ThirdWorld Quarterly, Vol. 17, No. 2, pp. 329± 348 1996

Makingthe economy scream: US economicsanctions against Sandinista Nicaragua

WILLIAMM LEOGRANDE

From1981 to 1990,the USA engagedin a concertedand multifaceted campaign tooverthrow the government of NicaraguaÐ a policythat was highlycontro- versialdomestically and culminated in the Iran± contra scandal. In the history of USattemptsto destabilise other governments, the effort against Nicaragua stands outas oneof the most intensive and long-lasting. The covert paramilitary dimensionof Washington’ s policyis wellknown and quite comprehensively documented,in partbecause of theinvestigations resulting from the Iran± contra affair.1 Theeconomic dimension of the policy has receivedless attention,even thoughit was arguablymore effective. The `contra’ war failed to achieve its aim ofoverthrowing the Sandinista government by military means, whereas econ- omicsanctions, combined with the costs ofthewar, succeeded in devastatingthe economy.Amid widespread privation, the Sandinistas’ popular support fell severely,and they were soundly defeated in the 1990 elections. 2 Theweight of scholarly opinion holds that economic sanctions are notan effectiveforeign policy instrument. 3 Evenamong scholars who have recently triedto rehabilitatesanctions, most agree that they can only be successful under alimitedset ofcircumstances. Hufbauer, Schott and Elliot, for example, offer a listof nine conditions that determine whether or not sanctions will bring about thedesired policy change by the target country. One of their conclusions, interestingly,is thatthe use ofeconomic sanctions by the USA todestabilise governmentsin LatinAmerica has beenmore successful historicallythan the use ofeconomic sanctions for various other aims. 4 Theexample of Nicaragua is a case inpoint.

Carter’s aidpolicy On19 July 1979, the Marxist Sandinista National Liberation Front (Frente Sandinistade la Liberacõ ÂonNacionalÐ FSLN)tookpower in Nicaragua after an 18-month-longinsurrection against the dynastic dictatorship of Anastasio Somoza.During the ® nalmonths of the revolution, the USA tried,unsuccess- fully,to ease Somozaout of of®ce infavour of moderateoppositional ® guresin

WilliamM LeoGrandeis atthe Department of Government, American University, Washington, DC20016,USA

0143-6597/96/0329-20$6.00 Ó 1996Third World Quarterly WILLIAMM LEOGRANDE orderto prevent the radical Sandinistas from coming to power. In the wake of Somoza’s defeat,however, President Jimmy Carter adopted a policyof cautious acceptanceof the new Nicaraguan government. Both Nicaragua and the USA hadan interest in maintaining friendly relations. Nicaragua desperately needed foreignassistance tohelp rebuild its shattered economy, which Washington pledgedto provide. Moreover, other international assistanceÐ from Latin America,Western Europe, and the international ® nancialinstitutionsÐ would tendto follow the lead of the USA. ForWashington, maintaining cordial relations with Nicaragua was ameans of salvagingsomething from the failure to keepthe Sandinistas out of power.From Washington’s perspective,the struggle to control the succession to Anastasio Somozahad been `lost’ , butperhaps Nicaragua itself need not be. The Carter Administrationset out,quite consciously, to avoid repeating the errors of 1959±60, when US hostilitycontributed to the radicalisation of the Cuban revolutionand its alignment with the USSR. Inthe immediate aftermath of the insurrection, the USA provided$10.5 millionin emergency relief to help feed and house the thousands of people displacedby the war. This was followedin September 1979 by $8.5 million in `reprogrammed’economic reconstruction assistance, ie money reallocated to Nicaraguafrom other foreign aid accounts. 6 Inaddition, the State Department drewup an $80 million supplemental foreign aid request for Central America for® scal year( FY)1980,$75 million of which was forNicaragua. 7 Despite intenseopposition from conservative Republicans, the $75 million aid package eventuallypassed Congress,albeit with 16 conditions restricting how the funds forNicaragua could be used. 8 Oneof theseconditions required that aid be terminatedif the president found thatthe Nicaraguan government was aidingor abetting acts ofviolence in anothercountry. Despite some intelligencereports that arms were¯ owingfrom Nicaraguato the guerrillas in nearby El Salvador,Carter gave the Sandinistas the bene®t ofthe doubt, concluding that this was notgovernment policy. 9 By January1981, however, new intelligence left no doubt that the Sandinistas were directlyinvolved in smuggling arms toEl Salvador. As aresult,Carter sus- pendedeconomic assistance. `I hadno alternative but to cut off aid to the Sandinistasbefore I leftof® ce’ , Cartersaid, `because there was evidencethat was clearto me thatthe Sandinistas were giving assistance totherevolutionaries inEl Salvador, and the law required me tostop the aid.’ 10 Thesuspension of aid was the® rst stepin dismantling the constructive relationswith Nicaragua that Carter had tried to maintain for 18 months. By only suspendingaid rather than cancelling it, Carter left open the possibility that it mightbe resumed if Nicaragua ceased itssupport for the Salvadoran guerrillas. Butthat determination would to fall to Ronald Reagan.

Haltingbilateral assistance PresidentRonald Reagan came toof® ce ill-disposedtowards Carter’ s policyof tryingto maintain friendly relations with Sandinista Nicaragua. Two days after 330 USECONOMIC SANCTIONS AGAINST SANDINISTA NICARAGUA inauguration,Secretary of StateAlexander Haig recommended that the president rea® rm thesuspension of economic aid to Nicaragua, and Reagan agreed. Two weekslater, the US Agencyfor International Development ( US AID) announced thata $9.6million shipment of wheat was beingdelayed pending a reviewof Nicaragua’s supportfor the Salvadoran guerrillas. 11 Thesemoves surprised no one,since Congressional Republicans had bitterly opposed Carter’ s Nicaraguan aidpackage, and the Republican Party Platform explicitly called for ending it. ButUS Ambassadorto NicaraguaLawrence Pezzullo, one of thearchitects of Carter’s strategyof wooing the Sandinistas with economic assistance, was not willingto give up so easily.Pezzulo argued forcefully that the proper mix of diplomaticpressure andthe threat tocut off badly needed economic assistance couldpersuade the Sandinistas to curtail their material support for the Sal- vadoranguerrillas. If USaidwas actuallystopped, Pezzulo pointed out, the Sandinistaswould no longerhave any incentive to limittheir role in ElSalvador ormaintaina moderatedomestic policy. The only instrument Washington would thenhave to modify Sandinista behaviour would be military pressure. Pezzulo convincedHaig and Reagan to delay a ®nalcut-off of aid for 30 days while he explainedWashington’ s terms tothe Sandinistas. 12 Pezzullo’s strategybegan to show results almost immediately; the arms ¯ow fromNicaragua to El Salvadorstopped. 13 SeniorUS of®cials met in mid-March toreview Nicaragua’ s compliancewith Washington’ sdemands.Hard-liners in thenew administration sought to repudiate Carter’ s (andPezzulo’ s) strategy, replacingit with a policyof hostility towards Nicaragua. Led by National SecurityAdviser Richard V Allen,they advocated a permanentcut-off of aidto Nicaragua,pointing to theRepublican Platform as theirrationale. They acknowl- edgedthat intelligence reports indicated the arms ¯owto El Salvador had stopped,but they interpreted this as merely`seasonal’ , aresultof theguerrillas’ reducedlogistical needs; thesmuggling might resume. There was noway to disprovesuch speculation, and the hard-liners carried the day. Aid was perma- nentlycut off. 14 TheUS actionprevented the shipment of $9.6 million of food aidand cancelled disbursal of the ® nal$15 million of Carter’ s $75million aid package,except for a fewmillion dollars destined for the Sandinistas’ opponents inthe private sector. TheSandinistas described the aid cut-off as `interventionism,blackmail, and Yankeeeconomic aggression’ . Withina fewweeks, the USSR hadoffered to provideNicaragua with 20 000tons of wheat to make up for the cancelled US shipment,Libya had offered a $100million loan, and Cuba agreed to provide $64million in technical aid. 15 OnCapitolHill, liberal Democrats lamented the new Nicaragua policy, noting thatit was inconsistentwith the evidence that the Sandinistas had, in fact,halted aidto the Salvadoran guerrillas. Congressman Tom Harkin (D-Iowa) saw the decisionas somethingmore sinister: `There are elementsin this administration thatare gearedup tocreateeconomic chaos in Nicaragua’, Harkinwarned. `[The aidcut-off] is nomorethan the ® rst stepin thisdestabilization process, the same destabilizationprocess our CIA engagedin [in] the Dominican Republic, in Guatemala,and in Chile.’The real objective of thepolicy, he predicted,was `to overturnthe Nicaraguan revolution’ . 16 331 WILLIAMM LEOGRANDE

