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Structural Adjustment Programs at the Root of the Global Social Crisis: Case Studies from Latin America

prepared by The Development GAP for the Social Summit in Copenhagen, 1995



Although a serious social crisis exists around the globe, the origins of this week's World Summit for Social Development are found in Latin America. Investors and politicians in that region were becoming increasingly concerned by the early 1990s about the growing economic and social polarization in most Latin American countries. It took the initiative, however, of Chile's Ambassador to the United Nations, Juan Somavia, to set in motion the events that have led to the international spotlight being shone on this global problem in Copenhagen.

In the center of the storm are the economic structural adjustment programs pushed by the World Bank, the International Monetary Fund (IMF) and the U.S. Government on countries badly in need of international financing. These programs have, in some cases, helped to effect precarious economic growth and, in almost all cases, increased poverty, a further concentration of income, depression of wages, and the undermining of rural livelihoods.

Nowhere has the polarization of society and the instability of this economic model been so vivid as in Mexico. The financial, economic, social and political shocks in that country have been felt, not only across the region, but around the world. Yet, there have been even greater economic and social disasters in Latin America, foremost Nicaragua, which has suffered under an adjustment program since 1990. Meanwhile, in the Andean countries, small farmers, squeezed by adjustment policies, have turned to producing coca to survive. Even democratic and stable Costa Rica has seen a steady deterioration of economic and social conditions during its dozen years under adjustment.

The World Bank, the IMF, Northern finance ministries and other financial interests have substantially succeeded in preventing an examination of the relationship between economic adjustment programs and the social problems under consideration at the Social Summit. While additional social spending has once again been proposed as a means of mitigating the effects of adjustment programs, the principal measures in the adjustment package -- trade liberalization, privatization, deregulation, credit reduction, wage suppression, etc. -- are not on the table for discussion in Copenhagen. Clearly, however, an analysis of growing poverty, unemployment and disintegration of societies without a critical examination of the economic programs that have been in place for a decade or more is an absurd and useless exercise.

As part of the effort to shed real light on the deepening social crisis at the end of the 20th century, we offer the following brief case analyses of structural adjustment programs and their economic and social effects in four Latin American countries.

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The Root of the Crisis

by Carlos Heredia and Mary Purcell

Based on the 1994 Equipo PUEBLO study, The Polarization of Mexican Society: A Grassroots View of World Bank Economic Adjustment Policies, published by The Development GAP and Equipo PUEBLO.


  • Over 50 percent of all Mexicans live in poverty.
  • More than a quarter of a million workers lost their jobs in past two months.
  • There has been a sharp decline in real wages, further exacerbated by the current economic crisis.
  • Government bars free wage negotiation.
  • Economic policies are the cause of the Chiapas uprising.

Mexico is in the throes of an economic and social crisis following twelve years of adherence to "structural adjustment" programs imposed by the World Bank, the International Monetary Fund (IMF) and the United States Treasury.

Since the start of this year, the Mexican stock market has fallen by 40 percent while the value of the peso has dropped by 43 percent. Inflation is now running at greater than 60 percent. With consumer interest rates at 80 to 100 percent, businesses and individuals are finding it impossible to pay back loans, and major banks are going under. More than a quarter of a million workers have lost their jobs as factories and other businesses fail or severely cut back production.

Rather than deal with the causes of the failed economic model, the Clinton Administration, the IMF and the Mexican government worked out a US$51 billion bailout package that further entrenches the very policies that caused the collapse. The increased tightening of credit, suppression of wages, cuts in social spending, and liberalization of trade and financial markets will intensify the decline of local productive capacity, deteriorate the welfare of the vast majority of Mexicans, and increase the country's dependence on foreign capital, imports and markets. Social and political tensions, manifested most dramatically in the Chiapas crisis, threaten to tear the country apart as it heads towards economic collapse.

The Crippling Effects of Structural Adjustment in Mexico

Since 1982, the Mexican government has implemented virtually all of the adjustment policies promoted by the World Bank and the IMF: a reduction in public expenditures (including social services); elimination and/or targeting of subsidies; tax reform; restriction of credit; privatization of most state enterprises; trade liberalization; devaluation; removal of barriers to foreign investment; and "competitive" wages. Privatization and deregulation have contributed to a steep concentration of income and wealth, a trend which runs counter to the imperative of creating a strong domestic market as a factor in ensuring sustained economic growth.(1) In what analysts term a "trickle up" process, there has been in Mexico a massive transfer of resources from the salaried population to owners of capital, and from public control to a few private hands.

