68 - Minerals in Bolivian Development 1970-90 - Auty

8/3/2019 68 - Minerals in Bolivian Development 1970-90 - Auty

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THE RESOURCE CURSE THESIS:MINERALS IN BOLIVIAN DEVELOPMENT, 1970-90

R.M. AutyDepartment of Geography, Lancaster University

Lancaster LA1 4YB. U.K.

ABSTRACTRich natural resource endowments like minerals often prove to be a curse. This is because they raise

over-optimistic expectations that lead to lax economic policies which in turn retard the competitivediversification needed to sustain rapid economic growth. A clear example is provided by Bolivia during the1974-78 and 1979-81,mineral booms. But Bolivia also shows a corollary of the resource curse thesis: inadversity (the hyperinflation and mineral price falls of the mid- 19809, tough but necessary reforms mayemerge. Bolivia now needs to accelerate the re-orientation of its economy towards the tropical lowlands.

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THE RESOURCE CURSE THESISIn recent years, evidence has emerged which

suggests that t h e economies of resource-richdeveloping countries may under-perform comparedwith resource-deficient countries. For example,Nankani (1 979) found that the mineral economies(which comprise about one-fifth of all developingcountries and are characterised by the fact thatmining provides at least 10 per cent of their GrossDomestic Product (GDP) and 40 per cent of theirexports) tended to have slower economic growth,less equitable income distribution and lower levelsof welfare than developing countries which lackedthe mineral resource bonus. Subsequent researchby Gelb (1988) on the oil-exporting countries andby Auty (1993) on the ore-exporters confirmed thefact that the mineral resource can easily turn into acurse rather than a blessing. Meanwhile, among thenewly-industrialised countries (NICs), resource-

deficient East Asian countries like South Korea andTaiwan have industrialised more successfully (Auty,1994) than the large resource- and market-rich LatinAmerican economies like Mexico.

Such research has led to the formulation of theresource curse thesis which provides a plausibleexplanation for the disappointing economicperformance of resource-rich countries. It explainshow a favourable natural resource endowmentcan become a curse. Basically, over-optimisticprojections of the rents (returns in excess of thoserequired by a competitive producer to remain inoperation) from the natural resource trigger a five-stage process in which:

(i) macro-economic policies become too lax;(ii) pressure for compet itive economic

diversification eases so that manufacturing

Singapore Journal of Tropical Geography, Vol. 15, No. 2 (1994) ,95-111


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96 R. M. Auty

is slow to m ature (i.e. to reach internationallevels of competitiveness);(iii) the capacity of the primary se ctor (mining

and farming) to t ransfer subsidies andforeign exchange to the slow-maturingm a n u f a c t u r i n g s e c t o r i s e v e n t u a l l yexceeded so that fiscal and trade deficitsexpand;(iv) yet the required policy reform is thenblocked by the interest groups (factoryowners and their unionised workforce)which benefit from rent-seeking activityin the slow-maturing manufacturing sector;(v) governments therefore abandon reform andinstead, seek to stimulate economic growththrough higher publ ic spending whichproves counter-productive and leads tomore erratic and slower economic growth(Sachs, 1989).Mahon (1992) has argued with reference to LatinAmerica that the adoption of orthodox economicpolicy reforms is required to restore rapid economicgrow th. But such reforms require cuts in real wage s(in order to achieve competitive industrialisation)that are on a scale which is difficult to implementin resource-rich countries. Th is difficulty arisesbeca use the political co sts of reform are high whilethe benefits are unlikely to be captured within thel i fe- t ime of most governmen ts . Consequen t ly,governments tend to shun the austerity required byorthodox policy reform. Instead , they prefer to staywith structuralist policies which rely heavily on stateintervention to revive flagging economic growth

through public spending aimed at utilising spareindustrial capacity (Sachs, 1989). Yet, such publicspending triggers populist booms which invariablycreate excess demand which quickly outst r ipsdom estic productive capacity. As a result, populistbooms mere ly exacerba te the growing macro-economic disequilibria (rising inflation and growingdeficits in the current account and budget) andperpetuate weak economic growth. In effect, Mahon(1992) is describing stages four and five of theresource c urse thesis.

This pap er uses Bolivia a s a case study to showhow the resource curse thesis can explain thed i s a p p o i n t i n g e c o n o m i c p e r f o r m a n c e o f adeveloping mineral econ om y. Existing literaturesuggests that mineral economies must satisfy twobasic conditions in order to achieve sustainableecon om ic development (Repetto, 1992). First, afraction of the mineral revenues must be savedannually to replace the income that will be lostwhen the depleting mineral asset is eventuallyexhausted. Sec ond , environmental dam age frommineral extraction (such as pollution of air, waterand land) must be minimised by incorporatingappropriate incentives in the process of mineralextraction (Mikesell, 1992). A vital pre-requisitefor achieving these two conditions of sustainabledevelopm ent is the avoidance of the resource cursesyndrome. This requires the adoption of appropriatemacro-economic and sectoral policies.

At the root of the resource curse in mineraleconomies lies the fact that mineral rents providegovernments with revenues which fluctuate and areinvariably over-estimated. In addition, the mineralrents can tempt governments into deploying themfor short and medium term political ad vantage ratherthan for long term sustainable development. Fewgovernments are able to resist political pressure forthe rapid domestic absorption of mineral windfallsdu r i ng boom s so tha t the i r pol ic ies tend toexac erbate the boom/bust cycle (Gelb, 1988).

