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

R.M. Auty
Department of Geography, Lancaster University Lancaster LA1 4YB. U.K.

ABSTRACT
Rich 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 competitive diversification needed to sustain rapid economic growth. A clear example is provided by Bolivia during the 1974-78 and 1979-81,mineral booms. But Bolivia also shows a corollary of the resource curse thesis: in adversity (the hyperinflation and mineral price falls of the mid- 19809, tough but necessary reforms may emerge. Bolivia now needs to accelerate the re-orientation of its economy towards the tropical lowlands.
~

THE RESOURCE CURSE THESIS

In recent years, evidence has emerged which suggests that the economies of resource-rich developing countries may under-perform compared with resource-deficient countries. For example, Nankani (1 979) found that the mineral economies (which comprise about one-fifth of all developing countries and are characterised by the fact that mining provides at least 10 per cent of their Gross Domestic Product (GDP) and 40 per cent of their exports) tended to have slower economic growth, less equitable income distribution and lower levels of welfare than developing countries which lacked the mineral resource bonus. Subsequent research by Gelb (1988) on the oil-exporting countries and by Auty (1993) on the ore-exporters confirmed the fact that the mineral resource can easily turn into a curse rather than a blessing. Meanwhile, among the newly-industrialised countries (NICs), resource-

deficient East Asian countries like South Korea and Taiwan have industrialised more successfully (Auty, 1994) than the large resource- and market-rich Latin American economies like Mexico. Such research has led to the formulation of the resource curse thesis which provides a plausible explanation for the disappointing economic performance of resource-rich countries. It explains how a favourable natural resource endowment can become a curse. Basically, over-optimistic projections of the rents (returns in excess of those required by a competitive producer to remain in operation) from the natural resource trigger a fivestage process in which:

(i)
(ii)

macro-economic policies become too lax; pressure for competitive economic diversification eases so that manufacturing

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is slow to mature (i.e. to reach international levels of competitiveness); (iii) the capacity of the primary sector (mining and farming) to transfer subsidies and foreign exchange to the slow-maturing manufacturing sector is eventually exceeded so that fiscal and trade deficits expand; (iv) yet the required policy reform is then blocked by the interest groups (factory owners and their unionised workforce) which benefit from rent-seeking activity in the slow-maturing manufacturing sector; (v) governments therefore abandon reform and instead, seek to stimulate economic growth through higher public spending which proves counter-productive and leads to more erratic and slower economic growth (Sachs, 1989). This paper uses Bolivia as a case study to show how the resource curse thesis can explain the disappointing economic performance of a developing mineral economy. Existing literature suggests that mineral economies must satisfy two basic conditions in order to achieve sustainable economic development (Repetto, 1992). First, a fraction of the mineral revenues must be saved annually to replace the income that will be lost when the depleting mineral asset is eventually exhausted. Second, environmental damage from mineral extraction (such as pollution of air, water and land) must be minimised by incorporating appropriate incentives in the process of mineral extraction (Mikesell, 1992). A vital pre-requisite for achieving these two conditions of sustainable development is the avoidance of the resource curse syndrome. This requires the adoption of appropriate macro-economic and sectoral policies. At the root of the resource curse in mineral economies lies the fact that mineral rents provide governments with revenues which fluctuate and are invariably over-estimated. In addition, the mineral rents can tempt governments into deploying them for short and medium term political advantage rather than for long term sustainable development. Few governments are able to resist political pressure for the rapid domestic absorption of mineral windfalls during booms so that their policies tend to exacerbate the boom/bust cycle (Gelb, 1988). Corden and Neary (1982) have identified two effects which result from a mineral boom, the spending effect and the resource transfer effect. The spending effect of the boom causes the prices of services to rise compared to the prices of non-mining tradeables (agriculture and manufacturing), which are constrained by competition from imports. The resource transfer effect results from the attraction of capital and labour from the constrained nonmining tradeable sector into the boom sector and services. The resulting loss of both relative and absolute competitiveness by the non-mining tradeables is known as the Dutch disease effect (Krugman, 1987), after the impact of the North Sea gas boom on the economy of the Netherlands. All too often, the mineral rents are used during booms to protect the manufacturing sector from

Mahon (1992) has argued with reference to Latin America that the adoption of orthodox economic policy reforms is required to restore rapid economic growth. But such reforms require cuts in real wages (in order to achieve competitive industrialisation) that are on a scale which is difficult to implement in resource-rich countries. This difficulty arises because the political costs of reform are high while the benefits are unlikely to be captured within the life-time of most governments. Consequently, governments tend to shun the austerity required by orthodox policy reform. Instead, they prefer to stay with structuralist policies which rely heavily on state intervention to revive flagging economic growth through public spending aimed at utilising spare industrial capacity (Sachs, 1989). Yet, such public spending triggers populist booms which invariably create excess demand which quickly outstrips domestic productive capacity. As a result, populist booms merely exacerbate the growing macroeconomic disequilibria (rising inflation and growing deficits in the current account and budget) and perpetuate weak economic growth. In effect, Mahon (1992) is describing stages four and five of the resource curse thesis.