Harkinproved to be right. During the ® rst ReaganAdministration, of® cials weresomewhat divided over the ultimate aim of US economicsanctions and paramilitarysupport for the contras.Hard-liners,like Allen, his successor as NationalSecurity Adviser, William Clark, and CIA DirectorWilliam Casey, soughtfrom the beginning to depose the Sandinista government. The `pragma- tists’(as theyreferred to themselves), like Chief of Staff James Bakerand Secretaryof StateGeorge Shultz, doubted that the contras hadthe capability of overthrowingthe Nicaraguan regime, but they nevertheless supported Reagan’ s policyof hostility as aformof coercive diplomacy designed to force the Sandinistasinto making major concessions to Washington regarding both their domesticand foreign policies. These two factions jockeyed for control over the policyuntil 1985, after which the hard-liners consolidated dominance. 17

Blockingcommercial credit Bymid-1981, Washington was alsolobbying against new loans to Nicaragua bothfrom private commercial banks and multilateral lending agencies like the WorldBank and the Inter-American Development Bank. Somoza left Nicaragua saddledwith $1.6 billion in foreign debt, $760 million of which was owedto privatebanks. 18 TheSandinistas agreed to pay all of these debts in hopes of keepinglines of credit open for new loans. In 1980, private banks were willing toreschedule Nicaragua’ s debton terms favourableto the government, since otherwiseit would have been forced into default. But few were willing to risk advancingnew capital to the revolutionary regime, and those that considered it wereactively discouraged by the USA. `Wesimply tell bankers what the situationis inNicaragua, what our government feels aboutNicaragua, the generalconditions in the area, and the risks’ , aUSof®cial explained. 19 InMarch 1982, for example, Nicaragua was negotiatinga $130million loan froma London-basedinternational banking syndicate that included banks from theUSA, Germany,Switzerland, Japan and Mexico. The loan inexplicably fell throughat the last minute. In December, the Bank of Americawas preparingto loanNicaragua $30 million for just 90 days so thatthe government could meet ascheduleddebt service payment. The loan would have been repaid with proceedsfrom the cotton harvest. Of® cials from the US governmentcalled loan of®cers atthe bank to inform them of Washington’ soppositionand, according tosome reports,threatened to call members ofthe Bank’ s boardof directors if necessary tostopthe loan. It was stopped. 20 Inearly 1983, the USA government downgradedNicaragua’ s credit-worthinessrating from `substandard’ to `doubt- ful’, furtherdiscouraging private bank loans, even though Nicaragua was meetingits debt payment schedule at the time. After1979 Nicaragua received a totalof only $12 million in new private commercialbank loans, all of which were 90 day credits to facilitate trade. 21 Managuawas forcedto renegotiatethe scheduling of its private bank debt again in1983 and 1984 as itshard currency de® cit became greater and greater. After 1985,it simply stopped paying, after having spent $234 million on private debt servicesince 1980, and gotten almost nothing in return. 22 332 USECONOMIC SANCTIONS AGAINST SANDINISTA NICARAGUA

Blockingmultilateral assistance TheUSA beganopposing multilateral development bank loans to Nicaragua in mid-1981when it was addedto what a TreasuryDepartment of® cial called the `hitlist’ of countries that Washington sought to deny loans. The list also includedCuba, Vietnam, Afghanistan and Grenada (until the 1983 US in- vasion).23 InNovember 1981 Washington prevailed upon Chile and Argentina to helpblock a $30.7million Inter-American Development Bank ( IDB) loan to Nicaraguafor 50 ®shingboats to replace the Somoza-owned ¯ eetthat had sailed awaywhen he was overthrown.For Chile and Argentina, cooperation against Nicaraguawas awayto repay a politicaldebt to Ronald Reagan. In July 1981 Reaganhad reversed the Carter Administration’ s policyof voting against multilateralbank loans to Argentina and Chile on human rights grounds. 24 Votingstock in the multilateral banks is basedon each country’ s ®nancial contribution.As thelargest contributor to all the banks, Washington naturally wieldedconsiderable in¯ uence. Together, the USA, Chileand Argentina con- trolledenough votes in the IDB toreject the ® shingboat loan, so Nicaragua withdrewthe request rather than have it killed. Washington blocked another Nicaraguaneffort to get the loan approved in March 1982. Afterthe USA sidedwith the UK inthe 1982 Falklands/ MalvinasWar, Argentinadropped out of Washington’ s cabal.In September 1982 Nicaragua received$34.4 million from the IDB fora hydroelectricproject because Argentinasupported it despite Washington’ s opposition. 25 Butit still took anotheryear and a halfbefore the loan was approvedbecause of whatone of the bank’s executivedirectors called `® libustering’by the US representative,Jose  ManuelCasanova. Casanova,a ®ercelyanti-communist Cuban exile and major contributor to the RepublicanParty, argued against the economically sound ® shingboat loan on thegrounds that the Nicaraguans would use theboats to smuggle guns into El SalvadorÐdespite the fact that 44 of the 50 boats were intended for use on Nicaragua’s Atlanticcoast. 26 AnotherUS of®cial was morecandid. Washington opposedthe loan, he said, because `we had an overall political problem’ with Nicaragua.27 Althoughno one doubted that Washington’ smotiveswere political, the Administrationcould not openly say so becausethe charters of all the multilat- eralbanks prohibited the use ofpolitical criteria in making loan decisions. Consequently,US representativesat the banks had to argue, evidence to the contrarynotwithstanding, that the loans were economically unsound. Since that couldbe embarrassing, Washington’ s preferredstrategy, according to aninternal TreasuryDepartment memorandum, was to`attempt to persuade the manage- mentsof the Banks not to bring these loans forward’ . 28 Oneinstance that caused particular anger among representatives from other countrieswas theUS vetoin 1983 of a $2.2million IDB loanto ® nisha rural roadproject that was begunin 1976 and was over90% completed. The loan was fromthe bank’ s SpecialOperations Fund, a `softloan’ facility that provided fundson concessionary terms. Approval of a loanfrom the fund required a two-thirdsmajority, and the USA controlled35% of the voting stock. 333 WILLIAMM LEOGRANDE

