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Tuesday, October 14, 2003

Bolivia's Neoliberal Reckoning - Another Submerging Market

Evo and Goni

For those who have followed Bolivia's sorely troubled development path over the last thirty years, this week's sharp escalation of political violence is a tragic, but by no means surprising, conclusion to this tiny country's many failed experiments with both state-led development and neoliberal dogmatism. (For the recent conflict, which has already claimed at least 53 lives, see http://story.news.yahoo.com/news?tmpl=story&cid=586&e=5&u=/nm/20031014/wl_nm/bolivia_protests_dc.) Unfortunately, the US and several other Latin American countries bear a heavy responsibility for this fiasco. And Bolivia's failed policy experiments go a long way to explain why its citizens now have the lowest per capita incomes in South America, with 70 percent of the population living below the poverty line -- despite the fact that Bolivians are extraordinarily resourceful, and that their country is so rich in resources, like natural gas, zinc, gold, tin, spectacular scenery, culture, and history.

Bolivia has long suffered from exploitation at the hands of foreign and domestic elites. But the proximate cause of the current crisis is much more recent. In the 1960s and 1970s, desperate to prevent the country from moving to the left, the US and its "Condor Project" partners in the juntas of Brazil, Argentina, and Chile sponsored several coups in Bolivia that installed a series of military dictatorships and civilian governments that were "democratic" in name only.

The resulting rulers not only turned out to be corrupt, murderous thugs, but also fairly talented drug lords and arms merchants. For example, in the 1980s, the Bolivian Air Force was allowed to buy ten C-130 cargo planes from the US military, more than any other Latin American country. At the height of the cocaine trade, these planes made a great many unregistered flights to Miami, not only providing illicit arms for the Nicaraguan contras, but also laying the foundation for the direct supply routes around Colombian and Peruvian drug lords that the US has recently been complaining about so vociferously.

Another consequence of this development path was an extraordinary increase in corruption and inequality. Often these were directly subsidized by the Bolivian elites' foreign sponsors. To cite one notorious example -- the lavish four-lane, 6.2 mile, $140 million highway that connects downtown La Paz to its international airport. Funded by the InterAmerican Development Bank, a proxy for US support, this became one of the world’s most expensive roads per mile. As usual, most of the funds quickly disappeared into the pockets of well-connected "blancos."



Fast forward to the 1980s, by which time Bolivia had accumulated one of Latin America's heaviest foreign debt burdens -- again, with the encouragement of the USG, multilateral banks, and a bevy of foreign banks. So much of this debt was wasted that the country completely lost track of just how much debt it owed. In June 1979, Lloyds Bank estimated Bolivia's foreign debt at $1.9 billion. But in November 1982, Bolivia's new Finance Minister summoned a UN debt expert and a New York investment banker to measure it again. These experts spent a month pouring through reams of loan agreements at Bolivia's Central Bank that no one had bothered to tally, and located $3.6 billion. A year later, a more complete survey raised this to $3.8 billion, nearly twice the initial estimates -- all told, the highest per capita foreign debt in Latin America, owed by a country with just 8 million people. One of the UN auditors joked that he had singlehandedly doubled Bolivia's debt! But he was still not sure that all the debt had been found -- he only located $168 million of “ deuda reservado,” a proxy for the military's debts, including the funding for the C-130s. Other than the C-130s and the the IADB highway, there was little to show for all the debt, which was of course owed by the public. As in many other Latin American countries, the "cream" had long since been siphoned off to private bank accounts in Miami and New York.

By the mid-1980s, because of this debt overhang, Bolivia was flat broke, reduced to minting more and more of its own depreciating currency to pay its bills. That kicked off a Weimar-like hyperinflation. It also led the local elite and foreign bankers to seek outside help. One might have thought that they would have at least turned to someone familiar with the country's economy, region, industries, or at least a local languages. But instead they turned to Harvard's Prof. Richard Musgrave, who had worked on their tax system. He was by then a bit too old to leave Cambridge, so he introduced them to the youthful Prof. Jeffrey Sachs, by all accounts a brilliant young macroeconomist. Unfortunately, at that point he had no background whatsoever in any of these arenas, much less developing countries. What he did have was a strong conviction in the orthodox neoclassical economist's prescriptions about free markets, deregulation, and disinflation -- with an added twist of Ivy League presumption and noblesse oblige.