Resource curse thesis: Bolivia

global competition and also to cushion the relative decline in agriculture. This policy of subsidy and protection has been justified on the grounds that mineral booms cause a real appreciation (strengthening) in the exchange rate which weakens the competitiveness of the more labour intensive non-mining tradeable sub-sectors. But in fact, the extension of protection during mineral booms retards the required competitive diversification of the economy away from mineral dependence. This is because the protected sectors invariably prove too weak to expand when mineral revenues fall after the boom and employers and workers (the vested interests benefiting from the mineral rents during the boom) strongly resist the removal of protection. The inadequate performance of the weak nonmining tradeables during the post-boom downswings means that the economic gains made during the mineral booms are often reversed. In this way, economies affected by the Dutch disease display slow and erratic economic growth. In the extreme, the mineral sector itself may be seriously weakened if the transfers from mining to the protected sectors are excessive and leave the mines with insufficient funds for equipment maintenance and exploration. Such an outcome has occurred in Bolivia, Guyana, Peru and pre-Pinochet Chile in South America, as well as in many sub-Saharan African mineral economies, notably Zambia, Zaire and Nigeria. In the case of a second set of mineral economies, including Jamaica, Trinidad and Tobago, Venezuela and Papua New Guinea, less damage has been inflicted on their mining sectors but their overall economic growth has still been disappointing. A third group of mineral economies shows, however, that the resource curse thesis is not a deterministic law but a strong recurring tendency. (Moreover, like all unicausal explanations, the resource curse thesis understates the role of other variables for clarity of exposition). This group of countries includes post-Allende Chile (Auty & Warhurst, 1993), Indonesia (Bhattacharya & Pengetsu, 1993) and Botswana (Harvey & Lewis, 1990). Their situations highlight the policies which are required to avoid the Dutch disease effects and thereby meet the two pre-conditions for sustainable development listed earlier. Specifically,

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they share a commitment to orthodox macroeconomic policy with its twin disciplines of prompt fiscal and trade gap adjustments. Such timely adjustments prevent the cumulation of economic distortions. They have also adopted a mineral stabilisation fund (albeit belatedly in the case of Chile) which accumulates rents during the booms and releases them during the subsequent downswings. This fund smooths the injection of the mineral rents into the economy. It thereby mutes the mineral-driven shifts in the real exchange rate which sap the competitiveness of agriculture and manufacturing (i.e. the Dutch disease effects). Finally, the successful countries maintain mineral tax regimes which are sensitive to the profitability of the mining sector and its investment needs. The successes notwithstanding, many economies do suffer from the resource curse and this paper demonstrates how the thesis works in the specific case of Bolivia from 1972 to 1990 when two mineral booms gave the country an opportunity to recover from past economic neglect. The paper will be divided into five sections focusing on the relaxation of macro policy during the 1974-78 boom; the postponement of reforms during the 1979-8 1 boom; the vested interests and delayed diversification; the decapitalisation of Bolivian state-owned mines; and reform under straitened circumstances.

RELAXATION OF MACRO POLICY DURING THE 1974-78 BOOM

Bolivia was a remarkably mineral-dependent economy in the early 1970s, generating 77 per cent of exports, 44 per cent of taxes and 20 per cent of GDP from mining. More than half the population lived on the harsh Altiplano where the mines and capital city are located (Fig. 1). Although GDP growth was moderately good at that time (Table l), the fiscal and current account deficits were growing and the ratio of foreign debt to Gross National Product (GNP) was relatively high. These economic problems reflected flaws in the institutions of state capitalism which the 1952 revolution had established in place of the previous system of internal colonialism (exploitation by a local elite). But the

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Source (for figures): World Bank, 1992

Fig. 1. Bolivia: population distribution by region.

Resource curse thesis: Bolivia

99

1970-73

1974-78

1979-82

1983-86

1987-91

Pre-boom GDP growth (%) Terms of trade (1980 = 100) Real effective exchange rate (1965 = Balance of payments (% GDP) Fiscal gap (% GDP) Debt (% GNP)
4.2 56.1 86.6 (0.3) (3.1) 50

First Boom Second Boom Downswing Stabilisation

4.4 81.4 101.3 (4.0) (2.8) 59 (1.2) 95.3 128.1
(10.4)

(2.2) 87.4 212.3 (11.0) (14.3) 164

(1.2) 95.3 128.1 (10.4) (6.2) 87

(6.2)
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 its lead role in the economy which, through the 1960s and 1970s, entailed responsibility for half or more of total Bolivian investment and also management of the larger mines. Yet, despite the institutional deficiencies, the lead role of the state survived US pressure, beginning in 1964, to adopt orthodox economic policies (Bailey & Knutsen, 1987). The Bolivian state was unable to expand domestic taxes to a level commensurate with its large public sector role. This reflected a conflict between workers eager to expand social spending and those with wealth who resisted such trends (Pastor, 1991). As a result, the government generated insufficient revenue to provide services and meet public investment needs. The state could not therefore offset the low level of private investment and this meant that total investment was low relative to GDP. In fact, investment was not only low, it was also poorly applied. Scant concern was shown for maintaining the efficiency of the state mines which were regarded principally as a source of revenue and welfare rather than as a business (Jordan & Warhurst, 1992). Yet, despite neglect of the mines, the competitive diversification of the economy was not given high priority.