Health and Nutrition. One of the first adjustment policies implemented was a drastic cut in public spending. In general, adjustment suggests the cutting of "non-productive" spending so as not to affect output or revenues. This implies cuts in social spending. Thus during the decade of the eighties, the health budget as a percentage of overall public spending fell from 4.7 percent to 2.7 percent.(2) The World Bank has acknowledged that the Mexican government "...may be under-spending on health care," but because of the need to control public spending the Bank argues that it is necessary to look for alternative sources of financing, "...including the possibility of privatizing health sector activities such as curative services."(3) The poor who rely on these services are hardest hit by such cuts since they cannot afford private alternatives. One result is that between 1980 and 1992 infant deaths due to nutritional deficiencies almost tripled to rates higher than those in the seventies.(4)

Squeezing Small Producers. Meanwhile, trade-liberalization and restrictive-credit policies have undermined many domestic small industries and agricultural producers who were unprepared for the dropping of trade barriers and unable to compete with cheap imports. Many of them have gone out of business or turned into retailers for U.S. manufacturers. This situation has been exacerbated as total credit has been restricted and priority is given to producers with export potential. This credit structure has seriously hurt micro, small and medium-sized businesses (which employ 80 percent of the labor force of the country) and at the same time has reinforced monopolies in the Mexican economy. Those who could get credit faced extremely high real interest rates -- maintained to attract foreign investment and prevent capital flight -- even before the recent financial crisis and bailout program.

Unemployment. Mexico had been cited as a successful example of a country where adjustment has included a real wage reduction in order to prevent massive unemployment.(5) However, in a 1991 study, the Labor Congress (CT) indicated that, out of an economically active population of 34 million, 15 percent were openly unemployed, and over 40 percent -- some 14 million people -- were underemployed.(6) The government only measures urban unemployment, while the problem is thought to be greatest in rural areas. According to the United Nations' Economic Commission for Latin America and the Caribbean (ECLAC), Mexico is the rare case in which the economy is marked by an inverse relationship between investment and employment. While the former has increased by nine percent over the last three years, the creation of new jobs has gone down.(7)

Declining Wages. Mexico witnessed a steep and continual decline in real wages during the eighties alongside massive layoffs and high levels of unemployment. By mid-1994, the minimum wage in Mexico was 14.8 new pesos ($4.42) per day. According to a study by researchers at the Faculty of Economics of the National Autonomous University of Mexico (UNAM), from the initiation of the government's Pact with business and labor in December 1987 until 1 May 1994, the minimum wage had increased by 136 percent, while the cost of the Basket of Basic Goods had grown by 371 percent.(8)

Skewed Income Distribution. Since 1982, privatization and deregulation have contributed to a steep concentration of income and wealth. In what analysts term a "trickle-up" process, there has been in Mexico a massive transfer of resources from the salaried popu private hands. Over the past decade the already large gap between the rich and the poor has widened. The richest 20 per cent of the population received 54.2 per cent of national income in 1992, against 48.4 per cent in 1984. The income of the poorest 20 per cent fell from 5 per cent in 1984 to 4.3 per cent of national income in 1992.(9) According to a 1992 study, about one half of all Mexicans lived in poverty in 1990 (42 million) and 18 million lived in conditions of extreme poverty. The study goes on to say that "... if the poverty figures are frightening, their consequences should be even more frightening,... Malnutrition has become the normal condition of society...(10)

To illustrate the extreme concentration of wealth and income, the wealthiest Mexican, Carlos Slim, the owner of Telefonos de Mexico, is said by Forbes magazine (18 July 1994) to be worth 6.6 billion dollars. At the other extreme, about 20 percent of the population -- 17 million people in extreme poverty -- subsist on incomes of less than $350 per person per year. In other words, the assets of the richest man in Mexico total more than the annual income of the poorest 17 million people combined. Slim is not an isolated case: during the Salinas Administration the number of billionaires in Mexico rose from 2 to 24.(11)

Structural Adjustment in Rural Mexico: The Case of Chihuahua

Bordering on the United States, Chihuahua is one of Mexico's largest states, with a population estimated in 1990 to be 2,441,873. Its rain-fed agriculture is dedicated primarily to the cultivation of corn and beans, two staples of the Mexican diet. Peasants generally grow these crops for their own consumption and to supply the urban population in the city of Chihuahua.

