BOLIVIA: BLEAK ECONOMIC PROSPECTS FOR A THREATENED DEMOCRACY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85S00317R000300020001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 20
• Document Creation Date: December 22, 2016
• Document Release Date: May 4, 2010
• Sequence Number: 1
• Publication Date: October 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Bolivia:
Bleak Economic Prospects for
a Threatened Democracy
ALA 84-10101
October 1984
363
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Directorate of Secret
Intelligence
a Threatened Democracy
Bolivia:
Bleak Economic Prospects for
This paper was prepared 25X1
with a contribution fro of o 25X1
the Office of African and Latin American
Analysis. It was coordinated with the Directorate of
Operations. 25X1
Comments and queries are welcome and may be
directed to the Chief. South America Division, ALA,
Secret
ALA 84-10101
October 1984
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a Threatened Democracy
Bolivia:
Bleak Economic Prospects for
Key Judgments Bolivian President Siles is struggling with an economy that is deteriorating
Information available domestically and losing support internationally. Inflation has climbed to
as of 12 September 1984 over 500 percent, nearly a third of the work force is idle or underemployed,
was used in this report.
strikes have hampered production, and the government has halted pay-
ments on its foreign debt. The pace and magnitude of the decline, the
reluctance of international creditors to risk further support, and Siles's
preoccupation with his political survival leave little prospect that he will
reverse the slide. Under these circumstances, Bolivian radical leftist
groups, backed by Cuba and the Soviet Union, are preparing to capitalize
on the disorder, whether or not the President's opponents in the armed
forces replace him under the excuse of ending economic chaos.
double the size of the US diplomatic presence.
In our judgment, leftist influence in general is likely to grow during Siles's
remaining two years in office. In part because he needs the political
support of leftist and Communist political parties during this period of
economic difficulty and in part because of his ideological affinity with the
left, Siles is likely to retain the Communist Party in the Cabinet. His
radical advisers, some with close connections to the Communist Bloc and
Cuban-trained paramilitary units, will remain dominant. Cuba and the
USSR probably will attempt to increase their involvement by offering
technical and security advisers and sales of military equipment on conces-
sionary terms and by strengthening links with labor and other important
sectors. Already, some 100 Soviet Embassy and technical personnel and 19
Cuban mission representatives are based in Bolivia-together, they are
continue to hinder narcotics cooperation with the United States.
The greatest potential long-term threat to US interests in Bolivia is the
growing capability of the various radical leftist and Communist groups to
exploit economic deterioration and social and political instability. There is
a danger that Cuba and the Soviet Union will be able to expand their links
to such groups if Siles perceives he has been abandoned by Western allies.
Even if this trend toward the growth of leftist influence is halted, however,
US interests will suffer. In the near term, US investors will face more
stringent restrictions on their operations, while US bankers may not see La
Paz's suspension of debt repayments lifted for some months. Additionally,
financial constraints, nationalism, and Siles's political weakness will
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ALA 84-10101
October 1984
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In addressing the economic problems, Siles has avoided broader reforms
out of fear that the resulting social strains-especially labor protests-
would provide military coup plotters the opportunity they have been
seeking to oust him. His piecemeal approach has enabled him to weather
labor opposition, garner some modest assistance from Western countries,
and escape one serious coup attempt, but it has produced no lasting
economic or political gains.
Nevertheless, we believe Siles will continue his short-term, patchwork
strategy because it best serves his overriding objective of political survival.
In our view, however, his failure to undertake broad reforms will lead to
further economic contraction, accompanied by an average annual inflation
rate in excess of 500 percent for 1984 and probably for the next year or two
as well. The likelihood of inconclusive negotiations with the IMF will
preclude both the refinancing of Bolivia's $4 billion debt and a resumption
of Western aid and credit flows.
While economic deterioration itself is unlikely to bring down the govern-
ment, Siles must be deft in juggling his adjustment policies. With the
economy unstable and fiscal discipline yet to be restored, any miscalcula-
tion in his approach could quickly cause prices to spiral upward at an
accelerating rate; we believe the resulting social unrest would lead the
military to force Siles from office. In our view, radical left elements would
also take action, including terrorist violence, to exploit the instability and
to protect their positions following a military takeover.
In our opinion, Bolivia's only hope for rekindling economic growth is to im-
plement fully a stabilization program under IMF guidance. Although a
healthier economy might lessen any government's vulnerability to military
coups over the long term, the short-term political dangers of the kinds of
adjustment policies needed-including devaluation, cuts in government
spending and employment, and relaxation of price controls-are so great
that we doubt Siles will pursue them. Nevertheless, we judge there is only a
slight chance that he will break completely with the IMF in an effort to
rally domestic support through nationalistic fervor; any resulting economic
surge would collapse well before his term is up.
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The Political Setting
Origins of Disintegration: 1983
4
Bleak Near-Term Economic Prospects
8
Continued Piecemeal Approach
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Bolivia:
Bleak Economic Prospects for
a Threatened DemocracyF_
to deal with the ailing economy.