Bolivia was one of the poorest countries in the Americas in the early 1970s because its prodigious mineral wealth had failed to diffuse through the population. It was provided with an opportunity to begin to correct past errors by the positive economic shocks triggered by the 1973 and 1979 rises in mineral prices. This is because the country experienced a substantial improvement in its external trade after the 1973 oil shock. A combination of the quadrupling of oil prices in 1973-74 and a doubling in the world tin price conferred a 40 per cent gain in Bolivias terms of trade comparing the period from 1974 to 1978 with the period from 1970 to 1973 (Table 1). Given the ratio of exports to GDP, this yielded a windfall equivalent to 12.1 per cent of GDP annually for the years from 1974 to 1978. This positive shock compares with shocks over the same period of 10.8 per cent for Venezuela and 16.8 per cent for Ecuador (Gelb, 1988). The second shock was also initially positive, albeit more modestly so, with an impact about one-quarter the size of the first shock. Despite the positive shocks, the long term trend of the Bolivian economy was one of accelerating weakness through the 1970s and 1980s (Table l ) , a similar outcome to that of other high absorbing

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to diversify the economy. One way it did this was through the substitution of taxes on minerals for taxes on incomes as part of the relaxation of fiscal discipline which occurred after the 1973 oil shock. But even with the extra taxes from mining, the earlier success in shrinking the fiscal deficit under Banzer was reversed. The fiscal deficit, having narrowed to 0.8 per cent of the GDP in 1974-75, deteriorated rapidly through the boom to average 4.9 per cent of the GDP in 1977-78 (UN, 1977; 1984). Foreign aid at first expanded to meet a growing share of the fiscal deficit, rising from onefifth to one-third during the mid- 1970s. Between 1978 and 1985, government revenues began declining and the fiscal gap therefore widened sharply. A second way in which consumption was increased was through higher import purchases which were made cheaper as a result of the strengthening of the real exchange rate. Consequently, as with the fiscal deficit, an initial improvement in the trade deficit was reversed during the boom (Table 1). Imports grew even faster than exports so that the trade deficit widened despite the sharp increase in export earnings brought about by higher oil and tin prices. This trend would have been less worrying if a larger fraction of the imports had comprised capital goods for expanding competitive manufacturing or farming in order to earn foreign exchange after the mineral boom. In line with the second stage of the resource curse thesis, Bolivia failed to promote competitive economic diversification. The countrys investment ratio remained low, even though in the early 1970s, it was only 15 per cent of the GDP, some 5 per cent below the Syrquin and Chenery (1989) norms (which are averages based on data for over 100 countries) for a country of Bolivias size and level of development. The private sector responded to the imprudent economic policy through capital flight and by 1978, public investment had reached twothirds of all investment (Morales & Sachs, 1988). Meanwhile, consistent with stage three of the resource curse thesis, insufficient investment was allocated to oil exploration and development. Moreover, the investment in hydrocarbons which

hydrocarbon-exporting countries like Nigeria and Venezuela. This is the more disappointing because a military government came to power under Hugo Banzer Suarez in 1972 which proved capable of at last launching an economic stabilisation programme. The successful completion of that programme would have enabled the government to use the windfalls for sustainable development. Bolivia needed to allocate part of the mineral windfall to a stabilisation fund in order to complete its economic adjustment programme and to curb any strengthening of the real exchange rate. It could then make investments in projects which would accelerate long term economic growth. Such projects included elimination of the infrastructure backlog (like a main road to the Pacific), updating mining sector technology and helping peasants to migrate from the Altiplano into the potentially productive tropical eastern lowlands (Fig. 1). Instead, consistent with the first stage of the resource curse thesis, the Banzer government used the first oil shock to relax the austere stabilisation policy which it had launched in 1972. Worse, the government did not adopt a prudent policy for the deployment of the mineral windfall. Rather, Banzer took advantage of the favourable mineral price trends not only to backtrack on stabilisation but also to boost immediate consumption, especially that of his supporters. Far from saving a part of the windfall in a stabilisation fund in order to smooth out the boom and bust of the mineral cycle, Bolivia used its hydrocarbon reserves as collateral to increase foreign borrowing, in the same way that Mexico did (with similarly disastrous consequences). Bolivia expanded its sizeable debt, thereby amplifying the mineral windfall and increasing upward pressure on the exchange rate (Table 1). The real exchange rate appreciated by 44 per cent in 1973-74 and remained around that level until the 1979 oil shock drove it still higher. This further weakened the competitiveness of farming and manufacturing so that the windfall deployment intensified the dependence of the economy on mining. The bulk of the mineral windfall therefore went into higher consumption rather than into investment