For Jeffrey, Bolivia (1985-86) turned out to be a bonanza, the first in a series of advisory roles for some of the world's most important submerging markets. From Bolivia he proceeded directly to Poland -- which, like Bolivia, also appeared to need anti-inflation shock therapy. From there he moved on to the rest of eastern European, and finally to Yeltsin's Russia in the early 1990s. Unfortunately, Russia proved to be a bit more complicated than these smaller countries, and he and his colleagues at Harvard's (since-abolished) "Institute for International Development," emerged from the experience with something less than an unblemished reputation. To this day, however, they remain more or less unapologetic about their role in Russia's "primitive accumulation," blaming most shortcomings on indigenous corruption, the lack of funds from the US government, and other anomalies.

In any case, for the hapless Bolivians, Sachsian liberalization proved to be the first in a series of very costly neoliberal experiments with their very lives. There is not enough space to tell the full story here, but the gist is that this neoliberal path and its political side-effects-- combined with a hefty dose of countervailing influence from the profoundly illiberal drug wars --- led almost inexorably, step by step, to the recent crisis.

Fortunately, we now have every reason to expect that thecorrupt, neoliberal, US-backed regime of President/ multimillionaire Gonzalo Sanchez de Lozada Bustamante, is on its last legs, and that this failed route to development has seen its last hurrah, at least in Bolivia. Senior Sanchez de Lozada became President in a dubious, heavily sedated vote by the Bolivian Congress, after he and the populist leader Evo Morales deadlocked in the June 2002 Presidential elections. Then Sanchez de Lozada sailed completely out of control, trying to privatize the country's natural gas reserves, which he offered on inexplicably favorable terms to former business cronies in Chile and the US. He also supported a dubious US-backed scheme to train a 1500-person paramilitary force to eradicate the country's coca crops by force. Even before this month's disturbances, that group had already been implicated in numerous acts of repression against campesinos and union leaders. By October 2003, most of Sr. Sanchez de Lozada's supporters had abandoned him -- his approval rating fell to 8 percent, and even his own hand-picked Vice President deserted when Sanchez called out the military to suppress popular demonstrations, at a cost of more than fifty lives.

So let us now take a moment of silence to honor these victims -- ultimately, of the neoliberal pipedream. And take note as well of the latest notch on the handle of the once-bright-eyed, bushy-tailed neoliberal policy advisors, now increasingly long in the tooth and short of success stories, and yet another "submerging market" that now seeths with animosity toward gringos, as all its political, social, legal, cultural, and economic institutions crumble into the dust. We can add Bolivia to the growing list of Latin America countries that are seeking another way -- Venezuela, Argentina, Ecuador, Nicaragua, Peru, Brazil. No wonder there are so many inter-South trade pacts and so many treaties with far-away places in Europe, China, and Russia under discussion; so many illegal immigrants streaming northward towards our border. Oh, by the way -- Bolivia's foreign debt now stands at $6.6 billion, about the same "real" per capita level as at the peak of the "1980s Third World debt crisis." Evidently that "crisis" was a rather prolonged one. Evidently there is more to economic development than controlling hyperinflation.

But Bolivia, the rest of Latin America, and Russia be damned! Who needs them? The neoliberal experts have decamped for Iraq, where they are busy preaching the same old nostrums about liberalization, privatization, and unfettered free markets -- except perhaps for drugs and arms. Perhaps fast therapy will work this time! See the enemy, Pogo? He's that well-meaning fellow over there in the corner, working quietly behind closed doors, outsmarting himself again.........

(c) James S. Henry October 2003. Not for reproduction or other use without express consent from the author.

October 14, 2003 at 06:42 PM | Permalink

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