structural Adjustment Facility, that deepened its commitment to many of the policy reforms implemented to date. This action was coupled with a new ERC loan from the World Bank, which was approved in June 1994. The Bank and the Fund have closely coordinated a series of policy conditions in the two loans: the dismissal of 13,569 public employees; privatization of the
remaining state-owned enterprises, including the telephone company; further reductions in government spending, including the elimination of funds earmarked for universities; increases in taxes on gasoline and other products and in fees for health and education services; financial-sector reforms, including the requirement that the government not recapitalize state banks; resolution of property-rights disputes; reduction of the discretionary powers of government ministries in the area of fiscal policy; further tariff reductions; and changes in labor policies.

Many of these conditions dictate changes in Nicaraguan laws, further complicating local efforts to achieve national consensus on economic-policy issues. For example, before the ERC loan document was presented to the World Bank's Executive Directors for approval, the Bank required that the Nicaraguan government present it with a "satisfactory" letter outlining changes the government would make in labor laws and policies. Not only does this raise questions about the Bank's interference in Nicaragua's internal political affairs, but several of the legal changes outlined in the subsequent letter from the Ministry of Labor clearly violate internationally recognized labor rights. The government committed itself to abrogate the right of workers to strike in the public-service sector or in "services in the general interest," to subordinate collective agreements to individual contracts, and to provide the legal conditions for easy dismissal of unnecessary workers. It also promised to monetize benefits, converting them to cash payments, the value of which could be wiped out if inflation were to increase again. Each of these promises closely mirrors recommendations in the Bank's 1994 Country Economic Memorandum on Nicaragua.

In 1995, political tensions reached a boiling point after the Nicaraguan National Assembly passed a series of 67 constitutional amendments designed to take back power from the executive branch. In addition to changing the Constitution to shorten presidential terms and to prohibit the election of a President's relatives, the constitutional reforms reduced the executive branch's power to unilaterally set fiscal and other economic policies. President Chamorro attempted to suppress the amendments by refusing to promulgate them, and a standoff between the executive and legislative branches ensued. Under pressure to resolve the constitutional crisis before the June 1995 Consultative Group meeting of Nicaragua's donor governments, a compromise was reached that recognized the Assembly's right to approve fiscal policy measures and international agreements. If the National Assembly should reject a future structural adjustment program, the executive branch would now be required to renegotiate it with the IFIs.

The Future: An Alternative Vision

Although Nicaragua remains a country deeply divided by political and economic policy disputes, there is widespread agreement on the continuing failure of the adjustment program to deliver the economic prosperity and social stability that many had hoped would materialize after the 1990 elections. While strikes and popular mobilizations still occur, some organizations are moving from protest to proposal by beginning to develop the elements of an alternative economic program.

Some elements of a consensus around an alternative are emerging despite the inflexibility of the IFIs. Many organizations from across the political spectrum advocate increasing credit to the agricultural sector. CRIES, a Managuabased regional network of research centers, sent its proposals to a meeting of donor countries, called in Paris in June 1994, to coordinate aid programs in Nicaragua. They included: reduction and renegotiation of the foreign debt; selective tariff protection in key sectors; financial reform and channeling of domestic savings to productive sectors; a program to stimulate production, especially that of small and medium-sized producers; and the expansion of public-health and education services. These recommendations had little impact, however, on the donors' deliberations.

Under the current structural adjustment program, the government's own ability to respond to its constituents' demands is extremely limited. If the country is to emerge from this period of conflict and polarization to achieve lasting peace and equitable economic growth, these constraints must be lifted and a genuine dialogue among the various sectors of society encouraged. Only then will the specter of renewed civil strife end and a new period of equitable, democratic and sustainable development begin.

