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External financing of the Nicaraguan development experiment

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Title:
External financing of the Nicaraguan development experiment
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Nicaraguan development experiment
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Vichas, Robert Paul, 1933-
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English
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x, 206 leaves. : illus. ; 28 cm.

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Subjects / Keywords:
Agriculture ( jstor )
Capital investments ( jstor )
Cotton ( jstor )
Economic development ( jstor )
Exports ( jstor )
Financial investments ( jstor )
Foreign exchange ( jstor )
Foreign investments ( jstor )
Highways ( jstor )
Imports ( jstor )
Dissertations, Academic -- Economics -- UF
Economic policy -- Nicaragua ( lcsh )
Economics thesis Ph. D
Investments, Foreign -- Nicaragua ( lcsh )
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bibliography ( marcgt )
non-fiction ( marcgt )

Notes

Thesis:
Thesis--University of Florida.
Bibliography:
Bibliography: leaves 189-204.
General Note:
Manuscript copy.
General Note:
Vita.

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EXTERNAL FINANCING OF THE

NICARAGUAN DEVELOPMENT EXPERIMENT











By
ROBERT PAUL VICHAS














A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF
THE UNIVERSITY OF FLORIDA
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF DOCTOR OF PHILOSOPHY












UNIVERSITY OF FLORIDA August, 1967























































Copyright by
Robert 2aul Vichs
1967


































a ra















PREFACE


The present study represents the result of material collected periodically during approximately the past four years. Publications found in the libraries of Louisiana State University and the University of Florida as well as those consulted in Mexico City have been utilized. The writer has also had the benefit of consulting with a number of individuals concerning economic problems that have especial significance for Latin American developing countries. In addition, the writer has made several trips, beginning in 1962, to Nicaragua and the other Central American countries, several of which have been by land. Part of the Summer of 1965 was spent in Nicaragua to accumulate material as well as the first part of the present year (1967) to complete field research for this dissertation.

A dearth of material and possible errors and discrepancies in some of the statistics, compiled principally by agencies of the Government of Nicaragua. impose a certain degree of limitation on the analysis; but the information is considered sufficiently accurate for the purposes herein. The proximate pages are restricted to projects and programs that are regarded as strictly economic in nature; and while it may be worthwhile and beneficial to the reader to explore some of the aspects of social development in order iv








to better comprehend the Nicaraguan society, these subjects are beyond the scope of the presentation.

The writer is indebted to the members of his Doctoral Committee who offered their guidance and insight in patiently reviewing the early drafts of the dissertation. The writer acknowledges his indebtedness to his Committee Chairman--Dr. Robert W. Bradbury (Professor of Economics)

--and to the Committee Members who approved the final draft of the dissertation--Dr. Ralph H. Blodgett (Professor of Economics) and Dr. Harry Kantor (Professor of Political Science). The writer is also grateful for the Travel and Research Grant awarded him by the Center for Latin American Studies at the University of Florida to partly finance research activities in Nicaragua during part of 1967.

Without the cooperation of many of the governmental agencies of Nicaragua and the many casual conversations with a number of Nicaraguans, the data would not have been as comprehensive as found in its present form. The assistance willingly offered by Prof. Rene Rodriguez Nasis, in charge of the library of the Central Bank of Nicaragua, and by Juan Jose Martinez L., Department of Economic Studies of the Central Bank, is greatly appreciated. The writer wishes to express his thanks to Dr. Carlos Flores Lovo for providing him with office space and other valuable assistance and to his wife for organizing a great deal of the material in Spanish and for being a longanimous and indefatigable travelling companion.















TABLE OF CONTENTS


Page


PREFACE .... LIST OF TABLES INTRODUCTION


. .. *. iv


* . . . S S * * * S S * * S S *

* 5 9 5 * S S S * * S * * S * S


viii


* * * 1


CHAPTER


I. CLIMATE FOR FOREIGN INVESTMENTS. . .


Incentive Legislation . . � � Central American Integration. Guaranty Coverage . . . . � Political Conditions... *


II. LOANS FOR INFRA-STRUCTURE DEVELOPMENT


Electrification . * * � * * � . , Transportation. . * . * � . � * . Port Authority of Corinto . * � # Analysis . . * . * * * & * * * * �


III. LOANS TO FINANCIAL INSTITUTIONS . . ....


Comments . . . � . � � � � � � � INFONAC. . � � � � � � � � � � � Banks. . . . . . � � � � � � � � Analysis . * o o o & o o � � �


IV. FLOW OF PRIVATE FOREIGN INVESTMENT . . ...

Factors Affecting Private Investment �
Inflow of Private Foreign Capital. � � 4 Effect on the Economy .... � * Problems of Foreign Investment * � � �


. a * 10


� � � 39


102
103 108
114
123


& 0 0









CHAPTER Page

V. PURCHASING POWER OF EXPORTS ..... .. 130

Income from Exports.. *.... .. 131 Expenditures for Imports....... 141 Terms of Trade .. .. .. .. ..... 149
Capacity to Import . e . . .. 155

VI. ANALYSIS OF DEVELOPMENT PROGRESS . o .... 160

Capacity to Service Debt. o . . � . . 161 Measurement of Growth. o � � � � . * . . 167 External Capital as an Economic Stimulant.180 Some Final Comments. o * . � . . . . . . 185

BIBLIOGRAPHY. � - . . . . . . . . . . . . . . . . . . 188
VITA o o * * * 6 # o o o * # o . * . . * * . . # . . * 205


vii














LIST OF TABLES

Table Page

1. Summary of Exemptions from Nicaraguan Customs
Duties and Taxes Granted to Manufacturers
in the Law of March 20, 1958.0 . . . .. 14

2. Summary of Benefits Accorded by the Central
American Agreement on Fiscal Incentives
for Industrial Development . . . . . . . . * 26

3. Cumulative Summary of Specific Risk Investment
Guarantees in Nicaragua written by U.S. AID
through March 31, 1966. .. ..... . . . . 32

4. Nicaragua: Financing of Electrical Energy,
1955-1964 . . . . . . . & � # � � * � � � � 45

5. Highways and Road System of Nicaragua,
1955-1964 . � � . � � � � � � � � � � � � � 50

6. Highway Works in Progress in Nicaragua at
December 31, 1964 . . . � � . . . * * 0 * 53
7. Nicaragua: Financing of Highways and Roads,
1955-1964 . . . . . . . . . . � � * * � . 54

8. Financing Improvement of Port of Corinto,
Nicaragua, 1955-1964 . � � � . � .. . . . . 64

9. Savings and Financial Obligations of INFONAC,
1955-1963 . . . . . . . . . . . . . . . . . 80

10. External Loans of INFONAC through December 31,
1964 . . . . . . . . . . . . * � � * � . * 81

11. National Bank of Nicaragua Loans in Arrears,
1955-57. . . . . . . . . . . . . . . . . . . 88

12. Nicaragua: Composition of Loans to Industry
from the Banking System & INFONAC,
1 9 5 8 - 6 3 . . . . . . . . . . . . . . . . . ..0 * 9 1


viii








Table Page
13. External Funds Drawn by the National Bank of
Nicaragua, 1955-64,. � .. . .. . � � 93

14. Nicaragua: Foreign Investments, 1955-1964 . . o 110
15. Nicaragua: Fourteen Firms in Operation or in
Organization with Foreign Capital Sheltered
by Industrial Incentive Laws, 1964 . . . . . 112
16. Nicaragua: Wage Rates of Various Groups, 1964 � 115
17. Nicaragua: Percentage Distribution of
Economically Active Population by Branch
of Activity, 1955-1964 ........... 118
18. Nicaragua: Relationship of Quantum of Goods
and Services Exports and Gross Domestic
Product, 1955-1964 .. . . . . � * � � * � � 132
19. Structure of Exports of Nicaragua, 1955-1964 o o 136
20. Destiny of Nicaraguan Exports by Country,
1955-1964 . . . o . . . . . . . . . . . . . 138
21. Nicaragua: Relation between Exports and Gross Values in Various Areas, 1955-1964 o o . . . 140 22. Nicaragua: Surplus or Deficit with the Exterior, 1955-1964 . . .. . . 0 * � � � � 143 23. Nicaraguan Imports of Goods and Services, 1955-1964 . . . . . . . . . . . . . . . . . . 145
24. Nicaragua's External Sources of Supply, 1955-1964 . . . . . . . � * * 0 . . . . . . 148
25. Nicaragua: Index of the Terms of Trade, 1955-1964 �. o o � .. .. . & � * � * * � 151 26. Nicaragua: Purchasing Power of Exports, 1955-1964 . o o . . . . . . . . . . . . . . . 154
27. Nicaragua: Capacity to Import, 1955-1964 . . . 156 28. Nicaragua: Relation between Import Capacity and Gross National Product, 1955-1964 o 0 . . ... 157










29. Nicaragua: Relation of Long-Term Foreign
Obligations to the Ingress of Foreign
Exchange on Current Account, 1955-1964 . . . 163
30. Nicaragua: Relation of Long-Term Foreign
Obligations to Gross Domestic Product and
Gross Domestic Savings, 1955-1964 . . . . . 165
31. Population and Gross Domestic Product of
Nicaragua, 1955-1964 . . . � . . . � * . . * 170
32. Nicaragua: Projected Per Capita Income,
1964-2100 . . . . . . . � � � � . . . . . . 172
33. Nicaragua: Structure of the Gross Domestic.
Product According to Economic Sectors,
1955-1964 . . . .. .... � � 173

34. Nicaragua: Distribution of Workers According
to Weekly Salaries, 1960-1964 . . . . . . . 177
35. Nicaragua: Savings and Investments by Sectors
1955-1962 . . . . . . . . . . * . . . . . 182


Tabl e


Page















TNTRODUCTI c:,T


At the invitation of' the Coverrment of Ticeraaa,

the International Bank for Reconstruction nrd Development in 1951-1952 sent a survey miss-on to the 3eoublic with the object of' oresentin. a program for economic develonment. in its published report in 1953, The Economic DeveloDment of' Nicaragua, the mission outlined ten Fe jor obj ectives. The only fiscal measure cal]-ed for long-term credits and. technical assistance. Others were amelioration of' agriculture, transportation, communication, illiteracy,

public health, industry, and power. The first five-year plan was to augment the volume of' agricultural and industrial production by twenty-five oer cent and anrual oer caoita income was suoposed to rise by fifteen oer cert.

If* any epoch in recent Nicaraguan history can be

properly labeled as the inchoation of' economic development in a present-day sense, then this period of' the carly 1950's might be justifiably called the point where Nicaragua decided to embark upon an experiment in economic development. Beginning in 1951, the International Bank for Reconstruction and Development sanctioned the first of* several loans to the Nicaraguan Government to aggrandize the pool of










public capital. Organized by the Centr-! Government, the National Development Institute initiated its operations the first day of' 1954. A National Planning Office w>:as established by presidentlal decree. 'in 155, the levislature passed a law to protect foreign capital and to provide it with certain guarantees. in 1958, a more comprehensive law to stimulate and promote develoment capital was promulgated. During the decade Nicaragua was negotiating an economic integrration treaty with the rest of Central America. The National Bank of Nicaragua followed a credit policy which would foment an export surplus in cotton and coffee. Wdith these events evolving, a deliberate plan 'ws forming to exploit the natural advantages of the country in an effort to raise the level of real per capita income.

One of the earliest steps in the Government's program was the devaluation of the cordoba in November, 1950, which raised the exchange rate for exports from 5.7 to 6.6 cordobas to the dollar. The exchange rate for imports varied between 5.37 and 7.05. The devaluation provided the stimulus for the expansion of' exports coupled with liberal agricultural credits from the National Bank.

During the first half of the century, the Government followed a relatively passive course in its policies. Other than the Ethelburga Loan of the 1890s and the negotiations with Brown Bros. & Co. especially during









the first two decades of this century, r[Icararua horolo"ated relatively few foreign loans. 'omne foreir-n credits after 1039, were obtained from. the Export-lmport ank. Between 1945 and 1950, the external debt was formed exclusively of Central Government agreements having a bal nce of 10.5 million cordobas in 1950. 3o-rrowings were used basically for the amortization of old debts.

Several loans granted by the Export-Import Bank between 1939 and 1957 totaled "14.2 million. In the decade of the 1950's, external funds began to flow into economic development projects. During the decade the ICA progr -mr in Nic-ragua averaged !800,000 yearly with funds chiefly channeled into agriculture, natural resources, urban plannirg, transportation, health, and education. The United States Bureau of Public Roads granted "8-5 million for construction of the Inter-American Highway and another .13.5 million for the Rnma Road Project. Between 1951 and 1964, Nicaragua contracted for twelve loans with the World Bank aggregating ,38.1 million.

External loans transformed transportation and electric power development. In 19l0, Nicaragua essentially had no paved sections of highway and the main transport link was the railroad concatenating a seanort with the principal cities and production areas. Public power was so deficient and unreliable that a public system of electrification could be said to scarcely exist. Vuch of the










private power generated was in isolated mining areas. The 1950's saw a rapid rise in the lerngth of roads :rnd h -.,ys. In 1954, a national power and light company was forced d a program of' electrification of the PacifIc area was initiated a few years later.

While there are no comprehensive statistics on manufacturing in Nicaragua, a 1953 industrial census records more than 1,500 enterprlses---most of which were very small, employed only a few persons, and applied cottage

-industry techniques to process for domestic consumptlon. In agriculture, cotton production multiplied 100 times between 1949 and 1955, stimulated by favorable world prices and liberal credit. The market tumbled in 1956, but in 1957 a "cotton pool" was formed to buffer domestic growers from the decline in international prices. The Government granted a subsidy to producers of the 1958-1959 cron and output was sustained at the 1955 level throughout the next

three years in spite of a fall in world cotton prices. A deteriorating fiscal position caused the Government to abandon its scheme. The effort to diversify was partly undertaken by the Natlonal Development Institvte which had acceded loans of about 88 million c6rdobas by the end

of 1959. Even so, around one-fifth of these still went to the traditional coffee growers, approximately one-fourth was granted to cattle growers, and something under one-half flowed to the Industrial sector materially in the form of long-term credits.










From 1945, the Government ran a deficit every year financed from its foreign exchange reserves. By 1949, reserves were practically exhausted, emergency loans were obtained from abroad, and import restrictions were inosed. Between 1950 and 1955, with a strong demand for ricaraguan exports, the export sector grew at an average annual rate of twenty-six per cent. Public revenues rose and Central Government spending approximately trebled in this ouinquennial. Many of the increased expenditures were administered in programs of public works and economic development.

To finance these development efforts, the Government and its agencies borrowed from abroad---from the international Bank for Reconstruction and Development, the Export-import Bank, the Development Loan Fund and the Agency for International Development, private foreign commercial banks, and supply houses. This is what the proximate chapters are about---the external funds Nicaragua has borrowed to finance an economic infra-structure, loans that have been channeled through financial intermediaries, funds received from the inflow of private foreign capital, and income generated from its exports.

The foreign exchange impact is oivotal, and external capital is the dynamic force which, through 1964, has kept the development experiment viable. Compared with the rest










of Latin America, jlccracua has had an impressive absolute growth rate in spite of' having one of the h rates of population expansion in recent years.

The Durnose of this paper is to examine the effect external capital has had on the economic Tro,!th of the country. The contention is that without external f-n-s, no economic growth would have occurred during the period under discussion. 7n the final chnpter, some measurement of' ,rowth for the entire economy will be attempted; then, to the extent possible, the effect of external capital as an economic stimulant will be isolated.

3ecause the terms 'economic growth' and 'economic development' have been used loosely throughout the text and at times tend to overlap, an important distinction should be made at the outset between the two. 'Economic development' is meant to be defined as th-e growth Ir output, whether as a result of' population increase, capital accumulation, or technical pro-ress. The corce'D4 --ltes to raising the levels o1 output or of income. Tn this sense, the text auite correctly speaoTs .s of the economic development of certain setors of the economy. ..o.evC , it is conceivable that economic Oeveloo='ert ,2an te m~ce even at the cost of lower g er r capot income; i.e., if the objective is to fl um empty spaces, it may be that the economy rearra-'eas itself" 4o such a fashion as to allow the rate of popul.ation rise outstrip the 7ains production.










The term 'economic growth' more accurately describes the oroblem with which we are basically concerned here. It is defined as raising per capita income by modifying the economy in such a fashion that -rowth becomes a Dermanent feature of the economy; i.e., the process of' raising per capita income becomes self-feeding to sustain itself over a very long period. In examining the various projects and programsfinanced partly through outside help, the central issue is not develoDment for the sake of development but whether the fomentation of these projects and programs either directly or indirectly have achieved or hlave contributed to the growth objective. A country has failed to solve the problem if' an inflow of capital over a relatively short period (or periods) does not set the economy off on the path of sustained growth.

This is precisely the point that will be looked into

in the following pages. The objective will be to determine

into what areas public and private foreign capital have flowed. We are interested, for example, not in any direct influences infra-structure projects may have had on growth but whether, in a roundabout fashion, these projects have exerted any influence on the growth process. For this reason the process has been called a development experiment. It is an experiment to achieve sustained growth by the development of th , various sectors of the economy. It









remains until the last chapter, however, before definite conclusions are drawn in this direction.

The ten-year period, 1955-1964, was selected for observation. The interval includes both periods of prosperity and of recession. The year, 1955, represents the end of a five-year period of expansion of the country's export sector. The latter half of the decade of the 1950's is considered largely recessionary, followed by a period of expanding prosperity which covers the balance of the observed period. The selection of these ten years, then, offers some balance for purposes of analysis and tends to lend greater validity to the conclusions drawn.

By 1955, most of the factors which have impelled the economy were already operative or planned. Since private capital formation in part, at least, has lagged behind public capital investment, it can be argued that 1958 to 1967 is the more descriptive period. Also, it is noted that the Investment Incentive Law was not passed until 1958 and the Economic Integration Treaty was not signed by Nicaragua until late 1960. These factors have been considered in examining the evidence; however, for the sake of uniformity, data on private foreign investment coincide with the material in other chapters. The cutoff date of 1964 was partly a matter of convenience, partly because of more complete information available









throuj-h that year, and partly due to some indication of a snift in policy and direction of investment after

The final chapter will somewhat br toet>-er the material in an effort to analyze development prog;re5s. i will discern lTicaragua's capacity to service Its external debt and will review! those factors which constitute the country's ability to continue e:ternal borrowin,:. :he chapter will end by restating the role th-iat exterral capital has played as an economic stimulant.















CHAPTER I

CLIMATE FOR FOREIGN INVESTMENTS


The Republic of Nicaragua, a mixed economy, endorses the tenets of a free enterprise system which underpins its development experiment. While its economic development must substantially originate internally, by its very nature as a low-income country Nicaragua is looking beyond its frontiers for investment capital. One of its objectives of economic development is to induce an inflow of foreign investments. To this end, the Government has taken action to create a substructure favorable to a free enterprise system; but it is not enough that such conditions exist. "Development further required the presence of a dynamic, innovating, and alert private sector to discover and take advantage of appropriate opportunities.",1

The flow of capital will respond to the forces that influence the productivity of capital within the country. It will consider the size of the local market, the formation of an adequate infra-structure, the access to foreign markets for locally produced goods, the availability of


1Committee for Economic Development, How Low Income Countries Can Advance Their Own Growth, Supplement (New York: CED, September, 1966), p. 32.










financing, and some degree of certainty with respect to fiscal and monetary policy and the ability of the government to maintain political equilibrium. Foreign capital requires reasonable assurance against confiscatory or discriminatory treatment and against depreciation or blocking of local currencies. Nicaragua has maintained a respectable record in this regard.

The following pages will make reference to some of

the forces which encourage the ingress of foreign capital into Nicaragua. The present chapter will take stock of some of the factors affecting the foreign investment climate and the marginal influences legislated by the Nicaraguan Government. Discussion in the chapter will center on incentive legislation initiated both locally and within the economically integrated region. Also, Nicaraguan participation with the United States in providing risk guarantees to capital will be briefly pursued. Before examining social-overhead-capital in the next chapter, the current chapter will end with some pertinent comments on political stability.


Incentive Legislation


Nicaragua has promulgated two laws calculated to

assure foreign-financed industry of its welcome. The first law deals with the unrestricted movement of foreign capital, in equality with property of nationals, and the repatriation









of profits, which the foreign capital may generate; the second law treats special incentives offered to both foreign and domestic firms which come within the vigilance of the decree.


Law on Foreign Investments.---By decree of February 26, 1955, and amendment of October 10, 1959, the Law of Foreign Investments was legislated to establish guarantees of ecual treatment designed to stimulate the entry of foreign capital "to obtain a superior grade of economic aid.'2

The Law recognizes that foreign capital is essential for the exploitation of the natural resources. Similarly, it acknowledges the necessity of the free movement of capital and the right to earn profits as well as to be able to retire them from the country even in times of exchange control. The Law was created to hasten desired economic development within the framework of a competitive free

-market system. The Law admits to the efficiency of private investment and sanctions the greatest possible freedom within the limitations of foreign exchange reserves.


Stimulation of Industrial Development.---While the

preceding enactment provides for the free movement of capital within the definition of the law, the Law of Protection and Stimulation of Industrial Development of March 20, 1958,


2Nicaragua, Ley sobre inversiones extranjeras, pte. I.









classifies eligible industries into three categories--fundamental, necessary, and convenient-- and further subdivides

these categories into new and established firms. The classified industries are entitled to custom-free importation

of necessary capital equipment, duty-free raw material

imports, and certain other exemptions or privileges defined

by the Law. Table 1 on the proximate pages summarizes some

of the major benefits extended to classified industries.

Chapter I of the Act sets forth the policies of the

Government in four articles. Some of the phrases from this

Chapter are quoted

Art. 1.---Manifests general interest in establishing,
in country, industrial plants which contribute
to the industrial process, manufacture or transform
raw materials or domestic or foreign semi-manufactured products, with the object of satisfying the
domestic demand of manufactured or semi-manufactured
products, or to increase the export trade of the
Republic by means of the production of new exportable articles or the increased manufacturing of
those which already are the object of said exportation.



Art. 2.---The Government of the Republic will take
all te necessary measures in order to counteract
perfidious practices of business which cause or threaten. to cause injury to the industrial production of the Nation, or which set back the
establishment of a national industry.

Art. 3.---The Government of the Republic, . . .
and, in general, all the official organs, in equality with qualities, prices, and conditions, will
give preference in its ourchases of official character to the industrial products of national fabrication . . ..









TABLE 1

SUMMARY OF EXEMPTIONS
FROM NICARAGUAN CUSTOMS DUTIES AND TAXES
GRANTED TO MANUFACTURERS IN THE LAW OF MARCH 20, 1958



Exemption Class of New Industry


Customs Duties and Fundamental Necessary Convenient Consular Fees


Construction materials Yes Yes Yes

Machinery & equipment Yes Yes Yes

Maint. supplies & imp. 10 yrs. 5 yrs. No

Custom duties:
Fuels & lubricants 10 yrs. 5 yrs. No Raw materials 10 yrs. 5 yrs. No Semi-finished pdts. 10 yrs. 5 yrs. No

Taxes:
On plant operation &
product sales 5 yrs. 5 yrs. No
On investment capital 5 yrs. 3 yrs. No
On plant income:
100 per cent 5 yrs. 3 yrs. No
50 per cent 5 yrs. No No

Plants are classified as fundamental, necessary, convenient, or not at all on the following criteria:

(1) Contribution to the national income and distribution of the contribution among various factors
of production.
(2) Advantages to local consumers.
(3) Quantity and quality of labor required.
(4) Capacity and efficiency of equipment to be used.
(5) Value and quantity of local raw materials
required.
(6) Market need for the product(s).
(7) Intended use of the product(s).
(8) Income or saving in foreign currency to be
produced.
(9) Amount of invested capital.









TABLE 1 (continued)


Class of Established Industry


Fundamental Necessary Convenient
Before After Before After Before After


No Yes No Yes No No No Yes No Yes No Yes 5 yrs. 5 yrs. 3 yrs. 3 yrs. No No 5 yrs. 5 yrs. No No No No 5 yrs. 5 yrs. No No No No 5 yrs. 5 yrs. No No No No



No 3 yrs. No No No No No 3 yrs. No No No No No No No 5 yrs. No No


Plants established before or law.


Sources:


after effective date of the


(1) Nicaragua, A reference study by Industrial Development Manufacturers Record (Atlanta, Ga.: Conway Research, Inc., Feb., 1964), p. 53.
(2) Nicaragua, Ley de oroteccion y estimulo a! desarrolo industrial,
20 de narzo de 1958.










Art. 4.---The Schedule of Excise Taxes of the Municipalities . . . will not be able to encumber the
exempted industries with taxes similar to those
from which they are exempted ...

Chapters II and III of the Law define classified

industries and the exemptions to which they are entitled

---which are summarized in Table 1. Chapter IV sets forth the obligations of the sheltered plants, while the remaining Chapters of the Law deal with the establishment of an Advisory Commission of Industrial Development and the procedures relative to seeking protection accorded by this enactment.

This is perhaps the most decisive piece of legislation attacking the problem of private capital formation from the demand side, which assigns significant, favored treatment to those industries fortunate enough to qualify for the exemptions and privileges accorded. From all reports, the Law is not one which has become involved in bureaucratic red tape and has already afforded sheltered treatment to nearly 500 firms. The cooperating agencies of the Government have acted on applications within the allowed thirty

-day limit.

This incentive law, which is similar to many used

throughout the world to reduce taxes for firms whose activities are presumed summum bonum to the development process,

3Nicaragua, Ley de proteccion y estimulo al desarrollo industrial, cap. I. [Translation by writer.)









has introduced new burdens and problems in administration and at the same time has tended to reduce government revenues. This is counter to the trend of rising expenditures for government operations which has accompanied the expansion of state activities in both the public and private sectors.

The real economic advantage generated. by this Law

occurs when these incentives induce investment which might otherwise not have materialized. From this standpoint there is little objection on revenue grounds since these exemptions are transitory. Once established, capital investments tend to be permanent and should result in net additions to national tax revenues. The eventual economic and social benefits should outweigh any ephemeral advantages granted.

The objectives of the Law indicate that the country has placed especial emphasis on the foreign exchange impact. Any enterprise that saves foreign exchange by import substitution or generates income in the external sector through new or expanded export production is regarded to have utility. What the legislation fails to specify, among other things, is the type of foreign exchange it desires to conserve or accumulate. It is conceivable that the introduction of some intermediate process could result in a loss of the type of foreign exchange essential to capital outlays. For example, an export oriented assembly plant,










which obtains from the United States its components, may become established within the Republic. Assuming that the hypothetical firm exports a large portion of its output to Costa Rica (which initiated exchange controls on January 2, 1967)4 , Nicaragua would, in effect, be exchanging hard currency for overvalued soft currency, thereby restricting, to a limited degree, the amount of capital goods it could import.

Another problem is that the incentive legislation fosters import substitution only at the consumer level but works against itself at the intermediate goods level of production. For example, let's assume that a hypothetical firm has been granted special exemptions to produce metal products in Nicaragua. The metal-producing firm has to import most of its raw materials, which it does duty

-free. Its main role within the national economy is to add the value of domestic labor to the firm's final product. The firm comes within the shelter of the industrial development law since it does contribute significantly to the level of employment, is import substitutive, and has the capacity to supply a substantial part of the local market. Since a large portion of its products are fabricated according to specifications, it is a potential supplier to a variety of industries.

4Conversation with Joseph Ramirez, Vice-consul, Consulate of Costa Rica in Miami, Florida, on January 5, 1967.









On the demand side of capital, a moderately protective tariff may increase the incentive to invest by preserving the domestic market. Even a small-scale firm may anticipate slightly under-pricing competing imports. But, in addition to the problems related to inadequate facilities, a small market, lack of trained labor, and possibly lower

-quality products, the very law which purports to shelter the firm concomitantly abrogates it.

Let's assume that a local hatchery has decided to

expand operations from its ordinary undertakings to that of raising, killing, and freezing fryers for the local market. Initially the firm employs laborers on a piece

-work basis to kill, clean, and package the chickens. Precursory results have been encouraging and the firm opts to fan out to serve a substantial portion of the domestic market with frozen birds. After consulting with a United States manufacturer, the local firm learns that it can substitute a substantial quantity of its labor with capital equipment and lower per-unit costs over a wide range of outputs. Further examination affirms that most of the new capital equipment is simply constructed and could be produced according to specification by the local metal fabricator.

The price quoted by the local fabricator is competitive with the delivered price of the imported equipment, and, ceterisparibus, the domestic metal firm would supply









the local hatchery. However, the development law grants exemption of customs duties and consular fees for machinery and equipment to an established fundamental or necessary industry desiring to expand. If, after exemption of fees and duties, the delivered price of the equipment from the United States company is lower, then the hatchery would import its capital equipment rather than pay a higher price to a domestic producer. The effect of import substitution is inoperative in this case.

If it is concluded that incentive legislation is the best way to attract the desired industries, then, at least in some instances, the only advantages are to be found in tax reductions during the early periods of operation. However, with the facility to evade taxes coupled with the probability that the firm may be operating at a loss during its infancy, then forgiving zero taxes only multiplies paper work for the 'privileged' firm.

Another cul-de-sac associated with the development

laws is that tariff protection actually assists the stronger firms by bestowing windfall benefits upon firms which might have made the same moves, and be equally beneficial to the country, even in the absence of such laws. Evidence hints that the marginal firm is induced to initiate activities which may reveal a permanent incapacity to function without artificial support resulting in a perpetuation of





21



the protection. Operating satisfactorily, the period of

sheltered treatment should give the protected industry an

opportunity to survive the initial period of heavy losses

but with the idea that it will administer itself more efficiently and survive once the protection is lifted. If

the firm's management is not thoroughly convinced that

protection will one day be withdrawn, then it will have

little incentive to strive toward a more efficient operation. Some evidence of this appears in the following

paragraph:

Incentives are of more importance to smaller
firms . . . . With one exception the companies
that insisted on the critical role of incentives
were in this category. One told me that "we
couldn't have come in without them because all
our material is imported and our volume so small,
we would have been wiped out otherwise." Small firms simply do not have the resources to incur
losses for lengthy periods. The flow of cash
made available to them by lightened tax burdens was essential to their continuing as going concerns. Generally speaking, the big corporations did not wish to stand on these incentives either because they felt that they cost more in the long run in terms of interference and paperwork or did not attach great weight to them because they presented very small cost savings . . . 1



5Sheldon L. Schreiberg, "The United States Private Investor and the Central American Common Market," U.S., Congress, Joint Economic Committee, Subcommittee on Inter-American Economic Relationships, Hearings, Latin American Development and Western Hemisphere Trade, 89th Cong., 1st Sess., September b-10, 1965, p. 271.









Even with the possibility of an industry being able to eventually operate successfully without shelter is not sufficient basis for even provisional protection. While the law is being implemented, it entails costs for the entire Republic including other industries which are obligated to transact business without special exemptions.

With the advent of the Central American Common Market, another problem became evident. Incentive legislation could become involved in cut-throat competition with priority being given to the establishment of a National Industry without consideration of the costs involved to the individual economy as a whole. An industry would tend to locate where it could receive the most lucrative benefits. To counter this development, the governments of the region adopted a uniform system of incentives for industrial development---the Central American Agreement on Fiscal Incentives for Industrial Development.


Central American Integration


Respective of its domestic market, Nicaragua has little to protect, but as part of the Central American Common Market (CACM) local industries, unrestricted by internal tariffs and other obstructions, have a market potential, in terms of numbers, expanding from under two million in Nicaragua alone to close to fourteen million for the entire









integrated region. Entwined with purchasing power, expansion of the geographical size of the market does not necessarily extend the economic size of the market. A heightening of economic efficiency, ceterisparibus, enlarges the size of the market under competitive conditions. The attention of' these laws, however, appears to be directed at establishing national industries with only minor regard for the real costs involved. Brief mention will be made here of three agreements which affect private capital development in Nicaragua---the Integrated Industries Agreement signed June 10, 1958, the Special System of Production Promotion, and the Fiscal Incentives for Industrial Development.

The Integrated industries Convention declares that Central American integrated industries are those which require that the minimum volume of production that can be engendered at reasonable cost must be greater than the needs of a single country. The firm designated must make certain guarantees as to quality, price, and delivery. In return, it receives a ten year exemption from import duties on raw materials, a waiver of production taxes, and tariff protection from third countries. Each country is to have one designated industry before any country may have a second one. A caustic soda and chlorinated









insecticides plant has been designated as an integrated industry in Nicaragua.6

The objection to this convention is its interference with the free-market system. If the entire integrated region will only support one industry of a given type, then it seems that free-market forces can determine this more efficiently. The administrative machinery set up to regulate integrated industries is both cumbersome and expensive and may be ouite ineffective.

The Special System of Production Promotion garners

industries which cannot be classified as integrated industries. The special system establishes uniform protective tariffs which are higher than those established in the Uniform External Tariff or generally higher than those In effect in each country. The applicants must prove that their plants will have the capacity to supply at least fifty per cent of total CACM demand in order to be accorded the protective tariff.7

If only protection may be necessary to create economic development, then the problem is quite simple. Actually tariff protection has existed all along. Even coupled with


6"The Central American Isthmus," Latin American Report, V (April, 1964), 70�
7U.S., Dept. of Commerce, "Trade and Invest in Central America," International Commerce, supplement (July, 1965, 29.





25



fiscal incentives, it is contrary to reality to expect a flood of foreign private capital to inundate the country. While factitive, these measures are evidently of secondary consequence.

Possibly the most salient of the integration instruments, the Fiscal Incentive Agreement applies only to manufacturers, outside of extractive industries, agriculture, and construction of low-cost housing. This law has tended to prevent competitive incentive legislation. Industries are divided into three classes---A, B, and C. A new Class A firm, for example, is eligible for exemption from customs duties on machinery and equipment imports up to ten years; exemption up to 100 per cent on raw materials, semi-manufactured products and packaging for the first five years, up to 60 per cent for the next three years, and 40 per cent for another two years; and exemption from taxes on net worth for ten years. Existing firms and lower-classified firms retrieve correspondingly reduced benefits.8 Table 2, on the next page, summarizes the fiscal levies which the law may forgive to eligible firms. Group C (not shown below) accommodates those firms which do not qualify under the other two categories or which assemble, pack, cut, or dilute products. Group C also enspheres producers


U.N., ECLA, Report of the Central American Economic Cooperation Committee (Q/CN .12/672) (New York , 1964).









TABLE 2
SUY... OF B ..EFITS ACCORDED BY T-E - JT-.3 AE ?JC
AGREEMENT C:" FISCAL TICThVES FOR INDUSTHIk]L DEVECL7>C:E:



Ground A Group n
Fiscal Benefits 1\T - " Existin ew ew Existing


Exemption from Import Duties on:

Machinery & equipment 10 yrs. 6 yrs. 8 yrs. 5 yrs.

Raw materials, semi- First None First None
manufacturers, & 5 yrs. 3 yrs.,
packaging 100 ; next 1 OO" last
3 yrs., 2 yrs., 60/> >st 5Op
2 yrs.,
t " 0 4
Fuels, except 5 yrs. None First None
gasoline 3 yrs.,
100 ;last
2 yrs.,
50
Exemption from Income and Profit Taxes:

8 yrs. 2 yrs. 6 yrs. None Exemption from Taxes on Assets and Net Worth:

10 yrs. 4 yrs. 6 yrso None Source: U.S., Dent. of Commerce, International Comerce (March 18, 1963), 30.









of alcoholic and non-alcoholic beverages, manufactured

tobacco products, and perfumery, cosmetics, and toilet

preparations with the exception of soaps and dentifrices.

While the intended reaction to this law may have been

to equalize the incentives legalized by the CACM members,'

data disclose that Nicaragua has continually experienced

an adverse balance of trade with the CACM countries, in

global terms.9 The Nicaraguans blame the comparatively

less-developed state of their industrial sector along with

administrative barriers that Nicaraguan exports encounter 10
in the integrated market area.
The Nicaraguan Chamber of Industries presented
President Guerrero in August [19663 with a thorough report on the problem facing Nicaraguan industry in its efforts to compete within the CACM. Among the
specific needs cited to make Nicaraguan industry
more competitive were cheaper electric power,
better water supply, worker and management training,
better port facilities, and additional capital.
The other CACM countries were also accused of placing administrative barriers in the way of Nicaraguan
exports. In addition, the Chamber of Industries report admitted that part of the difficulty lay
with Nicaraguan industrialists themselves because
of a lack of initiative, entrepreneurial spirit,
and other qualities needed to compete in the CACM.11


9Nicaragua, Banco Central, Boletin Trimestral, VI (No. 24, octubre-diciembre, 1966), p. 65.
10U.S. Embassy in Nicaragua, Summary of Economic Conditions in Nicaragua (3rd quarter, 1966), pp. 3-4. (Ximeo .
i1llbid.t p. 4.









In September, 1966, Nicaragua requested preferential

treatment with respect to the Fiscal incentives Convention. Honduras was earlier granted a preferential status based on a study by the Economic Commission for Latin America (ECL, and a similar study has been requested for Nicaragua. The study is anticipated to be completed by mid-1967 in order to determine whether Nicaragua should be given sanction to accede more favorable fiscal benefits to new industries. In addition, Nicaragua has requested preferential treatment in the establishment of integrated industries and In financial assistance from regional organizations.12

In addition to fiscal incentives and tariff protection, Nicaragua has entered into an agreement with the United States to insure specific risks of private foreign capital investment whIch is substantially beneficially o rned by citizens of the United States.


Guaranty Coverage


'While a number of Insurance plans is accesslb'-C to private, foreign investors, only one will be disserted here since it involves an agreement with the Nicaraguan Government. The Specific Risk Investment Guaranty program is authorized by the Congress of the United States under


12Loc. cit.









the Foreign Assistance Act of 1961, as amended, end is administered by the agency for International Development (AID). "This program is designed to encourage the transfer to less developed countries of the capital and tech-nioues that helped this country to grow and thus assist the objectives of the United States foreign aid program."13

Once the agreement was signed with Nicaragua, the

specific risks which may be covered by such guaranties are:

1. Inability to convert actual profits or earnings
or return of the original investment into dollars;

2. Loss of investment due to expropriation, nationalizatlon, or confiscation by the foreign government

3. Damage to or destruction of tangible property
attributable to the investment as a result of
-'ar, revolution, or insurrection

The program doec not affirm guaranties against such risks as devaluation, default of a creditor, bankruptcy, or against normal business risks.14

Under the convertibility guaranty coverage, the Investor is assured that "if there is a means available for converting the dividend, interest, or principal, or other payments arising from the investment into dollars of the

United Statesl at the time the guaranty contract is
1j

U.S., Dept. of State, AID, s1si- i r.! Investment Guaranty Hand~book, revised Octor, o.
14 Ibid.,p. 2.









executed for converting these local payments into dollars, such local currency will continue to be convertible into dollars for the duration of the contract, by equivalent means."115 The guaranty does not protect the Investor against currency devaluation or inflation, and in the case of multiple exchange rates it normally offers protection only against blockage of all the legally recognized exchange rates. Nicaragua has not adopted a system of exchange controls and the Nicaraguan c~rdoba16 is freely convertible at the time of this writing. The 1955 Law on Foreign Investments decrees that "foreign capital will be able to enter and to leave the country without restrictions, according to the disposition of this law.'"17 On the basis of past record and the Implementation of the present laws, the convertibility cover ge offers little additional incentive for the inflow of United States private capital.

The second coverae, expropriation guaranty, countenances protection to United States investors against losses due to expropriation, confiscation, or national7zat-- of the insured property. Under international law, the oer

151bid., p. !4.
1 6 A t h, ^
At the current official exchange rate, the Nicaraguan c6rdoba is equivalent to a buying rate of U.S. 14.2857 , approximately.

Nicaragua, Ley sobre inversions e eras,
Decreto No. 10, 26 ae feorero de 1955,A: . -.ansiation by writer









of property is to be compensated Justly and e=c ent..y when exp oprat'n su-ervenes. toe -na tertona lawsuits are frequently lengthy, the claimant frecuently feels that he has been inadequately indeifled for his losses, and suits are frequently inconclusive. Under the Program, after the investor has taken "a!l reasonable measures", the United States Government makes compensation and the claim is transferred to the Government for action in the World Court.

Table 3 on the following page elucidates the general lack of interest in the Program. The R.isk Guarantees Legislation has been in operation since 1948. Through Karch, 1966 (the latest available data), only seven different firms have availed themselves of the Specific Risk insurance for a total of .S. 810,745,352 in all three categories. Almost half of this amount encapsulates exproOriation. The category with the smallest amount of coverage is war-risk. The primary interest in the latter classification is revolution and insurrection; but Nicarag7a can boast of a fairly high degree of political stability. The same National Liberal Party has been in power since 192918 and the country has been substantially under


1See. Carlos Cuadra Pasos, -irteri> de medio siglo,
2 ed. (Managua: Editorial Un'on, y .