Contraryto bank tradition, the US representativesdid not mention their oppositionto the loan until the last moment when it was comingto a vote, whereuponthe USA announcedit would vote no. It was thesecond time Washingtonhad exercised its veto over a concessionaryloan to Nicaragua; the ®rst was inJanuary1982 when it blockeda small$0.5 million agricultural loan. Halfa dozendirectors representing Latin America and Western Europe com- plainedat the transparency of Washington’ s motives,and when the loan came toa vote,representatives of 42 countries supported it. The USA alonestood opposed,and the loan was defeated.Eventually, the Netherlands provided Nicaraguawith bilateral aid funds to ® nishthe project. 29 Themost controversial IDB loanto Nicaragua involved its 1984 request for $58million to help small private farmers. Likethe 1982 hydroelectric loan, the fundswould not come from the special concessionary account, so Washington alonecould not block them. The Bank’ s MiddleManagement Committee approvedthe loan in October 1984 and the senior management’ s LoanReview Committeeapproved it on 17 November, saying `We consider the program viabletechnically, institutionally, ® nancially,economically, and legally, and we recommendapproval of the proposed loan’ . Allthat remained was forthe loan tobe put on the agenda of the Board of Directors. 30 ButBank President Antonio Ortõ ÂzMenadidn’ t scheduleit. When Jorge Alexeyde Synegub,a Guatemalanwho served as thedirector for all the Central Americancountries at the bank, inquired as towhy the loan was noton the agendafor either the November or December board meetings, he was told, falsely,that the loan was stillunder review by the bank’ s technicalstaff. 31 USDirectorCasanova threatened to walk out of any board meeting at which theNicaragua loan was broughtup. Since the board required attendance by directorsholding three-quarters of one voting stock in order to have a quorum, Casanova,holding Washington’ s 35%of the votes, was threateningto paralyse allbank operations. 32 Whenthe Nicaragua loan was leftoff the agenda for the Januaryboard meeting as well,all 25 Latin American countries took the unprecedentedstep of ordering the Bank management to schedule the loan for thenext meeting. That seemed toleave Bank President Ortõ ÂzMenano choice. Butthe Reagan administration had not exhausted all its options. To trumpthe LatinAmerican directive to Ortõ ÂzMena,Washington issued one of its own. On 30January 1985, Secretary of State Shultz wrote to Ortõ ÂzMenaexpressing the administration’s `strong’opposition to any loans for Nicaragua. `Nicaragua is notcredit-worthy’ , Shultzbegan, and moreover, it might `misuse’ theproceeds fromthe loan. `Monies received from the Bank would relieve ® nancialpressures on the GON [Governmentof Nicaragua] and could free upother monies that couldbe used to help consolidate the Marxist regime and ® nanceNicaragua’ s aggressionagainst its neighbors ¼ ’Shultzwrote. Finally,lest there by any doubt about Washington’ s seriousness,Shultz warned OrtõÂzMenato `consider carefully’ how the US Congressand public wouldreact to approvalof theNicaragua loan. `We are alltoo well aware of the increasingdif® culties in gaining Congressional appropriations for the inter- national® nancialinstitutions such as theInter-American Development Bank’ , Shultzwrote. The USA was already$1 billion in arrears onits contributions to 334 USECONOMIC SANCTIONS AGAINST SANDINISTA NICARAGUA theBank. Approval of theNicaragua loan, Shultz warned, would make it `even moredif® cult’ to gain additional funding. Shultz concluded by urging Ortõ Âz Menato `defer release ofthe documentation for the proposed loan to a more opportunetime in thefuture’ Ð thatis, to defythe previous vote of the board that theloan be scheduled for ® nalapproval. 33 `Weread ¼ [it]as athreat,’said one bank of® cial. Even in the early 1970s, whenWashington pressured the bank to cut off credits to Salvador Allende’ s governmentin Chile, `there was neversuch a communicationfrom a secretary ofstate’ , hesaid. `There has neverbeen anything like this.’ 34 Shultz’s actions, wrotea BritishForeign Of® ce of®cial, was `typicalof bully-boy tactics which thepresent US Administrationis aptto adoptÐ towards allies as wellas adversaries’. 35 OrtõÂzMenasent the loan back to the technical staff forre-evaluation on the groundsthat recent adjustments in the Nicaraguan economy required further analysis.The Latin American members oftheBank, also under US pressure,did notobject. The new technical review of the loan lasted a fullyear, concluding onlyafter top bank of® cials instructed the technical staff towrite a negative reporton the loan. The Loan Review Committee, chaired by Executive Vice- PresidentMichael E Curtain,a Reaganappointee, rejected the staff’ s®rst assessment becauseit concluded that the project would probably succeed. A revisedreport came tothe opposite conclusion, echoing Washington’ s policy positionÐthat Nicaragua’ s macroeconomicpolicies would `not permit econom- icallyef® cientoperation of theproject’ . Thenegative report, which would have killedthe loan for good, was quicklyscheduled for presentation to the Board of Directors.36 Itwas putoff yet again, this time at Nicaragua’ s request,to prevent itfrom being rejected. The loan ® nallydied with a whimperwhen the IDB discontinuedall further loans to Nicaragua because the Sandinistas fell into arrears inrepaying past loans. But even that was notthe ® nalinsult. In 1987 it was Nicaragua’s turnto appoint the Central American director for the Bank, a postthat normally rotated among the ® vecountries in the region. Washington’ s alliesvoted together to deprive Nicaragua of the seat. 37 IntheWorld Bank, Washington cast its® rst voteagainst Nicaragua in January 1982,when it opposed a loanfor $16 million to ® nanceinfrastructure develop- mentin low-income neighbourhoods in Managua. The project was so well conceivedthat both the Treasury Department and the Latin American Bureau at theState Department supported it, but Secretary of State Alexander Haig ordered theUS executivedirector at the Bank to vote against the loan nevertheless. It passed anyway,because Washington did not have the votes at theBank to block it.38 Butlike the Inter-American Development Bank, the World Bank was suscep- tibleto pressure fromits principal contributor. An October 1981 World Bank report,based on a 1980® eldvisit, was generallyoptimistic about Nicaragua’ s prospectsfor economic recovery from the insurrection against Somoza, if it could`receive external assistance atconcessional terms’ .Thereport recognised thatNicaragua would be largelydependent on bilateraland multilateral aid, since furthercommercial bank ® nancingwas unlikely. 39 Butin 1981, Robert McNamara retired as presidentof the World Bank 335 WILLIAMM LEOGRANDE andwas succeededby Republican A WClausen,president of BankAmerica Corporation.The World Bank’ s positionon Nicaragua underwent a radical reversal,just as Washingtoninitiated its policy of blockingmultilateral loans to theSandinistas. In February 1982, World Bank staff prepareda newcon® dential reporton Nicaragua.In contrastto the report issued just four months earlier, this onewas extremelynegative. `Nicaragua’ s shortand medium term prospects are notgood,’ the report predicted. The Sandinistas had failed to `establish clear policyguidelines for the economy’ , andthe contradiction between their `Marx- ist±Leninist approaches’ and the capitalist character of the economy had `not onlythwarted the recovery process, but jeopardized the country’ s development prospectsand credit-worthiness’ . 40 Themain problem was Nicaragua’s lackof hardcurrency, which could only be remedied by increasing export production. Sinceprivate businessmen held a dominantposition in the export sector, productionwould not increase unless the climate for private investment im- proved. `Theideological struggle between economic models is, in the ® nalanalysis, apowerstruggle’ , thereport observed. No further loans should be made to Nicaraguaunless the Sandinistas were willing to accept the Bank’ s `most importantrecommendation’ Ð thatis, to begin `revitalizing the private sector’ . 41 Thisrequirement echoed precisely the demands of the private sector inside Nicaraguaand the rationale Washington was usingto justify its opposition to Nicaraguanloans. Evenif these measures weretaken, Nicaragua would need large-scale econ- omicassistance andloans at concessionary interest rates justto remain solvent inthe medium term. Without them, the economy was headedfor disaster. The reportthen recommended that the World Bank cut back its lending to a level `wellbelow that of the previous two years’ , astrategythat, by the logic of the Bank’s ownanalysis, was destinedto push Nicaragua into even deeper crisis. Thereport suggested loans equal in real terms tothe levels the Bank had providedSomoza, before the loss of35%of Gross DomesticProduct ( GDP) and $500million in capital ¯ ightcaused by the 1978-1979 insurrection. Even this limitedlending programme should be delayed,the report urged, and conditioned uponthe Nicaraguan government giving `some indicationsthat it plans to follow ourpolicy advice’ . 42 Inshort, the Sandinistas were expected to surrender to the privatesector in the struggle to de® ne the nature of Nicaragua’ s socialand economicmodel, in exchange for which they would receive a reducedlevel of multilateralassistance, inadequate to prevent the economy from slipping into severe recession. Inwriting this report, the Bank staff was verymuch aware of US opposition tofurther lending to Nicaragua. The report recommended against a `major assistance’ programmebecause `increasing constraints and political limitations ontheBank may render this alternative unfeasible’ . Nicaraguawas `likelyto be averycontroversial client’ the report added. Washington’ s oppositionto all lendingwas tacitlyacknowledged when the report noted that concessionary loanscould not be offered to Nicaragua because the USA heldenough votes to vetothem unilaterally. 43 Washington’s pressure onthe multilateral banks was extremelyeffective. In 336 USECONOMIC SANCTIONS AGAINST SANDINISTA NICARAGUA thetwo years fromAugust 1979 to June 1981, before Washington began pressingthe banks to halt loans to Nicaragua, the Inter-American Development Bankprovided Nicaragua with $193 million and the World Bank provided $91 million.From late 1981 to 1984, Nicaragua received only $34 million from the IDB and$16 million from the World Bank. 44 After1984, Nicaragua got nothing fromeither of them because the Sandinistas stopped making debt service paymentson prior loans. Their decision to halt the payments was notunreason- able.During the ® rst halfof the decade, Nicaragua experienced a netcapital out¯ow in its relations with both the private commercial banks and the multi- laterals,paying a totalof $423 million in debt service and receiving very little newcapital. 45

