San José State University
Department of Economics
& Tornado Alley
ECONOMY OF BOLIVIA
The State of Bolivia has been a remarkably unsuccessful state. Bolivia is now poor and backward but this was not always the case for the area that is now Bolivia. In pre-Columbian times the high plains, the Altiplano, had an economy based upon irrigated agriculture and was relatively densely populated compared to other areas of South America. At that time the Altiplano was closely linked with the area that is now Peru. Sometimes there were kingdoms of the Aymara-speaking natives of the Altiplano which controlled the Quechua-speaking natives of Peru and at other times the roles were reversed. In the era immediately before Spanish contact it was the Quechua-speaking kingdom of the Inca that controlled the Altiplano and sent Quechua-speaking colonists into the Altiplano such that today the native speakers of Aymara and Quechua language are of equal importance in the population of Bolivia.
Shortly after the Spanish conquest, silver deposits were discovered at Potosí and these silver mines made the region one of the wealthiest and most heavily populated in the Spanish Empire. In 1800 Bolivia had a population that was second only to Brazil among the regions of South America. The wealth however did not trickle down to the native population, who were forced to supply labor for the mines. During the Spanish Imperial era and up until independence the area was known as Upper Peru. For a period of time the Spanish authorities decreed that all contact between the provinces of Rio de la Plata (what later became Argentina, Uruguay and Paraguay) should be through Upper Peru (Bolivia). In 1800 Bolivia's population was five times that of Argentina's and 50 percent larger than the population of Chile.
By the end of the 18th century the silver deposits had been worked out and the region was economically depressed. When Napoleon gave the Spanish crown to his brother Joseph rebellion broke out in 1809 in the cities of Upper Peru. The area was finally liberated in 1825 by Simon Bolivar forces under the command of Antonio José de Sucre. The leadership of the independence forces initially intended that Upper Peru would be joined with Peru or Argentina but leaders from the region convinced them that the region should be an independent country. As part of the campaign for an independent state the local leaders chose to name the state after Bolivar and selected the leader of the forces that liberated it, Antonio José de Sucre, as its first president. The original territory of Bolivia was considerably larger than the present nation. The original Bolivia had territory on the Pacific Coast, territory that is now part of Chile. The state of Acre, now in Brazil, was originally Bolivian. Territory now in western Paraguay was originally claimed by Bolivia. This failure to maintain the original territory reflects the weakness of the Bolivian state.
The loss of the Pacific Coast territory came as a result of Bolivia's inability to develop the nitrate deposits in the territory. As a result of the catastrophic decline in silver mining Bolivia lacked capital and Bolivian politics was in the hands of local military bosses who primarily concerned with their own survival. One of these leaders, Marshal Santa Cruz, did rise above local politics and engineered a confederation of Bolivia and Peru that lasted from 1836 to 1839. This confederation was looked upon as threatening to Chile and so the Chilean army attacked, first defeating the Bolivian army and then the Peruvian army.
After the defeat of the confederation of Bolivia and Peru commercially important nitrate and guano deposits were discovered in the Bolivian Pacific Coast territory. When Bolivia did not pursue the development Chilean interests secured leases and with British financial backing started marketing the nitrate and guano for fertilizers. When Bolivia in 1879 tried to exert control over the nitrate operations Chile invaded Bolivia and the War of the Pacific began. It lasted from 1879 to 1884 and ended with defeat of the Bolivian and Peruvian armies by Chile. Chile then annexed the Pacific Coast territories of Bolivia. As a result of their defeat in the War of the Pacific the military in Bolivia lost status and the power shifted to entrepreneurs who were trying to resurrect Bolivian mining. There had been some recovery of the silver industry but declining silver prices and the exhaustion of deposits cut that recovery short. The new mining bonanza was in tin. In the latter part of the 19th century new uses for tin were developed such for coating steel in so-called tin cans. The new higher price of tin brought prosperity to the old mining areas. Fabulous fortunes were made.
One tin-mining fortune was made by Simon Patiño, who worked as a clerk in a general store that sold supplies to mining prospectors. One day a prospector came into the stores for supplies but had nothing of value to pay for them except a deed to a mine. Patiño took pity on the miner and accepted the mine deed as payment. When the owner of the store found out about the transaction he was furious. He told Patiño that he was fired and that his wages would be paid in the form of the dubious mine deed taken in trade for the store's supplies. Patiño , not able to find another job, went to the mine to see what he could do with it. The mine appeared to be worth little but Patiño discovered a vein of tin ore in 1899 and ultimately became one of the world's wealthiest individuals. Patiño proved to be a master of organization, something that probably no one realized during the early part of his life when he worked for others.
Two political parties were formed in the 1880s. Both were parties of the upper classes and both were conservative politically. One was called the Conservative Party and the other the Liberal Party. (Outside of the United States the term liberal means what conservative means in the U.S. and in Latin America conservative means something that is outside the U.S. political spectrum. Roughly it means maintaining the control by the large land holders and the Catholic Church.) The two parties were in agreement on economic policy and only differed in how they perceived the role of the Catholic Church.
