The Multinational Monitor


N E W S   M O N I T O R

Bolivia's Economic Horror Story

Bolivia's labour unions are locked in a bitter wrangle with the left-of-centre government over who calls the tune in economic decision-making. Led by the powerful Confederation of Bolivian Workers (COB) the unions have twice brought the country to a standstill for three days at a stretch during the past month. They threaten further stoppages if the government of Dr. Hernan Sites Zuazo refuses to rescind a series of harsh economic measures, passed on April 12. The idea of the measures was to pave the way for IMF support for the country's beleaguered economy.

The nub of the unions' argument is that the workers have already borne the brunt of five economic "packages" over the last two years. The people, they say, have suffered enough.

Three years of negative growth have turned Bolivia into Latin America's fastest de-developing country. Income per capital-long the lowest of the Latin American mainland -has fallen by at least a quarter since 1980. Real wages have evaporated as inflationrunning at around 35 per cent a month-spirals out of control. "We're fast moving into an economic black hole," says a La Paz economist, "and there is no obvious way out."

Conventional wisdom in financial quarters is that Dr. Sites has no option but to go to the IMF and accept the policy conditions that this implies. There are strong incentives to do so. It would mean a US$350 million standby credit over two years plus at least as much again in loans held up by the World Bank pending an agreement with the Fund. But more important still an IMF deal is the basic condition that the country's creditors insist on in agreeing to put off upcoming payments on the $4.5 billions foreign debt. The debt is small by Latin American standards, but servicing it would absorb the equivalent of 140 per cent of export earning this year, if not rescheduled.

None of the four previous "packages" produced an IMF accord, and observers say that in spite of the toughness this time-devaluing the peso from 500 to 2,000 against the dollar, removal of all food subsidies, and a 400 per cent increase in domestic petrol prices-there is still no guarantee that Bolivia will get the IMF standby. The stumbling block in the past was that, each time, the unions managed to force wage increases to help mitigate the drop in real wages.

On April 12 the government kept its compensatory award down to a symbolic $24 a month. But bankers say that even this will not go down well at Fund headquarters in Washington.

For the IMF Bolivia has become a particular horror story. A large under-productive state sector, an over-valued currency, import controls, and a massive public sector deficit puts it firmly in the Fund's black books. The most immediate issue is the deficit. While Fund officials do battle with other Latin American countries over deficits of 5 to 8 per cent of GDP, Bolivia's was 25 per cent last year. Planning ministry proposals offer to get it down bit by bit-to 17 per cent this year, 12 per cent in 1985, and 8 per cent in 1986. But the Fund wants faster results. This means, say the planners, doing the politically impossible; dismantling the state sector, which includes controlling interests in mining, oil and industry.

For its part the workers' representatives in the COB reject all IMF policy conditions. They want a moratorium on debt repayments, at least until Bolivia can afford to start paying again. The also want wages to be indexed to inflation and state control to be extended to local banks. Finally they recommend immediate sale of gold reserves to raise cash to buy vital imports held up over the past two years; for example, machinery and spare parts to keep the mines going.

Many Bolivian economists doubt the validity of the IMF stabilisation recipe that shortterm hardship is the price of long-term recovery. Even normally cautious sources at the World Bank say they see little perspective for growth, at least for the next five years, while inflation will be practically impossible to control. The critics say that devaluation, removing subsidies and higher fuel prices will push up annual inflation from 1983's 320 per cent to over 2,0(>0 per cent this year. At the same time public spending cuts and the drastic fall in Bolivians' purchasing power make it impossible to get the economy moving again, they say.

Most development projects have ground to a halt for lack of hard-currency. At Karachipampa in Potosi, for example, a $135m silver and lead smelter stands idle in the absence of money to spend on increasing the output at the nearby Bolivar mine. A vegetable oil plant at Villamontes in the south cannot be used until $30m is found to spend on agricultural development in the area.

A brand-new highway leaves La Paz for the northern jungle city of Trinidad. It peters out after 30 miles, and $50m is needed to get construction moving again. Housing and drinking water projects in several cities stand half finished and projects to colonise lowland regions to ease population pressure in the Andes have had to be scrapped.

Low prices on world mineral markets-especially tin--have added to Bolivia's problems. Minerals account for half total exports. All the country's major mining areas are running at a loss, and Comibol, the state-run mining company, published record loss last year of $113m. Comibol executives say that it will probably be worse this year except in the unlikely event of an upward shift in world tin prices.

A more intractable problem is that proven mineral deposits are running out. It is now often more profitable to rework old slagheaps where the mineral content is higher than in the mines themselves. New deposits have to be found and new mines sunk, but investment in Comibol has been at a virtual standstill for the last thirty years.

Until a few years ago development hopes were pinned on oil from the eastern Santa Cruz region. But after making huge investments in refineries and pipelines, reserves turned out to be lower than expected. Today Bolivia imports rather than exports oil.

After the oil bonanza, hopes then turned to selling natural gas to neighbouring Argentina. Gas is now Bolivia's biggest single export commodity, but the Bolivians are at the mercy of Argentina's ability to pay for what they receive through the gas pipeline. So Bolivia is hoping to increase exports by selling gas to Brazil. But this involves financing a 1,200 mile pipeline from Santa Cruz to Sao Paulo, and it is still unclear how much Brazil would pay Bolivia for the supply of gas.

To add to these problems, Bolivia is recovering from the worst drought for over a hundred years.

While economists and the government fumble for solutions to these problems, the average Bolivian has had to take decisions. Faced with rising unemployment and shrinking real wages, increasing numbers are heading for new and unorthodox activities.

One booming business is contraband, fuelled partly by the price differences for basic goods between Bolivia and its neighbours.

Another major employer is the semi-clandestine cocaine industry, where production doubled last year. The cocaine factories pay relatively well for people to mash down coca leaves in the preparation of cocaine paste. The Santa Cruz sugar mills have found it hard to find labourers to work on the sugar harvest in recent years. The peasants are earning five times as much as cocaine labourers, or simply growing their own leaves.

Miners, too, are leaving the high-altitude mining communities to search for better paid work. Some head for the jungle cocaine plants, others to the steep mountain valleys on the eastern flank of the Andes where a better living can be made from gold panning.

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