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Third World Quarterly

Making the Economy Scream: US Economic Sanctions against Sandinista NicaraguaAuthor(s): William M. LeograndeSource: Third World Quarterly, Vol. 17, No. 2 (Jun., 1996), pp. 329-348Published by: Taylor & Francis, Ltd.

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Third World Quarterly,Vol. 17, No. 2, pp. 329-348 1996 [C J

CARFAX

M a k in g t h e e c onomy s c r e a m : U S

e c on om i c sanc t ions a g a i n s t Sand in i s t a

Nicaragua

WILLIAM M LEOGRANDE

From 1981 to 1990, the USA engaged in a concertedand multifacetedcampaignto overthrowthe governmentof Nicaragua-a policy that was highly contro-versial domesticallyand culminated n the Iran-contrascandal. In the historyofUS attempts o destabilise othergovernments, he effort against Nicaraguastandsout as one of the most intensive and long-lasting. The covert paramilitarydimension of Washington's policy is well known and quite comprehensivelydocumented, n partbecause of the investigationsresultingfrom the Iran-contraaffair.' The economic dimensionof the policy has received less attention,even

though it was arguablymoreeffective. The 'contra' war failed to achieve its aimof overthrowingthe Sandinistagovernment by military means, whereas econ-omic sanctions,combinedwith the costs of the war, succeededin devastating heeconomy. Amid widespread privation, the Sandinistas' popular support fellseverely, and they were soundly defeated in the 1990 elections.2

The weight of scholarly opinion holds that economic sanctions are not aneffective foreign policy instrument.3Even among scholars who have recentlytried to rehabilitate anctions,most agree thatthey can only be successful undera limited set of circumstances.Hufbauer,Schottand Elliot, for example, offer alist of nine conditions that determine whetheror not sanctions will bring about

the desired policy change by the target country. One of their conclusions,interestingly,is that the use of economic sanctions by the USA to destabilisegovernments n LatinAmerica has been more successful historicallythan the useof economic sanctions for various other aims.4The example of Nicaraguais acase in point.

Carter's aid policy

On 19 July 1979, the Marxist Sandinista National Liberation Front (FrenteSandinista de la LiberacionNacional-FSLN)took power in Nicaraguaafter an

18-month-long insurrection against the dynastic dictatorship of AnastasioSomoza. During the final months of the revolution, the USA tried, unsuccess-fully, to ease Somoza out of office in favourof moderateoppositional figuresin

William M LeoGrande is at the Department of Government, American University, Washington,

DC 20016, USA

0143-6597/96/0329-20 $6.00 ? 1996 Third World Quarterly







WILLIAM M LEOGRANDE

order to preventthe radicalSandinistasfrom coming to power. In the wake of

Somoza's defeat,however,PresidentJimmyCarteradopteda policy of cautiousacceptance of the new Nicaraguangovernment.Both Nicaraguaand the USAhad an interestin maintaining riendly relations.Nicaraguadesperatelyneededforeign assistance to help rebuild its shatteredeconomy, which Washingtonpledged to provide. Moreover, other international assistance-from LatinAmerica, Western Europe, and the international inancial institutions-wouldtend to follow the lead of the USA.

For Washington,maintainingcordial relationswith Nicaraguawas a meansofsalvaging somethingfrom the failure to keep the Sandinistasout of power.FromWashington'sperspective, the struggle to control the succession to Anastasio

Somoza had been 'lost', but perhapsNicaraguaitself need not be. The CarterAdministration set out, quite consciously, to avoid repeating the errors of1959-60, when US hostility contributedto the radicalisation of the Cubanrevolution and its alignmentwith the USSR.

In the immediate aftermath of the insurrection,the USA provided $10.5million in emergency relief to help feed and house the thousandsof peopledisplaced by the war. This was followed in September1979 by $8.5 million in'reprogrammed'economic reconstructionassistance, ie money reallocated toNicaraguafrom other foreign aid accounts.6In addition,the State Departmentdrew up an $80 million supplemental oreign aid request for CentralAmerica

for fiscal year (FY) 1980, $75 million of which was for Nicaragua.7Despiteintense oppositionfrom conservativeRepublicans,the $75 million aid packageeventually passed Congress,albeit with 16 conditionsrestrictinghow the fundsfor Nicaraguacould be used.8

One of these conditionsrequired hat aid be terminatedf the presidentfoundthat the Nicaraguangovernment was aiding or abetting acts of violence inanothercountry.Despite some intelligencereportsthat arms were flowing fromNicaragua o the guerrillas n nearbyEl Salvador,Cartergave the Sandinistas hebenefit of the doubt, concluding that this was not government policy.9 ByJanuary1981, however, new intelligenceleft no doubtthatthe Sandinistaswere

directly involved in smuggling arms to El Salvador. As a result, Carter sus-pended economic assistance. 'I had no alternative but to cut off aid to theSandinistasbefore I left office', Cartersaid, 'because there was evidence thatwas clear to me that the Sandinistaswere giving assistance to the revolutionariesin El Salvador,and the law requiredme to stop the aid.'10

The suspension of aid was the first step in dismantling the constructiverelations with Nicaragua hat Carterhadtried to maintain or 18 months. By onlysuspendingaid ratherthan cancelling it, Carter eft open the possibility that itmight be resumedif Nicaraguaceased its support or the Salvadoranguerrillas.But that determinationwould to fall to Ronald Reagan.

Halting bilateral assistance

PresidentRonaldReagan came to office ill-disposed towards Carter'spolicy oftrying to maintainfriendly relationswith SandinistaNicaragua.Two days after

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US ECONOMIC SANCTIONS AGAINST SANDINISTA NICARAGUA

inauguration,Secretaryof State AlexanderHaig recommended hat the president

reafirmthe suspension of economic aid to Nicaragua, and Reagan agreed. Twoweeks later, the US Agency for InternationalDevelopment (USAID) announcedthat a $9.6 million shipment of wheat was being delayed pending a review ofNicaragua'ssupport for the Salvadoranguerrillas." These moves surprisednoone, since CongressionalRepublicanshad bitterly opposed Carter'sNicaraguanaid package, and the Republican PartyPlatform explicitly called for ending it.

But US Ambassador o NicaraguaLawrence Pezzullo, one of the architectsofCarter'sstrategyof wooing the Sandinistas with economic assistance, was notwilling to give up so easily. Pezzulo argued forcefully that the propermix ofdiplomatic pressureand the threat to cut off badly needed economic assistance

could persuade the Sandinistas to curtail their material support for the Sal-vadoran guerrillas. If US aid was actually stopped, Pezzulo pointed out, theSandinistaswould no longerhave any incentive to limit theirrole in El Salvadoror maintaina moderatedomesticpolicy. The only instrumentWashingtonwouldthen have to modify Sandinista behaviour would be military pressure.Pezzuloconvinced Haig and Reaganto delay a final cut-off of aid for 30 days while heexplained Washington'sterms to the Sandinistas.'2

Pezzullo's strategy began to show results almost immediately; the arms flowfrom Nicaraguato El Salvador stopped.'3SeniorUS officials met in mid-Marchto review Nicaragua's compliance with Washington'sdemands.Hard-liners n

the new administrationsought to repudiate Carter's (and Pezzulo's) strategy,replacing it with a policy of hostility towards Nicaragua. Led by NationalSecurityAdviser RichardV Allen, they advocated a permanentcut-off of aid toNicaragua,pointingto the RepublicanPlatformas theirrationale.They acknowl-edged that intelligence reports indicated the arms flow to El Salvador hadstopped,but they interpreted his as merely 'seasonal', a result of the guerrillas'reduced logistical needs; the smuggling might resume. There was no way todisprove such speculation,and the hard-linerscarriedthe day. Aid was perma-nently cut off.'4 The US action preventedthe shipmentof $9.6 million of foodaid and cancelled disbursal of the final $15 million of Carter's$75 million aid

package, except for a few million dollars destined for the Sandinistas'opponentsin the private sector.The Sandinistasdescribed the aid cut-off as 'interventionism,blackmail,and

Yankee economic aggression'. Within a few weeks, the USSR had offered toprovide Nicaraguawith 20 000 tons of wheat to make up for the cancelled USshipment, Libya had offered a $100 million loan, and Cuba agreed to provide$64 million in technical aid.'5

On CapitolHill, liberal Democrats amentedthe new Nicaraguapolicy, notingthat it was inconsistent with the evidence that the Sandinistashad, in fact, haltedaid to the Salvadoranguerrillas. CongressmanTom Harkin (D-Iowa) saw the

decision as somethingmore sinister: 'There are elements in this administrationthat aregearedup to create economic chaos in Nicaragua',Harkinwarned.'[Theaid cut-off] is no more than the firststep in this destabilizationprocess, the samedestabilizationprocess our CIA engaged in [in] the Dominican Republic, inGuatemala,and in Chile.' The real objective of the policy, he predicted,was 'tooverturnthe Nicaraguanrevolution'.'6

