Bolivia: A Cast Study in Foriegn Aid; R. Freeman

Bolivian aid is listed in the U. S. Budget as "defense support" although it would require a great deal of imagi nation to visualize what bearing this country in the center of South America, without an army or a seacoast, has upon the defense of the United States. Bolivia's trouble stems from a bloody revolution in 1952 which threw the country into a turmoil from which it will be long recovering. The new government nationMr. Freeman is Vice-president of the Institute for Social Science Research in Washington, D. C. He served as fiscal adviser to the Bolivian government in 1956-57 on a mission of the U. S. State and Treasury Departments and the International Cooperation Ad ministration. [287 ] alized the mines, expropriated the farm owners, sent a large segment of its educated class into exile, and drove private industry and commerce toward bankruptcy. Within a year Bolivia~s people were starving and the gov ernment was in trouble up to its neck.1 It is quite likely that another revolution would have driven the government out no later than 1954 if U. S. aid had not come to its rescue.

Encouraging Consumption Most of the U. S. aid was used not to strengthen local productive capacity but to boost imports and support consumption. This discouraged local production and en abled the country to live beyond its means. The govern ment kept printing banknotes at a rapid pace and the exchange rate of the peso boliviano dropped precipi tously. A few years ago a dollar was worth 190 pesos; in the fall of 1956 it took 13,700 pesos to buy one dollar in the free market. In December 1956 an attempt was made to stabilize the currency at a rate of 7,500 to the dollar with the help of a $25 million fund from the United States and the International Monetary Fund. The present official rate which is set according to free market supply and de mand, is 8,500, and there is no indication that it could be maintained without the stabilization fund and without 1 This is more than a phrase. The first president this party had put into office was hanged from a lamppost in front of his palace in 1946.

[288 ] continued U. S. aid. The greater part of U. S. aid still is used to supply over half the regular Bolivian budget. The large government enterprises, the mines and the petroleum monopoly, are operating deeply in the red and cover their deficits through central bank credits. Low Taxes in Bolivia The government so far has shown no inclination to cut its expenditures to a level which Bolivian taxpayers are willing and able to support. Bolivia~s tax load is low. At 5 to 7 per cent of gross national product it compares with a tax burden of 25 per cent of the gross national product in the United States. Income tax collections dropped from an average of $3.5 million between 1948 and 1952 to $0.5 million by 1956. Property taxes shrank from $0.5 million to $124, 000. Mine royalties used to be a mainstay of the Bolivian budget. But the government corporation which took over the mines in 1952 paid none. Royalties were re-estab lished in December 1956 by supreme decree as part of the stabilization plan. But so far none have been paid.

The tin and tungsten mines are Bolivia's only source of foreign exchange besides U. S. aid. They used to be profitable. But soon after nationalization, the mine pay roll swelled from 26,000 to almost 40,000, and production declined. The mines showed vast dencits which the gov ernment covered by printing more banknotes. A Mining Survey Mission, paid for by the International Cooperation Administration, and staffed by the New York [289 ] engineering firm, Ford, Bacon & Davis, reported in De cember 1956 that there is no technical reason why the mines could not be operated economically. But the man agement would have to be turned over to technically qualified personnel and control wrested from the poli ticians and union leaders who are running the mines as their private preserve. Much of the mine equipment is worn out or obsolete. The mines' foreign exchange earnings were used to im port automobiles (rather than trucks which the country needs desperately) and other consumption goods includ ing food. In the average of the past three years Bolivia imported $25 million annually in food and $7 million in machinery. Prudent economic policy would have re versed those figures.

Bolivia does not need to import food. A U. S. State Department Survey Mission concluded in 1941-42: "Bo livia could produce practically all agricultural products in unlimited quantities." These findings were subse quently confirmed by a United Nations Mission in 1950 and by the Joint Agricultural Service (Servicio Agricola Interamericano) . Serious Questions Why did Bolivia face starvation in 1953? Why does it still import a large part of its food and fiber? One obvious reason is that most of Bolivia's good soils are in the humid lowlands while most of its people live [290 ] in the dry and rocky High Andes. The U. S. Mission in 1941-42 recommended building a road from Santa Cruz to 'Cochabamba, to connect the tropics with the moun tains. The road was built with a $44 million loan from the Import-Export Bank of Washington, completed two years ago. This year, the service on the loan was suspended.

This is not unusual. Bolivia has been in default on its foreign debts since 19S2-the only country this side of the iron curtain which made no payments at all to its credi tors over such a long period. The so-called agricultural reform four years ago dealt food production a blow from which it seems unable to recover. Instead of channeling the landless Indians to ward the noncultivated areas in the lowlands, they were given the freedom to take and divide the haciendas which had been supplying the cities with food. About half a million people took over land without much if any plan or procedure. Property rights remained uncertain, and in the first three years only 7,621 titles were granted. Most of the new owners grow food only for themselves. Cooperatives do little better. President Paz Estenssoro complained in the summer of 1956 that cooperatives "have paid more attention to supplying their members than to production itself."

