Bolivia Goes East

September 25, 2007

JEFFREY SACHS ARRIVED ON THE SCENE IN Poland in the early fall of 1989, within weeks of Solidarity's overwhelming triumph in the June parliamen- tary elections-a veritable blast of can-do American energy and self-confidence. 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 unex- pectedly being thrust upon them. Young Dr. Sachs-only 34 and already a full professor at Harvard-presented himself as the proverbial Man with a Plan. A plan-and a resume. 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. 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). He was, in short, no simple Chicago boy. 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. I interviewed Sachs at length at that time for several articles I was writing on Poland. Leafing back through my notes, I find that he had much to say about Bolivia. 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. 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. 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 imagina- tion from the country's workers," says Victor L6pez, executive secretary of the Bolivian Workers Confedera- tion (COB). "What we need are alternative ways of approaching the problems most people face." 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. These priorities, he asserts, should be supported by a progressive taxation system, and im- ports should be restricted to what is essential for increas- ing production of these basic goods. common sense: "The peasant Indians in the Bolivian market were able to operate the free exchange rate perfectly well within one day." 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. 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. And it's legal for me to do so." Poles were understandably dazzled at the prospect. But Sachs insisted that the transformation had to be sudden and almost convulsive. 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." 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!" AT ONE POINT AROUND THIS TIME, I ASKED Sachs how, irrespective of any favorable macroindica- tors, the poorest classes were doing back in Bolivia. "To tell you the truth," he replied, "no one knows. 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. Tin prices col- lapsed at the beginning, no one buys Bolivian tin anymore. Natural gas no one pays for anymore because it goes to Argentina, and Argentina is bankrupt, so they don't pay for Bolivian gas. And cocaine-everyone is doing the best they can to cut off that source of income, including the Bolivian government. So you have an intrinsic deep economic prob- lem there." 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. "I always told the Boliv- ians, from the very beginning, that what you have here is a miserable, poor economy with hyperinflation; 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. Lawrence Weschler is a staff writer at The New Yorker. His A Miracle, A Universe: Settling Accounts with Torturers will be published in paperback this fall by Penguin. 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 avoid- ing the inefficiency and lack of productivity generated prior to 1985. Government policy could provide incen- tives 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 alterna- tive strategies, particularly to increase local food produc- tion.' 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. 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." "Now, here," he continued, "the situation is completely different...." 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, consider- able resources, and so forth. He saw no end to its potential, once it got its house in order. Two years have passed, and the results have been, well, mixed. Hyperinflation was averted, though inflation has recently been creeping back. The currency did stabilize, markets filled with all manner of goods, exports boomed. At the same time, however, the country experienced a harrow- ing recession, far worse than anyone predicted and from which it has yet to emerge. 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. 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." Economist Rolando Jordan, on the other hand, argues, "Bolivia can earn far more from well-run and competitive state enter- prises 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 domes- tic 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 improve- ment for the majority of its people. push the plan all the way. They still claim to be intending to do so in the months immediately ahead. I'm reminded of an incident which occurred during Lech Walesa's first triumphant tour of the United States, back in November 1989. One morning during that week, a story buried deep in the New York Times was headlined "Bolivia Declares State of Siege after Breakdown in Strike Talks." It went on to detail the mass arrests of union leaders and their incarceration in Amazonian internment camps. I showed a clipping of the piece to a senior official in Walesa's entourage-a longtime oppositionist and supporter of Poland's workers. "Oh dear," he smiled grimly. "Oh dear. Do you mind ifI keep this?" He slid the clipping into his coat 'pocket. "I want to be able to show it to the prime minister back in Warsaw so he'll know what to do when we get to that stage of the plan." Sachs himself, meanwhile, has continued to support and consult with Poland's leaders. When last seen in print, however, he was deeply involved in discussion with Soviet planners and government officials, this time mapping out a Bolivia-style rescue plan the size of a virtual continent.

Tags: Bolivia, Inflation, shock treatment, neoliberalism, Poland

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