The Political-Economic Stakes
The civilian government of President Hernan Siles
Zuazo, in office since the military withdrew to the
barracks in October 1982, is fragile. Because of his
weak political base and domestic opponents on the
right and on the left, Siles is vulnerable to popular
demands for rapid economic expansion, but he also
must take steps to redress financial imbalances and
satisfy international creditors. Siles is finding the
balance difficult to maintain without the backing of
force enjoyed by his military predecessors. The gov-
ernment has so far survived splits within the ruling
coalition, labor strikes, military coup plotting, and
power struggles with opposition parties in Congress-
but at the expense of forgoing the reforms necessary
We do not believe, however, that the link between
Bolivia's economic problems and its renowned and
continuing political instability is necessarily a direct
one. Personalist politics, weak institutions, and the
traditionally interventionist military establishment
mean the political system is likely to remain inherent-
ly unstable regardless of the state of the economy. In
addition, most Bolivians are somewhat inured to
hardship. Thus, rather than directly fostering political
upheaval through social unrest, economic distress
conditions the atmosphere in which political strug-
gles-that would most likely occur in any event-take
place. When these struggles revolve around the choice
of economic policies and their frequent modification,
as has occurred in Bolivia over the past year, the
effects are highly disruptive.
This setting-deteriorating economic conditions and
an unstable political atmosphere-would hardly be
unusual for Bolivia, except for a new factor, the
presence of a sizable number of radical leftists in and
out of government bent on profiting from the threat of
disorder. Over the two years of the Siles administra-
tion, several groups of extreme leftists have emerged,
built links with Cuba and the USSR, established
paramilitary cadres, and maneuvered to influence
government policies. The most important groups are:
? The palaciegos, a clique of executive branch offi-
cials and advisers led by Felix Rospigliosi, chief
adviser to the President, who are the principal
organizers of paramilitary groups of ruling party
militants.
? The sergios, moderately leftist senior military offi-
cers who have been placed in key command posi-
tions and are reportedly loyal to the President.
? The Communist Party of Bolivia (PCB), which
serves in the ruling coalition, occupies the important
Ministries of Labor and Mining, exerts significant
influence in organized labor, and is closely guided
by Moscow.
? The Movement of the Revolutionary Left (MIR),
which-as the party of Vice President Paz
Zamora-is also in the ruling coalition, but which
seeks power in its own right, has organized some of
its own leftist paramilitary groups, and competes
with most of the other leftist sectors.
? The Bolivian Workers' Confederation (COB), which
is dominated by independent leftist labor boss Juan
Lechin (who has longstanding presidential ambi-
tions), but is strongly influenced by the Communist
Party.
There is little or no cooperation among these groups
and frequently, competition among and within them.
Nevertheless, their goals are roughly similar: to
develop the capability to defend themselves from the
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conservative armed forces and like-minded civilian
groups, to gain and keep control of the government in
order to promote a state-run economy and other leftist
domestic policies, and to expand ties to the Third
World and the Communist Bloc. The plans, opportu-
nities, and potential of these leftist forces over the
next few years will be significantly affected by the
course of the economy and the kinds of economic
policies the government adopts.
The Political Setting
Siles took office determined to revive the stalled
impetus of the 1952 revolution and has looked to
radical leftist activists to assist him in that task. His
key advisers in this effort include not only Rospigliosi,
but also Congresswoman Tamara Sanchez, Minister
of Information Mario Rueda (who lived for a time in
East Germany), and Subsecretary of the Interior
Gustavo Sanchez
However, Siles's weak political base has limited his
ability to carry through with the broad economic
reforms necessary to correct the economy's structural
defects. The leftist Democratic and Popular Unity
coalition-composed of the PCB, the MIR, and
Siles's own National Revolutionary Movement of the
Left (MNRI)-has been strained from the beginning
by policy disputes, personality differences, and de-
bates over inclusion of the Communists. This dissen-
sion produced-and continues to do so-recurring
Cabinet crises and has hampered Siles's efforts to
formulate a coherent economic program. The Presi-
dent has recomposed his Cabinet five times in an
unsuccessful effort to broaden his political base in
order to implement unpopular economic measures.
Despite his reliance on leftist counsel, Siles is a
pragmatist, who recognizes that his political survival
depends upon continued Western political support and
economic assistance and maintaining. a modus vivendi
with the conservative military. Therefore, throughout
his two years in office he has been open to advice on
stabilization policy from Western-educated techno-
crats who serve in the Cabinet and as close economic
advisers. He also has been at least partly receptive to
US counsel on a variety of issues, especially the need
for economic adjustments. Even his leftist advisers
have seen the necessity of reaching an acceptable
agreement with the IMF, according to the US
Siles keeps the Communists in his Cabinet, in our
view, to induce the Communist Party to moderate the
miners' union and the Bolivian Workers' Central, the
principal labor confederation, where the party holds
influential executive board positions. Hardline Com-
munists have argued that participation in the govern-
ment contradicts their Marxist-Leninist principles;
and another round of austerity measures would proba-
bly intensify dissension within the party. Nonetheless,
we believe the Communist leaders will stay in the
governing coalition because of the opportunities it
provides to increase their strength and influenceF_
In our view, Bolivian labor will continue to exercise its
muscle to extract economic concessions and mobilize
against the government's economic policies. Accord-
ing to the US Embassy, the President does not want
his economic policies to provide Lechin, Bolivia's most
powerful labor leader and Siles's longtime foe, with
leverage against his administration. This consider-
ation was behind the
suspension of debt payments to foreign banks in May
and Siles's failure to decontrol prices and restrain
wage hikes. Leaders of the Bolivian Workers' Central
now contend that public announcements by the gov-
ernment that its foreign debt will be renegotiated
violate the recent labor accord and will be challenged
by the unions. We believe Siles will continue to try to
placate organized labor to avoid providing a pretext
for military intervention.