TABLE 3

CUMUI\TIVE SUMMIARY OF SPECIFIC RISK INVESTMENT GUARANTEES IN NICARAGUA WRITTEN T3Y U.S. AID THROUGH NRCH 31, 1966



Investor Product Convertibility Expropriation War-Risk


Booth Fisheries Div.
Consul-Foods Corp. Fish processing $4-0,000 $440,000 $330,000 General Mills, Inc. Wheat flour/Poultry feeds 200,000 600,000 General Mills, Inc. Wheat flour/Poullty feeds 100,000 International Ore and
Fertilizer Corp. Fertilizer 200,000 200,000 200,000 Leigh Textile Corpany Fats,, oils from


Leigh Text !e Comnpany Tropical Dovelopment Corp. Sears, Roebuck, S.A.


cotton seed Fats, oils from cotton seed Loggitng, d(1rying ha rdwoods Retail store


1, 000, 000 550, 000


1,000,000


706,000 150,000

1,000,000


1,000,000








TABLE 3 (continued)


Investor


Product


Convertibility Expropriation WarRisk


St. Rgois Paper Coipany St. Regis f'ape"r Company


Corrugated boxes

Corrcugated boxes


T (ORA L


, 5,079,000 '2,245,000


TO(T ALS (23) ,1i0,745,352


Siouir C: U.S., Dept. of Sbate, AID, Ofce of Developent Fiimnj c rnd Private
-1.Cprise, Inve-stment Guarantees Division, Clmula:I I ve M of Nil
Soccific Risk !Ivestrient Guraintees Issued since the o of the
Pr i 19 thr'ough i#>rc --ah 31,19 C ua7 U.S. Embatssy in
', ,kl:') u ) pp 241$'-' ;( "-;


$L5, 000 375,000


p3,420,000


350,000


315,000









one-family rule continuously since 1936.10 The National Guard has been able to mitigate any internal perturbations.20

In studying Table 3, it should be noted that the total of the twenty-three insured risks does not substantiate that the total flow of insured capital amounted to nearly U.S. $11 million. For equity investments the maximum amount of the guarantee generally cannot exceed 200 per cent of the dollar value of the original investment. A firm may insure the same investment three times---once in each category. (For example, look at International Ore and Fertilizer Corp. It insured the same investment, $200,000, three different times---once in each of the three categories. Total investment was not '600,000 but only $200,000.)

The danger here is one of principle. Ostensibly, the lack of interest is due, in part, to business sentiment in that firms prefer to operate without additional government control or interference in their business quests. The investment guarantees require approval of two governments

---the United States and Nlcaragua--- plus the time involved to process the applications.

19See. Alejandro Ccl Chamorro, 1'45_Aos de historia politica en Nicaragua (lanoSa: Editor Niceraguense,
20See. Peter Smith, "Development and Dictatorship in Nicaragua, 1950-60," The American Economist, V:1 (June, 1963).









While domestic incentive legislation, regional fiscal benefits, and foreign government guarantees may ensphere several of the propitious elements that a climate for attracting foreign capital may embody, the general characteristic is the profit motive. Especially in the case of sizeable capital outlays, the firm must examine more than Just short-rrn benefits in order to recover its investment. The firm may be more interested in becoming established ahead of competition and not wish to wait for approval of a guaranty in one or more categories.

This specifies that the firm has been motivated by the prospects of immediate profits rather than by any special advantages that may be secured under the Specific Risk Investment Guaranty. The firm 7ay make ap7licatlon at the same time it begins construction but this would lend strength to the analysis that the investment guarantee is something "extra" to be realized along with oth-er special benefits such as the possibility of tributary abatement during initial activity. These are not necessarily inducements since the decision to invest was made on a priori factors. Table 3 especially supports this contention, since over a lapse of several years only seven different firms have applied for a combined total of twenty-three coverages in all three categories.

The investment guarantees may afford a greater incentive to invest in areas whore there is a history of









political instability. This has not been t' case with Nicaragua. Whie many may opne th'-at the Government of Nicaragua is omproblous, the Goernnent has generally maintaned an air of stability for nearlv a thlrd of a century. This does not guarantee that the next one-thira1 of a century will conform to the pattern of the preceding epoch but it does suggest that the Government has effectively assuaged internal disturbances to provide another constituent---political stability--- which reinforces an opportune investment climate.


Political Conditions


Political instability deters private capital formation because it raises uncertainties as to the future which may adversely affect present decisions. The fact that the Nicaraguan Government has the power to interrupt, harass, or destroy any private foreign capital venture is a factor that must be taken stock of when making an investment decision. In addition to investigating market condition , technical data, and available financing, the investor has to reflect on the past perfor.ance of the political parties, the internal conditions, nationalism, and the official and unofficial attitude of governmenttwn investors.
govern .foreign investors.

With this latter data in hand, he then r.ust form conjectures on the future political direction of the country.









It is the political stability, not the degree of

democracy, which influences private foreign Investment. Excessive nationalism or tendencies toward socialism might tend to dampen investor activity. But with a fairly high degree of political stability, the entreprene ur will feel there is reasonably more security in government policies and will attach more faith to guarantees legislated by the government. It has already been pointed out that Nicaragua has a good record in this regard; and a long period of dominion by the Establishment, which has allowed
n unton much of the time, is a favorable an Opposition to fun 4. of adjunct in energizing private foreign capital. However,

there have been minor intera1 disturbances and business has reacted quickly to any possible changes In the political atmosphere. The followLng paragraph adumbrates the business seauel after a brief outbreak between a group of Conservatives and the National Guard that took elace during the latter part of T anary, 1967:

Businessmen seem generally optimistic about
the prospects for 1967. in recent weeks there has been some decline in sales---partl cular-ly a-fter the
flare-up of violence I :anaua on January 22 resulting in a number killed and wounded and property damage in the capitals business distrlct---but this
is considered to be re ted to ebcction tens-ons
and an upturn is ewoected no-, that e!cion have
t a k e n p l a c e . 1 ... . . . . . .


21US. Embassy in Nicaragut, Su...y o. f Economic Conditions in Nlcaragua (1,.-nagua: n4h -4- er, I 66T, T). ; (7imeo.),





38



As later proved to be true, business did continue 'as usual' after the elections. New capital continues to be invested in the country; and there apparently has been no flood of applications for guaranty coverage under the Specific Investment Guaranty Program.

Nevertheless, economic development is not defined solely in terms of the growth of private capital. Only one part of the development process has been animadverted here in the first chapter; i.e., what are some of the measures Nicaragua is adopting in order to create a propitious foreign investment climate? We have very briefly examined some of the incentive legislation as it has materialized both domestically and within the economically integrated region. Additionally, we have ruminated on the legacy of foreign government guarantees implemented in cooperation with the domestic government as well as the inducement of maintaining political stability. The remaining chapters will make reference to actual statistics where both public and private capital has played a part in the development process. Chapter Ii will report on the progress of social-overhead-capital. The chapter will emphasize the lack of electrical energy and the under-development of the transportation system.















CHAPTER II

LOANS FOR INFRA-STRUCTURE DEVELOPMENT


Possibly the most important category of project loans are those destined for the development of an economic infra

-structure. While a favorable climate should exist to attract foreign capital, it is generally conceded that adequate investment in socali-oserhead-cap!tal is a necessary condition of development. The International Bank for Reconstruction and Development has strongly favored the fields of electric power and transportation, and Nicaragua has received most of its external financial assistance in the expansion of these two areas. lost of the current chapter will be devoted to these two fields. The "analysis" section will define economic and social infra-structure and will bring together some of the central points of the chapter.


Electrification


Shortage of power facilities has been a chronic problem. Measures taken during the 1950's were substantially stopgap until longer-range programs were initiated. Chiefly through external borrowings, the installed









capacity of public electrical generation has multiplied approximately ten times. Current plans call for further expansion of the generating capacity and more extensive electrification of rural areas. Although rates to domestic users continue relatively high, this block has, in recent years, been consuming a slightly greater proportion of energy than the industrial block.

As a stopgap measure, the 1951-1952 mission of experts of the International Bank for Reconstruction and Development (IBRD) recommended the formulation of some long-range plans to fill in the gap of the existing shortage of electrical energy production1 and provided funds toward this end. The installed public generating capacity jumped from 7,900 kilowatts in 1950 to 48,300 in 1960 and to 80,000 by the end of 1964, while private installed capacity built-up from 20,000 in 1950 to 29,400 in 1964.2

External debt of the autonomous agency charged with

the conversion of energy averaged 1344,200 per year during the 1952-1955 period, intensified to an annual average of $1,544,500 in the 1955-1960 period, and during 1960-1964 the external debt jumped to a yearly average of

1International Bank for Reconstruction and Development, The Economic Develooment of Nicaragua (Baltimore: John Hopkins Press, 1957), P. 126.

2Nicaragua, Banco Central, Informe Anual, 1965, p. 137.









$2,990,800.3 The IBRD has been the major supplier of funds.

The initial loan arranged with the I2RD in 1953 as a

provisional step for h450,000 helped to finance the installation of a 3,000 kilowatt diesel plant in Nanagua. This unit, intended to cope with the shortage, began operation in 1954 4 Also, in 1954, established by legislative power, the Empresa Nacional de Luz y Fuerza (ENA.LUF) was created as the National Power and Light Company, an autonomous governmental agency, to generate electrical energy and to execute a national plan of electrification.5 In 1955, the IBRD made a $7.1 million loan to YTALUF to supply foreign exchange for the construction of a 30,000 kilowatt steam plant. A loan for 8400,000 conceded in the same year to

the Instituto de Fomento Naclonal served as a basis for credits which allowed municipal power distributors in 15 smaller communities to generate and expand their distribution systems. A , 12.5 million loan made to ENALIUF in 1960 began the evolution of Nicaragua's hydroelectric power potential.

3Nicaragua, Consejo Nacional de Economia, Oficina de
Planificacion, Estudlo del comercio exterior y de labalanza de pagos de Nicaragua, 1 o ' iciemo, 1066, p. 32 .
4 international Bank for Reconstruction and Development, The World Bank Group in the Americas, June, 1953, P. 57.
5Las Novredades (Managua), 18 de marzo de 1967, p. 15.
international Bank for Reconstruction and Development, The World Bank Group in the Americas, P. 57.









Substantial progress has been registered since the

1951-1952 Bank Technical Lission fundamentally as the result of five IBRD loans aggregating Q122,050,000, another $2,500,000 from the Development Loan Fund, and a total of $1,100,000 from the Export-import Bank.

On June 20, 1960, the Empresa Yac'onal de Luz y Fuerza concluded a loan with the International hank for Reconstruction and Development for 812.5 million, payable over a 25-year period at 6 per cent interest. Participating in the loan for a total of $95,000 are the Grace Fational Bank of New York and the Girard Trust Corn Exchange Bank.7 The accommodation has facilitated the construction of a 50,000 kilowatt hydroelectric plant on the Rio Tuma and a 75-mile transmission line to bring power to Kanagua and other population centers en route. The entire cost of the project calculated in 1960 at "20.8 million8 was revised downward in Februry, 1965, to just under 019.5 million.9

The project consists of the construction of a dam on
the upper Rio Tuma on the high rainfall eastern side of the Continental Divide, creating a reservoir with a gross


international Bank for Reconstruction and Develooment, Fifteenth Annual Reort, 1959-1960, p. 32.
8Loc. cit.

9Nicaragua, Conselo Nacional de Economia, Oficina de Planificacion, Evaluacion del Programa de !nversiones Publicas, enero-sentiembre, 1965, noviembre, 1965, p. 45.










storage capacity of 410 million cubic meters. The water has been diverted through a tunnel to the powerhouse in the valley of the Rio Viejo on the drier and steeper Pacific slope.

By the end of 1964, ENALUF had an installed capacity of 45,000 kilowatts; with the inauguration of the first step of the Rio Tuma Hydroelectric Project (TV), total capacity jumped to 70,000. The second unit of the Central American Plant, put into comnercial operation during March, 1965, upped the effective capacity of the National Interconnected System (SIN) by the end of 1965 to 95,981 kilowatts. Via SIN, ENALUF services a total of 44 population centers. In addition to SIN, ENALUF services five isolated systems in the cities of Rivas, Bluefields, Ocotal, Somoto,
10
and San Rafael. To the extent that the shortage of electric power has imposed a bottleneck on the economic development of the country, the culmination of TMV should contribute significantly to the widening of this bottleneck especially when the third and final stage of TMV, which will boost total capacity to 200,000 kilowatts, is a fait accompli.

Essentially this accounts for the amplification of electrical energy generation, which has materially augmented with the debut of the TMV. Apparently the Republic


10Empresa Nacional de Luz y Fuerza, Datos, Estadisticos, 1965, p. 3.









would not have been able to evolve these resources at the same rapid pace in the absence of external resources. Taking advantage of the World Bank Policy to strengthen electrical power development with secondary emphasis on transportation, Nicaragua was able to utilize this source of funds to a great extent. Of the thirteen loans it contracted for with the IBRD through 1964 for a total of 41,ioo,ooo, five were for electric power amounting to $22,050,000. Most government documents and newspaper articles on the subject continue to italicize the inadequacy of power and claim that continued substantial investments are necessary.

Table 4 registers total public investments in electrical energy production from 1955 through 1964. Not specified in the table is percentage of external investments adhibited in the earlier 1952-1955 period, which equaled 51.5 per cent. Reliance on external sources surged sharply In the subjoining 1955-1960 period reaching 77.2 per cent of total investment. During this phase, the

project "Electrification of the' Pacific" was inaugurated in 1958 with two thermoelectric units of 15,000 KW capacity11 each plus a transmission line of 69 kilovolts between Chinandega and Granada.12 The high costs of this program


11Nicaragua, Banco Central, Informe Anual, 1964, p. 112.
12Las Novedades, loc. cit.










resulted in high tariffs to all consumers, which tended to restrict demand of ti.e idustrial market. After proposing to exploit the hydroelectric resources of the country, the "Project of the Electrification of the Tuna Rivc rl" was initiated.


TABLE 4

NICARAGUA: FINANCING OF ELECTRICAL ENvERGY, 1955-1964
(annual averages in thousands of U.S. dollars)



Absolute Avera"es Per cent 1955-60 1955-6 906 Total Investment 2,091.3 4,364.5 100.0 100.0

nt rna 476.7 1,371.2 22.8 31.4 External 1,614.6 2,993.3 77.2 68.6


Source: Ncr , Conselo Naclonal de Economia,
Cficina de Planificacion, Estudio del comercio exterior y de la balanza d- ,oagos de Nicaragua,
i95U-1LJ- o.ciembre, 1,>66, D* 47


Compared with highway construction, a larger portion of external financing was administered in the electrification program because of greater import recuirements. The same relationship is seen between the two nrograms---Blectrification of the Pacific ond the Turn River Project--where greater emnloyment of domestic resources was scheduled in the construction of the latter.










The rate structure is biased toward the large cormercial and industrial users. The domestic consumer pays the highest rate and, in effect, subsidizes to some extent the large user; but he apparently considers this a satisfactory substitute for other alternatives such as propane gas, gasoline, kerosene, diesel or fuel oil. Compared with the rest of Central America, Nicaragua's rates to domestic and small commercial and industrial users rank the highest in the region with the exception of Honduras. On the other hand, large industrial and commercial users enjoy rates considerably lower, which places Nicaragua as the median among the five countries. For example, a domestic consumer disposing of 50 KWH would pay an average of 5.72 per KWH, a small commercial or industrial consumer converting to use 100 KWH would pay an average rate of 5.43 , while a major industrial consumer adsorbing 1,000 KWH would pay an average rate of 2.30 per KIW. Even a large residential consumer of 550 KWH would pay 4.57 and a minor industrial consumer turning as many as 900 KWH to use would still pay

4.13 per KW4H.13

The special rate tendered to a select class of industrial consumers is in keeping with the development and incentive laws ventilated in the first chapter. It is


13Nicaragua, Banco Central, Informe Anual, 1966, p.
171.









felt that by acceding priority to the ampliation of electrical energy, and therefore abundant power at comparatively cheap rates to the industrial sector may mean foregoing expenditures in some other sector of the economy which may be equally essential to the expansion process. Before exploring another crucial field in the economy---transportation---it may be appropriate to reproduce a brief comment

made by Philip Sporn:

The influence of electric power on economic
development is commonly overestimated and it is
erroneously assumed that there is a direct causal relationship between electric power resources and
economic wealth. This has sometimes resulted in excessive investment of scarce capital resources in power development for which there was no economic justification. There is a need to develop
sound criteria to make possible balanced invest- 14
ment in power, or indeed in other utility services.

TransPortation


While external sources have played a prominent role in the financing of electrical energy, it has played a less formative role in the transportation field. In the case of highways and roads, external loans and grants were of greater importance in the 1952-1955 period than they have been in the subsequent period extending from 1955 to 1964. Exceptional progress has been effectuated, especially during the past decade, in advancing power and transport


14Comite para el Desarrollo Economico, Desarrollo
Economico de Centroamerica (Nueva York: noviembre, 7 64), p. 82.









services. Until World War II, the chief transport link was the railroad connecting Managua with the principal production areas of the plains on the Pacific side and the Port of Corinto. The amelioration of roads commenced with the construction of Nicaragua's section of the Inter

-American Highway started in 1940 and improved to all

-weather standards five years later. The country today is still not effectively linked east-west by land and the limited trading between the west and east coasts is done via lakes and rivers, where possible, or via more expensive air transportation employing the services of LNNICA.

During 1952-1964, investments in roadways, electric power, and the Port of Corinto amounted to p125,504,900 distributed as follows: roadwrays, $84,680,300; power, $35,459,000; and betterment of the Port of Corinto, $5,365,000. The portion financed by internal resources totaled 65.9 per cent; while 34.1 per cent came from sources outside of the country. There has been a growing tendency to rely on external financing for this area of the infra-structure. During 1955-1960, 28 per cent of the financing derived from outside of the domestic economy and during 1960-1964, 40 per cent of the financing was external.15


P. 343.


15Nicaragua, Estudio del comercio exterior . . .,


_ .









Highways and Roads.---Present-day highways in Nicaragua were started in the 1930's when a route between Managua and Tipitapa was completed and a route southward from Managua was begun. With the organization of the Highway Department in January, 1940, under the impetus of the Inter-American Highway Program, an intensive construction effort began which has continued to the present time.

In 1950, Nicaragua could claim only 1,880 kilometers of roads and highways, of which merely 150 kilometers were
16
paved. By 1955, the entire system had approximately doubled, while the length of pavement rose to 250 kilometers. (See Table 5.) By 1960, the total system more than tripled the 1950 figure while the paved length jumped to nearly 41 times the 1950 base. The rate of Increase since 1960 has been much lower than that experienced during the same period of the previous decade, but more attention has been slanted toward increasing the length of paved sections.

External financing of roads has come primarily from international institutions since 1951. The International Bank for Reconstruction and Development, by the end of 1964, had granted accommodations aggregating $7 million. These two loans, for S3.5 million each, made in 1951 and


16Nicaragua, Direccion General de Estadistica y
Censos, Resumen de Estadistica, 1950-1960, 2a ed., junlo, 1961, p. 67.









TABLE 5

HIGHWAYS AND ROAD SYSTEM OF NICARAGUA, 1955-1964"
(in kilometers)


Years Total Paved Improved Dry system


1955 3,687 280 707 2,700 1956 4,087 300 787 3,000 1957 4,466 362 904 3,200 1958 5,079 515 1,164 3,400 1959 5,118 548 1,170 3,400 1960 6,137 669 1,868 3,600 1961 6,161 761 1,800 3,600 1962 6,177 787 1,790 3,600 1963 6,272 802 1,870 3,600 1964 6,303 840 1,963 3,500

*
Several minor discrepancies appear among the various
sources for more recent years, which necessitated
small adjustments.

Sources: 1) 1955-60: Nicaragua, Direccion General de Estadistica y Censos, Resumen de Estadistica, 1950-1960, 2a ed., junio, 1961, p. 67;
2) 1961, 1963: Nicaragua, Consejo Nacional de Economia, Oficina de Planif!cacion, Estudio de los servicios de transporte en Nicaragua, 1950-1962, 196L4, p. 30; 3) 1962: Nicaragua, Direccion General de Estadistica y Censos, Boletin de Estadistica, III, No. 11, octubre, 1966, p. 159;
4) 1964:
a) Nicaragua, Banco Central, Informe Anual, 1964, forro; b) Nicaragua, in0sterio de Fomento y Obras Publicas, Depto. de Carreteras, 10 aaos de servicio al Patria, 1955-196;
0c) entral American Bank of Economic Integration, Central American Transportation Study, Vol. I (WJashington: T.S.C. Consortium---Transportation Consultants, Inc., July 1, 1965), p. 158.










1953, supplied foreign exchange for an estensive highway system. Under the program all-weather roads connected Managua with departmental capitals and seaports. A network of farm-to-market roads linked rural areas with the main highways and the principal cities.17

From the United States Nicaragua has received considerable aid through its agencies. The Bureau of Public Roads during 1959-1964 made grants for highway construction exceeding $9 million. Throughout the entire period, Nicaragua has received S4.3 million from the Development Loan Fund (DLF) and $3.7 million from the Agency for International Development (AID) for the construction of highways. During 1952-1964, the Export-Import Bank also loaned Nicaragua $6 million for highway development.8

The United States Government has been especially instrumental in the construction of the Inter-American Highway and the Rama Road. By the end of 1964, the Inter

-American Highway through Nicaragua has been completed except for the rebuilding of the Nandaime-Rivas section. The Nandaime-Rivas stretch, built several years ago, was surfaced with a relatively light asphaltic penetration


171nternational Bank for Reconstruction and Development, The World Bank Group in the Americas, p. 56.
18Nicaragua, Estudio del comercio exterior . . . Pp. 127, 336-41.









treatment on an inadequate base. The 45-kilometer piece broke up under the impact of heavy traffic and became the only unpaved fragment of the highway. This is an Inter

-American Highway Project to which the United States contributes two-thirds of the initial cost (based on the estimate) and Nicaragua one-third. The appraised cost, primarily for paving, is 4'1,455,000. 19

The Rama Road, originating at San Benito on the Inter

-American Highway about 35 kilometers north of Managua, links Managua with the Atlantic coast. The Rama Road terminates 252 kilometers eastward at Rama, a river port on the Rio Escondido, and connects with the seaports of Bluefields and El Bluff by river transport. The highway is being built under an agreement with the United States whereby the latter bears all of the costs of construction, except for right-of-way, including grading, bridges, drainage, and subbase but excluding paving. This part of the work is completed to the Rio Siquia, 8 kilometers west of Rama, and construction of the 8 kilometers and the bridge over the Rio Siquia is under contract. Total expenditures on the work have been approximately $9,745,000. An all

-weather highway, the completed section is unpaved except


19Central American Bank of Economic Integration, Central American Transportation Study, Vol. I (WashingtonT.S.C. Consortium---Transportation Consultants, Inc., July 1, 1965), pp. 252-3.









for the two stretches totaling 42 kilometers. Work on the route, first conceived during World War II by the United States Government, was seriously undertaken in 1955 although the entire highway was not open to traffic until 1963. The calculated cost for placing the base, paving, and improving and reconditioning the subbase, which is the responsibility of the Government of Nicaragua, is $12 million.20

Several other projects for which external financing, largely from the Central American Bank for Economic Integration (CABEI), is available will not be discussed since they are still in the planning stage. Other projects already underway by the end of 1964 are shown in Table 6.


TABLE 6

.HIGHWAY WORKS IN PROGRESS IN NICARAGUA AT DECEMBER 31, 1964


Project Length Total Financed External Dates
(kms.) Cost Externally Source Start -E (thousands U.S.4)

Esperanza-Rama 9 1,789 1,789 U.S. Gov. 6/64-4/67 Pave Rama Road 236 5,876 4,243 AID 7/64-12/69 Telica-Sn. Isidro 96 8,876 3,526 DLF 8/62-7/67 Jiloa-La Paz 49 2,340 1,170 AIDJ.S.G.11/64-12/66 Yalaguina-Ocotal 20 1,884 777 DLF 7/63-12/65 Piedrecitas-Jiloa 14 1,021 340 DLF 8/63-11/65
Source: Nicaragua, Banco Central, informe Anual,
1966, p. 172.

20Ibid., P. 255.









During the 1952-1955 period, 23.4 per cent of the

entire investment in highways and roads came from external sources. In the succeeding period, 1955-1960, this percentage declined to 11.4, although average annual investment had risen more than 11 times to k7,405,200. (See Table 7.) One source states that "the causes can be explained by the government forces to use more labor and less machinery in the maintenance of the existing communication system and to remedy the unemployment provoked by the economic crisis of the period.''21 Table 7 reveals that although average annual investment declined during 1960

-1964, more reliance was placed on external sources.


TABLE 7

NICARAGUA: FINXCING OF HIGHWAYS AND ROADS, 1955-1964
(annual average in thousands of U.S. dollars)


Absolute Amounts Per cent 1955-60 1960-64 1955-60 1960-64

Total Investment 7,405.2 6,723.4 100.0 100.0
Internal 6,563.1 5,386.0 88.6 80.1 External 842.1 1,337.4 11.4 19.9


Source: Nicaragua, Consejo Nacional de Economia,
Oficina de Planificacion, Estudlo del
Comerclo Exterior y de la balanza de pagos de
icaragua, 1950-1964, diciembre, 1966, p. 347.


21Nicaragua, Estudio del comercio exterior . p. 344. [Translation by writer.j










Although significant sums have been invested in recent years in the formation of a somewhat more nearly adequate system, Nicaragua is still not effectively integrated, by land transportation, by either roads or railroads or a combination of the two. The east coast is isolated, in terms of cheap transportation, from the populous west coast centers. Products moving from the Atlantic side in any great volume have to be shipped through the Panama Canal, adding

materially to their cost, to arrive at one of the Pacific coast seaports to be transported inland by highway or rail.

Another decisive delimitation as to the type and density of transportation network needed is in terms of the percentage of land apportioned for agriculture or that is potentially available. One report attests that eight departments of Nicaragua register no increase or an actual decrease in land cultivation between 1952 and 1963.22 Basically a land tenure problem, this is not directly tied in with transportation deficiencies. Arfble land at the present is not being exploited at its optimum level. Projects under advisement include greater capitali7ation of penetration roads to open up new lands now owned by the Government. Because of rigidities in the political system, that have become firmly congealed over the past thirty


22Central American Bank of Economic Integration, oo. cit., p. 42.










years, making available virgin lands appears the solution proffering minimal resistance. Judgirg from the past pattern, about one-fifth of all financlng would have to originate with sources external to the Republic.

The growth of regional trade depends, in part, upon an integrated highway system that efficiently connects the production and market centers. Nicaragua has a common boundary with Honduras of 750 kilometers but with only one border crossing at present. On the Costa Rican side, with a common frontier of 300 kilometers, there exists only one border crossing which handles trade largely between the important centers while integration of the periphery remains incomplete.

Even with the present highway system, travel time is too long since the traffic cannot freely move at noral speeds. Many hazards exist. The highways are too narrow; some sections are poorly constructed. After traveling many of' the Nicaraguan roads, the writer is led to comment that it is dismaying that the Nicaraguan Government, together with the Government of the United States plus loans from various external sources, has Invested millions of dollars to develop a transportation system cluttered by oxcarts, handcarts, and lightless bicycle riders who refuse to yield the center of the highway to faster-moving vehicles. These hazards result in the highways being greatly

underutilized.









Many studies conducted throughout the world
have shown that the movement of people and goods
does not necessarily increase arithmetically with
decreases in travel time. But such movement of
goods varies more directly with travel costs, but
travel time is an important factor in travel costs.
This means that every decrease in travel time that
can be accomplished will bring great dividends in 23
the movement of people and goods within the region.

As long as bicycles and oxcarts effectively have the right

-of-way on the supposedly high-speed highways, it is difficult to believe that the movement of goods in Nicaragua will increase to an exponential function.

Railroads.---The Ferrocarrl! del Pacifico de Nicaragua (FPN) administers a line concatenating the prominent PacifIc Port of Corinto with the major population centers of

Leon, Managua, and Granada, penetrates the agricultural areas around El Sauce and Diriamba, and manages a small cargo service out of Granada onto Lake Nicaragua. Roads parallel the entire trunk line.

The first steps taken in 1875 toward building the

railroad line started at Corinto (which had been a port since 1858) in 1878. The last branch was extended from El Sauce to Rio Grande by 1940. An isolated spur from San Jorge on Lake Nicaragua to the port San Juan del Sur opened in 1929 was dismantled in 1955 when traffic movement shifted to the paved highway.


231bid., p. 202.









A direct agency of the Government, the railroad operates under the Ley Constitutiva de l Empresa del Ferrocarril del Pacifico de N'icaragua of October 22, 1940. "The FPN is 1.067-meter (42-inch) gauge and totals 319 kilometers of main line and branches."24 (The statistical bulletin reports that the total length of railway over the past several years has been maintained at 403 kilometers.25 This includes some short, privately-owned lines not convergent with the FPR.) All rail is old and the lighter rail, 40 and 45 pounds per yard, is heavily worn. The main bridges need strengthening. "The four principal structures on the main line have 6 KPH speed restrictions; . .. , 9126 Many of the stations combine passenger and freight and most are over 30 years old.

Most of the rolling stock has been fully or nearly fully depreciated. The CABEI report states:

Including six diesel locomotives purchased
in the summer of 1964 and an estimated 100 camp
cars, this railroad maintains and operates anproximately 520 units of rolling equipment
Of 30 steam locomotives, six or eight were in
the shop most of the time . . . . These locomotives average 40-45 years of service and are
expensive to maintain ..


24Ibid., p. 304.

25Nicaragua, Direccion General de Estadistica y
Censos, Boletin de Estadistica, III, No. 11, octubre, 1966,
p. 159.
26Central American Bank of Economic Integration, op. cit., p. 305.









Also in service are seven self-propelled
diesel "autocarrilles", each towinF rn additional unit. Each of these combinations is
capable of seating about 90 passengers ....27
Freight equipment total 266 units . .. .

As the above discloses, most of the FPN equipment is old and well-worn. With the growth of the motor transport industry, the importance of the railroad has declined. In the ten years from 1954 to 1963, the FPN lost about one

-half of its passenger business and approximately one-third 28
of its freight business. The greatest strain was put on the railroads during the cotton-coffee boom lasting to the mid-1950's. With increased export earnings and a high propensity to import, incoming goods crowded the dock. Poor coordination and lack of facilities created a bottleneck for the inland movement of goods, which, in part, induced a price rise.29

With the decline in importance (the railroad does not conjoin internationally with any other country of the Central American region), relatively little new investment has been funneled into the FPN. Funds have been apportioned for maintenance and most of the new equipment has


27Loc. cit.

28Ibid., p. 308.

29Peter Smith, "Development and Dictatorship in
Nicaragua, 1950-1960,,, Thi American Economist, VII (June, 1963), p. 30.









been financed by domestic sources. Where external credit has been utilized, it originated with foreign supply houses. Through the end of 10,64, two supply houses which have extended a significant amount of credit are International General Electric for $723,100 for railroad equipment and Ferrostaal, A.G. for $2,55S,300 for industrial rail and transport equipment.

This railroad is beset with a number of maintenance and management problems in addition to stiff highway and pipe-line competition and heavy losses of revenue tonnage. It does have the important function of serving the principal Port of Corinto, which must continue to depend on rail transport if it is to expand into a large port. Another future function may be to serve as a link with the Atlantic. If an extension of the Rama Road or improvement of the Rio Escondido should develop a major Atlantic port, the terrain is suitable for the economical construction of a rail connection. Any undertaking of this size, however, would require extensive external financing within the present financial condition of the country.

Air transportation.---Although of a secondary consequence compared with the other transportation facilities, brief mention will be accorded air transportation. The Nicaraguan airline, LANICA, materialized in 1945 as a privately-owned, Somoza-controlled airline. Internationally, it joins Managua with San Salvador, Miami, and









San Juan, Puerto Rico. It has been expedient in the export of fresh meats to Puerto Rico. Domestically, it unifies about forty-four towns and cities- only two airports are paved. Many small towns and villages have no Tater, road, or rail spans with the balance of the Republic and air transportation is essential to these isolated areas. Even such bulky exports as minerals have been moved by air transports.

Through the end of 19664, Nicaragua had obtained one

loan from the United States Agency for International Development for ,1,000,000 for the enlargement of the international airport, Las Mercedes,30 located about twelve kilometers north of Managua. 'hen LA.NICA began acquiring airplanes in 1958, it received external credits guaranteed by the Nicaraguan Government. In the interim, credits included $2,840,000 from the Bank of America National Trust and Savings Association to buy airplanes.31


Port Authority of Corinto


The Port of Corinto, the principal port of Nicaragua, is located on the Pacific coast 138 kilometers by rail from Managua and 149 kilometers by highway. The port was constructed in 1858. For more than 50 years prior to 1957


30Ibid., p. 340.

31Ibid., p. 341.









the elementary facilities were owned by the Corinto Pier, a subsidiary of the Ferrocarril del Pacifico. The operation of loading and unloading ships was executed entirely by railroad cars. The warehouses of the older section of the port were built in 1900. The official act creating the Autoridad Portuaria de Corinto, an autonomous agency, was subscribed to on January 24, 1956.32

"In May, 1956, the Bank [IBRDJ lent 3.2 million to the new Port Authority of Corinto to help finance the building of a new quay and the installation of cargo-handling equipment and transit sheds.,,33 The Nicaraguan Government provided an additional 1,460,000; the port facilities were realized in 1957. Subsequently, the Port Authority assembled a modern two-story maintenance and administration building out of its own funds. The wharf and associated cargo warehouses were dedicated in 1961. The modernization of the port in 1957 embraced a calculated investment of 4,660,000 for the new waterfront and associated cargo warehouses. The Port Authority ectimates the value of the entire property in 1964 at about


32La Gaceta (Diario Oficial de Nicaragua), No. 30 (6 de febrero de 1956).
33International Bank for Reconstruction and
Development, The World Bank Group In the Americas, p. 56.









$4,585,000. 34 The impact of these investments can be seen in the movement of exports. In 1950, 45 per cent of the exports were shipped through the Port of Corinto; in 1962, the movement of' exports through the port exceeded 70 per cent.35

Table 8 dramatizes the distribution of financing the Port of Corinto. External debt during the interlude is owing wholly to the International Bank for Reconstruction and Development and represents in the neighborhood of 60 per cent of the computed cost of port improvement. In terms of' efficiency, the port has maintained a competitive position with respect to other private ports and has been able to pay its administrative costs plus the orderly retirement of its debt. Although it is somewhat distant from the capital, economical transportation expedites the free movement of goods. With the recent fabrication of the highway bridge, Pasos de Caballas, motor transports compete with the railroad. The port's location has the advantage of affording a substantial source of employr.'-nt in a peripheral area. In 1964, the total work force was reported in excess of 625 individuals.


34Central American Bank of Economic Integration, o. cit., pp. 380-1.
35Nicaragua, Estudio del comercio exterio ... P. 349.










T1% BLE 8

FIN&NCING IMPROVEMENT OF PORT OF CORINTO, N7C" pGUA 1955-1964
(annual averages in thousands of U.S. dollars)



Absolute Amounts Per cent 1955-60 1960-64 1955-60 1960-64


Total Investment 708.1 474.9 100.0 100.0

Internal 306.9 179.9 43.3 37.9 External 401.2 295.0 56.7 62.1


Source: Nicaragua, Consejo Nacional de Economia,
Oficina de Planificacion, Estudio del
comercio exterior y de la b?2.snza de pagos
de Nicaragua, 9 diciembre, 1966,
p. 347.


Essentially this covers the fundamental aspects of external financing of the economic infra-structure. External financing, largely from international institutions and the United States Government, has played a pivotal role in the development of an infra-structure. In the case of the Port of Corinto, as much as 60 per cent of the financing came from one international agency. Another central approach concerns funds borrowed internationally by domestic lending institutions. The two most influential institutions in Nicaragua, which have capitalized on external sources, are the National Development Institute and the National Bank. Before discussing this issue in the next chapter, a few more comments on the present chapter may be appropriate.





65



Analysis


Following the terminology of the National Planning Office, the economic infra-structure includes electric power, transportation, communications, agricultural proJects, et cetera; while the social infra-structure includes health, education, and housing. Although rising amounts are being expended in the latter area xith substantial sums being derived from external sources, this range of project loans and grants have been excluded from the discussion. Using Hirschman's definition, Social Overhead Capital (SOC) "is usually defined as comprising those basic services without which primary, secondary, and tertiary productive activities cannot function.t36 He also states that "the hard core of the concept can probably be restricted to transportation and Dow'er,"37 or it can be operationally defined "as comprising those activities for the financing of which the International Bank for Reconstruction and Development shows a pronounced preference.' Over tqo

-thirds of the IBRD loans through 1964 have been distributed between transportation and electric power. 7n keeping


36 Albert 0. Hirschman, The Strategy of Economic
Development (New Haven: Yale University Press, 1057),
8. 3.

37Loc. cit.

38Loc. cit.









with this spirit, the present chapter is devoted primarily to these two fields of development.

During 1955-1960, an exceptional amount of public

investment took place. It was actually undertaken in an interval when Nicaragua was in an economic downturn due to depressed world prices for its two-crop exports coupled with adverse weather conditions which resulted in a lower volume of production for export. Beginning with this interim, public investment has relied decreasingly on domestic public savings and increasingly on external sources to sustain its level of investment.39 The criteria established have not been to broaden the economic infra-structure because of its direct effect on final output but because it invites domestic and foreign private capital to invest in the Republic.

With the decline in savings during the recessive

phase, a fall in foreign exchange earnings, and some political disorder around 1956 when the President, Anastasio Somoza Garcia, was assassinated, net international reserves
40
fell. Much of the infra-structure expansion required the import of equipment and supplies, especially from the United


39Nicaragua, Consejo Nacional de Economia, Estudlo del sector publico de Nicaragua, 1950-1962, diciembre, 1965, pp. 265-7.
40Nicaragua, Estudio del comercio exterior . . pp. 148-9.










States. To offset the foreign exchange needs for these ambitious plans, Nicaragua has had to rely on medium and long-term loans to at least finance the foreign exchange requirements. It has already been pcinted out that the IBRD has been the leading institution filling in the foreign exchange gap.

It can be stated that, in general, during the earlier stages just orior to and immediately following 1955, infra

-structure investment was induced via shortages in this sector of the economy and was geared according to the needs of development. In more recent years, it may not be too difficult to argue that excess capacity has been built into many SOC projects to lead Directly Productive Activities (DPA) in an effort to further bolster the private sector. It would be difficult, however, to criticize the development plan, as it has unfolded through 1964, on these grounds alone.

Excess capacity is not unrealistically redundant.

Partial demand does exist for the facilities of the Port of Corinto, for example, and growth rates projected by the Government would tend to substantiate that the excess capacity will disappear in the relatively short term. To the extent that it can be carried out, the true gauge of any project of this type is whether anticipated benefits will exceed the social and economic costs involved in a given stream of time. If given projects are rationalized









to be economically justified, and funds are available, then it becomes a matter of proceeding on a priority basis. Since building too far in advance is economically wasteful and unsound from a financial point of view, expecially with borrowed foreign funds, then timing of projects is of primary urgency. Similarly, quality versus quantity is central to the experiment. While it may be desirous to construct a highway system of the highest standards found in the most developed countries, assuming that financing creates no special problems, it would be economically wasteful to construct paved highways over which the principal traffic for some years to come is largely a slow

-moving type.

In Nicaragua, a =ajor criticism of road and highway development is that effort on construction of penetration roads may be more beneficial than upgrading the existing system. The huge Zelaya Department comprises almost half of the country, but its virgin lands are largely uninhabited and are not traversed by any means of transportation. If a direct attack on the land tenure problem is to be avoided, then low-grade, penetration-type roads may serve as the beginning of a colonizing effort to bring this vast area into economic production.

One last point that deserves mention concerns the

rates at which the services of the infra-structure should be sold. The general rule is that the user should pay









the cost. In the case of electricity, it has been suggested that the large industrial consumers receive preferential treatment; however, if the remaining Central American countries suffice as any kind of guideline, then industrial rates in Yicaragua fall in line. To the degree that any rate competition takes place among the Five, Nicaragua represents the median rate; i.e., its rates are competitive with two of the countries but significantly higher than those found in two other countries. Domestic users represent a separate market segment which bears the burden of higher rates.

The Empresa Tacional de Luz y Fuerza, like the autonomous agency, Autoridd Portuaria de Corinto, has been able to generate some surplus funds in its operations. On the other hand, relatively little material has been developed

on transportation users. It would be safe to say, nevertheless, that.road and highway users do not pay their fair share of the cost. The emphasis in this case has been on expansion.

Nicaragua is faced with the basic cuestion of how to allocate scarce capital between agriculture and industry and an infra-structure to gain the maximum economic advantage. The present chapter has examined the use of external funds in terms of specific projects; the next chapter will examine some non-project loans in support of the development experiment.














CHAPTER III

LOANS TO FINANCIAL !NSTITUTIOiNS


The foregoing chapter made reference to loans and financial assistance accorded directly to the Central Government of Nicaragua or to its various autonomous agencies for specific projects. The present chapter will continue the theme of loans to autonomous agencies of the government but which are not made for specific projects. The primordial institutions in this category are the financial ones---the National Development Institute and the National Bank. The Central Bank's one major external borrowing for a specific program beseems cursory examination.

Other institutions have utilized external funds to a limited extent but they have been eliminated from the current discussion either because of their relatively minor importance or because their activities are directed toward housing or similar activities which were excluded in the previous chapter. Because of its pivotal role as a relatively new institution, this financial intermediary, INFONAC, will occupy a large portion of this probe. Many of the resources of INFONAC, since its inception in 1954,









have been devoted to industrial development and conplementary projects to supply longer-term credits which generally have not been accessible in the past; while the National Bank has channeled its funds into favored agricultural programs. Before exploring the loans to these institutions, a few comments will be made regarding financial intermediaries.


Comments


Financial intermediaries may be defined as institutions whose function is to participate as the middleman between the saver and the borrower. A mjor source of investment finance to the private sector has been through the development bank, which is referred to in the proximate paragraphs as INFONAC. This institution serves extensively as the middleman between larger international lending agencies and the small borrower as well as to channel domestic deposits of small savers into projects and programs akin to the development experiment.

