“If the present austerity plans continue,” predicted economic adviser Jeffrey Sachs in 1986, “Bolivia will experience an economic boom before the 1989 elections.” The elections are long past, and the New Economic Policy (NEP) has been pursued aggressively. While a measure of stability was achieved, instead of economic expansion, the country has been ravaged by recession and stagnation. Nonetheless, the Bolivian case has been touted internationally as an economic miracle, a prime example of what “neoliberal” policies can achieve.
With one important exception, the NEP is a regurgitation of initiatives adopted repeatedly since the mid-1950s. 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. 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.
The NEP’s fundamental effect is to perpetuate Bolivia’s historical role as exporter of raw materials, primarily minerals and hydrocarbons. “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. Despite its geographic isolation, Bolivia’s well-being is overwhelmingly dependent on international prices for primary materials, over which it exercises no control. Price fluctuations on the world market throw the economy into crisis, impeding long-term planning and stability. As a consequence, the country has developed a highly disarticulated society, lacking regional integration and the ability to address basic human needs.
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 revolution, but also established the model of pillaging of the country’s resources for the benefit of foreign economies. After silver came tin, which until the 1985 crash represented half of total legal exports.
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. 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). 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.
COMIBOL faced severe difficulties from the start. The mineral content of tin reserves had been dropping since the 1920s, and the mines were undercapitalized. The tin barons’ control of contracts with international markets and foreign smelters initially limited COMIBOL’s marketing capacity. 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. 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. Since 1952, not one new mine has opened. COMIBOL’s accumulated losses now reach $300 million.
Diverting earnings to other parts of the economy continues under the NEP with the state-controlled oil and gas company, YPFB. The enterprise currently generates 40% of legal export earnings and its profits finance a quarter of the current state budget. As with COMIBOL, earnings transferred to the state could not be invested in modernization, and YPFB’s productivity has fallen drastically.
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. But after six years not a single enterprise has been fully privatized. In the meantime, the state continues to feed off the income from state companies, which are required to deposit their earnings in state banks. Private companies, on the other hand, were provided with over $938 million in state subsidies between 1987 and 1990.
State enterprises will most likely limp along into the foreseeable future. However, they still play a central economic role; their combined expenditures rose by 35% in 1990. Different policies could prevent them from continued failure. 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. 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.
Bolivia’s business class is ill-equipped to take over the economy as the state withdraws. Political and economic instability has encouraged most wealthy Bolivians to put their money into speculative ventures or investment abroad. Private investment, only $150 million in 1989, centers on export mining, with Bolivian-owned mines accounting for about 40% of all production. 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. 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. Ninety per cent of the gold leaves the country as contraband, providing no tax revenue at all.
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. 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. Bolivian industry has always been hampered by a small internal market, aggravated by the poverty of the average consumer. Low levels of internal and regional integration have also made market expansion extremely difficult. Moreover, wealthier consumers tend to prefer foreign goods. Ingenious leather manufacturers try to circumvent this problem by attaching “Made in Argentina” labels to their goods.
When the NEP withdrew state subsidies, the tiny industrial sector, centered on textiles and food processing, went into severe crisis. 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.
The other major area for Bolivian private investment is export-oriented agriculture. 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. General Hugo Banzer’s dictatorship in the 1970s aggressively promoted credits for lowland export crops, encouraged by high cotton and sugar prices. These loans strengthened the eastern elites, who often reneged on their obligations when international prices fell, saddling the country with a growing debt burden. 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.
Political instability, hazardous terrain and poor transport infrastructure have always made foreign investors leery. 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. Even during the 1970s, when General Banzer courted foreign investors with bargain deals, he only came up with $96.1 million over seven years.
Now Bolivia has to contend with what has come to be called the “Lithco factor.” In 1990, the U.S. mining concern, Lithco, negotiated a contract by which the government granted 40 years of exclusive rights to develop the world’s richest lithium deposits. Opposition arose quickly, centered on the government’s failure to conduct an open bidding process as required by law. 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.
