Background

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1.1. Background

Nicaragua has suffered a myriad of devastating incidents, such as the earthquake in 1972, the long-term civil war thereafter, and the socialist policies in the 1980s that affected the domestic economy, distribution of land, and industrial development for an extended time. In the 1990s, the government transitioned to a more democratic political regime, adopting the free market economy as part of the deal to receive the debt relief and economic assistance from the IMF while actively improving the investment environment to attract foreign investment. Due to the weak domestic industrial and technological foundation, the livelihood of its people and supplies relied on imports, thus, welcomed foreign investment. Export goods attached particular importance to agricultural products, textiles and garments, auto parts, leather shoes, food processing and other projects, mostly generated by foreign investment which provided job opportunities for the domestic labor force. In the state of globalization, businesses and manufacturing companies look to invest in Nicaragua to access its large labor force, tax incentives for imports and exports in its free trade zones, and other advantages to maintain a competitive edge in the market, which facilitated the economic prospects of the country.

Nicaragua is known its arable land that is responsible for producing various types of agricultural products, such as coffee, bananas, beef, poultry, tobacco, maize, rice, sugar, soybeans and other beans, and timber. According to the data provided by the FAO, there is about 50,650 square kilometers of agricultural land¹ and 15,040 square kilometers of arable land.² The map on figure 1 below shows the different land use and vegetation throughout the nation, where the western part is more developed than the eastern part, the eastern being part of the two autonomous regions of the country that are mostly less developed and largely

1 Agricultural land, according to the FAO, is the land area that is used for cultivation of crops and animal husbandry, which is under permanent crops, or under permanent meadows and pastures.

2 Arable land includes land under temporary crops, temporary meadows and pasture for mowing, and land with temporary fallow; it does not account for the land that is possibly cultivable and not farmed.

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comprised of dense rain forests. Nevertheless, the large plots of cultivated area scattered throughout the tropical dry forests in the eastern part are essential for the development since it provides food and income for the hundreds of thousands of people residing in the area.

Figure 1. Nicaragua - Land Utilization and Vegetation

Colored version available online at: https://legacy.lib.utexas.edu/maps/nicaragua.html

Economic development has taken off in recent years, and with regard to poverty reduction according to statistics from the National Institute of Information Development (Instituto Nacional de Información de Desarrollo, INIDE), the number of poor people has been reduced from 48.3 percent of the population in 2005 to 24.9 percent in 2016, while the number of extreme poverty has fallen from 17.2 percent in 2005 to 6.9 percent in 2016.³ The Zero Hunger program, also known as the Food Production Program (PPA), was a five-year program launched in 2007 to help eradicate hunger, malnutrition, extreme poverty and unemployment

3 Department of Investment Services (2019). ―Investment Guide to Nicaragua‖, page 3.

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among the poor rural families, and was one of the more successful programs implemented in Nicaragua under President Daniel Ortega. Other economic and social programs, although effective, have yet to eradicate a significant amount of poverty while the country continues to receive international economic assistance. The poverty rate⁴ grew to 13.1 percent in 2019 from 9.5 percent in 2017, introducing an extra 240,000 people into poverty (World Bank).

National Demographics:

- Approximately 5.59 million people in 2007, and 6.39 million in 2008. The population growth rate in 2007 was 1.4 percent annual change rate.

- In 2018, there were about 6.47 million people, and in 2019 about 6.55 million. The annual rate of change was estimated to 1.1 percent.

- The population growth in Nicaragua was consistently kept above one percent in the past decade.⁵

Nicaragua is the poorest country in Central America and the second poorest in the Americas in particular. Nicaragua was listed as part of the Heavily Indebted Poor Countries (HIPC) Initiative,⁶ which made it eligible to receive economic assistance for debt relief since 1996 from the IMF and the World Bank. Additionally, in 2006, the debt relief program was accompanied by the Multilateral Debt Relief Initiative (MDRI) that provided additional debt relief to assist the eligible low-income countries to further reduce poverty, accomplish macroeconomic stability and ultimately meet the United Nations‘ Millennium Development Goals (MDGs) by 2015,⁷ which was later updated and modified to a more ambitious

4 People living with average income below $3 per day in relations to 2011 Purchasing Power Parity (PPP).

5 Population Growth. World Bank Data. Retrieved: data.worldbank.org/indicator/SP.POP.GROW?locations=NI

6 A multilateral debt relief program launched by the IMF and World Bank in 1996 to reduce the external debt burden of low-income countries to a more sustainable level and promote implementation of poverty reduction strategy, and other key structural reforms designed to create macroeconomic stability and promote growth.

7 Marcelino, Sandra, and Ivetta Hakobyan (2014). ―Does Lower Debt Buy Higher Growth? The Impact of Debt Relief Initiatives on Growth‖, p. 3.

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development agenda with seventeen goals known as the Sustainable Development Goals (SDGs) set to be achieved by 2030. How to realize economic development in Nicaragua is an important issue at the present. To increase competitiveness in a freely open market, it is only after the government policies and the hard work of the people across the country that may drive and reverse the prevailing circumstances faced within the nation. This study hopes to uncover the economic circumstances, social problems, and development analysis of Nicaragua from 2007 to 2020 to better understand the reasons behind the complications to its economic development and analyze potential improvement methods.