Building Without a Foundation

Why the G8 Debt Relief Plan Won’t Help Nicaragua’s Poor

8 July 2005 by Sean Donahue

Achualinca sprawls out from the edge of the dump on the shores of Lake Managua, a barrio of improbably well cared for houses thrown together from whatever materials people could scavenge—tin, plywood, tar paper, cardboard, plywood. In the all but forgotten language of the first people who lived here, Achualinca means sunflower. Today scattered banana trees grow out of the mercury-laden soil, contaminated by a U.S. battery company that dumped its waste into the lake for decades.

This is the last stopping place for people with nowhere else to go in a country where farmers are losing their land as the prices for their crops fall on the global market and where massive unemployment creates fierce competition for a handful of jobs in textile factories that barely pay their workers enough money to feed a family a meager diet of rice, beans, tortillas, and the occasional vegetable. According to the United Nations Development Program, 79.9% of the population of Nicaragua lives on less than $2 a day. 45% live on less than $1 a day. Most of the residents of Acuhalinca are part of the informal economy—salvaging and washing plastic from the dump for recycling, washing windshields at stop lights, panhandling, selling fruit and water and pastries on the street.

This is the kind of community that the leaders of the G-8, the world’s most powerful nations, say they are trying to help by writing off the debt that Nicaragua and the rest of the world’s 18 poorest nations owe to the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(IMF) and the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

. But the devil is in the details, and the debt forgiveness plan will actually lock in place many of the conditions that created this poverty, and put conditions on the Nicaraguan government that will make it virtually impossible to use any of the savings from debt payments to help the poor.

For over a decade, Nicaragua has labored under “structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

” plans imposed by the IMF and the World Bank designed to insure that it would pay off its debts. Nicaragua will have to continue to comply with IMF dictates to qualify for debt forgiveness. Under “structural adjustment” the government was pressured to cut spending across the board and privatize public services, leading to the collapse of the nation’s public sector and a growing gap between rich and poor. According to sociologist Cirilo Otero “Structural adjustment has produced greater inequality in our society—there are less people with more wealth. In the 1970’s there still existed in Nicaragua an upper class and a middle class, but effectively that whole section of the middle class has disappeared, so now there are a very few people in the upper class and a very large lower class. One of the elements that has determined this is that various sectors have lost their access to essentials—electricity, potable water, health care, and education.

Many in Achualinca only have access to pirated electricity. Earlier this decade, international lenders successfully pressed the Nicaraguan government to privatize the country’s electrical system in a move intended to reduce electric rates, eliminate inefficiency, and cut government spending. But the process was flawed from the start. The Nicaraguan government hired the Spanish company Union FENOSA to assess the nation’s electric grid and assess a fair selling price for the state-owned electric company. Nicaragua then sold the electric company to Union FENOSA for less than the Spanish company said the utility was worth. Since privatization, electric rates have increased dramatically, and service to many poor areas has gotten worse. Promised expansions of the power grid into poorer communities never materialized.

Activists succeeded in blocking a similar effort to privatize the nation’s water system last year, but institutions like the World Trade Organization and the Inter-American Development Bank have been increasing pressure for privatization, and many Nicaraguans fear that the prospect of debt forgiveness may actually mean the government will feel more pressure to go along with the wishes of wealthy nations and big lenders. Consumer activist Gonzalo Sagaldo Soza warns that “In general the G-8 agreement will probably mean more pressure from the outside for Nicaragua to put the public services up for sale because all of these agreements have conditions. The policies of the U.S. have the most impact on the country, but the European companies are putting the most pressure to privatize and sell off these resources. We don’t doubt that this debt forgiveness comes in that framework.

The health care system is in shambles due to budget cuts and partial privatization. In Achualinca, a woman named Yamoleth runs a small health clinic from her kitchen with support from the Ministry of Health and a womens’health group. She dispenses malaria medicines and birth control and health information. But the clinic can’t afford most other basic medicines and neither can its patients. Malaria and typhoid run rampant through the barrio. And there is little help available at the public hospitals where the wait is nearly endless, the conditions are unsanitary, and patients have to pay for everything from rubber gloves to antibiotics. Private clinics charge exorbitant rates, the equivalent of a week’s pay for a factory worker. Government spending on health care now amounts to about $47 per person each year. The number of doctors in the public sector has plummeted from 4,500 in 1990 to just under 1,200 this year.

For many in Achualinca and throughout Nicaragua, education is an unaffordable luxury. The country’s education system has been hit especially hard by the financial constraints imposed by international lenders. In the early 1980’s, following the country’s Sandinista revolution, a massive literacy campaign led by teenage volunteers succeeded in reducing the country’s illiteracy rate from nearly fifty percent to less than twelve percent. Structural adjustment led to dramatic budget cuts. Rather than actually closing schools or firing teachers, the government shifted the costs of school supplies and school maintenance to parents. Parents pay an average of $30 at the beginning of each school year for uniforms and basic supplies alone—a sum roughly equivalent to a farming family’s monthly wages, or two weeks’pay for a factory worker. For a family recycling plastic or selling food on the streets, the costs of education are completely out of reach, and the children Parents continue to pay to maintain school facilities and replace pens and notebooks throughout the year. As a result, there are over a million Nicaraguan children between the ages of eight and eighteen who don’t go to school at all, and many more who can only afford to go to school for part of the year. The illiteracy rate has more than doubled in recent years—its now at 35% and climbing.

Fr. Fernando Cardenal, the Jesuit priest who designed the literacy campaign of the 1980’s, fears that the collapse of the country’s education system will lock the majority of the country’s population into poverty. “There is no country on the planet that has achieved development without education,” he says “We cannot expect that our country will become developed if we do not invest in education. Our future will be nothing more than a future of campesinos who will be poor and illiterate, who will come to the point where they will be so poor that they will have to come to Managua to work in sweatshop factories.”—The growth of barrios like Achualinca attests to the fact that that future is already becoming a reality.

Debt forgiveness and other forms of foreign aid won’t make a difference for the poorest people Nicaragua unless there is a dramatic shift toward targeting aid to ensure that is used to bring about real investment in education, housing, agriculture, and public health—a focus that is sorely lacking in the G-8 debt cancellation plan. In prescient comments a few days before the G-8 deal was announced, Cardenal said that trying to spur development without investing in human needs is “like a building without a foundation. It will fall.

Sean Donahue is a freelance journalist based in Massachusetts. He recently led a Witness for Peace Delegation to Nicaragua. Much of his work can be found online at He can be reached at wrldhealer at

Source: Counterpunch,



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