In a simple model where all savings are amassed in a savings institution and all investing is derived from borrowed funds of the same institution, then the accumulation of physical capital will be accompanied by an equal accumulation of debt. The institution may be in a position to assign priorities to potential investors










ranked according to the social marginal productivity (SMP)1 of their respective projects. If this equality pervades at maximum deployment of attainable resources at an optimal level of savings, then the economy can be said to be progressing prodigiously in its development experiment.

In a more general sense, the savings of a particular unit is its income minus its expenditures on current consumption. The unit will then acouire financial or physical assets for its savings. If' the lending institution mobilizes capital outside of the domestic economy for local development projects, then the rest of the world is doing the saving. The domestic economy can tread in the steps of further growth without any reduction in consumption. If the local economy is able to cultivate a high savings rate---which funds are channeled into capital formation

---then, coupled with external financing, economic expansion can take place at a rate even faster than can be engendered from only domestically derived resources.

Referred to in the antecedent chapter, a land tenure problem still exists in Nicaragua. Additionally, a wave of land speculation is in progress especially in the Distrito Nacional; the purchase of land is attractive to individuals seeking safe and relatively liquid assets.


1Henry J. Bruton, Principles of Development Economics (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1965), pp. 284-5. 320.





73



Buying land is a form of saving since the purchaser has abstained from consumption. The effect on the economy as a whole, nevertheless, pivots on what the seller of the land does with the receipts from the sale. If the seller applies the funds to capital formation, then the sale of land has the same effect as a unit which deposits savings In a financial institution and the latter lends them to investors. If the seller of land converts the receipts to consumption, then this merely constitutes a transfer. From general observation it appears that this takes place quite freauently, but even then the receipts are not lost to the economy since the ultimate recipient of these funds may elect to channel them into capital formation. This can take place in the form of self-financing, direct transfer between surplus and deficit spending units, or indirectly through financial intermediaries.

The economy suffers a direct loss, however, when the receipts from the sale of land are spent outside of the country. This is especially true since Nicaragua is highly dependent on industrially developed countries for its capital imports. In the absence of exchange controls,

the country is unable to orotect itself against such losses in foreign exchange. Such a loss must be compensated for through a surplus trade balance or capital transfers. To support the rate of development desired






74



by the Government, it has had to rely on external financing for rapid completion of many of its infra-structure projects and at the same time the private sector has been faced with a lack of credit facilities.

An embryonic stock exchange was attempted in recent

years but lacked the vitality to function profitably. It was unable to mobilize the needed resources for investment purposes. Existing financial intermediaries have played a relatively insignificant role in the development process until quite recently. Most firms have required a certain amount of foreign exchange for plant construction and this has been at times difficult to overcome, especially during the 1955-1960 phase when export earnings were low, coupled with the export of capital, which unequivocally reduced net international reserves until toward the end of the cycle. Through external borrowing, the National Development Institute became a source of garnering at least some of the foreign exchange requirements needed by the private sector. Also in enlistment during the sequel were the two major laws, catechized in Chapter I, which advanced guarantees to registered foreign capital for its retreat and repatriation of profits accruing to it.

Where the Government has a grip on all loanable funds, it can establish priorities over the composition of investment. Where the Government cannot exercise complete restraint, the problem of establishing priorities, such as










applying the SMP criterion, becomes more difficult. The laws descanted in Chapter I connote a general approach to this matter by classifying eligible plants into three categories---fundamental, necessary, and convenient--further subdivided into new or established categories. The Central Bank, established in 1961, has more recently brandished some moderation through credit rationing. More directly, however, control is asserted through the foundational National Development Institute, created in 1954, and the oldest commercial bank, the -ational Bank established in 1912---both of which are instruments of the State. These agencies can allocate investment credits to preferred projects according to a loosely coordinated pattern of synchronized application of capital.

On the other hand, development banks founded in other countries have been either a mixture of private and government ownership or strictly private. The latter is apparently preferred by many international lending agencies.

Many international financing institutions, the World Bank Group in particular, have a strong
preference for private development banks and
other specialized credit institutions, partly on
the grounds that the policies and operations of
such institutions will be divorced from political
influence.2

Mikesell also adverts to some of the problems involved with private institutions of this type. Because of low


2Raymond F. Mikesell, Public International Lending for Development (New York: Random House, I9 -, Vpoii43.






76



profitability and high risk of such operations, it may be difficult to raise sufficient loan capital. Also, if the Central Bank does not assume the exchange risk, then the risk must be passed on the borrowers. The last point is that where lending operations must be accompanied by a great deal of technical assistance, then private institutions may require some form of government subsidy.3

The development bank should not become primarily

dependent on external financing to sustain its operations. Initial external loans should serve to rime the pumo of domestic savings and the latter should become the principal source of loanable funds. The next few pages will examine the origin, function, operations, and external financing of INFONAC and the role this institution, over a ten-year period, has played in the development experiment.


INFONA C


By Law Decree of March, 1953, the National Government established a promotional organ, the Instituto de Fomento Nacional (INFONAC), as an autonomous entity of the State, to dedicate its services to the economic development of the Republic. The organization actually began to function in January, 1954. In 1963 it opened a branch promotional office, headed by a North-American, in New York City.


3Loc. cit.










The fundamental objectives of the body may be summarized: "To increase, diversify, and rationalize the national production in all its aspects."4 In its promotional efforts, INFCNAC aims its activities toward the following fields:

1. To serve as an instrument of the State in the

execution of programs directed to the augmenting of national production;

2. To lend its technical assistance for better development of the branches of production;

3. To develop agricultural and cattle production,

stimulate diversification and create new lines for export;

4. To encourage the establishment, development, and expansion of those industries and activities which utilize and add to the value of the natural resources and which lead to the economic well-being of the Nation;

5. To stimulate capital formation by channeling private savings toward production ends;

6. To give aid to private initiative in activities which contribute directly and indirectly to furnish work well-remunerated to Nicaraguans;

4Nicaragua, Instituto de Fomento Yacional, Impulsando el desarrollo nacional---INFONAC 10 anos, Suplemento de publicidad,_ 9 3_. Translation by writerJ










7. To promote the formation of firms necessary to the economic development of Nicaragua.5

Since 1960, IYFONAC has undertaken to reach Nicaraguan management with technical assistance by means of the Center of Industrial Technical Cooperation (known as CCTI), which was first established with USAID endorsement. Seminars are held on productivity matters and a technical library and an information service has emerged.

In its role as a financial intermediary, INFONAC generally grants medium and long-term credits for the adquisition of fixed assets of industrial and agricultural enterprises. The "Banking Department" of INFOINAC is authorized by law to function in a wide range of financial activities such as:

1. To guarantee to other credit institutions authorized national or foreign loans to national enterprises;

2. To negotiate for and obtain loans from external sources;

3. To participate in the ownership of enterprises estimated to be in the interest of economic development;

4. To buy stocks, bonds and other obligations;

5. To discount notes and other mercantile activities;


5Loc. cit.









6. To open individual savings accounts and invest funds. 6

Financial resources of the institution are derived

from paid-in capital by the Central Government, individual and firm savings, bonds, and, possibly most determinant, external sources. The Central Government agreed to subscribe to a total of C$50,000,000 (cordobas)7 over a ten-year period. INFONAC's financial statement at December 31, 1964, reveals that the full C 50,000,000 have been paid in.8 Individual savings have risen rapidly over the period as Table 9 below highlights. Emission of a sizeable amount of bonds raised these obligations more than 21 times in the 1962-1963 lapse.

By the end of 1964, the number of savings accounts

had climbed to 23,743, having total deposits of O 14,661,000. Other financial obligations decreased by C95O,000 with the refunding of three bond issues. The institute also enjoyed a loan from the Central Bank of Nicaragua which amounted to C$13,313,000 at the end of 1963 but which was reduced by C$3,804,000 during 1964. Actually the proceeds


6Loc. cit.

7Where the sign "CV" appears, it is intended to specify cordobas, the national monetary unit of Nicaragua. The official rate of exchange at December 31, 1964 was pegged at seven cordobas to one United States dollar.
8Nicaragua, Banco Central, Informe Anual, 1964, p. 238.









TABLE 9
SAVINGS AND FINANCIAL OBLIGATIONS OF INFONAC, 1955-1963
(balances accumulative in cordobas)


Year Savings Bonds Totals

1955 1,132,418 --- 1,132,418 1956 1,733,638 --- 1,733,638 1957 2,168,138 300,000 2,468,138 1958 2,818,786 2,700,000 5,518,786 1959 3,139,522 4,150,000 7,822,073 1960 3,672,073 4,150,000 7,289,522 1961 4,804,330 4,850,000 9,645,330 1962 6,249,887 5,790,000 12,039,887 1963 10,556,000 13,866,000 24,416,474

Source: Nicaragua, Instituto de Fomento Nacional,
Impulsando el desarrollo nacional--- INFONAC
10 aHos, Suplemento de publicidad, 1963.

of the Central Bank loan originated with the Export-Import Bank.9
Possibly the group, sine qua non, supplying resources to INFONAC has been in the exterior. As the ensuing table (Table 10) reveals, more than CS64,000,000 (approximately US$9,173,587) have been advanced to the autonomous agency at one time or another during its stint of operation ending December 31, 1964. Further inspection affirms that the four major lenders embrace two International institutions and one private commercial bank. The International Bank for Reconstruction and Development acceded two loans equal

9Ibid., p. 242.





81



TABLE 10

EXTERNAL LOANS OF INFONAC THROUGH DECEMBER 31, 1964 (in cordobas)


Source of Loan Amount of Loan

Export- Import Bank 19,018,857 IDB 15,425,000 Bank of America 14,456,000 IBRD 13,399,750 Bentall 968,179 Moller and Rothe 957,702 Caterpillar 579,356 Tyler 179,263

Sources: 1) Nicaragua, Instituto de Fomento Nacional,
Imnulsando el desarrollo nacional---INFONAC
10 aros, Suplemento de publicidad, 1963;
2) }[icaragua, Banco Central, Informe Anual,
1964, D. 243;
37Banco Interamericano de Desarrollo,
Actividades nor paises, 1961-1964, pp. 46-9. to C$13,399,750; the Interamerican Development Bank loaned a total of C$15,425,000; the Bank of America N. T. & S. A. tendered loans aggregating C 14,456,000; and the Export

-Import Bank extended credits amounting to CP19,018,857. These accommodations have been floated on varying terms according to the various programs in which IFON'AC has been engaged. Since the balance of this section will be devoted to the use of funds, it will suffice to say that the terms on which external resources were obtained have ranged from short to long-term.





82



Comparing the years 1963 and 1964, it can be seen that external debt registers a net increase of over C'6 million. This came about in spite of a reduction in obligations of c$769,000 to the IBRD.10 Comparing this with savings, which improved a little over Ct4 million during the same lapse of time, leads to the conclusion that external funds are being employed more than just to 'prime the savings pump' but a fluidal stream to irrigate the private sector heavily depends on a steady flow from the financial well. This is probably due, in part, to the establishment and expansion of local industrial and agricultural enterprises which have had to import most of their capital equipment used in new or expansive undertakings. In some cases .701TAC has proved to be the most accessible source from which to obtain medium to long-term credits.

By the end of 1963, F...0ONAC had made 265 loans equal to C$87,284,000. By the end of December, 1964, INFONAC had acceded in loans C 92.4 million which was equivalent to 9.1 per cent of all resources of the financial sector. Of this last sum, C$15.6 million were loans with foreign banks, C$33.2 million were obligations in national currency, C:2.4 million were from miscellaneous sources, and C$41.2 million were from capital sources. At the end of


10lbid., p. 243.









this time, the institute had invested C517.6 million in participation with the private sector in industries and in programs of agricultural diversification. Throughout, the application of capital has been relatively homologous; between agriculture and industry each sector annexes in the neighborhood of 40 per cent of total investments plus another 10-12 per cent to improve the cattle-raising industry.2

Over a decade, more than 47 per cent of the credits

authorized went to agriculture, while the industrial sector snapped up almost 44 per cent. The remaining sum was voted to better cattle production.13 By the end of 1964, it became evident that nearly all of the short-term credits were apportioned to industry while agriculture was favored with medium-term loans. Examining the quaternary 1961-1964, it becomes aparent that the magnitude of medium-term lending has refluxed. Greater concentration of long-term accounts is realized in the activities of INFONAC. The industrial sector has been increasingly favored although the agricultural sector culls its conspicuous quota of long-term loans.14


11Ibid., P. 37.
12Nicaragua, impulsanio el desarrollo nacional.

13Loc. cit.
14Nicaragua, Banco Central, Informe Anual, 1964, p. 38.









As a financial intermediary, INFONAC has made notable contributions to the development process. It has filled a gap in the financing of programs that have been deemed essential to the development experiment by releasing medium and long-term credits of domestic currency and

foreign exchange. Operating as an agency of the Government, it has an advantage over private institutions In obtaining funds. INFONAC has employed external financing extensively in its endeavors. Additionally, through the support of the Agency for International Development, it has been able to convey technical assistance; technicians from several different fields are on the staff on a full-time or consulting basis. To some degree it has been able to mobilize underutilized or unused resources in the economy to channel

them toward more utilitarian ends in accordance with a national scheme of priorities that is manifested primarily in the development laws described in Chanter I.

On the other hand, many businesses prefer not to avail themselves to !1F0NAC's resources, even though they may qualify for financial and technical assistance, simnly because it is an arm of the Central Government. These entrepreneurs prefer to remain reasonably independent of governmental interference and have utilized commercial loan sources when attainable. Alternatively they have expanded through retained earnings of the business or have exchanged credit instruments directly with surplus









spending units. Those in certain areas of agriculture, however, frequently have had less difficulty than industrial enterprises in obtaining accommodations where the National Bank of Nicaragua was a party to the transaction.


Banks


The voluminous source of agricultural credit has been the long-time established Banco Nacional de Nicaragua (BNN), owned by the Government of Nicaragua, which continues as a significant force impelling this sector of the economy. The following subsection will explore some of the activities of this institution and the external

sources fro, which it borrows to meet foreign exchange requirements. This section will conclude with brief mention of one major loan secured by the Central Bank.


Banco Nacional de icaragua.---The National Bank of

Nicaragua, established in 1912, has been the leading lending institution bolstering government policies and preferred projects. Prior to the creation of the Central Bank in 1961, this governzment-owned bank performed many of the central banking functions. Together with INFONAC, these two institutions have supplied most of the credits required domestically by the private sector.

The extension of ample agricultural credits through the Banco Xacional de Ficaragua (BNN) stimulated the boom









during the quinquenium 1950-1955. Credits to the agricultural sector multiplied more than fourfold to C0255 million over the period and accounted for close to 90 per cent of new credits to the private sector. Coupled with favorable world prices for the two leading exports---coffee and cotton---the resulting expansion of export production brought export earnings from approximately 35 million in 1950 to over $80 million in 1955 15 The great credit expansion of the epoch was partly offset through savings in the banking system. Although the capacity to import grew rapidly during the phase, export receipts climbed relatively faster. A large surplus trade balance was attained every year through 1955. N et international reserves jumped from under ';LL million in 1950 to around 17
015 million in 1955.
in 1956, with smaller crops accompanying an adverse season, the value of exports dropped by more than a fifth to $65 million.18 At the same time, bank credit to the private sector rose by C$42 million. Imports declined


15Nicaragua, Direccion General de Estadistica y Censos, Resumen de Estadistlca, 1950-1960, 2a ed., junio, 1961, p. 7.
16 Ibid.

7lbid., p. 99 18Ibid., p. 87









relatively little as a result of the credit policy pursued and net foreign exchange reserves fell by roughly one-half.

Even with the decline in cotton prices and the adverse effects on the domestic industry beginning with the 1956 season, the National Bank continued to make credits accessible to the cotton growers even though many of the past loans were in arrears. Such a policy obstructed the smooth and effective operation of monetary policy and in spite of a restrictive credit policy followed after 1955, cotton growers continued to receive banc credit. To conform to this pattern of lending, the 3?T had to restrict loans to industry and commerce. This contributed to the illiquidity of the economy.

Crop loans comprehended not only losses to inefficient producers but also a substantial investment in cleared and improved land. Durirg this period of the latter 1950's, the National Bank accounted for approximately four-fifths of total bank lending, and, as Table 11 reveals, an excess amount of these loans were overdue. The category "e-tended" loans encapsulates negotiated short-term extensions. "Overdue" loans are mostly short-term ones past due about

one year. The policy of the BNN was not generally one of taking legal action against past due accounts.

Much of the credit contraction to the private sector took place in 1959, as a result, in part, of the liquidation of the "cotton pool" (which had absorbed C70 million









TABLE 11

NATIONAL BNK OF NICARAGUA LOANS IN ARREARS, 1955-57 (millions of cordobas)


Position at: Dec. 31 July 31 1955 1956 T1957

Loans in Arrears:

Extended 14.2 44-3 32.4
Overdue 15.9 23.2 62.4
Total 30.1 67.5 94.8 Loans not in Arrears 273.9 270.6 164.7 Total Loans to Private Sector 30.0 338.1 259.5

Percentage ratio of loans
ir arrears to total 9.8 19.3 36.4

Source: International Bank for Reconstruction and
Development, Dept. of Operations, The Current Economic Position and Prosnects of N.icaragua,
1257, (zHestrcted Report No. WH-66a),
T ,,., r "
,...uary 28, 1938, p. 4.

in the peak month of Kay, 1958) and as a result, in Dart, of a substantial abatement in credit to cotton and coffee producers during the 1959-1960 season. The Nation< 2ank of Nicaragua had directed much of the credit to the agricultural producers on the basis of fixed sums per area planted up to a limit of 70 per cent of the appraised crozp 7alue.

Although the upper limits had remained unchanged for severu1 ycr, in the '959-1960 season, the ceiling for









cotton was moderated by 18 per cent; and, with adverse weather and smaller crops, credits flowing to both cotton and coffee producers were less than those of the 1958-1959 season by approximately one-third. During the three seasons from 1957 to 1960, crop loans to farmers from the BNN were suppressed by C$65 million from C$147 million. Accommodations to other areas of agricultural production realized a slight increase in activity, but clearly the diminution in credit to the private sector affected chiefly agriculture.

Late in 1959, the National Government authorized the BNN to consolidate its loans into longer-term debts and to accomplish this the National Bank restricted credit availability to select borrowers for the 1960-1961 crops. At the end of March, 1960, total delinquent loans of the BNN was C137 million, about 51 per cent of its loan portfolio. Agricultural loans reached 6103 million of this amount.

Also, the National Bank acquired about 4 million

of an $8 million loan from the Export-Import Bank tendered in October, 1959, to liberalize medium-term loans for agricultural diversification. INFONAC accepted about $1.5 million for the same purposes with the privilege of drawing on an additional 1,1 million.









By 1963, the bad debt position of the BKN had Imoroved; the BrTq continued as the major lender among all commercial banks, administering 70 per cent of all loans. Short-term loans gained around 71 per cent with most funds channeled to the agricultural sector. For the 1963-1964 season, around 75 per cent of the cotton crop was financed through short-term bank credit and roughly 85 per cent of this sum came from the 'National Bank of Nicaragua. In spite of plans to diversify the export sector of the economy, this credit policy of the BNN enslaved the two-crop economy. As will be seen in Chapter V, this program merely changed the emphasis from coffee to cotton production without altering, significantly, the structure of' the agricultural sector. As the BN reduced its bad debts (of Decree No. 440), it expanded its longer-term credits (over 18 months) tied to fixed agricultural investments, cattle-raising, and industry. Approximately 271 per cent of the longer

-term loans went to industry during 1963.19

Summing short and long-term credits for the year,

1963, the BNN accounted for nearly one-half of the loans to the manufacturing industry. Table 12 compares industrial loans, since the 1959 Industrial Development La,, among the BINN, INFONAC, and private commercial banks.


19Nicaragua, Banco Central, Informe Anual, 1963, pp. 22-3.




Full Text

PAGE 1

EXTERNAL FINANCING OF THE NICARAGUAN DEVELOPMENT EXPERIMENT By ROBERT PAUL VICHAS A DISSERTATION PRESENTED TO THK GRADUATE COUNCIL OF THE UNIVERSITY OF FLORIDA IN PARTL(^L FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF FLORIDA August, 1967

PAGE 2

Copyright by Robert I'aul Vich 196?

PAGE 3

Para Ml Esposa

PAGE 4

PREFACE The present study represents the result of material collected periodically during approximately the past four years. Publications found in the libraries of Louisiana State University and the University of Florida as well as those consulted in Mexico City have been utilized. The writer has also had the benefit of consulting with a number of individuals concerning economic problems that have especial significance for Latin American developing countries. In addition, the writer has made several trips, beginning in 1962, to Nicaragua and the other Central American countries, several of which have been by land. Part of the Summer of I965 was spent in Nicaragua to accumulate material as well as the first part of the present year (196?) to complete field research for this dissertation. A dearth of material and possible errors and discrepancies in some of the statistics, compiled principally by agencies of the Government of Nicaragua, impose a certain degree of limitation on the analysis; but the information is considered sufficiently accurate for the purposes herein. The proximate pages are restricted to projects and programs that are regarded as strictly economic in nature; and while it may be worthwhile and beneficial to the reader to explore some of the aspects of social development in order iv

PAGE 5

to better comprehend the Nlcaraguan society, these subjects are beyond the scope of the presentation. The writer is indebted to the members of his Doctoral Committee who offered their guidance and insight in patiently reviewing the early drafts of the dissertation. The writer acknowledges his indebtedness to his Committee Chairman — Dr. Robert W. Bradbury (Professor of Economics) — and to the Committee Members who approved the final draft of the dissertation — Dr. Ralph H. Blodgett (Professor of Economics) and Dr. Harry Kantor (Professor of Political Science). The writer is also grateful for the Travel and Research Grant awarded him by the Center for Latin American Studies at the University of Florida to partly finance research activities in Nicaragua during part of I967. Without the cooperation of many of the governmental agencies of Nicaragua and the many casual conversations with a number of Nicaraguans, the data would not have been as comprehensive as found in its present form. The assistance willingly offered by Prof. Rene Rodriguez Masis, in charge of the library of the Central Bank of Nicaragua, and by Juan Jose Martinez L., Department of Economic Studies of the Central Bank, is greatly appreciated. The writer wishes to express his thanks to Dr. Carlos Flores Lovo for providing him with office space and other valuable assistance and to his wife for organizing a great deal of the material in Spanish and for being a longanimous and indefatigable travelling companion. V

PAGE 6

TABLE OF CONTENTS Page PREFACE LIST OF TABLES ^lii INTRODUCTION ^ CHAPTER I. CLIMATE FOR FOREIGN INVESTMENTS 10 Incentive Legislation 11 Central American Integration 22 Guaranty Coverage , , 28 Political Conditions 36 II. LOANS FOR INFRA-STRUCTURE DEVELOPMENT ... 39 Electrification 39 Transportation 4? Port Authority of Corinto 61 Analysis 65 III. LOANS TO FINANCIAL INSTITUTIONS 7O Comments 7I INFONAC 76 Banks. , 85 Analysis 96 IV. FLOW OF PRIVATE FOREIGN INVESTMENT 102 Factors Affecting Private Investment . . 103 Inflow of Private Foreign Capital. ... 108 Effect on the Economy 114 Problems of Foreign Investment 123 vi

PAGE 7

CHAPTER Page V. PURCHASING POWER OF EXPORTS I3O Income from Exports I3I Expenditures for Imports 1^1 Terms of Trade [ I40 Capacity to Import VI. ANALYSIS OF DEVELOPMENT PROGRESS ...... I6O Capacity to Service Debt I6I Measurement of Growth 16? External Capital as an Economic Stlmulant.180 Some Final Comments. I85 BIBLIOGRAPHY 188

PAGE 8

LIST OF TABLES Table Page 1. Siimmary of Exemptions from Nicaraguan Customs Duties and Taxes Granted to Manufacturers in the Law of March 20, 1958 14 2. Summary of Benefits Accorded by the Central American Agreement on Fiscal Incentives for Industrial Development 26 3. Cumulative Summary of Specific Risk Investment Guarantees in Nicaragua written by U.S. AID tnrough March 31, 1966 * . . 32 ^. Nicaragua: Financing of Electrical Energy 1955-196^^ T . . . -t^5 5. Highways and Road System of Nicaragua 1955-1964 ' 6. Highway Works in Progress in Nicaragua at December 31, 1964 ^3 7. Nicaragua: Financing of Highways and Roads, 1955-1964 \ ^ 8. Financing Improvement of Port of Corinto Nicaragua, 1955-1964 1 . . . 64 9. Savings and_^Financial Obligations of INFONAC, 10. External Loans of INFONAC through December 31 19 OS........ 81 11. National Bank of Nicaragua Loans in Arrears, ^^^^-57 33 12. Nicaragua: Composition of Loans to Industry 1958 63^ ^^^ing System & INFONAC. ******** 9^ viii

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Table Page 13. External Funds Drawn by the National Bank of Nicaragua, 1955-6i^ 03 14. Nicaragua: Foreign Investments, 1955-1964 . . . 110 15* Nicaragua: Fourteen Firms in OiDeration or in Organization with Foreign Capital Sheltered by Industrial Incentive Laws, 1964 112 16. Nicaragua: Wage Rates of Various Groups, 1964 . II5 17. Nicaragua; Percentage Distribution of Economically Active Population by Branch of Activity, 1955-1964 118 18. Nicaragua: Relationship of Quantum of Goods and Services Exports and Gross Domestic Product, 1955-1964 132 19. Structure of Exports of Nicaragua, 1955-1964 . . 136 20. Destiny of Nicaraguan Exports by Country. 1955-1964 ..... 138 21. Nicaragua: Relation between Exports and Gross Values in Various Areas, 1955-1964 140 22. Nicaragua: Surplus or Deficit with the Exterior, 1955-1964 li!^3 23. Nicaraguan Imports of Goods and Services. 1955-1964 li^5 24. Nicaragua's External Sources of Supply. 1955-1964 ^i^Q 25. Nicaragua: Index of the Terms of Trade 1955-1964 ; .... 151 26. Nicaragua: Purchasing Power of Exports. 1955-1964 154 27. Nicaragua: Capacity to Import, I955-I964 . . . 156 28. Nicaragua: Relation between Import Capacity and i Gross National Product, I955-I964 157 ''^ ix

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Table Page 29. Nicaragua: Relation of Long-Term Foreign Obligations to the Ingress of Foreign Exchange on Current Account, 1955-196^ . . , I63 30. Nicaragua: Relation of Long-Term Foreign Obligations to Gross Domestic Product and Gross Domestic Savings, 1955-196'4I65 31. Population and Gross Domestic Product of Nicaragua, 1955-196^ I70 32. Nicaragua: Projected Per Capita Income, 1964-2100 172 33* Nicaragua: Structure of the Gross Domestic Product According to Economic Sectors, 1955-1964 173 34. Nicaragua: Distribution of Workers According to Weekly Salaries, I96O-I964 I77 35* Nicaragua: Savings and Investments by Sectors 1955-1962 182 X A

PAGE 11

INTEODUCTIOM At the invitation of the Government of ?'icaragua, the International Bank for Reconstruction and Development in I95I-I952 sent a survey mission to the Republic vrith the object of presenting a program for economic development. In its published report in I953, The Sconomic Developme nt of Nicaragua , the mission outlined ten m.ajor objectives. The only fiscal measure called for long-term credits and technical assistance. Others were amelioration of agriculture, transportation, communication, illiteracy, public health, industry, and power. The first five-year plan was to augment the volume of agricultural and industrial production by twenty-five per cent and annual per caoita income was supposed to rise by fifteen oer cent. If any epoch in recent Nicaraguan history can be properly labeled as the inchoatlon of economic development in a present-day sense, then this period of the early 1950' s might be justifiably called the point where Nicaragua decided to embark upon an experiment in economic development. Beginning in I95I. the International Bank for Reconstruction and Development sanctioned the first of several loans to the Nicaraguan Government to aggrandize the pool of 1

PAGE 12

2 public capital. Organized by the Central Government, the National Development Institute initiated its operations the first day of 195^. A National Planning Office was established by presidential decree. In 1955, the legislature passed a law to protect foreign capital and to provide it with certain guarantees. In 1958, a more comprehensive law to stimulate and promote development capital was promulgated. During the decade Nicaragua was negotiating an economic integration treaty with the rest of Central America. The National Bank of Nicaragua followed a credit policy which would foment an export surplus in cotton and coffee. With these events evolving, a deliberate plan was forming to exploit the natural advantages of the country in an effort to raise the level of real per capita Income. One of the earliest steps in the Government ' s . program was the devaluation of the cordoba in November, I95O, v:hich raised the exchange rate for exports from 5.7 to 6.6 cordobas to the dollar. The exchange rate for imports varied between 5.37 and 7.O5. The devaluation provided the stimulus for the expansion of exports coupled with liberal agricultural credits from the National Hank. During the first half of the century, the Government followed a relatively passive course in its policies. Other than the Ethelburga Loan of the I890's and the negotiations with Brovm Bros. & Co. especially during

PAGE 13

3 the first two decades of this century, ?:icaragua homologated relatively few foreign loans. Son:e foreign credits after 1939 were obtained from the Export-Iriport Bank. Between 19ij.5 and 1950, the external debt was formed exclusively of Central Government agreements having a balance of 10.5 siillion cordobas in 1950. Borrowings viere used basically for the amortization of old debts. Several loans granted by the Export-Import Bank between 1939 and 1957 totaled ^Ik.Z million. In the decade of the 1950' s, external funds began to flow into economic development projects. During the decade the ICA program in Nicaragua averaged ?.800,000 yearly with funds chiefly channeled into agriculture, natural resources, urban planning, transportation, health, and education. The United States Bureau of Public Roads granted :^.8.5 million for construction of the Inter-Anerican Highway and another i?13.5 million for the Hama Hoad Project. Between I951 and 196^, Nicaragua contracted for twelve loans with the >,'orld Bank aggregating .|38.1 million. External loans transformed transportation and electric power development. In 19^0, Nicaragua essentially had no paved sections of highway and the main transport link was the railroad concatenating a seaport with the principal cities and production areas. Public power was so deficient and unreliable that a public system of electrification could be said to scarcely exist. Much of the

PAGE 14

private power generated iias In Isolated mining areas. The 1950s saw a rapid rise in the length of roads and highways. In 195^. a national power and light company was forced and a program of electrification of the Pacific area was initiated a few years later. While there are no comprehensive statistics on manufacturing in Nicaragua, a 1953 industrial census records more than I.500 enterprises— most of which were very small, employed only a few persons, and applied cottage -industry techniques to process for domestic consumption. In agriculture, cotton production multiplied 100 times between 19^9 and 1955. stimulated by favorable world prices and liberal credit. The market tumbled in I956, but in 1957 a "cotton pool" was formed to buffer domestic growers from the decline in international prices. The Government granted a subsidy to producers of the I958-I959 crop and output was sustained at the 1955 level throughout the next three years in spite of a fall in world cotton prices. A deteriorating fiscal position caused the Government to abandon its scheme. The effort to diversify was partly undertaken by the National Developm.ent Institute which had acceded loans of about 88 million co'rdobas by the end of 1959. Even so. around one-fifth of these still went to the traditional coffee growers, approximately one-fourth was granted to cattle growers, and something under one-half flowed to the industrial sector materially in the form of long-term credits.

PAGE 15

1 From 19^5 t the Government ran a deficit every year financed from its foreign exchan,t5e reserves. By 19^9, reserves were practically exhausted, emergency loans -A^ere obtained from abroad, and import restrictions were imposed. Between I95O and 1955. with a strong demand for Kicaraguan exports, the export sector grew at an average annual rate of twentysix per cent. Public revenues rose and Central Government spending approximately trebled in this quinquennial. Many of the increased expenditures were administered in programs of public works and economic development . To finance these development efforts, the Government and its agencies borrowed from abroad from the International Sank for Reconstruction and Development, the Export-Import Bank, the Development Loan Fund and the Agency for International Development, private foreign commercial banks, and supply houses. This is what the proximate chapters are about— the external funds Nicaragua has borrowed to finance an economic infra-structure, loans that have been channeled through financial intermediaries, funds received from the inflow of private foreign capital, and incom.e generated from its exports. The foreign exchange impact is pivotal, and external capital is the dynamic force vjhlch, through 196^, has kept the development experiment viable. Compared with the rest

PAGE 16

of Latin America, Nicaragua has had an impressive absolute growth rate in spite of having one of the highest rates of population expansion in recent years. The purpose of this paper is to examine the effect external capital has had on the economic grov:th of the country. The contention Is that vjithout external funds, no economic growth would have occurred during the r^eriod under discussion. In the final chapter, some measurement of grov:th for the entire economy will be attempted; then, to the extent possible, the effect of external capital as an economic stimulant will be isolated. Because the terms 'economic grox^th' and 'economic development' have been used loosely throughout the text and at times tend to overlap, an important distinction should be made at the outset between the two. 'Economic development' Is meant to be defined as the growth in output, whether as a result of population increase, capital accumulation, or technical progress. The concet)t relates to raising the levels of output or of Income. In this sense, the text quite correctly speaks of the economic development of certain sectors of the economy. However, it is conceivable that economic develoDKent can take place even at the cost of lowering per caplt?. income; i.e., 1-^ the objective is to fill up the empty spaces, it may be that the economy rearranges Itself in such a fashion as to allow the rate of population rise outstrip the gains in production.

PAGE 17

7 The term 'economic grovjth' more accurately describes the problem with which we are basically concerned here. It is defined as raising per capita Income by modifying the economy in such a fashion that growth becomes a permanent feature of the economy; i.eo, the process of raising, per capita income becomes self-feeding to sustain itself over a very long period. In examining the various projects and programs financed partly through outside help, the central issue is not development for the sake of development but whether the fomentation of these projects and programs either directly or indirectly have achieved or have contributed to the growth objective. A cou-ntry has failed to solve the problem if an inflow of capital over a relatively short period (or periods) does not set the economy off on the path of sustained growth. This is precisely the point that will be looked into in the following pages. The objective will be to determine into what areas public and private foreign capital have flowed. We are interested, for example, not in any direct influences infrastructure projects may have had on growth but whether, in a roundabout fashion, these projects have exerted any influence on the growth process. For this reason the process has been called a development experiment. It is an experiment to achieve sustained growth by the development of the various sectors of the economj^. It

PAGE 18

remains until the last chapter, however, before definite conclusions are dra'Aii in this direction. The ten-year period, 1955-1964, V7as selected for observation. The Interval Includes both periods of prosperity and of recession. The year, 1955, represents the end of a five-year period of expansion of the country export sector. The latter half of the decade of the I95O is considered largely recessionary, followed by a period of expanding prosperity which covers the balance of the observed period. The selection of these ten years, then, offers some balance for purposes of analysis and tends to lend greater validity to the conclusions drawn. By 1955. most of the factors which have impelled the economy were already operative or planned. Since private capital formation in part, at least, has lagged behind public capital Investment, it can be argued that I958 to 1967 is the more descriptive period. Also, it is noted that the Investment Incentive Law was not passed vmtll 1958 and the Economic Integration Treaty was not signed by Nicaragua until late I96O. These factors have been considered in examining the evidence; however, for the sake of uniformity, data on private foreign investment coincide with the material in other chapters. The cutoff date of 1964 was partly a matter of convenience, partly because of more complete Information available

PAGE 19

throii^jh that year, and partly due to sonie indication of a shift in policy and direction of investment after 1964 The final chapter will sonev.'hat brinr: together the material in an effort to analyze developr:ent progress. It will discern Nicaragua's capacity to service its external debt and will review those factors which constitute the country's ability to continue external borrowing. The chapter will end by restating the role that external capital has played as an economic stimulant.

PAGE 20

CHAPTER I CLIMATE FOR FOREIGN INVESTMENTS The Republic of Nicaragua, a mixed economy, endorses the tenets of a free enterprise system which underpins its development experiment. While its economic development must substantially originate Internally, by its very nature as a lowincome country Nicaragua is looking beyond its frontiers for investment capital. One of its objectives of economic development is to induce an inflow of foreign investments. To this end, the Government has taken action to create a substructure favorable to a free enterprise system; but it is not enough that such conditions exist. "Development further required the presence of a dynamic, innovating, and alert private sector to discover and take advantage of appropriate opportimities. The flow of capital will respond to the forces that influence the productivity of capital within the country. It will consider the size of the local market, the formation of an adequate infra-structure, the access to foreign markets for locally produced goods, the availability of ^ — — o« 4. J°^i*tee for Economic Development, How Low Income Countries Can Advance T heir Own Growth . Su pplement (rjew ^ork; CED, September, I966 , p. 32: — 10

PAGE 21

11 financing, and some degree of certainty with respect to fiscal and monetary policy and the ability of the government to maintain political equilibrium. Foreign capital requires reasonable assurance against confiscatory or discriminatory treatment and against depreciation or blocking of local currencies. Nicaragua has maintained a respectable record in this regard. The following pages will make reference to some of the forces which encourage the ingress of foreign capital into Nicaragua. The present chapter will take stock of some of the factors affecting the foreign investment climate and the marginal influences legislated by the Nicaraguan Government. Discussion in the chapter will center on incentive legislation initiated both locally and within the economically integrated region. Also, Nicaraguan participation with the United States in providing risk guarantees to capital will be briefly pursued. Before examining social-overhead-capital in the next chapter, the current chapter will end with some pertinent comments on political stability. Incentive Legislation Nicaragua has promulgated two laws calculated to assure foreign-financed industry of its welcome. The first law deals with the unrestricted movement of foreign capital, in equality with property of nationals, and the repatriation

PAGE 22

12 of profits, which the foreign capital may generate; the second law treats special incentives offered to both foreign and domestic firms which come within the vigilance of the decree. Law on Foreign Investments . By decree of February 26, 1955. and amendment of October 10, 1959, the Law of Foreign Investments vias legislated to establish guarantees of equal treatment designed to stimulate the entry of foreign capital "to obtain a superior grade of economic aid."^ The Law recognizes that foreign capital is essential for the exploitation of the natural resources. Similarly, it acknowledges the necessity of the free movement of capital and the right to earn profits as well as to be able to retire them from the country even in times of exchange control. The Law was created to hasten desired economic development within the framework of a com.petitive free -market system. The Law admits to the efficiency of private investment and sanctions the greatest possible freedom within the limitations of foreign exchange reserves. Stimulation of Industrial Development . While the preceding enactment provides for the free movement of capital within the definition of the law, the Law of Protection and Stimulation of Industrial Development of March 20, 1958, 2 ' ~ ~~~ — Nicaragua, Ley sobre inversiones extranjeras , pte. I.

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13 classifies eligible Industries into three categories — fundamental, necessary, and convenient — and further subdivides these categories into new and established firms. The classified industries are entitled to custom-free importation of necessary capital equipment, duty-free raw material imports, and certain other exemptions or privileges defined by the Law. Table 1 on the proximate pages summarizes some of the major benefits extended to classified industries. Chapter I of the Act sets forth the policies of the Government in four articles. Some of the phrases from this Chapter are quoted Art_jl. Manifests general interest in establishing, inthe country, industrial plants which contribute to the industrial process, manufacture or transform raw materials or domestic or foreign semi-manufactured products, with the object of satisfying the domestic demand of manufactured or semi-manufactured products, or to increase the export trade of the Republic by means of the production of new exportable articles or the increased manufacturing of those which already are the object of said exportation. »•«•» Art. 2 The Government of the Republic will take all the necessary measures in order to counteract perfidious practices of business which cause or threaten, to cause injury to the industrial production of the Nation, or which set back the' establishment of a national industry. Art. 3 . The Government of the Republic and, in general, all the official organs, in equality with qualities, prices, and conditions, will give preference in its purchases of official character to the industrial products of national fabrication ....

PAGE 24

Ik TABLE 1 SUrmRY OF EXEMPTIONS FROM NICARAGUAN CUSTOMS DUTIES AND TAXES GRANTED TO MANUFACTURERS IN THE LAW OF MARCH 20, 1958 Exemption Class of New IndustryCustoms Duties and Consular Fees Fundamental Necessary Convenient Construction materials Yes Yes Yes Machinery & equipment Yes Yes Yes Malnt. supplies & Imp. 10 yrs. 5 yrs . No Custom duties: No Fuels & lubricants 10 yrs. 5 yrs. Raw materials 10 yrs. 5 yrs. No Semi-finished pdts. 10 yrs. 5 yrs. No Taxes: On plant operation & No product sales 5 yrs. 5 yrs. On investment capital 5 yrs. 3 yrs. No On plant income: No 100 per cent 5 yrs. 3 yrs. 50 per cent 5 yrs. No No Plants are classified as fundamental, necessary, convenient, or not at all on the following criteria; (1) (2 (3 (5 (6 (7 (8 (9) Contribution to the national income and distribution of the contribution among various factors of production. Advantages to local consumers. Quantity and quality of labor required. Capacity and efficiency of equipment to be used. Value and quantity of local raw materials required. Market need for the product(s). Intended use of the product(s). Income or saving in foreign currency to be produced. Amount of invested capital.