TheUS tradeembargo Inaddition to blocking international loans to Nicaragua, the Reagan administra- tionalso gradually imposed restrictions on UStrade.In 1981 it deniedNicaragua creditthrough the US Import±Export Bank, which makes short-termloans to facilitatetrade. Since Nicaragua was unableto secure evenshort-term credits fromcommercial banks, it was forcedto pay cash foreverything it imported fromthe USA. Todiscourage US investment,the administration cancelled Overseas Private InvestmentCorporation ( OPIC)insurancefor Nicaragua, thereby substantially raisingthe risk to investors. In June 1983, when Nicaragua expelled three US diplomats,Washington retaliated by expelling 21 Nicaraguan diplomats and closingall six Nicaraguan consulates in theUSA outsideWashington. The main effectof this was tomake contacts between US businessmenand Nicaraguan traderepresentatives extremely dif® cult, further restricting commercial rela- tions.46 In1983 the administration reduced Nicaragua’ s share ofthe US sugarquota by90%. Nicaragua had been exporting about $15.6 million worth of sugar to Washingtonannually, receiving a premiumprice of 17 cents/ lbÐnearly three timesthe world market price. The reason for cutting the quota, according to the WhiteHouse, was toreduce the resources availableto Nicaraguafor `subversion andextremist violence’ . Infact, one of the main reasons was toreassure US alliesin Central America of Washington’ s steadfastantagonism to Nicaragua, despiterising Congressional opposition to the CIA’scovertparamilitary war. Reaganwanted to show he intendedto `stay the course in Central America’ , an administrationof® cial explained. 47 Nicaraguaappealed to the United Nations’ Sixth Conference on Trade and Development( UNCTAD),whichpassed (bya voteof 81± 18) a resolutioncon- demningeconomic sanctions against underdeveloped countries by developed ones.Nicaragua also complained that the reduction of the sugar quota violated UScommitmentsunder the General Agreement on Tradeand Tariffs ( GATT) and, inMarch 1984, a GATT panelagreed, ordering the USA to`promptlyrestore’ the Nicaraguanquota. Washington ignored the ruling. 48 Thenext logical step in the escalating economic war was theimposition of a 337 WILLIAMM LEOGRANDE fulltrade embargo. In fact, National Security Decision Directive 124 ( NSDD 124), whichReagan signed in February 1984, speci® cally called for of® cials to `reviewand recommend economic sanctions against Nicaragua that are likelyto buildpressure onthe Sandinistas’ . 49 Hard-linersin the Defense Department, CIA,and National Security Council staff wantedto impose an embargo, but State,Commerce, and Treasury were all opposed on the grounds that it would violate the GATT andharm relations with allies in both Latin America and Europe.The Commerce Department, in particular, worried that Washington wouldget a reputationas anunreliable trading partner, which could hurt administrationefforts to expandtrade with China and other countries with whom Washingtonhad less thatamiable political ties. TheJustice Department’ s Of®ce ofLegal Council had a `seriousproblem’ withthe legality of atradeembargo, said a sourcethere; it probablyviolated the Organizationof American States ( OAS)andUN charters,as wellas GATT.50 Article19 of the OAS Charterreads: `Nostate may use orencourage the use of coercivemeasures ofan economic or political character in order to force the sovereignwill of another state and obtain from it advantages of any kind.’ Article32 of the UN Chartercontains virtually identical language. Finally,some administrationof® cials believed that an embargo would be counterproductive.Since virtually no other country was likelyto join a US embargoagainst Nicaragua, the impact on the Sandinista government would probablybe minimal. The people likely to be hurt most were Nicaraguan businessmen,the backbone of the civic opposition to the Sandinistas. The Sandinistas,however, could use anembargoas anexcuseto blamethe country’ s mountingeconomic problems on the USA, justas FidelCastro had been doing inCuba for three decades. 51 In1983 and 1984 these arguments were enough to hold the line against the hard-liners’demands for an embargo. But after the House of Representatives prohibitedfurther funding for the contra warin 1984, and Reagan’ s initialeffort toresume itin1985was defeated,the administration needed to takequick action toreassure Hondurasthat the USA was notbacking out on its commitment to the contras. Imposinga tradeembargo was somethingthat could be done immediately,and it was oneof the few sanctions short of direct military action thatthe administration had not already imposed. The symbolic importance of the embargothus came toweigh as heavilyas itspractical effect. 52 Congressionalattitudes also ® guredin the decision to impose the embargo. During the contra aiddebates on Capitol Hill, many members hadurged an embargo,either as asupplementor an alternative to continued military action. ConservativeRepublicans were pressing for a tradeembargo to reinforce hard-linerswithin the administration. But moderate Republicans and Democrats alsourged Reagan to consider economic sanctions as analternative way to pressure theSandinistas. `If weopposethe regime in Managua, why do webuy Nicaraguanbeef and bananas?’ asked Senate Intelligence Committee Chairman DavidDurenberger. 53 On1 May1985, as Reaganarrived in Bonn, Germany, to laud the virtues of free tradeat an economic summit with the European allies, the White House announcedthat the USA was imposinga fulltrade embargo on Nicaragua. `US 338 USECONOMIC SANCTIONS AGAINST SANDINISTA NICARAGUA applicationof these sanctions should be seen bythe Government of Nicaragua, andby those who abet it, as unmistakableevidence that we take seriously the obligationto protect our security interests and those of our friends’ , Reagan wrotein a letterinforming Congress of his decision. 54 Toimposean embargo without Congressional approval, Reagan had to invoke theInternational Emergency Economic Powers Act ( IEEPA),underwhich he coulddeclare a `nationalemergency’ to deal with an `unusual and extraordinary threatto the national security and foreign policy of the United States’ . 55 Critics scoffedat the idea that Nicaragua, a smallcountry devastated by war,collapsing economicallyand surrounded by enemies, could pose the sort of threat to the USAthatthe law intended. But the law gave the president alone the power to decidewhat constituted a nationalemergency. 56 Reactionto the embargo among US allieswas uniformlynegative. Partici- pantsat the Bonn summit criticised it as counterproductiveand warned that it wouldincrease regional tensions. Among the Atlantic allies, the UK, Germany, Spainand Portugal all openly opposed the embargo and af® rmedtheir intention tocontinue trading with Nicaragua. Canada, France, Italy, Sweden and the Netherlandswent so far as toextend new trade credits to Nicaraguato offsetthe effects ofthe embargo. These reactions were a signi®cant setback for Washing- ton’s two-yeardiplomatic effort to convince the European allies to reduce their aid.57 Mexicocalled the trade ban `economic coercion’ , andthen reversed its earlier decisionto stop selling Nicaragua oil on creditÐ a decisionWashington had struggledfor two years toget the Mexicans to take. Colombia and Venezuela, whichhas beentrying to broker a diplomaticsettlement of the contra war, also criticisedthe US action. 58 InMay 1985 in a meetingof the Latin American EconomicSystem ( SELA)allthe governments of Latin America supported a resolutionthat called on the USA tolift the embargo and urged SELA members totake actions to counter the embargo’ s effects.The OAS PermanentCouncil adopteda similarresolution, and the 13 nations in the Caribbean Community (CARICOM)alsocalled on Washington to end the embargo. When Assistant SecretaryMotley was askedduring Congressional hearings if anycountries had expressedsupport for the embargo, he could name only El SalvadorÐ and even ElSalvador did not join it. 59 Atthe United Nations, the Security council voted 11± 1 (withthree absten- tions)for a resolutioncriticising the embargo. US alliesFrance, Denmark, and Australiavoted in favour, while the UK abstained;Washington’ slone`no’ vote vetoedthe measure. In the General Assembly, a similarresolution co-sponsored byNicaragua,Mexico, Peru and Algeria passed 84±4, with37 abstentions.Only theUSA, theGambia, Grenada and Israel votedagainst it. 60 Theimpact of the trade embargo on Nicaragua was signi®cant. As relations withWashington deteriorated during the early 1980s, the Sandinistas had anticipatedthat economic sanctions would be imposed eventually. They there- forediversi® ed Nicaragua’ s foreigntrade as muchas possibleto bluntthe impact ofanembargo.In 1980,30.4% of Nicaraguantrade was withthe USA. By1984 thathad been reduced to 14.9%, although Washington was stillNicaragua’ s largestsingle trading partner. Trade with Western Europe and Japan had grown 339 WILLIAMM LEOGRANDE from20.6% to 35.1%, and trade with the Soviet bloc jumped from only 1% in 1980to 15.4% in 1984. 61 Nicaraguanexports to the USA includedbananas, beef, shell® sh, tobacco, and sugarÐall easily marketable elsewhere, although Nicaragua incurred higher transportationcosts toget the goods to their new markets. The biggest problem causedby the embargo was theloss ofimports and the resulting unavailability ofspare partsfor US manufacturedgoods, which included virtually all Nicaragua’s non-agriculturalproductive capacity. Considerable production was lostwhile factories waited for crucial replacement parts to be found. The Nicaraguangovernment estimated that the embargo cost the country about $50 millionannually. 62 Thesecosts wereoffset to some degreeby thewillingness of some countriesto extendadditional trade credits to Nicaragua. In his trip through Europejust after the embargo was imposed,Ortega won pledges of $190million inloans from Western countries and $202 million from the Soviet Union and EasternEurope. 63