After widespread strikes, President Paz Zamora bowed to public pressure in May of last year and reneged on the agreement. The turn-around was hailed as a victory for the popular movement, especially in Potosí, where 30 civic and union leaders had gone on a hunger strike backed by daily protest marches and a general work stoppage. 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.
Negotiation delays are common. International bidding on the Bolívar mine, with rich tin, zinc and silver deposits, has been postponed three times, encouraging foreign companies to look elsewhere. 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.
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. The benefits to Bolivia are questionable: in 1988, Inti Raymi’s profits exceeded $13 million, but only 3% went to the state.
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 code offers generous incentives to foreign companies. MINTEC president Scottie Bruce reports that 15 new companies are contemplating investment possibilities.
All the “seven sisters” have expressed interest in Bolivia’s oil and gas resources. Exxon is to invest up to $40 million in developing oil reserves in the departments of Oruro and Potosí. In March, Texaco and Sun Oil signed exploration contracts for $24 million. Past experience gives little cause for optimism that these contracts will generate funds for economic development; during the 1960s, Gulf Oil repatriated nearly 80% of its profits.
Harvard economist Jeffrey Sachs. who designed the NEP, is only the most recent U.S. adviser to draw up Bolivia’s economic policies. 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.
Levels of U.S. aid have fluctuated according to how Washington has viewed the government in power. 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. In 1970, support was radically reduced when Gulf Oil was nationalized. In 1971 a regime which toed the line took power and aid once more flooded the country.
As with the 1956 IMF plan, adoption of the NEP brought a substantial increase in U.S. aid. In 1991, the package is about $200 million, 38% of which is directed at strengthening the private sector. In the view of economist Fernando Cossio, years of dependence on aid, foreign loans and U.S. advisers have created “an ideology of national incapacity.”
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. In 1990, the debt stood at $580 per capita, $10 more than per capita income. Even though the commercial debt has not been serviced since 1985, Bolivia has obtained record amounts of new multilateral credits. The Inter-American Development Bank (IDB) granted a record $161 million in new loans in 1990. For 1991, the government hopes to obtain $300 million in new credits to cover half of planned spending on public investment.
Since the introduction of the NEP, Bolivia has been granted “the Toronto treatment,” previously reserved for sub-Saharan African countries. This allows for a third of its bilateral debt to be condoned, together with the reprogramming of loan paybacks and interest rates. 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. International press reports called the move a “leftist whim” and lenders threatened to freeze Bolivian assets abroad. The UDP resumed interest payments under this pressure, but little new credit was forthcoming. 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.
The 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. By 1987, inflation had fallen to 14.6%, and by 1990 it was still only 18%. This was attributed to freezing salaries, denying public sector credit, transferring resources from profitable state companies, firing state workers, instituting new taxes, and allowing a floating exchange rate.
A major, if unstated, reason for this success was the channeling of income generated by drug trafficking. 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. To cater to this influx, the bank instituted short-term certificates of deposit, which quickly became the most important source of financing national reserves. 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.
The coca/cocaine economy is crucial to the country’s stability. In 1987, it generated some $1.4 billion, of which about $500 million remained in Bolivia, equivalent to 11% of the GNP. In the same year, drug exports were equal in value to the country’s legal foreign earnings.
Cocaine earnings combined with CD accounts have effectively “dollarized” the economy. By 1990, 86% of bank accounts were in U.S. dollars. Despite the NEP goal of lowering interest rates, high interest rates are needed to maintain fiscal reserves. This has the double impact of increasing the public deficit while making private savings unavailable for development. High interest rates also brought on economic contraction and a scarcity of credit in local currency.
Bolivia’s apparent economic stability rests on a rather shaky base. It would take forty years with an annual growth rate of 3.5% to restore income to 1978 levels. “The failure of the model demands enormous imagination from the country’s workers,” says Víctor López, executive secretary of the Bolivian Workers Confederation (COB). “What we need are alternative ways of approaching the problems most people face.”
Economist Arturo Nuñez 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. 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.
