Making the Economy Scream

On May 1, 1985, then-President Ronald Reagan solemnly declared that the United States was facing a "National Emergency." According to the president, an impoverished country of some 3.5 million people, roughly the size of New York State, with a GNP smaller than the economic output of most mid-Western U.S. towns, constituted "an unusual and extraordinary threat to the security and foreign policy of the United States." Taking the unusual step of invoking the International Emergency Economic Powers Act, Reagan imposed a comprehensive economic embargo on Nicaragua.

In the more than four years since, the United States has been severely criticized for the embargo. Latin America chided Washington for its punitive measures, Western Europe defied pressures to join in and the International Court of Justice ruled that the sanctions were illegal and ordered the United States to indemnify Nicaragua for damages. Each year, the United Nations General Assembly has voted to condemn the U.S. measure, as has the Non-Aligned Movement. Participants in the General Agreement on Tariffs and Trade (GATT) have also criticized the embargo as contrary to the principle of free trade. Even Washington's allies in the Nicaraguan private sector and harsh Sandinista critic, Cardinal Miguel Obando Y Bravo, have called on the United States to lift the sanctions. Despite the extensive condemnations, Reagan's successor, George Bush, decided to renew the economic embargo against Nicaragua last May 1 (and again on Nov. 1).

The embargo and U.S. economic warfare

Economic warfare has long been used by Washington as a political instrument against countries considered unfriendly or threatening to U.S. interests, and is usually aimed, as Henry Kissinger once put it with regard to Allende's Chile, at "making the economy scream."

Yet what makes Nicaragua different from other countries embargoed by Washington is that the United States has historically had no significant direct economic stake there; no more than a couple dozen U.S. companies have ever maintained substantial investments there, and Nicaragua does not supply the United States with any strategic resources. Washington's interest in that country has always been geo-political, stemming back to the mid-1800s when the prospect of building an inter- oceanic canal through Nicaragua first excited U.S. business interests.

The Reagan/Bush sanctions are one component of a complex war strategy directed against the Sandinistas including a range of military, political, diplomatic, ideological and economic aggressions. In the wake of the 1979 war of liberation against the Somoza dictatorship, U.S. strategists were quick to identify the underdeveloped, disarticulated and shattered Nicaraguan economy as the "weak underbelly" of the Revolution. "It takes relatively few people and little support to disrupt the internal peace and economic stability of (that) small country," noted then-CIA Director William Casey.

The economic war was designed to grind away at the country's productive infrastructure by means of contra attacks and also such CIA actions as mining the harbors and blowing up underwater oil pipelines. This physical destruction was to be complemented by external economic pressures, including the trade embargo, the blocking of multilateral credits and the exclusion of Nicaragua from European and Latin American commerce. In fact, the 1985 embargo merely capped the "creeping" economic blockade which Reagan initiated soon after taking office.

The "creeping" blockade

Reagan's first move was to suspend final payment on a U.S. loan package to Nicaragua approved by the Carter administration, which was followed by the cancellation of all bilateral assistance. In 1983, Washington reduced Nicaragua's sugar quota to the United States by 90 percent, and then eliminated it altogether the following year.

Between 1981 and 1985, the United States used its veto power to block numerous loans that had been approved by World Bank and Inter-American Development Bank (IDB) officials. Although Washington publicly claimed that its vetoes were in response to improper Sandinista economic policy, a confidential report by the U.S. Executive Director to the World Bank acknowledged that in fact "project implementation has been extraordinarily successful in Nicaragua and in some sectors, better than anywhere else in the world." In total, more than $400 million in loans and credits which had already been approved as bilateral and multilateral assistance were blocked by the Reagan administration in those four years. Simultaneous to the suspension of bilateral credits and before the slashing of the sugar quota, Washington cut off the investment insurance offered by the Export-Import Bank and the Overseas Private Investment Corporation. This step was detrimental to the capital-depleted Nicaraguan government because it was forced to pay in cash for all future U.S. imports. It also served as a strong disincentive to U.S. firms exploring the possibilities of trading with, or investing in, Nicaragua.

The loss of multilateral funds hurt the new government, as 34 percent of the country's external financing at the time came from these sources. Inside the country, the funds were earmarked for projects deemed critical to economic reactivation in the wake of the Revolution, which had reduced the gross national product (GNP) by some 30 percent. Moreover, most of the funding was to go to the private sector, which to this day accounts for 65 percent of the GNP.