Resource curse thesis: Bolivia

did occur failed to yield positive results, so that long term production was adversely affected. Furthermore, the opportunity was not taken to reverse the neglect of investment in the state-owned Altiplano ore mines which had been running down since the 1930s (Casanovas, 1990). Instead, the windfall from higher tin prices was taxed away from the leading state firm (Cornibol),which at that time accounted for two-thirds of Bolivian output (Ayub & Hashimoto, 1985). Much of the investment which was made in ore mining was used to establish a state-owned tin smelter in order to raise domestic value added in line with fashionable theories of resource-based industrialisation. The smelter was uneconomic, however, and suffered sizeable losses (Hennert, 1986). Consequently, even as the Dutch disease effect weakened the non-mining tradeables and increased Bolivian dependence on mining (examined in more detail below), the mining sector continued to be under-funded throughout the boom. In summary, the 1974-78 windfall was unwisely used to relax macro-economic policy and boost consumption, thereby reversing the gains of the 1972 stabilisation package. It failed on two counts: it did not correct macro-economic deficiencies; neither did it compensate for past under-investment in the mining and non-mining sectors. Ironically, despite the consumption boom, GDP growth decelerated continuously from its 1975 high of 6.6 per cent (Table I). Moreover, low income groups failed to benefit from the windfall deployment and this undermined political support for the Banzer government. Banzers dependence on elite groups in the tropical lowlands of his home province and the private Altiplano mines caused the Carter administration in the US (a critical source of foreign aid) to apply pressure on him to step down and restore democracy in 1978.

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to compensate. At first, ore exports offset the decline in hydrocarbons. This masked the failure to diversify into competitive agriculture and manufacturing, a task made even more difficult by a further strengthening of the real exchange rate (Table 1). Bolivias smaller second mineral boom also coincided with a period of political uncertainty after the resignation of Banzer. A leftist coalition under Herman Siles Zuazo which won the 1978 election was prevented from assuming office by military and political manoeuvres until 1982. This political instability prevented any prompt implementation of stabilisation measures which the cumulating economic deterioration called for (Morales, 1988). None of the Bolivian governments which briefly held power from 1978 to 1982 were able to enlist support to boost state revenues in line with expenditures. Public expenditure grew rapidly, almost doubling in real terms between 1975 and 1980 (Bailey & Knutsen, 1987). As inflation accelerated, domestic revenues first stagnated in real terms (i.e. after filtering out the effects of inflation) and then declined sharply in 1980. High levels of tax evasion forced successive governments to continue their reliance on trade taxes (mainly on minerals) for revenue. Once more, during a mineral boom, far from saving, the fiscal deficit deteriorated and averaged an unsustainable 6.2 per cent of GDP in 1979-82 (Table 1). Siles finally emerged as President at the head of a left-of-centre coalition in 1982. However, his government lacked the support needed to defeat existing vested interests and to restore economic stability. It launched six stabilisation packages which were each overturned by public protest. It pressed for public spending programmes for which it did not have the economic base to finance (Table 3). Initially, foreign finance covered the fiscal deficit and this caused the ratio of debt to GNP to jump and average 87 per cent over the period 1979 to 1982 (Table 1). But emergency debt rescheduling negotiations with the commercial banks broke down and both the World Bank and International Monetary Fund (IMF) stopped lending in 1981 so that Bolivia effectively ceased to have access to international credit. The cut-off in foreign finance greatly accelerated the cumulative deterioration of the economy and

POSTPONED REFORMS DURING THE 1979-81 BOOM

The second oil boom was weaker than the first as the share of hydrocarbons in exports was only 23 per cent in 1980 compared with 30 per cent in 1975 (Table 2). Oil exports had fallen to negligible levels and gas exports did not expand sufficiently

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1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

Production volume Crude (1,000 bpd)a Gas (mmcfd)b Tin (1,000 tomes) Value added (Bolivianos 1980)c Hydrocarbons Minerals Total value added Exports (US$m) Hydrocarbons Minerals Total export

24.2 36.2 43.7 83.7 222.2 331.3 29.4 30.3 30.3

47.3 45.5 40.4 414.4 395.0 384.6 28.4 29.8 31.8

40.7 34.7 32.4 27.9 430.7 416.9 431.2 438.3 30.6 33.9 30.8 27.4

27.5 461.0 27.3

7.46 7.22 6.98 6.42 6.73 7.77 7.58 7.31 2.00 3.01 6.09 12.50 13.16 12.90 14.04 13.30 13.41 13.29 14.51 14.16 13.06 12.68 83.84 88.08 95.10 100.56 103.52 11.08 116.21 121.99 124.49 124.66 122.95

13.2 23.9 41.6 204.7 173.4 174.1 228.6 216.0 240.4

67.0 193.1 153.9 225.9 387.3 304.3 338.3 650.5 521.4

167.5 134.9 122.2 149.7 245.2 336.9 492.7 315.6 591.9 641.1 625.3 715.4 725.3 857.2 1,036.2
-

1981

u 1
1982 1983 1984 1985 1986 1987 1988 1989 1990
__

Production volume Crude ( 1,000bpd) Gas (mmcfd) Tin (1,000tomes) Value added (Bolivianos 1980) Hydrocarbons Minerals Total value added Exports (US$m) Hydrocarbons Minerals Total export

30.5 27.5 481.0 515.0 29.8 26.7

25.7 23.0 24.5 28.4 26.5 488.0 473.0 450.0 441.0 441.7 8.1 19.9 16.1 10.5 25.3

24.7 464.1 10.7

25.8 n.a. 15.8

25.1 n.a. 17.5

7.07 7.48 6.84 6.87 6.73 6.47 6.56 6.88 13.07 12.05 11.78 9.47 7.55 5.59 5.69 7.57 124.08 118.67 110.94 110.61 110.45 107.21 109.48 112.56