The Military. We expect that, in charting his eco-
nomic course, Siles will remain sensitive to the ways
his economic policv choices contribute to
coup plotting.
nremi mg military issa is action
with Siles's leadership. This sparked an unsuccessful
coup attempt by a maverick army colonel and a police
unit in late June, and the military will probably
continue to threaten Siles.
We believe several factors have accounted for the
armed forces' reluctance to move more strongly as a
group against Siles. The military is still somewhat
discredited and dispirited by its poor performance in
Embassy.
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During his first six months in office, Siles attemped
to restore fiscal discipline by reducing subsidies for
gasoline, utilities, and many food staples. He estab-
lished a unified exchange rate to bolster the trade
accounts and required that foreign exchange from
exports be remitted to the state. To conserve thin
reserves, he banned nonessential imports and intro-
duced controls on the outflow offoreign exchange. To
assuage labor for the increased prices resulting from
reduced subsidies, Siles authorized upward wage
adjustments every six months to keep pace with
inflation.
of the economy, price freezes, and a rationing system.
President Siles's counteroffers of increases in the
minimum wage and a cost-of-living wage escalator
were rejected, and, in September, the unions launched
strikes and demonstrations to force annulment of
austerity policies. Labor continued thereafter to stage
strikes to challenge Siles at every turn, including his
attempts to reconcile with the IMF and his hike in
staple prices last November.
Under pressure from labor-and political oppo-
nents-Siles avoided thoroughgoing economic re-
forms, failed to prepare a budget, and did not insti-
This combination of measures temporarily muted
labor criticism. As the US Embassy reported, Boliv-
ian workers allowed the new civilian government
some breathing space through May 1983 to revive the
economy, but thereafter used their muscle to extract
economic concessions. Under the stewardship of Juan
Lechin, the Bolivian Workers' Central (COB) began
mobilizing opposition to government economic poli-
cies. In June 1983, the COB led a takeover of the
state mining corporation, demanding worker ` coman-
agement" to prevent planned layoffs aimed at in-
creasing efficiency. Subsequently, other public work-
ers in the state petroleum company and the Central
Bank demanded-and received-the right of coman-
agement.
In August, Lechin insisted that the administration
adopt populist measures such as greater state control
running the government before 1982. In addition,
Siles has assigned potential military rivals to innocu-
ous positions and placed loyalists-some of whom are
moderate leftists-in key command positions. Finally,
the military has taken vigorous US support for civil-
ian rule to heart, according to US defense attache
sources.
We believe the danger of a coup attempt will increase
over the next several months. Many officers expect a
hardening in Washington's attitude toward the Siles
administration after the US Presidential elections in
November, according to a US Embassy observer, and
changes in military assignments at the end of the year
tute the administrative mechanisms-such as regular
devaluations-required to sustain his economic ad-
justments. After workers won the right of comanage-
ment, he was reluctant to use decree powers to
improve efficiency in the state-owned enterprises. The
constant political turmoil also prevented him from
devising a credible program to revitalize the flagging
agricultural sector, according to US Embassy report-
ing. Despite initial adjustments, gasoline and food
prices were not increased at a rate to offset inflation,
resulting in continued subsidies and contraband ex-
ports to neighboring countries. Press and US Embas-
sy reports indicate that in April 1984 Siles increased
public spending and allocated new credits for farm-
ers, industrialists, and exporters, thus perpetuating 25X1
rapid monetary expansion.
probably will engender new resentments among senior
officers. Should the military decide to intervene, we
believe it would precipitate widespread labor unrest,
leftist violence, and probably a diplomatic backlash
from countries that have supported the democratic
process in Bolivia. On balance, we judge that this
prospect will probably continue to deter a well-orga-
nized military coup for some months to come, but
may not be sufficient to prevent an ambitious or
disaffected officer from putting together an attempt.
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Communist 000 ortunities. Early in his administra-
tion Siles
believed he could find badly needed economic assist-
ance in new places, especially in the Communist Bloc
and the oil-rich Arab world. For this reason, as well as
his own leftist sympathies and the influence of his
radical advisers, Siles has allowed the Soviet Union
and Cuba to make political and economic inroads in
Bolivia. The USSR has broadened its involvement in
the mining industry-participating in financing and
constructing two-tin processing (volatization) plants
and a lead-silver smelter. The Soviet presence has
grown and includes 61 embassy officials and 40
technicians who serve at the trade mission, various
mining facilities, and the two Soviet-manned satellite
tracking stations. Siles is instinctively less comfort-
able with the Soviets than with the Cubans, according
to the US Embassy, and he has, for example, denied
Aeroflot landing rights, while allowing a ticket office
to be opened. Nevertheless, if the economy continues
to deteriorate, longstanding Soviet offers of attractive
financing for military and industrial equipment would
be appealing.
