Economic growth in Nicaragua via production for export
Nicaragua is a relatively small country, but one where the ratio of people to land with moderate or better potential for farming is rather low. With a population of less than 5.5 million living in a land of 121,000 km^2, and 57% of the population being urban, the average rural population density is barely 20 per km^2. The country’s economic history has been one of trying to find crops that could be exported: an aim that was first realized in the late nineteenth century with the planting of coffee in the highlands. In more recent history, the economy grew rapidly in the 1950s and 1960s as Nicaragua converted its best lands into fields of cotton and cane, or pastures for beef cattle. As the fastest growing Central American economy at this time, by the turn of the 1970s it was also the region’s most prosperous economy.
But the political and social context was one of great inequality between the landowners and those running the import-export houses that supported the agricultural export industry on the one hand, and the majority of the population who subsisted on small-holdings or were plain landless, in both cases often dependent on the seasonal earnings from working on the export crops harvests. The excesses of the dictatorial Somoza regime eventually provoked rebellion and in 1979 a radical alternative took power, the Sandinistas. Although committed to equality and redistribution, the attempt to control the key points in the economy and to intervene strongly in markets led to perverse incentives and resource miss-allocation: as US opposition escalated to the point of funding the Contra, and government spending on defense rose in response, the economy all but collapsed in chaos and hyperinflation. After 10 years of outrageous struggle, peace was signed from both antagonist political factions and a new coalition government was voted in power. So in the 1990’s the economy moved forward to a free-market economy and integrated to the globalization. The new elected authorities opted to work along with the World Bank and International Monetary Fund in order to bring fresh money into Nicaragua’s impoverished economy. These two international organizations mainly dictated the economic policies for the next coming years, taking significant assessment such as privatization, fiscal reforms, budget evaluations and approval, and so forth.
All told, it was only in 1994 that the economy began to grow again: between 1978 and that year, GDP had fallen to 60% of the level achieved in 1977, and average per capita incomes were just 40%. Since 1994 economic growth has been modest, rarely rising above 5% a year. In the last years there has been a more important presence and impact on the local Nicaraguan economy from the European Union and other donor countries which have been supporting many developing projects on both rural and urban areas.
Nicaragua’s Gross Domestic Product had a modest growth of 3.2% in 2008, increasing from US$5.6 billion in 2007 to US$6.3 billion. Per capita income has also showed a reserved increase, rising from US$1,017 in 2006 to US$1,123 for 2008. According to official numbers from the Central Bank of Nicaragua, inflation for 2008 closed at 13.8%. At the end of Nicaragua’s war strife, external public debt was unbelievably huge for this small and impoverished country, reaching the sum of US$13 billion. In the last nineteen years of peace Nicaragua has been able to negotiate with its creditor countries this debt. Today Nicaragua’s external public debt has been considerably reduced to US$3.5 billion.
Because Nicaragua has abundant arable land and water resources, agriculture will always be an important component of the economy. Close to one-third of GDP is derived from agriculture, timber, and fishing. Opportunities exist in food and timber processing and preparation for export. Currently, most agriculture is small-scale and labor intensive. Livestock and dairy production have seen steady growth over the past decade and have taken the greatest advantage of free trade agreements. Many export products, especially coffee and gold, have benefited from the recent rise in international commodity prices.
