After the Crash

...Ingenious leather manufacturers try to circumvent this problem by attaching "Made in Argentina" labels to their goods...

...4. James Dunkerley, Rebellion in the Veins (London: Verso, 1984) p. 6 . 5. Bolivia was the first Latin American country to nationalize oil holdings...

...All the "seven sisters" have expressed interest in Bolivia's oil and gas resources...

...if you are brave, if you are gutsy, if you do everything right, you will end up with a miserable, poor economy with stable prices...

...Addressing Solidarity's parliamentary caucus, he recalled approvingly how at one point Bolivia's finance minister, suddenly seeing the light, had commented, "Stemming hyperinflation is like cutting the tail offa cat: it's better to do it in one fell swoop than through a succession of tiny slices...

...Now Bolivia's "favored nation" status with international creditors and bilateral lenders has allowed the debt to be reduced from $4.2 billion in 1987 to some $3.7 billion today...

...Economist Hormando Vaca Diez feels the state should assume the But there's a reason you have to do that, and that's because only with stable prices do you have any sort of chance at surviving into the future...

...Despite the NEP goal of lowering interest rates, high interest rates are needed to maintain fiscal reserves...

...VOLUME XXV, NUMBER 1 (JULY 1991) 25Bolivia Farmers from the coca-producing Chapare region protest U.S...

...Economists disagree about what the actual inflation rates were...

...He saw no end to its potential, once it got its house in order...

...7 OLIVIA'S BUSINESS CLASS IS ILL-EQUIPPED to take over the economy as the state withdraws...

...Economist Arturo Nufiez de Prado, planning minister under the center-left UDP, believes that priority should be given to a limited number of goods and services designed to meet basic needs, including food, clothing, health, education and housing...

...Low levels of internal and regional integration have also made market expansion extremely difficult...

...In 1987, it generated some $1.4 billion, of which about $500 million remained in Bolivia, equivalent to 11% of the GNP...

...After Paz Estenssoro (following Eder's advice) reversed many of the nationalist policies adopted in 1952, aid skyrocketed and in 1958, Bolivia was dependent on the United States for a third of its national budget.' 2 In 1970, support was radically reduced when Gulf Oil was nationalized...

...Coca er venue-equivalent in 1987 to y Political instability, hazardous terrain and poor transport infrastructure have always made foreign investors leery...

...26 26H ARVARD ECONOMISTJEFFREY SACHS, WHO designed the NEP, is only the most recent U.S...

...The NEP represents a crude reinforcement of the old scheme of development outward: Bolivia as a mining-export enclave, dependent on northern economies," maintains economist Hormando Vaca Diez.' Past efforts to use natural resource exports as the motor for economic development have been a resounding failure...

...Large doses of state protection built industries which are largely uncompetitive and extremely vulnerable to the onslaught of tax-free imports and contraband caused by the NEP...

...A plan-and a resume...

...Much of itthen ended up in China when the emperor demanded payment for tea in silver...

...2 Price fluctuations on the world market throw the economy into crisis, impeding long-term planning and stability...

...He was, in short, no simple Chicago boy...

...The other major area for Bolivian private investment is export-oriented agriculture...

...In the view of economist Fernando Cossio, years of dependence on aid, foreign loans and U.S...

...The elections are long past, and the New Economic Policy (NEP) has been pursued aggressively...

...and it could support small artisans and vendors who have little capital or access to credit...

...In 1990, the debt stood at $580 per capita, $10 more than per capita income...

...Bowing to conditions set by the International Monetary Fund (IMF) in 1985, the government put both COMIBOL and YPFB on the market, along with 157 other state companies...

...The country's economy was careening wildly, veering inexorably toward hyperinflation, and Solidarity's new legislators were utterly unprepared for the powers and responsibilities which were suddenly and unexpectedly being thrust upon them...

...If things have not gone as badly as some had warned, this is in part because the various Solidarity-configured governments have been hesitant to role of protagonist in the economy, while staying out of the management of public enterprises...

...International press reports called the move a "leftist whim" and lenders threatened to freeze Bolivian assets abroad...