But this was not enough to appease Washington. In 1983, the National Security Council compiled a list of diverse sanctions and economic measures that could be taken against Nicaragua, including trade cutoffs and pressure on West European allies to cease trade and aid. By early 1985 many of these steps had been implemented. First, the World Bank declared Nicaragua "ineligible" for any further assistance. That same year, Washington took the campaign to unprecedented heights when then- Secretary of State George Schultz sent a letter to IDB President Antonio Ortiz Mena, threatening to suspend all U.S. funding for the Bank if it went ahead with its plan to disperse a $58 million agricultural loan to Nicaragua which technical officers had already approved on economic grounds.

Latin American IDB officials were furious: "The gringos think their money and power gives them the right to turn the Bank into an instrument of their foreign policy," one official, in charge of Central American disbursements, told Multinational Monitor. Nevertheless, the Bank Directors succumbed. "The Bank has completely caved in to pressure from the U.S. administration," complained the Nicaraguan Central Bank President Joaquin Cuadra Chamorro.

The loss of U.S. bilateral and multilateral aid forced Nicaragua to rely heavily on socialist sources for foreign assistance. The Ministry of Foreign Cooperation reports the sources of the $5.9 billion in foreign economic assistance that the country has received from 1979-87:

From "creeping" to total embargo The May 1985 embargo, prohibiting "all imports into the United States of goods and services of Nicaraguan origin, all exports from the United States of goods to or destined for Nicaragua, except those destined for the organized resistance (i.e., the contras), and transactions relating thereto," as well as all air and sea travel between the two countries, was the culmination of the four-year "creeping" blockade.

The measure had disastrous repercussions for the entire process of production and distribution in Nicaragua. The backward, export-oriented economy had been extremely dependent on the United States, particularly for technology and capital goods. Much of the country's agricultural equipment and industrial base depended on U.S. machinery, spare parts and technology. For instance, the country's agro-industrial complex (slaughterhouses, sugar mills, coffee processing plants, cotton harvesting, fumigation aircraft, etc.) is nearly 100 percent American. Ninety percent of the nation's air fleet was from the United States, as was 40 percent of its public transportation fleet. Much of its service infrastructure, ranging from the sewage system to telephone lines, depended on U.S. equipment.

Nicaragua was acutely aware of the threat its dependence posed to the Revolution and had actually embarked on a strategy of market diversification since 1979, as part of a broader policy of non-alignment and the diversification of international relations (what one Nicaraguan leader billed as "diversifying dependence").

By the time the embargo was imposed, Managua had already significantly restructured its international economic relations. The Sandinista government had opened up new markets in Western Europe, Latin America and other developing countries, Asia (principally Japan), Canada and the socialist countries for its traditional agricultural exports of bananas, coffee, sugar, beef, cotton and seafood, as well as lumber, minerals and several other non-traditional products. The U.S. share of Nicaragua's imports decreased from 49 percent in 1980 to about 15 percent in 1985. In the same period, Nicaraguan exports to the United States decreased from 35 percent to less than 15 percent of the total.

This restructuring helped Nicaragua weather the United States' ongoing pressure. The effects of the embargo on Nicaragua's exports were limited to the initial dislocations resulting from the development and consolidation of new markets and to the greater costs involved in transporting goods to more distant ports. Within days of the embargo, for example, the first shipment of bananas (the principal U.S. import at that time) was re-routed to new markets in Belgium, the Netherlands and other European countries. In fact, most hurt were several private U.S. importers, such as Jack Pandol of California, who reported that 25 percent of his total business would be affected by the embargo, adding that "the U.S. lost and the Nicaraguans did not lose anything."

Moreover, the importation of capital goods from the United States had almost completely ceased by 1985. The Nicaraguan government had already begun to use new technology from other countries, so that the technological and industrial dependence that remained by 1985 was reduced to the maintenance of existing plants and machinery. Also, U.S. subsidiaries in other countries began providing some of the machinery and equipment previously imported directly from the United States.

Contrary to the perception promulgated by Washington that Nicaragua is an economic vassal of Moscow, the Sandinistas clearly achieved their goal of diversifying and balancing the country's trade regime without trading one dependency relationship for another. Overall trade with the socialist countries went from zero in 1979 to 11 percent of the total right before the embargo. It then shot up, in the wake of the sanctions, to 32.4 percent but has since levelled off at about 40 percent. Similarly, trade with all capitalist countries currently accounts for about 40 percent of the total, with nearly 29 percent corresponding to the EEC countries and the remainder, to Japan, Canada and others while trade with the U.S. is, of course, zero. The remaining 20 percent of the country's foreign trade is dispersed among Latin America and other developing countries, including markets recently opened up in China, Taiwan, the Caribbean and the Middle East.

