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Nicaragua: Poverty Assessment

Nicaragua FY95 PA

Main Report (6.4Mb PDF)

Annexes (6.4Mb PDF)

Nicaragua is one of the poorest countries in Latin America. In the 1980s, per capita GDP declined to one-third of its 1977 level due to the combined impact of inappropriate macroeconomic policies, institutional changes toward a centrally controlled economy, continued civil strife, and a trade embargo. Starting in 1991, the government initiated ambitious reforms to support Nicaragua's transitions from war to peace, from dictatorship to democracy, and from central planning to a market economy.

Poverty Profile

Using data from the 1993 Living Standards Measurement Survey, the Poverty Assessment computed poverty and extreme poverty lines. The poverty line was defined as the level of "total" per capita monthly expenditures at which an individual obtains the minimum daily caloric requirement (2,226 calories per adult). The extreme poverty line was defined as the level of per capita monthly "food" expenditures at which an individual obtains the minimum daily caloric requirement. According to these definitions, half of the population, or about 2 million people, fall below the poverty line. Forty percent of the poor, or 20 percent of the population, fall below the extreme poverty line and are food poor; that is, they cannot meet the daily minimum caloric requirement even if they were to devote all of their consumption to food.

Poverty and extreme poverty are overwhelmingly rural. With 41 percent of the country's population, rural areas contain 63 percent of the poor and 78 percent of the extreme poor. Rural poverty is also deeper than urban poverty. The average expenditures of the urban poor are 11 percent below the poverty line, while those of the rural poor are 37 percent below the poverty line. The poverty profile also shows major regional disparities in the incidence of poverty. With 23 percent of the population, the Northern (Jinotega and Matagalpa) and the Segovias (Esteli, Madriz, and Nueva Segovia) regions contain 46 percent of the country's extreme poor, with the average expenditures of the rural poor being 48 percent below the poverty line. In contrast, Managua, with one-third of the country's population, has only 7 percent of the extreme poor. Poverty is largely a problem of underemployment and low productivity rather than one of widespread unemployment, and is concentrated in the agricultural sector. Over three-quarters of poor households derive most of their income from agriculture either as farmers and/or wage laborers. Small farmers engaged in basic grains production are the poorest of all. Informal sector employment was not found to be a good predictor of poverty. Informal sector earnings are well above the poverty line, indicating that it is high dependency ratios that make them inadequate on a per capita basis. Although poor women participate less in the labor market than nonpoor women due to household work (childcare, fetching water, and collecting wood for cooking), female-headed households were not found to be at a greater risk of poverty than male-headed households.

Poor households have, on average, almost twice the number of children than nonpoor households, an important factor that explains low per capita incomes resulting from high dependency ratios. Poor households also have less education than the nonpoor, another key factor explaining low earnings capacity. Over half of the extremely poor in rural areas and over a third in urban areas are illiterate. With the important exception of enrollments in primary education, the poor have worse social indicators than the nonpoor, particularly in rural areas. Comparing very well with the rest of Central America, access to primary school is almost universal. However, many poor children do not complete primary school due to late entrance, high repetition, and the low quality of schooling. The poor have less access to health care services, including immunizations and prenatal and birth care and lack access to water and sanitation services. The study also found a strong correlation between poverty and child malnutrition. Almost one-third of all children below the age of five are malnourished, a proportion that increases to four out of 10 among the extreme poor in rural areas. In the poorest regions, the Northern and the Segovias, almost half of the rural children are malnourished. The poverty assessment found that: (i) a literate mother nourishes her children better; (ii) each additional child in the household increases the probability of malnutrition; (iii) breastfeeding is associated with lower malnutrition among children under 18 months; and (iv) children in households without water and sanitation are twice as likely to be malnourished as children in households with water and sanitation.

