Hinckley Journal of Politics vol 5

Modest Loans Leading to Monumental Chage_Page 81

HINCKLEY JOURNAL OF POLITICS 2004 cofee and banana plantations When inter national prices fel Nicaragua did not have the financial infrastructure safety net resources or other trade actvites to fall back on It began to dirty 11 hands withnationsl debt that import substitution industralization Would ty to correct but would only ampliy It Substtution Industiaization 1S Tn an attempt to distance tselffrom the exter nal shocks ike the Depresson that export promotion made them vulnerable to many Latin American countries pursuedpolicy of Import Substitution Industrlalization ISD in the post-war years This policy substtuted imports with domestically produced goods However with inequality stil pesistentn the region and the majarity of the incomes low the interal market for the domestically produced goods was stll small and unable to abcorb the supply While trying to sddress growth some asset that IST actually aggravated inequality in the reglon Franko 1999 67 The argument follows that eltes In political power were able to subsidize industries which hurt agriculture indlrectly betteing the welfare to further the export industries In other words the development thet cccurred under export promotion policy was generally unsustainable Over time Nicarague experienced declining terms of trade in the PPEs The proft from the export of the PPE was ot enough to sustain the termsof trade balance meaning the country had to import more and more Skidmore and Smith 1997 330-31 This was particularly visible throughout 1929 and 1930 when coffee prices dropped 40 percent Franko 1999 39 Whencountry plays the commodity lottery Franko 1999 37 putting their main economic effort behind the export ofPPE they run the risk of losing Upon losing the commodity lotterynation experiences the effects of the Dutch Disease The Dutch Disease referring to Hollandexperience with natural gas efers to the unbalanced development that occurs whencountry concentrates its financial resources intofew profitable sectors while ignoring other sectors or infrastructure Nicaregus Dutch Disease centered around its promotion of coffee which accounted for 47 percentof total exports in 1938 Rather than investing resources and or finances in infrastructure human capitel development in diversified exports Nicaragua devoted the majority of her resources to caffee and bananas Mot growth from the export promotion policy was unsustainable and unequaly distributed vith the most benelit being accrusd by the few elites who owned the industry owners The systemvery prone to carmuption Other flaws in the system were that it placed extreme reliance on foreign capital and international finance It also had inflationary effects and led to an accumulation of foreign debt Franko 1999 67 Dbt crises motivate macroeconomic stabilization Borrowing to finance ISI was the first sign of an impending debt trap in Nicaragua and other Latin American Nations Debt traps occur when unproductive investments or invest ments with long time horizons fai to generate revenue neededpay off the deb by the payment deadline Hoping to boost the economy through foreign investment which is often very senstive tonationforeign or external debt Nicaragua decided to batte ts debt by following austeity methods To even gain IMF loans with which to rollover immediate loans coming due Nicaragua was forced 1o continue its macroeconomic stabilization program MS Washington-based institutions such as the IMF and World Bank at the time gave Latin American countries policy advice that often had to be met for aid or loan disbursal The austerity and macrostabilization policies they stressed werefiscal discipline privatization trade liberalization and dereguition Thisoften referred to as the Washington Consensus on the way to approach development In order to reduce spending and mest the macroeconome stabilzation requirements there were cutbacks in social programs and social safety nets This createdheavy package specially-fitted to the backs of the poor The wealthy elites 81