331







WILLIAM M LEOGRANDE

Harkinproved to be right. During the first Reagan Administration,officials

were somewhat divided over the ultimate aim of US economic sanctions andparamilitarysupportfor the contras. Hard-liners, ike Allen, his successor asNational Security Adviser, William Clark, and CIA Director William Casey,sought from the beginningto depose the Sandinistagovernment.The 'pragma-tists' (as they referred to themselves), like Chief of Staff James Baker andSecretaryof State George Shultz,doubted that the contras had the capabilityofoverthrowing he Nicaraguanregime, but they neverthelesssupportedReagan'spolicy of hostility as a form of coercive diplomacy designed to force theSandinistas nto making majorconcessions to Washingtonregardingboth theirdomestic and foreign policies. These two factionsjockeyed for control over the

policy until 1985, after which the hard-linersconsolidateddominance."7

Blocking commercial credit

By mid-1981, Washingtonwas also lobbying against new loans to Nicaraguaboth from privatecommercial banks and multilateral ending agencies like theWorld Bank andthe Inter-AmericanDevelopmentBank. Somoza left Nicaraguasaddled with $1.6 billion in foreign debt, $760 million of which was owed toprivate banks.18 The Sandinistasagreed to pay all of these debts in hopes of

keeping lines of creditopen for new loans. In 1980, private bankswere willingto reschedule Nicaragua'sdebt on terms favourable to the government,sinceotherwise it would have been forced into default. But few were willing to riskadvancingnew capitalto the revolutionaryregime, and those thatconsidered itwere actively discouraged by the USA. 'We simply tell bankers what thesituation is in Nicaragua, what our government feels about Nicaragua, thegeneral conditionsin the area, and the risks', a US official explained.'9

In March 1982, for example, Nicaraguawas negotiatinga $130 million loanfrom a London-based nternationalbanking syndicate that includedbanks fromthe USA, Germany,Switzerland,Japanand Mexico. The loan inexplicablyfell

throughat the last minute. In December,the Bank of America was preparing oloan Nicaragua $30 million forjust 90 days so that the governmentcould meeta scheduled debt service payment. The loan would have been repaid withproceeds from the cottonharvest.Officials from the US governmentcalled loanofficers at the bank to informthem of Washington'soppositionand, accordingto some reports,threatened o call members of the Bank's board of directors fnecessaryto stop the loan. It was stopped.20n early 1983, the USA governmentdowngradedNicaragua's credit-worthiness atingfrom 'substandard'o 'doubt-ful', further discouraging private bank loans, even though Nicaragua wasmeeting its debt paymentschedule at the time.

After 1979 Nicaraguareceived a total of only $12 million in new privatecommercialbank loans, all of which were 90 day credits to facilitate trade.2"Managuawas forced to renegotiate he scheduling of its privatebankdebt againin 1983 and 1984 as its hardcurrencydeficit became greater and greater.After1985, it simply stoppedpaying, afterhaving spent $234 million on privatedebtservice since 1980, and gotten almost nothing in return.22

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Blocking multilateral assistance

The USA began opposing multilateraldevelopment bank loans to Nicaragua inmid-1981 when it was added to what a TreasuryDepartmentofficial called the'hit list' of countries that Washington sought to deny loans. The list alsoincluded Cuba, Vietnam, Afghanistan and Grenada (until the 1983 US in-vasion).23 n November 1981 Washingtonprevailedupon Chile and Argentina ohelp block a $30.7 million Inter-AmericanDevelopment Bank (IDB) loan toNicaraguafor 50 fishing boats to replace the Somoza-owned fleet that had sailedaway when he was overthrown.For Chile and Argentina, cooperation againstNicaragua was a way to repay a political debt to Ronald Reagan. In July 1981Reagan had reversed the Carter Administration's policy of voting againstmultilateralbank loans to Argentina and Chile on human rights grounds.24

Voting stock in the multilateralbanks is based on each country's financialcontribution.As the largest contributor o all the banks, Washington naturallywielded considerable influence. Together, the USA, Chile and Argentina con-trolled enough votes in the IDB to reject the fishing boat loan, so Nicaraguawithdrew the request rather than have it killed. Washington blocked anotherNicaraguaneffort to get the loan approved n March 1982.

After the USA sided with the UK in the 1982 Falklands/MalvinasWar,Argentina dropped out of Washington's cabal. In September 1982 Nicaragua

received $34.4 million from the IDB for a hydroelectric project becauseArgentina supported it despite Washington's opposition.25But it still tookanotheryear and a half before the loan was approvedbecause of what one of thebank's executive directors called 'filibustering' by the US representative,JoseManuel Casanova.

Casanova,a fiercely anti-communistCubanexile andmajorcontributor o theRepublican Party, argued against the economically sound fishing boat loan onthe groundsthat the Nicaraguanswould use the boats to smuggle guns into ElSalvador-despite the fact that 44 of the 50 boats were intended for use on

26AnteUNicaragua'sAtlantic coast. AnotherUS official was more candid.Washington

opposed the loan, he said, because 'we had an overall political problem' withNicaragua.Although no one doubted that Washington's motives were political, the

Administration ould not openly say so because the chartersof all the multilat-eral banks prohibitedthe use of political criteria in making loan decisions.Consequently,US representativesat the banks had to argue, evidence to thecontrarynotwithstanding, hat the loans were economically unsound. Since thatcould be embarrassing,Washington's preferred trategy,accordingto an internalTreasury Departmentmemorandum,was to 'attemptto persuadethe manage-ments of the Banks not to bring these loans forward'.28

One instance that caused particularanger among representatives rom othercountries was the US veto in 1983 of a $2.2 million IDB loan to finish a ruralroadprojectthatwas begunin 1976 and was over 90%completed.The loan wasfrom the bank's Special Operations Fund, a 'soft loan' facility that providedfunds on concessionary terms. Approval of a loan from the fund requiredatwo-thirdsmajority,and the USA controlled 35% of the voting stock.

333







WILLIAM M LEOGRANDE

Contraryto bank tradition, the US representativesdid not mention their

opposition to the loan until the last moment when it was coming to a vote,whereupon the USA announced it would vote no. It was the second timeWashingtonhad exercised its veto over a concessionaryloan to Nicaragua; hefirstwas in January1982 when it blocked a small $0.5 million agricultural oan.Half a dozen directorsrepresentingLatin America and Western Europe com-plained at the transparency f Washington'smotives, and when the loan cameto a vote, representativesof 42 countries supported t. The USA alone stoodopposed, and the loan was defeated. Eventually, the Netherlands providedNicaraguawith bilateralaid funds to finish the project.29

The most controversial DB loan to Nicaragua involved its 1984 request for

$58 million to help small privatefarmers.Like the 1982 hydroelectric oan, thefunds would not come from the special concessionaryaccount, so Washingtonalone could not block them. The Bank's Middle Management Committeeapprovedthe loan in October1984 and the senior management'sLoan ReviewCommittee approved it on 17 November, saying 'We consider the programviable technically,institutionally, inancially,economically,and legally, and werecommendapprovalof the proposedloan'. All thatremainedwas for the loanto be put on the agenda of the Board of Directors.30

But Bank President Antonio Ortiz Mena didn't schedule it. When JorgeAlexey de Synegub,a Guatemalanwho served as the director or all the Central

American countries at the bank, inquiredas to why the loan was not on theagenda for either the November or December board meetings, he was told,falsely, that the loan was still underreview by the bank's technical staff.31

US DirectorCasanovathreatened o walk out of any boardmeeting at whichthe Nicaragua loan was broughtup. Since the board required attendancebydirectorsholding three-quarters f one voting stock in orderto have a quorum,Casanova,holding Washington's35% of the votes, was threatening o paralyseall bank operations.32When the Nicaragua oan was left off the agendafor theJanuaryboard meeting as well, all 25 Latin American countries took theunprecedented tep of orderingthe Bank management o schedule the loan for

the next meeting. That seemed to leave Bank President Ortiz Mena no choice.But the Reaganadministration ad not exhaustedall its options. To trump heLatinAmericandirective to OrtizMena, Washington ssued one of its own. On30 January1985, Secretaryof State Shultz wrote to OrtizMena expressingtheadministration's strong' opposition to any loans for Nicaragua. 'Nicaraguaisnot credit-worthy',Shultzbegan, and moreover,it might 'misuse' the proceedsfromthe loan. 'Moniesreceivedfromthe Bankwould relieve financialpressureson the GON [Governmentof Nicaragua] and could free up other monies thatcould be used to help consolidate the Marxistregime and finance Nicaragua'saggression against its neighbors ... ' Shultz wrote.