PAGE 25

15 TABLE 1 (continued) Class of Established Industry Fundamental _ _ Necessary Con venient Before After Before After Before Ift^ No Yes No Yes No No No Yes No Yes No Yes 5 yrs. 5 yrs . 3 yrs. 3 yrs . No No 5 yrs. 5 yrs. 5 yrs. 5 5 5 yrs . yrs. yrs. No No No No No No No No . No No No No No 3 yrs. No No No No No No ir3 yrs. No No No 5 No yrs. No No No No law. Sources: (1) Nicaragua, A reference study by Industrial Development Manufacturers Record (Atlanta, Ga.: Conway Research, Inc., Feb., 1964), p. 53. (2) Nicaragua, Ley de protecclon y estlmulo al desarrollo indust rial, 20 de marzo de I958. ~

PAGE 26

16 A^^' The Schedule of Excise Taxes of the XunlcIpalities . . . will not be able to encumber the exempted industries with taxes similar to those from which thej'are exem.pt ed ... .3 Chapters II and III of the Law define classified industries and the exemptions to which they are entitled which are summarized in Table 1. Chapter IV sets forth the obligations of the sheltered plants, while the remaining Chapters of the law deal with the establishment of an Advisory Commission of Industrial Development and the procedures relative to seeking protection accorded by this enactment . This is perhaps the most decisive piece of legislatlor^ attacking the problem of private capital formation from the demand side, which assigns significant, favored treatment to those industries fortunate enough to qualify for the exemptions and privileges accorded. From all reports, the Law is not one which has become Involved in bureaucratic red tape and has already afforded sheltered treatment to nearly 500 firms. The cooperating agencies of the Government have acted on applications within the allowed thirty -day limit. This incentive law, which is similar to many used throughout the world to reduce taxes for firms whose activities are presumed summum bonum to the development process. 3 — Nicaragua, Ley de protecclon y estimul n al desarrolT o Industrial, cap. 1. [l-ranslatlon by writer/ ^esarrollo

PAGE 27

17 has introduced new burdens and problems In administration and at the same time has tended to reduce government revenues. This is counter to the trend of rising expenditures for government operations which has accompanied the expansion of state activities in both the public and private sectors . The real economic advantage generated by this Law occurs when these incentives Induce Investment which might otherwise not have materialized. From this standpoint there is little objection on revenue grounds since these exemptions are transitory. Once established, capital investments tend to be permanent and should result in net additions to national tax revenues. The eventual economic and social benefits should outweigh any ephemeral advantages granted. The objectives of the Law indicate that the country has placed especial emphasis on the foreign exchange impact. Any enterprise that saves foreign exchange by Import substitution or generates Income in the external sector through new or expanded export production is regarded to have utility, what the legislation falls to specify, among other things, is the type of foreign exchange it desires to conserve or accumulate. It is conceivable that the introduction of some intermediate process could result in a loss of the type of foreign exchange essential to capital outlays. For example, an export oriented assembly plant.

PAGE 28

18 which obtains from the United States its components, may become established within the Republic. Assixming that the hypothetical firm exports a large portion of its output to Costa Rica (which initiated exchange controls on January 2, 1967)^, Nicaragua would, in effect, be exchanging hard currency for overvalued soft currency, thereby restricting, to a limited degree, the amount of capital goods it could import. Another problem is that the incentive legislation fosters import substitution only at the consumer level but works against itself at the intermediate goods level of production. For example, let»s assume that a hypothetical firm has been granted special exemptions to produce metal products in Nicaragua. The metal-producing firm h^s to import most of its raw materials, which it does duty -free. Its main role within the national economy is to add the value of domestic labor to the firm's final product. The firm comes within the shelter of the industrial development law since it does contribute significantly to the level of employment, is import substitutive, and has the capacity to supply a substantial part of the local market. Since a large portion of its products are fabricated according to specifications, it is a potential supplier to a variety of industries. suiot«^nrr''^?^^2? ""^^^ ^""^^^^ Ramirez, Vice-consul, Consulate of Costa Rica in Miami, Florida, on January 5, I967.

PAGE 29

On the demand side of capital, a moderately protective tariff may Increase the Incentive to Invest by preserving the domestic market. Even a small-scale firm may anticipate slightly underpricing competing Imports. But, In addition to the problems related to Inadequate facilities, a small market, lack of trained labor, and possibly lower -quality products, the very law which purports to shelter the firm concomitantly abrogates it. Let's assume that a local hatchery has decided to expand operations from Its ordinary undertakings to that of raising, killing, and freezing fryers for the local market. Initially the firm employs laborers on a piece -work basis to kill, clean, and package the chickens. Precursory results have been encouraging and the firm opts to fan out to serve a substantial portion of the domestic market with frozen birds. After consulting with a United states manufacturer, the local firm learns that It can substitute a substantial quantity of its labor with capital equipment and lower per-unit costs over a wide range of outputs. Further examination affirms that most of the new capital equipment is simply constructed and could be produced according to specification by the local metal fabricator. The price quoted by the local fabricator is competitive with the delivered price of the Imported equipment, and, ceteris paribus, the domestic metal firm would supply

PAGE 30

20 the local hatchery. However, the development law grants exemption of customs duties and consular fees for machinery and equipment to an established fundamental or necessary industry desiring to expand. If, after exemption of fees and duties, the delivered price of the equipment from the United States company is lower, then the hatchery would import its capital equipment rather than pay a higher price to a domestic producer. The effect of import substitution is inoperative in this case. If it is concluded that incentive legislation is the best way to attract the desired industries, then, at least in some instances, the only ad\-antages are to be found in tax reductions during the early periods of operation. However, with the facility to evade taxes coupled with the probability that the firm may be operating at a loss during its infancy, then forgiving zero taxes only multiplies paper work for the 'privileged' firm. Another cul-de-sac associated with the development laws is that tariff protection actually assists the stronger firms by bestowing windfall benefits upon firms which might have made the same moves, and be equally beneficial to the country, even in the absence of such laws. Evidence hints that the marginal firm is induced to initiate activities which may reveal a permanent incapacity to function without artificial support resulting in a perpetuation of

PAGE 31

21 the protection. Operating satisfactorily, the period of sheltered treatment should give the protected Industry an opportunity to survive the Initial period of heavy losses but with the Idea that It will administer itself more efficiently and survive once the protection is lifted. If the firm's management is not thoroughly convinced that protection will one day be withdrawn, then it will have little incentive to strive toward a more efficient operation. Some evidence of this appears in the following paragraph : Incentives are of more importance to smaller lu^^A ' : 1 1 ^^^^ exception the companies that Insisted on the critical role of incentives were in this category. One told me that "we couxdn't have come in without them because all our material is Imported and our volume so small, we would have been wiped out otherwise." Small firms simply do not have the resources to incur losses for lengthy periods. The flow of cash made available to them by lightened tax burdens was essential to their continuing as going concerns. Generally speaking, the big corporations ttid not wish to stand on these incentives either because they felt that they cost more in the long ^^^^r^^ °^ Interference and Paperwork or did not attach great weight to them because^they presented very small cost savings . . . . ^ ey pre Tr^^f^J^^^'^^T^b Schreiberg, "The United States Private Investor and the Central American Common Karket " u S TnttlT' f Economic Committee. Sn^oo^lttle on ' Inter-American Economic Relationships, Hearings Stin ^Sgican Development and w...h... ...S.^^ g^fgf^.^^^f-^ , Cong.. 1st Sess., September Bri-57-l9 5 3 f p. 2?1.

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22 Even with the possibility of an industry being able to eventually operate successfully without shelter is not sufficient basis for even provisional protection. v;hile the law is being implemented, it entails costs for the entire Republic including other industries which are obligated to transact business without special exemptions. With the advent of the Central American Common Market, another problem became evident. Incentive legislation could become involved in cut-throat competition with priority being given to the establishment of a National Industry without consideration of the costs involved to the individual economy as a whole. An industry would tend to locate where it could receive the most lucrative benefits. To counter this development, the governments of the region adopted a uniform system of incentives for Industrial development the Central American Agreement on Fiscal Incentives for Industrial Development. Central American Integration Respective of its domestic market, Nicaragua has little to protect, but as part of the Central American Common Market (CACM) local industries, unrestricted by Internal tariffs and other obstructions, have a market potential. In terms of numbers, expanding from under two million in Nicaragua alone to close to fourteen million for the entire

PAGE 33

23 Integrated region. Entwined with purchasing power, expansion of the geographical size of the market does not necessarily extend the economic size of the market, A heightening of economic efficiency, ceteris paribus , enlarges the size of the market under competitive conditions. The attention of these laws, however, appears to be directed at establishing national industries with only minor regard for the real costs involved. Brief mention will be made here of three agreements which affect private capital development in Nicaragua the Integrated Industries Agreement signed June 10, 1958, the Special System of Production Promotion, and the Fiscal Incentives for Industrial Development. The Integrated Industries Convention declares that Central American integrated industries are those which require that the minimum volume of production that can be engendered at reasonable cost must be greater than the needs of a single country. The firm designated must make certain guarantees as to quality, price, and delivery. In return, it receives a ten year exemption from Import duties on raw materials, a waiver of production taxes, and tariff protection from third countries. Each country is to have one designated industry before any country may have a second one. A caustic soda and chlorinated

PAGE 34

2k insecticides plant has been designated as an Integrated industry in Nicaragua.^ The objection to this convention is its interference with the free-market system. If the entire integrated region will only support one industry of a given type, then it seems that free-market forces can determine this more efficiently. The administrative machinery set up to regulate integrated industries is both cumbersome and expensive and may be quite ineffective. The Special System of Production Promotion garners industries which cannot be classified as Integrated industries. The special system establishes uniform protective tariffs which are higher than those established in the Uniform External Tariff or generally higher than those in effect in each country. The applicants must prove that their plants will have the capacity to supply at least fifty per cent of total CACK demand in order to be accorded the protective tariff."^ If only protection may be necessary to create economic development, then the problem is quite simple. Actually tariff protection has existed all along. Even coupled with g — — "The Central American Isthmus," Latin Am.e^lcan Heport . V (April, 1964), 70, " ' U.S., Dept. of Commerce, "Trade and Invest in Central America," International Commerce , supplement (July, I965, 29 • *

PAGE 35

fiscal incentives, it is contrary to reality to expect a flood of foreign private capital to inundate the country. While factitive, these measures are evidently of secondary consequence. Possibly the most salient of the integration instruments, the Fiscal Incentive Agreement applies only to manufacturers, outside of extractive industries, agriculture, and construction of low-cost housing. This law has tended to prevent competitive incentive legislation. Industries are divided into three classes A, B, and C. A new Class A firm, for example, is eligible for exemption from customs duties on machinery and equipment imports up to ten years; exemption up to 100 per cent on raw materials, semi-manufactured products and packaging for the first five years, up to 60 per cent for the next three years, and kO per cent for another two years; and exemption from taxes on net worth for ten years. Existing firms and lower-classified firms retrieve correspondingly reduced benefits.^ Table 2, on the next page, summarizes the fiscal levies which the law may forgive to eligible firms. Group C (not shown below) accommodates those firms which do not qualify under the other two categories or which assemble, pack, cut, or dilute products. Group C also enspheres producers g — — . , U.N., ECLA, Report of the Central Americ an Economic Cooperati on Committee (E/GN .12/67? i vn^v _ ^p^^l }'.' —

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26 TABLE 2 SUMMARY OF BEI^JEFITS ACCORDED 3Y THE CE^'TR/vL AMERICAN AGREEMENT ON FISCAL INCENTIVES FOR INDUSTRIAL DEVELOPMEI^TT Group A Group B Fiscal Benefits New Existing New Existing Exemption from Import Duties on: Machinery & equipment 10 yrs. 6 yrs. 8 yrs. 5 yrs. Raw materials, semiFirst None First None manufacturers, & 5 yrs. 3 yrs., packaging 100/^;next 100;?; last 3 yrs., 2 yrs., 60,^^; last 50^ 2 yrs.. Fuels, except 5 yrs. None First None gasoline 3 yrs.. 100^; last 2 yrs., 50% Exemption from Income and Profit Taxes: 8 yrs. 2 yrs. 6 yrs. None Exemption from Taxes on Assets and Net Worth: 10 yrs. 4 yrs. 6 yrso None Source: U.S., Dept. of Commerce, Intern at loral Commerce (March 18, I963), JTTT '

PAGE 37

of alcoholic and non-alcoholic beverages, manufactured tobacco products, and perfumery, cosmetics, and toilet preparations with the exception of soaps and dentifrices. While the intended reaction to this law may have been to equalize the incentives legalized by the CACM members,* data disclose that Nicaragua has continually experienced an adverse balance of trade with the CACM countries, in global terms. ^ The Nicaraguans blame the comparatively less-developed state of their industrial sector along with administrative barriers that Nicaraguan exports encounter in the integrated market area.^*^ The Nicaraguan Chamber of Industries presented President Guerrero in August £1966;? with a thorough report on the problem facing Nicaraguan industry in its efforts to compete within the CACM. Among the specific needs cited to make Nicaraguan industry more competitive were cheaper electric power, better water supply, worker and management training, better port facilities, and additional capital. The other CACM countries were also accused of placing administrative barriers in the way of Nicaraguan exports. In addition, the Chamber of Industries report admitted that part of the difficulty lay with Nicaraguan industrialists themselves because of a lack of initiative, entrepreneurial spirit, and other qualities needed to compete in the CACM."'-^ 9 Nicaragua, Banco Central, Boletln Trimestral, VI (No. 24, octubre-diciembre, I966), p. 65. ^ Embassy in Nicaragua, Summar y of Economic Conditions in Nicaragua (3rd quarter, 1966). pp. l-ii'." (Mimeo. ) /t i'^^. T. 7 11 Ibid . , p. 4.

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28 In September, I966, Nicaragua requested preferential treatment vrith respect to the Fiscal Incentives Convention. Honduras was earlier granted a preferential status based on a study by the Economic Commission for Latin America (ECIA ), and a similar study has been requested for Nicaragua. The study is anticipated to be completed by mid-1967 in order to determine whether Nicaragua should be given sanction to accede more favorable fiscal benefits to new industries. In addition, Nicaragua has requested preferential treatment in the establishment of integrated industries and in financial assistance from regional organizations.'^^ In addition to fiscal incentives and tariff protection, Nicaragua has entered into an agreement with the United States to insure specific risks of private foreign capital investment v:hlch is substantially beneficially ovmed by citizens of the United States. Guaranty Coverage While a number of insurance plans is accesslblr^ to private, foreign investors, only one will be disserted here since it involves an agreement with the Nicaraguan Government. The Specific Risk Investment Guaranty Program is authorized by the Congress of the United States under Loc. cit.

PAGE 39

the Foreign Assistance Act of I96I, as amended, and is administered by the agency for International Development (AID). "This program is designed to encourage the transfer to less developed countries of the capital and techniques that helped this country to grow and thus assist the objectives of the United States foreign aid program. "^-^ Once the agreement was signed with Nicaragua, the specific risks which may be covered by such guaranties ares 1. Inability to convert actual profits or earnings or return of the original investment into dollars; 2. Loss of investment due to expropriation, rationalization, or confiscation by the foreign government ; 3. Damage to or destruction of tangible property attributable to the investment as a result of war, revolution, or insurrection. The program does not affirm guaranties against such risks as devaluation, default of a creditor, bankruptcy, or against normal business risks. Under the convertibility guaranty coverage, the investor is assured that "if there is a means available [for converting the dividend, interest, or principal, or other payments arising from the investment into dollars of the United States] at the time the guaranty contract is 13 U.S., Dept. of State, AID, Specific RisV Investment Guaranty Handbook , revised, Oct obe?;~19b o, g^^'^'^ -^^^ 1 Ibia., p. 2.

PAGE 40

30 executed for converting these local pajTuents into dollars, such local currency vrill continue to be convertible into dollars for the duration of the contract by equivalent means." The guaranty does not protect the Investor against currency devaluation or inflation, and in the case . of multiple exchange rates it normally offers protection only against blockage of all the legally recognized exchange rates. Nicaragua has not adopted a system of exchange controls and the Nicaraguan cc5rdoba is freely convertible at the time of this writing. The 1955 Law on Foreign Investments decrees that "foreign capital will be able to enter and to leave the country without restrictions, according to the disposition of this law."^"^ On the basis of past record and the implementation of the present laws, the convertibility coverage offers little additional incentive for the inflow of United States private capital. The second coverage, expropriation guaranty, countenances protection to United States investors against losses due to expropriation, confiscation, or nationalization of the Insured property. Under international law, the ovmer ^^ Ibid ., p. ' ~ 1 6 At the current official exchange rate, the Nicaraguan c^rdoba is equivalent to a buying rate of U.S. 1^4-.2857$Z., approximately. 1? Nicaragua, Ley sobre inverslones extranieras, Decreto No. 10 26 ae febrero de 1955. Art. 1." ifFanslation by writer.!

PAGE 41

31 of property is to be compensated justly and expediently when expropriation supervenes. However, international lawsuits are frequently lengthy, the claimant frequently feels that he has been inadequately indemnified for his losses, and suits are frequently inconclusive. Under the Program, after the investor has taken "all reasonable measures", the United States Government makes compensation and the claim is transferred to the Government for action in the World Court. Table 3 on the following page elucidates the general lack of interest in the Program. The Risk Guarantees Legislation has been in operation since 19^-8, Through March, 1966 (the latest available data), only seven different firms have availed themselves of the Specific Risk insurance for a total of U.S. $10,7^5.352 in all three categories. Almost half of this amount encapsulates expropriation. The category with the smallest amount of coverage is war-risk. The primary interest in the latter classification is revolution and insurrection; but Nicaragua can boast of a fairly high degree of political stability. The same National Liberal Party has been in power since 1 8 1929 and the country has been substantially under IB — — _ . ^ff' Carlos Cuadra Pasos, Histo ria de med io slglo, 2 ed. (Managua: Editorial Union, 1^6-^7: — '

PAGE 42

W PQ CO WvO W^O E-t ON s ^ CO w w o 2; o W E-i CO n p o-^ M • Cm CO M • w o w , E-t cr; M CO w > M EH o o u o -p CO > o o o o o o o o o o o o CM o o o o o CM o o o o" o o o o o" o o o o o o > • • • •H a o o Q }h s: O M M w o o •H CO CO CO fH 'd r-i r-i 0) o rH X o W Ix, s SI •H 1 li, rH (H iH cS ^ W ^1 ?H p CD Q o o s:^ o o o 05 o u o iH O ct! O 0) •H N P -H Cj rH -P O Q rH c; O T-i P. o ^^ EH o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o vo o o o o o o o o <-( CM o T-I o r-H r-l CO CO CO xi 'd 0 o o o (m ,•5 -d >5 >^ U fH ?H C3 +i -P ^ fH (H ^3 S s 60 e; o O o o C •H Jh fH t-t CO \ -d «H x: c6 P CO P CO 4J CC CO (U 0 fH -P o P o ^ •H 0. 05 o a o o 0 3: &4 Cm PI CO o O CO CO

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I •p o o pq •H I c3 o o u A, X w -p •H !h Q) !> O o p o o o -p m (1) X o (D a fn O u S o o O Pa Oh m p CO o o o o o o -rH CM CM o O o o o o o o m o X o ,o -d U U o o a gi o Oh bO 0 PI -P CO o o \ ^ o o o o °. o o" CM =Cj©^ CM CM CO >-:i 5^! K o H > P o

•H -P CtJ H ^3 Oj-H C CO H CO c x> o CO 05 60 S 'd 03 o d) ::i CO cqKO M\0 to CD I 0^ .C -P 05 c3 o c3 P l-t 05 o j3 0? CO o 4-> f3 -P g S CO p CO o 05 o ol 5-1 0) ,c > M.-CO M ^ CJN CO ( CM P 0 « P, CO P ?-t -H ^ -H • 0) o CO' 4J ai » c: c. 05 d 03 i>0 03 CO O d o CO

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3^ one-family rule continuously since 1936."^ The National Guard has been able to nitigate any internal perturbations.2° In studying Table 3, it should be noted that the total of the twenty-three insured risks does not substantiate that the total flow of insured capital amounted to nearly U.S. $11 million. For equity investments the maximum amount of the guarantee generally cannot exceed 200 per cent of the dollar value of the original investment. A firm may Insure the same investment three times once in each category. (For example, look at International Ore and Fertilizer Corp. It insured the same investment, $200,000, three different times— once in each of the three categories. Total , investment was not $600,000 but only $200,000.) The danger here is one of principle. Ostensibly, the lack of interest is due, in part, to business sentiment in that firms prefer to operate without additional government control or interference in their business quests. The Investment guarantees require approval of two governments the United States and Nicaragua plus the time involved to process the applications. 19 ~ — — See. Alejandro Cole Chamorro, l'^5 Ano s de >^istoria ^oiltlca en Nicaragua (Kanagua: Edit o?a ivj icaraguense , 1 9 67). See. Peter Smith, "Development and Dictatorship in Nicaragua, 1950-60," The American Economist . VII (June

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While domestic incentive legislation, regional fiscal benefits, and foreign government guarantees may ensphere several of the propitious elements that a climate for attracting foreign capital may embody, the general characteristic is the profit motive. Especially in the case of sizeable capital outlays, the firm must examine more than just short-run benefits in order to recover its investment. The firm may be more Interested in becoming established ahead of competition and not wish to wait for approval of a guaranty in one or more categories. This specifies that the firm has been motivated by the prospects of immediate profits rather than by any special advantages that may be secured under the Specific Risk Investment Guaranty. The firm may make application at the same time it begins construction but this would lend strength to the analysis that the investment guarantee is something "extra" to be realized along with other special benefits such as the possibility of tributary abatement during initial activity. These are not necessarily inducements since the decision to Invest was made on a priori factors. Table 3 especially supports this contention, since over a lapse of several years only seven different firms have applied for a combined total of twenty-three coverages in all three categories. The Investment guarantees may afford a greater incentive to Invest in areas where there is a history of

PAGE 46

36 political instability. This has not been the case with Nicaragua. V/hile many may opine that the Government of Nicaragua is opprobious, the Government has generally maintained an air of stability for nearly a third of a century. This does not guarantee that the next one-third of a century will conform to the pattern of the preceding epoch but it does suggest that the Government has effectively assuaged internal disturbances to provide another constituent—political stability— which reinforces an opportune investment climate. Political Conditions Political instability deters private capital formation because it raises uncertainties as to the future which may adversely affect present decisions. The fact that the Nicaraguan Government has the power to interrupt, harass, or destroy any private foreign capital venture is a factor that must be taken stock of when making an investment decision. In addition to investigating market conditior.s, technical data, and available financing, the investor has .to reflect on the past performance of the political parties, the internal conditions, nationalism, and the official and unofficial attitude of government toward foreign investors. With this latter data in hand, he then must form conjectures on the future political direction of the country.

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37 It Is the political stability, not the degree of democracy, which influences private foreign investment. Excessive nationalism or tendencies toward socialism might tend to dampen investor activity. But with a fairly high degree of political stability, the entrepreneur will feel there is reasonably more security in government policies and will attach more faith to guarantees legislated by the government. It has already been pointed out that Nicaragua h^s a good record in this regard; and a long period of dominion by the Establishment, which has allowed an Opposition to function much of the time, is a favorable adjunct in energizing private foreign capital. However, there have been minor internal disturbances and business has reacted quickly to any possible changes in the political atmosphere. The following paragraph adumbrates the business sequel after a brief outbreak between a group of Conservatives and the National Guard that took place during the latter part of January, I967: Businessmen seem generally optimistic about the prospects for I967. In recent weeks there has been some decline in sales— part icularly after the llare-up of violence in Managua on January 22 r'=>sulting in a number killed and wounded and oroperty damage in the capital's business district— Ibut this is considered to be related to election tensions and an upturn. is expected now that elections have taken place. 21 Nicaragua, Summary of E conomic .Conditions in Nicaragua (Managua: "^t h ouarter, 19667 , p. '+» (Mimeo,)^ » ^ /»

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38 As later proved to be true, business did continue 'as usual' after the elections. Nev; capital continues to be invested in the country; and there apparently has been no flood of applications for guaranty coverage under the Specific Investment Guaranty Program. Nevertheless, economic development is not defined solely in terms of the growth of private capital. Only one part of the development process has been animadverted here in the first chapter; i.e., what are some of the measures Nicaragua is adopting in order to create a propitious foreign investment climate? VJe have very briefly examined some of the incentive legislation as it has materialized both domestically and within the economically integrated region. Additionally, we have ruminated on the legacy of foreign government guarantees implemented in cooperation with the domestic government as well as the inducement of maintaining political stability. The remaining chapters will make reference to actual statistics where both public and private capital has played a part in the development process. Chapter II will report on the progress of social-overhead-capital. The chapter will emphasize the lack of electrical energy and the under-development of the transportation system. '

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CHAPTER II LOANS FOR INFRA-STRUCTURE DEVELOPMENT Possibly the most important category of project loans are those destined for the development of an economic infra -structure, vmile a favorable climate should exist to attract foreign capital, it is generally conceded that adequate investment in social-overhead-capital is a necessary condition of development. The International Bank for Reconstruction and Development has strongly favored the fields of electric po-^er and transportation, and Nicaragua has received most of its external financial assistance in the expansion of these two areas. Most of the current chapter will be devoted to these two fields. The "analysis" section will define economic and social infra-structure and will bring together some of the central points of the chapter. Electrification Shortage of power facilities has been a chronic problem. Measures taken during the lo50ts ^ere substantially stopgap until longerrange programs were initiated. Chiefly through external borrowings, the installed 39

PAGE 50

capacity of public electrical generation has multiplied approximately ten times. Current plans call for further expansion of the generating capacity and more extensive electrification of rural areas. Although rates to domestic users continue relatively high, this block has, in recent years, been consuming a slightly greater proportion of energy than the industrial block. As a stopgap measure, the I95I-I952 mission of experts of the International Bank for Reconstruction and Development (IBRD) recommended the formulation of some long-range plans to fill in the gap of the existing shortage of electrical energy product Ion and provided funds toward this end. The installed public generating capacity Jumped from 7,900 kilowatts in 1950 to 48,300 in I96O and to 80,000 by the end of 196^, while private installed capacity built-up from 20,000 in 1950 to 29,400 in 1964.^ External debt of the autonomous agency charged with the conversion of energy averaged $3^4,200 per year during the 1952-1955 period, intensified to an annual average of $1,5^^,500 in the 1955-1960 period, and during I96O-I964 the external debt jumped to a yearly average of mu International Bank for Reconstruction and Develoomert The Economic Developm ent of Nicaragua (Baltimore: John nopkins Press, 1953). p. izB. — . 0 onn 2 Nicaragua, Banco Central, Informe Anual. I965 . p. I37.

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1^1 •a $2,990,800.^ The IBRD has been the major supplier of funds. The initial loan arranged with the IBRD in I953 as a provisional step for $^^50,000 helped to finance the installation of a 3,000 kilowatt diesel plant in Managua. This unit, intended to cope with the shortage, began operation in 195^.^ Also, in 195^, established by legislative power, the Empresa Nacional de Luz y Fuerza (ENALUF) was created as the National Power and Light Company, an autonomous governmental agency, to generate electrical energy and to execute a national plan of electrification.^ In I955, the IBRD made a $7.1 million loan to ENALUF to supply foreign exchange for the construction of a 30,000 kilowatt steam plant. A loan for S400,000 conceded in the same year to the Institute de Fomento Nacional served as a basis for credits which allowed municipal power distributors in I5 smaller communities to generate and expand their distribution systems. A $12.5 million loan made to ENALUF in I96O began the evolution of Nicaragua's hydroelectric power potential.^ Pl«niJ?i''jr^^''^^ Nacional de Economia, Oficina de Planificacion, Estudio del comercio ext eriory de la balanza de pagos de Nic aragua. 19VJ-iqA^ , -T .,.!/^ ^^l^?" -^ 4 ^ ^• ThP wn^H^r^^S^?''^^ ^^-"^^ Reconstruction and Develom-nt The World Bank Group i n the Americas . June, I953, p. 5?. ^las Novedades (Managua), 18 de marzo de I967. p. 15. The WogrL-n^r^^^L^f Development.

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li2 Substantial progress has been registered since the 1951-1952 Bank Technical Mission fiindanientally as the result of five IBRD loans aggregating |22 , O50, 000, another $2,500,000 from the Development Loan Fund, and a total of $1,100,000 from the ExportImport Bank. On June 20, I96O, the Empresa Naclonal de Luz y Fuerza concluded a loan with the International Bank for Reconstruction and Development for $12-5 million, payable over a 25-year period at 6 per cent interest. Participating in the loan for a total of $95,000 are the Grace National Bank of New York and the Glrard Trust Corn Exchange Bank."^ The accommodation has facilitated the construction of a 50,000 kilowatt hydroelectric plant on the Rio Tuma and a 75-nile transmission line to bring power to Managua and other population centers en route. The entire cost of the project calculated in 1960 at ^20. 8 million^ was revised downward in February, I965, to Just under $19.5 million.^ The project consists of the construction of a dam on the upper Rio Tuma on the high rainfall eastern side of the Continental Divide, creating a reservoir with a gross ^^^^ Reconstruction and DevelODiiient. Fifteenth Arxnual Report, 1959 -1960. p. 32. 8^ ' Loc. clt.

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43 storage capacity of 410 million cubic meters. The water has been diverted through a tunnel to the powerhouse in. the valley of the Rio Viejo on the drier and steeper Pacific slope. By the end of 1964, ENALUF had an installed capacity of 45,000 kilowatts; with the inauguration of the first step of the Rio Tuma Hydroelectric Project (TKV), total capacity jumped to 70,000. The second unit of the Central American Plant, put into commercial operation during ferch, 1965. upped the effective capacity of the National Interconnected System (SIN) by the end of I965 to 95,981 kilowatts. Via SIN, ENALUF services a total of 44 population centers. In addition to SIN. ENALUF services five isolated systems in the cities of Rivas. Bluefields, Ocotal, Somoto, and San Rafael. To the extent that the shortage of electric power has imposed a bottleneck on the economic development of the country, the culmination of TMV should contribute significantly to the widening of this bottleneck especially when the third and final stage of TKV. which will boost total capacity to 200,000 kilowatts, is a fait accompli , Essentially this accounts for the amplification of electrical energy generation, which has materially aug' mented with the debut of the TMV. Apparently the Republic 10^ ' — TTci-oH. Empresa Nacional de Luz y Fuerza, Datos, Estadisticos, 196'^ . p. 3. *

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would not have been able to evolve these resources. at the same rapid pace in the absence of external resources. Taking advantage of the World Bank policy to strengthen electrical power development with secondary emphasis on transportation. Nicaragua was able to utilize this source of funds to a great extent. Of the thirteen loans it contracted for with the IBRD through 196^ for a total of $^1,100,000. five were for electric power amounting to $22,050,000. Most government documents and newspaper articles on the subject continue to italicize the inadequacy of power and claim that continued substantial investments are necessary. Table 4 registers total public investments in electrical energy production from 1955 through 196^. Not specified in the table is percentage of external investments adhibited in the earlier 1952-1955 period, which equaled 51-5 per cent. Reliance on external sources surged sharply in the subjoining 1955-1960 period reaching 77.2 per cent of total investment. During this phase, the project "Electrification of the' Pacific" was inaugurated in 1958 with two thermoelectric units of 15,000 KW capacItyll each plus a transmission line of 69 kilovolts between Chinandega and Granada. The high costs of this program ^^^^^<^^^agua. Banco Central, Inf orm.e Anual . ^Q^U ^110 Las Novedades . loc. cit.

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^+5 resulted in high tariffs to all consumers, vhich tended to restrict demand of the industrial market. After proposing to exploit the hydroelectric resources of the co^ontry, the "Project of the Electrification of the Tuma River" was initiated. TABLE k NICARAGUA: FINANCING OF ELECTRICAL ENERGY, 1955-196^ (annual averages in thousands of U.S. dollars) Absolut e Avera.cres P e-^ cent T9jr-T0 1960-64 1935-60 1960-64' Total Investment 2.091. 3 4,364.5 loo.O 100.0 Internal 476.7 1.371.2 22.8 31. 4 External 1.614.6 2.993.3 77.2 68.6 Source: Nicaragua, Consejo Nacional de Economia Oficina de Planlf Icacion, Estudio del c omerclo exterior y de l a balanz a de m^os de Njn.r...^, Compared with highway construction, a larger portion of external financing was administered in the electrification program because of greater import requirements. The same relationship is seen between the two programs Electrification of the Pacific and the Tuma. River Project where greater employment of domestic resources was scheduled in the construction of the latter.

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k6 The rate structure is biased toward the large comnercial and industrial users. The domestic consuner pays the highest rate and. in effect, subsidizes to some extent the large user; but he apparently considers this a satisfactory substitute for other alternatives such as propane gas, gasoline, kerosene, diesel or fuel oil. Compared with the rest of Central America. Nicaragua's rates to domestic and small commercial and industrial users rank the highest in the region with the exception of Honduras. On the other hand, large industrial and commercial users enjoy rates considerably lower, which places Nicaragua as the median among the five countries. For example, a domestic consumer disposing of 50 KWd would pay an average of 5.725^: per Km, a small commercial or industrial consumer converting to use 100 KWH would pay an average rate of 5,^-3^, while a major industrial consumer adsorbing 1,000 KWH would pay an average rate of 2.30^ per Km. Even a large residential consumer of 550 Km would pay 1^.5?^ and a minor industrial consumer turning as many as 900 Km to use would still pay ^.13^ per Km,^^ The special rate tendered to a select class of Industrial consumers is in keeping with the development and Incentive laws ventilated in the first chapter. It is ^^Ticaragua, Banco Central, Inform.e Anual , ^QA^ p.

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^7 felt that by acceding priority to the ampliation of electrical energy, and therefore abundant power at comparatively cheap rates to the industrial sector may mean foregoing expenditures in some other sector of the economy v/hich may be equally essential to the expansion process. Before exploring another crucial field in the economy— transportation— it may be appropriate to reproduce a brief comment made by Philip Sporn: The influence of electric power on economic development is commonly overestimated and it is erroneously assumed that there is a direct causal relationship between electric power resources and economic wealth. This has sometimes resulted in excessive investment of scarce capital resources in power development for which there was no economic Justification. There is a need to develop sound criteria to make possible balanced investment in power, or indeed in other utility services . ''^ Transportation While external sources have played a prominent role in the financing of electrical energy, it has played a less formative role in the transportation field. In the case of highways and roads, external loans and grants were of greater importance in the 1952-1955 period than they have been in the subsequent period extending from I955 to I96ij.. Exceptional progress has been effectuated, especially during the past decade, in advancing power and transport m, — Comite para el Desarrollo Economlco, Desarrollo Economico de Centroamerlca (Nueva York: nov lemhre^ m k)^

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48 services. Until World War II. the chief transport link was the railroad connecting Managua with the principal production areas of the plains on the Pacific side and the Port of Corinto. The amelioration of roads commenced with the construction of Nicaragua's section of the Inter -American Highway started in 1940 and Improved to all -weather standards five years later. The country today is still not effectively linked east-west by land and the limited trading between the west and east coasts is done via lakes and rivers, where possible, or via more expensive air transportation employing the services of lANICA. During 1952-1964. investments in roadways, electric power, and the Port of Corinto amounted to i'pl25.504, 900 distributed as follows: roadways, $84,680,300; power, $35.^59,000; and betterment of the Port of Corinto, ^5.365,000. The portion financed by internal resources totaled 65.9 per cent; while 34.1 per cent came from sources outside of the country. There has been a growing tendency to rely on external financing for this area of the infra-structure. During 1955-1960, 28 per cent of the financing derived from outside of the domestic economy and during I96O-I964. 40 per cent of the financing was external. ^-^ „ -,.^^^^°^^^sua, Estudio del come rclo exterior p. — —

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^9 Highways _and__Roads Present-day highways in Nicaragua were started in the 1930 's when a route between Managua and Tipitapa was completed and a route southward from Managua was begun. With the organization of the Highway Department in January, l^l^O, under the impetus of the Inter-American Highway Program, an intensive construction effort began which has continued to the present time. In 1950, Nicaragua could claim only 1,880 kilometers of roads and highways, of which merely I50 kilometers were 16 paved. 3y 1955. the entire system had approximately doubled, while the length of pavement rose to 250 kilometers. (See Table 5.) By I96O, the total system more than tripled the I95O figure while the paved length Jumped to nearly ^ times the I95O base. The rate of increase since i960 has been much lower than that experienced during the same period of the previous decade, but more attention has been slanted toward increasing the length of paved sections . External financing of roads has come primarily from international institutions since I95I. The International Bank for Reconstruction and Development, by the end of 196^^, had granted accommodations aggregating $7 million. These two loans, for .§3.5 nllllon each, made in I95I and "^^Nicaragua. Direccion General de Estadlstlcn v censos. ^Hesu^en Est........ ,o.. , J.^^^^^^^-^

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50 TABLE 5 . HIGHV/AYS AND ROAD SYSTEM OF NICARAGUA, 1955-1964* ( in kilometers ) Years Total Paved Improved Dry system 1955 3,687 280 1956 4,08? 300 1957 i^A66 362 1958 5,079 515 1959 5,118 5/18 1960 6,137 669 1961 6,161 761 1962 6,177 787 1963 6,272 802 1964 6,303 840 707 2,700 787 3.000 904 3,200 1,164 3,400 1,170 3.400 1,868 3,600 1,800 3,600 1,790 3,600 1,870 3,600 1,963 3.500 Several minor discrepancies appear among the various sources for more recent years, which necessitated small adjustments. Sources: 1) 1955-60: Nicaragua, Direccion General de Estadistica y Censos, Resumen de Estadistica. 1950-1960 . 2a ed., junio, 1961, p. 67; 2) 1961, 1963: Nicaragua, Consejo Nacional de Economia, Oficina de Planificacion, Estudio de los servicios de transporte en iviicaragua. 1950-1962 . 1964. n. ^(Tr 1962: Nicaragua, Direccion General de Estadistica y Censos, Boletin d e Estadistica. Ill, No. 11,' octubre, I966. p. 159; 4) 1964: a) Nicaragua, Banco Central, Informe Anual. 1964 . forro; ^ Nicaragua, Minister io de Fomento y Obras Publicas, Deoto. de Carreteras. 10 anos de servicio al Patrla, 1955-19gT l c) Central American Bank of Economic Integration, Central A merican Transportation Study . Vol. r (u^^hmgton: T.S.C. Consortium Trans1965K^p? I^^-. July 1.

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51 1953, supplied foreign exchange for an estensive highway system. Under the program all-weather roads connected Managua with departmental capitals and seaports. A network of farm-to-market roads linked rural areas with the main highways and the principal cities.'"^ From the United States Nicaragua has received considerable aid through its agencies. The Bureau of Public Roads during 1959-196^ made grants for highway construction exceeding $9 million. Throughout the entire period, Nicaragua has received $4.3 million from the Development Loan Fund (DLF) and $3-7 million from the Agency for International Development (AID) for the construction of highways. During 1952-196U, the Export-Import Bank also loaned Nicaragua $6 million for highway development.^^ The United States Government has been especially instrumental in the construction of the Inter-American Highway and the Rama Road. By the end of 196^1, the Inter -American Highway through Nicaragua has been completed except for the rebuilding of the Nandaime-Rlvas section. The Nandaime-Rlvas stretch, built several years ago, was surfaced with a relatively light asphaltlc penetration 17 Reconstruction and DevelopThe World Bank Group in the Americas / n. 56. 18>M Nicaragua, Estudio del comerc lo exte>'lor pp. 127, 336-41. "~~ — — — -

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52 treatment on an inadequate base. The ii-5-kllonieter piece broke up under the impact of heavy traffic and became the only mpaved fragment of the highway. This is an Inter -American Highway Project to which the United States contributes two-thirds of the initial cost (based on the estimate) and Nicaragua one-third. The appraised cost, primarily for paving, is ,455, 000. "'^ The Rama Road, originating at San Benito on the Inter -American Highway about 35 kilometers north of Managua, links Managua with the Atlantic coast. The Rama Road terminates 252 kilometers eastward at Rama, a river port on the Rio Escondido, and connects with the seaports of Bluefields and El Bluff by river transport. The highway is being built under an agreement with the United States whereby the latter bears all of the costs of construction, except for right-of-way, including grading, bridges, drainage, and subbase but excluding paving. This part of the work is completed to the Rio Siquia, 8 kilometers west of Rama, and construction of the 8 kilometers and the bridge over the Rio Siquia is under contract. Total expenditures on the work have been approximately .^9,745,000. An all -weather highway, the completed section is unpaved except " ~~ ~ Central American Bank of Economic Intearrat ion, Cen^ral American Transpor tation Study . Vol. I (Washington! — T.S.C. Consortium Transportation Consultants, Inc., • July 1, 1965), pp. 252-3.

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53 for the two stretches totaling 42 kilometers. Work on the route, first conceived during World War II by the United States Government, was seriously undertaken in 1955 although the entire highway was not open to traffic until 1963. The calculated cost for placing the base, paving, and improving and reconditioning the subbase, which is the responsibility of the Government of Nicaragua, is $12 million. ^° Several other projects for which external financing, largely from the Central American Bank for Economic Integration (CABSI), is available will not be discussed since they are still in the planning stage. Other projects already underway by the end of 1964 are shown in Table 6. TABLE 6 HIGHWAY WORKS IN PROGRESS IN NICARAGUA AT DECEMBER 31, 1964 Project Length Total Financed External Dates (kms.) Cost Externally Source Start End (thousands U.S.$ ) Esperanza-Rama 9 1,789 1,789 U.S. Gov. 6/64-4/6? Pave P^ma Road 236 5.876 4,243 AID 7/64-12/69 Telica-Sn. Isidro 96 8,876 3.526 DLF 8/62-7/67 Jiloa-I^ Paz 1,9 2.340 1,170 AIDd.S.G. 11/64-12/66 Yalaguina-Ocotal 20 1,884 777 DLF 7/63-I2/65 Piedrecitas-Jiloa 14 I.021 340 DLF 8/63-II/65 sHIIF^il Nicaragua, Banco Central, Infor me"AH^ 1966 . p. 172. — ~ 20 Ibid., p. 255.