The President established diplomatic relations with
Cuba in January 198
only the Charge level, primarily to avoid antagonizing
the United States and jeopardizing Western aid. The
19 members of the Cuban mission unobtrusively
promote Havana's interests with Bolivian leftists. At
the same time, the Castro regime has provided covert
paramilitary training in Cuba for 300 to 500 members
of Siles's party,
This training apparently was suspended in
our view, the coup attempt in June probably persuad-
Bolivia's Economic Nosedive
Siles has publicly acknowledged that improvements in
Bolivia's dismal economic performance are now neces-
sary to bolster democracy and regain foreign financial
support. On several occasions he has attempted to
make some economic adjustments, but labor reaction
and political dissension have caused him to backslide.
Origins of Disintegration: 1983. Siles's failure to
adopt thoroughgoing economic reforms, combined
with natural disasters, led to the worst economic crisis
in Bolivian history, starting last year. The economy
had been running uncontrolled for most of the past
decade, sustained by a surge of public borrowing and
spending during the 1970s at a time of high prices for
its tin, oil, and gas exports. The government tried to
maintain the pace of expansion in the face of low
export prices and revenues during the past several
years, instead of adjusting by holding down govern-
ment deficits, reducing subsidies, controlling wages,
and improving public-sector efficiency
Poor weather brought these economic problems to a
head last year. A freak change in the ocean current
(known as El Nino) caused severe drought on the
Altiplano (the high plain) and flooding in the lowlands
in 1983. The US Embassy reports that agricultural
output dropped at least 60 percent below normal,
forcing many related industries to close. Moreover,
the floods heavily damaged roads, bridges, and other
facilities. Increased food imports put an additional
drain on Bolivia's thin foreign exchange reserves,
while food shortages helped spur inflation: food prices
increased fivefold throughout the Altiplano, according
to the US Embassy. La Paz received some interna-
tional assistance, but not enough to match the eco-
nomic damage that, according to estimates by the US
Agency for International Development, exceeded
$600 million.F____1 25X1 25X1
The effects of the natural disasters and of Siles's
inability to exert strong management were stark:
? GDP fell at least 12 percent, and 30 percent of the
work force became idle or underemployed.
? Per capita income dropped at least 15 percent,
compared to 1982 levels.
? Inflation skyrocketed to almost 300 percent, up
from about 100 percent in 1982.
? The current account deficit nearly doubled to $183
million because of low mineral production and
export earnings and increases in food imports.
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Bolivia is an economic backwater. The majority of
the population is composed of poor Indians outside of
the economic mainstream. Annual per capita income
(about $875) ranks among the lowest in Latin Ameri-
ca. Life expectancy in 1981 was 51 years, a full 10
years below the South American average, and infant
mortality that year claimed an estimated 129 out of
every 1,000 live births before age 1. According to
World Bank statistics, only a third of the population
has access to potable water.
stabilization program has accentuated structural and
financial imbalances and precluded progress in refi-
nancing the foreign debt.
Formidable internal obstacles also have hindered 25X1
broad-based development. Economic infrastructure is
primitive; transportation and communications links
reach only afraction of the country. With limited
opportunities at home and frequent political changes,
numerous Bolivian technical and professional work- 25X1
ers emigrate abroad. Worker productivity is general-
ly low as a result of inadequate schooling, health
care, and diet. Despite a relatively rich resource base,
Bolivia has been unable to attract the foreign capital
necessary to develop fully its extractive industries or
The lucrative narcotics trade has increased corrup-
tion at all levels of Bolivian society and among
government officials. We believe that little of the
narcotics money has found its way into domestic
econ mic savings or investment; 25X1
most of the profits are banked outside the 25X1
country. 25X1
Political instability also has traditionally hampered
Bolivia's economic development efforts. The armed
forces have been the active agents in most of the 193
changes of government in 159 years since independ-
ence. Political parties are undisciplined and quarrel-
some, civilian institutions are weak, and labor strife
regularly disrupts economic activity.
As a result of these problems, La Paz has been unable
to frame and implement economic reforms. In recent
years, fiscal discipline has collapsed, causing the
government deficit as a share of GDP to increase
from about 5 percent in 1977 to almost 29 percent in
1982. This reflects the failure to trim the losses of a
large and inefficient public sector that controls over
70 percent of Bolivia's economy, the political unwill-
ingness to eliminate subsidies, and the need to grant
large wage increases to placate influential labor
groups.
These sizable budget deficits have been financed
through monetary expansion: money supply grew over
120 percent in 1982, compared to about 38 percent in
1980, fueling spiraling inflation. Moreover, the gov-
ernment's unwillingness to submit to an IMF
to start other lines of production
The Bolivian economy depends on mining, which
provides some 60 percent of exports and 20 percent of
government revenues. Subsistence farming supports
half of the population and accounts for about 20
percent of GDP. The cocaine trade has stymied 25X1
efforts to diversify agriculture and siphons talent
away from the modern sector. The small internal
market, antiquated production facilities, lack of
managerial skills, and continuing political turbulence
handicap the development of modern industry, com-
merce, and finance.