...Estabilidad, Desarrollo y Ajustes," 1988...

...Since 1985, over 120 factories have closed, a familiar scenario for those with long memories: the rapid growth of industry after the 1952 revolution was cut short by an IMF stabilization plan in 1956, which also led to massive factory closures...

...So you have an intrinsic deep economic problem there...

...Since 1952, not one new mine has opened...

...These loans strengthened the eastern elites, who often reneged on their obligations when international prices fell, saddling the country with a growing debt burden...

...Bolivian industry has always been hampered by a small internal market, aggravated by the poverty of the average consumer...

...The mineral content of tin reserves had been dropping since the 1920s, and the mines were undercapitalized...

...It would take forty years with an annual growth rate of 3.5% to restore income to 1978 levels...

...Now, here," he continued, "the situation is completely different...

...Falling productivity and lack of investment in modernization was largely due to the government's policy of feeding off COMIBOL's income to finance economic diversification...

...The benefits to Bolivia are questionable: in 1988, Inti Raymi's profits exceeded $13 million, but only 3% went to the state...

...Even though the commercial debt has not been serviced since 1985, Bolivia has obtained record amounts of new multilateral credits...

...Since the adoption of a new mining code on April 6, after a 3-year delay, interest in Bolivian mining has seen a resurgence...

...The most radical workers, the miners, forced the middle-class MNR to nationalize the holdings of the "tin barons" and create the Bolivian Mining Corporation (COMIBOL...

...Five small agreements with international companies have been signed to date...

...And with prices rising and wages held down (a key element of the plan), the standard of living for many has dropped significantly though a good quarter of the population is doing quite well...

...In the same year, drug exports were equal in value to the country's legal foreign earnings...

...But Sachs insisted that the transformation had to be sudden and almost convulsive...

...6. For a comprehensive proposal for how COMIBOL could be made economically viable see Desempeio y Colapso de la Mineria Nacionalizada en Bolivia: Estudio Tdcnico, Econdmico, Social y Organizacional de la Corporaci6n Minera en Bolivia, (La Paz: Centro de Estudio Mineria y Desarrollo, 1990...

...Exxon is to invest up to $40 million in developing oil reserves in the departments of Oruro and Potosi...

...The failure of the model demands enormous imagination from the country's workers," says Victor L6pez, executive secretary of the Bolivian Workers Confederation (COB...

...Secondly, although in many ways a straightforward neoliberal, he had no use for the banks and regularly advised his clients on how to defer debt payments and concentrate instead on their own economy's domestic needs (which, granted, might turn out to be increasing foreign investment and exports...

...And it's legal for me to do so...

...Nationalization was gradually extended to other areas, and by 1985, 70% of the economy was in state hands and COMIBOL was exporting 80% of the country's minerals...

...Such treatment contrasts with the banks' reaction in 1984, when the center-left Popular and Democratic Unity (UDP) government suspended servicing on the commercial debt...

...MINTEC president Scottie Bruce reports that 15 new companies are contemplating investment possibilities...

...The NEP' s fundamental effect is to perpetuate Bolivia's historical role as exporter of raw materials, primarily minerals and hydrocarbons...

...Political and economic instability has encouraged most wealthy Bolivians to put their money into speculative ventures or investment abroad...

...9. The Agrarian Reform of 1953 broke up the large estates of the highland areas into individual parcels owned by peasant farmers...

...Levels of U.S...

...By 1990, 86% of bank accounts were in U.S...

...25 (1988...

...Poles were as surprised as anyone to find themselves suddenly focusing their national debate on fantasies about what might have happened in such a far distant land...

...Some contend inflation reached 20,000%, while others argue that it was closer to 8,000% at its peak...

...As early as 1955, despite an agrarian reform, agricultural estates in the eastern lowlands received over 50% of all credits from the state's Agricultural Bank.9 General Hugo Banzer's dictatorship in the 1970s aggressively promoted credits for lowland export crops, encouraged by high cotton and sugar prices...

...Private investment, only $150 million in 1989, centers on export mining, with Bolivian-owned mines accounting for about 40% of all production...