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5^ During the 1952-1955 period, 23 .k per cent of the entire Investment In highways and roads came from external sources. In the succeeding period. 1955-1960, this per. centage declined to 11. although average annual Investment h^d risen more than 1| times to $7.^05.200. (See Table 7.) One source states that "the causes can be explained by the government forces to use more labor and less machinery In the maintenance of the existing communication system and to remedy the unemployment provoked by the economic crisis of the period.'-^l Table 7 reveals that although average annual Investment declined during I96O -I96Z1. more reliance was placed on external sources. TABLE 7 NICARAGUA: FINANCING OF HIGHWAYS AND ROADS. 1955-1964 (annual average in thousands of U.S. dollars) Absolute Amo un t s l955-bU 1960-64 Per cen t 1955-60 1960-64 Total Investment Internal External 7.405.2 6,723.4 6'563.1 5.386.0 842.1 1.337.4 100.0 88.6 11.4 100.0 80.1 19.9 source: Nicaragua. Consejo Naclonal de Economla. rnlll^^ Planificacion, Estudlo del Comercio Exter ior y de la h^^l.^r ... '^.^^^ ^e 21, ^ ^^^a^agua, Estud lo del comercio exteriorp. 344. rTranslatl^b3n^rltg?; j ^^terior . .

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55 Although significant sums have been invested in recent years in the formation of a somewhat more nearly adequate system, Nicaragua is still not effectively integrated, by land transportation, by either roads or railroads or a combination of the two. The east coast is isolated, in terms of cheap transportation, from the populous west coast centers. Products moving from the Atlantic side in any great volume have to be shipped through the Panama. Canal, adding materially to their cost, to arrive at one of the Pacific coast seaports to be transported Inland by highway or rail. Another decisive delimitation as to the type and density of transportation network needed is in terms of the percentage of land apportioned for agriculture or that Is potentially available. One report attests that eight departments of Nicaragua register no increase or an actual decrease in land cultivation between I952 and 1963.^^ Basically a land tenure problem, this is not directly tied in with transportation deficiencies. Arable land at the present is not being exploited at its optimum level. Projects under advisement Include greater capitalization of penetration roads to open up new lands now owned by the Government. Because of rigidities in the political system, that have become firmly congealed over the past thirty at , .^ITTz^.^^ American Bank of Economic Integration, ov.

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56 years, making available virgin lands appears the solution proffering minimal resistance. Judging from the past pattern, about one-fifth of all financing would have to originate xirith sources external to the Republic, The growth of regional trade depends, in part, upon an integrated highway system that efficiently connects the production and market centers. Nicaragua has a comm.on boundary with Honduras of 75 0 kilometers but with only one border crossing at present. On the Costa Rican side, with a comm.on frontier of 30O kilometers, there exists only one border crossing which handles trade largely between the important centers while integration of the periphery remains incomplete. Even with the present highway system, travel time is too long since the traffic cannot freely move at normal speeds. Many hazards exist. The highways are too narrow; some sections are poorly constructed. After traveling many of the Nicaraguan roads, the writer is led to comment that it is dismaying that the Nicaraguan Government, together with the Government of the United States plus loans from various external sources, has invested millions of dollars to develop a transportation system cluttered by oxcarts, handcarts, and llghtless bicycle riders who refuse to yield the center of the highway to faster-moving vehicles. These hazards result in the highways being greatly underutilized.

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Many studies conducted throughout the world have shovm that the movement of people and goods does not necessarily increase arithmetically with decreases in travel time. But such movement of goods varies more directly with travel costs, but travel time is an important factor in travel costs. This means that every decrease in travel time that can be accomplished will bring great dividends in the movement of people and goods within the region. ^-^ As long as bicycles and oxcarts effectively have the right -of-v7ay on the supposedly high-speed highways, it is difficult to believe that the movement of goods in Nicaragua will increase to an exponential function. Railroads The Ferrocarrll del Pacifico de Nicaragua (.PPN) administers a line concatenating the prominent Pacific Port of Corinto with the major population centers of Leon, Managua., and Granada, penetrates the agricultural areas around SI Sauce and Diriamba, and manages a small cargo service out of Granada onto Lake Nicaragua. Roads parallel the entire trunk line. The first steps taken in I875 toward building the railroad line started at Corinto (which had been a port since 1858) in I878. The last branch was extended from El Sauce to Rio Grande by 19^0. An isolated spur from San Jorge on Lake Nicaragua to the port San Juan del Sur opened in 1929 was dismantled in 1955 when traffic movement shifted to the paved highway. Ibid . , p. 202.

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58 A direct agency of the Go^'ernment, the railroad operates under the Ley Const Itutiva de la Empresa del Ferrocarril del Pacif ico de Nicaragua of October 22, 1940. "The FPN is 1.067-ineter (ii2-inch) gauge and totals 319 kilometers of main line and branches. "^^ (The statistical bulletin reports that the total length of railway over the past several years has been maintained at 403 kilometers .^^ This includes some short, privatelyowned lines not convergent with the FPN.) All rail is old and the lighter rail, 40 and 45 pounds per yard, is heavily worn. The main bridges need strengthening. "The four principal structures on the main line have 6 KPH speed restrictions; . . . ."^^ Many of the stations combine passenger and freight and most are over 30 years old. Most of the rolling stock has been fully or nearly fully depreciated. The CABEI report states: Including six diesel locomotives purchased in the summer of 1964 and an estimated 100 camp cars, this railroad maintains andor)erates aiD520 units of rolling equipment . . . Of 30 steam locomotives, six or eight were in the shop most of the time .... These locomotives average 40-45 years of service and are expensive to maintain .... 24 ~~ ~~ ~~ — Ibid . . p. 304. Oov,o^!^^'i°?^f?^^: Direccion General de Estadistica y ^^""^^^l Boletin de Estadist i n.. . m. No. 11, octubre, I966. 26 cit. p?^305^''' ^^^^^^^^ 2^^^ Economic Integration, 0£.

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59 Also in service are seven self-propelled dlesel "autocarrllles", each towing an additional unit. Each of these combinations is capable of seating about 90 passengers . . . , Freight equipment total 266 units . . . As the above discloses, most of the FPN equipment is old and well-worn. With the growth of the motor transport industry, the importance of the railroad has declined. In the ten years from 195^ to I963, the FPN lost about one -half of its passenger business and approximately one-third Of its freight business.^ The greatest strain was put on the railroads during the cotton-coffee boom lasting to the mid-1950»s. With increased export earnings and a high propensity to import, incoming goods crowded the dock. Poor coordination and lack of facilities created a bottleneck for the inland movement of goods, which, in part, induced a price rise.^^ With the decline in importance (the railroad does not conjoin internationally with any other country of the Central American region), relatively little new investment has been funneled into the FPN. Funds have been apportioned for maintenance and most of the new equipment has 27 ^ Loc . cit . ^^Ibld., p. 308. 29 Peter Smith, "Development and Dictatorship in Nicaragua, 1950-1960,'. The American Economist . VII (June.

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been financed by domestic sources. Where external credit has been utilized, it orisinated with foreign supply house Through the end of 196^. two supply houses which have extended a significant amoujit of credit are International General Electric for $723,100 for railroad equipment and Ferrostaal. A.G. for 1^2.555.300 for industrial rail and transport equipment. This railroad is beset with a number of maintenance and management problems in addition to stiff highway and pipe-line competition and heavy losses of revenue tonnage. It does have the important function of serving the principal Port of Corinto. which must continue to depend on rail transport if it is to expand into a large port. Another future function may be to serve as a link with the Atlantic If an extension of the Rama Road or improvement of .the Rio Escondido should develop a major Atlantic port, the terrain is suitable for the economical construction of a rail connection. Any undertaking of this size, however, would require extensive external financing within the present financial condition of the country. Alillransportatlon.— Although of a secondary consequence compared with the other transportation facilities, brief mention will be accorded air transportation. The Nicaraguan airline, LAMICA. materialized in ms as a prlvately-ovmed, Somoza-controlled airline. Internationally. It Joins Managua with San Salvador, Miami, and

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61 San Juan, Puerto Rico. It has been expedient in the export of fresh meats to Puerto Rico. Domestically, it unifies about forty-four to:«is and cities; only two airports are paved. Many small tov^ms and villages have no imter, road, or rail spans with the balance of the Republic and air transportation is essential to these isolated areas. Even such bulky exports as minerals have been moved by air transports . Through the end of 196^, Nicaragua had obtained one loan from the United States Agency for International Development for 000. 000 for the enlargement of the international airport. Las Mercedes, located about twelve kilometers north of Managua, when UKICA began acquiring airplanes in 1958. it received external credits guaranteed by the Nicaraguan Government. In the interim, credits included $2.8/10,000 from the Bank of America National Trust and Savings Association to buy airplanes. ^Port Authority of Corinto The Port Of Corinto. the principal port of Nicaragua, is located on the Pacific coast 138 kilometers by rail from Managua and 149 kilometers by highway. The port was constructed in 1858. For more than 50 years prior to I957 30 Ibid., p. Jko. 31 Ibid., p. 341.

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62 the elementary facilities were owned by the Corlnto Pier, a subsidiary of the Ferrocarrll del Pacifico. The operation of loading and unloading ships was executed entirely by railroad cars. The warehouses of the older section of the port were built in I9OO. The official act creating the Autoridad Portuaria de Corinto, an autonomous agency, was subscribed to on January 2^-, 1956.^^ "In May, I956, the Bank [ibrd] lent $3.2 million to the new Port Authority of Corinto to help finance the building of a new quay and the installation of cargo-handling equipment and transit sheds. "^^ The Nicaraguan Government provided an additional 460,000; the port facilities were realized in 1957. Subsequently, the Port Authority assembled a modern two-story maintenance and administration building out of its own funds. The wharf and associated cargo warehouses were dedicated in I96I. The modernij:ation of the port in 1957 embraced a calculated investment of $4,660,000 for the new waterfront and associated cargo warehouses. The Port Authority estimates the value of the entire property in 1964 at about (6 de^ffeio-^ [f^tf; Nicaragua), No. 30 33 International Bank for Reconstruction and ' Development. Th^rld Bank Groui> 1. g"f.°".?^,^ p. 55.

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63 $4,585,000.^ The Impact of these investments can be seen in the movement of exports. In 1950, ^5 per cent of the exports were shipped through the Port of Corinto; in I962, the movement of exports through the port exceeded 70 per cent .-^-^ Table 8 dramatizes the distribution of financing the Port of Corinto. External debt during the interlude is owing wholly to the International Bank for Reconstruction and Development and represents in the neighborhood of 60 per cent of the computed cost of port improvement. In terms of efficiency, the port has maintained a competitive position with respect to other private ports and has been able to pay its administrative costs plus the orderly retirement of its debt. Although it is somewhat distant from the capital, economical transportation expedites the free movement of goods. With the recent fabrication of the highway bridge, Pasos de Caballas, motor transports compete with the railroad. The port's location has the advantage of affording a substantial source of employment in a peripheral area. In 1964, the total work force was reported in excess of 625 Individuals. 34 ~~~ ~ cif T.^^^'^Sn^/'^^-^^^'' ^^""^ °^ Economic Integration, od. ^i-i' » , pp. joV—l, — ^ 35 ohn ^'^°^^asua, Estudio del comercio exterio .... p. 3^7. ~ — — — '

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TABLE 8 FINANCING IJ4PR0VEMENT OF PORT OF CORSTO. NTCaRAGUA 1955-196iJ. (annual averages in thousands of U.S. dollars) Absolute Amoijints Per c^nt 1955-60 1960-54 1935-60 1960-64 Total Investment 708. 1 /174.9 100. 0 100. 0 Internal 3O6.9 179.9 ^3.3 37.9 External 1^01,2 295-0 56.7 62. 1 Source: Nicaragua, Consejo Nacional de Economia, Oflcina de Planif icacion, Estudio del comercio exterior y de la 'balanza de 'oagos ae Nicaragua. 1950-1964 . diciembr-R. IqAA. ' p. 3^1-7. Essentially this covers the fundamental aspects of external financing of the economic infra-structure. External financing, largely from international institutions and the United States Government, has played a pivotal role in the development of an infra-structure. In the case of the Port of Cor into, as much as 60 per cent of the financing came from one international agency. Another central approach concerns funds borroi.ed internationally by domestic lending institutions. The two most influential institutions in Nicaragua, which have capitali^^ed on external sources, are the National Development Institute and the National Bank. Before discussing this issue in the next chapter, a few more comments on the present chapter may be appropriate.

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65 Analysis Following the terminology of the National Planning Office, the economic infra-structure includes electric power, transportation, communications, agricultural projects, et cetera; while the social infra-structure includes health, education, and housing. Although rising amounts ' are being expended in the latter area with substantial sums being derived from external sources, this range of project loans and grants have been excluded from the discussion. Using Kirschman's definition. Social Overhead Capital (SOC) "is usually defined as comprising those basic services without which primary, secondary, and tertiary productive activities cannot function. "^^ He also states that "the hard core of the concept can probably be restricted to transportation and power, "^"^ or it can be operationally defined "as comprising those activities for the financing of which the International Bank for Reconstruction and Development shoves a pronounced preference. "^^ Over two -thirds of the IBRD loans through 196^ have been distributed between transportation and electric power. In keeping 3 6 — — — Albert 0. Hirschman, The Strateg y of Economic Development (Mew Haven: Yal e University Press, 19^8 ") 37 Loc. cit. LoCo cit.

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66 with this spirit, the present chapter is devoted primarily to these two fields of development. During 1955-1960, an exceptional amount of public investment took place. It was actually undertaken in an interval when Nicaragua was in an economic downturn due to depressed world prices for its two-crop exports coupled with adverse weather conditions which resulted in a lower volume of production for export. Beginning with this in" terim, public investment has relied decreasingly on domestic public savings and increasingly on external sources to sustain its level of investment .^^ The criteria established have not been to broaden the economic infra-structure because of its direct effect on final output but because it invites domestic and foreign private capital to invest in the Republic. With the decline in savings during the recessive phase, a fall in foreign exchange earnings, and some political disorder around 1956 when the President, Anastasio Somoza Garcia, was assassinated, net international reserves if 0 fell. Much of the infra-structure expansion required the import of equipment and supplies, especially from the United 39 ~*~ ~ ~ Nicaragua, Consejo Nacional de Economia, Estudio iyo:>^^pp°^^S^y^''° N icaragua. 1Q'^Q-1Q6? . dici embre, Nicaragua, Estudio del com ercio exterior . . . pp. 148-9. ~ ' *

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67 States. To offset the foreign exchange needs for these ambitious plans, Nicaragua has had to rely on medium and long-term loans to at least finance the foreign exchange requirements. It has already been pointed out that the IBIiD has been the leading institution filling in the foreign exchange gap. It can be stated that, in general, during the earlier stages Just prior to and immediately following I955, infra -structure investment was induced via shortages in this sector of the economy and vras geared according to the needs of development. In more recent years, it may not be too difficult to argue that excess capacity h^s been built into many SOC projects to lead Directly Productive Activities (DPA) in an effort to further bolster the private sector. It would be difficult, however, to criticize the development plan, as it has ^onfolded through 1964, on these grounds alone. Excess capacity is not unreallst Ically redundant. Partial demand does exist for the facilities of the Port of Corinto, for example, and growth rates projected by the Government would tend to substantiate that the excess capacity will disappear in the relatively short term. To the extent that it can be carried out, the true gauge of any project of this type is whether anticipated benefits will exceed the social and economic costs Involved in a given stream of time. If given projects are rationalized

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68 to be economically Justified, and funds are available, then it becomes a matter of proceeding on a priority basis. Since building too far in advance is economically wasteful and unsound from a financial point of view, expecially with borrowed foreign funds, then timing of projects is of primary urgency. Similarly, quality versus quantity is central to the experiment. While it may be desirous to construct a highway system of the highest standards found in the most developed countries, assuming that financing creates no special problems, it would be economically wasteful to construct paved highways over which the principal traffic for some years to come is largely a slow -moving type. In Nicaragua, a m^jor criticism of road and highway development is that effort on construction of penetration roads may be more beneficial than upgrading the existing system. The huge Zelaya Department comprises almost half of the country, but its virgin lands are largely uninhabited and are not traversed by any means of transportation. If a direct attack on the land tenure problem is to be avoided, then low-grade, penetrationtype roads may serve as the beginning of a colonizing effort to bring this vast area into economic production. One last point that deserves mention concerns the rates at which the services of the infra-structure should be sold. The general rule is that the user should pay

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69 the cost. In the case of electricity, it has been suggested that the large industrial consumers receive preferential treatment; however, if the remaining Central American countries suffice as any kind of guideline, then Industrial rates in Nicaragua fall in line. To the degree that any rate competition takes place among the Five, Nicaragua represents the median rate; i.e., its rates are competitive with two of the countries but significantly higher than those found in two other countries. Domestic users represent a separate market segment which bears the burden of higher rates. The Smpresa Naclonal de Luz y Fuerza, like the autonomous agency, Autorldad Portuarla de Corinto, has been able to generate some surplus funds in its operations. On the other hand, relatively little material has been developed on transportation users. It would be safe to say, nevertheless, that. road and highway users do not pay their fair share of the cost. The emphasis in this case h^s been on expansion. Nicaragua is faced with the basic question of how to allocate scarce capital between agriculture and Industry and an infra-structure to gain the maximum economic advantage. The present chapter has examined the us.e of external funds in terms of specific projects; the next chapter will examine some non-project loans in support of the development experiment.

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CHAPTER III LOANS TO FINANCIAL INSTITUTIONS The foregoing chapter made reference to loans s:nd financial assistance accorded directly to the Central Government of Nicaragua or to its various autonomous agencies for specific projects. The present chapter will continue the theme of loans to autonomous agencies of the government but which are not made for specific projects. The primordial institutions in this category are the financial ones the National Development Institute and the National Bank. The Central Bank's one major external borrowing for a specific program beseems cursory examination. Other institutions have utilized external funds to a limited extent but they have been eliminated from the current discussion either because of their relatively minor importance or because their activities are directed toward housing or similar activities which were excluded in the previous chapter. Because of its pivotal role as a relatively new institution, this financial intermediary, INFONAC, will occupy a large portion of this probe. Kany of the resources of INFONAC, since its inception in I954. 70

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71 have been devoted to industrial development and complementary projects to supply longer-term credits xv'hich generally have not been accessible in the past; while the National Bank has channeled its funds into favored agricultural prograns. Before exploring the loans to these institutions, a few comments will be made regarding financial intermediaries. Comments Financial intermediaries may be defined as institutions whose function is to participate as the middleman between the saver and the borrower. A major source of investment finance to the private sector has been through the development bank, which is referred to in the proximate paragraphs as INFONAC. This institution serves extensively as the middleman between larger international lending agencies and the small borrower as well as to channel domestic deposits of small savers into projects and programs akin to the development experiment. In a simple model where all savings are amassed in a savings institution and all investing is derived from borrowed funds of the same institution, then the accumulation of physical capital will be accompanied by an equal accumulation of debt. The institution may be in a position to assign priorities to potential investors

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72 ranked according to the social marginal productivity (SMP)^ of their respective projects. If this equality pervades at maximum deployment of attainable resources at an optimal level of savings, then the economy can be said to be progressing prodigiously in its development experiment. In a more general sense, the savings of a particular unit is its income minus its expenditures on current consumption. The unit will then acquire financial or physical assets for its savings. If the lending institution mobilizes capital outside of the domestic economy for local development projects, then the rest of the world is doing the saving. The domestic economy can tread in the steps of further growth without any reduction in consumption. If the local economy is able to cultivate a high savings rate— which funds are channeled into capital formation then, coupled with external financing, economic expansion can take place at a rate even faster than can be engendered from only domestically derived resources. Referred to in the antecedent chapter, a land tenure problem still exists in Nicaragua. Additionally, a x.ave of land speculation is in progress especially in the Distrito Nacional; the purchase of land is attractive to individuals seeking safe and relatively liquid assets. (E^glewoSfc^Iff^rT; ^I^n£iPl.es of Develoment i..n.o...o pp^ 284-5? 32o! ' ^^^^^^^^-Kall. Inc.. 1965).

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73 Buying lend Is a form of saving since the purchaser has abstained from consumption. The effect on the economy as a whole, nevertheless, pivots on what the seller of the land does with the receipts from the sale. If the seller applies the funds to capital formation, then the sale of land has the same effect as a unit which deposits savings in a financial institution and the latter lends them to investors. If the seller of land converts the receipts to consumption, then this merely constitutes a transfer. From general observation it appears that this takes place quite frequently, but even then the receipts are not lost to the economy since the ultimate recipient of these funds may elect to channel them into capital formation. This can take place in the' form of self -financing, direct transfer between surplus and deficit spending units, or indirectly through financial intermediaries. The economy suffers a direct loss, however, when the receipts from the sale of land are spent outside of the country. This is especially true since Nicaragua is highly dependent on industrially developed countries for its capital imports. In the absence of exchange controls, the country is unable to protect itself against such losses in foreign exchange. Such a loss must be compensated for through a surplus trade balance or capital transfers. To support the rate of development desired

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74 by the Government, It has had to rely on external financing for rapid completion of many of its infrastructure projects and at the sane time the private sector has been faced with a lack of credit facilities. An embryonic stock exchange was attempted in recent years but lacked the vitality to fujiction profitably. It was unable to mobilize the needed resources for investment purposes. Existing financial intermediaries have played a. relatively insignificant role in the development process until quite recently. Most firms have required a certain amount of foreign exchange for plant construction and this has been at times difficult to overcome, especially during the 1955-1960 phase when export earnings were low, coupled with the export of capital, which unequivocally reduced net international reserves until toward the end of the cycle. Through external borrowing, the National Development Institute became a source of garnering at least some of the foreign exchange requirements needed by the private sector. Also in enlistment during the sequel were the two major laws, catechized in Chapter I, which advanced guarantees to registered foreign capital for its retreat and repatriation of profits accruing to it. vniere the Government has a grip on all loanable funds, it can establish priorities over the composition of investment. Where the Government cannot exercise complete restraint, the problem of establishing priorities, such as

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75 applying the SMP criterion, becomes more difficult. The laws descanted in Chapter I connote a general approach to this matter by classifying eligible plants into three categories fundamental, necessary, and convenient further subdivided into new or established categories. The Central Bank, established in I96I. has more recently brandished some moderation through credit rationing. More directly, however, control is asserted through the foundational National Development Institute, created in and the oldest commercial bank, the National Bank estab. lished in 1912— both of which are instruments of the State. These agencies can allocate investment credits to preferred projects according to a loosely coordinated pattern of synchronized application of capital. On the other hand, development banks founded in other countries have been either a mixture of private and government o^-nership or strictly private. The latter is apparently preferred by many international lending agencies. So^^H^2^^''"^^^°''^' financing institutions, the World Bank Group in particular, have a st-ong Pfjf^erence for private development banks and other specialized credit institutions, vj-tly on such^Ins???.^?"' the policies and operations o? in?^uence"" ""^^^ divorced from political Mikesell also adverts to some of the problems involved with private institutions of this type. Because of 1, .ov:

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76 profitability and high risk of such operations, it nay be difficult to raise sufficient loan capital. Also, if the Central Bank does not assume the exchange risk, then the risk must be passed on the borrowers. The last point is that where lending operations must be accompanied by a great deal of technical assistance, then private institutions may require some form of government subsidy.^ The development bank should not become primarily dependent on external financing to sustain its operations. Initial external loans should serve to lorirae the pump of domestic savings and the latter should become the principal source of loanable funds. The next few pages will examine the origin, function, operations, and external financing of INFONAC and the role this institution, over a ten-year period, has played in the development experiment. INFONAC By Law Decree of Karch. 1953. the National Government established a promotional organ, the Institute de Fomento Nacional (INFONAC). as an autonomous entity of the State, to dedicate its services to the economic development of the Republic. The organisation actually began to function m January. 195^. m 1963 it opened a branch promotional office, headed by a North-American, in New York City.

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77 The fundamental objectives of the body may be summarized: "To Increase, diversify, and rationalize the national production in all its aspects."^ m its promotional efforts. INFCNAC aims its activities toward the following fields: 1. To serve as an instrument of the State in the execution of programs directed to the augmenting of national production; 2. To lend its technical assistance for better development of the branches of production; 3. To develop agricultural and cattle production, stimulate diversification and create new lines for export; ^. To encourage the establishment, development, and expansion of those industries and activities which utilize and add to the value of the natural resources and which lead to the economic well-being of the Nation;5. To stimulate capital formation by channeling private savings toward production ends; 6. To give aid to private initiative in activities Which contribute directly and indirectly to furnish work well-remunerated to x\Ucaraguans ; 4 ' .

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78 7. To promote the formation of firms necessary to the economic development of Nicaragua. Since I960, IMFONAC has undertaken to reach Mlcaraguan management with technical assistance by means of the Center of Industrial Technical Cooperation Omorni as CCTI). which was first established with USAID endorsement. Seminars are held on productivity matters and a technical library and an information service has emerged. In its role as a financial intermediary, INFONAC generally grants medium and long-term credits for the adqulsition of fixed assets of industrial and agricultural enterprises. The "Banking Department" of IMFOMAC is authorized by law to function in a wide range of financial activities such as: 1. To guarantee to other credit institutions authorized national or foreign loans to national enterprises; 2. To negotiate for and obtain loans from external sources ; 3. To participate in the ownership of enterprises estimated to be in the lnt(=«-rpc;-h n-r ^^^^^ * ^ xu uae in-cerest of economic development; ^. To buy stocks, bonds and other obligations; 5. To dlsco.ant notes and other mercantile activities;

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79 6. To open individual savings accounts and invest funds/ Financial resources of the institution are derived from paid-in capital by the Central Government, individual and firm savings, bonds, and, possibly most determinant, external sources. The Central Government agreed to subscribe to a total of C?^50,000,000 (cordobas)"^ over a ten-year period. INFONAC's financial statement at December 31. 1964, reveals that the full C$50,000,000 have been paid g in. Individual savings have risen rapidly over the period as Table 9 below highlights. Emission of a sizeable amount of bonds raised these obligations more than 2^ times in the 1962-1963 lapse. By the end of . 1964, the number of savings accounts had climbed to 23.743. having total deposits of CSl4,66l,00a Other financial obligations decreased by C|;950,000 with the refunding of three bond issues. The institute also enjoyed a loan from the Central Bank of Nicaragua which amounted to C$13,313,000 at the end of I963 but which was reduced by C$3,804,000 during 1964. Actually the proceeds 6^ ~ ' — Log. cit . ^r.r J^^^lJ^v^ the sign "C$" appears, it is intended to spect2 o??iM%'' national monetary unit of Nicaragua!"^ The official rate^of exchange at December 31, 1 964 was pegged at seven cordobas to one United States dollar! g p. 233!^''^^^^''^' ^"^""^ Central, Informe Anual. 1964 .

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80 TABLE 9 SAVINGS AND FINANCIAL OBLIGATIONS OF INFONAC. 1955-1963 (balances accumulative In cordobas) Year Savings Bonds Totals 1955 1956 1957 1958 1959 I960 1961 1962 1963 1,132,418 1,733,638 2,168,138 2,818,786 3,139,522 3,672.073 4,S04,330 6,249,887 10,556,000 300,000 2,700,000 4,150,000 4,150,000 4,850,000 5.790,000 13,866,000 1,132,418 1.733,638 2,468,138 5,518,786 7,822,073 7,289,522 9,645,330 12,039,887 24,416,474 Source: Nicaragua, Institute de Fonento Nacional, Impulsand o el desarrollo nacional— INFONA C lU anos. Suplemento de publicidad, 1963" of the Central Bank loan originated with the Export-Import Bank.^ Possibly the group, sine qua non. supplying resources to INFONAC has been in the exterior. As the ensuing table (Table 10) reveals, more than C$64,000,000 (approximately US$9, 173.587) have been advanced to the autonomous agency at one time or another during its stint of operation ending December 3I. 1964. Further inspection affirms that the four major lenders embrace two international institutions and one private commercial bank. The International Bank for Reconstruction and Development acceded two loans equal

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81 TABLE 10 EXTEMAL LOANS OF INFONAC THROUGH DECEMBER 31. 1Q64 ( in cordobas ) Source of Loan Amount of Loan ExportImport Bank IDB Bank of America IBRD Bentall Moller and Rot he Caterpillar Tyler 19,018,857 15,^25,000 1^,^56,000 13,399,750 968,179 957,702 179,263 sources: 1) Nicaragua. Institute de Fomento Naclonal. Impulsando el de5^ arrollo naciona l— -TMi^nMAP ' IQ^nos. aupiemento de Publicld ad. 1963-' 196^; pt^'sfr* Central. Informe A^ual. 3T~Banco Interamericano de Desarrollo. Activldade s por palses. I96l--1Q6^ . pp. Z+6-9. to C$13,399,750; the Interamerican Development Bank loaned a total Of C$15,425,000; the Bank of America N. T. & S. A. tendered loans aggregating CSl4. ^56. 000; and the Export -Import Bank extended credits amounting to C^19. 018, 857. These accommodations have been floated on varying terms according to the various programs in which INFONAC has been engaged. Since the balance of this section will be devoted to the use of funds, it will suffice to say that the terms on which external resources were' obtained have ranged from short to long-term.

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82 Comparlns the years I963 and 1964, It can be seen that external debt registers a net increase of over C$6 million. This came about in spite of a reduction in obligations of C$769,000 to the IBRD.^^ Comparing this with savings, which improved a little over C$U million during the same lapse of time, leads to the conclusion that external funds are being employed more than Just to 'prime the savings pump' but a fluidal stream to irrigate the private sector heavily depends on a steady flow from the financial well. This is probably due, in part, to the establishment and expansion of local industrial and agricultural enterprises which have had to import most of their capital equipment used in new or expansive undertakings. In some cases INFO^JAC has proved to be the most accessible source from which to obtain medium to long-term credits . By the end of I963. INFONAC had made 265 loans equal to C$87, 28/+, 000. By the end of December, I96i^, INFONAC had acceded in loans C|92./| million which was equivalent to 9.1 per cent of all resources of the financial sector. Of this last sum, C$15.6 million were loans with foreign banks, C,$33.2 million were obligations in national currency. c:.2.4 million were from miscellaneous sources, and (4^1,2 million were from capital sources. At the end of

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this time, the institute had invested C$17.6 million in participation with the private sector in industries and in programs of agricultural diversification. Throughout, the application of capital has been relatively homologous; between agriculture and Industry each sector annexes in the neighborhood of ^0 per cent of total investments plus another 10-12 per cent to Improve the cattle-raising 1 ? Industry. Over a decade, more than 4? per cent of the credits authorized went to agriculture, while the Industrial sector . snapped up almost l^l^ per cent. The remaining sum was voted to better cattle production. By the end of 196^, it became evident that nearly all of the short-term credits were apportioned to Industry while agriculture was favored with medium-term loans. Examining the quaternary 1961-196^]-, it becomes apparent that the magnitude of medium-term lending has refluxed. Greater concentration of long-term accounts is realized in the activities of INFONAC. The industrial sector has been Increasingly favored although the agricultural sector culls its conspicuous quota of long-term loans. ^ 4bld .. p. 37. 12 Nicaragua, Impulsando el desar rollo naclonal. 13 ~ ~~ — — =. Log. cit . 1^ Nicaragua, Banco Central, Informe Anual, 1964 . p. 38.

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84 As a financial Intermediary, INFONAC has made notable contributions to the development process. It has filled a gap In the financing of programs that have been deemed essential to the development experiment by releasing medium and long-term credits of domestic currency and foreign exchange. Operating as an agency of the Government, it has an advantage over private institutions in obtaining funds. INFONAC has employed external financing extensively in its endeavors. Additionally, through the support of the Agency for International Development, it has been able to convey technical assistance; technicians from several different fields are on the staff on a full-time or consulting basis. To some degree it has been able to mobilize underutilized or unused resources in the economy to channel them toward more utilitarian ends in accordance with a national scheme of priorities that is manifested primarily in the development laws described in Chapter I. On the other hand, many businesses prefer not to avail themselves to INFONAC 's resources, even though they may qualify for financial and technical assistance, simply because it is an arm of the Central Government. These entrepreneurs prefer to remain reasonably independent of governmental interference and have utilized commercial loan sources when attainable. Alternatively they have expanded through retained earnings of the business or have exchanged credit Instruments directly with surplus

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spending imits. Those in certain areas of agriculture, however, frequently have had less difficulty than industrial enterprises in obtaining accommodations where the National Bank of Nicaragua was a party to the transaction. Banks The voluminous source of agricultural credit has been the long-time established Banco Nacional de Nicaragua (BNN), OT-med by the Government of Nicaragua, vj-hich continues as a significant force impelling this sector of the economy. The following subsection will explore some of the activities of this institution and the external sources froDi. which it borrows to meet foreign exchange requirements. This section will conclude with brief mention of one major loan secured by the Central Bank. Banco Nacional de Nicaragua The National Bank of Nicaragua, established in 1912, has been the leading lending institution bolstering government policies and preferred projects. Prior to the creation of the Central Bank in I96I, this government-oxmed bank performed many of the central banking functions. Together with INFONAC, these two Institutions have supplied most of the credits required domestically by the private sector. The extension of ample agricultural credits through the Banco Nacional de Nicaragua (BNN) stimulated the boom

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86 during the quinquenium 1950-1955. Credits to the agricultural sector multiplied more than fourfold to C^^255 million over the period and accounted for close to 90 per cent of new credits to the private sector. Coupled with favorable world prices for the two leading exports coffee and cotton the resulting expansion of export production brought export earnings from approximately «;35 million in 1950 to over §80 million in 1955-^^ The great credit expansion of the epoch was partly offset through savings m the banking system. Although the capacity to import grew rapidly during the phase, export receipts climbed relatively faster. A large surplus trade balance was attained every year through 1955.'*^' Net international reserves Jumped from under million in I95O to around ^!;15 million in 1955.^"^ In 1956. with smaller crops accompanying an adverse season, the value of exports dropped by more than a fifth to $65 million. At the same tim.e, bank credit to the private sector rose by C$k2 million. Imports declined ^^Ibld. 17 Ibid ., p. 99 1 8 Ibid., p. 87

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87 relatively little as a result of the credit policy pursued and net foreign exchange reserves fell by roughly one-half. Even with the decline in cotton prices and the adverse effects on the domestic Industry beginning with the I956 season, the National Bank continued to make credits accessible to the cotton growers even though inany of the past loans were in arrears. Such a policy obstructed the smooth and effective operation of monetary policy and in spite of a restrictive credit policy followed after 1955, cotton growers continued to receive bank credit. To conform to this pattern of lending, the 3NN had to restrict loans to industry and commerce. This contributed to the llliquidity of the economy. Crop loans comprehended not only losses to Inefficient producers but also a substantial Investment in cleared and improved land. During this period of the latter 1950's, the Natior-al Bank accounted for approximately four-fifths of total bank lending, and, as Table 11 reveals, an excess amount of these loans were overdue. The category "extended" loans encapsulates negotiated short-term extensions. "Overdue" loans are mostly short-term ones past due about one year. The policy of the ENN was not generally one of taking legal action against past due accounts. Much of the credit contraction to the private sector took place in 1959, as a result, in part, of the liquidation of the "cotton pool" (which had absorbed C$70 million

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S8 TABLE 11 NATIONAL BANK OF NICARAGUA LOANS IN ARREARS, 1955-5? (millions of cordobas) Position at : Dec. 31 19^5 1956 1957 Loans in Arrears : Extended Overdue Total 1-^.2 15.9 30.1 44.3 23.2 67.5 32.4 62.4 94.8 Loans not in Arrears 2?3.9 270.6 164.7 Total Loans to Private Sector 304.0 338.1 259.5 Percentage ratio of loans in arrears to total 9.8 19.3 36.4 Source: International Bank for Reconstruction and Development, Dept. of Operations, The Cu rrent Economic Position and Prospects of Nicar a,Q:ua. 1957. (Restricted Report No. lv'H-66a), ~ January 28, 1958, p. 4. in the peak month of Kay, I958) and as a result, in part, of a substantial abatement in credit to cotton and coffee producers during the 1959-1960 season. The National Bank of Nicaragua h^d directed much of the credit to the agricultural producers on the basis of fixed sums per area planted up to a limit of 70 per cent of the appraised crop value. Although the upper limits had remained unchanged for ceveral ycarc, in the 1959-1960 season, the ceiling for

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89 cotton was moderated by 18 per cent; and, vrith adverse weather and smaller crops, credits flowing to both cotton and coffee producers were less than those of the I958-I959 season by approximately one-third. During the three seasons from 1957 to i960, crop loans to farmers from the ENN were suppressed by C$65 million from C$m-7 million. Accommodations to other areas of agricultural production realized a slight increase in activity, but clearly the diminution in credit to the private sector affected chiefly agriculture. Late in 1959, the National Government authorized the BNN to consolidate its loans into longer-term debts and to accomplish this the National Bank restricted credit availability to select borrowers for the I96O-I96I crops. At the end of March, I96O, total delinquent loans of the BNN was C-:?137 million, about 51 per cent of its loan portfolio. Agricultural loans reached (^^lOJ million of this amount. Also, the National Bank acquired about .^,4 million of an $8 million loan from the Export-Import Bank tendered in October, 1959, to liberalize medium-term loans for agricultural diversification. INFONAC accepted about §1.5 million for the same purposes with the privilege of drawing on an additional $1 million.

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90 By 1963, the bad debt position of the BOT had improved; the BN:I continued as the major lender among all commercial banks, administering 70 per cent of all loans. Short-term loans gained aroimd 7^ per cent with most fxinds ch^anneled to the agricultural sector. For the 1963-1964 season, around 75 per cent of the cotton crop was financed through short-term bank credit and roughly 85 per cent of this sum came from the National Bank of Nicaragua. In spite of plans to diversify the export sector of the economy, this credit policy of the BNN enslaved the two-crop economy. As will be seen in Chapter V, this program merely changed the emphasis from coffee to cotton production without altering, significantly, the structure of the agricultural sector. As the BNN reduced its bad debts (of Decree No. 4^0), it expanded its longer-term credits (over 18 months) tied to fixed agricultural investments, cattle-raising, and industry. Approximately 27i per cent of the longer -term loans went to industry during 1963.^^ Summing short and long-term credits for the year, 1963, the BNN accounted for nearly one-half of the loans to the manufacturing industry. Table 12 compares industrial loans, since the 1959 Industrial Development Law, among the BNN, INFONAC, and private commercial banks. Nicaragua, Banco Central, Informe Anual, I963.

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91 TABLE 12 NICAPAGUA: COMPOSITION OF LOANS TO INDUSTRY FROM THE BANKING SYSTEM & INFONAC. 1958-63 (per cent) Source of Funds 1958 1959 I960 I96I I962 I963 National Bank 36.93 3^.91 36.75 35.90 ^3.72 i^7.60 Commercial Banks 3^.57 3^.09 35.68 33.63 30. 77 31.28 INFONAC 28.50 31.00 27.57 3O.J47 25.51 21.12 TOTAL 100.00 100.00 100.00 100.00 100.00 100.00 Source: Nicaragua, Banco Naclonal, Prograraa de desarrollo Industrial y slstema cred lticia, 1955-1969 , 196^ p. 72. {Mimeo.K Until 1963, only the National Bank and the Development Institute made loans of 18 months to 20 years. Resources of the 3NN were enhanced during 1961^ due, in part, to the cultivation of external borrowings. Short-term loans grew about 20 per cent and nearly one-half of these were channeled into the industrial sector. The value of longer-term loans expanded by roughly 12 per cent, but the entire increase was absorbed by the agricultural sector. Of the total amount of agricultural loans 20 Nicaragua, Ba.nco Nacional, Prograroa de desarrol lo industrial y sistema crediticia, 19651969. 196^. p. 7^. ( Mimeoo } ' " ~~

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92 authorized for the 196^-65 season, approximately 73 per cent of these were used for cotton production, and coffee, in second place, received over 12 per cent of these. The lessons of the Eiid-1950's were quickly forgotten by the Government. Relatively greater effort was made toward agricultural diversification but with a comparatively small volume of bank credit. Directed by Article 63 of its Ley Organica , the BNN submitted a three-year program (to begin in I965) to the Consejo Dlrectivo del Banco Central for the development of a cattle industry^^ and in July, 196^, solicited a loan from the Interamerican Development Bank (IDE) for $9 mill i on. External debt of the Banco Nacional de Nicaragua is concentrated at the beginning of and the end of the I955 -196hperiod. In 1952 and 195^. it made use of nearly $2 million in external borrowings. Beginning In I955 (see Table 13), external borrowings dropped, in comparison to 195^. but climbed during the next three years. Although it did not draw directly on external resources, it did receive the benefit of an ^8 million loan between the 21 Nicaragua, Banco Central, Informe Anual, 1964. pp. 30-1. ^^Ibid., p. 32. 23 See. Nicaragua, Banco Nacional, "Sollcltud de credlto de US?,. 9, 000, 000 al Banco Interamerlcano de Desarrollo, Julio de 1964," Programa Nacional para el desar rollo de la Ganaderia. —

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93 Central Bank and the ExportImport Bank in the years I96O and 1961. As Table I3 reveals, drawings were renewed during 1963 and 196^. TABLE 13 EXTERNAL FUNDS DRAWN BY THE NATIONAL BANK OF NICARAGUA l955-6i^ Amount Drawn 1955 US$ 102,800 1956 523.^^00 mi 750.000 1959 i960 1961 1962 1963 1,300,000 196^ 3.871,000 Source: Nicaragua, Consejo Nacional de Economia, Oficina de Planif icacion, Estudio del comerclo exterior y de la balanza de pag os de Nicaragua, 1950-196^ . dlclembre. 1966. ' p. 328. One of the main sources of funds has been the Interamerican Development Bank. The IDB, between I96I and 196^^, granted loans aggregating $^,830,000 for agricultural uses, including a loan of §2,500,000 for the Rural Credit Program of the BNN. The latter is a 20-year loan contracted on June 14, 1962, to finance 62 per cent of a program of rural credit. 24 Banco Interamerlcano de Desarrollo, Tercer Info-r-me Anual, 1962 . p. 96.