Nevertheless, largely as a result of the embargo, Nicaragua's GNP, which had been slipping by about 1 percent per year due to the contra war, plummeted by 4.1 percent in 1985, while the trade deficit widened by some 40 percent. Both were key factors in sparking the inflationary spiral which peaked several years later.

Isolating Nicaragua in Latin America and Western Europe

The third plank in Washington's economic destabilization plan was to isolate Nicaragua from international economic intercourse, starting with the country's Central American neighbors and broadening to include Latin America, Western Europe and the rest of the world. The 1985 Agency for International Development (AID) annual report, for instance, recommended that AID use its funding to Central America to pressure those countries to reduce trade with Nicaragua. Although most of the Central American regimes subordinated their foreign policies to Reagan's anti-Sandinista campaign, at least up until the Esquipulas Accords were signed in 1986, not one agreed to go along with the embargo. The region's historic interdependence, heightened by the limited integration achieved through the establishment of the Central American Common Market in the 1960s, makes it impossible for the Central American nations to isolate one country without affecting all of them. Latin America also rejected Washington's embargo outright.

Perhaps Washington's biggest disappointment, however, has been its failure to bring Western Europe into the economic blockade. Implicitly rejecting the Monroe Doctrine, during the 1980s the Europeans developed their own perspective on Central America. Operating with a view towards their future Common Market and expanded international trade and investment, the Europeans have defined their interests in Central America as different from those of the United States. In the yearly summit meetings between the EEC and Central American Foreign and Economic Ministers, during which European aid and trade with the Isthmus are discussed, political stability and integrated regional development, with the explicit inclusion of Nicaragua, have dominated the agenda.

Ever since the first of these summits, in San Jose, Costa Rica in September 1984, the State Department has tried to isolate Nicaragua. On the eve of the 1984 meeting, for instance, then- Secretary of State George Schultz sent a much-publicized letter to each EEC Minister, urging them to exclude Nicaragua from any EEC economic agreement.

Although certain European governments, particularly those of Margaret Thatcher and Helmut Kohl, have held back assistance to Managua at the behest of Washington, Nicaragua is in fact the principal Central American recipient of EEC multilateral aid, as well as of bilateral aid from most of the Scandinavian countries.

As with foreign aid, the withdrawal of U.S. foreign investment has coincided with and perhaps stimulated the emergence of Europe and Japan as the major sources of foreign capital flowing into Nicaragua. No new U.S. investment has been recorded in Nicaragua since 1979, but European and Japanese companies have embarked on numerous individual and pint ventures. Several Italian firms constructed Nicaragua's novel "Momotombo" geothermal energy plant, a French company rebuilt Managua's telephone system and a consortium of Italian and other European firms are involved in a $40 million tourist project at the Pacific Coast resort of Montelimar. Japanese interests are financing studies to determine the feasibility of constructing an interoceanic canal through Nicaragua.

In 1988 the National Assembly approved a new foreign investment law, drafted with the assistance of the UN's Center on Transnational Corporations and advisers from the Mexican and Cuban governments. The legislation guarantees foreign investors repatriation of a percentage of profits and access to national and foreign credit.

Currently, about 36 multinational corporations are active in Nicaragua, including such giants as Esso, Coca Cola, Nestle and Nabisco. Most of these companies have enjoyed what they describe as a cooperative relationship with the Sandinista government, with their main complaint being the acute shortage of foreign exchange. In fact, according to a 1986 Harvard Business Review article entitled "Managing After the Revolutionaries Have Won," which interviewed managers of 40 foreign enterprises in Nicaragua, multinational corporations have "survived, grown and generated profits" since 1979.

In an effort to encourage new foreign investment, Minister of Foreign Cooperation Henry Ruiz has met with members of the U.S. business community since the drafting of the foreign investment law, arguing that the economic blockade does not have to be an obstacle to U.S. foreign investment. Ruiz has cited the fact that no U.S. sanctions have been imposed against Coca Cola or Esso, which ironically throughout the war refined Soviet oil for use in combat aircraft and army vehicles.

How much damage?