Although adjustment has proceeded more slowly in the agricultural sector than in other areas, by 1992 the Salinas administration had utilized a variety of adjustment policies to transform the agricultural sector into a more efficient producer for the international economy. Mexico received an Agricultural Sector Loan (ME-2918) from the World Bank in 1988 that guided agricultural reforms for two-and-a-half years. The overall objectives of the program were to:

  1. remove global food subsidies and target remaining food subsidies to the poor;
  2. reduce government intervention in agricultural markets, in part by moving from guaranteed prices for grains (corn and beans excluded) toward market-determined pricing;
  3. abolish export controls and quantitative restrictions on key products;
  4. reduce the role of agricultural parastatals;
  5. liberalize agricultural trade;
  6. cut the subsidization of inputs;
  7. increase the efficiency of public investment in agriculture in real terms; and
  8. decentralize and cut staff of the agriculture ministry.(12)

In addition, other sectoral loans making up part of the adjustment "package" directly affected Chihuahuan corn and bean producers. For example, the Bank, through a financial-sector loan, sought to reduce subsidized credit from development banks; a trade liberalization loan was linked to a reduction in tariffs on agricultural imports; and a fertilizer sector loan required the internationalization of fertilizer prices.(13) Together, these loans have led to a comprehensive restructuring of the agricultural sector.

The loan programs have reduced credit to small grain producers, eliminated farm-input subsidies, reduced or eliminated guaranteed prices, and further liberalized trade. Their effect has been to stimulate the large-scale production of export crops and reduce support for the production of basic foods, with import-tariff reductions resulting in a surge of cheap imported basic grains with which the farmers cannot compete. While increasing the cost of farm inputs, they have at the same time decreased the price of basic grains.

Faced with such drastic cuts in credit, the peasants of Chihuahua have been forced to seek various forms of supplemental financing. This may entail the selling off of livestock, though, more commonly, family members are forced to work in the cities, in the maquila industries, for large landholders, or in the United States, creating more financial problems on the farms because of the loss of free family labor. In fact it is becoming more and more difficult to find a family that does not have at least one relative working in the U.S. and sending money home. The situation of Martha Hernandez de Gonzalez is typical:

My husband is always here during planting season, but the rest of the year he spends working in the United States. He and four children in Texas, Florida, Colorado and New Mexico take care of all the family expenses and they take turns helping with the planting. When we are short of money, my husband and my children are contracted to work in the apple orchards or to do some other work in the countryside.(14)

The adjustment policies have thus resulted in decreased peasant production and productivity and a further concentration of land ownership. A vicious cycle of decapitalization, low productivity, decline in incomes, deterioration of living standards, and migration is repeating itself. The overall quality of life in the state has deteriorated.

It is clear to many that the government is attempting to slowly force small farmers out of corn and bean production. However, no practical alternative has been offered. Officials at the World Bank recommend that these producers move on to more productive activities or to crops "like strawberries".(15) Aside from the fact that strawberries cannot be competitively produced on these lands, such a transition would require financing, training, and technical and marketing assistance, and very little government support is available in any of these areas. Without comprehensive programs to assist in the restructuring of economic activity, current economic policy will only lead to increased poverty and migration to the cities.

The Impact of Adjustment on the Urban Poor: The Case of San Miguel Teotongo

As opportunities have diminished in the countryside, Mexicans have increasingly moved to the cities in search of a better life. Although poverty is most severe in rural areas of Mexico (due largely to decades of an urban bias in public policy), it is broadly believed that the urban poor have been hit hardest by the adjustment process. They constitute the group that relies most heavily on wage employment, consumer subsidies and public services -- all of which have declined under adjustment.

The community of San Miguel Teotongo is located in the Iztapalapa district on the eastern outskirts of Mexico City. Iztapalapa is the largest and one of the poorest districts of metropolitan area. San Miguel was settled in 1972 by poor families that left the center of the city because of high rents and overcrowding. Since then, San Miguel has grown rapidly to a population of close to 80,000 today.