Finally, lest there by any doubt about Washington's seriousness, Shultzwarned Ortiz Mena to 'consider carefully' how the US Congress and publicwould reactto approvalof the Nicaragua oan. 'We are all too well aware of theincreasing difficulties in gaining Congressional appropriations or the inter-national financial institutionssuch as the Inter-AmericanDevelopment Bank',Shultz wrote. The USA was already$1 billion in arrearson its contributions o

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the Bank. Approval of the Nicaragua oan, Shultz warned,would make it 'even

more difficult' to gain additional funding. Shultz concluded by urging OrtIzMena to 'defer release of the documentation or the proposed loan to a moreopportune ime in the future'-that is, to defy the previousvote of the board thatthe loan be scheduled for final approval.33

'We read ... [it] as a threat,' said one bank official. Even in the early 1970s,when Washington pressuredthe bank to cut off credits to Salvador Allende'sgovernmentin Chile, 'there was never such a communicationfrom a secretaryof state', he said. 'There has never been anythinglike this.'34Shultz's actions,wrote a British Foreign Office official, was 'typical of bully-boy tactics whichthe present US Administration is apt to adopt-towards allies as well as

) 35

adversaries'.Ortiz Mena sent the loan back to the technical staff for re-evaluation on the

grounds that recent adjustmentsin the Nicaraguan economy required furtheranalysis.The Latin American members of the Bank, also under US pressure,didnot object. The new technical review of the loan lasted a full year, concludingonly after top bank officials instructed the technical staff to write a negativereport on the loan. The Loan Review Committee, chairedby Executive Vice-President Michael E Curtain, a Reagan appointee, rejected the staff's firstassessment because it concluded that the project would probably succeed. Arevised report came to the opposite conclusion, echoing Washington's policy

position-that Nicaragua'smacroeconomicpolicies would 'not permit econom-ically efficient operationof the project'. The negative report,which would havekilled the loan for good, was quickly scheduled for presentation o the Board ofDirectors.36 t was put off yet again, this time at Nicaragua'srequest, to preventit from being rejected. The loan finally died with a whimper when the IDB

discontinued all further loans to Nicaragua because the Sandinistas fell intoarrears n repaying past loans. But even that was not the final insult. In 1987 itwas Nicaragua'sturn to appointthe Central American director for the Bank, apost thatnormallyrotatedamong the five countriesin the region. Washington'sallies voted togetherto deprive Nicaraguaof the seat.37

In the WorldBank, Washingtoncast its first vote againstNicaragua n January1982, when it opposed a loan for $16 million to finance infrastructure evelop-ment in low-income neighbourhoodsin Managua. The project was so wellconceived that both the TreasuryDepartmentand the Latin American Bureau atthe StateDepartment upported t, butSecretaryof State AlexanderHaig orderedthe US executive director at the Bank to vote against the loan nevertheless. Itpassed anyway,becauseWashingtondid not have the votes at the Bank to blockit.38

But like the Inter-AmericanDevelopment Bank, the World Bank was suscep-tible to pressurefrom its principalcontributor.An October 1981 World Bank

report,based on a 1980 field visit, was generally optimistic about Nicaragua'sprospects for economic recovery from the insurrectionagainst Somoza, if itcould 'receive externalassistance at concessional terms'. The report recognisedthatNicaraguawould be largely dependenton bilateraland multilateralaid, sincefurthercommercialbank financingwas unlikely.39

But in 1981, Robert McNamara retired as president of the World Bank

335







WILLIAM M LEOGRANDE

and was succeeded by RepublicanA W Clausen, president of BankAmerica

Corporation.The World Bank's position on Nicaragua underwent a radicalreversal, ust as Washington nitiated its policy of blocking multilateral oans tothe Sandinistas.In February1982, World Bank staff prepareda new confidentialreporton Nicaragua.In contrast o the report ssuedjust fourmonthsearlier,thisone was extremelynegative. 'Nicaragua'sshortand mediumtermprospectsarenot good,' the reportpredicted.The Sandinistashad failed to 'establish clearpolicy guidelines for the economy', and the contradictionbetween their 'Marx-ist-Leninist approaches'and the capitalist characterof the economy had 'notonly thwartedthe recoveryprocess, butjeopardizedthe country'sdevelopmentprospects and credit-worthiness'.0 The main problemwas Nicaragua'slack of

hardcurrency,which could only be remediedby increasingexportproduction.Since private businessmen held a dominant position in the export sector,productionwould not increase unless the climate for private investment im-proved.

'The ideological strugglebetween economic models is, in the final analysis,a power struggle', the report observed. No furtherloans should be made toNicaragua unless the Sandinistas were willing to accept the Bank's 'mostimportantrecommendation'-that is, to begin 'revitalizingthe privatesector'.41This requirementechoed precisely the demands of the private sector insideNicaraguaand the rationaleWashingtonwas using to justify its opposition to

Nicaraguan oans.Even if these measureswere taken, Nicaraguawould need large-scale econ-

omic assistance and loans at concessionaryinterestratesjust to remainsolventin the medium term. Withoutthem, the economy was headed for disaster. Thereportthen recommendedthat the World Bank cut back its lending to a level'well below that of the previoustwo years', a strategythat,by the logic of theBank's own analysis, was destined to push Nicaraguainto even deeper crisis.The report suggested loans equal in real terms to the levels the Bank hadprovidedSomoza, before the loss of 35% of GrossDomestic Product GDP) and$500 million in capital flight caused by the 1978-1979 insurrection.Even this

limited lendingprogramme hould be delayed, the reporturged,andconditioneduponthe Nicaraguangoverumentgiving 'some indicationsthatit plansto followour policy advice'. 2 In short,the Sandinistaswere expected to surrendero theprivate sector in the struggle to define the nature of Nicaragua's social andeconomic model, in exchange for which they would receive a reducedlevel ofmultilateralassistance, inadequateto prevent the economy from slipping intosevere recession.

In writing this report,the Bank staff was very much awareof US oppositionto further lending to Nicaragua. The report recommendedagainst a 'majorassistance' programmebecause 'increasingconstraintsand political limitations

on the Bank may renderthis alteruativeunfeasible'.Nicaraguawas 'likely to bea very controversialclient' the report added. Washington's opposition to alllending was tacitly acknowledged when the report noted that concessionaryloans could not be offered to Nicaraguabecause the USA held enough votes toveto them unilaterally.43

Washington'spressure on the multilateralbanks was extremely effective. In

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the two years from August 1979 to June 1981, before Washington began

pressing the banks to halt loans to Nicaragua, the Inter-AmericanDevelopmentBank providedNicaraguawith $193 million and the World Bank provided$91million. From late 1981 to 1984, Nicaraguareceived only $34 million from theIDB and $16 million from the WorldBank.4 After 1984, Nicaragua got nothingfrom either of them because the Sandinistas stopped making debt servicepayments on priorloans. Theirdecision to halt the payments was not unreason-able. During the first half of the decade, Nicaraguaexperienced a net capitaloutflow in its relations with both the private commercial banks and the multi-laterals,paying a total of $423 million in debt service and receiving very littlenew capital.45

The US trade embargo

In additionto blocking international oans to Nicaragua,the Reaganadministra-tion also gradually mposed restrictionson US trade.In 1981 it deniedNicaraguacredit throughthe US Import-ExportBank, which makes short-term oans tofacilitate trade. Since Nicaraguawas unable to secure even short-termcreditsfrom commercialbanks, it was forced to pay cash for everything it importedfrom the USA.

To discourage US investment,the administration ancelled Overseas PrivateInvestment Corporation(OPIC) insurance for Nicaragua, thereby substantiallyraising the risk to investors. In June 1983, when Nicaraguaexpelled three USdiplomats, Washington retaliatedby expelling 21 Nicaraguan diplomats andclosing all six Nicaraguanconsulatesin the USA outside Washington.The maineffect of this was to make contacts between US businessmen and Nicaraguantrade representativesextremely difficult, further restricting commercial rela-

46tions.