Corden and Neary (1982) have identified twoeffects which result from a mineral boom, thespending effect and the resource transfer effect. Thespending effect of the boom causes the prices ofservices to rise comp ared to the prices of no n-miningtradeables (agriculture and manufacturing), whichare constrained by competition from imports. Theresource transfer effect results from the attractionof capital and labour from the constrained non-mining tradeable sector into the boom sector andservices. The resulting loss of both relative andabso l u t e com pe t i t i venes s by t he non- m i n i ngtradeables is known as the Dutch disease effect(Krugman, 1987), after the impact of the North Seagas boom on the economy of the Netherlands.All too often , the mineral rents are used duringboo ms to protect the manufacturing sector from


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Resource curse thesis: Bolivia 97

global competition and also to cushion the relativedecline in agriculture. Th is policy of subsidy andprotection has been justified on the grounds thatm i n e r a l b o o m s c a u s e a r e a l a p p r e c i a t i o n(strengthening) in the exch ang e rate which weakensthe competitiveness of the more labour intensivenon-m ining tradeable sub-sectors. But in fact, theextension of protection during mineral boom s retardsthe required compet i t ive diversi f icat ion of theeconomy away from mineral dependence. This isbecause the protected sectors invariably prove tooweak to expand when mineral revenues fall afterthe boom and employers and workers (the vestedinterests benefiting from the mineral rents duringthe boom ) strongly resist the removal of protection.

The inadequate performance of the weak non-mining tradeables during the post-boom downswingsmeans that the economic gains made during themineral boo ms are often reversed. In this way,economies affected by the Dutch disease displayslow and erratic economic growth . In the extrem e,the mine ral sector itself may be seriously w eakenedif the transfers from m ining to the protected sectorsare exce ssive and leave the mines with insufficientfunds for equipment maintenance and exploration.Such an ou tcome has occurred in Bolivia, Guyana,Peru and pre-Pinochet Chile in South America, aswel l as in many sub-Saharan Afr ican mineraleconom ies, notably Zam bia, Zaire and Nigeria. Inthe case of a second set of mineral economies,including Jamaica, Trinidad and T obag o, Venezuelaand Papua New Guinea, less damage has beeninflicted on their mining sectors but their overallecon om ic growth h as still been disappointing.

A third group of mineral economies shows,however, that the resource curse thesis is no t adeterministic law but a strong recurring tendency.(Moreover , l ike al l unicausal explanat ions, theresource curse thesis understates the role of othervariables for clarity of exposition). This group ofcountr ies includes post-Allende Chi le (Auty &War hur s t , 199 3) , I ndones i a ( Bha t t acha r ya &Pengetsu, 1993) and Botswana (H arvey & Lewis,1990). Their situations highlight the policies whichare required to avoid the Dutch disease effectsand thereby meet the two pre-condi t ions forsustainable developmen t listed earlier. Specifically,

they share a commitment to orthodox macro-economic policy with its twin disciplines of promptfiscal and trade gap adjustments. Suc h timelyadjustments prevent the cumulation of economicdistortions. They have also adopted a mineralstabilisation fund (albeit belatedly in the case ofChile) which accumulates rents during the boomsa n d r e l e a s e s t h e m d u r i n g t h e s u b s e q u e n tdownswings. Th is fund smoo ths the injection ofthe mineral rents into the econom y. It thereby mutesthe mineral-driven shifts in the real exchange ratewhich sap the competitiveness of agriculture andmanufacturing (i.e. the Dutch disease effects).Finally, the successful countries maintain mineraltax regimes which are sensitive to the profitabilityof the mining sector and its investment needs.

Th e successes notwithstanding, many econom iesdo suffer from the resource curse and this paperdemonstrates how the thesis works in the specificcase of Bolivia from 1972 to 1990 when two mineralbooms gave the country an opportunity to recoverfrom past economic neglect. Th e paper will bedivided into five sections focusing on the relaxationof macro policy during the 1974-78 boom ; thepostponement of reforms during the 1979-8 1 boom;the vested interests and delay ed diversification; thedecapitalisation of Bolivian state-owned mines; andreform under straitened circumstances.

RELAXATION OF MACRO POLICYDURING TH E 1974-78 BOOMBolivia was a remarkably mineral-dependenteconomy in the early 1970s, generating 77 per centof exports, 44 per cent of taxes and 20 per cent of

G D P from mining. Mo re than half the populationlived on the harsh Altiplano where the mines andcapital city are located (Fig. 1). Althoug h GD Pgrowth w as moderately g ood at that time (Table l),the fiscal and current account deficits were growingand the ratio of foreign debt to Gross NationalProduct (GNP) was relatively high. Th ese econo micproblems reflected flaws in the institutions of statecapitalism which the 1952 revolution had establishedin p lace of the previous sys tem of in te rna lcolonialism (exploitation by a local elite). But the


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Source (for figures): World Bank, 1992Fig.1 . Bolivia: population distribution by region.


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Resource curse thesis: Bolivia

1970-73 1974-78 1979-82Pre-boom First Boom Second Boom

99

1983-86 1987-91Downswing Stabilisation

GDP growth (%) 4.2 4.4 (1.2) (2.2) (1.2)Terms of trade (1980 = 100) 56.1 81.4 95.3 87.4 95.3Real effective exchange rate (1965= 86.6 101.3 128.1 212.3 128.1Balance of payments (% GDP) (0.3) (4.0) (10.4) (11.0) (10.4)Fiscal gap (% GDP) (3.1) (2.8) (6.2) (14.3) (6.2)Debt (% GNP) 50 59 87 164 87

Note: The figures in parentheses are negative numbers (i.e. deficits).Sources: World Bank, 1993,except a Wood, 1988

Bolivian state lacked the capacity to execute itslead role in the econo my w hich, through the 1960sand 1970 s, entailed responsibility for half o r moreof total Bolivian investment and also managementof the larger mines . Yet, despite the institutionaldeficiencies, the lead role of the state survived USpressure, beginning in 1964 , to adopt orthodoxeconomic policies (Bailey & Knutsen, 1987).