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Figure 1
Bolivia: Selected Economic Indicators,
1975-84
Real Economic Growtha
Percent
Consumer Price Inflation a
Percent
U
Mineral Production a
Index: 1980=100
Money Supply Growth a
Percent
a Annual average 1975-79.
b Weighted average 1975-79.
C Estimated.
d Projected. Assumes La Paz backs away from austerity program.
Agriculture Output a
Index: 1980=100
Government Deficit as a Share of GDP b
Percent
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Bolivia: Balance of Payments, 1975-84
1975-79
Average
Current account balance
-227
-118
-287
- 93
-183
-279
Trade balance
-14
262
229
399
275
114
Exports, f.o.b.
606
942
909
828
778
822
Of which:
Natural gas
70
221
337
382
350
378
Imports, f.o.b.
620
680
680
429
503
666
Net services and transfers
-213
-428
-541
-420
-345
-340
Interest payments, net
-74
-249
-334
-380
-309
-250
Arrearages
3
0
50
250
430
300
Capital account balance
238
19
319
209
185
135
Direct investment
15
41
60
37
45
40
Long-term loans
391
441
434
305
390
375
Short-term capital
-12
-20
148
-36
31
30
Foreign exchange reserves (at end of year)
170
106
100
156
137
135
a Estimated.
b Projected. Assumes La Paz continues piecemeal approach.
These deteriorating economic conditions aroused con-
siderable unrest. Miners struck to protest food short-
ages; public-sector workers denounced the govern-
ment's refusal to grant bonuses and improve social
security benefits; and peasants blocked roads in La
Paz Province to demand lower prices and additional
seed and machinery. Citizens' groups in the capital
also organized mass demonstrations in protest against
food shortages and reduced urban transport services.
Sites's Response. To halt the economic plunge, Siles
in November 1983 decreed a series of piecemeal
measures to try to stabilize the economy, improve the
payments account, and qualify for IMF assistance.
in food and gasoline subsidies, and a 50-percent hike
in transport fares and electric power tariffs, Siles
simultaneously announced income tax reductions and
new credits for businesses.
Siles implemented additional austerity measures last
April, bolstered by the decision of the Movement of
the Revolutionary Left Party to rejoin the government
coalition it had abandoned a year earlier. He devalued
the peso 75 percent and implemented large hikes in 25X1
the prices for basic foods, gasoline, and transporta-
tion. The Monetary Board more than doubled domes-
tic interest rates in an attempt to resuscitate financial
markets and to control capital flight. To compensate
for the rise in living costs, however, Siles decreed
quarterly indexation of wages and new bonuses.
President first announced a 72-percent increase in
minimum wages to soften labor reaction. Then, when
he implemented a 60-percent devaluation, a reduction
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To dampen labor militancy, Siles agreed to a request
by the chief Bolivian labor confederation to suspend
debt payments to foreign commercial banks in May.
bankers
agreed to a 90-day payments standstill in July, but are
now treating Bolivian loans as nonperforming and
accelerating the writeoff of these credits because they
expect no resumption of payments this year.
Economic deterioration continued apace, however.
Bolivia continued to experience erratic and unpredict-
able fluctuations in prices that made any rational
economic planning impossible. According to reports
from the IMF and the Bolivian Statistical Institute,
following the economic adjustments last spring, con-
sumer prices jumped 63 percent in April and 47
percent in May. Although the US Embassy reports
that agricultural production is recovering from the
drought, the erosion of purchasing power that oc-
curred early this year has depressed the industrial and
construction sectors, kept about a third of the labor
force either idle or underemployed, and impeded
banks' ability to fund new investments. Frequent
strikes are creating spot shortages by disrupting pro-
duction in a number of sectors, including transporta-
tion. One such strike, however-a prolonged walkout
at the Central Bank that curbed the issue of bank
notes-was a key factor in the deceleration of infla-
tion to only 4 percent in June
Meanwhile, Bolivia's payments position is worsening.
The suspension of debt servicing, payments from
Argentina for past gas deliveries, and a $50 million
trade surplus in the first quarter took some pressure
off foreign exchange reserves, but only temporarily.
Increased imports of food, raw materials, and spare
parts in the second quarter and the failure so far to
establish a payments schedule for 1984 gas shipments
to Argentina suggest that the current account will
continue to deteriorate: we project a payments deficit
of some $280 million by yearend and foreign ex-
change reserves sufficient to support a little more than
two months of imports.
Siles recognizes that additional measures are needed,
and, according to the US Embassy, he is promising
another devaluation and a round of price hikes.
According to the US Embassy, the IMF representa-
tive in La Paz reported that further actions will be
Figure 2
Bolivia: Monthly Consumer Price
Fluctuations, 1982-84a
5 Nov-
Aug- Wage Increase;
Adjustment 17 Nov-
in Minimum Economic
Wages Measures
12 Apr-
Economic
Measures
necessary before Bolivia can qualify for a $300 mil-
lion Extended Fund Facility. These include deeper
cuts in the budget deficit through reduced spending
and increased tax collections, tighter monetary policy,
and positive real interest rates and currency devalua-
tions in line with inflation. Moreover, La Paz will
need to clear arrears and resume debt repayments.