Bolivia was ruled by the Conservative Party from 1880 to 1899. The Liberal Party won power in 1899 over the issue of which city, Sucre or La Paz, would be the capital of Bolivia.
The Liberal Party governed from 1899 to 1920. A rebellion had broken out in the province of Acre which was within the Amazon region and was affected by the rubber boom. The Liberal Party decided not to try to fight for control of the distant province but instead sold Acre to Brazil in 1903 and used the funds to build the transportation system of Bolivia. The Liberal Party so politically overwhelmed in the elections that the Conservative Party dissolved itself. Political opposition re-emerged in 1914 with the formation of the Republican Party which differed very little from the Liberal Party in economic policies.
The Republican Party was able to take control of the government in 1920. By 1930 the tin mining industry was in financial difficulty because the price of tin dropped as a result of the outset of the Great Depression whereas the tin deposits that were left involved higher production costs.
In the 1930s Bolivia fought another disasterous war. The territory between Bolivia and Paraguay, known as the Chaco, was in dispute. Paraguay claimed a greater portion of the Chaco than Bolivia was willing to recognize. The President of Bolivia provoked a war over the disputed territory which lasted from 1932 to 1935. Bolivia initially had a larger, supposedly better trained army but it was defeated by the army of Paraguay. In the Chaco War Bolivia suffered losses and casualties of about one hundred thousand and lost more territory to Paraguay than Paraguay had initially claimed. The people of Bolivia, particularly the veterans, recognized the enormity of the failure of the Bolivian government and looked for radical solutions to their political and economic problems. In 1936 a group of military officers carried out a coup d'etat and tried to institute a military variety of socialism. Standard Oil properties in Bolivia were nationalized and the social welfare-oriented constitution was adopted.
The radicalization of Bolivian politics continued into the 1940s. Two radical political movements emerged:
In 1943 the elected president was overthrown in a military coup d'etat under the leadership of Gualberto Villaroel. The military junta allied itself with the MNR and Villaroel was president from 1943 to 1946. During this period the Bolivian peasants were organized and mobilized by the MNR. But Villaroel was opposed by both the political right and left. He governed so ineptly that he was hanged by a revolutionary mob outside the presidential palace in 1946.
The radical leftist PIR tried to governed the next four years but failed and in 1950 it was replaced by the Bolivian Communist Party. In the presidential election of 1951 the MNR candidate won a plurality but a military junta took control of the government. The MNR foresook its fascist ties and allied itself with organized labor including Trotskyite labor unions. The Trotskyite labor unions were enemies of the Communist-dominated labor union whose leadership was Stalinist in its orientation. One important figure of the labor union leadership was Juan Lechin, an individual who wielded major power in Bolivia from behind the scenes.
This alliance undertook a series of more and more violent revolutionary actions and finally in 1952 defeated and virtually destroyed the army and the military regime in power.
Despite the fact that the Bolivian army has never won a war the military had long been a major force in Bolivian politics.
From the rise of tin mining until 1952 Bolivia was dominated by the tin oligarchy, nicknamed la Rosca, literally a small, hard kernel but sometimes translated as The Screw. In that year miners and peasants combined with middleclass elements to overthrow the government dominated by the tin oligarchy.
The Bolivian National Revolution of 1952 was a major social revolution carried out under the leadership the MNR. After the military victory of the revolution, a political revolution was carried out under the leadership of Victor Paz Estenssoro of the MNR. The largest tin mines were nationalized and the workers in these mines were given a role in their management. A sweeping land reform gave land to the peasants. The peasants as well as the tin mine workers were given weapons. The literacy requirement for voting was abolished. Paz Estenssoro held the presidency from 1952 to 1956. This was his first term as president.
After the episode of sweeping, radical reforms of Paz Estenssoro there was extensive inflation. The president that followed Paz Estenssoro, Hernando Siles Zuazo devoted his term to curbing inflation and moderating the radical programs of his predecessor. Siles Zuazo's term was a period of reversal of the revolution. The role of the workers in the administration of the nationalized tin mines was eliminated. The social welfare programs were reduced.
Paz Estenssoro returned to the presidency in 1960 and he continued the policies of Siles Zuazo. A political crisis arose in 1964 when Paz Estenssoro tried to continue in office for another term and the military under the leadership of Vice President and General René Barrientos deposed him.
Barrientos took control of the government and continued the process of his predecessors of moderating the programs and policies of the Bolivian Revolution of 1952. In 1969 Barrientos was killed in a helicopter accident.
Barrientos was replaced as President by Vice President Luis Adolfo Siles Salinas who was soon deposed by a military coup which placed General Alfredo Ovando Candía in the presidency. President Ovando Candía nationalized the properties of Gulf Oil. Ovando Candía was a militarist with noted organizational abilities. Politically he was a corporatist and willing to nationalize private property if it was to his political advantage but he was no socialist. His successor's political orientation was quite different. In October of 1970 General Juan José Torres deposed Ovando Candía. Torres was from a humble background and rose to prominence in the military but his political orientation remained socialist, even radically socialist.