Three sets of adjustment policies have had the greatest impact on the residents of San Miguel Teotongo: the reduction of real wages and reduced public investment; cuts in subsidies and the liberalization of prices; and cuts in public services. The effects of these policies include: a reduction in real income and purchasing power; an increase in the importance of the informal economy and family labor; an increase in the relative price of many basic goods and services; and a reduction in the quality of public services while their costs increase.

Declining real wages and job opportunities are the most serious problems faced by families in San Miguel Teotongo. A central feature of the government's stabilization and adjustment program has been the reduction of real wages, while declining investment, the growing privatization of the economy, and public- sector cutbacks (all part of adjustment) have led to fewer employment opportunities. In general, families in San Miguel working harder and longer for less income today than 12 years ago.

Nationally, decreases in wages have occurred at all salary levels, but losses have been greatest among the lowest wage earners. Considering the 67 percent loss in purchasing power of the minimum wage between 1982 and 1991, workers should be making three times the minimum wage just to maintain the purchasing power of the 1981 minimum wage. With only 5.7 percent of the workers surveyed in San Miguel in 1993 earning more than twice the minimum wage, it is clear that there has been a substantial decline in overall family and community purchasing power. According to national poverty indicators, 67.9 percent of the population of San Miguel Teotongo lives in poverty.(16)

The decline in real wages has been accompanied by an increase in prices. Studies show that the price of basic foods has risen even faster than that of many other consumer goods. Since food is the primary expense of poor households in San Miguel, the latter are severely affected by such price rises. Increases in food prices are the result of the reduction or removal of subsidies and the liberalization of the basic-foods market. Both of these policies were mandated under adjustment. The "canasta basica" (the basket of basic goods deemed necessary for a family of five) cost 46 percent of the minimum wage in 1983, 81 percent of the minimum wage in 1988, and 61 percent more than the minimum wage in 1992.(17)

The trends in education in San Miguel reflect what is happening nationally. Most children complete primary school, but increasing numbers of secondary-school-aged children are dropping out. One of the stated goals of SAPs regarding education is the transfer of government resources from higher education to primary education. However, between 1982 and 1990, the education budget fell from 5.5 percent of GDP to 2.5 percent. As public spending declined, the cost of books and materials increased. As a result, the cost of sending children to school is often prohibitive for poor families, and economic crises frequently force even young children to work. The impact has been felt by many in San Miguel, including Gloria Bautista:

I have six children. My two oldest dropped out of secondary school after the first year. We couldn't afford to buy the books and they got bored. Now they help with family expenses by doing odd jobs in the street... It's a problem because they aren't old enough to work legally, so they are paid almost nothing...(18)

In 1970 the Mexican government adopted the goal of providing health care to the country's entire population by the year 2000. Adjustment, however, caused sharp reductions in overall health- care spending during the eighties. Subsequent spending increases have been significant, but they still have not compensated for the earlier cuts. San Miguel suffers from a lack of health centers but, in theory, all Mexicans are covered by some type of health care program. In practice, however, very poor or non- existent service, exacerbated by budget cuts in the 1980s, has meant that many poor Mexicans do not have access to adequate health care through public institutions. They either go to private physicians or they do not go at all.

Today in San Miguel, families must work harder and longer hours to make less money and to purchase more expensive goods and services. Items such as books and health care are cut out of their budgets under these circumstances. Food consumption is cut back and consumption patterns change, with a variety of nutritional foods being replaced with less expensive, and often less nutritional, foods.


In the fall of 1994, Equipo PUEBLO concluded that adjustment in Mexico had failed to achieve its two principal goals: sustainable economic growth and the long-term alleviation of poverty. The World Bank and the IMF were applauding the economic performance of Mexico under adjustment, but, with one half of the population living in poverty, and with an increasing concentration of wealth, the success of the model had been clearly in doubt for some time.

The removal of government from most areas of economic planning had left the future development of the country principally in the hands of the market. This has generated huge profits for a relative few and helped to restore fiscal balance, but it has not addressed structural problems blocking long-term participatory and sustainable development. The case of Mexico is a clear example that success in the achievement of some macroeconomic indicators does not necessarily translate into the improved social well-being of the population. The pursuit of economic efficiency and short-term profits has overridden concerns about greater equity, leading to an increased economic polarization of society.

