THE ECONOMIC CRISIS IN BOLIVIA: IS TIME RUNNING OUT?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86M00886R001200330041-1
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 4
• Document Creation Date: December 21, 2016
• Document Release Date: November 7, 2008
• Sequence Number: 41
• Publication Date: August 6, 1984
• Content Type: MEMO

Approved For Release 2008/11/07: CIA-RDP86M00886R001200330041-1
SECRET
Executivc ;e isiry
84-3C>
6 August 1984
FROM: Maurice Ernst
National Intelligence Officer for Economics
SUBJECT: The Economic Crisis in Bolivia: Is time running out?
The attached memorandum presents a hypothesis on Bolivia's economic
crisis. The hypothesis that Bolivia is a state of hyperinflation
which may be causing a progressive breakdown of economic activity and can
only be stopped by extraordinary economic measures -- is based largely on
logical extrapolation of the exceedingly negative trends emphasized in
the IMF's Staff Report of 20 June 1984. The near absence of recent
economic data and the infrequency of pertinent on-the-spot observations
prevents any systematic analysis of the issue., Most observers of the
Bolivian scene probably will consider the hypothesis to be plausible, but
unlikely. My objectives in presenting the hypothesis so starkly are:
a. To alert the interested policy community to the possibility
of rapid economic deterioration and political change.
b. To help in better focusing reporting ana intelligence
collection on Bolivia.
SECRET CL BY SIGNER
DECL OADR
Approved For Release 2008/11/07: CIA-RDP86M00886R001200330041-1
 Approved For Release 2008/11/07: CIA-RDP86M00886R001200330041-1
SECRET
The Economic Crisis in Bolivia: Is time running out?
1. Bolivia may be in a state of hyperinflation which can be
stabilized only with drastic economic reforms that the present democratic
government is incapable of. The economic deterioration may be
accelerating so rapidly that declaration of a state of emergency or a
military coup may soon be imperative. Bolivia's foreign debt problems,
although severe, for the moment have become largely irrelevant if
hyperinflation has taken over the domestic economy.
2. Although Bolivia has been considered an economic basket case for
years, political incapacity during the late stages of the military
government and even more during the moderate-left democratic government
in power since early 1982, has resulted in escalating economic problems.
Inflation was over 800 percent at an annual rate in April and may have
gone up since. When inflation reaches such astronomical rates, it
usually accelerates and severely disrupts the economy.
3. The fundamental problem is the inability of the government to
control its expenditures and collect its revenues. The fiscal deficit,
which had been running at about 8 percent of GOP in 1979-82, surged to 18
percent of GOP in 1983 and, according to the IMF, would constitute 40
percent of GDP in 1984 in the absence of fundamental reforms. All of the
recent deficits are being financed internally --- that is by printing
money.
4. The Bolivian government has tried to deal with these problems by
doing too little too late. Large devaluations near the beginning and the
end of 1982 were quickly offset by domestic inflation. Another
devaluation in late 1983 stuck for only 4 months. The currency was
devalued again by 400 percent in April 1984, but domestic prices have
been catching up rapidly. Numerous other stabilization measures,
including price increases for subsidized products, such as petroleum,
cuts in public investments, and sharp increases in domestic interest
rates, were announced, but implemented only partially, if at all.
Widespread strikes and other forms of resistance from organized labor
forced wage increases at least matching the inflation rate. The
government's incapacity is well illustrated by:
o The inability to make any payments to service foreign debt;
o The fact that COMIBOL, the government enterprise which
controls most mineral production and exports, has refused to remit
its earnings to the government budget;
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The Economic Crisis in Bolivia: Is time running out?
o A several-week strike of Central Bank employees which has
halted the printing of money (ironically, perhaps causing a temporary
slowing of inflation).
5. It is highly probable that, as inflation accelerates, it is
growing much faster than the money supply. From early 1981 through mid
1983, consumer prices and the money supply grew at about the same rates.
In the third quarter of 1983, the most recent period for which money
supply data are available, prices grew twice as fast as money supply (44
percent as against 22 percent). Since then the rate of inflation has
increased several fold and it is reasonable to assume that the growth of
money supply has been a great deal slower.
6. A growing discrepancy between inflation and money supply growth
should indicate an increased velocity of money -- that is, a tendency for
people to spend their money receipts more quickly. A rapidly increasing
velocity of money is symptomatic of hyperinflation. People spend money
faster because they know its purchasing power will decline quickly if
they hold it. This creates a vicious circle of accelerating inflation
and creation of money. Eventually, hyperinflation severely disrupts
economic activity because people increasingly resort to barter and spend
their time buying and selling rather that working at their jobs. It
seems quite probable that Bolivia will soon reach, if it has not already
reached, the point where hyperinflation causes severe and growing
economic disruptions.
7. If this is indeed the situation, there is little foreign
creditors or nations can do about it until the domestic economy is
stabilized. The only way to stabilize the economy is to take extremely
drastic steps, such as:
o A monetary exchange -- issuing, on a fractional basis new
currency in return for the existing currency, subject to various
conditions, with the old currency ceasing to be legal tender.
o Tight controls over financial transfers and withdrawals;
o A temporary wage and prize freeze;
o Drastic reductions in government subsidies;
o Establishment of a realistic exchange rate;
o Revamping of the tax system.
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 Approved For Release 2008/11/07: CIA-RDP86M00886R001200330041-1
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The Economic Crisis in Bolivia: Is time running out?
8. Given the chaotic political structure, the weakness of the
government, and the power of the unions, measures such as these can only
be taken if a state of emergency is declared, with the military
supporting the present government, or if the military itself takes over
the government. In either case there would be high risks of violent
reaction from labor and prolonged armed resistance from the left, which
the USSR and Cuba could exploit. But there may be no alternative.
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