Theeconomic effects ofthe contra war Fromthe earliest stages ofthe contra war,the Nicaraguan economy was a primarytarget, despite the CIA’sassurances toCongress that only military installationswould be attacked. 64 The contras preferredto attack lightly de- fendedfarms andvillages rather than Sandinista military posts and, along the borderwith Honduras, their episodic raids severely curtailed agricultural pro- duction. In1983 the Reagan administration sought to escalate the war’ s economictoll signi®cantly by mounting a concertedsabotage campaign. `Let’ s makethe bastardssweat’ , CIA DirectorWilliam Casey toldDewey Clarridge, his chief of operationsfor Latin America. Clarridge came withthe idea of creatinga special commandoforce of CIA contractagentsÐ `unilaterally controlled Latino assets’ , or UCLAsÐto attackvital economic installations. 65 `Ourmission was tosabotage ports,re® neries,boats and bridges, and try to make it look like the contras had doneit,’ one of the UCLAslaterexplained. 66 The CIA out®tted two oil rig servicing ships as platformsfor the UCLAs, who weremercenaries recruited from all over Latin America. Operating out of a secret CIA base onTiger Island, Honduras, in theGulf of Fonseca,these `mother ships’sat offthe Nicaraguan coast, just outside the 12-mile limit. From there, theylaunched speedboats and helicopters to attackNicaraguan ports. CIA of® cers managedthe operations from the mother ships. USArmySpecial Operations Forces fromthe 160th Task Force of the 101st AirborneDivision did the ¯ ying.Heavy Chinook helicopters ferried the UCLAs andtheir speed boats to the Nicaraguan coast; lightHughes 500 helicopters strafedand rocketed Nicaraguan coastal defences. Sometimes, especially dif®cult sabotage operations were carried out by US Navy SEALs(Sea,Air, and Landspecial forces). `You don’ tthinkwe would have gone to all that trouble fora bunchof contras,doyou?’ said one former army helicopter pilot, describinga particularlyheated battle to extract a SEAL team.67 BetweenSeptember 1983 and April 1984 the UCLAsandUS SpecialForces 340 USECONOMIC SANCTIONS AGAINST SANDINISTA NICARAGUA carriedout 19 attacks, most of them targeted at Nicaragua’ s threeoil storage facilities.On 10 October 1984 the commandos blew up oil storage tanks at Corinto,causing the loss ofover3.2 million gallons of gasolineand diesel fuel. Onehundred and twelve people were injured and some 20000 had to be evacuatedfrom the city. The ® res burnedfor several days. Three days later, frogmenblew up mooring facilities on the oil pipeline in PuertoSandino. Shortly thereafter,Exxon Corporation informed Nicaragua it would no longer provide tankersto transport Nicaraguan oil. 68 Casey was thrilledby the success ofthe sabotage campaign, and pressed Clarridgeto come up with new ideas for crippling the Nicaraguan economy. Clarridge,who had studied the effectiveness of naval mines in the Russo- Japanese Warwhile he was atColumbia University, suggested mining Nicaragua’s harbours. 69 TheNicaraguan economy was highlydependent on trade.Choke off shipping, and the economy would die. `Our intention is to severelydisrupt the ¯ owof shipping essential to Nicaraguan trade during the peakexport period’ , NationalSecurity Council ( NSC)staffers wrotein a memo toNational Security Adviser Robert McFarlane shortly after the mining began. `Itis entirelylikely that once a shiphas beensunk, no insurers will cover ships callingin Nicaraguan ports.’ 70 Toavoid the diplomatic headaches that would come from sinking ships and killingseamen fromthird countries, the CIA had`® recracker’mines specially madeÐmines supposedly not big enough to sink a vessel orkill anyone (althoughsome contained300 pounds of plastic explosive), but big enough to damageships and, as oneof® cial put it, `wake up folksat Lloyds of London’. 71 Mexicanships were speci® cally targeted, because Mexico supplied almost all of Nicaragua’s oil. 72 Themining began in January 1984 and continued until Washington’ s role becamepublic in earlyApril. The mines, about 75 inall, were laid by speedboats andhelicopters piloted by UCLAsandUS SpecialOperations Forces. More than halfa dozenmerchant ships from Japan, Panama, Liberia, the Netherlands and theUSSR weredamaged by mines in Nicaragua’ s threemajor portsÐ Corinto, PuertoSandino and El Bluff. Fifteen sailors were injured, and two Nicaraguans werekilled when their ® shingboats hit mines and sank. The domestic and internationaloutcry over the mining caused the administration to abandon the projectin Apriland, within a fewweeks, the Nicaraguans had managed to clear theremaining mines. Nevertheless, the estimated cost of the mining to the Nicaraguaeconomy was $10million. 73 During1985 and 1986 the contras andthe Sandinista army fought what NicaraguanPresident Daniel Ortega called the `the great coffee war’ . InJanuary 1985 the contras launcheda sustainedoffensive to disrupt the coffee harvest, therebydepriving the government of desperately needed hard currency. They attackedsome 50state and cooperative farms, andambushed dozens of trucks carryingfarm workers.Between 20% and 25% of the 1985 harvest was lost becauseit was toodangerous for farmers togointothe ® eldsto pickit. By early 1986,however, the contras wereso weakened they did not even attempt to mountan attack on the harvest, even though the world market price for coffee haddoubled, making the harvest all the more critical to the economy. 74 341 WILLIAMM LEOGRANDE

Overall,the cost of physical damage caused by the ® ghting,and lost productionresulting from the disruption of transportation, displacement of peoplefrom the war zones, interruption of energysupplies, etc, amounted to an estimated$2 billion between 1980 and 1986. 75 Themost signi® cant effect of the war,however, was thediversion of resources fromeconomic development to militarydefence. By 1986, 55% of the government’ s budgetwas devotedto ®ghtingthe war, a ®gurethat held constant until 1988. 76 Withproduction declining,tax revenues could not begin to cover the costs ofthecon¯ ict, so the governmentclosed the ® scal gapby simply printing money.

Theimpact of US sanctions Thecumulative impact of theembargo, the evaporation of external capital from theinternational banks, and the costs ofthe contra warproved to befatalfor an economythat had never really recovered from the insurrection against Somoza. Theinsurrection in 1978± 79 destroyed some 22%of the ® xedcapital assets in themanufacturing sector of the Nicaraguan economy. Nevertheless, with the helpof external® nancing,recovery was briskin 1980 and 1981. 77 The economy beganto slow in 1982, however, and by 1983 it had turned down. From there thedecline accelerated. Tobe sure, the economic policies of the Sandinista government and its ongoingfeud with the private sector discouraged investment, thereby exacerbat- ingthe country’ s economicplight. 78 ButNicaragua, like Chile in theearly 1970s, was anunderdeveloped agricultural export economy, especially dependent on the internationalmarket for both goods and capital. When Washington undertook to cutoff Nicaragua from the outside world, its economy could not survive the severance.Economic aid from the USSR nevercame closeto covering the resultinglosses. 79 Evenwithout the contra war,the Nicaraguan economy would have faced a seriouscrisis inthe mid-1980s. The war tipped it into chaos. Government subsidiesto the poor and to small producers, combined with the rising costs of thewar, produced a ®scal de®cit that the government closed by printingmoney, triggeringa rise inin¯ ation. In 1984, the annual rate was 50%.As thegrowing tradede® cit produced shortages of hard currency, imported inputs to the domesticeconomy grew scarce, curtailingproduction and increasing unemploy- ment.80 As thestandard of living in Nicaragua sank, the Reagan administration tried todetach itself from responsibility for the resulting misery. In May 1985 the StateDepartment released a reporton US economicsanctions which concluded, `depressedeconomic conditions in Nicaragua were, of course, due to disastrous economicpolicies adopted by the Sandinistas, and not to any actions by the UnitedStates’ . 81 Bythe end of 1985, Nicaragua was sufferinga severe recession.Gross DomesticProduct contracted by 5.9% that year, and in¯ ation reached 320%. 82 By1987, the in¯ ation rate was 1300%.The government took its supplies of old 20 and 50 coÂrdoba banknotes and simply printed three more zeroes onthemto make20 000and 50 000 coÂrdoba notes.In 1988, the government’ s austerity 342 USECONOMIC SANCTIONS AGAINST SANDINISTA NICARAGUA measures, intendedto control in¯ ation by reducing public spending, triggered a severe recession.The economy contracted by 15%,and the ® scal de®cit actually widened.In¯ ation raged completely out of control, reaching 33 600%Ð hyperin¯ation of the sort experienced by only a fewnations in history. As moneybecame worthless, the economy was reducedto primitive barter, further dislocatingproduction and exchange. By the end of theyear, the Gross Domestic Producthad fallen by athirdand per capita consumption had fallen by morethan 50%from 1979 levels. 83 Thiseconomic catastrophe proved fatal for the Sandinistas in the 1990 election.They tried as bestthey could to defuse the economic issue byappealing tonationalism, linking their electoral opponents with the contras andthe United States.Polls indicated that the war issue seemed tobene® t theSandinistas, whereasdiscontent over the economy favoured the opposition. By focusing on thewar, the Sandinistas hoped to escape, Houdini-like from the political consequencesof the country’ s economiccollapse. It didn’ t work. On25February1990, 86% of Nicaragua’s registeredvoters turned out to cast theirballots under the watchful eyes ofsome 2000foreign observers. The oppositioncoalition, headed by Violeta Chamorro, won a stunningvictory. Chamorrotook 54.7% of the popular vote for president, to Daniel Ortega’ s 40.8%,and Chamorro’ s allieswon 51 seats inthe 93-member National Assembly,to 39 for the Sandinistas. 84 TheBush administration rejoiced at Chamorro’s election,lifted the economic embargo Reagan had imposed in 1985, andasked Congress to provide $300 million in economicassistance forthe new governmentin 1990 and another $241 million in ® scal year1991. 85 TheReagan administration failed to achieve its principal policy goal in NicaraguaÐthe ousting of the Sandinista government by military force, spear- headedby the contras.Butthe economic sanctions imposed on Nicaragua,which wereseen atthe time by Washington as asecondarypolicy instrument, ultimatelyproved far moreeffective, for several reasons. First, the structure of Nicaragua’s underdevelopedeconomy made the Sandinistas more vulnerable to economicthan military pressure. Especially in the wake of the economic losses causedby the insurrection against Somoza, Nicaragua was highlydependent uponexternal ® nancialassistance. And, like most of LatinAmerica, Nicaragua’ s tradewas predominantlywith the USA. ThusWashington was especiallywell positionedto punishNicaragua economically by blockingexternal ® nancingand cuttingoff trade, even though few other countries supported these sanctions. 86 Second,although the USSR and its allies were willing to provide Nicaragua witha vaststore of military hardware to ® ghtthe contra war,they were not preparedto shoulderthe ongoing ® nancialburden of proppingup theNicaraguan economy.As inthe earlier case ofSalvador Allende’ s governmentin Chile and thecontemporary case ofMauriceBishop’ s governmentin Grenada,the Soviets abjured`another Cuba’ as toocostly. Third,Washington’ seconomicsanctions were undertaken in tandem with extensiveparamilitary attacks, as partof a multifaceteddestabilisation pro- gramme. The contra warmagni® ed the effectiveness of the economic sanctions bydirectly damaging production and by siphoning off scarce resources to nationaldefence. 343 WILLIAMM LEOGRANDE