Sources include: CRIES, "Towards a National Solution for the Crisis: Adjusting the Adjustment in Nicaragua, 1 June 1994; David Dye, "A Chamorro Dynasty Dashed In Deal Struck in Nicaragua," Christian Science Monitor, 20 June 1995; Trevor Evans, "Nicaragua: An Introduction to the Economic and Social Situation", October 1993; Roberto Fonseca, "Economy-Nicaragua: Government Gets Low Marks on Annual IMF Exam," InterPress Service 17 April 1995; Interview with Alejandro Bedana, Centro de Estudios Internacionales, 14 June 1994; Memorandum from Pharis Harvey, International Labor Rights Education and Research Fund to David Joy, U.S. Department of the Treasury on International Labor Law Provisions Threatened by Proposed Nicaraguan Labor Policy, 20 June 1994; "Nicaragua: Unemployment and Poverty," Central America Report, 11 November 1994; NotiSur, 11 February, 29 April and 6 May 1994; Otton Solis, "Towards Economic and Social Development in Nicaragua," 1993; Nan Wiegersma, "The Restructuring of Women's Industries in Nicaragua," in Women in the Age of Economic Transformation, Routledge: New York, 1994; Witness for Peace, A High Price to Pay: Structural Adjustment and Women in Nicaragua, August 1995; World Bank, "Report and Recommendation of the International Development Association to the Executive Directors on a Proposed Second Economic Recovery Credit" 27 May 1994.

Eroding an Egalitarian Tradition

by Karen Hansen-Kuhn
The Development GAP

In 1985, Costa Rica became the first country in Central America to implement a series of structural adjustment programs imposed as a condition of lending by the International Monetary Fund, the World Bank and the U.S. Agency for International Development. The SAP measures followed on the heels of an IMFdesigned stabilization program that the government had begun implementing in 1980.

The Bank and Fund have hailed the country as an adjustment success, citing improvements in some economic indicators and the expansion of new agricultural exports. In addition, Costa Rica continues to boast the highest literacy rate (93 percent), lowest infant-mortality rate (16 per 1000), and longest life expectancy (76 years for men; 78 for women) in Latin America, though these were achieved well before the adjustment program began. This year, USAID declared "mission accomplished" and announced it was shutting down its operations in Costa Rica.

Other measures of the country's well-being, however, including a number of macroeconomic indicators traditionally used by the Bank and the IMF, reveal a troubling picture. Costa Rica's trade deficit, for instance, has increased enormously despite aggressive export-promotion efforts. The fiscal deficit and inflation, two principal targets of SAPs, also continue at high levels. Income distribution has worsened significantly, particularly in the rural areas, where many small and mediumscale farmers have faced cuts in loans and subsidies for food production and lack necessary capital and technical and marketing skills to make the transition to the "non-traditional" export crops promoted by the government and USAID.

Social indicators, such as the incidence of infectious diseases, also demonstrate a disturbing trend away from the relatively high standard of living for which Costa Rica has been well-known. This decrease in the quality of life, together with new proposals to deepen the adjustment measures, have led to growing social unrest. In July 1995, discontent boiled over into a massive public demonstration in which over 100,000 Costa Ricans from a variety of sectors marched through the streets of the capital, San Jose, demanding an end to the continued implementation of adjustment programs in their country.

A decade after starting down the adjustment road, and a full 15 years after the IMF appeared on the scene, Costa Rican policymakers still have been unable to begin delivering benefits to the majority population. Indeed, they have once again been forced into difficult negotiations with the Bank and the Fund over economic policy and their country's future.


Costa Rica has long been viewed as an oasis of tranquility in impoverished, war-torn Central America: a century-old, stable, constitutional democracy which, following a brief civil war in 1948, abolished its army and nationalized the banks. Over the next 30 years, the Costa Rican government, unhindered by military coups, civil unrest or guerrilla warfare, invested resources in its poorer regions and in energy, transport and communications infrastructure. The government built an extensive and largely well-run social welfare system that included public utilities, free health care and education, low-cost housing, and insurance, pension and savings programs. It also established credit and technical assistance programs for farmers and guaranteed, subsidized prices to encourage production of food crops. These programs provided a strong social safety net for the country's poor and spurred growth of a large middle class of professionals, entrepreneurs and civil servants.

Costa Rica's post-World War II economic model was built around food self-sufficiency, a few agricultural exports (coffee, bananas, beef and sugar), trade with other Central American countries, highly protected import-substitution industries, and heavy state investment in manufacturing and agroindustries. Between 1949 and 1979, the country had one of the top economic growth rates in Latin America, with its Gross Domestic Product (GDP) climbing an average of nine percent a year. Throughout this period the U.S. government and international lending institutions viewed Costa Rica as a stable but economically and strategically unimportant backwater. It received little USAID or World Bank/IMF funding.