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9^ In December, 196^, the IDS conceded two loans totaling $9*1 million to the 3NN, both for 15 years (one for $4.5 million at 4 per cent Interest and the other for $'^.6 million at 6 per cent), to develop the cattle Industry. These two loans supply about 46 per cent of the total financing needed for the cattle development program mentioned earlier. Throughout the period the BNN has been the principal credit force which has propelled cotton production and has perpetuated the twocrop export economy. Only In later years, together with the operations of INFONAC, has credit been channeled to the Industrial sector to form an Industrial base In accordance with the laws and plans of development. Most of the National Bank's extension of credit to Industry has been short-term loans, while those of INFONAC have been predominantly long-term. BNN's credit policy to the cotton growers during the 1950's was tantamount to subsidizing losses of the Industry. Acting in the dual role of commercial bank lender and central banker, the Bm was pulling toward opposite ends. With the formation of the Central Bank of Nicaragua in I96I, the National Bank of Nicaragua was relieved of its central banking functions .

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95 Banco Central de Nicaragua . In accordance with Legislative Decree No. 525 of August 25, I960, the Central Bank of Nicaragua was created to begin operations on January 1, I96I. The Bank Immediately assumed the responcibillty of maintaining monetary stability and control of commercial bank credit. The exchange system was unified on March 1, I963. In July, 196^, Nicaragua became the twentyfifth country to subscribe to the International Monetary Fund's Article VIII, making the cordoba freely 26 convertible for current transactions. The Central Bank has supported the credit operations of both the National Bank of Nicaragua and the National Development Institute through its rediscount activities and by making credit directly available to them for development programs. The Central Bank obtained an $8 million loan from the ExportImport Bank (disbursed in two eqixal installments in I96O and I96I) for the improvement and diversification of the agricultural sector. ^"^ As mentioned earlier in the chapter, these funds were channeled through the BNN and INFONAC. 25 -^Nicaragua, Consejo Naclonal de Economla, Oficlna de Planlf icacion, Analisis del desarrollo economlco y social de Nicaragua, 1950-1962 (version prellminar). .^gostn. 1 Qh/^. ^ 26 "Nicaragua Another Central American Success Story," First National City Bank Magazine (July, I966), p. 8. 27 Nicaragua, Consejo Naclonal de Economla, Oficlna de Planificacion, Sstudlo del comercio exterior y de la balanza de pagoF de Nicarag ua. 1950-1^6^. dlclembrfi. 1964, p. 330.

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Assuming that all the borrowed proceeds of the $8 million loan ended up in the destined ends, the loan may still not have achieved the full Impact of its purpose. The loan might have released other funds which could have been destined toward a diversification program. These funds became available for favorite projects; viz., the expansion of the coffee and cotton production. Rather than achieve diversification, the loan may have only aided the further dependence on a two-crop export economy, whose economic development continues subject to the whims of nature and volatile international prices. Analysis Excessive amounts loaned to cotton growers tend to develop an extensive framevfork dependent upon this one crop. For example, small insecticide and fertilizer industries may spring up in response to the demands, private companies will form to Invest considerably in duster planes to cover the crops with Insecticides, distributors will seek foreign supplier credits to extend seasonal domestic credits to growers for the purchase of Imported equipment, cotton gins mushroom to compete for the business of cotton processing, cotton exporters, brokers, and transporters facilitate the international movements of the products, and a corps of workers come to depend on cotton. The entire structure heavily depends on short-term credits

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97 Issued on the collateral of an anticipated harvest. Barring adverse effects from any unexpected change in vjorld prices for cotton, ineffective insecticides or late rains can drastically reduce the anticipated crop to result in extensive credit losses. The better-financed and the foreign suppliers will survive the crisis, but wide-spread bankruptcies which have a chain effect, since each of the above lives from the one crop will tend to paralyze a large sector of the economy. With cotton production alone accounting for close to one-fifth of the Gross Domestic Product, a bad crop, in the absence of additional international assistance, can set back the development experiment noticeably. One successful cotton grower estimates that, in the productive Chinandega area, at today's costs and world prices, the break-even point per manazana is close to 35 28 quintales. Assuming an average production of 38 quintales per manazana, the margin of safety appears relatively small. It seems especially small when a significant portion of the development effort hinges on earning, sufficient foreign exchange to sustain the level of capital Imports needed to bolster a growing private and public sector. 28^ Conversation with Jaime Flores Lovo at his home in Managua, Nicaragua on March 6, 19 6?.

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Nicaragua has experienced a rather acceptable rate of growth that has been largely impulsed by agricultural exports. This was largely true during the early 1950's when high production coupled with attractive world prices for cotton and coffee filled the foreign exchange coffers. Growth, for the entire period 1950-196^1-, of the Gross Domestic Product averaged 6.1 per cent annually, vxhile the population grew at an average annual rate of 3.0 per cent. Next to Venezuela, this was the highest growth rate experienced in Latin America. During I96I-I965, expansion took place at a rate of 8 per cent a year largely based on cotton and coffee exports. During the same period, total exports grew at an annual average rate of I5 per cent; per capita income increased by some ^.7 per cent a year, "estimated by the Inter-American Committee for the Alliance for Progress (CIAP) as the highest per income growth rate in Latin America for that period. "-^^ In spite of the high growth rate xvhich can be attributed to the expansion of exports until the 1955-1956 season and the high growth rate experienced in the 1960's through the 196^1-1965 season, this did not prevent 29 "Definicion y naturaleza del desarrollo economico, " Desarrollo Economico . Ill (Nos. 3 y 4, I966), 35. 30 "Nicaragua Another Central American Success Story," op. cit., p. 1.

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99 Nicaragua from plxir.slng Into a rather deep recession during the latter half of the 1950' s. Had it not been for the heavy import of foreign capital, the economic recession might have been more severe and even possibly longer-lasting. The policies followed since I955 have not been ones which necessarily tend to iron out these fluctuations. The long-term prospects for cotton and coffee appear less than favorable and a financial policy contrived to stimulate the production of these two crops is inconsistent vjith development aims. The criticism is not aimed at the promotion of a more viable agricultural sector nor does it suggest that more emphasis should be placed on developing an industrial sector. During the I960's. at least, there appears to be some equilibrium of government policy between these two sectors of the economy. The exaggeration, however, is on the excessive amount of credit that has been apportioned to cotton, especially during a recessive period. The experience of this epoch does not Justify the credit practices of the National Bank in the 1960's. In fact, it appears to be contrary to the spirit of diversification. Toward the end of this period, after mid-196^, there seems to be some change in this trend. According to the activities of the BNN and INFONAC, more funds were being obtained for agricultural diversification. The emphasis of the 1965-1969 quinquennial, utilizing funds received

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100 during the latter part of 1964, will be to create a national cattle industry large enough to sustain a high volune of exports . Kuch of the national effort must still be directed toward developing the agricultural sector for a number of reasons. Nicaragua has been experiencing a relatively high population growth rate and it will require an expanding agricultural sector to feed this rapid increase in births. Some food products are Imported but the industrial sector is still in its infancy and lacks the dynamism to provide the necessary foreign exchange. The case for agricultural diversification is one of numbers. If the base is four products and one of the four falls, then the leakage is twenty-five per cent. If the base is twenty-five, then a loss of one is only a four per cent deficit. It would take a reversal of six products to even approach the twenty-five per cent impairment encountered in the first example. The aim, then, is to broaden the agricultural base to lessen vulnerability of the economy and to produce sufficiently for domestic needs. Another reason is that with three million acres of land potentially arable (roughly one-third of this area, Including grazing lands, are currently under cultivation), Nicaragua may find a lucrative market for many agricultural exports within the Central American Common Market.

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Some of the factors, then, which nay have adverselyaffected agricultural diversification, may have their origin in urban activities and relate ins.lnly to prices (high prices for manufactured consumer goods), the distribution of agricultural products (due to an inadequately developed transportation system), and lack of incentives to invest in diversified agricultural activities (inherent in the credit system). This last chapter and especially the last section has served as an Introduction to the next two chapters. The ensuing chapter will continue on the theme of private investment (largely as it has occurred in the industrial sector) but In terms of direct investment rather than indirectly through government entities. Chapter V examines the balance of trade and the purchasing power of exports to sustain the development effort. By the same token some of the evidence presented in the next two chapters will support the material of Chapters II and III.

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CHAPTER IV FLOW OF PRIVATE FOREIGN INVESTMENT Chapter I stated that the flow of capital will respond to the forces that influence the productivity of capital within the country. The chapter also pointed out how the Nlcaraguan Government has pronoted private development capital through incentive legislation, by becoming a member of the Central American Common Market, and in maintaining political stability. Chapter II delved into some of the external economies of private investment achieved through extensive public investment in social-overhead-capital. Discussion in the previous chapter included an examination of the credit policies over the period and the effect on economic development. The present chapter will analyze the movement of private foreign capital, most of which is destined to the industrial sector. The chapter will begin by reviewing some of the factors which have influenced private investment and later will attempt to analyze the effect on the domestic economy. The last section deals with some general problems of foreign Investment which have confronted the Nlcaraguan economy. Because of lack of 102

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103 reliable data, in addition to the late enactment of the 1958 Development I^.w, there is a dearth of figures in the following pages. Factors Affecting Private Investment The list of factors which compel the import of foreign private investment could be quite long, but it is not the purpose of this subdivision to simply produce a chronicle. Basically, it will review the factors already postulated in the preceding chapters and will add a few others which deserve mention. There is no order of magnitude and at times one or several of these factors may be of greater hegemony to an investment decision than others. "... the most important factor in the economic development of I^tin Ar^erican countries has been the economic policy the country has followed. The first few chapters have already alluded to some of these factors. On the subject of private foreign capital, another author writes, "the most important single factor is the discovery, maintenance, or expansion of a profitable 1 Inter-American Council for Commerce and P-^oductlon "Economic Development of Latin America," How L ow Income ' Countries Can Advance Their Ovjn Grovjth (New vo-rki " Committee for Economic Development, September I966 ) ,

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10^ 2 market." Within its plan of industrial development, Nicaragua has essayed to legislate a profitable market through the Introduction of investment and business incentive laws. At the same time, it has been a party to investment guarantees and has m.ade a shift to enlarge its market area through economic Integration with the other four Central American countries. Through its incentive laws and the official posture of INFONAC and other governmental agencies, the official (as well as unofficial) attitude toward foreign capital and toward the intromission of new foreign firms into the country has been hospitable. It is generally acquiesced that the governm.ent ' s role should encompass investment in the infra-structure. It is also generally conceded that economic development is not conceivable without continued investment for the expansion and improvement of the infra-structure. Chapter II points out that an extensive infra-structure will not necessarily assure more rapid growth but that it is necessary to, although not solely the cause of, economic progress. Its role relative to private capital is the external economies an adequate infra-structure can impart to 2 Sheldon L. Schreiberg, "The United States Private Investor and the Central American Common Market," U.S. congress, Joint Economic Committee. Subcommittee on InterAmerican Economic Relationships, Hearings. L atin American peveloipment and Weste r n Hemisphere Trade . A gt.h Cnr^r, i ob sess., Sept. b-10, 1965, p. 28?" — ^"^-S., isz

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105 private capital. Ceteris paribus, it can be expected that private foreign capital will be more aptto nove into those areas where an infra-structure already exists. This is not always true, however, since situations to the contrary tend to disprove this. Again, it can be said that profits are the prime mover. Chapter III specifies that prior to the creation of INPCMAC, only limited long-term credit facilities were accessible to private industry in the domestic market. In more recent years, this financial intermediary has m^de longer-terin credit available to the industrial sector. The BNN's efforts have been largely in the area of short -term credits. Exchange restrictions have been eliminated (although prior deposits on imports were not lifted until mid-1965), few exports are taxed and only relatively lightly, and inflation has been kept under control which keeps costs of production, and therefore the price of exports, dovm. Starting with 1955 as the base year, a consumer price index actually declined more than six points by 1964.^ Another source, using I958 as the base year, reports a cost of living rise of three percentage points by the end 3 ' ~ Organizaclon de Sstados Americanos, Indices de T:rellll)^'^ consumidor (Washington: Union Pan amerlcana .

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106 of 1964.^ The above factors have contributed to an effective export policy; the importance of exports to the economic development process cannot be denied. There also appears to be a tendency toward avouching some balance between agricultural and industrial development, although some of the shortcomings were pointed out in the preceding chapter. Available statistical data demonstrate that countries with the greatest monetary stability are those which have experienced a higher rate of economic growth. During the interlude open to inquiry, 1955-196^1., Nicaragua experienced relatively little inflation as measured by the International Monetary Fund. Statistics also reveal that Nicaragua has experienced one of the highest growth rates in all of Latin America. Essential to easier long-term financing, monetary stability provides greater incentive to foreign investors. On the other hand, a high rate of inflation tends to hasten capital flights abroad, increase the demand for Imports, and distort the price structure. Investment rushes into non-productive ventures when such conditions materialize. Inflation raises costs of production, the price of exports, and exports tend to fall. To complement monetary stability, fiscal policy is extremely important for its short-term and long-term Stati!tfc: f";v^?r^Mrng^.T^""^"international Financial

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10? economic effects. Nicaragua has a moderately progressive income tax, but the country still substantially leans on indirect taxes for the p-lnclpal portion of its revenue. Because of inefficiency in collection and ease of evasion, direct taxes do not play the role they can. In more recent years the Government has followed the policy of increasing deficit financing. A policy of deficit financing that may be advisable under certain circumstances for the government of a developed country has little or no value for xmderdeveloped countries. On the contrary, it can cause serious problems. This is because deficits are not covered by private savings but generally by central bank currency issues, which tend to increase prices as a result of the economic structure and the low elasticity in the supply of goods and services. 3 The following statement fairly well summarizes the intent of this subdivision: Several conditions are necessary for a satisfactory development of free enterprise. In the first place, the price mechanism must operate freely since its function is to guide production and investments in accordance with consumer demand, to compensate enterprise according to its productivity, to distribute commodities produced in accordance with customer preferences within a given distribution of national income. Secondly, there must be monetary stability in order to avoid distortions of the economy which would lead to control on prices, on foreign exchange, or on foreign trade. Thirdly, freedom is needed in the field of international economic relations. Fourthly, public sector operations should be demarcated to Insure the aforementioned conditions and to realize activities in the area of social and economic Infrastructure which are unattractive to private capital. While not directly productive, investment in infrastructure Inter-American Council for Commerce and Production 0£. £lt., p. 31, •

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108 Is nontheless essential for development since it creates external economies and adds social capital to the country's vjealth. In principle, and except . for very special cases, government should not engage in economic activities in which the private sector is willing to act.° Nicaragua has essentially completed the above requirements in its efforts to attract private capital. It is now appropriate to scan vihat has transpired in the way of private capital Investment. Inflow of Private Foreign Capital Lack of data on the flov; of private foreign funds subtracts from the meaningfulness of the inquiry; however, scattered information gives some evidence of the trend over the ten-year period. Some surveys have been conducted with a number of the firms classified under the 1958 Law on the Stimulation and Development of Capital, but here again the information does not Include all of the classified firms. It also excludes foreign Investment in agricultural enterprises but this probably Is traceable to a relatively small portion of the total in recent years. For this reason the query will center on foreign investments in the Industrial sector with especial emphasis on the epoch sequacious to the passage of the I958 law. Ibid . . p. 32.

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109 Due to insufficient data prior to 1955, very little can be said about this period. As a general statement, however. Indications are that even during the recessive I956-I96O quinquennial, average annual foreign investment surpassed the earlier 1950-1955 Interval. Possibly foreign Investments began to acquire greater Importance after the 1955 Iaw on Foreign Investments. At least, according to Table 1^, investments reached a peak of C$19.9 million in 1957 (in constant cordobas of I958). After the passage of the 1958 Law on Protection and Stimulation of Industrial Development, it was anticipated that a greater inflow of foreign private capital would take place almost immediately. The material in Chapter I denoted some of the pitfalls in this logic and the data in Table Ik bear out this argument. In spite of the passage of this law, which was promulgated during the early part of 1953, foreign Investment actually minified in that year. The proximate year, 1959, documented a further decline in this trend, and I96O registered foreign Investments just slightly under the amount inscribed for 1958. The 1957-1958 level was not actually exceeded until 1961. In part, this trend can be ascribed to political tensions which created an unfavorable investment climate. Another factor which may infer the cause of waning Investment of the latter 1950's and the saltatory movement

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TABLE 14 NICARAGUA: FOREIGN INVESTMENTS, 1955-1964 (millions of cordobas of 1958) Year Amount 1958 1959 . . . . 15.1 Averages 19551960Source : Nicaragua, Consejo Nacional de Economia, Oficina de Planif icacion, Estudio del comercio exterior y de la balanza de pathos de Nicaragua, 1950-1964, diciembre. 1966, D. 40. of foreign capital in I96I may relate to the common market strategem. The General Treaty on Central American Economic Integration (GTEI) as well as the Agreement Establishing the Central American Bank for Economic Integration (CABEI) was signed in Managua in December, I96O, by the Central American countries (excepting Costa Rica) to provide for the establishment of a Central American Common Market (CACM) within five years of the ratification of the GTEI, treatment of goods equal with domestic products, uniform

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Ill Investment incentive lavjs, and the CABEI as the regional Q financing agency. Undoubtedly, there was some postponement of business investment decisions until the GTEI was accepted by the participating countries and with further study of the industrial projects and classifications. In 1961, Nicaragua, along with three other countries, ratified the GTEI. The CABEI initiated its activities in September, 196I, with starting capital of $l6 million. A month later the Central American Clearing House began its struggle to facilitate currency transactions among the 9 participating countries.^ Foreign investments in Nicaragua augmented approximately 2| times in I96I over the previous year. The years I962 and I963 saw less activity but another wave of investment rolled in during 196^. By i960, political-social stability was established and negotiations for a Central American Common Market were evolving. In the same period, foreign companies in Cuba were being expropriated, and many reflected on expanding their operations in Central America. The biggest investment attracted, which accounts for the transmogrification in foreign investment between I96O and I96I, is the Esso Refinery just outside of Managua. Having a capacity of g Comite para el Desarrollo Economic©, Desarrollo e conomico de Gentroamerica (Nueva York: CDE, noviembre. 196^;, p. 119. Ibid ., p. 120.

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112 TABLE 15 NICARAGUA: FOURTES?: FIRMS IN OPERATION OR IN ORGANIZATION V/ITH FOREIGN CAPITAL SKELTERED BY INDUSTRIAL INCENTIVE L\yS, 196^^ (millions of U.S. dollars) Name of Firm Line of Business AmountSource Esso Standard Oil petroleum refinery 8.0 U.S. Nicaraguan Long Leaf -1-. J i» "1 Pine Lumber Co. naval stores ^.3 U.S./Nic. GEMNA flour mill ^.1 Can./Nic. Aceites y Grasas vegetable oils k.O Sal./Nic. Nestle milk derivatives 3.5 U.S./C.A. Cafe Soluble instant coffee 2.5 U.S./Nic. METASA mtl. structures, etc . 2.3 C.A ./Nic. Edmundo Tefel y Westinghouse refrig., air cond. 2.0 U.S./Nic. h;.sa agricultural tools 0.6 Ger ./C.A . Kativo de Nicaragua paints, plastics 0.6 C.A. /Nic. Encases de Hojalata containers 0.5 U.S ./Nic. Textiles Largaespada cotton textiles 0.3 U.S./Nic. A vena 3 minutos oat meal 0.2 U.S./Nic. Acumuladores de Centreamerica batteries 0.1 C.A. /Nic. Sources: 1) Nicaragua , A reference study by Industrial Development /ianufacturers Record (Atlanta, Ga.: Convj-ay Research, Inc., February, 196^-), p. 3O1 2) Nicaragua, Institute de Fomento Naclonal, Compendio actlvidades de interes desarrolladas durante la semana comprendida de mayo 31 al 5 de .1unlo . I. No. 3? rlc, junio. 19t^), pp. 2-3 (mimeo.); 3) Direct investigation.

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113 5,000 barrels dally, this ,^8 million plant (all of it U.S. capital) receives crude Venezuelan oil discharged at sea into a 2j-2iile undervjater pipeline flowing into storage tanks and then to Kanagua via a 35-i^ile pipeline. "The refinery is described as an integrated hydroskimming unit . . . ."^^ Its output is mainly import substitutive products such as liquid petroleum gas , high-grade and regular gasoline, turbofuel, kerosene, diesel fuel, and Bunker C heavy fuel oil. Table 15 on the preceding page tabulates some of the larger firms v;hich characterize either exclusively foreign capital or Joint ventures with Nlcaraguan capital. The sample of fourteen firms all enjoy or have applied for benefits under the shelter of the incentive laws, (See also Table 3 , ) The next section of this chapter will explore in further detail some of these firms and the presumed effect they have on the economy. Some mention has already been made of the im.port substitution effects of the .^8 million Esso Standard Oil plant, which has comprehended the largest single foreign investment of the Interlude, X 0 Nicaragua . A reference study by Industrial Development Manufacturers Record (Atlanta, Ga,: Conway Research Inc, February, 196k), x). 30. '

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Ilk Effect on the Hconomy According to the incentive laws outlined in Chapter I, the 1955 Law of Foreign Investments was legislated to stimulate the entry of foreign capital to secure a superior grade of economic aid. The 1958 Law of Protection and Stimulation of Industrial Development sets forth the qualities it expects industrial investment to exude to the economy. Although stress Is universally on the foreign exchange impact, the law is also leveled at those industries which "increase the level of employment in the Republic, providing work well-remunerated to a considerable 11. number oi persons, in a permanent manner . , . A labor-intensive firm which could not othervj'ise qualify should reap preference over a capital-intensive operation according to one interpretation of the laxv. Industries employing labor-intensive technology enlist more labor per unit of product than do capital-intensive ' industries. In Nicaragua wages are relatively low (see Table 16), while capital is relatively scarce and expensive. It has already been recorded that most of the capital equipment must be Imported. This is a case where a lower unit cost should be achieved by applying capital 11.-. Nicaragua, Ley de Frotecclon y Estlmulo al Desarrollo industr-ial . 20 de m.arzo, 195^, Art. 6 (6). . [.Trans— lation by writer^

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TABLE 16 NIGAPAGUA: V.'AGE RATES OF VARIOUS GROUPS, 1964 (U.S. dollars) Occupation V/ages Administrative Personnel: Monthly Wages : Accountant 150.00 to 250.00 Assistant bookkeeper 100.00 to 150.00 Secretary 80 on 150.00 General : Chauffeur 1 .00 to 3.00 Messenger i Of* 1 .25 to 1 .90 Painter 2.00 to 3 . '^0 Plumber 2.75 to 5.00 Mason 3.00 to 4.25 Carpenter 3.00 to Electrician 3.00 to 6.50 Mechanic 3.50 to 6.50 Industrial V/orkers: Supervisor 3.80 to -^.70 Semi-skilled worker 2.00 to 3«25 Unskilled x^orker 1.20 to 2.00 Field Laborers: Overseer 1.60 to 2.10 Worker 1.^5 to 1.75 Source: Direct investigation.

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116 relatively thin to improve labor efficiency to attain a higher level of productivity. To the extent that incentive legislation is operative, it is expected that the economy will be basically moulded by industries using a high concentration of labor relative to capital. Unfortunately, virtually no data are available to substantiate empirically the trend in industrial development taking either 1955 or 1958 as a starting date. From general observation, however, it appears that the trend is toward a higher capital/labor ratio, especially among the newer firms which are in part or wholly foreign-financed and which have imported and applied advanced technology to their operations. The criterion is, of course, which method will yield the lowest per unit cost? It is not always an either-or proposition but determining which combination of labor and capital for a particular industry under specific conditions will sire the desired response. Assuming that this observation is reasonably accurate, then greater applications of capital will require a higher level of technical skills and training. With over half the population illiterate and only a small approachable force of skilled workers, a widening disparity between trained workers and those unable to respond to training will continue to isolate a large section of the population from the money economy. However, with a dearth of unemployment figures coupled with the further inextricability

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117 of Judging the height of under-employment , it is burdensome to authenticate this premise with adequate data. Although worker productivity appears to be extremely low, vjages still respond to free market forces. Labor unions are weak and the Central Government has only since 1963 endorsed a national minimum wage, which varies with geographical areas. Exporting industries and those which compete with imports from industrially developed countries ostensibly find they can safeguard their competitive position by a higher capital/labor ratio. Under the priority system formulated by the 1958 Law, an industry which can earn foreigh exchange through new or expanded exports or save foreign exchange through import substitution v;ill receive the favored treatment. It is the application of capital-intensive technology rather than a significant contribution on the level of employment which qualifies industry. Although unemployment figures are not impending, some conclusions can be presupposed from Table 1? on the following page which exemplifies the changing employment structure. The agricultural sector encapsulates a systaltic proportion of the population. On the other hand, it may be expected that as the industrial sector floresces it will be engulfing a superior share of the population. In actual numbers this has been true but percentagewise practically no change is logged between 1955 and 196-!+.

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119 As a per cent of Gross Domestic Product (GDx'^), Irduntrio.! manufacturing has grown from attributing a scant eleven 1? per cent in 1955 to GDP to in the neighborhood of four1 3 teen per cent in 1964. The table communicates the structural change in employment in which "services" has absorbed a mounting per cent of the labor force. The Table also divulges one other interesting feature, "Unspecified Activities" encompass only a very small fraction of the total number economically active but if something can be read into the figures, it may be indicative of the tendency of unemployment. This category in all likelihood embodies many of the agricultural workers who 12 Nicaragua, Consejo Nacional de Economia, Oficina de Planificacion, Plan Nacional de desarrollo economico y social de Nicaragua. 1965-1969 . Pte. I. febrero. pp. 19-19A. 13 Nicaragua, Banco Central, Informe Anual. 1965. p. 89. Ik This is a natural tendency that as an economy reaches a higher level of development tertiary activities will expand. Going back to 1950, data reveal that "services" have been absorbing an increasing percentage of the economically active population. Government activities have exhibited a rapid growth in recent years. Tertiary activities contributed 39.6 per cent to Gross Domestic Product (GDP) in 1950 and ^5.6 per cent in 1 9 64. In both 1963 and 1964, central and municipal government activities accounted lor 5.3 per cent (in each year) of GDP. (Nicaragua. Banco Central, Informe Anual. 1964 . pp. 68, 7I, 124-5.) By I965 the Central Government alone was employing 21,462 persons.' (Nicaragua, Banco Central, Informe Anual. I965 . p. 203.) This would encompass roughly one-l'ourth of all those working in tertiary industries.

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120 have migrated to the city in search of opportunities. These are generally imskilled and uneducated workers. In 1963 f about 0.6 per cent of these laborers have reached a secondary level of education and 70.5 per cent have received no schooling whatsoever. Upon arrival to the city, these individuals generally fill the lines of the unemployed or engage in activities of low productivity. With the agricultural sector recruiting an ebbing percentage of the economically active population and with other employment usually necessitating a level of training beyond the reach of these persons, it is calculated that the unemployment trend may be upward although the precise level is not known. Where industries have sprung up to utilize locally grovm agricultural yields, they have tended to perpetuate the traditional two-crop economy. The growth of a textile industry which fabricates basically for the local market has been able to absorb a portion of the large quantities of cotton grovm in the region. By definition, this industry comes under the shelter of the 1958 investment incentive law since it transforms domestically available raw materials into finished goods. To a limited extent, the industry may also be import-substitutlve. Another Industry which also transforms part of a domestic agricultural crop as well as to contributes to the level of foreign exchange through a new-product export

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121 is the i960 formation of Cafe Soluble. Located Just outside of Managua, this $2.5 million plant represents joint United States-Nicaraguan capital. Additionally, it employs slightly under 200 individuals, 99 per cent of whom are Nicaraguan. Its output is marketed under the label MJB Instant Coffee in the San Francisco (California) area. Kuch of the emphasis, however, has been placed on the foreign exchange impact. Investment has spread horizontally to pervade in simple import substitution industries or to simply engender a new consumer article for export. The largest single investment made by foreign capital has. been the Esso Refinery which transforms imported petroleum into five combustibles destined to local consumption. The extent of import substitution is limited to the value of local labor added to the final product. The effect on the economy of this plant, nevertheless, may be somewhat less than what first appears , The extent of foreign exchange savings is limited to the value of labor apportioned to generate the final product; but since the amount of capital deployed per unit of labor is relatively high, then the quantity of workers used is considerably less than that which would be employed by a labor-intensive industry. Protected by tariffs, this monopoly can charge prices equivalent to those operative before the construction of the plant. Profits accruing to the undertaking due to tariffs and reduced local taxes

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122 amount to utile dulci. Under the terms of the law, these profits can be repatriated along with the value of the original investment. The repercussions, then, are no lower prices to the consumer and the economy benefits only to the extent of local labor applied. On the other hand, an advertisement in an INFONAC publication reports that "in the opinion of many economists, the [jrefineryj has been a decisive contribution for the attraction of foreign capital to Nicaragua Working twenty-four hours a day, the refinery can convert 231,000 gallons of ravr material. The size of the operation has been planned to not only blanket the domestic market but also to process for the Central American region as well. For Nicaragua, however, it has been most interested in the short-run result of Increasing its dollar holdings brought about by the inflow of this sizeable investment. Assuming no leakage from some other source, if efficiently administered, this proliferation of foreign exchange can be rather beneficial to the development experiment. If wastefully expended, the country will have difficulty in meeting future foreign exchange drains as profits are withdrawn from the Republic. 15 T advertisement appearing in: Nicaragua, Instituto de Pomento Nacional, Impulsando el desarrollo naclonal— -INFONAC 10 anos . Suplemento de iDublicidad, 'isSj, jTransiatlon by writer H

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123 The development experiment has been characterized by the formation of industries which have made simple substitutions of domestically produced goods for imported ones. Not all industries have been formed at this same level of endeavor but, generally, the statistics tend to disclose that vertical development is lacking. Comparing imports with total consumption, this ratio rose above forty per cent by the end of 196^. Also, in comparing imports with the domestic value of production, it can be seen that this ratio has been rising and exceeds twenty per cent by the end of 196^1-. This tendency is accented with the continuing establishment of simple processes and the parallel lack of intermediate goods creation. Problems of Foreign Investment The above reflection leads us back to the question of Just v/hat motivates foreign capital to invest in a country. If legislation alone will do the trick, then a flood of foreign capital should 'have inundated the economy after the passage of the I955 law assuring the rights of foreign capital and the 1958 decree which proclaims special tax benefits for classified firms. This has not turned out to be the case. Although all of the external economies thus far taken stock of may have ijicaragua, Banco Central, Informe Anual. I965.

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contributed to the development nisus, these conditions alone are not sufficient cause to attract foreign investment. The pivotal factor is vjhether a climate to earn an adequate return on investment exists. It has not been possible to legislate or command into existence a profitable market on the basis of decrees alone. The first subdivision of this chapter has scrutinized some of the factors which affect business decisions. The theme throughout has been that incentive legislation has not played the pivotal role for which it is sometimes accredited. On the contrary, it is easier to accept the thought that where these special concessions did not play a part in enticing marginal firms into operation, it merely provided windfall benefits to those who vfould have made the same business decision in the absence of those incentives. However, in order to maintain the momentum achieved toward the end of this period (196^)-), it will be necessary to encourage investment at a level higher than just simple mixing processes or simple substitution of consumer goods. The problem, then, is to better define policies and goals of the administration to induce the desired capital formation. Another problem deals with the partnerships between foreign and domestic capital. Ideally this would encompass an equally contributing partnership between foreign and local capital— the foreign capital providing the foreign

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125 exchange requirements and technology needed for the establishment of a firm, while the domestic partner would supply domestic credit needs and knowledge of the local market. Some businessmen have admitted that such a relationship has, at times, worked against the local partner while the foreign contributor reaped sizeable gains from the venture. This is due to the unequal relationship of the financial resources of the partners, technology applicable to more capital intensive industries, and superior entrepreneurship on the part of the foreign partner. A hypothetical case would perhaps follow along these lines. Suppose that a Joint business decision between a foreign and a domestic investor is arranged to construct a firm to manufacture a new domestic product. Since no local experience is available, the foreign partner (who has had years of experience churning out the same or similar goods in his own country) imports the technology and managerial skill to operate a relatively small plant. The local partner contributes an equal amount of capital and opens channels necessary for the establishment of the firm. After an interval of activity, the firm's foreign management reports that to remain competitive and to continue profitable operations it will have to take advantage of new achievable technology. This results in new capital equipment imports which must be financed through increased

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paid-in capital as the production run since inception has been too short to generate sufficient earnings for the improvement , The local partner, at this point, exhausts his resources while the larger and better-financed foreign partner can make the added investment with ease. During the second interlude of endeavor, earnings are allowed to fall and the foreign partner again says that to keep the business operating additional capital must be put into the business. This time, however, the local partner is unable to pour new money into the venture. The firm's operation is permitted to deteriorate toward bankruptcy and the local partner is pressured into accepting a depreciated price for his interest. De Jure ownership then falls entirely to the foreign partner at the partial loss of his local counterpart. It might be argued, however, that once the firm is bankrupt local interests could mobilize sufficient funds to take over the operation of the firm. Apparently production skill gained is usually too limited to operate the firm profitably over a long haul. These obstacles can be overcome by hiring foreign labor skilled in this particular line of production, but it ,is suspected that rather high salaries (in relation to the size of the firm) would be required to command the proper movement of skilled management. Too, where the industry may consist of more

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127 than one firm, a foreign plant may be set up In the country and tend to dominate the market. The problem would essentially be the same as in the above example. It should be added that this practice has not been widespread, but, reportedly, cases of this kind exist throughout the Central American region. Some local businessmen pessimistically forecast the extended practice of this type of activity. The third issue is a common one on which much has been written, but the oft repeated topic again deserves citation since it frequently weighs heavily in business decisions. Nevertheless, it is not confined to solely conditions brought about through the entrance of new foreign investments. The conundrum is that v;orkers grounded in a skill by one firm are easily hired away by another firm in the same industry. This is especially damaging where a new firm comes in but lacks the time and experience to tutor workers. (The general rule is that so few qualified workers exist, that the firm cannot expect to hire skilled workers unless he can raid a competitor.) A competing firm can expect not only to hire individuals educated at his competitors' expense but expects to receive at least some of his competitor's business secrets. Firm loyalty may not last from breakfast to siesta-time. A well-financed, foreign-oisTied enterprise may be in a position to destroy domestic competition and there is nothing illegal in this practice. An employee realizing his limitations

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128 as a worker may manage to accumulate a considerable amount of knowledge of a small business operation over time. At the right moment, this knowledge may bring the employee a handsome reward in terms of cordobas but would be a relatively low price for the foreign firm to pay in terms of dollars, for example. Even if the domestic firm would make a counter-offer, there is no assurance that the employee's loyalty v;ould stay bought. A Florida distributor (whose market area includes Latin America) of an Iowa-based, hatchery-egg producer confirmed the existence of this problem among its Latin American customers. In Nicaragua, for example, no independent chicken sexer services the several local hatcheries. Some firms have contracted for an individual to fly down from Guatemala City at each incubation, which entails expenses additional to the normal fee for such work. The Florida distributor will instruct various employees of its Latin American customers but frequently encounters unpleasant after-effects. For example, if a Nicaraguan hatchery would send an Individual to Florida to learn chicken sexins the chances are that upon returning the person would vxant to be advanced to plant manager or begin to operate 1 7 independently. ' A small firm may offer little opportunity Conversations at Wallace Hatchery, Inc., St. Petersburg, Florida, with John Wallace, President, and with Don Allen, Export Manager, on January 10, 196?.

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and ends up subsidizing the individual and perhaps a competitive firm. One local businessman feels that one of the best solutions to this problem is to keep the firm as much of a family enterprise as possible, where various members of the family are trained in the major areas of the firm's operation. The development conatus is wrapped up in the foreign exchange impact. Attention has been turned toward the short-run effects of the inflov; of private foreign invest ment . The following chapter will examine in more detail the external sector of the economy and the Republic's capacity to import.

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CrLilPTER V PURCHASING POWER OF EXPORTS To bridge the gap of foreign exchange shortage in order to sustain the pace of the development experiment, Nicaragua has relied on loans and grants from foreign governments and international organizations, public and private sources, and private foreign capital to sustain its present level of investments. The external financing necessary, however, for the execution of its development plan will depend extensively upon preserving a favorable balance of trade to guarantee regular servicing of its external debt and to warrant the confidence of investors. Over the period, income from exports have accounted for roughly one-fourth of Gross National Product, with two agricultural exports cotton and coffee producing close to two-thirds of this amount. v;ith developing Africa advancing as a competing supplier in tropical exports and with richer northern regions subsidizing themselves toward surpluses in temperate foodstuffs, Nicaragua should seek to diversify its range of exportables if it is to bolster its import capacity over the long haul. 130

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131 The chapter will examine the composition of exports and of imports separately to the extent possible within a few pages. Some comments will be directed at the relationship with Gross National Product as well as on the destination of the principally traded products. One subdivision of the chapter will be devoted to the terms of trade effects. As a summary of the present and preceding chapters, a table will detail the capacity to import. Income from Exports The dependency on foreign trade has mounted more than proportionally relative to the growth in the Gross National Product (GNP), Over the fifteen-year period, 1950-196^^-, about one-fourth of GNP was derived from external activities. The central factor can be attributed to the external demand for Nicaragua's chiefexports stimulated by climatic and political conditions. By the same token, these exports have been the source of difficulties which have impeded the development experiment at times. Table 18 symbolizes the relationship between Gross Domestic Product (GDP) and the quantum of goods and services exported (in constant cordobas of I958) from 1955 1. Inter-American Council for Commerce and Production, iiconomic Development of Latin America," Kow Low Income countrie s Can Advance Their Own Growth (New YorkCommittee for Economic Development, September, I966), p. -^k

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132 TABLE 18 NICARAGUA: RELATIONSHIP OF QUANTUM OF GOODS AND SERVICES EXPORTS AND GROSS DOMESTIC PRODUCT, 1955-1964 (millions of cordobas of 1958) Year Exports GDP Relation 1955 J. 7^ u 1 Q'^? ^7 J I 1959 i960 1961 1962 1963 1964 536.4 474.9 550.3 595.9 719.7 576.1 610.5 763.3 927.4 1,100.0 2,210.6 2,209.2 2,395.7 2,403.6 2.439.7 2,472.9 2,633.1 2,910.6 3,125.3 3.386.7 24.3^ 21 .5 23.0 24.8 29.5 23.3 23.2 26.2 29.7 32.5 Source; Nicaragua, Consejo Nacional de Economia, Oficina de Planif icacion, Estudio del comercio exterior y de la balanza de Dasros de Nicaragua, 19501964, diciembre. 1966. p. 9. through 1964. The relation of the first quinquennial, 1950-1955 (not observed in the table), discloses an annual average of 21.1 per cent. The table communicates that that relationship rose to 24.5 per cent for the I956-I96O period and registered a further annual advance during 1961-1964. It will be recalled that the recession period of the latter 1950' s reduced economic activity emphatically as a result of both internal and external forces at work. Nevertheless, the quantum of exports waxed after I956 despite lower international prices for cotton and coffee.

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133 This sector of the economy, therefore, helped to support the level of GDP. The 1960-196^ era registered a higher level of capital goods imports to promote the industrialization aspirations of the country. During the early part of the 1950's about 62 per cent of the goods exports consisted of coffee and gold. By 1955. the prestige enjoyed by these two products had prolapsed to particularize k^A per cent of total exports, while cotton exports grew from i|-.5 per cent of the I95O total to 36.2 per cent by 1955.^ V/ith the appreciation in x^orld prices for cotton, a larger proportion of the available credit was channeled,, essentially through the Banco Nacional de Nicaragua, to existing cotton growers and to encourage grain harvesters to switch to cotton production. The National Bank was pressed to preserve the international value of the cordoba and heightened cultivation of coffee and cotton was supposed to yield a larger volume of foreign exchange earnings. The 1955-1956 agricultural year witnessed excessively heavy rains and the multiplication of a cotton plague which diminished the export surplus. Coupled with a reversal in international prices for these two products, foreign exchange earnings declined relative to expected income. 2,-. Nicaragua. Consejo Nacional de Economia, Estudio del d^lf. ^^lanza de Dagos de N icara^u^ . 1950-196^ . diciem&re. IQhh. p. i fS —

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widespread losses and bankruptcies resulted. (The position of the National Bank has already been aired in Chapter III.) The world supply of cotton expanded as a result of swelled output of the fiber in such countries as Mexico, Brazil, India, and Pakistan. In the case of coffee, the United States Department of Agriculture estimated an over-production of ten million bags for 1956. In spite of a drop in the unit value of cotton and coffee exports, continued financial support by the National Bank encouraged its propagation until the agricultural year 1959-1960, As the world price abated, a more than proportional increase in volume resulted in higher income imtil coffee's turning point in 1958 and cotton's turning point in 1959. By the I959-I96O agricultural year, the National Bank had considerably withdrawn its support of cotton, and the area planted dv^indled some 11 per cent and the volume exported in I96O was only about per cent of the previous year's exports. In the same year, coffee production recovered and these exports advanced around one-third over the prior year. Two new exports frozen meat and copper stepped in to help sustain the level of exports. Also, with the Cuban revolutionary forces taking over in 1959, sugar sales from Nicaragua expanded in I96O. In spite of these countervailing forces, the value of exports fell nearly I5 per cent in the same year and failed to recover

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the 1959 level until after 1961.^ The structure of exports seen in Table 19 reveals that 86.6 per cent of the exports in 1955 included cotton, coffee, and gold. Exports from the agricultural sector dominate and characterize 78.1 per cent of the external trade from I956 to I96O. Although the total volume of agricultural exports strengthened in the I96I-I964 period, their participation in this sector plopped to 68.4 per cent due to an erosion of cattle and cotton seed sales. At the same time, processed products began playing a more significant role in this sector of the economy. By 1964, cotton continued to dominate the export sector. The value of cotton sold in the world market exceeded 1963 by 29 per cent due to a 2k per cent stepping up of . volume and an improvement in the unit price of cotton fiber from $25.00 per quintal in I963 to 025.90 in 196^^.'^ The primary markets for the fiber are Germany and Japan ^^rith France, the Netherlands, and the European Common Market being of secondary consequence.-^ For 196^-, the volume of coffee languished by nearly 20,000 quintales although 3 Nicaragua, Banco Central, Informe Anual, 1964 . p. I53. 14. ~~ '. Ibid . , p. 154. Nicaragua, Banco Central, Departamento de Estudios Economicos Boletin Trimestral. V (No. I7, enero-marzo.