Finally,the hardships imposed by Nicaragua’ s economiccollapse in 1988± 89 fatallyundermined the Sandinistas base ofpopular support, which had been widespreadin 1979 and still considerable when they won elections in 1984. Althoughthe Sandinistas preferred a Leninist,single-party model of government, theynevertheless allowed a domesticopposition to exist and functionÐ in contrastto Fidel Castro’ s governingstrategy in Cuba. Theexistence of anelectoral system thatforced the Sandinistas to periodically contendwith the opposition for power provided a mechanismfor the population toexpress itsdiscontent with their deteriorating standard of living. That is, althoughthe economic sanctions imposed by the USA didnot force the Sandinistasto abandontheir core policies or ideology,the sanctions did alter the domesticbalance of Nicaragua political forces suf® cientlyto drive the Sandin- istas outof power. 87 Inshort, the Nicaraguan case demonstratesthat under some circumstances, economicsanctions can be highly effective against a vulnerableeconomy, even whenthey are largelyunilateral and the demands being made on the target regimeare extreme.

Notes 1 Peter Kornbluh, Nicaragua:The Price ofIntervention ,Washington,DC: Institutefor Policy Studies, 1987; ChristopherDickey, Withthe Contras: A Reporterin the Wilds of Nicaragua ,New York:Simon and Schuster,1985; Holly Sklar, Washington’sWaron Nicaragua ,Boston,MA: SouthEnd Press, 1988;Sam Dillon, Commandos:The CIA andNicaragua’ sContraRebels ,New York:Henry Holt, 1991; and US Congress, Reportof the Congressional Committees Investigatingthe Iran± Contra Affair , H. Rept No 100±433, S. ReptNo 100± 216, 100th Congress, 1st session, 17 November 1987, Washington, DC: GovernmentPrinting Of® ce ( GPO), 1988. 2 Theonly speci® cexaminationsof the economic dimension of Washington’ s policyof hostility towards Nicaragua are Kornbluh, Nicaragua,pp93± 122; and Michael E Conroy,`Economic aggression as an instrumentof low intensity con¯ ict’ ,inThomas W Walker(ed), ReaganVersus theSandinistas: The UndeclaredWar on Nicaragua ,Boulder,CO: Westview,1987, pp 57± 79. 3 See, forexample, JohanGaltung, `On the effects ofinternational economic sanctions: with examples from thecases ofRhodesia’ , WorldPolitics ,19,1967, pp 378± 416; Gunnar Adler-Karlsson, WesternEconomic Warfare,1947± 1967: A Case Studyin Foreign Economic Policy ,Stockholm:Almqvist and Wiksell, 1968; Peter Wallensteen,`Characteristics ofeconomic sanctions’ , Journalof Peace Research , 5, 1968. pp 248±267; Klaus Knorr, ThePower of Nations:The Political Economy of International Relations , New York: Basic Books,1977; James Barber,`Economic sanctions as apolicyinstrument’ , InternationalAffairs , 55, 1979,pp 367±384; and Margaret Doxey, InternationalSanctions in Contemporary Perspective , New York: StMartin’ s Press, 1987. 4 Gary ClydeHufbauer, Jeffrey J.Schott & KimberlyAnn Elliott, EconomicSanctions Reconsidered: History andCurrent Policy ,Washington,DC: Institutefor International Economics, 1990, pp 94±104. Other scholars whohave argued that sanctions can beeffective insome circumstances include:David A Baldwin, Economic Statecraft,Princeton,NJ: PrincetonUniversity Press, 1985;Richard Stuart Olson, `Economic Coercion in worldpolitics: with a focuson North± South relations’ , WorldPolitics ,31,1979, 471± 494; William H Kaempfer &AntonDavid Lowenberg, InternationalEconomic Sanctions: A PublicChoice Perspective , Boulder,CO: Westview, 1992; Kenneth A Rodman,`Sanctions at bay?Hegemonic decline, multinational corporations,and US economicsanctions since thepipeline case’ , InternationalOrganization , 49, pp 105±137. 5 RobertA Pastor, Condemnedto Repetition: The United States and Nicaragua ,Princeton,NJ: Princeton UniversityPress, 1987,pp 192± 193. 6 Karen DeYoung,`House unit votes $9 million in aid for Nicaragua’ , WashingtonPost ,12September1979. 7 US Senate, S 2012,Hearingsbefore the Committee onForeign Relations, 96th Congress, 1st session, 6± 7 December 1979,Washington, DC: US GPO,1980,pp 77± 80. 344 USECONOMIC SANCTIONS AGAINST SANDINISTA NICARAGUA

8 Inaddition to the Senate’ srequirementthat 60% of the funds go to the private sector, the House of Representatives speci® edthat only US goodscould be purchasedwith the aid, that none of the money could beusedfor educational projects in which Cuban advisors or teachers were involved(eg Nicaragua’ snational literacy crusade) andthat 1% ofthe funds had to be usedto inform the Nicaraguan people of thebene® cence ofthe US aidprogramme. Aid would be terminated if Nicaragua engagedin a consistentpattern of gross humanrights violations, aided or abetted acts ofviolence in another country, allowed Cuban or Soviet combattroops to be stationedin Nicaragua, violatedthe right of unionsto organise and operate, or violated therights of free speech andpress. A numberof even more restrictive amendments were defeated. CongressionalRecord ,27February 1980, pp H2009± H2020. 9 PresidentialDetermination No 80± 26, September 12, 1980,’ 45 FederalRegister 62779.See alsoUS House ofRepresentatives, Review ofthe Presidential Certi® cationof Nicaragua’ sConnectionto Terrorism , Hearingsbefore the Subcommittee on Inter-American Affairs, Committee onForeignAffairs, 96thCongress, 2ndSession, 30 September, 1980, Washington, DC: US GPO, 1980. 10 Fora descriptionof the new intelligencesee Pastor, Condemnedto Repetition ,p228.The law didnot, in fact, leave Carter muchalternative. Section 536 (g) of theForeign Assistance Act as amendedreads: `Inthe eventthat the President transmits sucha certi® cation,but at alater date hedetermines thatthe Government ofNicaragua cooperateswith or harbors any international terrorist organization or is aiding,abetting, or supportingacts ofviolence or terrorism inother countries, the President shall terminate assistance tothe Governmentof Nicaragua underthis chapter ¼ `fromª PresidentialDetermination No 80± 26’ . 11 AlexanderM Haig,Jr, Caveat:Realism, Reagan and Foreign Policy ,New York:MacMillan, 1984, p 109; JuandeOnis, `Wheat sale toNicaragua delayed’, New YorkTimes ,11February 1981. 12 Pastor, Condemnedto Repetition ,pp232±233; author’ s interviewwith Lawrence Pezzullo,Washington, DC, May 1982. 13 See thetestimony of administrationof® cials intheUS Senate, TheSituation in El Salvador ,Hearingsbefore theCommittee onForeignRelations, 97th Congress, 1st session, 18 March and 9 April,1981, Washington, DC: US GPO,1981,pp 10±11; US Houseof Representatives, ForeignAssistance Legislation for Fiscal Year 1982(Part 7) ,Hearingsand Markup before the Subcommittee on Inter-American Affairs oftheCommittee onForeign Affairs, 97thCongress, 1st session, 23, 26 30 March and 8 April1981, Washington, DC: US GPO 1981,pp 68, 71. 14 Roy Gutman, BananaDiplomacy: The Making of American Policy in Nicaragua 1981± 1987 , New York: Simonand Schuster, 1988, pp 35± 37; Dickey, Withthe Contras , p 106. 15 `Nicaragua denouncesUS aidcut-off’ , LosAngeles Times ,3April1981; and Associated Press, `Sovietssend aidto Nicaragua’ , MiamiHerald ,26April 1981. 16 CongressionalRecord ,2April1981, pp S3391, H1285± 1287. 17 Theinternal divisions within the Reagan administrationare describedin virtually all thememoirs of Reagan’ sforeignpolicy aides. Regarding Nicaragua, see especially,George P Shultz, Turmoiland Triumph: MyYears as Secretary ofState ,New York:Charles Scribner’s Sons,1993; and Constantine C Menges, Insidethe National Security Council: The True Story of the Making and Unmaking of Reagan’ sForeign Policy,New York:Simon and Schuster, 1988. For an outsider’ s view,see Gutman, BananaDiplomacy . 18 InternationalBank for Reconstruction and Development ( IBRD), CountryProgram Paper: Nicaragua , 16 February1982, Washington, DC: typescript,1982, p 11. 19 Quotedin Alfonso Chardy `US studies further cutback in commerce withNicaragua’ , MiamiHerald , 14 May 1983.On the initial willingness of the banks to restructure Nicaragua’ sdebt,see RichardWeinart, `Nicaragua’ sdebtrenegotiation’ , CambridgeJournal of Economics ,5,1981, 187± 194. Weinart was a consultantto the Nicaraguan government during the restructuring negotiations. 20 RichardStahler-Sholk, `Foreign debt and economic stabilization policies in revolutionary Nicaragua’ ,in Rose JSpalding(ed), ThePolitical Economy of Revolutionary Nicaragua ,Winchester,MA: Allenand Unwin,1987, pp 151± 168; Rodman, `Sanctions at bay?’, pp195± 137. 21 Stahler-Sholk,`Foreign debt and economic stabilization policies in revolutionary Nicaragua’ ,pp151± 168. 22 EVKFitzgerald,`An evaluation of the economic cost to Nicaragua ofUS Aggression,1980± 1984’ , Spalding(ed), ThePolitical Economy of Revolutionary Nicaragua ,pp195± 216. 23 Jim Morrell,`Redlining Nicaragua’ , InternationalPolicy Report ,December 1985,pp 1± 7. 24 JohnM Goshko,`US ends opposition to loans to repressive Latinregimes’ , WashingtonPost ,9July1981. Carter’ spolicywas basedon Sec 701of the International Financial Institutions Act, whichmandates oppositionto loans for countries whose governments are guiltyof `gross violations of internationally recognizedhuman rights’ , exceptin cases where theloans would bene® t thepoor. 25 Jim Morrell& William Jesse Biddle,`Central America: the® nancialwar,’ InternationalPolicy Report , March1983, pp 1± 11. 26 MichaelGardenswartz, `Has politicsspoiled the IDB?, InstitutionalInvestor ,March1985, pp 97± 100; and Morrell,`Redlining Nicaragua’ ,pp1± 7. 27 ClydeH Farnesworth,`US bars loansfor Nicaragua road’, NewYork Times ,30June 1983. 28 Quotedin Kornbluh, Nicaragua,p105.Article VIII ofthe IDB charter, forexample, states: `TheBank, its of®cers andemployees ¼ shallnot interfere inthe political affairs ofany member, norshall they be 345 WILLIAMM LEOGRANDE