The situation changed in the late 1970s when Costa Rica suddenly plunged into economic crisis, the leftist Sandinistas toppled the U.S.-backed Somoza dictatorship in neighboring Nicaragua, and the Reagan administration took office in Washington. The economic down-spiral -- the worst in the country's history --was triggered by a steep rise in prices of gasoline and other petroleum products and a rapid fall in world coffee prices. As terms of trade shifted, Costa Rica was forced to borrow heavily from foreign banks and lending institutions. The situation was particularly acute because half the country's debt was in high-interest, short-term loans from commercial banks.

Between 1977 and 1981, Costa Rica's debt service quadrupled, totalling 60 percent of export earnings. By 1980, the nation's debt reached US$3 billion, one of the highest per capita (US$2,021) in the world, and inflation skyrocketed to 100 percent. President Rodrigo Carazo suspended debt payments to nearly all of the country's foreign creditors, predominantly commercial banks.

Faced with impending financial defaults by two Latin American giants -- Mexico and Brazil -- the commercial banks and the IMF were reluctant to negotiate new loans or repayment terms with Costa Rica, a relatively small debtor country. Instead, the Reagan Administration stepped forward with a bailout scheme, motivated not so much by Costa Rica's internal crisis as by Washington's strategic need to buy its cooperation in the covert war against Nicaragua, coupled with the Administration's crusade to push "supply side" economics beyond U.S. borders.

The Introduction of Economic Stabilization and Structural Adjustment

After President Luis Alberto Monge took office in May 1982, the Reagan Administration quickly struck a deal with his government. By 1983, USAID assistance had soared to $212 million, a 27-fold increase over 1978. Between 1982 and 1989, Costa Rica received over $1.2 billion in economic, military and food aid, six times more USAID support than in the previous three decades combined. During the 1980s, Costa Rica became the second-largest per capita recipient of U.S. economic aid, surpassed only by Israel.

In return for these dollars, Washington demanded political and economic quid pro quos. The Monge government quietly, often reluctantly -- and in violation of the country's neutrality and anti-militarism policies -- allowed its northern zone to be used by anti-Sandinista rebels, known as the contras. It also agreed to a wide array of economic adjustments, including partial privatization of the banks, the sale of state-owned industries, a new agricultural strategy that called for the production of luxury export crops for the U.S. market at the expense of food production for the domestic market, and the creation of a dozen or so USAID-funded private institutions that duplicated the functions of state entities. These institutions, which became known collectively as USAID's Parallel State, included a private agricultural college, an investment company, an export-promotion institute and a finance company, all of which drained resources and authority from government institutions. At the same time, USAID gave little assistance to Costa Rica's social-service programs.

Throughout the decade, Costa Rica's relationship with the IMF and World Bank was not a particularly smooth one. The first two Fund agreements, in 1980 and 1981, were canceled due to President Carazo's refusal to comply with the austerity measures dictated by the IMF, which included a devaluation of the local currency and drastic cuts in government spending. President Carazo subsequently expelled the IMF from the country after negotiations with the Fund broke down. The country's economic situation continued to deteriorate throughout 1982, with inflation rising to 109 percent and real GDP falling by seven percent. President Monge signed a new loan agreement with the IMF in December of that year.

In 1985, besides signing another Stand-by Arrangement with the Fund, the government received its first Structural Adjustment Loan (SAL I) from the World Bank to support longer-term changes in the economy. It received a second adjustment loan (SAL II) of US$100 million in November 1989, along with a matching loan from the government of Japan. The conditions attached to these loans mirrored those in the USAID-mandated program: cuts in government spending; the privatization of state-owned enterprises; and a reorientation of production away from satisfying domestic needs and toward non-traditional agricultural and manufactured exports.

In March 1995, negotiations with the Bank over a third SAL broke down, with the Bank accusing President Jose Maria Figueres' government of not complying with conditions attached to the US$350 million package it had negotiated with the previous President, Rafael Calderon. The Costa Rican government did manage to negotiate a provisional US$80 million Stand-by Arrangement with the IMF, tied to the government taking immediate concrete steps to reduce the fiscal deficit through massive cuts in public-sector employment and increases in taxes. These actions were not enough, however, to persuade the Bank to resume funding.

Economic Indicators of Failure

After more than a decade of stabilization and structural adjustment, massive amounts of U.S. economic assistance, and significant sacrifices by the population, Costa Rica's economy appears to be in the process of further decline. Even in the narrow macroeconomic terms by which the Bank and Fund want SAPs to be judged, the economic program has failed. While GDP growth has resumed after a sharp fall during the economic crisis of 1981-82, GDP per capita, a key indicator of living standards, had only barely recovered to pre-crisis levels in 1993.