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VO On ^ J I \ VO On f. . uj -V rrt NO VO On ON O 1 M /— \ vr^ O NO UN ON c! * d I [H CO CO CD bO CC5 0) o u ^ OnO VO VO 00 VO r^OC) 00 VO o 00 VO VO VO ON VO 00 (Nl CO ON 00 00 t-i CO p <— ' rH O •H U OnCO^thOtHOt-iO cvi ^ 0^ oo 0^ 0^ t>C^CVJ^'tHOCVJOt-iO l>-vO C^O C^-:± C\| VPiJ^(TNOJ^CJOt-iOt-HtH CVJ VAOO 1-1 C^vo C^tH u^u^ u^GN^^f^r^T-^000 CM CM O^ O-VO VP»0 O CV) o^o ^^o^CM^ooc\!OOT-^ C3NT-t CSN^VO C^v-< CM CM ^ CM ON 00 r>^ VO ov^. CO ^^^ CM o I o vOCNlOOiHCOVO^ lO • ••••••J • C\ i VO CM CM T-H O I tH • ••••••I • CN-t-hvoicMxHOO io CMOO^OCjNVPi I CO • ••••••f • v0^xr^CMC^JOO lO o i-H o CO m cv 0) m w CCDCOJCUlHCtfP, 0(uoaiHa)s:;a^ oooa)ci-HciXi+^ OOOCOO-P^COO C/0 iH tH VO U^CM CM CM O ON VO o CA tH 00 (3N3CAC^A tH CM CM O CM O^VO CO o • 1 O I y-i • I O I 00 I • I CM I u ft o bo O rH O

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137 iH t>i>(r> (X) o VO • • • • • • • • ON o^vocvj O U>i VO o t-H o iH OS VO ON CO 0^1-1 VPv C3N o ' ^3 • • • • • • « • On ON o o O aJ tH iH o •H ^ 1-1 o as 0? o C\J \c\j o CM o tH 1-1 o 1-1 'd P. o o ^ VO 1 CM CO o o VO • C d ON 1 o CM o r-i x-i o O CO 1-1 H bi ON 00 O 1-1 I !>-0 cv o O 03 • iH ON C^CM f O CV VO o 05 x-i o 03 ;Q 1-1 •ri CO OJ • iH ^1 1 1-1 VD 1-1 o O rH CM • • If.. • • 1 ON CV 1 1 O 1-1 ' cv o O ! 1 OnVO iH o O -P ON * • I 1 • • • • •H X 1-1 ON O I 1 O iH o O 1 A • -P V-H CO •H CO 3\ CO OS O -p O •H bO O CO Ci5 -C (D ^^ c e +j 0 o CO !w iH H O CO W CO pi •o 'd
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138 TABLE 20 DESTINY OP .NICARAGUA^ EXPORTS BY COWITRY, 1955-1964 (average annual percentage) Region 1955-1959 1960-1964 43 • o 47.7 Canada Mex 1 CO 4 « ^ ^ X W W Dutch Antilles Central America Rest of Latin America 1.6 1.2 2.5 3.4 30.3 3.0 U . U 0.9 4.0 1.5 Europe 41.8 31.1 Germany Belgium Netherlands Engl and Rest of Europe 17.0 2.8 10.5 6.9 4.6 14.7 2.0 4.4 3.9 6.1 Japan 12.3 20.3 Rest of V/orld 0.3 0.9 TOTAL 100.0 100.0 Source: 1) Nicaragua, Banco Central, Departamento de Estudios Economicos, Boletin Trimestral . VI (No. 21, enero-marzo, lybbj, pp. 5O-I; ' 2) Nicaragua, Dlreccion General de Estadistoca y Censos, Resumen de Estadistico . 1950-1960 , 2a ed., junio, I96I, p. 9I; 31 Nicaragua, Consejo Nacional de Economia, Oficina de Planif icacion, Estudio del comercio exterior y de la balanza d"e~pagos de Nicaragua, 1950-1964 . diciembrfi. IQAA. p. 214.

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the value of these exports ascended ft3»S million due to an advance in the average price of the grain from ?^32.50 per quintal in I963 to S42.20 in 196^ an increment of 26 per cent. Cafe Soluble, which imported roughly 10 per cent of its supply from Trinidad in 1964, exported about two-thirds of its output to the United States. Table 20 on the preceding page delineates the destiny of Nicaraguan exports by region and by country. On the following page. Table 21 is another v:ay of interpretat ing the same point that the agricultural sector is externally oriented, and it has been this sector which has paid for a large part of the development experiment. Between 1955 and 19^4, industrial exports have grown roughly five times relative to total production. This coincides with the accumulation of private foreign investment investigated in the foregoing chapter. Agricultural diversification has been vjritten into the national plans and policies suggested for the var ious organizations involved in the development process, but the fact remains that Nicaragua is still basically a twocrop export economy. It is dependent upon two crops which are at the mercy of weather, insects, and world prices which fluctuate according to the policies of the more powerful nations along with changing supply curves of a dozen or more countries also in the developing stages.

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TABLE 21 NICARAGUA: RELATION BETWEEN EXPORTS AND GROSS VALUES IN VARIOUS AREAS, 1955-1^6^1 (in per cents based on constant cordobas of 195S) Years (3)* 1955 38.1 10.6 3.2 1956 30.1 10.8 2.3 1957 • 32.7 8.9 2.5 1953 36.9 8.7 3.1 1959 40.1 7.5 7.2 i960 30.7 10.3 9.1 1961 29.9 11.3 10.6 1962 35.1 10.0 14.9 1963 40.6 7.9 16.7 196i443.6 . 6.7 13.1 ANNUAL AVERAGES 1955-1959 35.6 9.3 4.3 1960-1964 36.0 9.2 12.9 1955-196^1 35.8 9.3 8.6 (A; Relation between agricultural and cattle exports and the gross value of agricultural and cattle production. (B) Mineral exports related to total exports of goods and services. « (CJ Relation of industrial exports to the gross value of industrial production. Source: Nicaragua, Gonsejo Nacional de Economia, Oficina de Planif icacion, ' Estudlo del comercio exterior y de la balanza de Pagos • de Nicaragua. 1950-1964 . diciembre. I966. pp. 24-5, 28.

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The policy of pushing exports and promoting agricultural development cannot be criticised on the basis of too much emphasis on industrial development and Inadequate attention to agriculture. The criticism concerns pushing too far along one or two lines. Artificially sustained coffee prices, for example, encourage the entrance of competitive suppliers into the market. Nicaragua might do better to take advantage of any international coffee agreement by not expanding its own production but to reduce proportional dependence upon this crop as a basis for earning substantial sums of foreign exchange through its export. In the case of cotton, a weakening of demand in one year ought not to be the basis for continued over-financing of this crop especially at the expense of diminishing the residual of foodstuffs necessary to the basic diet of the population. Further, the lessons of the recession of the late 1950' s should serve as a guideline for future policies In this regard if the country is to maintain an adequate growth rate based on a relatively high level of export earnings. Its capacity to import depends primarily on a healthy export sector. Expenditures for Imports With the exception of 1959. the quantity of goods and services exported have been insufficient to pay for the

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1^2 quantity of goods and services imported from 1955 through 1964.^ With a high propensity to import, dependence on a two-crop export economy to earn adequate foreign exchange for the development efforts resulted in certain exchange controls and import restrictions being imposed. The capacity to import was strengthened by a net positive movement of capital plus transfers. With a high propensity to consume imported goods, the expanded export activity of the first half of the 1950' s increased the demand for consumer goods which reached a peak in 1955 • With the narrowing of economic activity beginning in I956 and the first restrictive measures imposed by the Departamento de Emision del Banco Kacional de Nicaragua, the importation of goods contracted about one-fourth compared with 1955-'' During 1956. the economy maintained a comparable level of consumption due partly to some import substitution which was taking place in the industrial sector. The positive net movement of capital which prevailed at this time could also be counted as a favorable factor. 6 Nicaragua, Direccion General de Estadistica y Censos. Resumen de Estadistica . 1950-1960 . 2a ed.. Junio, I96I, 7 'Loc. clt.

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143 TABLE 22 NICARAGUA: SURPLUS OR DEFICIT WITH THE EXTERIOR, 1955-1964 (millions of U.S. dollars) Year t Exports (FOB) Imports (FOB) Trade Balance Net Balance of Goods and Services (based on constant cordobas of I958) 1955 1956 1957 1958 1959 i960 1961 1962 1963 1964 79.9 65.3 70.7 70.6 74.7 63.9 69.9 90.4 106.7 125.5 64.3 57.6 68.4 65.3 52.7 56.4 58.7 78.7 91.0 109.8 15.6 7.7 ^ • J 5.3 22.0 7.5 11.2 11.7 15.7 15.7 -17.3 -17.6 -1. J , J -10.7 + 19.3 2.2 0.9 4.7 0.5 3.0 )( A minus sign of a sign or balance . indicat a plus es a negative sign indicates balance; the lack a positive includes non-monetary gold. Sources: Column #1: (a) Nicaragua, Direccion General de Estadistica y Censos, Resumen de Estadistica, I95O-I96O . 2a ed., Junio, 1961, p. 871 (b) Nicaragua, Banco Central, Departamento de Sstudios Economicos, Boletin Trime stral. VI (No. 22. abril-junio, I966), p. 6U Column #2: (a) Nicaragua, Banco Central, Informe Anual . 19 63 . p. 74; Tbl Nicaragua, Banco Central, Infor me Anual, 1966. p. 206. Column #3: ^Nicaragua, Consejo Nacional de Economia, Cficina de Planif icacion, Estudio del comercio exterior y de la balanza de pagos de Nicaragua. I9'j0 -1"964 diciembre, 1966, pp. 52-3. *

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Some slight recovery was evident in 1957, but business investment projects were delayed partly due to the impending 1958 Investment Incentive Law, Perhaps greater investment decisions would have accompanied the passage of this law, but political tensions in I959 created an unfavorable climate. It has already been seen in an earlier chapter that investment decisions of business were further delayed until the signing of the Central American Common Market Treaty. These events affected the structure of imports in the latter half of the decade. Table 22 above records the commercial balance of Nicaragua over a ten-year interval. With imports calculated on an FOB basis, Nicaragua shows a favorable trade balance for every year of the survey. Summing goods and services, the last column divulges that with the exception of 1959 the export of goods and services together are insufficient to pay for the sum of goods and services imported. Although Nicaragua does have a small shipping g fleet, it transports only about one-fourth of the total Q I"IAMENIC (marina Mercante Nicaraguense ) is the only shipping line registered in Nicaragua. Organized privately in 1952, of which the Somoza family is reported to have controlling interest, it owns six vessels and charters ten others. ( Organizacion de Estados Americanos, Nicaragua [Washington: Union Panamericana, I962 1 . p. 22.)

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145 TABLE 23 NICARAGUAN IMPORTS OF GOODS AND S2RVICES, 1955-1964 Category Years 1955' 1956 1957 1958 (millions of cordobas of 1959' 1958) Consumer Goods 166.S 144.2 150.8 Non-durables 106.4 102.1 110.0 Durables 60.4 42.1 40.8 Combustibles & Lubes 41.0 33.6 36.7 Intermediate Goods 231.4 184.4 2O3.? Capital Goods 164.9 110.6 132.5 Agriculture 56.2 26.0 24.6 Industry 33.2 27.9 43.5 Construction 9.I 5.2 12.0 Transportation 50,1 32.6 33. 0 Other activities 16. 3 18,9 19.4 Total Imports of Goods 604.1 472.8 523.6 Total Services Imports 53. 1 125.3 119.8 TOTAL GOODS & SERVICES 657.3 598.1 643.5 148.3 105.8 42.5 48.1 195.4 114.4 30.9 30.4 4.0 28,9 20.2 506.2 164.4 670.6 123,4 91.9 31.5 39.9 164,9 91.5 21.0 20.2 8.0 28,1 14.3 419.7 164.8 584.5 i960 1961 1962 1963 1964 (millions of cordobas of 1955) Consumer Goods Non-durables Durables Combustibles & Lubes Intermediate Goods Capital Goods Agriculture Industry & Mining Transportation Total Imports of Goods' Total Services Imports TOTAL GOODS & SERVICES 142.0 98.5 43.5 ^5.7 199.8 102.0 22.9 46.4 32.7 443.8 147,6 591.4 141 .5 101.3 40.2 48.2 211.4 113.7 22.4 59.2 32.1 467.0 149.6 616.6 171.4 121.5 49.9 52.2 300.4 168.8 39.3 81.7 47.8 629.2 167. 3 796.5 212.7 146.0 66.7 57.9 314.8 205.7 44.9 100.5 60.3 744 . 0 I87.O 931.0 268 186 81 59 410 268 67 121 80 918 202 1121 .4 .9 .3 .9 .8 .0 .5 .3 ,4 .6 ,0 After adjustment in Balance of Payments, Source: Nicaragua, Consejo Nacional de Ec Oficina de Planif icacion, Estudio comercio exterior y de la balanza de Nicaragua. 1950-1964 . dici^^ pp. 63-6. onomia, del de pagos 19667

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trade. The cost of insurance and freight has accounted for a sizeable leakage to national income. If the imports in Table 22 are figured on a GIF basis, the only two years which can boast a surplus are 1955 and 1959 $10.^4and $5.^ million, respectively. The remaining years all chalk up a deficit balance ranging from a low of $3»7 million for 1956 with a tendency, in the last two years, to rise above the 1957 high of $9.7 million. The year 19 60 saw a reversal in the trend of imports over the previous three years. This gain consists of an approximately eleven per cent revival in demand for consumer goods, a scant seven per cent rise in combustibles and lubricants, and more than a four per cent rise in Intermediate goods imports. (See Table 23 on the preceding page.) The remaining years saw a lower rate of increment in consumer goods and the most rapid increase in capital goods followed closely by intermediate goods. The pressures of the second quinquennial on the Balance 9 In order to find cargo for its ships, MA.MENIG is constantly encouraging new industries. It meets about 25 per cent of the country's shipping requirements and contributes in the neighborhood of $250,000 annually to foreign exchange earnings. (U.S., Department of Commerce, "Basic Data on the Economy of Nicaragm," Econom ic Reports, Part I, No. 61-66, March, I96I, p. 9.) ' '^Nicaragua, Banco Central, Informe Anual, 196^}-. pp. 148 sig. — — — —

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147 of Payments resulted from the process of Industrialization and modernization of agricultural techniques. The stimulation of raw materials and capital goods imports has created a serious drain on foreign exchange reserves. In the first half of the 1950's (not revealed in Table 23). the high level of imports was due to the initial industrialization process, carrying out the plan formulated by the IBRD Mission, and the mechanization of certain areas of the agricultural sector. Although capital goods imports were encouraged (as the earlier chapters have already denoted) by means of stimulating industrial development and qualitative tariff restrictions on trade, the desired direction of development did not take place for reasons previously mentioned. After I96O, mechanization of the cotton-growing industry, coupled with an emergence of industrial development after the signing of the GTEI, caused capital goods imports (according to Table 23) to multiply more than two-andone-half times. Before moving on to the Terms of Trade discussion in the next subsection. Table 24 discloses the supply sources for most of Nicaragua's imports during the period. It can be seen that dollars have played the pivotal role in the development process although their relative magnitude has ebbed. In I95O (not sho;«i in the table), Nicaragua imported over 8k per cent of its goods from the United States; but by I964, the latter supplied slightly less

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TABLE 21^NICARAGUA'S EXTERNAL SOURCES OF SUPPLY, 1955-1964 (average annual distribution in per cents) Region 1955-1959 1960-1964 1955-1964 Americas 75.9 69.7 72.8 United States 58.4 49.2 53.8 1 R X . 0 Mexico 1.2 2.0 1.7 ijutcn An&ixxes 0 . / 5o Central America 3.4 6.1 4.7 Rest of Latin America 4.3 6.4 5.4 Europe 20.2 23.0 21 .6 Germany 7.9 7.7 7.8 Belgium 3.2 3.4 3.3 Netherlands 1.3 2.4 1.9 England 3.9 4.4 4.2 Rest of Europe 3.9 5.0 4.4 Japan 3.2 6.1 4.7 Rest of V/orld 0.7 1.1 0.9 TOTAL 100.0 100.0 100.0 Source: 1) Nicaragua, Consejo Nacional de Economia, Oficina de Planif icaclon, Estudio del comer cio exterior y de la balanza de pagos de Nicaragua, 1950-196^ . diciembre. 1966. pp. 275-6: 2) Nicaragua, Banco Central, Departamento de Estudios Economicos, Boletin Trimestral . VI (No. 23, julio-septiembre, I966), pp. 66-7.

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11^9 than ^7 per cent of import needs. Europe has gained in its trade with the Republic. During the early years, Germany appears to be the leading supplier; but in the 1960's, trade seems to be slightly more evenly distributed among the trading European nations. On the other side of the world, Japan has shared a larger portion of trade in the 1960's largely resulting from more intensive promotion efforts . The significance of these comparisons exemplifies the foreign exchange requirements, which are mostly dollar needs. Comparing this table with Table 20 exposes the problem of bilateral trade between Nicaragua and those countries v^hich supply the bulk of the imports. In the absence of offsetting capital flows, Nicaragua must be able to export goods of sufficient value to maintain the high level of capital goods imports necessary to the development experiment. The distinction of the external sector in the groxrth process is seen by the changing structure of imports described in the last few pages. Terms of Trade The significance of the terms of trade is the purchasing power of the exports; i.e., the value of the quantity exported determines the ability to pay for imports. A shift in the terms of trade is equivalent to an international transfer of income. A more favorable

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150 exchange ratio makes resources available for capital formation. Nurkse writes that "the great advantage of this potential source of capital formation is that it gives rise neither to a foreign debt burden nor to the various frictions that may arise from inter-governmental loans and 11 grants." The key word in this phrase is 'potential'. An appreciation in the Value of exports resulting from improved terms of trade engenders a higher level of money income. What is done with the added Income in the light of unchanged governm.ent policies will determine vrhether the better exchange prices will result in expanded capital formation. Past experience attests that the propensity . to import has been rather high. The bulk of the unsaved income will lead to a higher level of consumer spending for both domestic and imported goods. Although improved terms of trade do furnish added foreign exchange, it is not an automatic source of capital formation unless fiscal and monetary authorities supplant offsetting policies. In the absence of international cooperative action, there is little that Nicaragua can do about the international exchange price for its exports as long as export earnings come chiefly from cotton and coffee. The alternative is a shift toward putting greater emphasis on the 11 Eagnar ICurkse, Problems of Capital Fo rmation in Under-developed Countrie.9 TMp.. vny^v. Oxford University rress, lywj, p. 98. ^

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151 diversification of exports. With 1958 as the base year, Table 25 reflects the change in the terms of trade over a ten-year interval. TABLE 25 NICARAGUA.: INDEX OF THE TERMS OF TRa.DE, 1955-196^^(195s equals 100) ^^^^ Indices of Unit Values Ratio of Exports Imports Exchange l'^^ 112.1 82.9 135.0 1956 95.3 11Q Q \m ^08.9 102.7 ioL'o 100.0 1953 100.0 100.0 92.9 95.6 95.8 •9^? 92.9 100.0 1961 91^.0 93.3 1952 93.9 90^0 \l% 93.5 97,0 196^ 91.9 9^.6 97.1 Sources: CSPAL con base en las Memorias de la Recaudacion General de Aduanas, jr Banco Central de Nicaragua citado en: Nicaragua, Consejo Nacional de Economia, Oflcina de Planificacion, Sstudlo del comerclo exterio: y de la balanza de pa gos de Nioa^ao-ua ' 19:)U-19&^ . diciembre. 1Q^ 6, p". 31^" From 1956 through I959, the deterioration in the international prices of coffee and cotton influenced the unit value of Nicaragua's exports to reach a level in I959 very similar to the I95O level; while the unit value of imports oscillated around 100 per cent. During the second half of the period, export prices recovered from their low

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152 in 1959 although they did not again climb to their 1955 -I958 level. Over the last four years, the terms of trade have remained relatively stable. A diminution in the exchange ratio reduced the purchasing power of the Republic in terras of unit prices. To uphold the 1956 level of purchasing power results in a larger quantity of goods exported. A constant level of income is generated by an increase in the quantity proportional to the fall in price. The conundrum is that Nicaragua faces a relatively inelastic demand for its leading exports within the relevant range of prices. '^^ With a greater quantity offered, the unit price falls disproportionately lower. This results in further erosion of income from exports, xvhich prompts the production of an even larger export surplus in an attempt to offset the price This is especially true in the case of coffee where market demand has been calculated to be inelastic within a broad range of prices between perhaps a low of 25 cents a pound to 99 cents. The high coffee prices in the United States around I955 tended to evidence greater elasticity of demand at prices ranging above $1 a pound. It should also be remembered that Nicaragua is a relatively small supplier of coffee and cotton. Acting alone to expand its production may have little, if any, effect on the world prices for its exports.

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153 13 reflux. If a majority of the suppliers of a product in the world act in unison to expand output, at a rate excessive to the growth in demand for the product, then 111 the terms of trade are determined to deteriorate. To protect its local cotton producers, Nicaragua attempted to subsidize losses through a "cotton pool", maintained at a level comparable with 1955 prices; but the country was unable to finance, for long, this domestic buffer arrangement . 13 'Raul Prebisch writes, relative to the importance of disparities in international demand, that "we are witnessing a manifest trend towards an external bottleneck in economic development." It is caused by "the divergent trends of international demand and their effect on exports and the relative prices of these." The factor, responsible for the disparity is due to a slower population growth rate in the major centers which results in a lower rate of increase in demand for Latin American exports; and it is also due to the fact that the income elasticity of demand for food is lovjer in the more developed regions. (U.N.. 5CLa, Towards a Dynamic Development Policy for Latin America [E/CN.12/660/Rev .IJ ^New York, I963J , pp. 6?-8.) 14, x\n opposite case is where primary products T)roducers are not expanding their output but the economies of the industrialized countries are growing and increasing their demand for the above products. Assuming the imisorte-^s do not follow restrictive trade policies, imder conditions of inelastic demand, the improvement in the terms of trade will demonstrate their greatest favorable change, which transfers a large part of the benefit of expansion to the less-aevelOTDed economies. Of course, if the lesser-developed countries remain, stagnant in their production, this will tend to dampen the rate of expansion of the industrialized countries. On the other hand, if both groups ot economies are growing together at some rate, then ' greater benefits should accrue to both. (See. Ha^ry G. Johnson, international Trade and Econ omic Growth fLondonUnwln University Books, 1964) , pp. 66-73.)

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15^ Because demand is inelastic, this requires an agreement among all the suppliers to restrict output while market demand climbs. There are many implications involved (which will not be dealt with here) in such agreements which tend to make them unvrorkable over any sustained period of time. All of this seems to strengthen the case for diversification of not putting all the eggs into one basket rather than for entering into international agreements and subsidies arrangements, TABLE 26 NICARAGUA: PURCEASING POWER OF EXPORTS, 1955-1964 (millions of U.S. dollars; base year 1958) Year Exports Terms of Purchasing Power Effect of* (FOB) Trade of Exports T of T 1955 79.9 1956 65.3 1957 70.7 1958 70.6 1959 74.7 I960 63.9 1961 69.9 1962 90. if 1963 106. 7 196k 125.5 135.2 107.0 27.1 119.8 78.1 12.8 106.0 71^.9 4.2 100,0 . 70.6 87.6 65.3 9.4 92.9 59.4 4.5 95.6 66.8 3.1 95.8 86,6 3.8 96.4 102,9 3.8 97.1 121.9 3.6 Lack of a sign indicates a positive balance; the minus sign (-) signifies a negative balance. Sources: Calculated from data appearing in TabT e 22 and Table 25.

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155 Table 26 calculates the effect of a changing terms of trade starting v;ith 1958 as the base year. The right -hand column manifests the measured loss to the economy for the years 1959 through 196^. The last four years reveal a relatively stable element reflected in the comparatively small fluctuations of foreign exchange losses. The materiality of this is brought out in the following section vjhich points out that the export sector occupies a dominant position in the country's import capacity. Capacity to Import The National Planning Office defines the capacity to import as the purchasing power of the exports of goods and services, plus the net movement of capital, net entries attributable to the factors of production, net transfers, and errors and omissions of the Balance of Payments .''•^ The following Table 2? interprets this definition in per cents based on constant I958 cordobas to demonstrate the relative importance of the purchasing power of exports and the net capital movement. Had the table been expanded to include earlier years, it would have registered a high net movement of capital that in absolute amounts was not surpassed until I963. I5.T. Nicaragua, Estudio del comercio exterior . pp. 42, 44. —'

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TABLE 27 NICARAGUA: CAPACITY TO IMPORT, ^1955-1964 (percentages based on 1958 cordobas ) Purchasing Net Net Net Errors Year Pov;er of Capital TransFactor & OmisImport Exports Flow fers Pay ' ts sions Capacity 1955 101.4 + 1.4 + 2.5 10.0 + 4.7 100.0 1956 103.8 + 1.3 + 3.0 6.4 1.7 100.0 1957 85.7 + 14.0 + 2.9 1.7 0.9 100.0 1958 94.4 + 3.0 + 4.4 3.4 + 1.6 100.0 1959 107.3 1.3 + 3.7 2.4 7.3 100.0 i960 90.4 + 13.6 + 3.2 3.0 4.2 100.0 1961 88.8 + 11.3 + 4.1 2.7 1.5 100.0 1962 88.5 + 14.4 + 3.5 3.6 2.8 100.0 1963 88.0 + 14.0 + 2.8 2.7 2.1 100.0 1964 91.9 + 12.8 + 3.5 4.8 3.4 100.0 Source: Nicaragua, Consejo Nacional de Economia, Oficina de Planlf icacion, Sstudio del comercio exterior y de la 'balanza de pagos de Nicaragua. 1950-196^ . diclembre , 1966, p. 49. During the second half of the decade of the 1950's, the import capacity fluctuated due to a substantial fall ' in the terms of trade that ^^^as recorded In Table 25. The inflow of foreign capital buoyed up the level of imports. The net movement of capital fluctuated from a low of C$7.2 million (cordobas of 1958) in I956 to an extremely high figure of C$95.5 million in 1957. After falling from their I955 level, exports gradually climbed through 1959. (The latter year was the only one which registered a deficit capital movement due partly to political problei of the times . )

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157 TABLE 28 NICAPiAGUA : REIATION BETWEEN IMPORT CAPACITY AND GROSS NATIONAL PRODUCT, 1955-1964 (millions of cordobas of 1958) Year Import Capacity GNP Relation 1955 1956 1957 1958 1959 i960 1961 1962 1963 1964 715.0 545.6 680.8 631.4 587.8 591.7 656.9 826.5 1,016.2 1,14?. 2 2.327.9 2, 268.0 2,416.8 2,382.1 2,336.4 2,414.1 2,588.1 2,849.0 3.064.3 3,299.3 30.7 24.1 28.2 26.5 25.2 24.5 25.4 29.0 33.2 34.8 Source: Nicaragua, Consejo Nacional de Economia, Oficina de Planif icacion, Estudlo del conerclo exterior y de la balanza de " pagos de Nicaragua, 1950 -196^. dlciembre , 1966. p. 4.

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158 In i960, exports of goods and services abated by roughly I5 per cent but the capacity to import rose very slightly. Again the net movement of capital came to the rescue with Ci|;80.3 million. Since I96O, exports have been expanding. Net capital settled to C$7^.5 million in I96I, but the three following years scored consecutive increases Cffll9.2, C!i;1^2.5. and C^U^7»3 million, respectively. Net transfers have been positive throughout; net movement of the payments to factors of production have been negative. "Errors and Omissions" have shown negative balances with the exception of the years 1955 and 1958. The import capacity has experienced three setbacks in its upward trend — 1955, 1958. and 1959. Table 28 demonstrates the importance of the external sector to the national economy by comparing the import capacity and the Gross National Product. When the economy entered into a prolonged recession in 1956, which lasted \intil i960, GNP augmented at a rate of approximately 1.6 per cent annually. Nevertheless, the capacity to import fluctuated mostly as a result of changes in the net capital flow. After 1959, the import capacity has steadily grown and has disclosed a high relationship with GNP as shown in the preceding table.

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The previous pages have Investigated the development experiment of Nicaragua in light of the foreign exchange impact on the grov/th process. Two chapters have delved into loans for economic projects and program loans from sources external to the country. Capital formation was analyzed in terms of private foreign capital movement and some of the effects this type of investment may have on the economy. The present chapter subjected to examination the external trade sector, and the purchasing power of the Republic's exports has been explored. This essentially concludes the analysis of the source and use of external funds in the Nicaraguan development experiment. The last chapter will principally perform an analysis function and will bring out some points not previously discussed in any detail.

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CHAPTER VI ANALYSIS OF DEVELOPMENT PROGRESS The preceding chapters have clearly indicated that economic development has been taking place throughout the Interval under examination. Funds have been borrowed from international organizations for specific infra-structure projects, foreign loans to financial intermediaries have indirectly filled a gap in domestic credit needs, private foreign investment has responded to the call of profits,and agricultural exports have paid for many of the capital imports. While it is apparent that economic development is taking place, it is less obvious whether economic growth is occurring. Following a discussion on the capacity to service the external debt of the country, the bulk of this chapter will be concerned with the measurement of economic growth; i.e., whether external savings have caused an ephemeral upsurge or whether sustained growth is occurring. The paper will end with a few comments on recent trends after 196^. 160

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161 Capacity to Service Debt Debt service Is defined as Interest payments plus amortization of external debt owed directly by the Government or Its agencies or public guaranteed. Public debt service Is stressed In this section of the last chapter because public debt has priority over private debt In times of exchange difficulty; however, capital Invested under the shelter of the Incentive laws is provided certain guarantees such as repatriation of profits even in times of exchange control and complete or partial withdrawal of registered capital. Due to the dearth of figures, the data in this last section will exclude the latter category. Measuring the. ratio of gold and foreign exchange reserves plus the International Monetary Fund (IMF) gold tranche to imports (GIF) reveals a rather thin margin of protection against any adverse change in export earnings. A more liberal approach compares gold and foreign exchange (convertible currencies) plus total IMF tranche (equals gold tranche plus credit tranche) to imports (GIF). For the last quarter of 196^, this ratio was 30.5.-^ . Of course, anything less than a one-to-one ratio could impair the Republic's ability to meet its obligations in periods of short-term disequilibrium, but possibly International Monetary Fund, Internati onal Financial Statistics . XX (No. 1, January, 196? ), 220-2. ~

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a liquidity ratio (including the IMF credit tranche) of at least fifty per cent may be considered adequate under most conditions for very short intervals (of one year or less). The three-year decline in exports experienced in the years I956-I958 (as compared with the 1955 level) reduced the liquidity position of the country. The coefficient of long-term foreign obligations relative to the income of foreign exchange on current account reveals in Table 29 relatively minor changes afte 1956 and registered only small fluctuations after I96O. Comparing this ratio with 1952-195^ shows a marked declin in its direction. The annual average for 1952-1954 is calculated at 14.0, for 1955-1959 it is 9.4, and for I96O -1964 it is 6.7. The last quinquennial is characterized by a parallel rise of foreign exchange with the increase in debt service charges in the same period. If it can be assumed that countries experiencing a coefficient lower than 25 per cent are not in difficulty, then by this standard Nicaragua is presumed to be safe territory. However, such broad statements should be made cautiously due to the instability of the two-crop export sector, which has already been discussed in the preceding chapter. Income from these two major crops depends upon weather conditions, diseases, and world prices. Also, "services" in the balance of payments have accounted for

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163 TABLE 29 NICAMGUA: RELA.TION OF LONG-TERM FOREIGN OBLIGATIONS TO THE INGRESS OF FOREIGN EXCHANGE ON CURRENT ACCOUNT _!/ 1955-1964 Interest Amortization Total Total 8.8 0.5 4.3 4.8 13.6 4.9 0.7 4.7 5.4 10.3 0.8 0.7 5.2 . 5.9 6.7 3.6 1.0 4.2 5.2 8.8 1.8 ^ 1.0 4.6 5.6 7.4 l.i^ 1 .2 3.1 . 4.3 5.7 2.4 1.2 3.5 4.7 7.1 2.0 1.3 3.4 4.7 6.7 1.3 1.3 4.2 5.5 6.8 2.9 1.3 2.8 4.1 7.0 Years . Earnings2/ External Public Debt 1955 1956 1957 1958 1959 i960 1961 1962 1963 1964 Annual Averages 1955-1959 Q.i^ 1960-1964 U Includes earnings, interest, and amortization of the public external debt; excludes repatriation of foreign capital invested directly. 2/ Earnings accruing to direct foreign investments. Source: Nicaragua, Consejo Nacional de Economia, Cficina de Planif icacion, Estudio del comercio exterior y de la balanza de pa gos de Nicaragua. 1950-1964 . diciembre. iQ6<^. pp. 35^. 359, 363.

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16^ the deficit in current transactions and this deficit has been growing in more recent years. The development experiment itself is Important to long-run considerations and should be taken into account in an analysis of this kind. Progress is geared to increasing levels of capital imports which has had to weigh heavily not only on exports for their payment but also on external loans and foreign investment. It has already been stated that exports are tied to a fluctuating world market. Foreign investment can add to the permanent pool of foreign exchange only as long as these investments are not ^vithdrawn from the country and profits accruing to the registered capital are reinvested into local projects. Changing political conditions or greater profit opportunities elsevrhere can reverse this flow of capital to the detriment of the development experiment. Foreign loans are effective as long as their use contributes to raising per capita income in a permanent manner. However, toward the end of the period, the Republic began to pay back these loans which requires foreign exchange to repay principal plus interest. In other words, although Nicaragua has enjoyed sufficient creditor confidence to obtain needed long-term credits, its position could seriously deteriorate in a relatively short period through excessive indebtedness

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165 in the development process or through adverse changes in its earning power. External capital should be able to mobilize resources and raise productivity. The. increase in production should be accompanied by a high marginal rate of savings to match higher levels of investments. In this way external capital has contributed to the growth process provided that the added expansion has not been absorbed by population growth. TABLE 30 NICARAGUA: RELATION OF LONG-TERM FOREIGN OBLIGATIONS TO GROSS DOMESTIC PRODUCT AND GROSS DOMESTIC SAVINGS 1955-1964 Year Ratio with Ratio with GD? GDS 1956 2.7 17.2 1957 1.9 13.0 mi 2.0 14.0 1960 1./^ 1961 1.8 1962 1.9 1963 196i^ 10.3 12.9 12.9 2.1 12.4 2.2 13.2 See notes in Table 29. Source: Nicaragua, Consejo Nacional de Economia, Cficina de Planif icacion, Estudio d el comercio e xterior y de la balanza de pagos de Nica ragua. 1960-1964 . dlcipn^h^^, 1966, pp. 360-1.

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166 Table 30 divulges two ratios of long-term foreign obligations with Gross Domestic Product and compared vjith Gross Domestic Savings. Beginning with I960, the tendency of obligations to GDP has been upward; while compared with savings there has been relatively little change registered after i960. To pay its external obligations, Nicaragua must be able to set aside adequate savings; but to be able to transfer these sums outside of the country depends on having sufficient foreign exchange on hand. The data reveal that the country has been able to meet its external obligations throughout the growth period under analysis and indications are that immediate prospects appear favorable according to the measurements used. Reflections on the improvement in economic well-being tend to establish a growthrate well above the average. The recent growth of financial intermediaries has mobilized savings to a greater extent to amalgamate them with foreign funds invested in the country. Whether Nicaragua is able to hold onto this record pivots on future governmental policies, the ability to attract new capital, and stable growth of the export sector.

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16? Measurement of Growth The preceding chapters have analyzed the external public and private funds Nicaragua has received during the period under study. Now we can turn to the important aspect of whether economic growth has actually been achieved during the interval; i.e., it is now time to investigate whether the external funds, which have flowed into the country, have contributed to the mobilization of domestic resources in order to achieve some discernible rate of growth. After examining the growth statistics in this section, the following subdivision will further treat the topic of the influence external sources have had on overall grovjth. By economic growth, it is meant a sustained Increase in the per capita output of economic goods. Simon Kuznets writes that modern economic growth of countries has two distinctive features: "in all cases it involves a sustained and substantial rise in product per capita, and in almost all cases it involves a sustained and substantial rise in population . ^y^^ figures presented in the next few pages try to confirm whether this has been true in the case of Nicaragua. Kuznets also writes that "the emphasis on a sustained and substantial rise in per capita YoTlc.^^^T\^''^^'^'f^' Six Lectures on Economic r.rm .t.h (New York: The Free Press ol Glencoe. l961j, p, 14. ~

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168 product is particularly important because of its implications for the structure and conditions of modern economics growth."^ With human wants unchanged in a given period of time, a cumulative increase in per capita output results in demand shifts and therefore major changes in combinations of productive factors, in patterns of life, and in international relations. Measurement, then is not accomplished in terms of changes in the level of national incomes but according to the rate of change in per capita incomes. In other v;ords, if Nicaragua should be experiencing a population superfluity of an average annual rate of four per cent while total income is expanding at t?ie same rate, then little or no economic growth can be said to have occurred if changes in income are absorbed by changes in population. Jacob Viner states that "the basic criterion then becomes whether the country has good potential prospects of raising per capita incomes, or of maintaining an existing high level of per capita income for an increased population."^ Viner also points out that this definition "would be objectionable to those who want 'economic development' even 3 Loco cit o 4 Log , cit . ^Jacob Viner, International Trade and Economic Development . (Oxfordl Clarendon Press, 1953), p. 98.

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169 at the cost of a lowering of per capita income . . . Another problem associated with this kind of measurement, aside from lack of reliable data, deals with averaging the aggregates. This overlooks the issue of income distribution; however, this will not be dealt with here other than to present a table on some material covering the last five years of the study. Table 31 reveals what has taken place in the nature of population expansion and growth in the Gross Domestic Product. Although Nicaragua has experienced a rather precipitous rise in population which has cancelled out a substantial part of the rise in GDP per capita income has experienced a net improvement for the entire period. During the preceding expansion period, particularly high rates of accession were noted between I951 and 1952 (of 16.9 per cent) and 1953-195^ (of 9.3 per cent) in GDP, while population proliferated at an approximately even rate of 2.9 per cent annually. During the recession period, per capita income scarcely advanced; but if the two expansion periods and one recession period I95O through 1964 are measured, then a rate of accumulation in GDP of 6,0 per cent is seen, which produces a net rise in average annual per capita income of 3.I per cent. Scratching the first four years reduces the annual average rise in per ^Loc. cit.

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170 TABLE 31 POPULATION AND GROSS DOMESTIC PRODUCT OP NICARAGUA, 195^-1964 Years Population Gross Domestic Product Thousands annual Millions of % annual of Inhabs • increase 1958 cordobas increase 1954 1,185.9 2. 071 .4 2.9 6.7 1955 1 , 220.5 2,210.6 2.9 0.0 1956 1,256.1 2,209.2 2.9 8.5 1957 1.292.7 2,395.7 2 .Q 0.3 1958 1.330.4 2,403.6 2.9 1.5 1959 1,369.3 2.439.7 2.9 1.3 i960 1,409.2 2.472.9 2.9 6.5 1961 1,450.3 2,633.1 2.9 10.5 1962 1,492.6 2,910.6 2.9 8.1 1963 1,536.2 3,145.9 2.9 7.0 196-1^ 1,582.0 3.366.1 Average Annual Growth of Population GDP Per Capita Income 1955•1959 2.9 3.4 0.5 19601964 2.9 6.7 3.8 19551964 2.9 5.0 2.1 Sources: 1) Nicaragua, Banco Central, Inforne Anuel , 1964 , p. 68; 2) ^Nicaragua, Consejo Nacional de Sconomia, Oficina de Planif icacion, Plan Nacional de Desarrollo Economico y Social de Nicaragua, 1965-1969 , Pte. I, febrero. 1965. p. 9.^'

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capita income to 2.1 per cent. Returning to the Kuznets definition, then, Nicaragua's growth for this ten-year period is characterized by a substantial climb in per capita product and a sustained and substantial magnification of population. VJhether or not the economy can support a sustained growth rate is open to question and is a topic reserved for the next subdivision of the chapter. If by any stretch of the imagination it can be assumed that Nicarag;:ia is able to sustain a grovjth rate approximating the calculations made for 1955-196^ over a very long period of time, then a rate of expansion of 20 per cent per decade sustained over a century cumulates to 6,2 times the original value. Based on the calculations in Table 32, then per capita income by the year 2064 should be equal to close to $1,900. By the end of the century if should at least double. While it is impossible to Judge the technological changes, new discoveries, and structural alterations that are bound to occur over such a long projection, the figures do point out that it will be near the end of the present century before Nicaragua can hope to double the average income per Inhabitant, within the present pattern of growth and structure of the economy. Hopefully, the country will avoid some of the difficulties that past experience demonstrates may be expected and that the monetary and fiscal authorities will become

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TABLE 32 NICARAGUA: PROJECTED PER CAPITA INCOME. 1964-2100 (in U.S . dollars ) Year Approx. per capita income 1964 300 2000 600 2036 1,200 2064 1.900 2072 2,400 2100 3,800 Based on a constant rate of growth approximately equal to the average annual rate for 1955-1964. Source: Calculated from the data in Table 31. more sophisticated in the manipulation of the available tools. If a rate of growth comparable to or better than the I95O-I964 epoch can be achieved during the remainder of this century, then per capita income may approach the $1,000 mark by the year 2000. But even to approach the level found in the United States in 1964, the Republic would have to more than double its net rate of growth of I95O-I964 Just to reach this level by the end of the current century .