7.2 7.6 113.1

7.5 9.5 116.3

346.6 398.4 556.0 419.4 995.3 898.2

420.1 388.9 374.3 332.5 256.0 218.9 203.1 225.3 347.3 364.0 263.7 196.8 207.2 270.5 375.3 403.1 817.5 782.1 672.5 637.8 569.5 600.5 821..3 956.3

Note:

barrels per day millions of cubic feet per day The 1980 exchange rate was 24.5 Bolivianos per US$ n. a. = not available

Sources: Association National de Mineros Medianos Banco Central de Bolivia YPFB

Resource curse thesis: Bolivia

TABLE 3. PUBLIC REVENUE AND EXPENDITURE, BOLIVIA, 1980-90 (BILLION 1980 BOLIVIANOS)
YEAR 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
Note:

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REVENUE 49.8 39.7 40.5 27.9 23.7 15.5 21.2 18.1 24.4 26.6 29.7

EXPENDITURE 59.3 48.3 58.6 49.1 51.8 26.7 24.9 26.9 32.0 31.4 33.7

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

(4.0)

The figures in parentheses are negative numbers (i.e. deficits).

Source: World Bank. 1992.

triggered hyperinflation. Sachs (1987) calculates that the cut-off of foreign credit was equivalent to the loss of 10 per cent of the GDP for Bolivia in 1980-83. The current account deficit in 1982 was 15 per cent of the GDP and the fiscal deficit 16 per cent of the GDP. Yet, the misallocation of the windfalls in 1973-82 meant that neither a mineral stabilisation fund nor additional agricultural or industrial production were available to help close the gap left as mineral revenues fell. A sizeable part of the ballooning fiscal deficit was financed by printing money, and inflation (which over the previous two decades had not been high by Latin American standards) rose from 25 per cent in mid-1981 to 300 per cent by October 1982 and approached 20,000 per cent in 1985. Such hyperinflation caused chronic currency overvaluation (strengthening) to the further detriment of exports. Although trade generated 20 per cent of Bolivian GDP in the early 1980s, the country had very few activities other than mining which

were competitive at world prices. Meanwhile, Bolivias mining sector was being marginalised due to the cumulative over-valuation of the exchange rate, as explained in the next section. Per capita incomes fell by 25 per cent between 1980 and 1984 and official unemployment jumped to one-fifth of the workforce. Under these conditions, the informal economy, an activity not directly compatible with a soundly-run economy, played an increasingly important role. More and more people began to trade in drugs and smuggled goods, circumventing official channels (Blanes, 1989). As miners and other city dwellers returned to the countryside, land (which had been liberally redistributed after 1952) served as a cushion against recession. At least one family in ten was thought to depend directly or indirectly on coca production (The Economist, 8.10.88). By the mid-l980s, cocaine and related activities accounted for an estimated 12 per cent of GNP while the value of illegal cocaine-related exports at that time was

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thought to exceed that of mineral exports (World Bank, 1989). Meanwhile, workers who remained within the formal sector relied on the countrys wage indexation system (which attempted to tie wage rates to inflation rates) to secure pay increases to offset inflation. Their attempts broke down in 1984; strikes underlined the governments loss of labour support and provided a renewed push to inflation. Siles called an election for July 1985 and lost. Under extreme adversity, his successor embarked on orthodox economic reforms which, reflecting the resource curse effect, the oil windfalls had first allowed to be postponed and then made even more crucial.

only, rather than against the total value of the goods) for all sectors other than the unprotected mining sector, was estimated at 44 per cent in 1982, with forestry and agriculture slightly lower and industry twice as high (Morales, 1987). But such a situation could only persist as long as the mineral sector could earn sufficient subsidies and foreign exchange. Non-mineral exports other than coca formed a relatively small fraction of total exports and were almost wholly made up of primary products from the tropical lowlands such as soya bean, coffee and wood. The agricultural sectors share of GDP had shrunk to barely half the Syrquin and Chenery (1989) norm for a country of Bolivias size and level of development. In fact, agricultural exports declined between 1975 and 1980 from 6 per cent to 4 per cent of total official exports and the sector needed subsidies to protect it against imports. Bolivian agriculture had become a convenient conduit for political favours, especially under the Banzer regime, rather than an avenue of competitive diversification. This outcome was not due to any shortage in land resources: although two-fifths of Bolivia is unfit for cultivation and an additional two-fifths is forested, some 20 million hectares remain as potentially cultivable (Weil, 1973). Of this, some 3.6 million hectares were cultivated in the 1980s (World Resources Institute, 1992). This is a sizeable resource for a country whose rural population was only 3.4 million in 1988 and growing at a modest rate of 1.4 per cent per annum (IADB, 1989). The land remained under-used, however, because although farms on the Altiplano were sub-optimal in size, expansion into the mid-altitude valleys and lowland regions had proceeded slowly. Between 1976 and 1992, the Altiplano regions share of the population fell from 53 per cent to 45 per cent while that of the valleys rose by just over 1 per cent and the tropical lowlands increased its share from 20 per cent to 26 per cent (World Bank, 1992). The limited dynamism of the agricultural sector also owed much to institutional factors. The 1952 reforms transferred sizeable amounts of land from large estates to peasants on the Altiplano and in the