Quantifying the damage inflicted on the Nicaraguan economy by the U.S. economic warfare is difficult because specific losses are inextricably linked with losses accruing from other categories of U.S. aggression, including contra sabotage, and the secondary and tertiary effects of the sanctions. For instance, it is impossible to determine how much the GNP might have grown if the country had received the nearly $500 million in multilateral credits blocked by the United States. Nor is it possible to quantify losses in terms of the value of goods not produced due to the embargo.

Nicaragua's case against the U.S. government in the World Court entered the "phase of compensation" in 1988, with initial court hearings on indemnification. The Managua government has entered claims for damages accrued from the illegal U.S. actions totalling $12.16 billion, including losses of $608 million directly resulting from the embargo.

Washington claims the economic crisis is due to "Sandinista mismanagement." But, the contribution of U.S. economic warfare to Nicaragua's economic trouble is so undeniable that in 1985 the United Nation's Economic Commission for Latin America and the Caribbean (ECLAC) broke with its policy of formulating its country reports on the basis of strictly economic criteria, and began adding special appendices to the Nicaragua country report which assessed the "impact of the economic and military siege."

Bush follows Reagan's lead

The embargo has not only been widely rejected abroad, but has also been repudiated by elements in Nicaragua and in Washington. "The embargo was a mistake from the beginning," according to Carlos Huembes, president of the right-wing, anti-Sandinista coalition, "Coordinadora Nicaraguense." Anti-Sandinista business, labor and political groups are united in calling for an end to the sanctions. In addition, last April some 50 Congressional representatives wrote to President Bush calling for an end to the embargo. (Congress has not, however, gone so far as to exercise its authority under the National Emergencies Act to nullify the "state of emergency" that provides the legal basis for the sanctions.) Despite these entreaties and the continuing violation of international law, George Bush has opted to follow his predecessor's lead.

Facing the urgent need to reactivate the economy after eight years of war, in 1989 the Sandinistas introduced a drastic adjustment program, following the recommendations contained in a classified report prepared by a team headed by MIT economist Lance Taylor, which was financed by the Swedish government. The report concluded that in order to be successful, the adjustment program would require significant liquid foreign resources. The Swedish govemment convened a European-wide conference last April to raise these resources, setting a goal of $250 million.

Wasting no time, the Bush White House launched a blitzkrieg lobbying effort among the Europeans, the World Bank and the IDB urging them not to send delegates to the Stockholm meeting. U.S. diplomats literally followed Nicaraguan President Daniel Ortega from capital to capital on his tour of Western Europe prior to the conference. According to an administration official, the U.S. envoys were instructed "to encourage Western European governments and multilateral agencies not to attend" the conference and if they did go, not to commit themselves to providing any funds. One French Foreign Ministry official complained that "The [U.S.] State Department has been jamming fax's in Foreign Ministries throughout Europe with warnings not to promise anything to Ortega."

The conference eventually pulled in some $50 million. The Italian Government was planning to organize a follow-up conference in the Fall of 1989, but after Secretary of State James Baker met with authorities from Rome in September, informing them that the United States questioned "the political wisdom of providing high-level bilateral assistance to the Nicaraguan government," the Italians agreed to postpone the meeting.

Some analysts argue that this continued economic warfare is a part of the Bush administration's broader Nicaragua strategy to influence the elections scheduled for February 25, 1990. According to this theory, Bush is hoping that the severe economic crisis wrought by U.S. policy will lead Nicaraguans, suffering under shortages and economic hardship, to support the pro-U.S. opposition.

While the State Department is making every effort to block international economic support to the Managua government, Washington has already approved the allocation of $12.5 million in public funds, and according to some reports, an additional $5 million in covert aid, to enhance the electoral prospects of the right-wing opposition coalition.

Perhaps spending the equivalent of $10 for each and every Nicaraguan voter is the Bush administration's last-ditch effort to achieve an anti-Sandinista political victory. Yet the polls show that despite significant support for the opposition, the Sandinistas are favored to win with a comfortable margin. In all probability, after the February elections Washington will be facing a Sandinista government broadly legitimized in internationally observed elections. The White House will then have to decide between continuing the internationally repudiated economic warfare or normalizing relations with the Nicaraguan government, which starts with lifting the economic sanctions.

William I. Robinson is the Washington Correspondent for the Agencia Nueva Nicaragua (Nicaragua News Agency) and co-author of David and Goliath: The U.S. War Against Nicaragua (Monthly Review Press, New York, 1987).