T h e B o l i v i a n s t a t e w a s u n a b l e t o e x p a n ddomestic taxes to a level commensurate with itslarge public sector role. This reflected a conflictbetween workers eager to expand social spendingand those with wealth who resisted such trends( Pas t o r , 1991) . As a r e su l t , t he gove r nm en tgenerated insufficient revenue to provide servicesand meet public investment needs. Th e state couldno t t he r e f o r e o f f s e t t he low l eve l of pr i va t einvestment and this meant that total investment waslow relative to GDP. In fact, investment was notonly low, it was also poorly applied. Scant conce rnwas shown for maintaining the efficiency of thestate mines which were regarded principally as asource of revenue and welfare rather than as abusiness (Jordan & Wa rhurst, 1992). Yet, despiteneglect of the min es, the c omp etitive diversificationof the economy was not given high priority.

Bolivia was one of the poorest countries in theAm ericas in the early 1970 s becau se its prodigiousmineral wealth had failed to diffuse through thepopulation. It was provided with an opportunity tobegin to correct past erro rs by the positive econ omicshocks triggered by the 1973 and 1979 rises inmine ra l pr ices . This is becau se the count ryexperienced a substantial improvem ent in its externaltrade after the 1973 oil shock. A comb ination ofthe quadrupling of oil prices in 1973-74 and adoubling in the world tin price conferred a 40 pe rcent gain in Bolivias terms of trade com paring theperiod from 1974 to 197 8 with the period from1970 to 1973 (Table 1). Given the ratio of exportsto GDP, this yielded a windfall equivalent to 12.1per cent of G D P annually for the years from 1974to 1978. This positive shock compares with shocksover the same period of 10.8 per cent fo r Ven ezuelaand 16.8 per cent for Ecuador (Gelb, 1988). Thesecon d shoc k was also initially positive, albeit mo remodestly so, with an impact about one-quarter thesize of the first shock.

Desp ite the positive shocks, the long term trendof the Bolivian economy was one of acceleratingweakness through the 1970s and 1980s (Table l ) , asimilar outcome to that of other high absorbing


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100 R. M. Auty

hydrocarbon-exporting countries like Nigeria andVenezuela. Th is is the more disappointing becausea military governm ent cam e to power under HugoBanzer Su arez in 197 2 which proved capable of atlast launching an economic stabilisation programme.Th e successful com pletion of that programme wouldhave enabled the government to use the windfallsfor sustainable development.

Bolivia needed to allocate part of the mineralwindfall to a stabilisation fu nd in ord er to completeits economic adjustment programme and to curbany strengthening of the real exchan ge rate. It couldthen make investments in projects which wouldacce lera te long te rm economic growth . Suchprojects included elimination of the infrastructurebacklog (like a main road to the Pacific), updatingmining sector technology and helping peasants tomigrate from the Altiplano into the potentiallyproduct ive t ropica l eas te rn lowlands (Fig . 1).Instead, consistent with the first stage of the resourcecurse thesis, the Banzer government used the firstoil shock to relax the austere stabilisation policywhich it had launched in 1972.Worse, the government did not adopt a prudentpolicy for the deployment of the mineral windfall.

Rather, Banzer took advantage of the favourablemineral pr ice t rends not only to backtrack ons t a b i l i s a t i o n b u t a l s o t o b o o s t i m m e d i a t econs um ption, especially that of his supporters. Fa rfrom saving a part of the windfall in a stabilisationfund in order to smooth out the boom and bust ofthe mineral cycle, Bolivia used its hydrocarbonreserves as collateral to increase foreign borrowing,in the same way that Mexico did (with similarlydisastrous consequenc es). Bolivia expanded itss izeable debt , thereby ampl i fy ing the minera lwindfall and increasing upward pressure on theexchange ra te (Table 1) . The r ea l exchangerate appreciated by 4 4 per cent in 1973 -74 andremained aroun d that level unti l the 1979 oi lshock drove it still higher. This further weakenedthe competitiveness of farming and manufacturingso that the windfall deployment intensified thedependen ce of the econom y on mining.

Th e bulk of the mineral windfall therefore wentinto higher consumption rather than into investment

to diversify the economy. One way it did this wasthrough the substitution of taxes on minerals fortaxes on incomes as part of the relaxation of fiscaldiscipline w hich occurred af ter the 197 3 oil shock.But even with the extra taxes from mining, theearlier success in shrinking the fiscal deficit underBan zer was reversed. Th e fiscal deficit, havingnarrowed to 0.8 per cent of the GDP in 1974-75,deteriorated rapidly through the boom to average4.9 per cent of the GDP in 1977-78 (UN, 1977;1984). Foreign aid at first expa nde d to meet agrow ing share of the fiscal deficit, rising from one-fifth to one-third durin g the mid- 1970s. Between1978 and 1985 , gove r nm en t r evenues begandeclining and the fiscal gap therefore widenedsharply.

A second way in which consumpt ion wasincreased was through higher import purchaseswhich were made cheaper as a resul t of thes t r e n g t h e n i n g o f t h e r e a l e x c h a n g e r a t e .Consequently, as with the fiscal deficit, an initialimprov emen t in the trade deficit was reversed duringthe boom (Tab le 1). Imp orts grew even faster thanexports so that the trade deficit widened despite thesharp increase in export earnings brought about byhigher oil and tin prices. Th is trend would havebeen less w orrying if a larger fraction of the importsh a d c o m p r i s e d c a p i t a l g o o d s f o r e x p a n d i n gcompetitive manufacturing or farming in order toearn foreign excha nge after the mineral boom.

In line with the second stage of the resourcecurse thesis, Bolivia failed to promote competitiveeconom ic diversification. Th e countrys investmentratio remained low , even though in the early 1970s,it was only 15 per cent of the GDP, some 5 percent below the Syrquin and Chenery (1989) norms(which are averages based on data for over 100countries) for a country of Bolivias size and levelof deve lopm ent. Th e private sector responded tothe imprudent economic policy through capital flightand by 1978, public investment had reached two-thirds of all investment (Morales & Sachs, 1988).