VESTED INTERESTS AND DELAYED DIVERSIFICATION

Economic diversification improves economic performance by increasing the flexibility with which an economy can respond to external or internal shocks (Daniel, 1992). Failure to diversify is one important reason why, once the initial boost to economic growth from the start-up of mineral production has passed, many mature mineral economies experience such disappointing rates of economic growth. During mineral price booms, the Dutch disease effects hamper economic diversification by weakening the non-mining tradeables which either receive protection (and create rents which build up vested political interests which resist reform) or are allowed to shrink so that they become too weak to compensate for the deficiencies in foreign exchange earnings and tax revenues when the mineral boom falters. In this way, the ability of mineral economies to adjust to post-boom downswings is poor so that the economic gains made during the booms are reduced or even eliminated. The over-valuation of the Bolivian exchange rate through the two mineral booms brought successful pleas for increased protection for agriculture and manufacturing alike. The rate of effective protection (which measures the tariff rate against value added

Resource curse thesis: Bolivia

upper eastern Andean valleys and while this eased social tensions it did not encourage a dynamic farming sector. The farms were initially small and they were further sub-divided through inheritance so that they became even less viable. Remedies such as the formation of cooperatives proved deficient. The situation was exacerbated by neglect of technical improvements in peasant crops, notably the potato which alone occupied one-tenth of the arable land and had considerable potential via higher yields and lower prices to boost the real incomes of Bolivian consumers (de Franco & Godoy, 1993). But such a move would have further depressed the incomes of the smaller Altiplano farmers and aggravated soil erosion. This is because the farmers respond to lower farm incomes by seeking more off-farm employment and withdrawing labour from conservation tasks like stone terrace construction (Zimmerer, 1993). The sluggishness of agriculture had important implications for industry. This is because Bolivian farming still employed half the workforce in the mid- 1980s so that the limited purchasing power from low productivity farm work, when combined with the countrys relatively small total population, yielded a small domestic market. This curbed opportunities for efficient import substitution industry, much of which benefits from scale economies. By the 1970s, the industrial import substitution drive comprised high-cost food processing, basic consumer goods like clothes and shoes, and machinery and equipment for the mines. Industrial exports were negligible, discouraged as they were by the deficiencies in infrastructure and the over-valued exchange rate. Because manufacturing depended almost totally on domestic demand, industrial output shrank in the late 1970s as the domestic economy started to contract. Deindustrialisation occurred rapidly: manufacturing output shrank at a rate of 7 per cent per annum between 1978 and 1986, compared with a 3 per cent per annum decline in the economy as a whole during the same period. The share of manufacturing in the GDP fell sharply from 15.4 per cent to 10.8 per cent. By 1985, the sector employed only 8.7 per cent of the workforce and was geographically concentrated in La Paz (34 per cent) and Santa Cruz (30 per cent).

105

The rate of contraction of individual manufacturing sub-sectors from 1978 to 1986 varied widely, partly reflecting sizeable differences in the levels of protection against imports. The 1982 levels of effective protection for tobacco, textiles, leather goods and wood products were almost twice the average figure of 98 per cent (Morales, 1987). Yet these products were precisely the ones which might have been expected to require least protection in a country like Bolivia. They were labour intensive users of local raw materials targeted at a domestic market that was already insulated somewhat from imports by high transport costs. But the marked strengthening of the exchange rate during the mineral booms combined with the collapse of domestic demand to intensify the lack of competitiveness of the non-mining tradeables sector and to perpetuate the economys undesirable mineral dependence.

DECAPITALISATION OF BOLIVIAN STATE MINES

Even as Bolivian dependence on mineral revenues increased following the 1973 oil shock, the decapitalisation of the mining sector accelerated. This is why Bolivian economic performance conformed to the least successful sub-group of mineral economies, as noted earlier. The mining firms not only failed to discover sufficient new ore reserves, they also neglected equipment maintenance. In addition to the difficulties created for the mines by lax macro-economic management, two other problems were the absence of a profitsensitive taxation system and insufficient freedom from political interference for the dominant state ore-mining and hydrocarbon-producing firms (Comihol and Yacimientos Petroliferos Fiscales Bolivianos (YPFB) respectively). Nationalisation of the mines in 1952 had failed to improve the competitiveness of tin mining because political goals were pursued at the expense of commercial ones (Jordan & Warhurst, 1992). Comihol acquired the character of a mini-welfare state in which the provision of employment, bonuses and social needs (including health, education,

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R.M. Auty
had accumulated large debts which amounted to US$450 million (Suttil, 1988). Debt service expanded to absorb more than 25 per cent of Cornihols revenues. Bolivian hydrocarbon production, like that of ore, was also initially adversely affected by nationalisation in 1969. Oil reserves declined through the 1970s due to insufficient exploration and to low domestic energy prices. The latter were in fact just one way in which the windfall was wastefully consumed because low energy prices encouraged faster depletion of the oil reserves. Yet, as government finances deteriorated, YPFB was made to over-produce in order to generate tax revenues faster, revenues which were then not efficiently deployed. Meanwhile, as with Comibol,

housing and food) took little account of the firms ability to pay. Exploration lagged behind production and contributed to declining ore grades. Cornihols monopoly of reserves meant that private exploitation of those reserves which Comihol failed to prospect was precluded. In addition, it had also been run as an extension of the bureaucracy by the Ministry of Mines with little attention to efficiency. The costs of running their tin mines ranked among the worlds highest; operating costs in 1984 were some 50 per cent higher than most other producers (Ayub & Hashimoto, 1985). Cornibol ceased to publish accounts in 1977 and its losses grew as its production declined (Table 4). Cumulative losses from 1981 to 1985 exceeded US$230 million (Comibol, 1989). The tin smelting subsidiary lost money in every year except for 1979; by 1985, it

