Economic Anarchy Ends : Bolivia-- the Inflation Fever Cools

Once the most derelict of Latin American debtor nations, Bolivia is making a rapid comeback from hyper-inflation under a new, democratically elected government.

It will be a long time before the country can make more than token payments on its $3.4-billion foreign debt, but economic anarchy--reflected in runaway inflation, shortages and contraband as a way of life for many--has been halted.

President Victor Paz Estenssoro appears to have broken the back of inflation. Prices went up 65% just last August, when he took office, and economists were predicting that if nothing were done to stop it, the inflation for 1985 would be 20,000%.

Paz won a runoff election in Congress against conservative Hugo Banzer and immediately took action on the economy. The inflationary price spiral, accompanied by a vast illegal market of contraband imports paid for by cocaine dollars, has been stopped in its tracks through a series of bold moves.

Wage Freeze Until Dec. 31

These include removal of exchange controls, liberalization of imports, a 300% increase in gasoline prices (from about 35 cents a gallon to more than $1) and a wage freeze for public workers until Dec. 31.

Prices rose less steeply in September, and in October they actually began falling--for the first time in years. Eggs went from $1.20 a dozen to 75 cents. Wheat flour prices fell 50% as legal imports from Argentina replaced contraband. Domestic beef prices were slashed by butchers as shoppers refused to pay inflated prices.

Goods that had disappeared into black market circuits began to reappear in abundance. Bread, one of the consumer goods subject to price controls, had become a collector’s item. It is now being sold in baskets all over the city.

Noodles Still Costly

On Tarapaca Street, in an old, cobblestoned part of this colonial Andean capital, Felipe Rodriguez stood at the entrance to his neighborhood grocery store one day recently. He was surrounded by stacks of packaged noodles, which had become so scarce during the worst of the inflation that they had vanished into the black market and were not available in ordinary stores.

“Look, Dona Felisa, you haven’t seen noodles like these for months,” the gray-mustached grocer said to a regular customer.

“No, I haven’t,” she acknowledged, “but look at the price.”

A five-pound package costs the equivalent of $7, a week’s wages for unskilled workers here. The housewife went on her way after buying half a pound of corn flour, which was on sale, but no noodles.

“It is like that now. People don’t buy just to get rid of money. If you want to sell, you have to cut prices,” Rodriguez said.

“The problem is that the poorer people don’t have enough money to buy,” he lamented. The grocer said his sales are down but that, nevertheless, he supports the anti-inflation measures.

“We were all going crazy, with prices going up from one day to the next. These times are hard, but we need a dose of reality,” he said.

Confidence in the Bolivian peso is gradually returning. The exchange rate has stabilized at around 1 million pesos to the U.S. dollar after reaching 1.5 million in August. Bank checking account deposits, which had dropped to $3 million, are now over $40 million. In 1982, before the onslaught of hyper-inflation, they stood at about $600 million.

Some people are even bringing back dollars that they had invested abroad.

“A client deposited $70,000 here yesterday that he had been holding in a money market account in Miami. It wasn’t because of patriotism. It’s because we pay 12% and he was getting 7% in the United States,” a Bolivian banker said.

Credit is coming back to an economy where, during the two-year period of acute inflation, every transaction had been in cash.

With Christmas approaching, Domingo Cespedes, a door-to-door salesman, is peddling toys and games. After haggling over the price of a child’s building-block set with a potential customer, he made a sale by offering the buyer three months to pay.

“I couldn’t have done that when prices were going up 50% a month,” Cespedes said.

The economic reforms, which were announced Aug. 29, were drafted by an advisory committee, including bankers and businessmen. The 78-year-old Paz, a white-haired but vigorous leader who has served as Bolivia’s president three times before, pushed them through during a nonstop, 24-hour Cabinet meeting.

When one minister suggested a rest break, Paz refused. “If I give you a chance to think about these measures, some of you will not sign the decree,” he said.

‘Populist’ Policy Reversed

The new economic program, or NEP, as the Paz reforms have been named, reversed the so-called populist policies of former President Hernan Siles Zuazo. Siles, leading a coalition of leftist parties, was elected in 1980, but a military coup prevented him from taking office until 1982.

Siles said he would rid the government of corruption, including official involvement in cocaine trafficking, which had led to an international boycott of Bolivia’s previous military regime and to its eventual collapse.

But the Siles government proved unable to control constant labor union strikes for higher wages that disrupted production or to prevent corruption in state enterprises that led to huge budget deficits. The state oil company, the Bolivian government’s largest single source of revenue, did not pay any taxes or royalties during 1985 until Paz took over. Now it provides more than half the monthly tax revenues of $20 million.

Under pressure from his leftist allies, Siles refused to take the austerity measures called for by the International Monetary Fund. Bolivia even stopped paying interest on most of its foreign debt last year. Foreign private banks, owed $900 million, closed branches here and virtually wrote off Bolivia as a bad debtor.