In 1983 the administration educedNicaragua'sshare of the US sugar quotaby 90%. Nicaraguahad been exportingabout $15.6 million worth of sugar to

Washingtonannually,receiving a premiumprice of 17 cents/lb-nearly threetimes the world marketprice. The reason for cuttingthe quota,accordingto theWhite House, was to reduce the resourcesavailable to Nicaraguafor 'subversionand extremist violence'. In fact, one of the main reasons was to reassureUSallies in Central America of Washington'ssteadfastantagonismto Nicaragua,despite rising Congressional opposition to the CIA'S covert paramilitarywar.Reaganwantedto show he intended to 'stay the course in CentralAmerica', anadministrationofficial explained.47

Nicaraguaappealedto the United Nations' Sixth Conference on Trade andDevelopment (UNCTAD), which passed (by a vote of 81-18) a resolution con-

demning economic sanctions against underdevelopedcountries by developedones. Nicaraguaalso complainedthat the reduction of the sugar quota violatedUS commitmentsunderthe GeneralAgreementon Trade andTariffs (GATT)and,in March1984, a GATTpanel agreed,ordering he USA to 'promptlyrestore'theNicaraguanquota. Washington ignored the ruling.48

The next logical step in the escalatingeconomic war was the impositionof a

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WILLIAMM LEOGRANDE

full tradeembargo.In fact, NationalSecurityDecision Directive 124 (NSDD 124),

which Reagan signed in February 1984, specifically called for officials to'review andrecommendeconomic sanctionsagainstNicaragua hat are likely tobuild pressure on the Sandinistas'.49 Hard-linersin the Defense Department,CIA, and National Security Council staff wanted to impose an embargo, butState, Commerce,and Treasurywere all opposed on the groundsthat it wouldviolate the GATT and harm relations with allies in both Latin America andEurope. The Commerce Department,in particular,worried that Washingtonwould get a reputationas an unreliable trading partner,which could hurtadministration fforts to expandtradewith China and othercountrieswith whomWashingtonhad less that amiablepolitical ties.

The Justice Department'sOffice of Legal Council had a 'serious problem'with the legality of a tradeembargo,said a sourcethere; t probablyviolated theOrganizationof American States (OAS) and UN charters,as well as GATT.50Article 19 of the OAS Charterreads: 'No state may use or encouragethe use ofcoercive measures of an economic or political character n order to force thesovereign will of another state and obtain from it advantagesof any kind.'Article 32 of the UN Chartercontainsvirtuallyidentical language.

Finally, some administrationofficials believed that an embargo would becounterproductive.Since virtually no other country was likely to join a USembargo against Nicaragua,the impact on the Sandinistagovernmentwould

probably be minimal. The people likely to be hurt most were Nicaraguanbusinessmen, the backbone of the civic opposition to the Sandinistas. TheSandinistas,however,could use an embargoas an excuse to blame the country'smountingeconomic problemson the USA, just as Fidel Castro had been doingin Cuba for three decades.5"

In 1983 and 1984 these argumentswere enough to hold the line against thehard-liners' demands for an embargo.But after the House of Representativesprohibited urther undingfor the contra warin 1984, andReagan'sinitial effortto resume it in 1985 was defeated,the administration eeded to takequick actionto reassureHonduras hat the USA was not backingout on its commitmentto

the contras. Imposing a trade embargo was something that could be doneimmediately,and it was one of the few sanctions short of directmilitary actionthat the administration ad not already mposed.The symbolic importanceof theembargothus came to weigh as heavily as its practicaleffect.52

Congressionalattitudes also figuredin the decision to impose the embargo.During the contra aid debates on Capitol Hill, many members had urged anembargo,either as a supplementor an alternative o continuedmilitaryaction.Conservative Republicans were pressing for a trade embargo to reinforcehard-linerswithin the administration.But moderateRepublicansand Democratsalso urged Reagan to consider economic sanctions as an alternativeway to

pressure the Sandinistas. 'If we oppose the regime in Managua, why do we buyNicaraguanbeef and bananas?'asked Senate IntelligenceCommitteeChairmanDavid Durenberger.s3

On 1 May 1985, as Reaganarrived n Bonn, Germany,to laud the virtues offree trade at an economic summit with the European allies, the White Houseannouncedthatthe USA was imposing a full tradeembargoon Nicaragua. 'US

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applicationof these sanctionsshould be seen by the Governmentof Nicaragua,

and by those who abet it, as unmistakableevidence that we take seriously theobligation to protect our security interests and those of our friends', Reaganwrote in a letter informingCongress of his decision.54

To impose an embargowithoutCongressionalapproval,Reagan had to invokethe InternationalEmergency Economic Powers Act (IEEPA), under which hecould declare a 'nationalemergency'to deal with an 'unusualand extraordinarythreat to the nationalsecurityand foreign policy of the United States'.,, Criticsscoffed at the idea thatNicaragua,a small countrydevastatedby war, collapsingeconomically and surroundedby enemies, could pose the sort of threat to theUSA that the law intended. But the law gave the presidentalone the power to

decide what constituteda nationalemergency.56Reaction to the embargo among US allies was uniformly negative. Partici-

pants at the Bonn summit criticised it as counterproductive nd warned that itwould increaseregionaltensions. Among the Atlantic allies, the UK, Germany,Spain and Portugalall openly opposed the embargoand affirmedtheir intentionto continue trading with Nicaragua. Canada, France, Italy, Sweden and theNetherlandswent so far as to extendnew tradecredits to Nicaraguato offset theeffects of the embargo.These reactions were a significantsetback for Washing-ton's two-year diplomaticeffort to convince the Europeanallies to reduce theiraid.57

Mexico called the tradeban 'economic coercion', and then reversedits earlierdecision to stop selling Nicaraguaoil on credit-a decision Washington hadstruggledfor two years to get the Mexicans to take. Colombia and Venezuela,which has been tryingto broker a diplomatic settlement of the contra war, alsocriticised the US action.58In May 1985 in a meeting of the Latin AmericanEconomic System (SELA) all the governments of Latin America supported aresolution that called on the USA to lift the embargoand urged SELAmembersto take actions to counter the embargo's effects. The OAS PermanentCounciladopteda similar resolution, and the 13 nations in the CaribbeanCommunity(CARICOM)also called on Washington to end the embargo. When Assistant

SecretaryMotley was asked duringCongressionalhearingsif any countries hadexpressed supportfor the embargo,he could name only El Salvador-and evenEl Salvador did not join it.59

At the United Nations, the Security council voted 11-1 (with three absten-tions) for a resolutioncriticisingthe embargo.US allies France,Denmark,andAustraliavoted in favour,while the UK abstained;Washington'slone 'no' votevetoed the measure. In the GeneralAssembly, a similar resolutionco-sponsoredby Nicaragua,Mexico, PeruandAlgeria passed 84-4, with 37 abstentions.Onlythe USA, the Gambia,Grenadaand Israel voted against it.60

The impact of the tradeembargoon Nicaraguawas significant.As relations

with Washington deterioratedduring the early 1980s, the Sandinistas hadanticipatedthat economic sanctions would be imposed eventually. They there-fore diversifiedNicaragua'sforeigntrade as much as possible to blunt the impactof an embargo.In 1980, 30.4% of Nicaraguan rade was with the USA. By 1984that had been reduced to 14.9%, although Washington was still Nicaragua'slargest single tradingpartner.Trade with WesternEuropeandJapanhad grown

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from 20.6% to 35.1%, and trade with the Soviet bloc jumped from only 1%in

1980 to 15.4% in 1984.61Nicaraguanexportsto the USA includedbananas,beef, shellfish,tobacco,and

sugar-all easily marketableelsewhere, although Nicaragua incurred highertransportation osts to get the goods to their new markets.The biggest problemcaused by the embargowas the loss of importsand the resultingunavailabilityof spare parts for US manufacturedgoods, which included virtually allNicaragua'snon-agriculturalproductivecapacity. Considerableproductionwaslost while factories waited for crucial replacement parts to be found. TheNicaraguangovernmentestimated that the embargocost the countryabout$50million annually.62 hese costs were offset to some degreeby the willingness of

some countriesto extendadditional radecredits to Nicaragua.In his tripthroughEurope ust after the embargowas imposed,Ortegawon pledges of $190 millionin loans from Westerncountries and $202 million from the Soviet Union andEasternEurope.63

The economic effects of the contra war

From the earliest stages of the contra war, the Nicaraguaneconomy was aprimary target, despite the CIA's assurances to Congress that only militaryinstallations would be attacked.64The contras preferredto attack lightly de-

fended farms and villages rather than Sandinistamilitary posts and, along theborder with Honduras,their episodic raids severely curtailedagriculturalpro-duction.

In 1983 the Reaganadministrationoughtto escalate the war's economic tollsignificantly by mounting a concerted sabotage campaign. 'Let's make thebastardssweat', CIA Director William Casey told Dewey Clarridge,his chief ofoperations or LatinAmerica.Clarridgecame with the idea of creatinga specialcommando force of CIA contractagents-'unilaterally controlledLatino assets',or UCLAs-to attack vital economic installations.65Ourmission was to sabotageports,refineries,boats and bridges,and try to make it look like the contras had

done it,' one of the UCLASlater explained.66The CIA outfittedtwo oil rig servicing ships as platforms for the UCLAS,whowere mercenariesrecruited from all over Latin America. Operatingout of asecretCIAbase on TigerIsland,Honduras, n the Gulf of Fonseca, these 'motherships' sat off the Nicaraguancoast, just outside the 12-mile limit. From there,they launchedspeedboatsandhelicoptersto attackNicaraguanports.CIAofficersmanagedthe operationsfrom the motherships.

