cient to meet demand. The system remained congested, and there was large unsatisfied demand. Although the entrepreneurial class in Nicaragua has shown considerable managerial and administrative skill, the educational system has failed to supply a well-educated and skilled work force. Until 1980 the output from the secondary schools was ill-adapted to Nicaragua's manpower requirements. In the mid-1970s there were poor facilities for vocational training and for practical instruction in the sciences. The adult literacy rate of 57 percent in 1975 did not speak highly of the quality of the labor force. Events following the FSLN victory pointed to substantial changes in the quality of the work force. A substantial number of middle class professionals-estimates place the number at between 30,000 and 50,000-fled the country during the fighting and the period of political tension that followed the insurrection. On the other hand the revolutionary government committed resources to increased literacy and school enrollments. The result could well be a reduction in the size of the country's managerial and technical cadre but an improvement in the basic skills of its labor force. Economic Growth From the immediate post-World War II period until the insurrection of 1978-79, the Nicaraguan economy experienced sustained growth. The GDP grew at a real annual average rate of 5.2 percent in the 1950s and 7 percent in the 1960s (see table 7, Appendix). In the 1970s, however, this trend was brought to a halt. In 1978 GDP fell by 7.5 percent and in 1979 by 25 percent. Even though the years 1974 and 1976-77 recorded above-average growth for the period, the near collapse of the economy in 1979 brought the annual average growth rate for the decade to only 1.2 percent. The decade of the 1980s began with the first year of reconstruction, and the economy posted 11 percent real growth, recovering about one-third of the loss it sustained in 1979. The growth dynamic could be traced to various factors in different periods of Nicaragua's post-World War II economic history. During the period 1920-46 the economy was based almost solely on two crops coffee and bananas-and investment and growth were generally stagnant. During the 1950s there began a diversification of the agricultural base, including a rapid expansion of the acreage devoted to cotton, production of which increased from 3,300 tons in 1950 to 125,000 tons in 1965. This development was also accompanied by increases in the production of sugar and beef (see Structure of Agriculture, this ch.). In the 1960s industrialization was the main factor behind growth. Under the stimulus of the Central American Common Market (CACM) Nicaragua achieved a certain degree of specialization in processed foods, chemicals, and metal manufactures. By 1970 import substitution opportunities in many of these industries had been exhausted, and the growth stimulus was lost. Furthermore manufacturing firms that developed under the tariff protection of the CACM were generally high cost and inefficient; consequently they suffered a disadvantage when exporting outside the region (see Industry, this ch.). In the 1970s growth had primarily been a result of fluctuations in demand rather than further diversification of the economy. The rebuilding of Managua after the earthquake imparted dynamism to construction activities; this, in turn, fostered the expansion of the building material industries. Together with growth in agricultural incomes these factors brought the real growth rate to 13 percent in 1974-the biggest boom in Nicaraguan economic history. In 1976-77 the recovery of coffee and cotton prices helped revive the economy from the slump it had suffered in 1975. Maintaining the growth momentum in the 1970s had a price; disequilibria appeared in public sector finances and in the balance of payments. Earthquake reconstruction and the expansion of government bureaucracy increased expenditures without a matching increase in revenues. The sharp rise in the price of oil and in world inflation that came after 1973 increased the cost of essential imported inputs for the manufacturing and agricultural sectors. Because these costs were not paralleled by increased earnings from exports, trade deficits appeared that had to be covered by foreign borrowing. The rapid expansion and diversification of productive activities naturally required considerable public and private investment. The ratio of gross domestic investment to GDP increased from 9.5 percent in 1950 to 25 percent in 1977 (see fig. 10). Naturally investment increased most rapidly when growth was high because incomes and foreign exchange reserves were high. The sharp increase in investment in the 1950s had been due to the importation of agricultural equipment for expanding coffee acreage. During the 1960s investment was directed at manufacturing and public infrastructure (electric power and highway) development. Foreign investment was important in manufacturing since domestic investors generally favored agriculture. Between 1977 and 1980 investment in the Nicaraguan economy dropped sharply. After the onset of