Incentive and Regulatory Framework

The promotion of economic growth, the basis for poverty reduction, has been a driving force behind the government's stabilization and adjustment program initiated in 1991. The program has been highly successful in stabilizing the economy. Although the adjustment program included significant downsizing of the public sector, the liberalization of domestic and foreign trade, and the liberalization of the financial sector, its measures were not sufficient to trigger the resumption of growth. In the 1990-93 period, GDP per capita fell by 8 percent. Economic conditions improved markedly in 1994. Real GDP growth was 3.2 percent, the highest rate since 1983, and inflation declined from 20 percent in 1993 to 12 percent. Most encouragingly, 1994 saw strong growth in agriculture and non-traditional agricultural exports.

Reducing poverty will depend on sustaining and deepening the economic reform program and further refining policies that will promote growth. To this end, the government must increase its focus on strengthening the institutional structures that are needed for markets to function efficiently so as to generate growth. This will involve rebuilding the state apparatus to support the private sector and to assist the poor by providing essential infrastructure and strengthening the human capital base. Policy and incentive reforms must be designed to increase the responsiveness and flexibility of product and factor markets to price signals. Given Nicaragua's economic structure, the constraints imposed by the difficult property rights problem, considerable political uncertainty, and a difficult external environment, the revival of growth must be based on the agricultural sector over the medium term. Strong agricultural growth would not only provide a powerful stimulus to the rest of the economy and contribute to export diversification, but would also have a marked positive impact on the incomes of the majority of the poor.

The government's reform program aims to downsize the public sector further to increase public savings, to restore a safe foreign reserve level, and to permit the expansion of credit to the private sector. The key measures of the economic program encourage broad- based and non-distortionary economic growth, which would absorb and make productive use of the poor's most abundant resource—-labor. Eliminating tax, tariff, and other policies that distort the relative prices of capital, labor, and land would also encourage a labor-intensive pattern of growth. Public sector reform is also crucial to the poor. First, it is crucial to create a small and responsive public sector capable of facing declining foreign aid without fiscal crises. Second, a smaller public sector will also mean that fiscal savings can be made that can be spent on: (a) alleviating key bottlenecks identified in the poverty assessment as constraining poverty-reducing growth such as the lack of rural infrastructure, the poor quality of primary education, and inadequate access to basic health care and (b) expanding efficient and well-targeted safety net programs.

Public Expenditures

Nicaragua's public spending in the social sectors is higher than in most Central American countries. In 1994, the share of public spending on the social sectors was over 9 percent of GDP or about 40 percent of total public sector spending. Nevertheless, the poverty assessment found that, with the exception of primary education, such spending is not well-targeted to the poor and results in inadequate funding for basic services. Per student spending in primary education is US$55 per year compared to a Latin American average of US$100. At the same time, higher education, which was shown in the poverty assessment to serve the nonpoor exclusively, receives US$800 per student per year. Nicaragua's higher/primary spending ratio (14.5 times) is the second highest in the region (after Brazil). In 1994, annual per capita public health care spending was US$23.2, higher than that of any other Central American country except Costa Rica, and much higher than is typical for an economy with a similar GDP per capita. However, the coverage of primary health care is insufficient.

To implement the government's education strategy and to improve the quality and increase the internal efficiency of primary education, more resources are needed at this level. To this end, the generous subsidization of higher education must stop. Improving targeting of pre-primary and secondary education resources is also needed. Because the purpose of publicly financed pre-primary programs is to compensate children from disadvantaged backgrounds, they should be exclusively targeted to the extreme poor. In the case of secondary education, where the poverty assessment found that public spending is also regressive, there is ample room for cost recovery. In the health sector, increasing the access of the poor will require further reallocating public expenditures toward primary health care and increasing cost-recovery from the nonpoor who were found to be major users of public health services. There is ample room for cost recovery, particularly in urban areas.