Rather than blanket protection of national industry, Nuñez 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. Government policy could provide incentives to redirect spending away from luxury consumption and toward production; and it could support small artisans and vendors who have little capital or access to credit. 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.
While many economists concur with Nuñez de Prado’s proposals, the role of the state in such an alternative development process remains under debate. Economist Hormando Vaca Diez feels the state should assume the role of protagonist in the economy, while staying out of the management of public enterprises. 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.”
A shift in focus to domestic needs would not have to imply abandoning the development of overseas markets. As the current model demonstrates, an exclusive focus on either strategy leads to failure. 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. 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.
Bolivian economist Carlos Villegas, of the Centro para el Desarrollo Laboral y Agrícola (CEDLA), provided materials for this article and collaborated in its design.
 “Estabilidad, Desarrollo y Ajustes a la Nueva Política Económica,” Foro Económico Santa Cruz, No. 11, (La Paz, 1988). 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. From 1855 to the Chaco War with Paraguay in 1932, the economy was focused increasingly on tin exports. 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.
 In 1987, import and export commerce made up 45% of the GNP.
 The estimated $8 billion in silver that Spain extracted primarily from the richest silver mine in the world, at Potosí, was largely used to pay off Spanish loans to Dutch and British bankers. Much of it then ended up in China when the emperor demanded payment for tea in silver.
 James Dunkerley, Rebellion in the Veins (London: Verso, 1984) p. 6.
 Bolivia was the first Latin American country to nationalize oil holdings. Its 1937 action preceded Mexico’s nationalization by a full year.
 For a comprehensive proposal for how COMIBOL could be made economically viable see Desempeño y Colapso de la Minería Nacionalizada en Bolivia: Estudio Técnico, Económico, Social y Organizacional de la Corporación Minera en Bolivia, (La Paz: Centro de Estudio Minería y Desarrollo, 1990).
 “Drained of Energy: Oil, Gas, Minerals and Private Companies,” Bolivia Bulletin, Vol 5. No. 4, (La Paz, 1989).
 Gonzalo Sánchez 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.
 The Agrarian Reform of 1953 broke up the large estates of the highland areas into individual parcels owned by peasant farmers. Land tenure in the eastern part of the country was virtually untouched.
 Recently the government promoted joint venture enterprises with the state mining corporation, COMIBOL. Five small agreements with international companies have been signed to date. However, the central government has been tardy in establishing an appropriate legal framework to permit this investment. The new mining code was on the books for over three years before it was approved in April.
 Dunkerley, Rebellion in the Veins, p. 86. See also, Pablo Ramos, “Las Políticas Económicas Aplicadas en Bolivia: 1952-1987,” in Carlos Torranzo (ed.), Bolivia Hacia el 2000: Desafíos y Opciones, (Caracas: Editorial Nueva Sociedad, 1989).
 Víctor Paz Estenssoro has been one of the most enduring forces in Bolivian politics. One of the founders of the MNR party, he was president from 1952-1956 and 1960-1964. In 1964, he was elected for a third time, only to be overthrown in a coup led by Gen. Barrientos. 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.
 “La Inversión Pública,” Foro Económico, No. 25 (1988). The huge stockpiles of tin acquired during the Second World War gave the United States considerable influence over the direction of Bolivian politics. When a nationalist government briefly came to power in 1970 and ended agreements with two U.S. mining interests, the United States sold off its stockpiles, crippling Bolivian sales.
 Economists disagree about what the actual inflation rates were. Some contend inflation reached 20,000%, while others argue that it was closer to 8,000% at its peak. The psychological impact of hyperinflation on the Bolivian consciousness is discussed by Carlos Torranzo in Bolivia Hacia 2000, p. 10.
 Carlos Villegas, “Deuda Externa, Estrategias de Desarrollo y Políticas de Ajuste,” unpublished manuscript (1990).
 Arturo Nuñez de Prado, “Economías en viabilidad difícil: una opción a examinar,” in Bolivia Hacia 2000, p. 292.
 “Estabilidad, Desarrollo y Ajustes,” 1988.