The new government, formed in 1979 and dominated by the Sandinistas (see Glossary), resulted in a new model of economic development. The new leadership was conscious of the social inequities produced during the previous thirty years of unrestricted economic growth and was determined to make the country's workers and peasants, the "economically underprivileged," the prime beneficiaries of the new society. Consequently, in 1980 and 1981, unbridled incentives to private investment gave way to institutions designed to redistribute wealth and income. Private property would continue to be allowed, but all land belonging to the Somozas was confiscated.
However, the ideology of the Sandinistas put the future of the private sector and of private ownership of the means of production in doubt. Even though under the new government both public and private ownership were accepted, government spokespersons occasionally referred to a reconstruction phase in the country's development, in which property owners and the professional class would be tapped for their managerial and technical expertise. After reconstruction and recovery, the private sector would give way to expanded public ownership in most areas of the economy. Despite such ideas, which represented the point of view of a faction of the government, the Sandinista government remained officially committed to a mixed economy.
Economic growth was uneven in the 1980s (see table 5, Appendix A). Restructuring of the economy and the rebuilding immediately following the end of the civil war caused the GDP to jump about 5 percent in 1980 and 1981. Each year from 1984 to 1990, however, showed a drop in the GDP. Reasons for the contraction included the reluctance of foreign banks to offer new loans, the diversion of funds to fight the new insurrection against the government, and, after 1985, the total embargo on trade with the United States, formerly Nicaragua's largest trading partner. After 1985 the government chose to fill the gap between decreasing revenues and mushrooming military expenditures by printing large amounts of paper money. Inflation skyrocketed, peaking in 1988 at more than 14,000 percent annually.
Measures taken by the government to lower inflation were largely wiped out by natural disaster. In early 1988, the administration of Daniel José Ortega Saavedra (Sandinista junta coordinator 1979-85, president 1985-90) established an austerity program to lower inflation. Price controls were tightened, and a new currency was introduced. As a result, by August 1988, inflation had dropped to an annual rate of 240 percent. The following month, however, Hurricane Joan cut a devastating path directly across the center of the country. Damage was extensive, and the government's program of massive spending to repair the infrastructure destroyed its anti-inflation measures.
In its eleven years in power, the Sandinista government never overcame most of the economic inequalities that it inherited from the Somoza era. Years of war, policy missteps, natural disasters, and the effects of the United States trade embargo all hindered economic development. The early economic gains of the Sandinistas were wiped out by seven years of sometimes precipitous economic decline, and in 1990, by most standards, Nicaragua and most Nicaraguans were considerably poorer than they were in the 1970s.
Data as of December 1993