Nicaragua has long had, in effect, two economies: an export segment, producing mainly cotton, meat, coffee, and sugar; and a subsistence segment, tying a majority of both urban and rural Nicaraguans to an impoverished existence. Agriculture and forestry remain the mainstays of the Nicaraguan economy, employing about 42% of the labor force. During 1960–64, the GDP increased by an annual average of 8.1%, the highest rate in Latin America. Annual growth ranged from 4% to 6% during 1965–73, largely because of favorable world prices for Nicaraguan commodities. The 1972 earthquake that struck Managua caused material losses estimated at $845 million, but the agricultural sector was left largely unscathed.
The civil war of the late 1970s disrupted the economy. In 1978, the GDP fell by 7.9%; and in 1979, the year of the Sandinista takeover, by 25%. Under the Sandanista regime 80% of the economy was nationalized. Massive public spending resulted in a GDP growth of 10.4% in 1980 and 7% in 1981. However, because of floods in May 1982, a weak international market for export crops, the virtual collapse of the CACM, direct and indirect economic pressure from the US government, and disruption by the Contras, the economy suffered a GDP decline of 1.4% in 1982. Because of shortages, rationing of soap, flour, and cooking oil was introduced in 1982. In 1983, high world prices and a bumper harvest boosted GDP growth to 4.6%, but decline set in again 1984 to 1986. Across this three year period, GDP declined 6.7%, and on a per capita basis, with population growth averaging 3.4% a year, the decline was 16.3%. The average annual inflation rate during 1980 to 1984 was about 35%, but in 1985 this inflation jumped to 219.5%. In 1986 the US imposed a formal trade embargo on Nicaragua, and inflation (as measured by consumer prices) soared for the rest of the decade: 681.6% in 1986; 912% in 1987; 14,316% in 1988; 4,770% in 1989; and 12,338% in 2000. Total GDP contraction 1986 to 1990 was 16.2%; and twice that (32.1%) on a per capita basis.
In response to both domestic and international pressure, the Sandinista regime entered into negotiations with the Nicaraguan Resistance and agreed to nation-wide elections in February 1990. The candidate of the National Opposition Union (UNO), Violeta Barrios de Chamorro, whose campaign received financial support from the US, won the election. She took over a country with a controlled economy, uncontrolled inflation and debt outstanding at 508% of GDP. During President Chamorro's nearly seven years in office, her government achieved major progress toward consolidating democratic institutions, advancing national reconciliation, stabilizing the economy, privatizing state-owned enterprises, and reducing human rights violations.
Nicaragua began free market reforms in 1991. Despite some setbacks, it has made dramatic progress: privatizing 351 state enterprises, reducing inflation from 775% in 1990 to 12.4% in 1994 to 7.3% in 1997. Foreign debt had risen 638.4% as Nicaragua was given renewed access to IMF funding, but by 1997, this ratio had declined to 296.7% of GDP. The GDP continued to contract from 1991 to 1993 (by 0.3% overall, but by 15.2% in per capita terms), but from 1994 to 1997 GDP growth averaged 4.35% (1.4% in per capita terms). As a result of the strong decline in foreign debt, the country's current account balance declined as a percentage of GDP from 60.0% in 1992 to 30.3% in 1997. In addition, the government's budget deficit in 1997 stood at 9.7% of GDP (before grants), down considerably from 20.3% in 1990. The election of Arnoldo Alemán in 1996 served to continue the social and economic reforms. (This trend was undermined somewhat when, in December 2002, Alemán was indicted for diverting $100 million of state funds for his own and others' personal enrichment during his term in office.) Damage caused by Hurricane Mitch in 1998 reduced the GDP to 4% for that year, and shot inflation up to 18.5%, but an inpouring of foreign assistance and activity on reconstruction projects pushed GDP growth to 7.4% in 1999, the highest since 1982, while inflation fell to a new low of 7.2% by the end of the year. Growth continued in 2000, up 4.3% with inflation at 9%. However, in 2001, the global slowdown, and, in particular, a glut on the coffee market and lower demand in the United States for textiles and other manufactured goods from Nicaragua, reduced growth to 2%.