Fed by Uncle Sam When the Bolivian farmers would not supply the cities, the United States stepped into the breach. In each of the past four fiscal years, we have provided an average of [291 ] over $25 million in money, goods, and services. What has this accomplished? U. S. food was priced at fractions 10 to 20 per cent of cost. At least one-third of it was im mediately smuggled to neighboring countries to be sold at market prices. Much of the rest went into the Bolivian black markets. Some people grew rich on this traffic. Little reached consumers at official prices. The International Cooperation Administration last year sent auditors to Bolivia to find out about the ~~end use" of U. S. aid goods. They found themselves up against a stone wall and had to be satisfied with setting up pro cedures to provide better control in the future. While the Chilean and Peruvian ports of Antofagasta, Arica, and Mollendo were choked with ten thousands of tons of U. S. aid goods beyond the capacity of the rail roads, and merchandise had to be stored in the open for many months, the International Cooperation Administra tion kept sending additional shiploads which only added to the confusion and provided better opportunities for pilferage and contraband. This was done right up to 1957.

The U. S. aid program discouraged local food produc tion by underbidding Bolivian production costs. The gov ernment set maximum prices at which it would buy agricultural products so low that farmers reduced their output or smuggled livestock, com, rice, and the like to Brazil, Agrentina, or Peru where they brought higher returns. Meanwhile the United States was feeding Bo livia's cities. There has been some improvement. In December 1956 [292 ] the prices of U. S. supplied food were raised to market levels, and price controls were abolished. That has had some beneficial effect in encouraging local production. But not enough. Livestock, corn, wheat, sugar, and other items are now brought in from the surrounding countries at prices below Bolivian production costs. A country which is desperately in need of dollars to pay for ma chines and other industrial goods should not be spending scarce foreign exchange on food it can grow at home.

Hundreds of thousands or millions of additional people could grow food and fiber for themselves, for the cities, and for export on Bolivia's soil. But, the rural Indians are streaming into the cities and into the mines where living conditions and wages are better. The average mine worker now earns almost as much as a cabinet minister. That still is little by U. S. standards. But it is a great deal by Bolivian standards-more than twice what a teacher makes. It is only· a fraction of the earnings of a miner in the U. S., but a U. S. miner's out put is ten times that of a Bolivian. Without U. S. aid, Bolivia's alternatives would have been to work the land and grow more food or starve. Our program "saved" the Bolivians from both. It also saved the government from the consequences of its policies. All over the country one can see the terraces on the steep hillsides which tell a·story of past cultivation. Those terraced lands and irrigation channels were producing food in Inca days and often until quite recently. At this time only small parts of the terraces are still being worked.

[293 ] Bolivia has rich oil lands. The fields were explored and production started in the 1920's by the Standard Oil Company of New Jersey. Their property was confiscated years ago without compensation. Petroleum is now be ing produced by a government monopoly corporation (YPFB ). Output has increased in recent years. In fact one-fourth of it is being exported to Brazil and Argen tina which built railroads from the border to the produc tion centers (at their own expense). This year YPFB expects to sell $14 million worth in petroleum products locally, $5 million abroad. Petroleum products are almost tax free. The YPFB budget includes an item of $130,000 for taxes, about 0.7 per cent of its gross volume. I recommended the imposi tion of adequate gasoline taxes to finance the building of roads which Bolivia needs desperately. The government finally boosted the gasoline tax from 0.4 cents to 0.75 cents per gallon.· Diesel and fuel oil still are left tax free.

YPFB has been pricing its products far below cost. The government covered the deficits with the printing press. In December 1956 gasoline was raised from 7 cents a gallon to 25 and 27 cents. This is almost twice what gasoline would cost in the United States if there were no taxes. But YPFB, which pays almost no taxes, is still operating in the red at the new price, despite low wages. Unproductive Labor The low productivity of labor is the main reason for the high costs of production in the mines, in petroleum, [294.] in agriculture, for the excessively large staffs of the min istries and the high cost of government. At many jobs there are twice or three times as many people as are needed. To watch them "at work" is a frustrating experience to Americans. Productivity in private industrial :Grms is no better. Companies were forced by the government to place ad ditional people on their payroll and are not permitted to dismiss employees regardless of whether there is work for them, whether they are competent, whether they work, or whether they are caught stealing. There are always several strikes going on. This is small wonder-workers get paid while they are on strike.

Wages and incomes are low, but in terms of output they are higher than in the United States. Thus it is cheaper to import goods, agricultural or manufactured, than to produce them locally. The imports are paid for partly through high taxation in the United States while Bolivians are living in what may comparatively be called a tax paradise. Bolivia is being taught to depend increas ingly on U. S. aid, and its incentives for helping itself are being reduced. Should U.S. aid to Bolivia be abolished? The program was adopted four years ago to assist in a temporary emergency. The United States never intended to pay a regular and continuing subsidy to Bolivia. The International Cooperation Administration asserted re peatedly at congressional hearings its intention to taper off and end the program. It is about time that this be done. [295 ] WHO~S FORGOTTEN NOW? tg george m etart ~ "THE FORGOTTEN MAN," first described by Professor Wil liam Graham Sumner in the 1880's,was the hard-working taxpayer. A half century later, "the forgotten man" of the New Deal meant a person of low income-the "under privileged" and "neglected."