Meanwhile, consistent with stage three of theresource curse thesis, insufficient investment wasa l loca ted to o i l explora t ion and development .Moreover, the investment in hydrocarbons which


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did occur failed to yield positive results, so thatlong te rm product ion was adverse ly a f fec ted .Furthermore, the opportuni ty was not taken toreverse the neglect of investment in the state-ownedAltiplano ore mines which had been running downsince the 1930s (Cas anov as, 1990). Instead, thewindfall from higher tin prices w as taxed away fromthe leading s tate firm (Cornibol),which at that timeaccounted for two-thirds of Bolivian output (Ayub& Hashimoto, 1985). Much of the investment whichwas made in ore mining was used to establish astate-owned tin smelter in order to raise domesticvalue added in line with fashionable theories ofresource-based industrialisation. Th e smelter wasuneconomic, however, and suffered sizeable losses(Hennert, 19 86). Consequently, even as the Dutchdisease effect weakened the non-mining tradeablesand increased Bol ivian dependence on mining(exam ined in more detail below), the mining sectorcontinued to be under-funded throughout the boom.

In sum mary , the 1974-78 windfall was unw iselyused to relax macro-economic policy and boostconsum ption, thereby reversing the gains of the 19 72stabilisation package. It failed on tw o counts: itdid not correct macro-econo mic deficiencies; neitherdid it compensate for past under-investment in themining and non-m ining sectors. Ironically, despitethe consumption boom, GDP growth deceleratedcontinuously from its 1975 high of 6.6 per cent(Table I) . Moreo ver, low income groups failed tobenefi t f rom the windfal l deployment and thisunde r m i ned po l i t i c a l suppor t f o r t he Banze rgovernment. Banzers depe nden ce on elite grou psin the tropical lowlands of his home province andthe pr ivate Alt iplano mines caused the Carteradministration in the US (a critical source of fo reignaid) to apply pressure on him to step down andrestore democracy in 1978.POSTPONED REFORMS DURINGTHE 1979-81BOOM

The second oil boom was weaker than the firstas the share of hydrocarbons in exports was only23 per cent in 1980 compared with 30 per cent in1975 (Table 2). Oil exports had fallen to negligiblelevels and gas exports did not expand sufficiently

to comp ensate. At first, ore exports offset the declinein hydrocarbons. This masked the failure to diversifyinto competitive agriculture and manufacturing, at a sk m ade even m or e d i f f i cu l t by a f u r t he rstrengthening of the real exchange rate (Table 1).Bo l i v i a s sm a l l e r s econd m i ne r a l boom a l socoincided with a period of political uncertainty afterthe resignation of Banzer. A leftist coalition underHerman Siles Zua zo which won the 197 8 electionwas prevented from assuming office by militaryand political manoeuvres until 1982. This politicalinstability prevented any prompt implementationof stabilisation measures which the cumulatingeconomic deterioration called for (Morales, 1988).None of the Bolivian governments which brieflyheld power from 1978 to 1982 were able to enlistsuppor t to boos t s t a te revenues in l ine wi thexpendi tures . Publ ic expendi ture grew rapidly,almost doubling in real terms between 1975 and1980 (Bai ley & Knutsen , 1987) . As inf la t ionaccelerated, domestic revenues first stagnated in realterms (i.e. after filtering out the effects of inflation)and then declined sharply in 1980. High levels oftax evasion forced successive governments tocontinue their reliance on trade taxes (mainly onminerals) for revenue. Once more, during a mineralboom , far from saving, the fiscal deficit deterioratedand averaged an unsustainable 6.2 per cent of G DPin 1979-82 (Table 1).

Siles finally em erged a s President at the head ofa left-of-centre coalition in 1982. How ever, hisgovernment lacked the support needed to defeatexisting vested interests and to restore economicstability. It launc hed six stabilisation packageswhich were each overturned by public protest. Itpressed for public spending programmes for whichit did not have the econo mic base to finance (Table3). Initially, foreign financ e cove red the fiscaldeficit and this caused the ratio of debt to GNP tojum p and average 87 per cent over the period 1979to 1982 (Table 1). But emergency debt reschedulingnegotiations with the commercial banks broke downand bo t h t he Wor l d Bank and I n t e r na t i ona lMonetary Fund (IMF) stopped lending in 1981 sothat Bolivia effectively ceased to have access tointernational credit.Th e cut-off in foreign finan ce greatly acceleratedthe cumulative deterioration of the economy and


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1970 1971 1972 1973

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1974 1975 1976 1977 1978 1979 1980

Production volumeCrude (1,000bpd)aGas (mmcfd)bTi n (1,000 omes)

Value added (Bolivianos 1980)cHydrocarbonsMineralsTotal value added

Exports (US$m)HydrocarbonsMineralsTotal export

24.2 36.283.7 222.229.4 30.3

2.00 3.0112.50 13.1683.84 88.08

13.2 23.9204.7 173.4228.6 216.0

1981

Production volumeCrude (1,000bpd)Gas (mmcfd)Tin (1,000 o m e s )

Value added (Bolivianos 1980)HydrocarbonsMineralsTotal value added

Exports (US$m)HydrocarbonsMineralsTotal export

43.7 47.3 45.5 40.4 40.7 34.7 32.4 27.9 27.5331.3 414.4 395.0 384.6 430.7 416.9 431.2 438.3 461.030.3 28.4 29.8 31.8 30.6 33.9 30.8 27.4 27.3

6.09 7.77 7.58 7.31 7.46 7.22 6.98 6.42 6.7312.90 14.04 13.30 13.41 13.29 14.51 14.16 13.06 12.6895.10 100.56 103.52 11.08 116.21 121.99 124.49 124.66 122.95

41.6 67.0 193.1 153.9174.1 225.9 387.3 304.3240.4 338.3 650.5 521.4

1982 1983 1984 19851167.5336.9625.3-1986__ 134.9 122.2 149.7 245.2492.7 315.6 591.9 641.1715.4 725.3 857.2 1,036.21987 1988 1989 1990u27.5 30.5 28.4 26.5 25.7 23.0 24.5 24.7 25.8 25.1