Before the current crisis, structural adjustment in Mexico had resulted in:

  1. insufficient economic growth and a disequilibrium among different sectors of economic activity;
  2. a worsening of the already steep concentration of wealth and income;
  3. a greater dependence of the economy on external financing;
  4. a continued disequilibrium in the trade balance and in the current account of the balance of payments;
  5. a deteriorating physical and social infrastructure;
  6. high unemployment and underemployment; and
  7. the absence of an authentic political consensus around the consolidation of adjustment policies.

The distribution of the costs of adjustment has been very unequal. The Salinas government deliberately chose to compress salaries, with the supposed purpose of maintaining the competitiveness of Mexican exports. This policy has led to the over-exploitation and a deterioration in the quality of the labor force. Furthermore, even with extremely low real wages, unemployment and underemployment remain high.

The net effect of the adjustment program on the population groups that are the focus of this study is extremely negative. Not only has adjustment not contributed to laying the groundwork for an improvement in their standard of living, but it has threatened their very livelihood. Small farmers in Chihuahua have seen the prices of their products go down while the prices of their inputs have increased substantially. The residents of San Miguel have seen prices rise much faster than wages, and social services decline in quantity and quality. Many have been cut out of subsidy programs and forced to supplement family income in any way possible.

What has been lacking throughout the adjustment process in Mexico is a social and economic policy that truly puts people first. Both the Mexican government and the multilateral development banks have supported an economic policy that has more to do with subsidizing creditor commercial banks (by allowing the Mexican Central Bank to buy Treasury bonds and guarantee principal and interest repayment) than with addressing the people's needs. There remains a pressing need to strike a balance between efficiency, on the one hand, and social justice, on the other, in order to promote the well-being of society as a whole.

One of the most basic components missing from adjustment programs is an income-generating policy for the poor. Short- term, targeted compensatory funding programs, designed to protect vulnerable sectors from the transitions taking place, do not offer a solution to the long-term problem of poverty. Mexico is just one of many cases worldwide where adjustment and the free market have not only failed to alleviate poverty -- as their proponents insisted they would -- but have further polarized the country, economically and politically. World Bank and IMF officials continued to say -- right up to the current crisis -- that adjustment's attack on poverty would take time, but, after more than a decade of adjustment in Mexico, there is no light at the end of the tunnel. There must be a point at which these institutions acknowledge that their strategy has failed and needs to be abandonded, and that a new more democratically determined approach to the country's development has to be taken.


  1. Crevoshay, Fay, "Perjudica a Mexico la tendencia a la concentracion del ingreso: BID," La Jornada, 22 April 1994.
  2. El Financiero, October 12, 1992, p. 12.
  3. The World Bank, "Mexico: Basic Health Care Project: Staff Appraisal Report," November 8, 1990, p. 45.
  4. Salinas de Gortari, Cuarto Informe de Gobierno, Instituto Nacional de Estadistica, Geografia, e Informatica, 1992, p. 401.
  5. Corbo and Fisher, p. 11.
  6. Fernando Garcia, "Mexico en la OCDE: mas desempleados al club de los ricos", El Financiero, April 30, 1994.
  7. Gutierrez, Elvia, "En punto critico el empleo manufacturero," El Financiero, 27 April 1994.
  8. Cited by Carlos Ramirez in "Archivo Politico", El Financiero, May 22, 1994, p. 29.
  9. Fraser, Damian, "The poor make their presence felt," The Financial Times, 17 February 1994.
  10. La Jornada, 6 September 1992, p. 1.
  11. Forbes, 18 July 1994.
  12. The World Bank, "Mexico: Agricultural Sector Adjustment Loan (2918-ME): Project Completion Report," 10 November 1992, p. ii.
  13. Ibid., p. 11.
  14. Interview, Ranchos de Santiago, Municipality of Guerrero, March 1993.
  15. Interview with Frank Lysy, The World Bank, Washington, 23 February 1993.
  16. Aguilar, Ruben, and Roelfien Haak, Informe de la Mision Evaluadora: Projecto de Autodesarrollo Integral de San Miguel Teotongo, June 1993, p. 14.
  17. Oswald, Ursula, Estrategias de Supervivencia en la Ciudad de Mexico, Universidad Nacional Autonoma de Mexico, Cuernavaca, 1991, p. 108; and Becerril, Andrea, 1992, p. 4.
  18. Interview, San Miguel Teotongo, March 1993.

