STRUCTURAL IMPLICATIONS OF ECONOMIC LIBERALIZATION ON AGRICULTURE AND RURAL DEVELOPMENT IN NICARAGUA Arthur H. Grigsby V. Francisco J. Perez.

STRUCTURAL IMPLICATIONS OF ECONOMIC LIBERALIZATION

ON AGRICULTURE AND RURAL DEVELOPMENT

IN NICARAGUA

Arthur H. Grigsby V.

Francisco J. Perez

Post Colonial Agriculture

• 1821-1880 Subsistence agriculture combined with live cattle exports to Central American market. Indigo as the main export to Europe

• 1880 Introduction of Coffee plantations. A second wave of segmentation: large foreign and national coffee growers, peasants and indigenous rural workers.

• 1910 Establishment of large Banana plantations owned by foreign investors for USA market (United Fruit Co.) in the Caribbean Cost. Permanent rural workers as social sector.

• Coffee and Banana plantations were expanded at expenses of the expropriation of indigenous community's land

Agriculture Modernization area

• 1950-1978 Export Boom, Capitalist Agriculture development era: export expansion and diversification: coffee, cotton, beef, banana and sugar cane.

• Third wave of segmentation: – Large cattle states, large banana, coffee, sugar and cotton

plantations.

– Rural workers and landless families

– Farmers at the central region with cattle and coffee

– Settlers that populated the agricultural frontier

• 1960s-1970s Agrarian Reform at the agricultural frontier, high levels of land concentration at the Pacific areas.

• 1978-1979 Civil war, sharp reduction of agriculture exports

Sandinista Revolution 1980s

• Agrarian reform with a redistribution of 2.05 million hectares which represented 37 % of total agricultural land.

• Expropriation of foreign companies in mining and forestry• Nationalization of foreign and domestic trade. • Creation of a large state farms sector and organization of

agrarian cooperatives• Subsidized credit, inputs, agricultural machinery and

Technical assistance for rural families.• 1983-1989 Civil war, international blockade (US embargo),

hyperinflation process. Large proportions of rural men engage on conflicts.

• Emergency of black markets, and expansion of informal sector.

• 1987 Collapse of agricultural exports• 1988 First Stabilization policies in order to reduce

hyperinflation.

The Neoliberal Model (1990s-2000s)• Structural Adjustment Plan: “Shock therapy” approach that

combined sharp devaluation of the national currency with controlled prices for foodstuffs

• 1990 Dismantling of State intervention of the economy, including:– Privatization and liberalization of foreign and domestic

trade.

– Devolution of agrarian and urban properties.

– Public enterprises privatization program.

– Reduction of the state size and rural programs (credit, technical assistance, subsides).

The Neoliberal Model (1990s-2000s)• Early 1990s there is a stagnation of the economy with high

rates of unemployment. Private investment had a slow and weak recovery because of property rights conflicts and social instability and there was a sharp reduction of public employment due to military demobilization and public expending cuts.

• Domestic and international migration increased substantially. International migration flows to USA and Costa Rica quadrupled respect to 1980s.

• There is a second wave of colonization of Agricultural Frontier. Domestic migration to both the cities and to the relatively sparsely populated Caribbean region.

• Economic recovery led by a substantial increase in public investment in infrastructure, export growth and remittances. Private investment, however, is mainly oriented to non-agricultural sectors such as construction, commerce and banking services.

• Reduction of the agriculture's share of GDP

Nicaragua: GDP structure as percentage (based on Local Currency)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

year

% o

f T

ota

l G

DP

Agr GDP Industry GDP Basic Services Service sector

Rural population declining in relative terms but growing in absolute terms

Nicaragua: Population trends by origin

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

years

Mil

lio

n o

f p

erso

ns

Total Population Rural Population Urban Population

Nicaragua: Trends of the Population by location

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

years

% o

f to

tal

Po

pu

lati

on

Urban Population Rural Population

The Demographic Transition has just started

Nicaragua: Type of Rural Families and their share as total rural population

Subsistence, 32.5

Landless, 44.9

Low Middle income, 17.5

High Middle income, 3.6

High Income, 1.5

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0%

of

tota

l m

igra

nts

1970s 1980s 1990s

decades

Nicaragua: Migration flows per decade

Trade Liberalization

• Dismantling of tariff protection for domestic agriculture.• Trade policy based on the integration to the Central

American Common Market (regional economic integration) and Free Trade Agreements with USA, Canada, Mexico, and Chile. Currently negotiating with EU and Taiwan.

• Policies for employment based on the promotion of Exporting Production Zones, mainly textiles factories (maquilas)

• Foreign investment in key agribusinesses sectors : dairy products, poultry and pork, and fruits and vegetables. Main supermarket chains have been acquired by WalMart.

Nicaragua: Average tariff levels in Central America

0

10

20

30

40

50

60

1985 1987 1990 1995 1997 1999

year

Ave

rag

e T

arif

f Costa Rica

El Salvador

Guatemala

Honduras

Nicaragua

Nicaragua: Commercial balance on Goods traded

-300.0

-250.0

-200.0

-150.0

-100.0

-50.0

0.0

50.0

100.0

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

% o

f E

xp

ort

va

lue

go

od

s t

rad

ed

Agriculture Trade Balance• Nicaragua has a positive trade balance on food and

agricultural products. However, food imports represent more than double of inputs imports.