Negotiations are continuing with the IMF, but the
US Embassy reported that La Paz still had no budget
in early August and that the public deficit could reach
28 percent of GDP in 1984, compared with IMF
guidelines of 4 to 5 percent.
Bleak Near-Term Economic Prospects
Even though Siles has promised to continue the
economic adjustment process, we are skeptical that
he-or any successor in the event he is ousted-will
have the maneuvering room over the next year to
implement sweeping economic reforms. More popular
dissatisfaction-manifest in strikes, work stoppages,
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and consumer demonstrations-over government eco-
nomic policies is likely in coming months. Unemploy-
ment will remain high, and inflation is likely to spurt
again. Despite the past devaluations, many private
manufacturing firms will probably have to stop pro-
duction because of lack of foreign exchange to buy
spare parts. Price controls that discourage domestic
production and fuel contraband exports to neighbor-
ing countries are likely to continue, resulting in
frequent shortages of consumer goods. We foresee
three possible economic policy scenarios over the next
several months, described below in descending order
of probability.
Continued Piecemeal Approach. We believe there is a
strong chance that La Paz will continue austerity on a
piecemeal basis, resulting in continued economic stag-
flation-no growth, high unemployment, and soaring
inflation-and foreign financial difficulties. Based on
our evaluation of labor's strength and limited toler-
ance for further austerity, we think Siles will put a
premium on political survival and backslide on eco-
nomic adjustments in an effort to muddle through the
next two years. In this case, we believe the govern-
ment will resist scrapping the $150 million in annual
consumer subsidies to avert popular protests, and
influential state corporations probably will resist fiscal
discipline. Although La Paz will probably implement
some spending restraints, political disarray will im-
pede scaling down the public deficit to 4 to 5 percent
of GDP (compared with the 1983 level of 18 percent)
necessary to meet the targets established by the IMF.
We estimate that under this piecemeal approach
annual inflation would be on the order of 500 percent
because of shortages, the large public-sector deficit
financed by rapid monetary expansion, and peso
devaluations. Although devaluations would cut de-
mand for imports, we believe La Paz would not make
progress in reducing the current account deficit be-
cause of depressed world prices and demand for
mineral exports and relatively high international in-
terest rates. Piecemeal policies would enhance the
likelihood of inconclusive negotiations with the IMF,
precluding refinancing the debt over a longer term
and inhibiting aid and credit flows. These financial
pressures would probably lead Siles to prolong the
suspension of debt payments well into 1985.
Erratic, large fluctuations in Bolivia's monthly infla-
tion rate during 1984 price increases ranged from a
high of 63 percent in April to a low of 4 percent in
June-make. forecasting especially hazardous. Be-
cause historical relationships are statistically unreli-
able during periods of rapid price changes, most
observers of the Bolivian economy are extrapolating
current data to obtain an annual trend. Business
Latin America, for example, projects Bolivian infla-
tion at 1,700 percent in 1984, an estimate obtained by
extrapolating the price increases in April and May
for the year as a whole. An IMF report used the 63-
percent rise in May to project an annual inflation rate
of 2,500 percent. We believe these estimates are too
narrowly based and exaggerate the impact of the
April 1984 corrective economic adjustments-
poli-cies that usually lead to rapid increases in prices for
several months.
Our forecast is based on extrapolating the observed
rate of inflation during the first six months of 1984 to
an annual level. According to the National Institute
of Statistics, Bolivia recorded a 167 percent increase
in prices through June or an annual inflation rate of
about 600 percent. We believe this estimate-the
basis of our forecast in the piecemeal approach
scenario-is consistent with Siles's past record and
future plans for implementing patchwork economic
adjustments.
Based on the cessation of monetary expansion in
May, we judge Bolivia is not now experiencing a
"hyperinflationary" spiral. Academic research indi-
cates that hyperinflation is a temporary process of
rapidly accelerating price increases-generally in ex-
cess of 50 percent monthly-driven by massive cur-
rency issues. Between August 1922 and November
1923 in Germany, for example, prices rose an average
322 percent per month fueled by a currency issue of
192 quintillion marks. In Bolivia, a six-week strike
at the Central Bank curbed rapid monetary expan-
sion in May, but we believe the country remains
vulnerable to a hyperinflationary process if the gov-
ernment is unable to restore fiscal and monetary
discipline.
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Under this scenario, prospects for the rejuvenation of
the private sector over the next year or two would
remain dismal. Even with improved weather, the lack
of adequate seed varieties and machinery and the
diversion of land to higher paying coca leaf cultivation
probably would impede a significant increase in food
production. Inability to purchase spare parts, com-
bined with expensive credit, would cripple private
manufacturing
Although economic performance over the next several
years would be poor, we believe Siles would stand the
best chance of prolonging his tenure in office under
this approach. Most Bolivians are somewhat inured to
economic hardship, and Siles has ready scapegoats in
world bankers and higher interest rates. In the face of
pressures from labor and business, he would continue
to offer economic concessions to blunt the impact of
austerity. Such tactics have temporarily mitigated
serious unrest in the past, pacified labor, and re-
strained the military, and we see no indication that
their, effectiveness is waning.
