Although the economy expanded very rapidly in the 1960s and 1970s, with the manufacturing sector growing three-fold, the great majority of the people were excluded not only from the fruits of this economic progress but also from any participation in the political process. This was adapted to serve one aim: the personal enrichment of the Somoza family and its associates.The distribution of income was one of the worst in Latin America, the homicide rate was the highest in the world, more than 50 per cent of the population were illiterate, life expectancy was the lowest in central America and only 20 per cent of homes had running water. Since the revolution in 1979, the Sandinistas have been attempting to get the economy moving again while keeping the key foreign-exchange earning sectors largely in private hands. But investment has fallen. Private investment all but disappeared in the first few years after the revolution and government investment has been crowded out by the war effort. Growing budget deficits have been financed by printing money, and inflation has ranged up to 200 per cent a year.The author of the following authoritative study, Dr. Bill Gibson, put the overall cost of the war against the Contras at $1,567 million up to 1984, or about 18 per cent of GDP. The war has aggravated the rapid flow of labour from the countryside causing an acute shortage of labour during the harvests.Ironically, the Sandinistas have been forced back on relatively orthodox economic policies, almost of an IMF type. While relying on socialist countries increasingly for foreign loans, they have announced repeated rounds of austerity measures in 1984-85, including several devaluations of the cordoba and market forces have been encouraged to play a larger role both in the pricing and credit systems.In the author's view, further IMF-style contractionary policies would weaken the regime's political support. The basic problem is the lack of savings and private investment. The business class is insisting on greater access to the political system. This suggests that ultimately the regime will be faced with a choice: assume control of the foreign exchange earning sector or abandon the revolution.WIDER wishes to make clear that, while every effort has been made to check the facts reported in this analysis, it takes full responsibility for the contents of the report and for any errors that remain.