Economic history of Nicaragua

Nicaragua's economic history has shifted from concentration in gold, beef, and coffee to a mixed economy under the Sandinista government to an International Monetary Fund policy attempt in 1990.

Pre-Columbian Nicaragua had a well-developed agrarian society. European diseases and forced work in gold mines decimated the native population. Most tilled land reverted to jungle. Beef, hides, and tallow were the colony's principal exports. Commercial coffee growing began in the 1840s, expanding to resemble a banana republic at the end of the 19th century. After World War II, the economy diversified, with new crops and industrialization. In the 1960s, the Central American Common Market and import substitution industrialization stimulated the economy. The 1972 earthquake destroyed much of Nicaragua's industrial infrastructure. Reconstruction led to high foreign indebtedness, with the benefits concentrated in a few hands, especially the Somoza family.

The Sandinista government was determined to make workers and peasants the prime beneficiaries. All land belonging to the Somozas was confiscated, though private property continued in a mixed economy. Restructuring and rebuilding caused initial growth, but GDP dropped from 1984 to 1990. Between decreasing revenues, mushrooming military expenditures, and printing large amounts of paper money, inflation peaked at 14,000% annually in 1987. In early 1988, the Daniel Ortega administration established austerity with price controls and a new currency. Then the government spent massively to repair Hurricane Joan damage. A US embargo also hindered economic development. In 1990, most Nicaraguans were considerably poorer than in the 1970s.

The Chamorro administration embraced International Monetary Fund and World Bank policy with the Mayoraga Plan. The plan aimed to halt spiraling inflation, lower the fiscal deficit, reduce the public sector and military work force, reduce social spending, attract foreign investment, and encourage exports. Loss of jobs and higher prices resulted in crippling public and private-sector strikes. By the end of 1990, most free market reforms were abandoned. A severe drought in 1992 decimated the principal export crops and a tsunami left thousands homeless. Foreign aid and investment had not returned in significant amounts.

Pre-Columbian and colonial era

The first Spanish explorers of Nicaragua found a well-developed agrarian society in the central highlands and Pacific lowlands. The rich volcanic soils produced a wide array of products, including beans, peppers, corn, cocoa, and cassava (manioc).Annis, Barbara. "Pre-Columbian and colonial era". In . Agricultural land was held communally, and each community had a central marketplace for trading and distributing food.

The arrival of the Spanish in the early 16th century destroyed, for all intents and purposes, the indigenous agricultural system. The early conquistadors were interested primarily in gold; European diseases and forced work in the gold mines decimated the native population. Some small areas continued to be cultivated at the end of the 16th century, but most previously tilled land reverted to jungle. By the early 17th century, cattle raising, along with small areas of corn and cocoa cultivation and forestry, had become the primary function of Nicaragua's land. Beef, hides, and tallow were the colony's principal exports for the next two and a half centuries.

The coffee boom, 1840s–1940s

Coffee was the product that would change Nicaragua's economy.Annis, Barbara. "The coffee boom, 1840s–1940s". In . Coffee was first grown domestically as a curiosity in the early 19th century. In the late 1840s, however, as coffee's popularity grew in North America and Europe, commercial coffee growing began in the area around Managua. By the early 1850s, passengers crossing Nicaragua en route to California were served large quantities of Nicaraguan coffee. The Central American coffee boom was in full swing in Nicaragua by the 1870s, and large areas in western Nicaragua were cleared and planted with coffee trees.

Unlike traditional cattle raising or subsistence farming, coffee production required significant capital and large pools of labor. Laws were therefore passed to encourage foreign investment and allow easy acquisition of land. The Subsidy Laws of 1879 and 1889 gave planters with large holdings a subsidy of US$0.05 per tree.

By the end of the 19th century, the entire economy came to resemble what is often referred to as a "banana republic" economy—one controlled by foreign interests and a small domestic elite oriented toward the production of a single agriculture export. Profits from coffee production flowed abroad or to the small number of landowners. Taxes on coffee were virtually nonexistent. The economy was also hostage to fluctuations in the price of coffee on the world markets—wide swings in coffee prices meant boom or bust years in Nicaragua.

Diversification and growth, 1945–77

The period after World War II was a time of economic diversification.Annis, Barbara. "Diversification and growth, 1945–77". In . The government brought in foreign technocrats to give advice on increasing production of new crops; hectarage