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

Tin output (tomes) Workforce (1,000) Sales costs Operating profit Net income
Total assets Equity

18.6 26.5 352.8 301.9 50.8 (30.0) 475.7 117.6

18.6 25.7 378.1 379.4 5.3 (45.5) 528.2 72.7

15.5 26.1
278.8 340.3 (61.7) (51.9) 490.4 101.5

16.0 27.7

12.5 27.7

10.1 27.6

4.2 n.a.

n.a. n.a. 17.9 22.6 (4.7) (3.5) 519.3 480.1

n.a. 8.0 42.0 46.9 (4.9) (5.9)a 528.7 435.1

n.a. 8.01

280.3 224.6 135.1 50.7 340.9 369.2 383.1 71.6 (60.6) (144.5) (248.0) (20.9) n.a. (10.4) (51.6) (68.4) 500.0 58.3 529.9 23.9 573.9 530.5 34.7 441.0

n.a.
n.a. n.a. n.a.

n.a. n.a.

Memo items
Tin cost (US$/I b) LME price (US$/I b) 3.1 7.6 4.5 6.4

5.0 5.8

5.0 5.9

8.0 5.6

9.8 5.4

4.1 2.9

n.a. 3.2

n.a. 3.3

3.0 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.

Resource curse thesis: Bolivia

YPFBs retained cash flow was inadequate because of excessive taxation: YPFB under-invested even though it borrowed heavily. Nevertheless, hydrocarbon production, mainly gas, was the main vehicle for Bolivian diversification away from ore mining from 1970 to 1990 (Table 5). However, the value of the large natural gas reserves discovered by multinational corporations (MNCs) in the eastern lowlands was reduced by a lack of markets. Plans to use the gas and adjacent high grade iron ore for heavy industry failed for lack of capital and markets (domestic steel demand at only 100,000 tonnes was far too small to support a viable steel mill). Most of the gas was exported to Argentina, a market rendered uncertain in the mid-1980s by that countrys financial difficulties (Latin American Bureau, 1987).

107

policies which retarded economic diversification and built up vested political interests even as the mining sector on which the country depended heavily was decapitalised. In this way, a favourable flow of revenue from the mineral sector not only failed to improve Bolivian economic prospects, it weakened such prospects greatly.

COROLLARY: REFORM UNDER STRAITENED CIRCUMSTANCES

Just as positive shocks (the mineral booms of 1974-78 and 1979-81) had reversed Bolivias stabilisation policy, thereby prolonging and intensifying the countrys poor economic performance, so it was that the negative shock of hyperinflation at last triggered reform in 1985. The frightening and rapid deterioration of the Bolivian economy welded together a political consensus in the mid- 1980s that abruptly halted the downward spiral. That consensus found expression in the New Economic Policy (NEP) which was launched in August 1985 and was implemented under extraordinarily adverse circumstances as first the price of tin and then that of natural gas, collapsed.

In sum, neither hydrocarbons nor tin received adequate investment during the booms even though Bolivia depended on minerals and hydrocarbons for the bulk of its exports (Table 5) and more than half of government revenues (Bunco Central de Bolivia, 1989). As in other badly managed mineral economies like Peru and Zambia, the Bolivian mineral windfall deployment was associated with lax macro-economic

VOLUME (US$ BILLION) 1970 1973 I980 1985 1990

SHARE OF TOTAL (70)

1970

1990

Minerals Hydrocarbons Other Soya bean Coffee Wood Total

204.9 13.2 10.7

-

314.2 153.9 63.0

-

3.5 1.9 228.8

4.3 12.9 650.5

638.5 245.1 156.0 6.1 20.6 31.1 1,039.6

263.6 376.3 32.5 5.3 13.8 5.8 672.5

407.1 226.9 292.5 48.2 14.3 49.8 926.5

89.5 5.8 4.7

-

1.5 0.8 100.0

43.9 24.5 31.6 5.2 1.5 5.4 100.0

Source: Bunco Central de Bolivia

108

R.M. Auty
50 to 60 per cent (Morales, 1988). Some workers trapped by the wage freeze experienced a sharp decline in their real income and the countrys already poor nutritional standards were further eroded.
That the Bolivian government did receive a continued revenue flow after the tin price collapse owed much to the rapid revitalisation of the state hydrocarbon firm, YPFB. That firm accounted for more than 90 per cent of all revenues from state firms and comprised almost half of government revenues and 10 per cent of GDP (Bunco Central de Bolivia, 1989; World Bank, 1991). It promises to retain that role as a result of an agreement in 1989 to build a gas-fired power station to supply 3,000 MW to Brazil over a 25-year period. The power station would earn some US$270 million annually in 1988 prices upon its start-up in 1996 50 per cent of total export earnings (The Economist, 16.7.88). A gas-based fertiliser plant and a petrochemical plant (both to supply Brazil) are also planned, along with a gas pipeline to Sao Paulo.