fighting, the private sector cut investment plans, and much of government expenditure was shifted from the capital to the operational budget. Destruction and looting caused a large loss in inventories and operating stocks, and in 1979 the economy actually disinvested. In 1980 investment levels recovered somewhat as a result of reconstruction and the rebuilding of inventories, but private sector fixed investment remained at a very low level compared to the preinsurrection period. Throughout the period of high investment domestic savings played the dominant role, but foreign savings also had a significant part to play. Until 1977 gross domestic investment exceeded gross domestic savings by a substantial margin, indicating that foreign savings-foreign borrowing borrowing and foreign foreign direct investment—were important to Nicaragua's growth. By 1977 foreign savings were financing about 12 percent of the total gross domestic investment. During the two years following the insurrection, Nicaragua was effectively cut off from the flow of foreign savings. Foreign commercial banks were not making new loans until the debt inherited from the regime of Anastasio Somoza Debayle had been rescheduled. Foreign investors were also keeping their distance until they could be sure of the new government's attitude towards private investment. 1950 1960 1965 1970 1975 1976 1977 1978 1979 1980 Figure 10. Gross Domestic Investment and Savings, Selected Years, 1950-80 (in millions of 1958 córdobas) The Structure of the Economy The rapid growth that occurred during the 1970s naturally resulted in an economy very different from that of the immediate post-World War II period. In 1950 agricultural production had consisted of subsistence crops and two cash crops-coffee and bananas. Manufacturing was based on small-scale artisan products-clothing, furniture, and some food processingdirected at the low-income, domestic market. By the 1970s Nicaragua had achieved a more balanced economy that featured a diversified agricultural sector producing not only coffee and bananas but cotton, beef, and sugar for export. Manufacturing had grown to encompass a wide variety of products for export and domestic consumption. These developments could be seen in the changing composition of sectoral output after 1950 (see table 8, Appendix). Primary activities-agriculture, livestock, forestry, fishing, and hunting fell from 32.5 percent of GDP to 22 percent in 1977. Secondary activities-manufacturing, mining, and construction-grew from 15.7 percent of GDP to 29 percent in 1977. The most important industry in this activity was manufacturing, which alone grew from 11.5 percent in 1950 to 23.7 percent in 1977. Tertiary activities-commerce, government, utilities, and others -declined only slightly in relative importance from 1950 to 1977. The declining share of total output attributed to agriculture should not be interpreted as a decline in the importance of agriculture in the Nicaraguan economy. Agriculture remained the basis of the economy and continued to be the main source of employment and export earnings. Many industries and service activities were directly linked to agriculture; much of the growth in manufacturing, for example, revolved around food processing, agrochemicals, and textiles. Furthermore high agricultural incomes have provided the savings necessary for domestic capital formation. Income Distribution Until 1977 GDP growth generally exceeded population growth, increasing per capita income. From 1950 to 1960 per capita GDP fell at the average annual rate of 0.6 percent, but from 1960 to 1970 it rose 4.2 percent annually and from 1970 to 1977, by 2 percent annually. The slump in GDP that accompanied the fighting in 1978-79, however, led to a sharp fall in per capita income; in 1979 per capita GDP, in terms of constant 1978 prices, was less than one-half of its 1977 level. Using current prices, per capita GDP fell from US$980 in 1977 to $900 in 1978 and to $540 in 1979. Before the FSLN victory the benefits of Nicaragua's substantial growth had accrued to only a small portion of the population. In 1977 the wealthiest 5 percent of the population earned about 28 percent of total income; the poorest 50 percent earned only about 12 percent of the total. A skewed income distribution between rural and urban areas also existed. In 1972 the average income in Managua was three and one-half times higher than that in the rural areas. The average income of Managua's families in the lower 50 percent income bracket was more than 5.5 times higher than that of the corresponding rural group. But within the rural group there was a higher concentration of income; the wealthiest 5 percent of Nicaragua's farmers earned 42 percent of total rural income compared to 27 percent for the corresponding urban group. Other indices of the concentration of income were to be found in the 1970s. Substantial migration to Managua and to other urban areas was indicative of large urban-rural income differentials. In a 1972 survey the unemployment rate was found to be about 16 percent nationwide, and one-half of the unemployed had |