The strategy is a delicate one, however. Miscalcula-
tion in implementing economic adjustments or exter-
nal economic factors outside the government's con-
trol-for example, with debt talks stalled, bankers are
already threatening to seize Bolivian assets if La Paz
does not resume payments by the end of the 90-day
grace period on 13 October-could spark popular
unrest and improve the atmosphere for a military
takeover.
Reconciling With the IMF. We judge there is a small
chance that Siles will follow through and implement a
determined and consistent austerity program under
IMF guidance. Such a program would precipitate
popular opposition to the fragile coalition government,
lead quickly to a major confrontation with labor, and
prime military opponents to move against him when
his public backing reached low ebb. Such an IMF-
guided program would also arouse nationalistic senti-
ment by aggravating domestic hardships in favor of
Bolivia's foreign creditors. We believe Siles recognizes
these risks and would opt for the course of thorough
economic reform only if he believed that large-scale
foreign financial support and economic assistance
would become available to bolster his political stand-
To reconcile with the IMF, La Paz would have to take
concrete steps aimed at restraining wage increases,
strengthening controls over state corporations, and
significantly reducing the budget deficit. We concur
with the US Embassy that, to restore production
incentives and eliminate contraband to neighboring
countries, La Paz would also have to allow higher
domestic prices for essential commodities and contin-
ue devaluations to restore the competitiveness of
Bolivian exports and to hold down imports. If this
were accomplished and La Paz resumed interest
payments, we expect that foreign bankers would be
willing to provide debt relief, while development
assistance would be renewed to enable the government
to blunt some of the impact on living standards.
Under this approach, economic stagflation would
continue for the better part of the next year or so, but
the foundation would be laid for future progress.
Nationalistic Backlash. We judge there is only a
slight probability that massive domestic political dis-
content would cause Siles to adopt nationalistic eco-
nomic policies to regain popular support. In this
scenario, Siles-under intense pressure from labor
and political opponents and probably military coup
plotting-would reject any agreement with the Fund.
Such pressures would lead him to impose price con-
trols and increase spending in an effort to satisfy
popular demands for growth
In this case, we judge that economic instability would
become more pronounced. Price controls aimed at
keeping an artificial lid on inflation would cause
larger quantities of goods to find their way into the
black market, where they would command more
lucrative prices. Because production at controlled
prices would become even more unprofitable, manu-
facturing activity would decline if producers could not
use the black market as an outlet, exacerbating
product shortages. We would expect to see an increase
in business failures and a steady rise in unemploy-
ment. As the gap between controlled and black-
market prices widened, we believe urban dwellers
would lose confidence in Bolivian money, and gallop-
ing inflation-price rises consistently in excess of 50
percent per month-would take hold, destroying the
modern economy.
ing.
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With a narrowly based economy, Bolivia's best hope
is to exploit its minerals to finance social and
economic development and to persuade international
lending agencies and bankers to ease loan require-
ments in recognition of the government's political
vulnerability. Although tin,has been the country's
economic mainspring since the 19th century, we judge
that Bolivia's future will depend on untapped re-
sources of oil and gas. The tin industry has lost
ground because of substitute materials, increasing
production costs, scarce financial and technical re-
sources, and competition from Asian producers.
According to World Bank studies, Bolivia's untapped
reserves of natural gas and oil are far in excess of
domestic needs and would enable La Paz to develop
new export earnings and create new jobs in nonenergy
sectors of the economy. Based on World Bank and
US Embassy reports, we judge that gas sales to
Brazil are Bolivia's only realistic option for new
foreign exchange earnings. These, sales -which could
begin as early as 1986-87 and double La Paz's export
earnings to more than $1 billion-will be necessary
to replace natural gas exports to Argentina, which
will probably end in 1991. The proposed Santa Cruz-
Sao Paulo pipeline project, however, is an
The break with the IMF, in our view, would worsen
the international financial confrontation. Foreign gov-
ernments would be likely to cease official aid and
loans, while foreign private bankers would probably
judge it prudent to seize Bolivian assets in the face of
nationalization of banks and repudiation of the debt.
Although the nationalistic route would be popular
initially, the resulting financial consequences-such
as the cessation of trade credits and seizure of as-
sets-would ultimately spur even greater social unrest
and probably would lead to a military takeover in less
than a year.
Longer Term Prospects
Without sustained economic reform, we believe Boliv-
ia faces a bleak future. Political unwillingness to carry
through with stabilization will probably result in
continuing payments constraints, deep-set financial
emotionally charged issue in Bolivia, according to the
US Embassy in La Paz, because it involves exporting
the country's depletable resources. Brazilian interest
in Bolivian gas also has been placed in doubt by the
discovery of the large Jurua gasfields in the Amazon
region of Brazil, by declining Brazilian energy con-
sumption, and by the large capital costs of the
pipeline-at a time of fiscal austerity. Nevertheless,
we believe the uncertainty about the size of the Jurua
gas reserves, the expense of a Jurua-Sao Paulo
pipeline, the nine-year construction period for the
pipeline, and Brasilia's longstanding interest in hav-
ing a stable Bolivia on its border will keep the
possibility of a Brazil-Bolivia gas pipeline agreement
open.