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Sapping the Social Fabric

by Karen Hansen-Kuhn
The Development GAP


  • 75 percent of Nicaraguans now live in poverty.
  • Many small farmers have been forced into subsistence agriculture for lack of credit.
  • Per capita consumption of corn and beans fell some 15 percent between 1990 and 1993
  • Two-thirds of the workforce is un- or underemployed.
  • Unemployment rose from 25.1 percent of the workforce in 1988 to 51.8 percent in 1994.; unemployment rates in the first half of 1994 were 59 percent higher than during the first semester of 1993.
  • Over 13,569 public employees have been dismissed.
  • In 1993, the average wage covered only 70 percent of the cost of a "basket" of food and other basic necessities, down from 92 percent in 1990.
  • There have been widespread strikes by workers.
  • Ex-combatants have taken up arms again to demand that the government honor its economic and social commitments.

At present, the major threat to the democratic system [in Nicaragua] is not political conflict, but the deterioration of living conditions and the consequent loss of faith in democracy and its institutions.

-- UN Secretary General Boutros Boutros-Ghali

The 1990s have been a time of transition for Nicaragua. With an end to the contra war and the U.S. economic blockade, a new government took office with very different goals than those of the previous, Sandinista administration. While the government of President Violetta Chamorro actively promotes programs of political reconciliation and reactivation of the war-torn economy, it has also committed itself to the promotion of free-market economic policies that have undermined the achievement of these goals. The evidence to date is that, instead of promoting reconciliation through economic development, the structural adjustment policies insisted upon by the World Bank, the International Monetary Fund (IMF) and the U.S. Agency for International Development (USAID) and implemented by the Chamorro government since 1990 have increased poverty and unemployment and deepened political rifts in the society.


Nicaragua entered the nineties with an economy in crisis. The Sandinista government had attempted to establish a mixed economy, balancing production by the state with that of the private sector, including small producers, while placing a heavy emphasis on improving the social and economic conditions of the poor. The results of the Sandinista program were similarly mixed: there were some impressive achievements, such as improved literacy rates, but there were also significant problems, including an overemphasis on large state-run projects and a price-control program that generated tensions between urban and rural workers. By 1987, with decreases in international coffee prices and skyrocketing military costs associated with the contra war, the Sandinistas felt compelled to introduce a series of stabilization measures to reduce hyperinflation and restore macroeconomic balance.

This program, not unlike stabilization plans promoted by the IMF, involved substantial cuts in government spending on social services and on public employment and investment. Unlike standard stabilization programs, however, the Sandinista plan was implemented without funding from the international financial institutions (IFIs). While it initially succeeded in lowering inflation rates, by the time of the 1990 presidential elections hyperinflation had returned and general economic prospects were bleak.

Foreign Management of the Economy

Violeta Chamorro was elected president of Nicaragua on 25 February 1990. Upon taking office two months later, Chamorro implemented a new stabilization program that included the introduction of a new currency, further cuts in government spending and a restriction of credit. Over the next year, this program was intensified and expanded as a condition of IMF short-term financial support to the government (through a Standby Agreement), an Economic Recovery Credit (ERC) from the World Bank, and bilateral funding from the United States and other Northern governments.

With Nicaragua ineligible for new loans from the IFIs in 1990 due to debt-payment arrears, USAID became intimately involved in the design of an expanded economic adjustment program. USAID's second Stabilization and Recovery package, granted that September, committed the Nicaraguan government to begin the process of privatizing the economy and adopting other adjustment measures in advance of IFI financing, which came a year later along with an intensification of the country's stabilization program. The new structural adjustment program also included a further reduction in public-sector employment, as well as trade and financial-sector liberalization. These measures were intended to hold inflation to single-digit rates, to save foreign exchange so that the country could resume payments on its foreign debt, and to substantially reduce the role of the state in the economy by selling off state- owned enterprises and reducing government spending.

Policy-Induced Depression

The major achievement of the stabilization and adjustment programs to date has been the reduction in inflation, which fell from over 13,000 percent in 1990 to 19 percent in 1993. Other macroeconomic indicators, however, reflect the heavy cost of those policies. In effect, the inflation rate dropped because of a deep policy-induced economic depression. GDP per capita in 1993 fell to 71 percent of the 1985-1989 average, while investment decreased to 63 percent of the average during the late 1980s.