The net effect of the 1985 tin market collapse and the 1986 hydrocarbon price fall was a halving in Bolivias terms of trade between 1984 and 1990 (Table 1). Meanwhile, in the informal economy, coca prices also fell as wholesale cocaine prices declined from US$65,000 to US$40,000 per kg between 1982 and 1987 and went lower still in 1988 (The Financial Times, 10.6.88). The key to the new political consensus was a pragmatic orthodox macro-economic policy which, as Indonesia (Booth, 1992), Chile (Auty & Warhurst, 1993) and Botswana (Harvey & Lewis, 1990) demonstrate, is a prerequisite for sustained economic growth in mineral economies. The two main pillars of orthodox macro policy were commitment to a competitive exchange rate and a balanced budget (through a combination of acrossthe-board expenditure cuts and tax diversification). These two measures were later buttressed by a third one which was most unorthodox, namely a refusal to meet full debt repayments. In this, Bolivia took full advantage of the relatively small size of both its economy and its total debt to maximise concessions from the international financial community. The Bolivian government refused to restart commercial debt service in mid- 1986, convinced that such action would undermine political support for its entire strategy (Morales & Sachs, 1988). Therefore, interest payments on external debt, which had been equivalent to 25 per cent of total exports in 1985, dropped to 10 per cent in 1986 and 1987. Even so, the Bolivian government secured US and IMF support for negotiations with creditor banks to buy back 38 per cent of Bolivias US$670 million commercial bank debt at 11 cents in the dollar. The deal was financed with Western funds held for Bolivia in escrow by the IMF (The Economist, 28.5.88). The social costs of Bolivian stabilisation were high, so that the governments wise refusal to service its foreign commercial debt prevented opponents of its orthodox policy from portraying it as dictated by foreign banks (Morales & Sachs, 1988). Open unemployment reached 20 per cent (higher still in the Altiplano cities where public employment in government offices and state mines had been significant). Underemployment was estimated at

Comihol also secured greater autonomy in an effort to match private sector levels of profitability and efficiency. But its long term role was redefined to that of a promotional force in joint ventures with private mining firms. Large amounts of private, mainly foreign, capital were required to rebuild the mining sector which needed US$1.3 billion, of which the government could finance barely US$lSO million (The Financial Times, 29.6.89). The Bolivian government therefore proposed to privatise by distributing shares in the former state firms to Bolivians on a per capita basis and inviting private firms to make new investments in return for the private investor securing managerial control and 50 per cent of the equity.

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

Resource curse thesis: Bolivia

minimal diversification to be achieved, continued sound macro-economic policy, a mineral stabilisation fund (Morales et al., 1993), adequate commercial autonomy for YPFB and Comibol, and inflows of foreign capital will be required. One estimate (World Bank, 1989) suggested that restoration of per capita incomes to their 1980 level by the late 1990s will require a 6 per cent annual growth rate and an investment rate of 16.5 per cent of GDP.

109

CONCLUSION
Bolivias experience with external shocks points to a strong inverse relationship between favourable shocks and prudent policy-making. It shows how the resource curse thesis works: a rich resource base having first permitted the pursuit of lax policies is then used to postpone reform. Bolivia took advantage of the favourable external trends during the boom to stall on stabilisation policies and boost consumption, instead of repaying debts and accumulating overseas reserves. It expanded its foreign debts despite the fact that they were already high in relation to the size of the economy. Such risky use of a mineral windfall is not uncommon: Venezuela, Nigeria and Mexico have also accumulated debts under like circumstances. In each case, a high level of indebtedness made subsequent adjustment through the 1980s much more difficult. The mineral booms led to a rapid and large real exchange rate appreciation which reduced further the competitiveness of manufacturing and agriculture, much of which required protection. Yet, even as the countrys dependence on minerals increased, the windfalls were not used to strengthen mining; exploration was neglected in favour of investments in resource-based industry which proved ill-advised. The oil reserves were wastefully depleted and the state mining firms were decapitalised. When gas and tin prices collapsed in the mid- 1980s, agriculture and manufacturing could not quickly substitute the lost foreign exchange and taxes.

A corollary of the resource curse thesis is that straitened circumstances may engender prudent policies. Just as a counter-intuitive outcome resulted from Bolivias positive shocks, so Bolivias traumatic experience of hyperinflation acted as a catalyst to weld a political consensus on reform. Bolivia managed to execute a recovery strategy in the late 1980s which combined orthodox domestic economic management with an unorthodox external policy (of refusing to service foreign commercial debt). It will, however, take at least a generation to harness the potential of the tropical lowlands and diversify the economy away from its excessive and damaging dependence on mining. The resource curse thesis is not a deterministic law but a strong recurrent tendency; there are notable exceptions such as successful resource-rich countries like Indonesia, Malaysia and Botswana. Sufficient experience has also been accumulated to show how the counter-intuitively adverse effects of a bountiful natural resource endowment can be avoided. However, to do so would require particular political conditions which may be difficult to assemble, especially under mineral boom conditions. Prudent policies may thus not be implemented as a consequence.

ACKNOWLEDGEMENT
The financial assistance of RTZ with data collection is gratefully acknowledged.

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Resource curse thesis: Bolivia

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