481.0 515.0 488.0 473.0 450.0 441.0 441.7 464.1 n.a. n.a.29.8 26.7 25.3 19.9 16.1 10.5 8.1 10.7 15.8 17.5

7.07 7.48 6.84 6.87 6.73 6.47 6.56 6.88 7.2 7.513.07 12.05 11.78 9.47 7.55 5.59 5.69 7.57 7.6 9.5

124.08 118.67 110.94 110.61 110.45 107.21 109.48 112.56 113.1 116.3

346.6 398.4 420.1 388.9 374.3 332.5 256.0 218.9 203.1 225.3556.0 419.4 347.3 364.0 263.7 196.8 207.2 270.5 375.3 403.1995.3 898.2 817.5 782.1 672.5 637.8 569.5 600.5 821..3 956.3

Note: a barrels per daymillions of cubic feet per dayThe 1980exchang e rate was 24.5 Bolivianos per US$

n. a. = not availableSources: Association National de Mineros Medianos

Banco Central de BoliviaYPFB


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TABLE 3. PUBLIC REVENUE AND EXPENDITURE, BOLIVIA, 1980-90(BILLION 1980 BOLIVIANOS)YEAR I REVENUE I EXPENDITURE I DEFICIT19801981198219831984198519861987198819891990

49.839.740.527.923.715.521.218.124.426.629.7

59.348.358.649.151.826.724.926.932.031.433.7

(9.5)(8.6)(18.1)(21.2)(28.1)(11.2)(3.8)(8.8)(7.6)(4.8)(4.0)

Note: The figures in parentheses are negative numbers (i.e. deficits).Source: World Bank. 1992.

triggered hyperinflation. Sachs (1987) calculatesthat the cut-off of foreign credit was equivalent tothe loss of 10 per cent of the GDP for Bolivia in1980-83. The current account deficit in 1982 was15 per cent of the GDP and the fiscal deficit 16 percent of the GDP. Yet, the misallocation of thewindfalls in 1973-82 meant that neither a mineralstabilisation fund nor additional agricultural orindustrial production were available to help closethe gap left as mineral revenues fell.A sizeable part of the ballooning fiscal deficitwas financed by printing money, and inflation(which over the previous two decades had not beenhigh by Latin American standards) rose from 25per cent in mid-1981 to 300 per cent by October1982 and approached 20,000 per cent in 1985. Suchhyperinflation caused chronic currency over-valuation (strengthening) to the further detrimentof exports. Although trade generated 20 per centof Bolivian GDP in the early 1980s, the countryhad very few activities other than mining which

were competitive at world prices. Meanwhile,Bolivias mining sector was being marginalised dueto the cumulative over-valuation of the exchangerate, as explained in the next section.Per capita incomes fell by 25 per cent between1980 and 1984 and official unemployment jumpedto one-fifth of the workforce. Under theseconditions, the informal economy, an activity notdirectly compatible with a soundly-run economy,played an increasingly important role. More and

more people began to trade in drugs and smuggledgoods, circumventing official channels (Blanes,1989). As miners and other city dwellers returnedto the countryside, land (which had been liberallyredistributed after 1952) served as a cushion againstrecession. At least one family in ten was thoughtto depend directly or indirectly on coca production(The Economist, 8.10.88). By the mid-l980s,cocaine and related activities accounted for anestimated 12 per cent of GNP while the value ofillegal cocaine-related exports at that time was


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10 4 R . M . Auty

thought to exceed that of mineral exports (WorldBank, 1989).Meanwhile, workers who remained within the

f o r m a l s e c t o r r e l i e d o n t h e c o u n t r y s w a g eindexation system (which attempted to tie wage ratesto inflation rates) to secure pay increases to offsetinflation. The ir attempts brok e down in 1984;strikes underlined the governments loss of laboursupport and provided a renewed push to inflation.Siles called an election for July 1985 and lost.Under extreme adversity, his successor embarkedon orthodox ec ono mic reforms w hich, reflecting theresource curse effect, the oil windfalls had firstallowed to be postponed and then made even morecrucial.

VESTED INTERESTS AND DELAYEDDIVERSIFICATIONEconomic diversification improves economicperformance by increasing the flexibility with whichan economy can respond to external or internalshocks (Dan iel, 1992). Failure to diversify is on eimportant reason why, once the initial boost toeconomic growth from the s tar t -up of mineralproduct ion has passed , many mature minera leconomies experience such disappointing rates ofeconomic growth. Du ring mineral price booms,the Dutch d i sease e f fec t s hamper economicdivers i f i ca t ion by weakening the non-miningtradeables which either receive protection (andcreate rents which build u p vested political interestswhich resist reform) or are allowed to shrink sothat they become too weak to compensate for thedeficiencies in foreign exchange earnings and tax

reven ues when the mineral boom falters. In thisway, the ability of mineral economies to adjust topost-boom downswings is poor so that the economicgains m ade during the booms are reduced or eveneliminated.Th e over-valuation of the Bolivian ex ch ang e ratethrough the two mineral booms brought successfulpleas for increased protection for agriculture andmanufacturing alike. Th e rate of effective protection(which measures the tariff rate against value added

only, rather than against the total valu e of the goods)for all sectors other than the unprotected miningsector, was estimated at 44 per cent in 1982, withforestry and agriculture slightly lower and industrytwice as high (Morales, 1987). But suc h a situationcould only persist as long as the mineral sectorcould earn sufficient subsidies and foreign exchange.