Apart from macroeconomic fragility, political instability, and an overvalued real exchange rate in competitiveness terms, the poverty assessment found that the recovery of the agricultural sector has been slow due to several sector-specific constraints:

  • The inadequate implementation of sectoral policies and the lack of a strategy for addressing rural poverty. There is little coordination among institutions, which have weak formulation and implementation capacity. No emphasis has been placed on defining policies and programs that are cost-effective while also benefiting poor farmers, such as agricultural research, training and extension services.
  • Insecurity of land tenure and inefficient land markets. Although the government is addressing this issue, progress is slow.
  • Although many programs exist, there is a lack of viable financing schemes for small and medium- size farmers, and many programs use credit as a means to transfer a subsidy or social assistance.
  • Although Nicaraguan basic grains can compete effectively at the regional level, small producers are unable to benefit because of the high costs of information, poor rural infrastructure (particularly rural roads), the high costs of transportation, and non-tariff barriers, such as complicated and discretionary export requirements.

Safety Net

In the 1991-94 period, the government mobilized between 1.0 and 1.2 percent of GDP for safety net programs (the rehabilitation of basic infrastructure, integrated rural development programs for war victims, emergency employment, and nutrition). The social safety net has several positive features. First, some programs take a demand-driven approach. Second, partly as a result of this orientation, it gives communities an incentive to organize themselves, increases social participation, and fosters the democratic process. Finally, its strongest agency, FISE, is a financing entity; implementation is left to private contractors, local bodies, and NGOs.

The poverty assessment recommends that the government address the following problems of the safety net: (i) program fragmentation due to the lack of a coherent framework that clearly defines the role of the safety net vis-à-vis the line agencies; (ii) inefficient institutional arrangements with an excessive number of programs and overlaps with line agencies, insufficient emphasis in rural areas, and unclear targeting criteria and mechanisms; (iii) inadequate information systems in safety net agencies resulting in a lack of data on actual beneficiaries, the value of transfers, program costs (total, administrative, and unit costs), and the effectiveness of programs; (iv) insufficient attention to water and sanitation and to the short-term nutritional needs of pregnant and lactating mothers, children under five years of age, pre-school and school-age children; and (v) the inadequate role of the Ministry of Social Action, which instead of coordinating and monitoring the implementation of poverty alleviation programs, has became another executing agency.

Poverty Strategy

Although the government has made major progress, it should clearly spell out its overall poverty alleviation strategy and express it in a policy document. This document should specify priorities, programs, and measures to be pursued over the short- and medium-term, including a defined and articulated implementation plan with institutional responsibilities. This strategy should have three main elements. First, it should sustain a stable environment to enable rapid economic growth. Policies that absorb and make productive use of rural labor will expand employment and income-earning opportunities for the majority of the Nicaraguan poor. Second, the strategy should maintain and deepen the focus on the provision of basic social services for the poor. Family planning, though, should become a national priority as high dependency ratios are a major determinant of poverty, and an estimated 160,000 poor women, mostly in rural areas, need protection against unwanted pregnancies. Third, a revised and coherent social safety net, well targeted to the poor, is needed to protect the most vulnerable groups. Addressing child malnutrition and emphasizing the provision of water and sanitation should become a priority for the safety net. The poverty strategy document should be the instrument for coordinating donor support. The findings of the poverty assessment point to the need for comprehensive donor coordination around a single government strategy, particularly regarding agricultural sector and safety net programs.

Statistical System

The effectiveness of policy interventions in reducing poverty depends on the quality and timeliness of the information available to measure changes in poverty over time and for monitoring progress in the well-being of the poor. The government is well positioned to develop a good statistical monitoring system by institutionalizing the experience of the 1993 Living Standards Measurement Survey, which provided an adequate database. To this end, IDA and the government have already agreed to repeat the survey and to analyze its results. Because of the extent of rural poverty, the second survey should include a special module on agricultural activities. To strengthen its institutional capacity for policy analysis, the government should organize a high-level technical unit, responsible for monitoring and evaluating the government's poverty alleviation strategy. This unit would need staff with adequate analytical skills, capable of performing tasks from conception to data analysis. The institutional affiliation of this unit should be consistent with the Public Sector Reform Program.

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