Macroeconomic adjustment and poverty: the case of Nicaragua, 1980s-1990s



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The dissertation explores the relation between macroeconomic policy and performance and its impact on poverty in the case of Nicaragua during the eighties and early nineties. It takes a look at the nature of the various stabilization and adjustment packages adopted, first by the leftist Sandinista Regime, and later by the Chamorro Regime in response to macroeconomic crises. The period analyzed provides a unique opportunity for studying the effect of abrupt and sudden changes in political regimes and macroeconomic policies as the country transited from a centrally planned economy to economic liberalization and market reform. The dissertation relies on poverty decomposition analysis to look at the evolution of poverty in different sectors of the economy and across social groups, and to study the relationship with macroeconomic policies and performance during the period. The specific characterization of poverty leads to the consideration of strategic policy options by simulating and comparing the tradeoffs of an orthodox adjustment program with a pro-agricultural based strategy. A stylized computable general equilibrium (CGE) numerical model with two sectors and four social classes is used for this purpose. The dissertation argues that orthodox adjustment programs, while positive in the medium to long term in terms of economic growth, can potentially harm the poor in the short term. One way to offset this negative impact for the case of Nicaragua is by favoring a more dynamic growth of the rural sector since poverty is concentrated in the rural areas and the country´s tradable goods sector is primarily rural based and agricultural production is labor intensive. However, this must be understood as a temporary policy option as there are distortions in relative prices and potential macroeconomic gaps to take into account in the medium to long term. One way to offset these impacts in the context of a poverty oriented reduction strategy is through a temporary increase in foreign aid in the form of balance of payment support. It is argued that macroeconomic balance of payment support under these circumstances can have a broader impact than the traditional forms of aid that emphasize targeted development projects to help the poor.