...during the 1960s, Gulf Oil repatriated nearly 80% of its profits...

...In 1971 a regime which toed the line took power and aid once more flooded the country...

...However, the central government has been tardy in establishing an appropriate legal framework to permit this investment...

...Apart from providing a vehicle for laundering narco-dollars, CDs succeeded in repatriating a quarter of the estimated $2 billion which fled the country between 1980 and 1985...

...This allows for a third of its bilateral debt to be condoned, together with the reprogramming of loan paybacks and interest rates...

...To cater to this influx, the bank instituted short-term certificates of deposit, which quickly became the most important source of financing national reserves...

...In 1991, the package is about $200 million, 38% of which is directed at strengthening the private sector...

...Different policies could prevent them from continued failure...

...Despite its geographic isolation, Bolivia's well-being is overwhelmingly dependent on international prices for primary materials, over which it exercises no control...

...High interest rates also brought on economic contraction and a scarcity of credit in local currency...

...Opposition arose quickly, centered on the government's failure to conduct an open bidding process as required by law...

...This has the double impact of increasing the public deficit while making private savings unavailable for development...

...Economist Rolando Jordan, on the other hand, argues, "Bolivia can earn far more from well-run and competitive state enterprises than it could ever make from royalties on private investment...

...Arturo Nufiez de Prado, "Economfas en viabilidad dificil: una opci6n a examinar," in Bolivia Hacia 2000, p. 292...

...The protesters argued that the contract was a blatant giveaway of the country's natural resources and decried the lack of Bolivian management in the project...

...Carlos Villegas, "Deuda Externa, Estrategias de Desarrollo y Politicas de Ajuste," unpublished manuscript (1990...

...When a nationalist government briefly came to power in 1970 and ended agreements with two U.S...

...We pensioners are tired of promises...

...6 Hydrocarbons specialist Hugo Del Granado argues that YPFB is fully capable of developing the country's considerable oil and gas reserves if given access to its own earnings...

...Nonetheless, the Bolivian case has been touted internationally as an economic miracle, a prime example of what "neoliberal" policies can achieve...

...REPORT ON THE AMERICAS S...

...International bidding on the Bolivar mine, with rich tin, zinc and silver deposits, has been postponed three times, encouraging foreign companies to look elsewhere...

...Government policy could provide incentives to redirect spending away from luxury consumption and toward production...

...A shift in focus to domestic needs would not have to imply abandoning the development of overseas markets...

...To tell you the truth," he replied, "no one knows...

...COMIBOL faced severe difficulties from the start...

...Two aspects of that resume particularly commended themselves to the floundering Poles: He had been centrally involved a few years earlier in helping to formulate an emergency shock rescue in Bolivia which succeeded in bringing hyperinflation to a dead halt, virtually overnight...

...The international MINTEC mining group, which 18 months ago began negotiating a $250 million package, has seen investors pull out, reducing the amount to $50 million...

...Victor Paz Estenssoro has been one of the most enduring forces in Bolivian politics...

...Diverting earnings to other parts of the economy continues under the NEP with the state-controlled oil and gas company, YPFB...

...A few days later a prominent Warsaw columnist opined to the effect that "Professor Sachs is proposing to cut off the tail of the Polish economy-at the neck...

...A recent study by the Center for Studies on Mining and Development (CEMYD) argues that even at current low prices and with the present technology, COMIBOL could turn a profit, especially in mines where silver, lead and zinc deposits are found alongside tin...

...From 1855 to the Chaco War with Paraguay in 1932, the economy was focused increasingly on tin exports...

...1. "Estabilidad, Desarrollo y Ajustes a la Nueva Politica Econ6mica," Foro Economico Santa Cruz, No...

...I always told the Bolivians, from the very beginning, that what you have here is a miserable, poor economy with hyperinflation...

...5 The enterprise currently generates 40% of legal export earnings and its profits finance a quarter of the current state budget...

...Even during the 1970s, when General Banzer courted foreign investors with bargain deals, he only came up with $96.1 million over seven years.' 0 Now Bolivia has to contend with what has come to be called the "Lithco factor...