in¯uenced in their discussions by the political character ofthe member concerned.Only economic considerationsshall be relevantto their discussions ¼ ’Morrell,`Redlining Nicaragua’ ,pp1± 7. The World Bankagreement containsvirtually identical language in Article IV. 29 Inter-American DevelopmentBank, `Board of Executive Directors, Minutesof meeting 83/ 21¼June22, 1983’, DEA/83/21,28 June, 1983. 30 Morrell,`Redlining Nicaragua’ ,pp1± 7. 31 Dana Priest,`Nicaraguan loan splits Inter-American Bank’, WashingtonPost ,20January 1985. 32 Morrell,`Redlining Nicaragua’ ,pp1± 7. 33 Letter fromGeorge P Shultz,US Secretary ofState,to Antonio Ortõ ÂzMena,President of theInter-American DevelopmentBank, 30 January 1985. 34 Karen DeYoung,`Shultz intervenes on loan: Inter-American Bankis askedto defer fundsfor Nicaragua’ , WashingtonPost ,8March1985. 35 Quotedin Kornbluh, Nicaragua, p 112. 36 Jim Morrell,`Inter-American DevelopmentBank writes negativereport on Nicaragua loan’, Center for InternationalPolicy Aid Memo ,20December 1985;Kornbluh, Nicaragua, p 113. 37 AndresOppenheimer, `Nicaragua decries rebufffrom IDB’ , MiamiHerald ,25March 1987. 38 Morrell& Biddle,`Central America: the® nancialwar’ ,pp1± 11. A bankof® cial saidof this loan, `The Nicaraguangovernment had performed so well interms ofusingthe ® nancialand physical resources ¼they builttwice as manyroads and water supplyconnections as were expectedin so short a time. Itwas thebest urbandevelopment project at theBank.’ Nancy Strogoff, `Nicaragua: theother war’ , Progressive , January 1984,pp 22± 23. 39 Conroy,`Economic aggression as aninstrument of low intensity con¯ ict’ ,pp57± 79. 40 IRBD, CountryProgam Paper: Nicaragua , p 1. 41 Ibid,pp 2, 12± 13. 42 Ibid,pp 7± 8, 13. 43 Ibid,pp 13± 14, 17. 44 Ibid,pp 10± 11; Robert J McCartney,`US will oppose loans to Nicaragua’ , WashingtonPost ,1July1983. 45 Fitzgerald,`An evaluation of the economic cost to Nicaragua ofUS aggression,1980± 1984’ , inSpalding (ed), ThePolitical Economy of Revolutionary Nicaragua ,pp195± 216. The Sandinistas never sought ®nancingfrom the International Monetary Fund because inMay 1979, as theSomoza regime was crumbling, the IMF gaveit a $63million loan. Of that,$49 million was deliveredbefore Somoza, ¯ ed,and he took almost all ofitwithhim; the remaining $17 was providedto the Sandinista government in August 1979. The Sandinistasagreed topay off the loan to Somoza, but they were sowary ofthe IMF thatthey never asked itfor funds themselves. `The IFIsinCentral America: developmentor politics?’ , Center forInternational PolicyAid Memo ,1October1982. 46 PhilipTaubman, `21 Nicaraguans in6 ConsulatesExpelled by US’ , New YorkTimes ,8June1983. 47 LouCannon & MargotHornblower, `US to cut Nicaragua’ ssugarsales’ , WashingtonPost ,10May 1983; andFrancis X Clines,`Sandinists curbed on US sugarsales’ , New YorkTimes ,11May 1983. 48 On the UNCTAD ruling,see PaulLewis, `UN trade parleyattacks USmoveagainst Nicaragua’ , New York Times,3July1983; on the GATT report,see Kornbluh, Nicaragua, p 101. 49 Kornbluh, Nicaragua, p 93. 50 JoanneOmang, `Sanctions: a policyof default’ , WashingtonPost , 8 May 1985. 51 JoanneOmang, `Reagan expectedto place sanctionsagainst Nicaragua’ , WashingtonPost ,1May1985. This assessment was generallyshared by even the most anti-Sandinista members oftheNicaraguan private sector, suchas COSEPPresident Enrique Bolan Äos.`Nicaraguan says embargoaids Sandinista government’ , New York Times,29September 1985. 52 Omang,`Sanctions: a policyby default’ . 53 USHouseof Representatives, TheImposition of Economic Sanctions and a TradeEmbargo Against Nicaragua,Hearingbefore the Subcommittees on International Economic Policy and Trade, and Western Hemisphere Affairs, Committee onForeign Affairs, 99thCongress, 1st Session, 7 May1985, Washington, DC: US GPO 1985, p 59. 54 `Message tothe Congress on economic sanctions against Nicaragua, 1May,1985’ , PublicPapers of the Presidentsof theUnites States: Ronald Reagan, 1985, Book 1 ,Washington,DC: US GPO,1986,pp 548± 549. At thesame time, theadministration cancelled thelanding rights of Nicaraguan commercial aircraft inthe USA,and gave notice of itsintent to cancel abilateralTreaty of Friendship,Commerce andNavigation. The treatywas abrogatedbecause itprohibited exactly the sort of embargo Washington was imposing. 55 InternationalEmergency Economic Powers Act, 50U.S.C. Sec. 1701Met seq.; `Executive Order 12513Ð prohibitingtrade andcertain othertransactions involving Nicaragua, 1May,1985’ , PublicPapers of the Presidentsof the United States: Ronald Reagan, 1985, Book 1 ,pp547± 548. 56 `Key Congressmanpraise embargo’, NewYork Times ,2May1985. Under the National Emergencies Act 50 U.S.C.Sec. 1601 et seq.,itwas possiblefor Congress to declare anationalemergency at anend by concurrentresolution. But since aconcurrentresolution amounted to a legislativeveto, it was mostprobably 346 USECONOMIC SANCTIONS AGAINST SANDINISTA NICARAGUA