US Army Special OperationsForces from the 160thTask Force of the 101stAirborneDivision did the flying. Heavy Chinookhelicoptersferried the UCLASand their speed boats to the Nicaraguancoast; light Hughes 500 helicopters

strafed and rocketed Nicaraguan coastal defences. Sometimes, especiallydifficult sabotageoperationswere carriedout by US Navy SEALS(Sea, Air, andLand special forces). 'You don't think we would have gone to all that troublefor a bunch of contras, do you?' said one former army helicopter pilot,describinga particularlyheated battle to extracta SEAL team.67

Between September1983 and April 1984 the UCLAs and US Special Forces

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carried out 19 attacks, most of them targeted at Nicaragua's three oil storage

facilities. On 10 October 1984 the commandos blew up oil storage tanks atCorinto,causingthe loss of over 3.2 million gallons of gasoline and diesel fuel.One hundred and twelve people were injured and some 20 000 had to beevacuated from the city. The fires burned for several days. Three days later,frogmenblew up mooringfacilities on the oil pipeline in PuertoSandino.Shortlythereafter,Exxon Corporation nformedNicaraguait would no longer providetankers to transportNicaraguanoil.68

Casey was thrilled by the success of the sabotage campaign, and pressedClarridgeto come up with new ideas for crippling the Nicaraguaneconomy.Clarridge, who had studied the effectiveness of naval mines in the Russo-

Japanese War while he was at Columbia University, suggested miningNicaragua's harbours.69The Nicaraguan economy was highly dependent ontrade. Choke off shipping, and the economy would die. 'Our intention is toseverely disruptthe flow of shipping essential to Nicaraguantrade during thepeak export period', National SecurityCouncil (NSC) staffers wrote in a memoto National SecurityAdviser RobertMcFarlaneshortly after the mining began.'It is entirely likely that once a ship has been sunk, no insurerswill cover shipscalling in Nicaraguanports.'70

To avoid the diplomatic headachesthat would come from sinking ships andkilling seamen from third countries, the CIA had 'firecracker'mines specially

made-mines supposedly not big enough to sink a vessel or kill anyone(althoughsome contained 300 pounds of plastic explosive), but big enough todamageships and, as one official put it, 'wake up folks at Lloyds of London'. 1

Mexican ships were specificallytargeted,because Mexico suppliedalmost all ofNicaragua'soil.72

The mining began in January 1984 and continued until Washington's rolebecamepublicin early April.The mines, about75 in all, were laid by speedboatsand helicopters piloted by UCLAs and US Special OperationsForces. More thanhalf a dozen merchantships from Japan,Panama,Liberia,the Netherlands andthe USSR were damaged by mines in Nicaragua'sthree majorports-Corinto,

Puerto Sandino and El Bluff. Fifteen sailors were injured,and two Nicaraguanswere killed when their fishing boats hit mines and sank. The domestic andinternationaloutcry over the mining caused the administration o abandon theprojectin April and,within a few weeks, the Nicaraguanshad managedto clearthe remaining mines. Nevertheless, the estimated cost of the mining to theNicaraguaeconomy was $10 million.73

During 1985 and 1986 the contras and the Sandinista army fought whatNicaraguanPresidentDaniel Ortegacalled the 'the greatcoffee war'. In January1985 the contras launcheda sustainedoffensive to disruptthe coffee harvest,thereby depriving the governmentof desperatelyneeded hard currency.They

attacked some 50 state and cooperativefarms, and ambushed dozens of truckscarryingfarm workers. Between 20% and 25% of the 1985 harvest was lostbecause it was too dangerous or farmers o go into the fields to pick it. By early1986, however, the contras were so weakened they did not even attempt tomount an attackon the harvest,even though the world marketprice for coffeehad doubled,making the harvest all the more critical to the economy.74

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WILLIAM M LEOGRANDE

Overall, the cost of physical damage caused by the fighting, and lost

production resulting from the disruption of transportation,displacement ofpeople from the war zones, interruption f energy supplies, etc, amountedto anestimated$2 billion between 1980 and 1986.75The most significanteffect of thewar, however, was the diversion of resources from economic developmenttomilitary defence. By 1986, 55% of the government's budget was devoted tofighting the war, a figure that held constant until 1988.76 With productiondeclining, tax revenues could not begin to cover the costs of the conflict, so thegovernmentclosed the fiscal gap by simply printing money.

The impact of US sanctions

The cumulative impactof the embargo,the evaporationof externalcapitalfromthe internationalbanks,and the costs of the contra warprovedto be fatal for aneconomy that had never really recovered from the insurrectionagainstSomoza.The insurrection n 1978-79 destroyedsome 22% of the fixed capital assets inthe manufacturingsector of the Nicaraguan economy. Nevertheless, with thehelp of externalfinancing,recoverywas briskin 1980 and 1981. The economybegan to slow in 1982, however, and by 1983 it had turneddown. From therethe decline accelerated.

To be sure, the economic policies of the Sandinista government and its

ongoing feud with the privatesectordiscouraged nvestment,therebyexacerbat-ing the country'seconomicplight.78But Nicaragua, ike Chile in the early 1970s,was an underdevelopedagricultural xport economy, especially dependenton theinternationalmarket or both goods and capital.WhenWashingtonundertook ocut off Nicaraguafrom the outside world, its economy could not survive theseverance. Economic aid from the USSR never came close to covering theresulting losses.79

Even without the contra war, the Nicaraguaneconomy would have faced aserious crisis in the mid-1980s. The war tipped it into chaos. Governmentsubsidies to the poor and to small producers,combined with the rising costs of

the war, produceda fiscal deficit that the governmentclosed by printingmoney,triggeringa rise in inflation.In 1984, the annual rate was 50%. As the growingtrade deficit produced shortages of hard currency, imported inputs to thedomestic economy grew scarce, curtailingproductionandincreasing unemploy-ment.

As the standardof living in Nicaragua sank, the Reaganadministration riedto detach itself from responsibilityfor the resulting misery. In May 1985 theState Department eleased a reporton US economic sanctions which concluded,'depressedeconomic conditionsin Nicaraguawere, of course, due to disastrouseconomic policies adoptedby the Sandinistas, and not to any actions by the

United States'.81By the end of 1985, Nicaragua was suffering a severe recession. GrossDomestic Product contractedby 5.9% that year, and inflationreached 320%.82By 1987, the inflationratewas 1300%. The government ook its supplies of old20 and 50 co6rdoba anknotes and simply printedthree more zeroes on them tomake 20000 and 50000 co'rdobanotes. In 1988, the government's austerity

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measures,intended to control inflation by reducingpublic spending,triggereda

severe recession. The economy contractedby 15%,and the fiscal deficit actuallywidened. Inflation raged completely out of control, reaching 33 600%-hyperinflationof the sort experienced by only a few nations in history. Asmoney became worthless, the economy was reducedto primitivebarter,furtherdislocating productionand exchange.By the end of the year, the GrossDomesticProducthad fallen by a thirdand percapitaconsumptionhad fallen by more than50% from 1979 levels.83

This economic catastropheproved fatal for the Sandinistas in the 1990election. They triedas best they could to defuse the economic issue by appealingto nationalism, inking their electoralopponentswith the contras and the United

States. Polls indicated that the war issue seemed to benefit the Sandinistas,whereas discontent over the economy favoured the opposition. By focusing onthe war, the Sandinistas hoped to escape, Houdini-like from the politicalconsequences of the country's economic collapse. It didn't work.

On 25 February1990, 86%of Nicaragua'sregisteredvoters turnedout to casttheir ballots under the watchful eyes of some 2000 foreign observers. Theopposition coalition, headed by Violeta Chamorro,won a stunning victory.Chamorrotook 54.7% of the popular vote for president, to Daniel Ortega's40.8%, and Chamorro's allies won 51 seats in the 93-member NationalAssembly, to 39 for the Sandinistas.84The Bush administrationrejoiced at

Chamorro'selection, lifted the economic embargoReaganhad imposed in 1985,and asked Congressto provide$300 million in economic assistance for the newgovernmentin 1990 and another$241 million in fiscal year 1991.85

The Reagan administrationfailed to achieve its principal policy goal inNicaragua-the ousting of the Sandinista governmentby militaryforce, spear-headed by the contras. But the economic sanctions mposedon Nicaragua,whichwere seen at the time by Washington as a secondary policy instrument,ultimately proved far more effective, for several reasons. First, the structureofNicaragua'sunderdevelopedeconomy made the Sandinistasmore vulnerabletoeconomic thanmilitarypressure.Especially in the wake of the economic losses

caused by the insurrectionagainst Somoza, Nicaragua was highly dependentupon externalfinancialassistance.And, like most of LatinAmerica,Nicaragua'strade was predominantlywith the USA. Thus Washingtonwas especially wellpositionedto punishNicaraguaeconomically by blocking externalfinancingandcutting off trade,even though few other countries supportedthese sanctions.86

Second, althoughthe USSR and its allies were willing to provide Nicaraguawith a vast store of militaryhardwareto fight the contra war, they were notprepared o shoulder he ongoing financialburdenof proppingup the Nicaraguaneconomy. As in the earlier case of SalvadorAllende's government n Chile andthe contemporary ase of MauriceBishop's government n Grenada, he Soviets

abjured'anotherCuba' as too costly.Third, Washington's economic sanctions were undertakenin tandem withextensive paramilitaryattacks, as part of a multifaceted destabilisation pro-gramme.The contra war magnifiedthe effectiveness of the economic sanctionsby directly damaging production and by siphoning off scarce resources tonationaldefence.