Non-mineral exports other than coca formed arelatively small fraction of total exports and werealmost wholly made up of primary products fromthe tropical lowlands such as soya bean, co ffee andwood. Th e agricultural sectors share of G D P hadshrunk to barely half the Syrquin and Chenery(1989) norm for a country of Bolivias size andlevel of development. In fact, agricultural exportsdeclined between 1975 and 1 980 from 6 per cent to4 per cent of total official exports and the sectorneeded subsidies to protect i t against imports.Bol ivian agricul ture had become a convenientconduit for political favours, especially under theBanzer regime, rather than an avenue of competitivediversification.This outcome was not due to any shortage inland resources: although two-fifths of Bolivia is unfitfor cul t ivat ion and an addi t ional two-f i f ths isfores ted , some 20 mi l l ion hec tares remain aspotentially cultivable (Weil, 1973). Of this, so m e3.6 million hectares were cultivated in the 1980s(World Resourc es Institute, 19 92). This is a sizeableresource for a country whose rural population wasonly 3.4 million in 1988 and growing at a modestrate of 1.4 per cent per annu m (IAD B, 1989). Theland remained under -used , however , becausealthough farms on the Altiplano were sub-optimalin size, expansion into the mid-altitude valleys andlowland regions had proceeded slowly. Between

197 6 and 199 2, the Altiplano regio ns share of thepopulation fell from 53 per cent to 45 per centwhile that of the valleys rose by just over 1 percent and the t ropica l lowlands increased i t sshare from 20 per cent to 26 per cent (World B ank,1992).

Th e limited d yna mism of the agricultural sectoralso ow ed much to institutional factors. Th e 1952reforms transferred sizeable amounts of land fromlarge estates to peasants on the Altiplano and in the


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upper eastern Andean valleys and while this easedsocial tensions it did not encourage a dynamicfarming sector. The farms were initially small andthey were further sub-divided through inheritanceso that they became even less viable. Remediessuch as the formation of cooperatives proveddeficient. The situation was exacerbated by neglectof technical improvements in peasant crops, notablythe potato which alone occupied one-tenth of thearable land and had considerable potential via higheryields and lower prices to boost the real incomes ofBolivian consumers (de Franco & Godoy, 1993).But such a move would have further depressed theincomes of the smaller Altiplano farmers andaggravated soil erosion. This is because the farmersrespond to lower farm incomes by seeking moreoff-farm employment and withdrawing labour fromconservation tasks like stone terrace construction(Zimmerer, 1993).

The sluggishness of agriculture had importantimplications for industry. This is because Bolivianfarming still employed half the workforce in themid- 1980sso that the limited purchasing power fromlow productivity farm work, when combined withthe countrys relatively small total population,yielded a small domestic market. This curbedopportunities for efficient import substitutionindustry, much of which benefits from scaleeconomies. By the 1970s, the industrial importsubstitution drive comprised high-cost foodprocessing, basic consumer goods like clothes andshoes, and machinery and equipment for the mines.Industrial exports were negligible, discouraged asthey were by the deficiencies in infrastructureand the over-valued exchange rate. Becausemanufacturing depended almost totally on domesticdemand, industrial output shrank in the late 1970sas the domestic economy started to contract. De-industrialisation occurred rapidly: manufacturingoutput shrank at a rate of 7 per cent per annumbetween 1978 and 1986, compared with a 3 percent per annum decline in the economy as a wholeduring the same period. The share of manufacturingin the GDP fell sharply from 15.4 per cent to 10.8per cent. By 1985, the sector employed only 8.7per cent of the workforce and was geographicallyconcentrated in La Paz (34 per cent) and Santa Cruz(30 per cent).

The rate of contraction of individualmanufacturing sub-sectors from 1978 to 1986 variedwidely, partly reflecting sizeable differences in thelevels of protection against imports. The 1982 levelsof effective protection for tobacco, textiles, leathergoods and wood products were almost twice theaverage figure of 98 per cent (Morales, 1987). Yetthese products were precisely the ones which mighthave been expected to require least protection in acountry like Bolivia. They were labour intensiveusers of local raw materials targeted at a domesticmarket that was already insulated somewhat fromimports by high transport costs. But the markedstrengthening of the exchange rate during themineral booms combined with the collapse ofdomestic demand to intensify the lack ofcompetitiveness of the non-mining tradeables sectorand to perpetuate the economys undesirable mineraldependence.

DECAPITALISATION OF BOLIVIANSTATE MINESEven as Bolivian dependence on mineral

revenues increased following the 1973 oil shock,the decapitalisation of the mining sector accelerated.This is why Bolivian economic performanceconformed to the least successful sub-group ofmineral economies, as noted earlier. The miningfirms not only failed to discover sufficient new orereserves, they also neglected equipmentmaintenance. In addition to the difficulties createdfor the mines by lax macro-economic management,two other problems were the absence of a profit-sensitive taxation system and insufficient freedomfrom political interference for the dominant stateore-mining and hydrocarbon-producing firms(Comihol and Yacimientos Petroliferos FiscalesBolivianos (YPFB) respectively).

Nationalisation of the mines in 1952 had failedto improve the competitiveness of tin miningbecause political goals were pursued at the expenseof commercial ones (Jordan & Warhurst, 1992).Comihol acquired the character of a mini-welfarestate in which the provision of employment, bonusesand social needs (including health, education,


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106 R.M. Auty

1980 1981 1982 1983 1984 1985 1986

housing and food) took little account of the firmsability to pay. Exploration lagged behind productionand contributed to declining ore grades. Corniholsmonopoly of reserves meant that private exploitationof those reserves which Comihol failed to prospectwas precluded. In addition, it had also been run asan extension of the bureaucracy by the Ministry ofMines with little attention to efficiency. The costsof running their tin mines ranked among the worldshighest; operating costs in 1984 were some 50 percent higher than most other producers (Ayub &Hashimoto, 1985). Cornibol ceased to publishaccounts in 1977 and its losses grew as itsproduction declined (Table 4). Cumulative lossesfrom 1981 to 1985 exceeded US$230 million(Comibol, 1989). The tin smelting subsidiary lostmoney in every year except for 1979; by 1985, it

1987 1988 1989

had accumulated large debts which amounted toUS$450 million (Suttil, 1988). Debt serviceexpanded to absorb more than 25 per cent ofCornihols revenues.