...Since the introduction of the NEP, Bolivia has been granted "the Toronto treatment," previously reserved for sub-Saharan African countries...

...Cocaine earnings combined with CD accounts have effectively "dollarized" the economy...

...Poles were understandably dazzled at the prospect...

...Sachs-only 34 and already a full professor at Harvard-presented himself as the proverbial Man with a Plan...

...A strategy based on domestic needs would require a gradual redistribution of income toward the poor-precisely what the NEP decreed to be incompatible with development...

...His A Miracle, A Universe: Settling Accounts with Torturers will be published in paperback this fall by Penguin...

...State enterprises will most likely limp along into the foreseeable future...

...4, (La Paz, 1989...

...The UDP resumed interest payments under this pressure, but little new credit was forthcoming...

...While gold mining has mushroomed in recent years, most of the work, with the exception of the few large companies, is done in primitive conditions...

...As with the 1956 IMF plan, adoption of the NEP brought a substantial increase in U.S...

...The enterprise soon became a channel for the governing party's largess, with the ratio of underground to surface workers shifting from over two-to-one in 1952 to one-to-two by the 1960s...

...On a much smaller scale, private investors have participated in what has long been considered a key element of economic development: industrialization with a view to substituting imports and increasing manufactured exports...

...aid have fluctuated according to how Washington has viewed the government in power...

...He returned to the presidency in 1985, still at the head of the MNR party, and reversed the nationalization policies he had led in the early 1950s...

...adviser to draw up Bolivia's economic policies...

...The turn-around was hailed as a victory for the popular movement, especially in Potosi, where 30 civic and union leaders had gone on a hunger strike backed by daily protest marches and a general work stoppage...

...Cuts in public spending and deregulation of prices, currency exchange rates, and import restrictions, have been tried time and again, and Bolivia remains, as it was when revolution shook the country in 1952, the poorest in South America...

...Moreover, wealthier consumers tend to prefer foreign goods...

...The 1956 stabilization plan, similar to the NEP, was formulated by George Jackson Eder, who later revealed that he had acquired direct administrative control over the economy...

...What we need are alternative ways of approaching the problems most people face...

...The new mining code was on the books for over three years before it was approved in April...

...Lawrence Weschler is a staff writer at The New Yorker...

...I interviewed Sachs at length at that time for several articles I was writing on Poland...

...I 1, (La Paz, 1988...

...In 1990, the U.S...

...When I leave Bolivia, I'm happy to take it home for a month because when I get back I know it's going to have the same value...

...After widespread strikes, President Paz Zamora bowed to public pressure in May of last year and reneged on the agreement...

...These priorities, he asserts, should be supported by a progressive taxation system, and imports should be restricted to what is essential for increasing production of these basic goods...

...And he went on to count the ways: Poland, he insisted, was a country with all sorts of natural advantages-skilled work force, superb location, considerable resources, and so forth...

...As a consequence, the country has developed a highly disarticulated society, lacking regional integration and the ability to address basic human needs...

...mining concern, Lithco, negotiated a contract by which the government granted 40 years of exclusive rights to develop the world's richest lithium deposits...

...The Inter-American Development Bank (IDB) granted a record $161 million in new loans in 1990...

...In March, Texaco and Sun Oil signed exploration contracts for $24 million...

...And it's all so complicated because Bolivia happens to be a country that is at 14,000 feet, that isn't in the center of Europe, that produces three things-tin, natural gas, and cocaine...

...The coca/cocaine economy is crucial to the country's stability...

...Unless Bolivians reach a consensus for fundamental change, the nation will likely continue on a path which offers no long-term improvement for the majority of its people...

...Two years have passed, and the results have been, well, mixed...

...The psychological impact of hyperinflation on the Bolivian consciousness is discussed by Carlos Torranzo in Bolivia Hacia 2000, p. 10...

...3 Economic policies favoring exports have also burdened the country with one of the highest foreign debts in the world in relation to the country's GNP...

