The University of Maine DigitalCommons@UMaine School of Economics Faculty Scholarship School of Economics 2-1991 Bolivia: The olitP ics of Cocaine Melvin Burke University of Maine Follow this and additional works at: https://digitalcommons.library.umaine.edu/eco_facpub Part of the Food and Drug Law Commons, and the Latin American Studies Commons Repository Citation Burke, Melvin, "Bolivia: The oP litics of Cocaine" (1991). School of Economics Faculty Scholarship. 9. https://digitalcommons.library.umaine.edu/eco_facpub/9 This Article is brought to you for free and open access by DigitalCommons@UMaine. It has been accepted for inclusion in School of Economics Faculty Scholarship by an authorized administrator of DigitalCommons@UMaine. For more information, please contact [email protected]. = "Despite a marsive infusion oj monty and manpower, no one can seriously claim that the war on drugs in Bolivia is being won. » Bolivia: The Politics of Cocaine By MELVIN BURKE Professor of Economics, University of Maine OLIVIA'S sad and turbulent history continues The deteriorating economic situation - com­ . to repeat itself. The coca boom of today has bined with pressure from the international com­ Breplaced the tin boom of the last century, munity - forced the Bolivian military to return to its which in turn supplanted the exploitation of silver barracks in October, 1982.2 Hernan Siles Zuazo and other precious metals during the colonial and his Democratic and Popular Unity (UDP) period. And as in the past, Bolivia's export-based coalition, which had won the 1980 election, then economy continues to depend on foreigners for assumed power. President Siles, who had success­ everything from bank loans to economic advisers. fully implemented a stabilization program in It is impossible to understand Bolivia's current 1957-1958, was again heir to an inflationary, no­ economic situation without first understanding the growth economy that was not of his making. As links between Bolivia's prosperity during the 1970's economis t Jeffrey Sachs notes: and the inflation, price stabilization and stagnation The Siles government inherited an annual inflation of the 1980's. The economic prosperity Bolivia en­ rate of approximately 300 percent (October, 1982, joyed during General Hugo Banzer Suarez's reign over October, 1981), an inability to borrow on inter­ between 1971 and 1978 was financed with petrodol­ national markets, and an economy declining sharply lars borrowed from abroad. In less than a decade, in real terms (real GNP [gross national product] fell public debt increased from $671 million to more by 6.6 percent in 1982). At the same time, the new than $2.5 billion. Foreign loans were supplemented government was called upon to satisfy pent-up social during these global inflationary years by increased and economic demands.' export earnings from tin and crude oil as well as il­ licit dollars from the booming cocaine trade. In an attempt to repeat his earlier historic suc­ Bolivia's so-called economic miracle, however, cess, Siles implemented six price stabilization plans was short-lived. It came to an abrupt end in late during his short term of office. They all failed 1979, when the United States Federal Reserve because his government, which included Bolivian Board, following a monetarist policy to curb infla­ Communist party ministers, lacked support from tion, raised interest rates dramatically, precip­ Bolivia's businesspeople and its international credi­ itating the worldwide recession of 1980-1982.1 tors. This lack of support led to capital flight, Prices for oil and tin collapsed, private capital fled devaluation of the peso and rising prices. In a Bolivia, short-term foreign debts tripled between desperate attempt to stop the vicious spiral of deval­ 1980 and 1982, and Bolivia fell into a debt crisis and uation and inflation, the Siles government ftxed depression from which it has yet to recover. Not prices, wages, interest rates and the official ex­ even the Bolivian military could contain the social change rate. The result was an increase in black unrest brought on by this economic crash, which market economic transactions, which were not manifested itself in political turmoil. The four years taxed, and a subsequent drop in government from 1978 to 1982 witnessed no less than nine heads revenues. In a futile attempt to finance government of state. deftcits, the Central Bank printed more and more money. The outcome of all these measures was the 'Jerry R. Ladman, cd., Modern Day Bolivia: Legacy if the Bolivian hyperinflation of 1984 and 1985. Revolution and Prospects for the Future (Tempe: Arizona State University Press, 1982). 