President Torres was perceived as a man of the people and enjoyed a remarkable degree of popularity compared to the other military figures who took the presidency through coup d'etat. Torres went so far as to sanction the replacement of the National Congress with a national workers' assembly, which was labeled a Soviet by its critics.
In 1971 Torres was deposed and another military figure Colonel Hugo Banzer took the presidency. (Such a lot of political turmoil followed the helicopter crash of Barrientos in 1969!)
Bolivia is one of the poorest countries in the world. The poor soil conditions and high altitude make agriculture difficult. It has been the frequent victim of aggression by neighbors. Bolivia is now landlocked but this was not always the case. In the nineteenth century Bolivia had an outlet on the Pacific Ocean, but lost it in a war with Chile. In the twentieth century Brazil simply took away a substantial share of Bolivian territory. Despite the fact that the Bolivian army has never won a war the military is a major force in Bolivian politics.
Until 1952 Bolivia was dominated by a tin oligarchy, nicknamed "The Screw". In that year miners and peasants combined with middleclass elements to overthrow the government. The revolutionary government headed by Victor Paz Estenssoro called for drastic land reform and nationalized the large mines.
The governments of Bolivia were generally corporatist in the sense that they asserted that they were committed to capitalism but with significant state control and regulation in the interest of social justice. In the late 1950s the second post-revolutionary government, headed by Hernan Siles Zuazo, adopted an IMF stabilization program. In the 1960s union and leftist elements broke away from the government party and in the political turmoil the military took power in 1964. In 1969 a leftist faction of the military came to power and nationalized more industries, including oil, and gave benefits to the working class. This faction lost power in 1971 to General Hugo Banzer. Under Banzer in the 1970s there was political repression but economic growth financed by debt. International pressure forced Banzer to call for civilian elections in 1978.
The election of July 1978 was voided as a result of charges of voting fraud and Banzer resigned later in that month. After a rapid series of changes in government Lydia Tejada was chosen as interim president.
Siles Zuazo returned to lead a leftist coalition in the late 1970s. His party won the plurality in three elections, but each time military coups and parliamentary maneuvers prevented Siles Zuazo from taking the presidency. A coup in 1980 brought to power a military faction with strong ties to the drug trade. An economic collapse under this faction led to a new military regime which restored the civilian Congress which had been elected in 1980. This Congress gave the presidency to Siles Zuazo.
The new government found that there were no sources of loans or buyers for government bonds so they monetized the deficit; i.e., they printed money. The Siles Zuazo administration tried to gain control of the situation by instituting exchange controls, raising export taxes, indexing the minimum wage to the price level, and de-dollarizing the economy by converting all dollar-denominated contracts to Bolivian pesos. Market mechanisms were abandoned in favor of government intervention. These measures slowed inflation only briefly. There was a flight of funds out of pesos and into dollars. Servicing the debt became a major problem and hyperinflation developed. Workers earning more than the minimum wage called for the indexing of all wages in 1984. In May 1984 the government stopped servicing the debt. In the face of loss of support Siles Zuazo called for elections in 1985 instead of the scheduled 1986 elections. There was 4000 percent inflation in the first seven months of 1985. Hugo Banzer ran in the 1985 elections on a promise to implement a conventional stabilization program. Banzer got the most votes but not a majority and Congress chose Victor Paz Estenssoro for president, the man who had ruled after the revolution of 1952. Paz was expected to take gradual approach to slowing inflation but instead he contacted Banzer's financial advisors and had them implement Banzer's program under the name of the New Economic Policy (NEP) in 1985. NEP involved:
Overnight the government devalued the peso from 75,000 to the dollar to one million to the dollar. Three months of stability resulted but later tin prices collapsed and inflation rose to 33 percent per month. Further devaluation was called for, but Paz Estenssoro followed the advice of U.S. economist Jeffrey Sachs who called for the supporting of the peso by buying pesos in international markets with Bolivia's foreign exchange reserves. This resulted in an appreciation of the peso by 10 percent and monthly inflation quickly fell to zero. Paz Estenssoro reduced employment in the government mining corporation by 75 percent and broke the power of the tin miners union. He also instituted a value-added tax. Bolivia obtained favorable treatment from the IMF and other international source of funds. Later, in May of 1989, a principal architect of the NEP, Gonzalo Sanchez de Losada won a plurality in the elections. Gonzalo Sanchez de Losada is an individual with profound economic insights to the problems of Bolivia; Jeffrey Sachs referred to him as a genius.
Although Gonzalo Sanchez de Losada won a plurality in the election of 1989 he did not gain the presidency at that time. In 1993 he became president and governed until 1997. He was re-elected president in 2002 but social turmoil led to his resignation.
(To be continued.)
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