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WILLIAMM LEOGRANDE

Finally, the hardships mposed by Nicaragua'seconomic collapse in 1988-89

fatally underminedthe Sandinistasbase of popular support, which had beenwidespreadin 1979 and still considerable when they won elections in 1984.Although the Sandinistaspreferreda Leninist,single-partymodel of government,they nevertheless allowed a domestic opposition to exist and function-incontrast to Fidel Castro's governing strategyin Cuba.

The existence of an electoralsystem thatforced the Sandinistas o periodicallycontendwith the oppositionfor power provideda mechanismfor the populationto express its discontent with their deterioratingstandard of living. That is,although the economic sanctions imposed by the USA did not force theSandinistas o abandon heir core policies or ideology, the sanctions did alter the

domestic balance of Nicaraguapolitical forces sufficientlyto drive the Sandin-istas out of power.87

In short, the Nicaraguancase demonstrates hat under some circumstances,economic sanctionscan be highly effective against a vulnerableeconomy, evenwhen they are largely unilateraland the demands being made on the targetregime are extreme.

NotesPeter Kornbluh,Nicaragua: The Price of Intervention,Washington,DC: Institutefor Policy Studies, 1987;ChristopherDickey, With the Contras: A Reporter in the Wilds of Nicaragua, New York: Simon andSchuster, 1985; Holly Sklar, Washington'sWar on Nicaragua, Boston, MA: South End Press, 1988; SamDillon, Commandos: The CIA and Nicaragua's Contra Rebels, New York: Henry Holt, 1991; and USCongress, Report of the Congressional CommitteesInvestigating the Iran-Contra Affair, H. Rept No100-433, S. Rept No 100-216, 100th Congress, 1st session, 17 November 1987, Washington, DC:GovernmentPrintingOffice (GPO), 1988.

2 The only specific examinationsof the economic dimension of Washington's policy of hostility towardsNicaragua are Kornbluh,Nicaragua, pp 93-122; and Michael E Conroy, 'Economic aggression as aninstrument of low intensity conflict', in Thomas W Walker (ed), Reagan Versus the Sandinistas: TheUndeclared War on Nicaragua, Boulder, CO: Westview, 1987, pp 57-79.

3See, for example, JohanGaltung, 'On the effects of international conomic sanctions: with examples from

the cases of Rhodesia', WorldPolitics, 19, 1967, pp 378-416; GunnarAdler-Karlsson,WesternEconomicWarfare,1947-1967: A Case Study in Foreign Economic Policy, Stockholm:Almqvist and Wiksell, 1968;Peter Wallensteen, 'Characteristicsof economic sanctions', Journal of Peace Research, 5, 1968. pp248-267; KlausKnorr,The Power of Nations: The Political Economyof InternationalRelations,New York:Basic Books, 1977; James Barber, 'Economic sanctions as a policy instrument',InternationalAffairs, 55,1979, pp 367-384; and MargaretDoxey, InternationalSanctions in ContemporaryPerspective, New York:St Martin's Press, 1987.

4Gary Clyde Hufbauer,JeffreyJ. Schott& KimberlyAnn Elliott,Economic Sanctions Reconsidered:Historyand CurrentPolicy, Washington,DC: Institute or International conomics, 1990, pp 94-104. Other scholarswho have argued hat sanctionscan be effective in some circumstances nclude: David A Baldwin, EconomicStatecraft, Princeton,NJ: PrincetonUniversity Press, 1985; Richard StuartOlson, 'Economic Coercion inworld politics: with a focus on North-South relations', World Politics, 31, 1979, 471-494; William HKaempfer & Anton David Lowenberg, International Economic Sanctions: A Public Choice Perspective,Boulder, CO: Westview, 1992; Kenneth A Rodman, 'Sanctionsat bay? Hegemonic decline, multinational

corporations,and US economic sanctions since the pipeline case', International Organization, 49, pp105-137.

5Robert A Pastor, Condemned to Repetition: The United States and Nicaragua, Princeton, NJ: PrincetonUniversity Press, 1987, pp 192-193.

6 KarenDeYoung, 'House unit votes $9 million in aid for Nicaragua',WashingtonPost, 12 September 1979.7 US Senate, S 2012, Hearingsbefore the Committee on ForeignRelations, 96th Congress, 1st session, 6-7

December 1979, Washington, DC: US GPO, 1980, pp 77-80.

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8 In addition to the Senate's requirementthat 60% of the funds go to the private sector, the House ofRepresentatives pecified that only US goods could be purchasedwith the aid, that none of the money could

be used for educationalprojects n which Cuban advisors orteachers were involved (eg Nicaragua's nationalliteracy crusade)and that 1% of the funds had to be used to inform the Nicaraguanpeople of the beneficenceof the US aid programme.Aid would be terminated f Nicaraguaengaged in a consistent patternof grosshuman rights violations, aided or abetted acts of violence in another country, allowed Cuban or Sovietcombattroopsto be stationedin Nicaragua,violated the right of unions to organiseand operate, or violatedthe rights of free speech and press. A number of even more restrictive amendments were defeated.CongressionalRecord, 27 February1980, pp H2009-H2020.

9PresidentialDeterminationNo 80-26, September 12, 1980,' 45 Federal Register 62779. See also US Houseof Representatives, Review of the Presidential Certification of Nicaragua's Connection to Terrorism,Hearingsbefore the Subcommitteeon Inter-AmericanAffairs,Committeeon ForeignAffairs, 96th Congress,2nd Session, 30 September, 1980, Washington, DC: US GPO, 1980.

10For a descriptionof the new intelligence see Pastor, Condemned o Repetition,p 228. The law did not, infact, leave Cartermuch alternative.Section 536 (g) of the Foreign Assistance Act as amendedreads: 'In the

event that the President ransmitssuch a certification,but at a later date he determinesthat the Governmentof Nicaraguacooperates with or harborsany international erroristorganizationor is aiding, abetting, orsupportingacts of violence or terrorism n other countries, the President shall terminate assistance to theGovernmentof Nicaraguaunder this chapter... 'from "PresidentialDeterminationNo 80-26'.AlexanderM Haig, Jr, Caveat: Realism,Reagan and Foreign Policy, New York:MacMillan, 1984, p 109;JuandeOnis, 'Wheat sale to Nicaragua delayed', New YorkTimes, 11 February 1981.

12 Pastor, Condemned o Repetition,pp 232-233; author's nterview with LawrencePezzullo, Washington,DC,May 1982.

13 See the testimonyof administration fficials in the US Senate, The Situation n El Salvador, Hearingsbeforethe Committeeon Foreign Relations,97th Congress, 1st session, 18 March and 9 April, 1981, Washington,DC: US GPO, 1981, pp 10-11; US House of Representatives,ForeignAssistance Legislation or Fiscal Year1982 (Part 7), Hearingsand Markupbefore the Subcommitteeon Inter-AmericanAffairs of the Committeeon Foreign Affairs, 97th Congress, 1st session, 23, 26 30 March and 8 April 1981, Washington,DC: USGPO 1981, pp 68, 71.

14 Roy Gutman,Banana Diplomacy: The Making of AmericanPolicy in Nicaragua 1981-1987, New York:Simon and Schuster, 1988, pp 35-37; Dickey, With the Contras, p 106.

15 'Nicaraguadenounces US aid cut-off', Los Angeles Times,3 April 1981; and Associated Press, 'Soviets sendaid to Nicaragua',Miami Herald, 26 April 1981.

16 CongressionalRecord, 2 April 1981, pp S3391, H1285-1287.7 The internal divisions within the Reagan administrationare described in virtually all the memoirs of

Reagan's foreign policy aides. RegardingNicaragua,see especially, George P Shultz, Turmoiland Triumph:My Years as Secretary of State, New York: Charles Scribner's Sons, 1993; and Constantine C Menges,Inside the National Security Council: The True Story of the Making and Unmakingof Reagan's ForeignPolicy, New York: Simon and Schuster, 1988. For an outsider's view, see Gutman, Banana Diplomacy.