'James M. Malloy and Edwardo Gemarra, eds., Revolution THE NEW ECONOMIC POLICY and Reaction: Bolivia, 1964-1985 (New BrunswiCk, N.J.: Trans­ Hyperinflation forced Siles to call early elections ac tion Publishers, 1988), and Juan Antonio Morales, "Inflation in 1985 . In the elections, former General Hugo Stabilization in Bolivia," in Michael Bruno et al., eds. Inflation Banzer Suarez and his Democratic Nationalist Ac­ Stabilizalzon: The Expmence if Israel, Argentina, Brazil, Bolivia, and Mexico (Cambridge: MIT Press, 1988). tion (ADN) party won a plurality of 29 percent of 'Jeffrey Sachs, "The Bolivian Hyperinflation and Stabiliza­ the vote. Victor Paz Estensorro of the National ti on," The Amencan Economic Review, May, ) 987, p. 280. Revolutionary Movement (MNR), however, be- 65 66 • CURRENT HISTORY, FEBRUARY, 1991 came President with only 26 percent ot the vote cost of this stabilization program. Unemployment after forming an alliance with the Left Revolu­ of workers increased to an estimated 20 percent, tionary Movement (MIR) of Jaime Paz Zamora. real wages decreased, and rural teachers quit their Ironically, Paz Estensorro had been Bolivia's Presi­ jobs in record numbers. In compensation for their dent during the previous period of inflation between reduced incomes, Bolivian government ministers 1952 and 1956. were secretly paid salaries by the United Nations. 6 President Paz Estensorro took office on August 6, If this were not enough, the government imposed a 1985, and proclaimed the so-called New Economic 10 percent value-added tax (VAT) on all economic Policy (NEP), which included a devaluation of the transactions in mid-1986. peso and a managed floating exchange rate; a cut in Economist Nicholas Kaldor has observed that or­ government spending and deficits; a freeze on thodox economic policy, like Bolivia's, public sector wages; elimination of government is no more than a convenient smokescreen providing subsidies and controls on trade and prices; and an ideological justification for such antisocial privatization of public enterprises. This austere In­ measures [as1 high interest rates, an overvalued ex­ ternational Monetary Fund (IMF) stabilization change rate, and the consequent diminution in the program was intended to do more than eliminate bargaining strength of labor due to unemployment. 7 inflation. The policy succeeded in stabilizing prices, but it There are indications today that Bolivia's high in­ did so at a high human and social cost. Public sector terest rate of 19 percent discourages real investment employment decreased by 10 percent within a year, and that the "managed" peso is seriously overvalued the peso was devalued by nearly 100 percent and in­ by approximately 20 percent, thus reducing exports flation fell to an annual rate of 276 percent in 1986 while promoting imports. Moreover, there is sub­ and 15 percent' in 1987. 4 In return for complying stantial evidence that the Bolivian Central Bank is with the ~MF conditions, Bolivia received increased using drug money to stabilize its finances. Short­ international financial assistance, including loans term (30-day) deposits in dollars and dollar-indexed of $225 million from the IMF, $257 million from accounts (no questions asked) increased from less the World Bank and $351 million from the Inter­ than $28 million in September, 1985, to an esti­ American Development Bank. The Paris Club of mated $270 million'in March, 1987. Since then, creditor governments also permitted Bolivia to re­ dollar deposits in Bolivian banks have increased to schedule $2 billion in debt, and it granted Bolivia about $700 million, and the economy has once the unique privilege of repurchasing $450 million of again been "dollar stabilized." its foreign debt owed to commercial banks at 11 This stabilization, however, is not an economic cents on the dollar, with money donated by foreign miracle. The return of finance capital (international governments. In short, Paz Estensorro's center­ loans, debt reduction and drug money) to Bolivia right government was handsomely rewarded. for after 1985, the freeing of prices and regressive taxes returning Bolivia's economy to an open, laissez­ brought price stability to Bolivia. But the program faire and subordinate position in the global capital­ has not brought prosperity or social justice to the ist community. country. On the contrary, inequality has increased, Paz Estensorro's stabilization program also led to and the economy has shrunk. Nowhere is this more the privatization of the national mining company, evident than on the streets of La Paz, where street Corporaci6n Minera de Bolivia (Comibol) and the vendors and beggars contrast with the fancy bou­ firing of 23,000 of the company's 30,000 miners. 5 tiques, posh hotels and Mercedes-Benzes. The re­ The massive unemployment of miners was only one gressive VAT absorbs nearly 15 percent of the gross domestic product (GDP) and the high-interest dollar deposits discourage productive investment. 'See Arthurj. Mann and Manuel Pastorjr., "Orthodox and Heterodox Stabilization Policies in Bolivia and Peru: As a result, "real per capita GDP fell by 5.6 percent 1985-1988," Journal of Interamencan Studies and World Affairs, vol. in 1986, 0.6 percent in 1987 and 0.1 percent in 31 (Winter, 1989), pp. 170-176. 1988."8 From 1986 to 1989, Bolivia's per capita 'In October, 1985, the price of tin abruptly declined by 50 GNP was only 74 percent of the per capita GNP in percent.