Because of Bolivia's undeveloped financial markets,
the bulk of the investment funds to exploit mineral
resources will have to come from foreign lenders. La
Paz is counting on a major fundraising drive for over
$2 billion in new credits to finance development
projects over the next four years. Because lender
requirements for such funds are likely to be stiff La
Paz will seek some concessionary financing from
official sources, requiring a reconciliation with the
IMF, but on politically palatable terms.
distortions, a deteriorating economic infrastructure,
and declining domestic investment. We judge that
continued failure to reduce the public deficit and
restrain monetary expansion would ultimately drive
the inflationary spiral into the four-digit range, para-
lyzing the modern economy. Because Bolivia would
yet have to create the indexation mechanisms to blunt
the impact on living standards, such inflation would
cripple domestic production and generate persistent
civil strife. With access to foreign credit cuts, La Paz
would also have little choice but to resort to more
protectionist trade and investment policies to shore up
its external accounts. Such policies would end Boliv-
ia's ability to attract foreign capital and technical
expertise.
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Under conditions of unremitting economic deteriora-
tion-and with a weak political system-we judge
that there is little chance for long-term political
stability in Bolivia. Siles or any successor president
would face the same economic problems. Initially, we
judge that a successor military government would
attempt to win US acceptance in order to demonstrate
its legitimacy and gain foreign financial assistance.
Thus, we would expect a new military regime to try to
appear responsive to US urgings for economic adjust-
ment measures. Nonetheless, such a government
would probably continue to deal with the economic
situation much as Siles has, on a short-term, ad hoc
basis.
Successive governments-most likely military domi-
nated, even if headed by civilians-would have no
spare funds, and thus no flexibility, in rectifying social
imbalances. With social ills continuing to fester,
Bolivia's key political sectors would focus primarily on
competing for their own share of a shrinking economic
pie. Consequently, we believe that the collapse of
civilian rule would make Bolivia increasingly vulnera-
ble to the growing power of drug traffickers, terrorist
activity by paramilitary forces on the left and right,
and rising Soviet and Cuban maneuvering for a
Communist foothold in South America.
Implications for US Interests
Threat From the Left. The greatest potential long-
term threat to US interests in Bolivia is the growing
capability of domestic radical left groups, especially
the palace clique of advisers, to exploit unstable
economic conditions. Although we believe these
groups and their Cuban-trained paramilitary forces
are far from being able to challenge the armed forces
directly, they have the capability now to stage disrup-
tive terrorist operations. Communist Party participa-
tion in the government is a longer term threat as
Communist cabinet officials use their positions to
build on already substantial influence among orga-
nized labor. Cuba and the USSR probably will try to
increase their influence in Bolivia by offering techni-
cal and security advisers and sales of military equip-
ment on concessionary terms. They also are likely to
try to exploit links with labor and other groups in a
period of economic deterioration, and Havana may
offer additional secret paramilitary training for ruling
party militants.
Commercial Stakes. US commercial interests in Bo-
livia, although small, are being hurt by the severe
economic slide, and, if our bleak predictions for the
future hold, we would expect a further decline in
commercial opportunities. US exports to Bolivia
shrank by one-half to $99 million in 1982, failed to
recover in 1983, and are likely to remain depressed
this year. La Paz also unilaterally suspended debt
servicing payments to US and other foreign banks,
and we are concerned about its ability to resume such
payments quickly. These debt servicing difficulties led
Bolivia, most recently at the Cartagena debt confer-
ence in June, to call for radical action by Latin
American debtors, including tougher steps against
creditors. Bolivia may begin to seek out alternatives,
such as non-Western sources of financial support,
since economic assistance from Washington and other
Western donors is increasingly contingent on econom-
ic reforms and eradication of the cocaine trade.
Cooperation on Narcotics. In our estimation, the Siles
administration has not seriously attempted to curb
burgeoning coca production and trafficking. Despite
his repeated promises to US Embassy officials that
the government will undertake more effective control,
we estimate that illicit coca paste exports have been
unaffected and amount to some $1.5 billion annually,
and that roughly 40 percent of the 35 to 45 tons of
cocaine consumed in the United States annually
comes from Bolivian coca. There are several reasons
for Siles's failure to curb coca production:
? He has been reluctant to antagonize narcotics traf-
fickers, who are powerful enough to help unseat
him.
? He has been unable to extend effective and sus-
tained law enforcement in the coca-growing regions
because of limited police resources, rampant corrup-
tion, and trafficker-organized campesino resistance.
? Natural disasters and the deteriorating economy
have driven more farmers into coca growing, espe-
cially in the absence of crop diversification
programs.
? Strong nationalistic sentiment, fueled by traffickers,
has inhibited cooperation with the United States on
narcotics-related matters.
We expect that Siles will, at best, continue the present
level of passive cooperation on narcotics enforcement,
as the government's financial problems undermine
efforts to coordinate and enforce tougher policies.
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