Seeking IMF Accord

Paz, who heads a center-right political party, has changed all that. Unlike some other delinquent Latin American debtors, such as Peru, which reject surveillance by the IMF as a condition for debt refinancing by foreign banks, Bolivia is urgently seeking an IMF “standby” agreement.

Paz believes that an agreement with the fund is necessary to obtain an emergency loan of $150 million that Bolivia is seeking to maintain imports next year. With inflation under control, Paz also hopes to obtain $1 billion in development loans from the World Bank and Inter-American Development Bank next year.

The unions fought the Paz reforms, launching a general strike in September. “These measures will produce a social explosion,” warned Juan Lechin, the veteran leader of the Bolivian Workers Confederation.

After negotiations with the unions broke down, Paz declared a state of emergency and ordered the military to force the restoration of transportation and communication. The government arrested 1,200 union leaders and confined 150 of them in the remote department of Beni. By the end of September, the strike collapsed for lack of worker support and the union leaders were released. They are now negotiating with the government on job stability.

Paz Gaining Support

Instead of losing political support because of his reforms, Paz has gained strength. He was able to strike an agreement with Banzer, his rival in the presidential election, giving the government a congressional majority in favor of the emergency measures and the economic program.

“We agree with the basic ideas of the program and the restoration of government authority,” said Eudocio Galindo, secretary general of Banzer’s National Democratic Alliance party. “Without economic stability, we will not have democracy in Bolivia.”

Even the Revolutionary Left Movement (MIR), the largest leftist party, gave Paz tacit support. The MIR backed Paz’s decision to break up the major state mining and oil companies into smaller operating units to increase management control and reduce the influence of union leaders.

This reversed a traditional position of Paz’s party, the Nationalist Revolutionary Movement, which led a revolution in 1952 that nationalized big tin mines and distributed large rural estates to peasants. The party gave union leaders the power to name management in the nationalized mines, state farms and public banks.

Tin Output Dropped

The result has been chronic deficits, vast corruption and unnecessary employment, or featherbedding. The big tin mines, run by COMIBOL, the state holding company, have seen production drop from 16,000 tons to 9,000 tons this year while 26,000 workers were kept on the payroll. It costs COMIBOL $20 to produce a pound of tin that it sells for $5 on the world market.

Three labor union-appointed officials of the central bank, including the former general manager, are under arrest for using million of dollars for their own benefit. The central bank is the source of the newly printed money with which the Siles administration paid more than 60% of the government’s bills. Tax collections collapsed as the economy went into illegal channels.

The architects of the Paz program recognize that public support for the anti-inflation measures may erode quickly if there is a deep recession and a correspondingly high level of unemployment.

“There have to be new productive jobs. Even if the inflation and corruption was killing us, it put money in the hands of a lot of people. They have to find work or they will become criminals or guerrillas,” a businessman said in the city of Santa Cruz.

Poorest in Region

Bolivia, with a population of 6 million, is the poorest country in South America, with a per capita income of about $350 a year. About 40% of the people live on subsistence farms. The most prosperous of these farmers grow coca leaves to produce cocaine for export to the United States and Western Europe.

Bolivia’s important mining sector, once the mainstay of the economy, has been hit hard by declining international prices. The few Bolivian industries, such as the shoe and textile sectors, are in deep trouble.

Manaco, the largest shoe firm, has reduced prices 20%, but imports of cheaper plastic shoes from Taiwan have flooded the market, and Manaco has had to cut its work week to four days.

“For this program to succeed, we have to postpone all our foreign debt payments and obtain new investment capital,” said Juan Carriaga, general manager of the Bank of Santa Cruz, who is part of Paz’s economic advisory group.

Oil Discovered

The first sign of renewed interest in Bolivia by foreign investors came from the Occidental Petroleum Corp., which has found oil in two fields here. David R. Martin, an Occidental executive vice president, told Paz last month that the company is ready to increase investments here.

Bolivia owes Occidental $50 million for oil deliveries to the state refineries. But with international prices for tin, still the major export (other than illegal cocaine), falling in October to the lowest level since before World War II, Bolivian officials said they need emergency aid.

The most pressing need is for agricultural credits to finance the planting of major crops, including corn, soybeans and cotton, at the start of the November rainy season. The government’s austerity program to balance the budget has eliminated subsidized farm credit.

Javier Perez de Cuellar, the Peruvian who is secretary general of the United Nations, is leading an international effort to obtain a short-term loan of $150 million from the central banks of about 15 countries, including the United States, to meet Bolivia’s immediate needs until an agreement is signed with the International Monetary Fund.

An International Monetary Fund mission is due here this month to negotiate the “standby” agreement that will help Bolivia refinance its foreign bank debt, postponing payments that it cannot make now.