As part of the stabilization and adjustment program, credit to the agricultural sector was slashed by 62 percent. New bureaucratic requirements and very high interest rates have meant that small- and medium-scale farmers have been especially hard hit by these cuts, with many small farmers forced to produce subsistence crops using environmentally unsustainable "slash and burn" practices. The high interest rates have also led many large producers to shift to low-risk cattle production. Industrial production has also dwindled since the adjustment program began. High interest rates have favored speculative short-term investments, particularly in imports of luxury consumer goods, over productive investment. Average industrial production since 1990 is 14 percent less than during the 1985-1989 period, which itself was a time of economic slowdown.

The trade deficit increased from US$304 million in 1989 to US$461 million in 1993 as imports increased after trade liberalization, while production for export remained stagnant. This burgeoning deficit has been financed not by new investment but by extraordinary foreign aid flows totaling over US$3 billion in grants, new loans, and debt cancellations and rescheduling. These resources are now rapidly dwindling, but between 1990 and 1993 over one-third of the aid received in cash was used to pay foreign-debt service, and nearly all of the rest went to finance the trade deficit. Nicaragua continues to have one of the highest per capita debt burdens in the world -- in 1994 the debt totaled nearly US$11 billion -- which, if left unaddressed, will continue to seriously constrain the country's policy options.

A Social Disaster

While Nicaragua's economic performance during the 1990s under adjustment has been dismal, the deterioration in social indicators is even more distressing. As a result of massive public-sector layoffs and economic slowdown, over two-thirds of the population is either un- or underemployed, and the problem only continues to grow. A recent Labor Ministry report revealed that unemployment rates in the first half of 1994 were 59 percent higher than during the first semester of 1993. The purchasing power of wages for those fortunate enough to find employment has also fallen. In early 1991 the average wage covered 92 percent of the cost of a "basket" of food and other basic necessities; by 1993 it covered just 70 percent of those needs. According to the United Nations, 75 percent of Nicaraguans now live in poverty.

The severity of this social impact is due in good part to the tremendous contraction in production. Unemployment in the work force rose from 25.1 percent in 1988 to 51.8 percent in 1994. Increasingly, workers unable to find work in either the agricultural or industrial sector are forced to turn to the swelling informal sector for employment. With wages and employment declining, many families throughout the country have simply been forced to eat less: per-capita consumption of corn was down 16 percent in 1993 from 1990, and bean consumption dropped 14 percent during the same period.

The Public Responds

Nicaraguans have not reacted passively to these changes. Since the first stabilization plan in 1990, there have been a series of public strikes and demonstrations protesting the measures. An August 1994 transportation strike protesting hikes in fuel prices, for example, effectively halted distribution of goods within the country for eight days.

The economic recession and high unemployment rates have also contributed to increasing political polarization in Nicaragua. As the war ended, the contras were demobilized and the Sandinista army was cut from 96,000 in early 1990 to less than 17,000 by the end of 1992. The ex-combatants on both sides were promised access to land, credit and other resources so that they could reintegrate themselves into productive life. Unfortunately, due to the economic contraction and cuts in government spending under the adjustment program and to continuing conflicts over land titles, these promises have been largely unfulfilled. Many former combatants have taken up arms again to demand tht honor its commitments. In April 1992, ex-contras and ex-Sandinista soldiers even joined together in these actions.

More often, however, the two groups have separately invaded farms, cut off transportation in and out of cities or taken prisoners to publicize their demands. For example, the Frente Norte 3-80 (FN 3-80), a group of former contras, launched a military offensive in February 1994 that resulted in more than 50 deaths. While the group has called for political changes regarding the country's military structure, most of the FN 3-80's demands have centered on the need for social and economic assistance for ex-combatants. A peace accord was reached in late February, but some of these ex-combatants, skeptical of new government promises, continue to fight for what they consider to be their rights. In a public declaration issued in April, the rebels stated, "We are not asking for charity; we only want to be equipped to be able to work. We have a right to this... We favor a peaceful solution, but if the army wants war, they will get it."

Political instability has taken other forms in rural areas, as well. During the first half of 1994, police reported that over 400 agricultural producers in the north of the country had been victims of kidnaping by armed groups. This violence, combined with increasing crime throughout the country, has further depressed economic activity.