unconstitutionalunder the 1983 Supreme Court ruling in Immigrationand Naturalization Service vs Chadha. ThusCongress would have had to pass new legislationto end the embargo against Nicaragua. Sincethat wouldrequire a two-thirdsvote in both houses to overcome Reagan’ sinevitableveto, the Democrats never tried. 57 CliffordKrauss, `UStrade embargohelps Nicaragua’ sSandinistas’, WallStreet Journal ,2October1985; LouCannon, `Summit partners criticize sanctionsagainst Nicaragua’ , WashingtonPost , 4 May 1985; EdwardCody, `Western Europeansopen talks on Central America’ , WashingtonPost ,29September, 1984. 58 `Mexicojoins critics ofUS embargoagainst Nicaragua’ , WashingtonPost , 5 May 1985. 59 `Latingroup urges US tolift Nicaragua embargo’, Journalof Commerce ,16May1985; Reuters, `Caribbean unitfaults US’ , NewYork Times ,13May1985; US Houseof Representatives, TheImposition of Economic Sanctionsand a TradeEmbargo Against Nicaragua , pp 50, 71. 60 Reuters,`Managua sets austeritymeasures’ , WashingtonPost ,11May 1985; `Security council ruling sought’, New YorkTimes ,7December 1985.Nicaragua alsoasked GATT torule on the legality of the embargo,as ithad when Washington reduced the Nicaraguan sugar quota. The USA claimed theembargo was justi®ed under Article 21of the GATT agreement, whichgives member states theright to `take anyaction whichit considers necessary forthe protection of its essential securityinterests’ ,(quotedin US Houseof Representatives, TheImposition of Economic Sanctions and a TradeEmbargo Against Nicaragua , p 33). Washingtonwas onlywilling to allow a GATT panelto review whetherimposition of an embargo was, in general,consistent with Article 21;it wouldnot allow a review ofwhetherthe US claim ofnationalsecurity was justi®ed. Under those limitations, the GATT panelreluctantly agreed thatan embargo was allowable,but warnedthat Article 21needed to be clari® edto prevent its abuse in the future. ` GATT handstied on Nicaragua’ , FinancialTimes ,7November1986. 61 TonyJenkins, TheUS EmbargoAgainst NicaraguaÐ One YearLater ,PolicyFocus No 3, Washington,DC: Center forInternational Policy and Overseas DevelopmentCouncil, 1986, p 3. 62 `Nicaragua movesto protect assets’ , Journalof Commerce ,16March 1987. 63 Jenkins, TheUS EmbargoAgainst Nicaragua , p 5. 64 Chairmanof the House Intelligence Committee EdwardBoland described CIA Director William Casey’ s originaldescription of the contra war’ saims in CongressionalRecord ,27July 1983, p H5721. 65 BobWoodward, VEIL:TheSecret Warsof the CIA 1981± 1987,New York:Simon and Schuster, 1987, p 281. The CIA hadoriginally trained contra unitsas commandos,but they weren’ tveryeffective. Dillon, Commandos, p 133. 66 Quotedin Kornbluh, Nicaragua, p 47. 67 The SEALswere probablydrawn from US forces stationedin El Salvador, who were trainingSalvadoran commandosto use `piranha’speedboats provided by the CIA tointercept arms smugglingto the Salvadoran guerrillas.Both the Salvadoran commandos and the UCLAsoperatedtheir boats from the same base onTiger Island,just off the Honduras coast. Salvadorans were alsothe most numerous nationality among the UCLAs, thoughbefore the US trainingprogramme, El Salvador had no navy. Andres Oppenheimer, `Poor islanders fear arolein contra war despitechance ofjobs’ , MiamiHerald ,1November1986; Frank Greve &Mark Fazlollah,` NSC bypassedmilitary with covert operations’ , MiamiHerald ,26July 1987. Some of the UCLA operationsare describedin ` CIA employeesfought Nicaraguans’ , WashingtonPost ,20December 1984, althoughthe participants are describedas ` CIA employees’ rather thanSpecial Forces units. 68 DavidRogers & DavidIgnatius, `How the CIA-aidedraids in Nicaragua in’ 84led congress to end funds’ , WallStreet Journal ,6March1985; ` CIA internalreport details US rolein contra raids in Nicaragua last year.’ , WallStreet Journal ,6March1985; Charles RBabcock,` CIA directlyoversaw attack inOctober on Nicaragua oilfacility’ , WashingtonPost ,18April 1984; Associated Press, `October10 assault on Nicaraguans is laidto CIA’ , New YorkTimes ,18April 1984; and Robert J McCartney,`Exxon cuts Nicaragua’ soilsupply’ , WashingtonPost ,15October 1983. The CIA’srolein the harbour attacks came to lightshortly after thedisclosure that the USA hadmined Nicaragua’ sharbours,probably as aresultof EdwardBoland’ s off-handremark thatthere were `otherthings’ besides the mining that the UCLAs had done. CongressionalRecord ,12April 1984, p H2918. 69 Rogers& Ignatius,`How CIA aidedraids in Nicaragua in’ 84led Congress to end funds’ . 70 Memorandumto National Security Adviser Robert C McFarlane fromOliver L Northand Constantine Menges,`Special activities inNicaragua’ ,2March1984, in US Congress, Iran±Contra Investigation: Hearings,Volumes100± 107, Part III, Joint Hearings before the Senate Select Committee onSecret Military Assistance toIran and the Nicaraguan Opposition, and the House Select Committee toInvestigate Covert Arms Transactionswith Iran, 100th Congress, 1st session, Washington, DC: US GPO 1987,pp 726± 727. 71 HedrickSmith, `Britain criticizes miningof harbors around Nicaragua’ , New YorkTimes ,7April1984. GeorgeShultz con® rmed thispurpose: Shultz, Turmoiland Triumph: My Years as Secretary ofState , p 406. 72 AlfonsoChardy, `Contras plotted Mexican ship paths’ , MiamiHerald ,12January 1988. 73 Kornbluh, Nicaragua, pp 50±51. 74 Author’s interviewwith Daniel Ortega, Managua,Nicaragua, July1987. See alsoClifford Krauss, `ªGreat Coffee Warºin Nicaragua is beingwon by Sandinistas’ , WallStreet Journal ,21January 1986. 347 WILLIAMM LEOGRANDE

75 Jenkins, TheUS EmbargoAgainst Nicaragua ,p7;Fitzgerald, `An evaluation of the economic cost to Nicaragua ofUS aggression,1980± 1984’ , pp195± 216. 76 JuliaPreston, `In¯ ation runs away inManagua’ , WashingtonPost ,22January 1988. 77 John Weeks, TheEconomies of Central America ,New York:Holmes andMeier, 1985,p 158. 78 See, forexample, ForrestD Colburn, Post-RevolutionaryNicaragua: State, Class, and the Dilemmas of AgrarianPolicy ,Berkeley,CA: Universityof CaliforniaPress, 1986;Dennis Gilbert, Sandinistas:The Party andthe Revolution ,New York:Basil Blackwell, 1988. 79 Sovietaid to Nicaragua peakedin 1987 at about$750± 800 million annuallyÐ $300 million in economic assistance and$450± 500 million in military assistance. Theeconomic aid was vital,since itincluded virtuallyall ofNicaragua’ spetroleumimports. Don Oberdorfer, TheTurn: From the Cold War to a New Era , New York:Poseidon Press, 1991,pp 340± 341; Julia Preston, `Soviets raise pro®leÐ but not aidÐ in Managua’ , WashingtonPost ,6November1989. 80 InternationalBank for Reconstruction and Development ( IBRD), Reportand Recommendation of the Presidentof theInternational Development Association to the Executive Directors ona ProposedEconomic Recovery Credit¼ tothe Republic of Nicaragua ,3September1991, Report No P-5598-NI, Washington, DC: IBRD, 1991, p 3. 81 JoanneOmang, `Sandinistas mismanaged economy,US says’ , WashingtonPost , 4 May 1985. 82 BillGibson, `A structuraloverview of the Nicaraguan economy’ , inSpalding (ed), ThePolitical Economy ofRevolutionary Nicaragua , pp 15±42. 83 At theend of 1988, GDP stoodat 67.5%of its 1978 level, and per capita consumptionat 46.3%.International Bankfor Reconstruction and Development ( IBRD), Reportand Recommendation of the President of the InternationalDevelopment Association to the Executive Directors ona ProposedEconomic Recovery Credit¼ tothe Republic of Nicaragua ,3September1991, Report No P-5598-NI, Washington, DC: IRBD, 1991, p 3. 84 `Resultsof the February 25, election’ , BarricadaInternational (Managua),10 March 1990. 85 Lawrence Eagleburger,`US assistance toPanama, Nicaragua’ , CurrentPolicy ,1264,Washington, DC: Department ofState, 1990; Guy Gugliotta, `Criticism mutedas Nicaraguans visit’, WashingtonPost , 17 April 1991. 86 Onthe general issue ofdependenteconomies’ vulnerabilityto sanctions, see Olson,`Economic coercion in worldpolitics’ . 87 One way tounderstand the effect ofUSpolicyin this case is toview it as atwo-levelgame, inwhich US policymoves do not have much effect onthe Level I game (negotiationswith the Sandinistas), but have profoundreverberation in Nicaragua’ sLevelII game (thelevel of supportgiven the Sandinista government bydomestic political constituencies). Robert D Putnam,`Diplomacy and domestic politics: the logic of two-levelgames’ , InternationalOrganization ,42,pp 427± 460. For elaborations on Putnam’ s model,see especially thecollection of essays inPeter BEvans,Harold K Jacobson& RobertD Putnam(eds), Double-EdgedDiplomacy: International Bargaining and Domestic Politics ,Berkeley,CA: Universityof CaliforniaPress, 1993.

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