...AT ONE POINT AROUND THIS TIME, I ASKED Sachs how, irrespective of any favorable macroindicators, the poorest classes were doing back in Bolivia...

...common sense: "The peasant Indians in the Bolivian market were able to operate the free exchange rate perfectly well within one day...

...Leafing back through my notes, I find that he had much to say about Bolivia...

...Its 1937 action preceded Mexico's nationalization by a full year...

...Private companies, on the other hand, were provided with over $938 million in state subsidies between 1987 and 1990...

...Barrientos...

...As the current model demonstrates, an exclusive focus on either strategy leads to failure...

...Mining has been the axis of the economy since the days of the Spanish conquest, when the export of vast amounts of silver not only helped to fuel Europe's industrial REPORT ON THE AMERICAS 24revolution, but also established the model of pillaging of the country's resources for the benefit of foreign economies...

...After the Crash Bolivian economist Carlos Villegas, of the Centro para el Desarrollo Laboral y Agricola (CEDLA), provided materials for this article and collaborated in its design...

...La Inversi6n Piblica," Foro Econdmico, No...

...In 1964, he was elected for a third time, only to be overthrown in a coup led by Gen...

...One of the founders of the MNR party, he was president from 1952-1956 and 1960-1964...

...In the meantime, the state continues to feed off the income from state companies, which are required to deposit their earnings in state banks...

...However, they still play a central economic role...

...8. Gonzalo Sanchez de Lozada, head of the MNR party since 1989 and owner of COMSUR, is reputed to have accumulated a personal fortune of over $60 million...

...2. In 1987, import and export commerce made up 45% of the GNP...

...z/Bolivia Miners' wives block La Paz's main avenue BOLIVIA GOES EAST BY LAWRENCE WESCHLER EFFREY SACHS ARRIVED ON THE SCENE IN Poland in the early fall of 1989, within weeks of Solidarity's overwhelming triumph in the June parliamentary elections-a veritable blast of can-do American energy and self-confidence...

...advisers have created "an ideology of national incapacity...

...Bolivia's three largest companies, COMSUR, EMUSA and International Mining, account for 80% of all private production.' Private mines have adopted a strategy not available to COMIBOL: diversification away from tin toward zinc, gold and silver...

...The exception from past policies is that state control of the economy, a legacy of the revolution, is to be reversed and state-owned companies sold off...

...Land tenure in the eastern part of the country was virtually untouched...

...3 After silver came tin, which until the 1985 crash represented half of total legal exports...

...Past experience gives little cause for optimism that these contracts will generate funds for economic development...

...dollars...

...Vaca Diez divides Bolivian economic history into four periods, according to whether the orientation was outward or inward...

...From independence to 1855, the country was self-sufficient in food production and in many basic goods...

...Recently the government promoted joint venture enterprises with the state mining corporation, COMIBOL...

...3. The estimated $8 billion in silverthat Spain extracted primarily from the richest silver mine in the world, at Potosi, was largely used topay off Spanish loans toDutch andBritish bankers...

...5 In 1986, the government tacitly legalized the laundering of cocaine dollars by allowing dollar accounts to be opened at the central bank with no questions asked...

...He insisted that the short-term shock reforms he was proposing would be necessary whether one eventually wanted to end up with a Swedish-style social democracy oraThatcherite model-and he often implied a preference for the former...

...Negotiation delays are common...

...Bolivia Hacia el 2000: Desafios y Opciones, (Caracas: Editorial Nueva Sociedad, 1989...

...See also, Pablo Ramos, "Las Politicas Econ6micas Aplicadas en Bolivia: 19521987," in Carlos Torranzo (ed...

...At present, the only major project with foreign investment-the Inti Raymi gold company, a joint venture of the Bolivian mining firm EMUSA and the U.S.owned West World of Texas and Battle Mountain Gold, was negotiated prior to the NEP...

...Peasant farmers, the largest social group and also the poorest, must be included in the development of alternative strategies, particularly to increase local food production.' 6 While many economists concur with Nufiez de Prado's proposals, the role of the state in such an alternative development process remains under debate...

...A major, if unstated, reason for this success was the channelling of income generated by drug trafficking...