18InternationalBank for Reconstruction and Development (IBRD), Country Program Paper: Nicaragua, 16February1982, Washington,DC: typescript, 1982, p 11.

19Quoted n Alfonso Chardy US studies furthercutback n commerce with Nicaragua',MiamiHerald, 14 May

1983. On the initial willingness of the banks to restructureNicaragua's debt, see Richard Weinart,'Nicaragua's debt renegotiation', CambridgeJournal of Economics, 5, 1981, 187-194. Weinart was aconsultantto the Nicaraguan governmentduringthe restructuringnegotiations.

20 Richard Stahler-Sholk, 'Foreign debt and economic stabilizationpolicies in revolutionary Nicaragua', inRose J Spalding (ed), The Political Economy of Revolutionary Nicaragua, Winchester, MA: Allen and

Unwin, 1987, pp 151-168; Rodman, 'Sanctionsat bay?', pp 195-137.21

Stahler-Sholk,'Foreigndebt and economic stabilizationpolicies in revolutionaryNicaragua', pp 151-168.22 E V K Fitzgerald, 'An evaluation of the economic cost to Nicaragua of US Aggression, 1980-1984',

Spalding (ed), The Political Economy of RevolutionaryNicaragua, pp 195-216.23 Jim Morrell, 'Redlining Nicaragua',InternationalPolicy Report, December 1985, pp 1-7.24 JohnM Goshko, 'US ends oppositionto loans to repressiveLatinregimes', WashingtonPost, 9 July 1981.

Carter's policy was based on Sec 701 of the InternationalFinancial Institutions Act, which mandatesopposition to loans for countries whose governments are guilty of 'gross violations of internationallyrecognized humanrights', except in cases where the loans would benefit the poor.

25 Jim Morrell & William Jesse Biddle, 'CentralAmerica: the financial war,' InternationalPolicy Report,March 1983, pp 1-11.

26 Michael Gardenswartz, Has politics spoiled the IDB?, InstitutionalInvestor, March 1985, pp 97-100; and

Morrell, 'Redlining Nicaragua', pp 1-7.27 Clyde H Farnesworth, US bars loans for Nicaraguaroad', New YorkTimes, 30 June 1983.28 Quotedin Kornbluh,Nicaragua, p 105. Article VIII of the IDB charter,for example, states: 'The Bank, its

officers and employees ... shall not interfere in the political affairs of any member, nor shall they be

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WILLIAMM LEOGRANDE

influenced in their discussions by the political character of the member concerned. Only economicconsiderationsshall be relevantto their discussions ... ' Morrell, 'RedliningNicaragua', pp 1-7. The WorldBank agreementcontains virtuallyidentical languagein Article IV.

29 Inter-AmericanDevelopment Bank, 'Boardof Executive Directors,Minutes of meeting 83/21 ... June 22,1983', DEA/83t21, 28 June, 1983.

30Morrell, 'RedliningNicaragua', pp 1-7.

31 Dana Priest, 'Nicaraguan oan splits Inter-AmericanBank', WashingtonPost, 20 January1985.32 Morrell, 'RedliningNicaragua', pp 1-7.33 LetterfromGeorgeP Shultz,US Secretaryof State,to Antonio OrtizMena,Presidentof the Inter-American

Development Bank, 30 January1985.34 KarenDeYoung, 'Shultz interveneson loan: Inter-AmericanBank is asked to defer funds for Nicaragua',

WashingtonPost, 8 March 1985.35 Quoted in Kornbluh,Nicaragua, p 112.36 Jim Morrell, 'Inter-AmericanDevelopment Bank writes negative report on Nicaragua loan', Centerfor

InternationalPolicy Aid Memo, 20 December 1985; Kornbluh,Nicaragua, p 113.

37 Andres Oppenheimer, Nicaraguadecries rebuff from IDB', Miami Herald, 25 March 1987.38 Morrell & Biddle, 'CentralAmerica: the financialwar', pp 1-11. A bank official said of this loan, 'The

Nicaraguangovernmenthadperformed o well in termsof using the financialandphysicalresources .. theybuilt twice as many roadsandwatersupplyconnections as were expected in so shorta time. It was the besturbandevelopmentprojectat the Bank.' Nancy Strogoff, 'Nicaragua: he other war', Progressive, January1984, pp 22-23.

39 Conroy, 'Economic aggressionas an instrumentof low intensityconflict', pp 57-79.40

IRBD, CountryProgam Paper: Nicaragua, p 1.41

Ibid, pp 2, 12-13.42Ibid, pp 7-8, 13.43 Ibid, pp 13-14, 17.44 Ibid, pp 10-11; RobertJ McCartney, US will oppose loans to Nicaragua', WashingtonPost, 1 July 1983.45 Fitzgerald, 'An evaluationof the economic cost to Nicaraguaof US aggression, 1980-1984', in Spalding

(ed), The Political Economy of Revolutionary Nicaragua, pp 195-216. The Sandinistas never soughtfinancing romthe InternationalMonetaryFund becausein May 1979, as the Somozaregimewas crumbling,the IMF gave it a $63 million loan. Of that, $49 million was delivered before Somoza, fled, and he tookalmostall of it with him;the remaining$17 was providedto the Sandinistagovernment n August 1979. TheSandinistasagreedto pay off the loan to Somoza, but they were so wary of the IMF that they never askedit for funds themselves. 'The iFis in Central America:developmentor politics?', Center or InternationalPolicy Aid Memo, 1 October 1982.

46 Philip Taubman,'21 Nicaraguans n 6 ConsulatesExpelled by US', New YorkTimes, 8 June 1983.47 Lou Cannon & MargotHormblower,US to cut Nicaragua's sugar sales', WashingtonPost, 10 May 1983;

and Francis X Clines, 'Sandinistscurbedon US sugar sales', New YorkTimes, 11 May 1983.48 On the UNCTAD ruling, see Paul Lewis, 'UN tradeparley attacksUS move againstNicaragua',New York

Times, 3 July 1983; on the GATT report,see Kornbluh,Nicaragua, p 101.9 Kornbluh,Nicaragua, p 93.

50

JoanneOmang, 'Sanctions:a policy of default', WashingtonPost, 8 May 1985.51 JoanneOmang, 'Reaganexpectedto place sanctionsagainstNicaragua', WashingtonPost, 1 May 1985. Thisassessment was generallysharedby even the most anti-Sandinistamembersof the Nicaraguanprivate sector,such as COSEP PresidentEnriqueBolafios. 'Nicaraguansays embargoaids Sandinistagovernment',NewYorkTimes, 29 September1985.

52 Omang, 'Sanctions: a policy by default'.53 US House of Representatives,The Imposition of Economic Sanctions and a Trade Embargo Against

Nicaragua, Hearingbefore the Subcommitteeson InternationalEconomic Policy and Trade,and WesternHemisphere Affairs, Committeeon ForeignAffairs, 99th Congress, 1st Session, 7 May 1985, Washington,DC: US GPO 1985, p 59.

54 'Message to the Congress on economic sanctions against Nicaragua, 1 May, 1985', Public Papers of thePresidentsof the Unites States: RonaldReagan, 1985, Book 1, Washington,DC: US GPO, 1986, pp 548-549.At the same time, the administration ancelled the landing rights of Nicaraguancommercialaircraft n theUSA, andgave notice of its intent to cancel a bilateralTreatyof Friendship,CommerceandNavigation.The

treatywas abrogatedbecause it prohibitedexactly the sort of embargo Washington was imposing.5 InternationalEmergency Economic Powers Act, 50 U.S.C. Sec. 1701 Met seq.; 'Executive Order 12513-

prohibitingtrade and certain other transactions nvolving Nicaragua, 1 May, 1985', Public Papers of thePresidents of the United States: Ronald Reagan, 1985, Book 1, pp 547-548.

56 'Key Congressmanpraiseembargo',New YorkTimes,2 May 1985. Under the NationalEmergenciesAct 50U.S.C. Sec. 1601 et seq., it was possible for Congress to declare a national emergency at an end byconcurrent esolution. But since a concurrent esolutionamounted o a legislative veto, it was most probably

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unconstitutionalunder he 1983 SupremeCourtrulingin Immigrationand NaturalizationServicevs Chadha.

Thus Congress would have had to pass new legislation to end the embargo against Nicaragua.Since that

would require a two-thirdsvote in both houses to overcome Reagan's inevitableveto, the Democratsnever

tried.57 Clifford Krauss, 'US tradeembargo helps Nicaragua'sSandinistas',Wall Street Journal, 2 October 1985;

Lou Cannon, 'Summit partnerscriticize sanctions against Nicaragua', WashingtonPost, 4 May 1985;

EdwardCody, 'WestermEuropeansopen talks on CentralAmerica', WashingtonPost, 29 September,1984.