Nicaragua: Commercial balance of agricultural products

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

years

US

$ M

illi

on

Import Value Agriculture Total Export Value Agriculture Total

Nicaragua: Local consuption grains yields

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

year

TM

/ha

Yield Beans, Dry Yield Maize Yield Rice, Paddy Yield Sorghum

Capital goods are tiny fractions of total imports because of low level of investment on technology and the extensive path of Nicaraguan agriculture.

Nicaragua: Export products yields

0

0.5

1

1.5

2

2.5

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

year

TM

/ha

Yield Tobacco Leaves Yield Coffee, Green Yield Sesame Seed Yield Soybeans

Market Integration

• Nicaraguan is attracting foreign investment from different sources. Central American investors have mainly invested in commerce and banking services.

• South Koreans, Taiwanese and US companies have invested in textiles. US firms have also invested in supermarket chains as well as in some agroindustrial sectors such as dairy, coffee, peanut (Starbucks, WalMart, Cargill).

• Through free trade agreement Nicaragua is trying to ensure access to the US market for its products. Although Nicaragua has increased its quotas for meat, sugar, peanut and textiles, it is not clear whether rural production will be competitive by 2021 when average tariff will be 1.6 %.

Nicaragua:Trade partners as share of total export

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

years

% o

f to

tal

Imp

ort

s

ALADI

Mercosur

Andean Group

MCCA

USA

European Union

Asia

Japan

Nicaragua: Imports by region and/or partner

0.0

100.0

200.0

300.0

400.0

500.0

600.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

year

US

$ M

illi

on

ALADI

Mercosur

Andean Group

MCCA

USA

European Union

Asia

Japan

Nicaragua: Land Productivity, Ag GDP/Ha Ag Land

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

year

US

$/H

a

Chains and segmentation

• Agricultural products chains are highly segmented. Products such as cheese, poultry, pork that have low quality standards are sold in domestic low income markets, while relatively high standard products for supermarkets and export markets.

• Due to quality requirements, peasant agriculture tend to be excluded from high value and high prices commercial circuits; same situation can be observed on vegetables and fruits chains.

• Agro industrial products tend to have oligopoly phases of processing and exports. Coffee, sesame, banana, peanut and seafood are clear examples of this situation.

Blockades• Poverty and extreme poverty in Nicaragua have a

rural face; 68 % of rural families live under the US$ 2 a day poverty line and 27.4 live with less than US$ 1 a day.

• Urban poverty is relatively low with 30 % of urban families under poverty line and 6.2 % under extreme poverty.

• Poverty and agricultural crisis in tropical dry areas tend to be the push factor for migration, and high rural salaries in Costa Rica and El Salvador tend to be the pull factor.

• The extensive path of agricultural production is reaching its limits. Land is no longer an available resource any more; thus, internal migrations tend to be restricted and there are strong conflicts between settlers and indigenous communities.

Nicaragua: Land Lorenz Curve in 1963, 1971 and 2001

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

% of families

% o

f ar

eas

1963

1971

2001

1971

2001

Exit options• Some initiatives such as rural tourism and

environmental services are starting to be explored. Peasants and Farmers organized on cooperatives tend to have more option for exits, since international cooperation and NGOs are supporting their integration to alternatives markets such as organic and free trade.

• NGos are facilitating contracts between cooperatives and supermarket chains and international enterprises such as Wal-Mart and Starbucks.

• There are non agricultural options for rural workers such as textile maquilas. However, this sector is generating neither enough jobs for urban not for rural families.

Exit options

• Nicaragua is increasing its migrant population, up to 20 % of total population.

• Remittances are key factor for economic and social stability, representing around 71 % of total exports and 65 % of total commercial deficit.

• Temporal migration to Costa Rica and El Salvador is a key livelihood strategy for rural families. This will represent a demographic problem in the long term since active working population is moving out productive areas.

Rural Salaries in Nicaragua and Costa Rica

y = 0.3071x + 6.1714

R2 = 0.8359

y = 0.3679x + 4.6571

R2 = 0.797

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

1993 1995 1998 1999 2000 2001 2002

year

US

$ p

er d

ay

Costa Rica Nicaragua Difference Lineal (Costa Rica ) Lineal (Difference )

35.5

50.7

13.8

11.6

80.0

8.4

0

10

20

30

40

50

60

70

80

% o

f m

igra

nts

Urbano Rural

Origin

Nicaragua: Migrants to Costa Rica and USA per origin

USA CR Otro

18

100

11

106

12

81

14

96

19

108

24

104

42

148

64

114

79

117

82

110

0

20

40

60

80

100

120

140

160

% o

f to

tal

exp

ort

s

1989 1994 1995 1996 1997 1998 1999 2000 2002 2003

years

Nicaragua: Relationship bewteen remittances and commercial deficit as percentage of Total Exports

Remittances Commercial deficit

Rural Development Policies

• Nicaragua Rural Development policies are based on agro-industrial product exports and trickle down effects of agrarian capitalist development. This model tends to enhance the dualist development model and inequities between social sectors.

• The implementation phase is done by several institutions generating a fractionated intervention with limited impacts

• By November, 2006 Sandinistas won general elections. The new government has stated that rural areas will be a priority in the next five years with a Development Institute (Credits and technical assistance)