Despite claims that SAPs help countries ease their external debt, Costa Rica's burden actually increased under its adjustment program, from US$2.7 billion in 1980 to US$3.9 billion in 1993. This rise occurred despite the country's participation in the U.S. "Brady Plan" debt-relief scheme under which Costa Rica was able to "buy back" much of its outstanding commercial debt at a discount. Furthermore, debt reduction has been conditioned on continued implementation of adjustment measures and adherence to an economic model that increases the country's dependence on foreign markets, imports and loans.

The implementation of the model over the past decade has also benefitted narrow commercial interests at the expense of the general population. Under the adjustment program, import duties have been reduced and tax concessions and other subsidies granted to tourism, agriculture and manufacturing for export. Not only have these measures drained resources from the government in the form of much-needed revenue, but they have also helped to rapidly increase imports. As a result, inflation and the trade and fiscal deficits have grown to unacceptable levels. Inflation has continued to fluctuate greatly in the 1990s, running at 17 percent in 1992, six percent in 1993, and 20 percent in 1994. Costa Rica's trade deficit increased nearly 400 percent in the decade since the adjustment program began, from US$134.9 million in 1984 to US$651 million in 1994. By 1994, the fiscal deficit had risen to 8.1 percent of GDP. Instead of admitting the failure of the program, however, the Bank and the Fund are now demanding an intensification of the adjustment measures implemented to date.

"Agriculture of Change"

The adjustment programs promoted by USAID, the World Bank and the IMF since the mid-1980s centered around the expansion of new, "non-traditional" export-crop production for markets outside Central America. Under SAL II, the government introduced a new agricultural policy, the "Agriculture of Change", designed to promote the production of a bevy of luxury crops -- asparagus, strawberries, macadamia nuts, melons and miniature vegetables -- for export, primarily to the United States during the winter months. The same list of products was promoted throughout Latin America and the Caribbean by USAID and the IFIs with no regard to local climatic and soil conditions or the possibility of overproduction. As a 1986 U.S. General Accounting Office (GAO) report warned, "The countries export similar products, which could lead to increased competition and thus potentially reduced prices and foreign exchange earnings." By the end of the decade, Costa Rica's cardamom, cashews and macadamia farmers were all finding the export market glutted and prices falling.

The government provided a range of incentives for these new crops that included the removal of export taxes, the dropping of import duties on farm inputs, exemption from income taxes on production for export, preferential interest rates, and special access to foreign exchange. Many of these incentives were available to export companies, which were expected to pass them on to producers.

Forcing Small Producers off the Land

Small farmers were often reluctant, however, to give up the security of growing food crops, such as rice, beans and corn, that they could use to feed their families in hard times. Many of the new crops required substantial investment in irrigation systems, hybrid seeds, fertilizers, pesticides and sophisticated marketing systems that were beyond the financial reach of small producers. Traditionally, Costa Rica's national banks had been the main source of credit to farmers, but between 1983 and 1987 credit for the agricultural sector plummeted from 80 percent to 20 percent of total annual credit extended by the banking system. At the same time, Costa Rica was forced by the World Bank, the IMF and USAID to cut funding for the National Production Council (CNP), which, in fixing the buying and selling prices of basic grains, was the most important institution guaranteeing the country's food selfsufficiency.

The Development Group for Alternative Policies (The Development GAP) is a not-for-profit international development policy and resource organization. It brings grassroots Third World perspectives, information and experience to bear on bilateral and multilateral economic policymaking and program development.

The Development GAP expresses its appreciation to the staffs of Equipo PUEBLO in Mexico, the Coordinadora Regional de Investigaciones Economicas y Sociales (CRIES) in Nicaragua, the Centro para la Capacitacion y el Desarrollo (CECADE) in Costa Rica, and the Fundacion Nacional para el Desarrollo (FUNDE) in El Salvador, as well as its other colleagues in Latin America for the contributions they have made in the preparation of this report. Any errors or omissions are, of course, entirely our responsibility.

We would also like to thank the General Service Foundation, the Joyce Mertz-Gilmore Foundation, the Moriah Fund, the Charles Stewart Mott Foundation, and the Netherlands Organization for International Development Cooperation (NOVIB), whose support of our organization's work on structural adjustment in Latin America made possible the preparation and publication of this document. The views expressed herein do not necessarily reflect those of the above-mentioned organizations.

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