58 'Mexico joins critics of US embargoagainstNicaragua', WashingtonPost, 5 May 1985.59 'Latin groupurgesUS to lift Nicaraguaembargo',Journalof Commerce,16 May 1985; Reuters, 'Caribbean

unit faults US', New YorkTimes, 13 May 1985; US House of Representatives,The Impositionof Economic

Sanctions and a TradeEmbargoAgainst Nicaragua, pp 50, 71.60 Reuters, 'Managua sets austerity measures', WashingtonPost, 11 May 1985; 'Security council ruling

sought', New York Times, 7 December 1985. Nicaragua also asked GAT[ to rule on the legality of the

embargo,as it had when Washingtonreducedthe Nicaraguansugarquota.The USA claimed the embargo

wasjustifiedunderArticle 21 of the GATT agreement,which gives memberstates the rightto 'takeany action

which it considers necessary for the protectionof its essential security interests', (quoted in US House ofRepresentatives,The Impositionof Economic Sanctions and a Trade EmbargoAgainst Nicaragua, p 33).

Washingtonwas only willing to allow a GATT panel to review whether imposition of an embargo was, in

general,consistentwith Article 21; it would not allow a review of whetherthe US claim of nationalsecurity

was justified. Underthose limitations,the GATT panel reluctantlyagreedthatan embargowas allowable,but

warmed hat Article 21 needed to be clarified to prevent its abuse in the future. 'GATT hands tied on

Nicaragua',Financial Times,7 November 1986.61 Tony Jenkins,The US EmbargoAgainstNicaragua-One YearLater,Policy Focus No 3, Washington,DC:

Center for InternationalPolicy and Overseas Development Council, 1986, p 3.62 'Nicaraguamoves to protect assets', Journal of Commerce,16 March 1987.63 Jenkins, The US EmbargoAgainst Nicaragua, p 5.64 Chairmanof the House Intelligence Committee EdwardBoland described CIA Director William Casey's

original descriptionof the contra war's aims in CongressionalRecord, 27 July 1983, p H5721.65

Bob Woodward,VEIL: The Secret Warsof the CIA 1981-1987, New York: Simon and Schuster, 1987, p 281.The CIA had originally trained contra units as commandos, but they weren't very effective. Dillon,

Commandos,p 133.66 Quoted in Kornbluh,Nicaragua, p 47.67 The SEALS were probablydrawnfrom US forces stationedin El Salvador,who were training Salvadoran

commandosto use 'piranha'speedboatsprovidedby the CIA to interceptarmssmuggling to the Salvadoran

guerrillas.Both the Salvadorancommandosand the UCLAS operated heir boats from the same base on Tiger

Island, just off the Hondurascoast. Salvadoranswere also the most numerousnationalityamongthe UCLAS,

thoughbefore the US trainingprogramme,El Salvadorhad no navy. Andres Oppenheimer, Poor islanders

fear a role in contrawar despite chance of jobs', Miami Herald, 1 November 1986; FrankGreve & Mark

Fazlollah, 'NSC bypassed militarywith covert operations',Miami Herald, 26 July 1987. Some of the UCLA

operations are described in 'CIA employees fought Nicaraguans', WashingtonPost, 20 December 1984,

althoughthe participantsare describedas 'cIA employees' ratherthan Special Forces units.

68 David Rogers & David Ignatius, 'How the CIA-aided aids in Nicaraguain '84 led congress to end funds',Wall Street Journal, 6 March 1985; 'CIA internalreportdetails US role in contra raids in Nicaragualast

year.', Wall StreetJournal, 6 March 1985; CharlesR Babcock, 'CIA directly oversaw attackin Octoberon

Nicaragua oil facility', Washington Post, 18 April 1984; Associated Press, 'October 10 assault on

Nicaraguans is laid to CIA', New York Times, 18 April 1984; and Robert J McCartney, 'Exxon cuts

Nicaragua'soil supply', WashingtonPost, 15 October 1983. The CIA's ole in the harbourattackscame to

light shortly after the disclosure that the USA had mined Nicaragua's harbours, probably as a result of

EdwardBoland's off-handremark hat therewere 'otherthings' besides the miningthat the UCLAs had done.

CongressionalRecord, 12 April 1984, p H2918.69 Rogers & Ignatius, 'How CIA aided raids in Nicaraguain '84 led Congress to end funds'.70 Memorandum o National Security Adviser Robert C McFarlanefrom Oliver L North and Constantine

Menges, 'Special activities in Nicaragua', 2 March 1984, in US Congress, Iran-Contra Investigation:

Hearings,Volumes 100-107, PartIII,JointHearingsbefore the Senate Select Committeeon SecretMilitary

Assistance to Iran and the NicaraguanOpposition,and the House Select Committeeto Investigate Covert

Arms Transactionswith Iran, 100th Congress, 1st session, Washington,DC: US GPO 1987, pp 726-727.71 Hedrick Smith, 'Britaincriticizes mining of harbors aroundNicaragua', New YorkTimes, 7 April 1984.

George Shultzconfirmed his purpose:Shultz, Turmoiland Triumph:My Yearsas Secretaryof State, p 406.

72 Alfonso Chardy, 'Contrasplotted Mexican ship paths', Miami Herald, 12 January1988.73 Kornbluh,Nicaragua, pp 50-51.74 Author's interview with Daniel Ortega,Managua,Nicaragua,July 1987. See also Clifford Krauss, '"Great

Coffee War"in Nicaraguais being won by Sandinistas',Wall Street Journal, 21 January1986.

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WILLIAM M LEOGRANDE

75 Jenkins, The US Embargo Against Nicaragua, p 7; Fitzgerald, 'An evaluation of the economic cost toNicaraguaof US aggression, 1980-1984', pp 195-216.

77 Julia Preston, 'Inflationruns away in Managua', WashingtonPost, 22 January 1988.

78 John Weeks, The Economies of Central America, New York: Holmes and Meier, 1985, p 158.78 See, for example, ForrestD Colburn, Post-RevolutionaryNicaragua: State, Class, and the Dilemmas of

Agrarian Policy, Berkeley, CA: University of CaliforniaPress, 1986; Dennis Gilbert,Sandinistas: The Partyand the Revolution, New York: Basil Blackwell, 1988.

79 Soviet aid to Nicaragua peaked in 1987 at about $750-800 million annually-$300 million in economicassistance and $450-500 million in military assistance. The economic aid was vital, since it includedvirtuallyall of Nicaragua'spetroleum mports.Don Oberdorfer,The Turn:Fromthe Cold Warto a New Era,New York: Poseidon Press, 1991, pp 340-341; Julia Preston, 'Soviets raise profile-but not aid-inManagua', WashingtonPost, 6 November 1989.Inteational Bank for Reconstruction and Development (iBRD),Report and Recommendation of thePresident of the InternationalDevelopmentAssociationto the ExecutiveDirectors on a Proposed EconomicRecovery Credit .. to the Republic of Nicaragua, 3 September 1991, Report No P-5598-NI, Washington,

DC: IBRD, 1991, p 3.81 Joanne Omang, 'Sandinistasmismanagedeconomy, US says', WashingtonPost, 4 May 1985.82 Bill Gibson, 'A structuraloverview of the Nicaraguaneconomy', in Spalding (ed), The Political Economy

of RevolutionaryNicaragua, pp 15-42.83 At the end of 1988, GDP stood at 67.5%of its 1978 level, andper capita consumptionat 46.3%. International

Bank for Reconstructionand Development (IBRD), Report and Recommendationof the President of theInternational Development Association to the Executive Directors on a Proposed Economic RecoveryCredit .. to the Republic of Nicaragua, 3 September 1991, ReportNo P-5598-NI, Washington,DC: IRBD,

1991, p 3.

84 'Results of the February25, election', Barricada International (Managua), 10 March 1990.85 Lawrence Eagleburger, 'US assistance to Panama, Nicaragua', Current Policy, 1264, Washington, DC:

Departmentof State, 1990; Guy Gugliotta, 'Criticism muted as Nicaraguans visit', WashingtonPost, 17April 1991.

86

On the general issue of dependenteconomies' vulnerability o sanctions,see Olson, 'Economic coercion inworld politics'.87 One way to understand he effect of US policy in this case is to view it as a two-level game, in which US

policy moves do not have much effect on the Level I game (negotiationswith the Sandinistas),but haveprofoundreverberation n Nicaragua'sLevel II game (the level of supportgiven the Sandinistagovernmentby domestic political constituencies). Robert D Putnam, 'Diplomacy and domestic politics: the logic oftwo-level games', International Organization, 42, pp 427-460. For elaborations on Putnam's model, seeespecially the collection of essays in Peter B Evans, Harold K Jacobson & Robert D Putnam (eds),Double-Edged Diplomacy: International Bargaining and Domestic Politics, Berkeley, CA: University ofCaliforniaPress, 1993.

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making the economy scream

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