Bolivian hydrocarbon production, like that ofore, was also initially adversely affected bynationalisation in 1969. Oil reserves declinedthrough the 1970s due to insufficient explorationand to low domestic energy prices. The latter werein fact just one way in which the windfall waswastefully consumed because low energy pricesencouraged faster depletion of the oil reserves. Yet,as government finances deteriorated, YPFB wasmade to over-produce in order to generate taxrevenues faster, revenues which were then notefficiently deployed. Meanwhile, as with Comibol,

Tin output (tomes)Workforce (1,000)Salescos t sOperating profitNet incomeTotal assetsEquity

Memo items

18.6 18.6 15.5 16.0 12.5 10.1 4.2 n.a. n.a.26.5 25.7 26.1 27.7 27.7 27.6 n.a. n.a. 8.0

352.8 378.1 278.8 280.3 224.6 135.1 50.7 17.9 42.0301.9 379.4 340.3 340.9 369.2 383.1 71.6 22.6 46.950.8 5.3 (61.7) (60.6) (144.5) (248.0) (20.9) (4.7) (4.9)

(30.0) (45.5) (51.9) (51.6) (68.4) n.a. (10.4) (3.5) (5.9)a475.7 528.2 490.4 500.0 529.9 573.9 530.5 519.3 528.7117.6 72.7 101.5 58.3 23.9 34.7 441.0 480.1 435.1

n.a.8.01n.a.n.a.n.a.n.a.n.a.n.a.

Tin cost (US$/I b) 3.1 4.5 5.0 5.0 8.0 9.8 4.1 n.a. n.a. 3.0LME price (US$/I b) 7.6 6.4 5.8 5.9 5.6 5.4 2.9 3.2 3.3 4.12

Note: a Total losses 1981-91= US$662 million (The Financial Times, 23.10.92).n.a. = not available

Sources: Cornibol(l989) except I The Financial Times, 11.7.91.World Bank. 1992.


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VOLUME (US$ BILLION)1970 1973 I980 1985 1990

YPFBs retained cash flow was inadequate becauseof excessive taxation: YPFB under-invested eventhough it borrowed heavily.

Nevertheless, hydrocarbon production, mainlygas, was the main vehicle for Boliviandiversification away from ore mining from 1970to 1990 (Table 5 ) . However, the value of the largenatural gas reserves discovered by multinationalcorporations (MNCs) in the eastern lowlands wasreduced by a lack of markets. Plans to use the gasand adjacent high grade iron ore for heavy industryfailed for lack of capital and markets (domestic steeldemand at only 100,000 tonnes was far too small tosupport a viable steel mill). Most of the gas wasexported to Argentina, a market rendered uncertainin the mid-1980s by that countrys financialdifficulties (Latin American Bureau, 1987).

In sum, neither hydrocarbons nor tin receivedadequate investment during the booms even thoughBolivia depended on minerals and hydrocarbons forthe bulk of its exports (Table 5) and more than halfof government revenues (Bun co Central de Bolivia,1989). As in other badly managed mineral economieslike Peru and Zambia, the Bolivian mineral windfalldeployment was associated with lax macro-economic

SHARE OF TOTAL(70)1970 1990

policies which retarded economic diversification andbuilt up vested political interests even as the miningsector on which the country depended heavily wasdecapitalised. In this way, a favourable flow ofrevenue from the mineral sector not only failed toimprove Bolivian economic prospects, it weakenedsuch prospects greatly.

COROLLARY: REFORM UNDERSTRAITENED CIRCUMSTANCESJust as positive shocks (the mineral booms of

1974-78 and 1979-81) had reversed Boliviasstabilisation policy, thereby prolonging andintensifying the countrys poor economicperformance, so it was that the negative shock ofhyperinflation at last triggered reform in 1985. Thefrightening and rapid deterioration of the Bolivianeconomy welded together a political consensus inthe mid- 1980s that abruptly halted the downwardspiral. That consensus found expression in the NewEconomic Policy (NEP) which was launched inAugust 1985 and was implemented underextraordinarily adverse circumstances as first theprice of tin and then that of natural gas, collapsed.

Minerals 204.9 314.2 638.5 263.6 407.1 89.5 43.9Hydrocarbons 13.2 153.9 245.1 376.3 226.9 5.8 24.5Other 10.7 63.0 156.0 32.5 292.5 4.7 31.6

Soya bean - - 6.1 5.3 48.2 - 5.2Coffee 3.5 4.3 20.6 13.8 14.3 1.5 1.5Wood 1.9 12.9 31.1 5.8 49.8 0.8 5.4

Total 228.8 650.5 1,039.6 672.5 926.5 100.0 100.0

Source: Bunco Central de Bolivia


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108 R.M. Auty

The net effect of the 1985 tin market collapse andthe 1986 hydrocarbon price fall was a halving inBolivias terms of trade between 1984 and 1990(Table 1). Meanwhile, in the informal economy,coca prices also fell as wholesale cocaine pricesdeclined from US$65,000 to US$40,000 per kgbetween 1982 and 1987 and went lower still in1988 (Th e Financial T imes, 10.6.88).

The key to the new political consensus was apragmatic orthodox macro-economic policy which,as Indonesia (Booth, 1992), Chile (Auty &Warhurst, 1993) and Botswana (Harvey & Lewis,1990) demonstrate, is a prerequisite for sustainedeconomic growth in mineral economies. The twomain pillars of orthodox macro policy werecommitment to a competitive exchange rate and abalanced budget (through a combination of across-the-board expenditure cuts and tax diversification).These two measures were later buttressed by a thirdone which was most unorthodox, namely a refusalto meet full debt repayments. In this, Bolivia tookfull advantage of the relatively small size of bothits economy and its total debt to maximiseconcessions from the international financialcommunity. The Bolivian government refused torestart commercial debt service in mid- 1986,convinced that such action would underminepolitical support for its entire strategy (Morales &Sachs, 1988). Therefore, interest payments onexternal debt, which had been equivalent to 25 percent of total exports in 1985, dropped to 10 percent in 1986 and 1987. Even so, the Boliviangovernment secured US and IMF support fornegotiations with creditor banks to buy back 38 percent of Bolivias US$670 million commercial bankdebt at 11 cents in the dollar. The deal was financedwith Western funds held for Bolivia in escrow bythe IMF (The Econom ist, 28.5.88).