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CM rH • • On CX) o vH CM —J acio CM o NO • • • -H cn On o C\J <(-( :3 O yH •H u, 1— 1 C CG CC ?H rH CO CM CD On P4 O O NO • • •H o CJN CJN o ^ C^ < CO 'd Eh c O o\ CO r-i ^3 NO • • • o 05 ON CX3 OH 0^ <1h O o o • CO ON O o N£) n\ CO >-i tH M ^ NO • Eh vD C!N CO OS O • CO CTn G O Q. W T-H C tH 1 o s O o o p ^ On CX) W On • • • G CO tH C3N 0) o 0^ CO rH o • W CO CI) w rH O 1^ CO H CQ o CX) CM C H r-i
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The output of the primary sector surpassed, in 196^^, 83 per cent of the I95O production, but Table 33 reveals that the relative importance of the primary sector to GDP has been declining while a greater proportion of economic output has derived from secondary and tertiary activities.' Tables 32 and 33 suggest, that structural changes have been taking place within the economy. In 1955, slightly more than 65 per cent of the economically active population produced nearly per cent of GDP in primary industries. By 1964, the above figures had dropped by approximately 9 per cent from the 1955 relationship; i.e., about 59.5 per cent of the population was producing only a scant 39 per cent of the GDP in primary industries. It appears that only cotton received the benefits of technological application to the production process, while a large segment of the population has remained in agricultural activities of low or marginal productivity. I-Iany of these live near the subsistence level. Commercial loan policies and the rapid gain of cotton exports have been reviex^ed in earlier chapters. The preceding table indicates that the greatest changes observed in secondary activities have occurred largely in recent years. In 1955 they contributed slightly over 1^ per cent to GDP but by 1964 rose more than 40 per cent over the I955 figure to contribute in excess of 20 per cent to GDP. It was suggested in another chapter that

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175 perhaps a shortage of infra-structure services during the early part of the period may have contributed to the slov; growth of the industrial sect.or; but that during the latter part of the period, built in excess capacity has 'led' these activities. It is true that severe shortages of transportation and electrical energy did exist during most of the 1950' s. However, it vjould be an exaggeration to state that an ex-tensive infra-structure alone vj-as responsible for greater investment in secondary activities since many other factors, some of which have been recited, are similarly influential. Certainly the investments in an infra-structure have contributed to the economic development of the country, but the concern here is on the indirect achievements; viz., we are concerned viith the problem of whether these investments have contributed to any measurable economic grov;th. It is of further interest to attempt to determine whether growth can be sustained or vrhether the increases found in the period can be accounted for by injections of foreign capital into the economy. Although not well defined, the policy has been one to promote import substitution. The Increment in income and in population appears to have had relatively little influence to promote a structural change. The propensity to import consumer goods appears to rise with marginal Increases in income. (See Table 23.) It is suspected

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that a tendency to emulate the higherincome group is responsible for this trend. The writer has observed on innumerable occasions the prestige accorded to foreign-made goods and where the good is domestically produced efforts are frequently made to allude to possible foreign origin in advertising. For example, hand-rolled cigars from Esteli, Nicaragua are enveloped in a cellophane wrapper printed entirely in English. (Of course, some of the output is exported to the United States.) Before concluding this section, the table (Table 3^0 showing the distribution of personal income of Micaraguans for the last five years of the period reveals the changes for those individuals included in the survey. The table has several weaknesses and for that reason little comment will be made on any changes that appear to have taken place. These figures are constructed from the files of the National Institute of Social Security (INSS), which only encompasses that portion of the economically active sector v;ho voluntarily subscribes to the services of social security. By the end of 1964, 38.3 thousand individuals were registered, but since the table excludes government workers this eliminates ^.7 thousand. Commerce and industry enspheres 21.2 thousand of these alone. Those living Nicaragua, Banco Central, Informe Anual , 1964 . p. 125.

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TABLE 3^ NICARAGUA: DISTRIBUTION CF WORKERS ACCORDING TO V/ESKLY SAIiiRIES. 1960-196^ 1/ i960 1961 1962 1963 19d4' percentages accumulated Less than C 30.00 8.6 8.5 7.9 5.7 3.9 Less than /rS.OO 20.6 21 .0 19.^ 1^.1 10.2 Less than 66.00 3^.7 3^.2 31.^ 26.5 22.7 Less than 8^^.00 * excludes Source: Nicaragu a. Banco Central , Inform .e Anual, 196^. p. 126.

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178 outside of the money income and perhaps most of the maids, chauffeurs, small farmers and farm laborers are excluded from this analysis, which means that it is biased upwards. Few general conclusions can be drawn, then, about the economy as a whole. For those included in the above table, it can be said that in i960, 20.6 per cent of the contributors to Social Security received weekly salaries of less than C>48 and 50.9 per cent received weekly salaries of less than C!>8i|-. By 1964, only 10.2 per cent of the workers received shares of less than O'fkQ and about half of the population involved earned up to CftlOS weekly. Those earning salaries in excess of C41;558 weekly climbed from 2.5 per cent in I96O to 3.5 per cent five years later. The average weekly salary of government employees in I96O was C$202 (compared viith an average of C!?A35 i'ox all categories including Government) and was G$238 in 196-^ (compared with an overall average of C^';l60). The largest increase in salaries was registered with construction v:orkers v/ho averaged C^92 weekly in i960 but whose salaries rose 5? per cent by the end of 196^1-. Commerce registered only a 12 per cent gain starting from a base of C$169 weekly in I96O. The average for all categories, including Government, rose 19 per cent in the period.^ o Ibid . , p. 12k, 9 Loc. cit.

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179 It is dangerous to attempt drawing general conclusions from the data in this section mainly because the period covered is extremely short. Prior to 1950i the state of development was extremely low in modern terms and indications are that when a rise in per capita income vjould occur in one interval a decline in a succeeding span would eliminate part of the gains earlier achieved. Since 1950t substantial increases in per capita income have been registered for several years. The recession of the latter half of the decade seriously affected the results; and if the figures are to be believed correct to the last dollar, then negative results are recorded for most of the recession years . It can be stated that over the period a substantial rise in per capita income has taken place. It is more difficult to argue, however, that this is the beginning of a secular trend in economic growth. Analysis cannot be achieved on a year-to-year basis because of business fluctuations that occur during short intervals; figures based on perhaps ten-year periods would tend to iron out these variations. We can only speculate on the future trend, but part of this discussion will be reserved for the next section. If structural changes are to take place in order to achieve sustained growth, then the evidence observed does not reveal tendencies of sustained and substantial rates of increase.

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180 External Capital as an Economic Stimulant Now that it has been determined, as far as possible, that throughout the entire period under review at least some economic growth has occurred, some conclusions must now be drawn on the role of external resources in this process. The preceding chapters have traced the source and use of funds derived from outside of the Republic for purposes of economic development. The preceding section of this chapter has attempted to measure any changes these development efforts have had directly and indirectly in combination with domestic capital, to promote growth. To the extent possible, the importance of external funds will be isolated. In his lecture on "Economics of Development", Jacob Viner has said that "in countries where the marginal productivity function of capital is high and elastic, capital scarcity can be a major brake on economic development, and its pace can be greatly speeded if capital can be borrowed abroad at moderate rates. "'^'^ Many of the obstacles to international investment have already been pointed out, and the Government has relied rather extensively on funds from foreign governmental agencies and international organizations. Other than loans and investments, the role of the export sector is of major significance. 10,,. Viner, op. cit . , p. 109.

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181 During the period, the private sector has had to rely mainly on external sources, with the exception of the years 1959 and 1961, to complete its financing requirements. Table 35 reveals that private savings were deficient in providing the required investment funds because of a high consumption pattern. Groi^th in per capita consumption has averaged around three per cent annually over the past decade-and-a-half . The relatively high propensity to import consumer goods has been the source of a leakage to the economy . For every year after 1955. public investment has exceeded savings by the Government. The difference is derived from entirely "External Savings" for every year after I956 with the exception of the years 1959 and I96I. In 1959, private savings completely made up the deficit and in I96I private savings compensated for a large part of the deficit. External savings have been positive in every year of the study except in 1955 and in 1959 where a reversal of this flow is indicated. External savings were especially essential in the recessionary years of I956, 1957, and 1958. The activities of I959 have been related in other parts of the paper. The tendencies of the last three years— 1962, I963, and 196-^— suggest an even higher level of external savings to sustain the desired level of investments in both the public and private sectors.

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T-i u>i u^vo CM VO ON I I ^ VD <\J OnO^iTAOO VO O VO OO^VOOS-^ffjOOO^O x-i cv jjI I t I x-H I III OOn v-H ONVO ^ 1><\; CO T-^ (N-CO C\) U^c^i-H 0\ CNI I I t I I I I I -d!>VJ^ VO ONj:^ (MCO on 03 CNJ ^ jjCM ,-1 ^ ^ C»OC\J,-iO£>-OCN! U^VO CM NO • • CO ^ rH tH ON CM OON *. T-i CTnNO £>-nO C3N C7n t>O •rH £>-NO ^ VP) ON O o t-1 • CM {>ft C^NO o vO o O c3 p' +> fcc o O (1) Pi c\i o o o o sn o 6 o o u o g3 c3 cri 05 tt) ^3 ^ CM ;J o -d bO bOOD cD-H Ci (Jj cij N-i I— I g5 cd cj C -H O O CA O O •H -H NO -H rH Is^ ii^ T-i CO W -P •H CT W CM VANO £>-C0 CTnO ,h CM CA -V u>, \A vr>, U^NO NO VO NO NO ONCJNONC7NCJNONCKONC7NON w o o CO

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183 It may be interesting to reconstruct what might have happened within the economy had these resources not been utilized, but it is not necessary to the analysis. The obvious conclusion is that vjithout these funds the economy might have experienced some level of economic development but clearly no positive rate of growth would have taken place for the entire period in the absence of external savings. On this issue the National Planning Office of Nicaragua states that after 1953 external savings have contributed "permanently to finance the investments of 1 1 Government and of the private sector." In the decade of the 1950' s external funds began to flow into economic development projects. External loans transformed transportation and electric pov:er development. Stimulated by favorable -world prices and liberal credit, cotton surpassed coffee as the leading export. The Government turned more attention toward economic developff.ent and financed its development efforts from funds borrowed abroad. However, without substantial external assistance the development experiment would have failed; 11-. . Nicaragua, I'linisterio de Economio, Cficina de Plan i 1" i ca c i on , Plan Nacional de doj.-rrol] o e c on or-• c o y social de Nicaragua. 1965-1969 . r^te. irTeb^^TTTf — 1965. p. 118^ [Writer's Translation.]

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1? no growth would have been recorded for the period. The question to which we now return is whether the growth experienced was Just a transitory outburst caused by the injection of new capital or is the economy off to a period of sustained growth? It seems reasonable to conclude that without external assistance no growth would have occurred; but since the country has received this injection, structural changes probably should be occurring which will bring about a some sort of permanent combination of domestic resources to feed the process of continuing 12 It may be of interest to compare what is happening in some of the other countries of the region in terms of population rise and of the growth in real GNP. The following data are average annual per cent changes recorded from 1950 through 1963: Country Population Real GNP Per Capita Growth Costa Rica 3.9 7.6 3.7 Guatemala 3.0 3.I 0.1 Honduras 3.O 1,5 Mexico 3.1 5.9 Nicaragua 3. if 6.1 2.7 The years as well as the data presented for Nicaragua differ from the material found in other chapters of this paper; however, for purposes of comparison, all the data were taken from the same source. The above illustrates that Nicaragua has experienced a relatively high rate of population growth. This has been more than offset by an average annual increase in real GNP which is reflected in a relatively high rate of growth in per capita income. The case of Costa Rica above is overstated since 'Real GNP' is actually stated in current prices; Mexico and Nicaragua's GNP figures are actually Gross Domestic Product data. (International Bank for Reconstruction and Development, Department of Operations, Comparati ve Data on Latin American Countries . October, 1964. p. IT)

PAGE 195

185 growth. This may not have taken place to any significant extent. It is believed that unless Nicaragua adopts a pliable policy, any dynamism that has been achieved will disappear v;ithin a fev; short years in the absence of continued external assistance. In other words, it is felt that the economy has not reached a stage of self-sustained growth. Some Final Comments In the case of foreign loans, their successful amortization and interest payments depends upon vjhether the debtor country has used the loans for productive purposes and upon the creation of an export surplus from which foreign exchange will be available to service the loan.'''-^ It has been stressed that the policy followed by the Government of Nicaragua tov;ard exports has not been one that will support stable growth in the long run. The export sector is an important factor in the development experiment and repercussions of lov;income years are transferred to all parts of the economy. It is not suggested that all external funds should be channeled to form a lopsided development of this sector of the economy, but exports should contribute to stabilize and 13 Bagnar Nurske. Problems of Capital Format i or in Underdeveloped Countries . (>]ew Yorki ' Oxford iTr^i vpr^.Qi r.r Press, 1954;, p. 136.

PAGE 196

186 not to destabilize. It has been suggested that a wider range of available exports should tend to flatten out fluctuations. Over the long haul, however, dependence on two crops for exports, vjhose lonr^-run prospects do not necessarily appear to be the most favorable, is contrary to the spirit of the development experim.ent. Since this is already 196?, we can 'look ahead' of 196^ to see vihat the trend is for these two commodities. By the end of I966, exports had declined over the previous year, while imports have shov;n a significant rise. This is the first year exports have v;aned since I96O. The trade deficit with the other CACM countries continues to grow and was approaching S16 million by the end of I966. The deficit is generally attributed to higher costs and the less-developed state of Nicaragua industry. By early I967, the prospects for its exports appear less glowing. The downward trend in coffee prices toward the end of I966 forced an automatic reduction in export quotas by the members of the International Coffee Organization in order to strengthen prices. This creates difficulty for Nicaragua when it attempts to export the increase in production anticipated for I967. The 1966-1967 cotton harvest fell short of anticipated output due to a delay in the rains coupled with a plague which attacked much of the cotton crop. This will result

PAGE 197

18? in a sizeable Balance of Payments deficit which will have to be met out of existing foreign exchange reserves. Problems also arose in connection with beef exports to the United States. This sufficiently illustrates the problem which Nicaragua faces for the present, at least. On the other hand, foreign investment continues to flow into the country and the Government has negotiated several loans which will provide foreign exchange to be utilized in public works projects; economic growth continues to be registered for the years following 196^. It is difficult to predict the future course of economic growth since this centers largely on the policies the Nicaraguan Government chooses to follow; the problems associated with present policies have become apparent.

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I BIBLIOGRAPHY

PAGE 199

189 Articles and Periodicals Berheim, Carlos Tunnerman. "Exposicion comparada de las leyes organicas de las Universidades Centroamericanas," CSUCA (Leon, Nicaragua, I960), 1-3^. "The Central American Isthmus, "Latin American Report, V (April, 196^), 76-87. "Datos y Cifras," Americas , XV (Mayo, I963), 22-23. "Definicion y naturaleza del desarrollo economico," Desarrollo Sconomico , III, Nos. 3 Y ^ (I966), 3^-5, ^2. Gardner, Richard N. "Gatt and the United Nations Conference on Trade and Development," International Organization , XVIII (Autumn, 196i^), 685-705. "General Situation and Future Outlook of the Central American Sconomic Integration Programme," Economic Bulletin for Latin America , VIII (March, 1963). 22ff . Guerra, Jose A., y Lerd^u, Enrique. "Planeacion e Integracion en America Central," Economia La.tinoamericana , I (Julio. 196^). 351-366. Hanson, Simon G. "The International Coffee Agreement," Inter-American Economic Affairs , XVII (Autumn, 1963), 75-9^. "International Organizations: Summary of Activities, 'Central i\merican Program of Sconomic Integration'," International Organization , XVIII (Autumn, 196^), 873ff . Meek, George. "Coordinacion en Centromerica, " Americas , XVI (agosto, 196-^), 20ff. "Nicaragua Another Central American Success Story," First National City Bank Kagazine (July, I966), 1 f f . "Nicaragua," Latin American Business Highlights , XII (5hase Manhattan Bank, 1962 ), 11. Reddaway, W. B. "The Economics of Under-Developed Countries," The Economic Journal . LXXIII (March, I963), 9ff .

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"Report on Nicaragua," Latin American Report, IV (April 1961), 12-16. Revista Conservadora , XVI, No. 76 (enero, I967), 80-2. Smith, Peter. "Development and Dictatorship in Nicaragua, 1950-60," The American Economist , VII (June, I963), 24-32. Temas del BID , II, No. k (Julio, I965), Isig. Waggoner, Barbara, and George, and V/olf, Gregory 3. "Higher Education in Contemporary Central America," Journal of Inter-American Studies , VI (October, 1964), kkb-kbZ. Winters, Donald H. "The Agricultural Economy of Nicaragua," Journal of Inter-American Studies , VI ( October, 1964), 5OI-52I. Books Barquero, Sara L. Gobernantes de Nicaragua, 1825-194?. 2a ed. Nanagua: Kinisterio de Instruccion Publica Y. E. P., 1945. Brandenburg, Frank. The Development of Latin American Private Enterprise . (National Planning Association Pamphlet No. 121 . ) Washington: May, 1964. Bruton, Henry J. Principles of Development Economics . Englewood Cliffs, N. J.: Prentice-Hall, Inc., 1965. Cole Chamorro, Alejandro. 145 Anos de historia politica en Nicaragua . Managua? Editora Nicaraguense, I967. Comite para el Desarrollo Economico. Desarrollo economico de Centroamerica. Nueva York: CDE, noviembre. 1964. Committee for Economic Development. How Low Income Coimtries Can Advance Their OiTa Growth . New York: CED, September, I966. • Cooperation for Progress. New York: CED. 19^1. Cox, Isaac Jbslin. Nicaragua and the United States . Boston: World Peace Foundation, I927T

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191 Cuadra Pasos, Carlos. Hlstorla de medio slglo . 2a ed. Managua: Editorial Union, 1964. Cummins, LeJiine. Quijote on a Burro . Mexico, D. P.: La Impresora Azteca, 195b. Goldwert, Marvin. The Constabulary in the Dominican Republic and Nlcara,e!:ua . Gainesville: University of Florida Press, 1962. Guerrero C, Julian N. Geografia e Hlstorla de Nicaragua . Managua: Librerla Cultural Nicaraguense, 1963. Hlrschman, Albert 0. The Strategy of Economic Development . New Haven: Yale University Press, 1958, Ibarra Narvaez, Joaquin. Entre el dogal y la llberacion . Leon, Nicaragua: Editorial "El Centroamerlcano, " 1965. Johnson, Harry G. International Trade and Economic Grovjtht T' London: Unwln University Books, I965. Knight, Frank H. The Economic Organization . Harper Torchbook edition. New York: Harper & Row, I965. Kuznets, Simon. Six Lectures on Economic Growth . New York: The Free Press of Glencoe, I96I. Lecclones de hlstorla de la America Central . 4a ed. Managua : Institute Pedagogico de Varones, n.f. Lugo Marenco, J. J. A Statement of the Laws of Nicaragua in Matters Affecting Business . 2d ed. Supplement No. 1. Washington: Pan American Union, 195?. A Statement of the Laws of Nicaragua in Matters Affecting Business . 2d ed. Supplement No. 1. Washington: Pan American Union, I96O. Martz, John D. Central America ; The Crisis and the Chal lenge . Chapel Hill, North Carolina: University of North Carolina Press, 1959. Mikes ell, Raymond F. Public International Lending for Development . New York: Random House, I966. Nurkse, Ragnar. Problems of Capital Formation in Under developed Countries . New York: Oxford University Press, 1964.

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192 Porter, Charles 0., and Alexander, Robert J. The Struggle for Deinocracy In Latin America . New York: Maomillan Co., 19 61. Powelson, John P. Latin America ; Today's Economic and Social Revolution . New Yorkl McGraw-Hill Co., Roberts, Jr., Edwin A. Latin America . Silver Springs, Md.: The National Observer, 196k. Urquidi, Victor L. Free Trade and Economic Integration in Latin America . Berkley: University of California Press, 1962. Viner, Jacob. International Trade and Economic Development . Oxford: Clarendon Press, 1953. Government Publications Republica de Nicaragua: Banco Central . Banco Central . Banco Central . Banco Central . Banco Central . Banco Central . de Nicaragua . Vol. II. beptiembre. 1963. Banco Central. Hevista Trimestral . IV, No. l6 (octubre -diciembrel^ 196^. ~ Banco Central. Revista Trimestral . V, No. 1? (enero -marzo, 1965. ~~ Banco Central. Revista Trimestral . VI, No. 21 (enero -marzo, I966 ) . ~ Banco Central. Revista Trimestral . VI, No. 22 (abril -junio, 1966} . ~

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193 Banco Central, Revlsta Triciestral , VI, No. 23 (Julio -septiembre, I966 ) . Banco Central, Revlsta Trlmestral , VI, No. 24 (octubre -diciembre, 19 66). Banco Nacional, Departamento Tecnlco. Seccion de Sstadistica. Sstadlstlcas Agrlcolas de Nicaragua , 19611962 . (Mimeograf iado. ) Banco Nacional. Departamento Tecnico. Seccion de Estadistica. Sstadisticas Agricolas de Nicaragua , 19621963 . (Mimeograf iado. ) Banco Nacional. Departamento Tecnico. Seccion de Estadistica. Sstadisticas Agricolas de Nicaragua , 19631964 . ( Mimeograf iado. } ' '. Banco Nacional. Departamento Tecnico. Seccion de Estadistica. Sstadisticas Agricolas de Nicaragua , 19641965. (Mimeograf iado. ) Banco Nacional. Departamento Tecnico. Seccion de Estadistica. Sstadisticas Ganaderas I962 de Nicaragua . ( Mimeograf iado . ) Banco Nacional. Departamento Tecnico. Seccion de Estadistica. Sstadisticas Ganaderas I963 de Nicaragua . ( Mimeograf iado . } Banco Nacional, Programa de desarrollo industrial y sistema crediticia, I965-I969 . 1964. (Mimeograf iado. ) Banco Nacional. Programa Nacional para el desarrollo de la Ganaderla. . 1964. ~ Codigo del Traba.jo . Managua: Artes Graficas Nacionales. T9W: Consejo Nacional de Sconomia. Oficina de Planif icacion . Las activldades de la Oficira de Planif icacion del Gobierno de Nicaragua . Washington: Union Panamericana, octubre, I962. Consejo Nacional de Economia. Oficina de Planif icacion . Analisis del desarrollo economico y soci al de Nicaragua, 1950-1962" ; Agosto, 1964. (Version preliminar . )

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19^ Consejo Nacional de Economla. Oflcina de Planif icaclon . Cuadros Anexos-Anallals del desarrollo econonleo y social de Ilicaragua. 1950-1962~ A.gosto, 196'^. Consejo Nacional de Economla. Oficlna de Planif icaclon . Cuadros Estadisticos del Plan Nacional de desarrollo econoialco ?/ social de Nicaragua, 1965-1969 . Agosto, 1965 . Consejo Nacional de Economla. Oflcina de Planif icacion . Estudio del conerclo exterior y de la balanza de pagos de Nicaragua. 1950-196^^. Diciembre, I966. ConseJo^Nacional de Economla. Oflcina de Planif icacion . Estudio del desarrollo agropecuarlo de Nicaragua , 1950-1962 ~ Noviembre, I965. Consejo Nacional de Economla. Oflcina de Planif Icacion. Estudio del sector publico de Nicaragua , 1950-1962 ": Diciembre, 1965. '' Consejo Nacional de Economla. Oficlna de Planif Icaclon . Estudlos de los servlcios de transportes en Nicaragua, 1950-1962 . ' Consejo Nacional de Sconomia. Oficlna de Planif icacion . Evaluacion del programa de inverslones publlcas . enero-septiembre, I965 . Noviembre, 19 65. Consejo Nacional de Economla. Oficlna de Planif Icacion . Plan Nacional de desarrollo economico y social de Nicaragua, 1965-1969 . Parte I. Pebrero, I965. Consejo Nacional de Economla. Oflcina de Planif icaclon . Programa de inverslones publlcas de Nicarag ua para 1965 . Agosto, 196i^. ' ^ Consejo Nacional de Economla. Oficlna de Planif icacion . Situacion economico de Centroamerica en I965 y cumpllmlento de los planes de desarrollo. rH~de abril, I966. Empresa Nacional de Luz y Fuerza. Datos, Estadisticos. 1963. — • Empresa Nacional de Luz y Fuerza. Datos, Estadisticos 196^ . ' Empresa Nacional de Luz y Fuerza. Datos, Estadisticos. 1965 * —

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Empresa riacional de Luz y Fuerza. Inf'orme Mensual . Diciembre, I966. Institute Agrario de Nicaragua. Noticias Agrarias . II (31 de mayo de I965). ( Mimeograf iado . ) Institute de Foraento Nacional. Compendlo de actividades de interes desarrolladas durante la semana comprendida de mayo 31 al 5 de Junio , I ( 5 de jimio, 1965). (Mimeograf iado. ) Institute de Fomento Ilacional. Impulsando al Desarrollo Ma clonal INFONAC 10 anos . Suplemento de publicidad. 1963. Institute de Fomento Nacional. Nicaragua ; Tierra de lages y vol canes , n.f. Leyes de Aduanas y Puertes de I3. Republlca de Nicara.gua . Managua : Editorial Lacaye, I962 . Ley sobre inverslones extran J eras . 26 de febrero, 1955* Ley de protecclon y estlmulo al desarrollo industrial . 20 de marzo, 1958. Ministerie de Economia. Direccion General de Estadistica y Censos. Soletin de Estadistica . Ill, No. 9, i960. Ministerio de Economia. Direccion General de Estadistica y Censos. Boletin de Estadistica . 1964. Mlnlsterio de Economia. Direccion General de Estadistica y Censos. Boletin de Estadistica . Ill, No. 11, 1966. Mlnlsterio de Economia. Direccion General de Estadistica y Censos. El cafe en Nicarap;ua . I96I. Mlnlsterio de Economia. Direccion General de Estadistica y Censos. Censos Nacionales I963 Agrouecuario . Marzo, I966T ' Mlnlsterio de Economia. Direccion General de Estadistica y Censos. Censos Nacionales I963 Vivlenda . Vol. I. Septiembre, I965. Mlnlsterio de Economia. Direccion General de Estadistica y Censos. Censos Nacionales I963 Vivlenda * Vol, II. Diciembre, 1965 ,

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196 Mlnisterio de Economia. Direcclon General de Estadlstica y Censos. Censos Nacionales 19^3 Vivienda. Vol. III. Agosto, 1966. Mlnisterio de Economia. Direccion General de Estadistica y Censos. Clasificacion alfabetica de articulos , basada en CUGI, para los censos de Mineria, Industrie., Comercio, y Servicios . Junio, 1965 • (l-iimeograf iado . ) Mlnisterio de Economia. Direccion General de Estadistica y Censos. Poblaclon de la Republica por departa mentos y rauniciT3ios---urbana y rural . Calculada al 2b de febrero. 196?. Ministerio de Economia. Direccion General de Estadistica y Censos. Resumen de Estadistica, 195^-^960 . 2a ed. Jixnio, 1961. ' Ministerio de Educacion Publica. Division de Recursos Human OS . Nicaragua; Algunos aspectos historicos. , geograficos, ecologlcos, economicos, demograf icos , sociales y educativos~ ( US /A ID/K i ca . ) , n . f . Ministerio de Fomento y Obras Publicas. Departamento de Carreteras. 10 anos de servicio al Patria , 1955-1965. Ministerio de Trabajo, Departamento de Estudios Economicos. Sncuesta del comercio,. I965 . Julio, I966. (Mimeograf iado. ) National Tourist Bureau. Nicaragua A Country on the March . New York: Las Americas Publishing C, I960. Proyecto de Ley de Reforma Agraria . Enviado por el Poder Sjecutivo al Soberano Congreso Nacional. United States of America: Congress. Foreign Assistance Act of I96I . (As amended.) Congress. Joint Economic Committee. Subcommittee on Inter-American Economic Relationships. Hearings , Latin American Development and VJestern Hemisphere Trade . b9th Cong., 1st Sess., September «-10. 19^

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197 Department of Commerce. "Basic Data on the Economy of Nicaragua," Sconomic Reports . Part I. No. 61-66. March, I961. Department of Commerce. "Import Tariff System of Nicaragua," Overseas Business Reports . OER 63-18. March, 1963. Department of Commerce. International Commerce (March, 1963). Department of Commerce. "Investment in Nicaragua," Overseas Business Reports . OBR 62-14. December, 1962. Department of Commerce. "Trade and Invest in Central America," International Commerce (July, I965). ( Supplement . ) ~ Department of Interior. Bureau of Mines. The Mineral Industry of Nlcaraq:ua . (Reprint from Bureau of Mines, Minerals Yearbook, I963 .) Department of Labor. Bureau of Labor Statistics. Labor Law and Practice in Nicaragua . BLS Report No. 265. January , 1964 . Department of State. Agency for International Development. Memorandum; Aids to Business (Overseas Investment) . January, I963 . " Department of State. Agency for International Development. Office of Development Finance and Private Enterprise. Investment Guaranties Division. Cumulative Henort of All Specific Risk Investment Guarantees Issued since the Beginning?: of the Program In 1948 through March 31. 1966 . (Mimeographed copy from the files of Mr. Kadet, USAID Officer, at the U.S. Embassy in Managua, Nicaragua. ) Department of State. Agency for International Development. Specific Risk Investment Guaranty Handbook . Revised. October, I966. ~~~ Department of State. Bureau of Public Affairs. Office of Media Services. Background Notes on Nicaragua . Publication No. 7772"; November, 1964.

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198 Embassy in Nicaragua. Carta Comerclal . ( Publlcada trimestralments por la seccion comercial de la Estados Unidos en iManagua «) Enero, 1967 * ( Mimeograf iado . ) Embassy in Nicaragua. . Sunraary of Economic Conditions in Nicaragua . 3rd quarter, I966. (Kimeographed. ) Embassy in Nicaragua. Summary of Economic Conditions in Nicaragua . 4th quarter, 19 66, (Mimeographed. ) International Organizations Publications Banco Interamericano de Desarrollo: Actividades por paises, 1961-1964 . "El Banco presta US^^5f 250, 000 para progrsma de vivienda en Nicaragua," Gorr.unicado de orensa . (CP-l/65) (11 de enero, 196^". (Nimeograf iado. ) "El Banco presta US$9,100,000 para el program.a ganadero en Nicaragua," Comunicado de prensa . (CP-2/65) (febrero, 1965 )1 ( lameograf iado . } Primer Informe Anual, I96O . Segundo Informe A.nual , I96I . Tercer Informe j'^nual, I962 . Cuarto Informe Anual, I963 . Quint o Informe Anual, 1964 . Sexto Informe Anual, I965. International Bank for Reconstruction and Development: Fourteenth Annual Report, I958-I959 . Fifteenth Annual Report, I959-I96O. Sixteenth Annual Report, I96O-I96I .

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199 Seventeenth Annual Report, I96I-I962 . Eighteenth Annual Report, I962-I963 . Informe Anual. 1963-196^ . El Banco Mundlal y sus flllales en las Americas; resumen de sus actlvldades . Junlo, 1963 . Department of Operations. Comparative Data on Latin American Countries . October, 1964. Department of Operations. The Current Economic Position and Prospects of Nicaragua, 1957^ January 28, 1958. (Restricted Report No. V/H-66a. ) The Economic Development of Nicaragua . Baltimore: John Hopkins Press, 1953. Loan Agreement 332 NI (Rlvas Irrigation Project) between Nicaragua and the International Bank for Reconstruction and Development. March 1, I963. The V/orld Bank and IDA In the Americas . January, I962. The World Bank Group In the Americas; a Simmary of Activities . June, 1963. United Nations: Annualre de Statlsques des Compatibilities Nation al e s , 1963 . Neuve York: 1964. Comision Economlco Para America Latina. Boletln Eco nomico de America Latlna . VIII, No. 1 (1962). Conferencia sobre Comerclo y Desarrollo. Expansion del comerclo Internacional y su Importahcia para el " desarrollo economlco . Parte I, Ginebra, 26 de f ebrero, 1964 . Conferencia sobre Comerclo y Desarrollo. Expansion del comerclo internacional y su Importahcia para e l desarroll o economico . Parte II, Ginebra, 28 de f ebrero, 1964. Conference on Trade and Development. Final Act . Adopted by the Conference at its 35th plenary meeting held on June I5, I964.

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1 200 Conference on Trade and Development. Handbook of International Trade Statistics , Part II, Geneva, TWT. ~" Conference on Trade and Development. The Significance of GtiT'T for Underdeveloped Countries . Paper submitted by Professor Staff an 3. Linder on January 21, 1964. Conference on Trade and Development. Tovjards a Mew Trade Policy for Development . Report by Secretary-General Paul Prebisch, Nev: York, 1964. Consejo Sconomico y Social. Poslbllidades de desarrollo industrial Intepcrado de Centroamerica . Vol. II (E/CN.12/CCE/323, 22 de abril, 1965 . Department of Economic and Social Affairs. Possibilities of Integrated Industrial Development in Central America ( E/CN . 12/683/Rev . 1 , July. 1964). Department of Sconomic and Social Affairs. Yearbook of International Trade Statistics, I962 . New York: 1964. Economic Commission for Latin America. Human Resources of Central America. Panama., and Kexlco, 19 50-19^0 . Prepared by Louis Ducoll (E/CN.12/54b, i960). Economic Commission for Latin America. Report of the Central American Economic Cooperation Committee (September 3. 1959 to December 13, i960). Economic Commission for Latin America. The Role of Agriculture in Latin American Common Market and Free-Trade Area Arrangements (9th session) (Caracas, May, I96I). Economic Commission for Latin America. Tovfards a Dynamic Development Policy for La,tin A merica . (E/CN.l2/680/Rev.l) (New York, I963.). The Sconomic Development of Latin America in the Post-War Period (S/CN.I2I659U Rev.l) (New York, 1964). Fondo Especial. Nicaragua; Sstudio Mineraloglco, • 1963-1965. ^

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201 General Assembly. Report of the Economic and Social Council. I8th Sess., Agenda Item No. 12, October 23. 1963. Monthly Bulletin of Statistics . XVIII (December, 196k), Organizacion para la Agrlcultura y la Alimentaclon. Anuarlo de Gonerclo, I963. Roma: 1964'. Other International Organizations: Banco Centroamericano de Integracion Econonlco. Estudlo sobre proyectos industrlales . Abrll, I963. Banco Centroamericano de Integracion Economlco. Integracion de Transportes . I96I. (Reporte preliminar. ) Central American Bank of Economic Integration. Central American Transportation Study . Vol, I. '/ashlngton: T.S.C. Consortium Transportation Consultants, Inc., July 1, 1965. Central American Bank of Economic Integration. Central American Transportation Study . Vol, II. Washington: T.S.C. Consortium Transportation Consultants, Inc., July 1, I965. International Monetary Fund. Intern.^ t ional Financial Statistics, XVIII (May, 1965). International Monetary Fund. International Financial Statistics, XX (January, 196?). Organizacion de Sstados Americanos. Consejo Interamerlcano Economlco y Social. Las Actividades de la Oficina de Planlficacion del Gobierno de Nicaragua . b de octubre, 1962. (Mimeograf iado . ) Organizacion de Estados Americanos. Indices de preclos al consumldor . Washington: Union Panamericana. 1964. Organizacion de Estados Americanos. Nicaragua , Washington: Union Panamericana" I962 . Organizacion de Estados Americanos. Sistemas tributaries de America Latina . Washington! Union Panamericana. 19^5:

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202 Newspapers (By dates) "Las relaciones con America Central pueden incrementarse, " El Universal (Mexico, D.F.), 18 de marzo, I965. "Buscar sin timidez la Integracion Economica," El Universal (Mexico, D.F.). 25 de marzo, I965. Alvarez Montalvan, Emilio. "La Ultima Memoria del Banco Central," La Prensa (Managua), 9 de junio, I965. Eaca Munoz, Alejandro. "Aclarando conceptos sobre la Integracion Economica Centroamericana IV," La Noticia (Managua), 9 de Junio, 19 65. "Inauguran Conferencia de Inversiones de C. America," Koticia (Managua), 9 de junio, I965. "Reforma de la Ley Agraria," La Noticia (Managua), 9 de junio, 1965. "Politica Comun de Gentroamerica, " La Prensa (Managua), 23 de junio, I965. "ENALUP: una Empresa en Marcha, " Las Novedades (Managua), 18 de marzo, I967. "Mensaje del Senor President e de la Republica Dr. Lorenzo Guerrero al Honorable Congreso Nacional," Las ilovedades (Managua), 20 de abril, 196?. "Diez Millones en Deficit de Pagos," La Pr ensa (Managua), 26 de abril, I967. La Gaceta (Dlario Oficial de Nicaragua): La Gaceta . No. 30. 6 de febrero, I956. "Otorgase proteccion legal a fabrica de rom hecha," La Gaceta . Mo. 63, 16 de marzo, 1959. "Decreto No. if09 que establece un subsidio r^ara los alsoaoneros, " La Gaceta . No. 6I . 31 de marzo,

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203 "Decreto No. 8 de 28 de julio de I96I para crear un organo de coordinacion y planlf icacion de desarrollo economico y social," La Gaceta . Ko. 195. 26 de agosto, I96I. "Decreto 52 de 31 de enero de I962," La Gaceta . No. 33. 8 de febrero, I962. "Reformas FundasientalcG al Codigo del Trabajo," La G'^.ceta . No. 233. 13 de octubre, I962. "Protecclon a fabica de calzado de materiales plasticos," La Gaceta . No. 23?. 18 de octubre, I962. "Ley de Ref orma Agraria, " La Gaceta . No. 85, 19 de abril, 1963. Other Sources Bradbury, Robert W. "The Prospects for a Latin American Coimnon Market," Economic Leaflets (University of Florida), XXVI, No. 5 (.Xay, 196?). Conversation v/ith Don Allen, Export Manager, V/allace Hatchery, Inc., St. Petersburg, Florida. January 10, 196? . Conversations with Carlos Flores Lovo, President, Oakcrest de Nicaragua, Managua, Nicaragua. On various occasions in June and July, 19 65, and February-Kay, 1967. Conversation v:ith Jaine Flores Lovo at his home, Managua, Nicaragua. March 6, I967. Nicaragua . Atlanta, Ga.: Conway Research, Inc., February, 1964. (A reference study by Industrial Developaent Manufacturers Record.) Conversation with Joseph P^mlrez, Vice-Consul, Consulate of Costa Rica, Miami, Florida. January 5, I967. Palabras del Dr. Carlos Sanz de Santamarla, Presidente del Comite Interamericano de la Alianza para el Frogreso (CIA?), en la reunion informal celebrada el 7 de octubre de 1964 en la sede del CIAP.

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Sobalvarro Vega, Roberto. "Desenvolvimiento hlstorico situacion actual de la Industria Manufacturera . Jionografia presentada por el autor para optar a titulo de Licenciado de Sconoala, Facultad de Ciencias Econoriicos, Universidad ?'aclonal Autonoma de Nicaragua, .Managua, 19 66. Conversation with John VJallace, President, V/allace Hatchery, Inc., St. Petersburg, Florida. January 10, 196?.

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VITA Born in Central Ohio in 1933, Robert Paul Vichas studied for several years in the public schools, of Ohio' before attending Kentucky Military Institute at Lyndon, Kentucky, and Venice, Florida. Upon receiving his high school diploma, he enrolled in Louisiana State University for three terms, after which he travelled for a business firm headquartered in Lansing, Michigan . The following year he became a partner in a medium-sized retail firm, active in the day-to-day management, where he remained for nearly four years. After mid-1957, he was em.pl oyed by Dun and Bradstreet, Inc., where he received valuable business experience in analyzing a variety of credit problems and in sales by representing the company to a number of well-lcnown national and international firms. In early I963, the writer resigned from, this latter employment to return to undergraduate studies. He again attended Louisiana State University (Eaton Rouge) from where he earned the degree Bachelor of Science in "International Trade and Finance." During parts of 196^1and 1965, he was enrolled in classes at the University of the Americas (Mexico, D.F.). This institution, in which 205

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206 he majored in Economics and minored in International Relations, av:arded him the degree Kaster of Arts for his achievements there. Since September, 1965i Vie has been X'jorking toward fulfilling the requirements for the degree Doctor of Philosophy in Economics from the University of Florida (Gainesville). Mr. Vichas maintains his residence at Fort Lauderdale, Florida, with his wife, the former Maria Dolores Flores Castellon.

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This dissertation was prepared under the direction of the chairman of the candidate's supervisory committee and has been approved "by all members of that committee. It was submitted to the Dean of the College of Business Administration and to the Graduate Council and was approved as partial fulfillment of the requirements for the degree of Doctor of Philosophy. August, 1967. A dm in i s t ra t i on Dean, Graduate School SUPERVISORY COMMITTEE: