cries@mtxinu.COM (09/16/89)
/* Written 5:39 pm Sep 12, 1989 by cries in ni:cries.regionews */
/* ---------- "NicaEcon: Stability / Inflation" ---------- */
(followed by interview with economic advisor)
(cries.regionews from Managua September 12, 1989
89 lines 12886 bytes)
According to official figures, inflation for the month of
August was 6.6%, the lowest monthly rate recorded in the
last two and a half years. Vice-president Sergio Ramirez
stated that in Septemb, the goal is reduce this figure
even further.
Another minor victory was achieved on the economic front by
lowering the fiscal deficit for the month. It was
approximately 40% below that which had been budgeted for.
Ramirez explained that this was due to increased income from
tax revenues and to the sale of material donations coming in
from abroad.
The government continues to apply its policy of making mini-
devaluations, the most recent of which (September 9) lowered
the value of the cordoba to 22,000 to the US dollar. The
legal parallel rate has remained stable at 25,000 to one
since June and black market currency-related activity has
been almost completely quashed.
In order to alleviate somewhat the adverse effects of the
austerity policies on the population, the government
announced that 25 pounds of powdered milk will be included
every trimester in the heavily-subsidized package of basic
goods being provided to state-sector employees and retirees.
Meanwhile, in the markets, profiteering is coming back into
vogue with vendors charging higher than official prices on
many basic goods, a factor not taken into account in the
official calculations of inflation.
The financial requirements of the electoral process place
fresh strains on the government budget. Foreign funding is
seen as key to avoid a situation in which the holding of
elections gives an impetus to inflation.
Likewise, foreign funding is still needed to back up the
economic stabilization and recovery plan being implemented.
Another meeting of donor nations will soon take place in
Europe. The Nicaraguan government will try to firm up the
commitments made at the first such meeting held in
Stockholm, Sweden last May. A significant, and generous,
contribution was made by Libya after a recent visit by
Daniel Ortega to Tripoli. It is possible that Libya's
donation will run as high as $200 million, a figure almost
equal to one year of Nicaragua's export earnings.
*********************
INFLATION HAS TO GO LOWER STILL
Lance Taylor is an economics professor at the Massachusetts
Institute of Technology (MIT) and has worked in more than 25
countries in the Third World. His speciality is macro-
economics in countries on the road to development. He was
contracted by the Swedish government to be an economic
advisor in Nicaragua and has been portrayed by the
opposition as the architect of the current government
economic plan. Interview from Barricada, Sept.4, 1989.
*********************
**Q. What are the alternatives for stabilizing an economy
like Nicaragua's?
**A. Nicaragua basically had extremely serious inflation
problems. Perhaps only ten or twelve other experiences with
inflation in this century have reached the level that
Nicaragua did.
The first thing the 1988-89 policy did basically was fight
inflation. There are a number of ways to fight hyper-
inflation. One is to try and freeze prices as was done in
Brazil, Argentina, Mexico and Israel. A social pact is
needed and the government has to be capable of regulating
prices. That ability doesn't exist here.
A second way is to increase imports, but for that you need
dollars, and they don't have those here either. The Mexicans
began their stabilization plan with $16,000 million in
reserves, and they had quite a large reduction in their
reserves from importing and controlling prices.
A third way is to reduce wages, fixing the exchange rate at
a realistic level, but that isn't possible here either. So
you need austerity. The only way left to fight inflation is
by means of austerity, which is what is already being done
here. What we have to think about now is reactivating the
country's economy.
**Q. What suggestions have you made?
**A. Our suggestions have mainly been about treading
carefully and about the need to avoid big shocks such as
maxi-devaluations. Economic information should be made
available so that people have better information which they
can use when making decisions. There have also been some
suggestions about other technical matters, but I emphasise
that the plan really is a Nicaraguan one.
**Q. How has the stabilization plan been administered?
**A. Quite well, because the authorities are capable of
thinking about the problems they face, of changing their
policies when necessary, and the quality of their analyses
over the last 18 months has been notable.
**Q. What do you think of the results so far?
**A. As I said, there are few previous cases similar to the
Nicaraguan one. Only about 12 hyper-inflations have been
seen this century. Therefore you have to invent policies as
you go. You have to respond to the different problems which
may occur, such as when the black and parallel market dollar
rates rose as a result of the development of speculative
tendencies. That was very dangerous; it jeopardized the
program to the point where it could have failed. But the
authorities answered that challenge successfully with the
economic measures taken this past June.
**Q. Was maxi-devaluation the answer?
**A. Yes. But we could say it had its problems, too.
Devaluation obviously produced the June and July price
increases and had constricting effects on the economy. It
also distorted the program of mini-devaluations which had
been and is a sign of the policy's stability.
In hindsight, I think it could have been done better. It was
possible to organize the fight against the rise in the price
of the dollar better, but they got out of the problem and
people learned a lot from this experience.
**Q. What do you think about the fact that inflation was
reduced to less than 10% in each of the last two months?
**A. It's a big success, but inflation needs to come down
even more. An inflation of 30% or more a year, or more than
2% a month cannot be maintained. When inflation rises above
2 or 3% a month, then there's a lot of social pressure;
pressures from indexing of wages, interest rates, exchange
rates. All these exert inflationary pressure. There are
Latin American countries which have had 2% a month inflation
for years, but when it's over 2 or 3%, you can end up with
yearly inflation of 300 or 400%, and that can't be
sustained. An 8 or 10% monthly inflation is still high and
one has to think about reducing it.
**Q. What has been the recessive impact of the stabilization
plan?
**A. As I pointed out, the only way to combat inflation in
Nicaragua is with austerity. Freezing prices was impossible,
likewise importing goods, and manipulating specific prices
was not feasible. One is left with austerity, and you have
to accept that the cost of austerity is basically a strong
recession. And it won't be possible to get out of the
recession for months.
**Q. Is the depth of the recession an understandable result
of the big drop in inflation?
**A. Yes it is, but a country can't live with hyper-
inflation. The whole financial system would crumble; there
would be social breakdowns. The people wouldn't be able to
survive. Therefore, we have to fight hyper-inflation.
**Q. What has been the experience of other countries with
stabilization policies?
**A. The only recent case is that of Bolivia where there was
also hyper-inflation. Austerity was imposed, although with
much more external support than Nicaragua is receiving.
Bolivia's economy is, nevertheless, much more fragile three
years after stabilization. One has to think about
stabilizing the real economy, but the delicate situation of
the patient has to be considered in order to move towards
reactivation.
**Q. What difference do you see between Nicaragua's
stabilization plan and that of other countries?
**A. In Nicaragua there is the awareness that even though
inflation has dropped a lot, the people must be protected
from the effects of stabilization. There are a lot of poor
people and one has to think about protecting them, raising
real wages to the degree possible. The authorities now are
thinking of programs for social attention to those most
affected. Also, there is an awareness that ending hyper-
inflation is not an end in itself, but pnecessity.
**Q. Has hyper-inflation been beaten?
**A. Obviously now there is no hyper-inflation, but there is
still the danger of it reappearing. There was great danger
of this with the maxi-devaluation in June [of over 100%],
but luckily it didn't happen.
**Q. What are Nicaragua's chances of obtaining financial
resources in the next round of meetings with donor nations
to be held in Stockholm?
**A. We prepared our report for the meeting in May and in
international terms, conditions were favorable as far as
obtaining fresh funding was concerned. Getting more money in
the next few months is likely to be difficult, but after the
elections the chances will be better.
**Q. Economic tensions are predicted for October. What
perspectives do you see?
**A. We economists aren't very good at foreseeing things.
There are a few problems with some key prices, let's say for
example the price of beans. If there isn't a sufficient
supply of beans, the price could possibly rise, which would
affect other prices, and there could be another round of
inflation. There's also the possiblility of the development
of speculative tendencies with the dollar. And, there will
be an increase in the demand for goods because of the
elections, the payment of Christmas bonuses, and the
planting of the second crop. Everything has its risk and it
must be managed with plenty of intelligence and care.
**Q. What do you think about the economic blockade?
**A. Nicaragua doesn't have access to the same resources as
other countries. For example, a stabilization program such
as Nicaragua's would receive a lot of support from the
International Monetary Fund. There are big problems, as you
know, with the electricity network, roads, and housing. Many
things remain to be done, and a large part of financing for
those things could come from international organizations,
and it hasn't been forthcoming.
**Q. Under these conditions, what could be the strategy for
keeping inflation under control and achieving an economic
recovery?
**A. With luck and with agility in the execution of
policies, inflation could cease to be such a serious problem
in about six to nine months. After that, a slow reactivation
will have to be considered, and that could happen through
exports, developing projects which do not use too much
foreign exchange, and the transferral of resources from
defence to civilian use.
**Q. What other aspects will be covered by your report for
the next meeting of donor nations?
**A. Apart from what we've already said, we will put
emphasis on the need to avoid and control a possible
increase in the price of the dollar on the black and
parallel money markets. It's worthwhile to maintain well-
directed policies to facilitate exports, rationalize the
assignment of foreign exchange for imports, and control
credit for these activities, and we also need to redesign
the policy for payment for export products.
**Q. Is it feasible to continue to let prices find their own
level in the market?
**A. Nicaragua, in the final analysis, is a very small
country open to international trade. If we compare it with
Brazil -a very large country which is very closed to trade-
Brazil has more possibilities to manipulate its prices
compared to Nicaragua, which has to take into account what
is going on in the world. So, a price system with a
reasonable exchange rate is extremely important in countries
like this, in order to avoid distortions.
**Q. What impact can the structural changes in the economy
have on recovery?
**A. The Agrarian Reform was extremely important, and that
could be the basis for quite an active economy for Nicaragua
in a few years time. Agrarian Reform was an important step.
Regarding nationalization of banks, that hasn't got much to
do with it. The trouble with nationalized banks is possibly
that they don't respond with enough agility to the changes
in the market. At the same time, efforts made in the fields
of health and education were also quite important, and
hopefully they can return to this track.
(We encourage feedback. Send comments, suggestions, etc. to
us via e-mail. Address cdp!ni!cries)
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