There’s no underestimating the importance of coffee to the Nicaraguan economy. Coffee is produced on more than 100,000 hectares of Nicaraguan land, contributes an average of $140 million per year to the economy, includes more than 30,000 farms, and employs more than 200,000 people, about 10–20 percent of the agricultural workforce. Nicaragua exports its beans primarily to North America, Europe, and Japan—to the tune of 1 million 100-pound burlap sacks every year. These beans are roasted and ground (usually abroad) to produce 11 billion pounds of java. Because most Nicaragua growers produce full-bodied Arabica beans under the shade of diverse trees at altitudes of 900 meters and higher, the quality of its crop is recognized the world over. The June 2004 issue of Smithsonian magazine reported Nicaragua as “the ‘hot origin’ for gourmet coffee, with its beans winning taste awards and its decent wages for many small farmers a hopeful beacon for a global coffee market under siege.” It also declared Nicaragua a country where “the goals of a better cup of joe, social justice and a healthier environment are nowhere more tightly entwined.” This is important as Nicaragua struggles to emerge from the worst crash in the global coffee economy in a century. Producing and selling Nicaraguan coffee, challenging even in good times, was dealt a staggering blow in 1999, when low-quality Vietnamese and Brazilian robusta beans drove world prices to their lowest rates in 30 years (discounting for inflation, they were the lowest prices in a century). This was compounded by corporate consolidation in the trading and roasting industries, which dealt coffee farmers a blow while well-off overseas consumers were spared the extra costs. Discerning North American and European java swillers have created an enormous demand for a superior cup of coffee—and they are willing to pay extra for it, as we all well know. If the Nicaraguan coffee industry is to continue to gain ground, it must maintain its reputation for quality coffee. This requires a government-level effort to address environmental issues, like soil fertility and water contamination, the modernization of processing methods, and the resolution of severe microcredit and marketing issues.
Four-fifths of rural inhabitants depend solely on agriculture for a livelihood and overwhelmingly on a few crops - sorghum and maize in the lowlands and beans and vegetables in the highlands. With fertile soil, the Pacific coast is the main area for growing oilseed, fruit and tubers. Shrimp processing is also concentrated in this area, while provinces surrounding the capital host most of the agri-food and commodity trading activities. With high annual rainfall, the Atlantic coast has large areas of forestry, including African palm, and cocoa plantations, while coffee production is concentrated in the north of the country where temperatures are lowest.
Coffee, beef, peanuts, banana, lobsters, sugar, dairy products, beans and sesame are the main export crops, accounting for 67 per cent of Nicaragua's export earnings. These leading exports have seen significant growth since Nicaragua joined the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) with the US in 2006, helping the country attract investment and promote economic development. About half of all agricultural exports are produced by small and medium farmers, who are also responsible for producing 90 percent of the staple foods consumed.
Despite protective legislation and programs aimed at creating alternative livelihoods, shrimp cultivation and artisanal fishing have destroyed coastal mangroves. Most of the shrimp caught is exported, yet extremely low incomes and poor access to credit have continued to constrain the development of the fishery sector. Cattle are a significant source of hides, meat and dairy products in the west and east of the country. Goats, pigs and sheep are also kept in small numbers.
Drought, poor soils and water scarcity, as well as recurrent natural disasters such hurricanes, landslides, earthquakes and volcanic eruptions, add up to a challenging environment for Nicaragua's farmers. Two million people were affected when Hurricane Mitch hit Nicaragua in 1998. The resulting heavy rains and landslides not only destroyed vital infrastructure including roads and bridges, but also caused US$250 million in damage to the agriculture sector through the destruction of crops and death of livestock and fish. Hurricane Felix also caused extensive damage in 2007. In addition, the deforestation rate now tops 40,000 hectares a year as land is cleared through illegal logging operations and for ranching and farming, leaving hillsides vulnerable to landslides. But, despite substantial deforestation, Nicaragua's forests still cover more than a third of the country and contain valuable cedar, mahogany and pine trees. Roughly 20,000 people are involved in small-scale gold digging. The intensive use of mercury and cyanide to process the gold is a source of concern for the authorities, because of the impact on the environment and health of the gold diggers. Deposits of silver, zinc, copper, iron ore, lead and gypsum are also present.
In an effort to improve agricultural yields, the European Union and the UN's Food and Agriculture Organization (FAO) are currently providing quality seeds, storage infrastructure and technical support. USAID has also been working to increase the incomes of smallholders by expanding and strengthening value chains, adding value through processing and helping them to access international and regional markets. USAID is also targeting disaster preparedness by improving early warning systems and supporting measures such as drought resistant crops. Other interventions include World Bank projects tackling rural water supply, agro forestry and land administration, and support from the Inter-American Development Bank to implement an agricultural consensus.
While agriculture has been identified by the government as the sector with the greatest potential for growth, the combined impacts of recurrent natural disasters and climate change, as well as unresolved land tenure issues and access to credit are still major challenges.