...The emphasis on export agriculture has led Bolivia to import an increasing amount of food, a paradox for a country the size of Texas with a population of under seven million, with diverse ecological zones and half of its inhabitants working in agriculture...

...When the NEP withdrew state subsidies, the tiny industrial sector, centered on textiles and food processing, went into severe crisis...

...COMIBOL's accumulated losses now reach $300 million...

...Natural gas no one pays for anymore because it goes to Argentina, and Argentina is bankrupt, so they don't pay for Bolivian gas...

...The third period was a renewed attempt at internal development which lasted intermittently until 1964, when the dictatorship of General Barrientos restored the export-oriented model...

...Hyperinflation was averted, though inflation has recently been creeping back...

...REPORT ON THE AMERICAS 28Rather than blanket protection of national industry, Nufiez de Prado favors temporary and selective support for local producers to develop their potential, while avoiding the inefficiency and lack of productivity generated prior to 1985...

...For foreign investors, the incident only added to their lack of confidence, which was then further undermined during the year it took the government to initiate a new bidding process...

...mining interests, the United States sold off its stockpiles, crippling Bolivian sales...

...Further rhapsodizing on the effects of that transition, Sachs averred as to how "In Bolivia, they went from a rationed exchange rate to a convertible currency in a single day, stabilizing their currency in the process...

...their combined expenditures rose by 35% in 1990...

...At the same time, however, the country experienced a harrowing recession, far worse than anyone predicted and from which it has yet to emerge...

...This was attributed to freezing salaries, denying public sector credit, transferring resources from profitable state companies, firing State company retirees protest: "No more promises, tricks or jokes...

...And cocaine-everyone is doing the best they can to cut off that source of income, including the Bolivian government...

...The code offers generous incentives to foreign companies...

...But after six years not a single enterprise has been fully privatized...

...While a measure of stability was achieved, instead of economic expansion, the country has been ravaged by recession and stagnation...

...Though greatly dependent on exports of raw materials, the landlocked country has not a single paved road linking it to any of its five neighbors...

...For 1991, the government hopes to obtain $300 million in new credits to cover half of planned spending on public investment...

...Young Dr...

...Tin prices collapsed at the beginning, no one buys Bolivian tin anymore...

...iA-VM04AS-PROTESA> ENGAI OS- NIVUR LAS "LOS RENT ITAg A VOLUME XXV, NUMBER I (JULY 1991) state workers, instituting new taxes, and allowing a floating exchange rate...

...plans to militarize the drug war...

...4 The state has played a central role in mining since 1952, when the National Revolutionary Movement (MNR) was catapulted into power by a revolt of peasant farmers, workers and the middle class...

...T HE NEP'S PRINCIPAL, AND PERHAPS ONLY, success has been to control the hyperinflation which so profoundly disturbed Bolivian society in the first half of the 1980s.14 By 1987, inflation had fallen to 14.6%, and by 1990 it was still only 18...

...Ninety per cent of the gold leaves the country as contraband, providing no tax revenue at all...

...On another occasion he commented in passing that six million people had no business trying to eke out a living upon such tragically impoverished terrain-that that was the country's fundamental problem...

...The huge stockpiles of tin acquired during the Second World War gave the United States considerable influence over the direction of Bolivian politics...

...Thus, for example, to those who doubted the ability of average Poles to master the sudden complications of the capitalist system, Sachs insisted that such a system was as natural as Bolivia's apparent economic stability rests on a rather shaky base...

...Dunkerley, Rebellion in the Veins, p. 86...

...As with COMIBOL, earnings transferred to the state could not be invested in modernization, and YPFB's productivity has fallen drastically...

...The currency did stabilize, markets filled with all manner of goods, exports boomed...

...With one important exception, the NEP is a regurgitation of initiatives adopted repeatedly since the mid-1950s...

...7. "Drained of Energy: Oil, Gas, Minerals and Private Companies," Bolivia Bulletin, Vol 5. No...

...The tin barons' control of contracts with international markets and foreign smelters initially limited COMIBOL's marketing capacity...