The social costs of Bolivian stabilisation werehigh, so that the governments wise refusal to serviceits foreign commercial debt prevented opponents ofits orthodox policy from portraying it as dictatedby foreign banks (Morales & Sachs, 1988). Openunemployment reached 20 per cent (higher still inthe Altiplano cities where public employment ingovernment offices and state mines had beensignificant). Underemployment was estimated at

50 to 60 per cent (Morales, 1988). Some workerstrapped by the wage freeze experienced a sharpdecline in their real income and the countrys alreadypoor nutritional standards were further eroded.

That the Bolivian government did receive acontinued revenue flow after the tin price collapseowed much to the rapid revitalisation of the statehydrocarbon firm, YPFB. That firm accounted formore than 90 per cent of all revenues from statefirms and comprised almost half of governmentrevenues and 10 per cent of GDP (Bunco Centralde Bolivia, 1989; World Bank, 1991). It promisesto retain that role as a result of an agreement in1989 to build a gas-fired power station to supply3,000 MW to Brazil over a 25-year period. Thepower station would earn some US$270 millionannually in 1988 prices upon its start-up in 1996-50 per cent of total export earnings (The Economist,16.7.88). A gas-based fertil iser plant and apetrochemical plant (both to supply Brazil) are alsoplanned, along with a gas pipeline to Sao Paulo.

Comihol also secured greater autonomy in aneffort to match private sector levels of profitabilityand efficiency. But its long term role was redefinedto that of a promotional force in joint ventures withprivate mining firms. Large amounts of private,mainly foreign, capital were required to rebuild themining sector which needed US$1.3 billion, ofwhich the government could finance barely US$lSOmillion (Th e F inanc ia l T imes , 29.6.89). TheBolivian government therefore proposed to privatiseby distributing shares in the former state firms toBolivians on a per capita basis and inviting privatefirms to make new investments in return for theprivate investor securing managerial control and 50per cent of the equity.

In order to sustain long term economic recovery,rapid economic diversification was also required.However, industrial exports, mostly gas-basedpetrochemicals, were expected to comprise only 5.8per cent of the total exports even by the year 2000(Ministerio de Planeamiento, 1989). This compareswith projections of 24 per cent for agriculture, 8per cent for electricity and 62 per cent for mineralsand hydrocarbons (split in a roughly even mannerbetween hydrocarbons and ores). Even for this


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minimal diversification to be achieved, continueds o u n d m a c r o - e c o n o m i c p o l i c y , a m i n e r a lstabilisation fund (Morales et al., 1993), adequatecomm ercial autonomy for YPFB and Comibol, an dinflows of foreign capital will be required. O nees t i m a t e ( Wor l d Bank , 1989) sugges t ed t ha trestoration of per capita incomes to their 1980 levelby the late 1990s will require a 6 per cent annualgrow th rate and an investment rate of 16.5 per centof GDP.

CONCLUSIONBolivias experience with external shocks points

to a strong inverse relationship between favourableshocks and prudent policy-making. It show s howthe resource curse thesis works: a rich resource basehaving first permitted the pursuit of lax policies isthen used to postpone reform.Bolivia took adv antage of the favourable externaltrends during the boom to stall on stabilisationpolicies an d boost consumption, instead of repayingdebts and accumula t ing overseas reserves . I texp ande d its foreign deb ts despite the fact that they

were already high in relation to the size of theeconomy. Such risky use of a mineral windfall isnot uncommon: Venezuela, Nigeria and Mexicoh a v e a l s o a c c u m u l a t e d d e b t s u n d e r l i k ecircumstances. In each case, a high level ofindebtedness made subsequent adjustment throughthe 1980smuch more difficult.The m ineral bo oms led to a rapid and large realexchange rate appreciation which reduced furthert h e c o m p e t i t i v e n e s s o f m a n u f a c t u r i n g a n d

agriculture, much of which required protection. Yet,even as the countrys dependence on mineralsincreased, the windfalls were not used to strengthenmining; exploration was neglected in favour ofinvestments in resource-based industry which provedi l l -advised . The o i l r eserves were was tefu l lyd e p l e t e d a n d t h e s t a t e m i n i n g f i r m s w e r edecapitalised. Wh en gas and tin prices collapsed inthe mid- 1980s,agriculture and m anufacturing couldnot quic kly substitute the lost foreign e xcha nge andtaxes.

A corollary of the resource curse thesis is thatstraitened circumstances may engender prudentpolicies. Just a s a counter-intuitive ou tco me resultedf r om Bo l i v i a s pos i t i ve shocks , so Bol iv ia straumatic experience of hyperinflation acted as acatalyst to weld a political consensus on reform.Bolivia managed to execute a recovery strategy inthe late 1980s which combined orthodox domesticeconomic managem ent w ith an unorthodox externalpolicy (of refusing to service foreign commercialdebt). It will, how ever, take at least a generation toharness the potential of the tropical lowlands anddiversify the econom y away from its excessive anddamaging dependence on mining.

The resource curse thesis is not a deterministiclaw but a strong recurrent tendency; there arenotableexceptions such as successful resource-rich countrieslike Indones ia, Malay sia and Botsw ana. Sufficientexpe rience has also been accum ulated to show howthe counter-intuitively adverse effects of a bountifulna t u r a l r e sou r ce endowm ent can be avo i ded .However, to do so would require particular politicalconditions which may be difficult to assemble,especially under mineral boom conditions. Prudentpo l i c i e s m ay t hus no t be i m p l em en t ed a s aconsequence.

ACKNOWLEDGEMENTTh e financial assistance of RT Z with data collectionis gratefully acknowledged.

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Documents

68 - Minerals in Bolivian Development 1970-90 - Auty