Free Market Woes.

Is globalization doing Bolivia more harm than good?

FIFTEEN YEARS AGO, ANGEL CHIARA SUPPORTED HIS FAMILY BY digging tin for the state-owned mining company. But in 1985, he and 45,000 other miners were laid off. Today he is still without a salaried job and, like the majority of Bolivia's poor, ekes out a living in the informal economy.

On a recent Sunday, Chiara, 46, sat by a collection of rusty metal nails and gears at a street market in the poor city of El Alto, outside La Paz. A passerby inspects a rusty cog, asks the price and walks away. "For a miner, there is no work," says a frustrated Chiara. "I don't have money to buy even bread."

Neo-liberalism wasn't supposed to be this way.

Advocates argue that an unfettered free market attracts foreign investment, boosts economic growth, creates jobs and reduces poverty. In many Latin American nations, they say, globalization has controlled hyperinflation and brought modest economic growth. Privatizations, they add, have modernized once inefficient state-run companies.

In 1985, before neo-liberal reforms, Bolivia was battered by a global recession, falling exports and tumbling tin prices. The economy had spun out of control; annual inflation hit 24,000%. Since reforms were introduced, inflation has been reduced to 5%, the annual growth rate over the past decade has averaged 3% to 4% and exports--once dominated by minerals--now include agricultural and manufactured products.

But, as in other Latin American nations, economic reforms have also brought pain. Unemployment and poverty rose as government downsized and local businesses failed, while elimination of price controls and austerity measures imposed by the International Monetary Fund (IMF) made life harder by the minute. Money once earmarked for social programs now goes to balance budgets and pay foreign debt.

The privatization of nearly all state companies led to thousands of layoffs in Bolivia, where more than 60% of the 8 million inhabitants live in poverty. "It is ridiculous to put the same neo-liberal policies used in Chile in a country like Bolivia, which is much poorer," says Arturo Leon, an adviser for the U.N. Economic Commission for Latin America and the Caribbean (ECLAC).

Eliahu Kreiss, the former IMF representative in Bolivia, argues that long-term structural poverty is the problem. He says IMF policies seek to repair the economy so that Bolivia can repay future loans. "You have to assume that if a country comes to us and says they can't pay their debt then something is wrong with the policies that they are following." Kreiss says.

"Societies with social tension are not fit to compete in this world [of globalization]," says Chile's President Ricardo Lagos. "Markets allocate resources very well in most areas but not all. You need a combination of state and market."

Growing gap. According to ECLAC, Latin America's urban poor grew from 63 million to 130 million between 1980 and 1999 and from 73 million to 80 million in rural areas. In Chile, the nation that first embraced free market reforms and sustained the highest economic growth, the share of national wealth of the poorest 40% remained the same while the richest 10% increased its wealth. The richest tenth of the country now accounts for about 40% of total income.

Latin America has the largest income distribution gap in the world: 5% of the population owns 25% of the region's wealth. When the first ever World Social Forum took place in January in Brazil, a nation with one of the world's largest income gaps, 3,000-plus delegates from more than 100 countries assembled in Porto Alegre to call for a different economic model.

In Bolivia, the gap between rich and poor has also widened. Unemployment officially hovers at 25% and per capita income barely exceeds US$1,000. (In 1975, the per capita average was $1,200.) In the past five years, real incomes of most non-salaried La Paz workers declined 2.2% annually, while the incomes of salaried workers, some 51% of the population, rose 6.4%, according to the government.

That economic reality sparked two rounds of violent civil unrest last year. In April, protests broke out in Cochabamba, Bolivia's third-largest city, after U.S.-based Bechtel Corp. took over management of the water company and customers found their monthly bills jumping as much as 400%--a hefty increase in a nation where the minimum wage is less than $60 a month. The government canceled the Bechtel contract only after six protesters died in clashes with soldiers.

Then, in September, residents of other cities took to the streets for 19 days to protest water privatizations, low wages for teachers and a poor funding of education. Peasants angry over a lack of land reform and a government coca eradication program that left them jobless barricaded roads with rocks, bricks, glass and wire, causing food shortages and blocking more than $15 million in exports.

"Our fight over water, and the fight around the country, was a result of the policies of the neo-liberal model dictated to Bolivia by the IMF, World Bank and other international economic institutions," says Oscar Olivera, president of the Cochabamba factory workers union. "People feel assaulted, robbed, ignored, marginalized."

Critics point fingers at the IMF for imposing austerity amidst such severe poverty. Bolivia, where the gross domestic product is only $7 billion, has an enormous foreign debt of $4.6 billion. Last year, the government spent $340 million to pay off that debt--the same amount it spent on education, health and other social programs combined.

Missing investment. Supporters of the neo-liberal model say privatization has improved Bolivia's infrastructure. The value of the nation's two rail systems has increased, and the eastern network is now controlled by a modern command center. City street corners--and even some rural villages--boast modern public telephones connected to fiber optic cables.

Bolivian Vice President Jorge Quiroga even argues that his country's social problems are better served by privatizations. "When the state controlled the hydrocarbon sector, guess what? Nobody was doing anything about health, education, water and sewage," he says. "Now, with privatization we are freed up to spend our money on these things."

As Humberto Bohrt, vice-minister of the Investment and Privatization Ministry, puts it: "Bolivia's model is working, but investment is missing."

Bolivia's reforms came in stages. In 1985, President Victor Paz Estenssoro liberalized employment rules, legalized use of the dollar, lowered tariffs, revamped the tax code, opened markets, reduced gasoline subsidies and froze government salaries to reduce the public deficit.

In 1994, a capitalization program required foreign companies that bought half interests in nearly all government-held enterprises to pump investments equal to the companies' value back into the company. Six state enterprises totaling 6% of GDP were acquired by foreign companies, which invested $2.1 billion by the end of 2000.

But most corporate owners of former state-run services have shrunk workforces. And while new four-wheel-drive trucks are a common sight in most cities, millions of rural residents have no water, sewage or electricity.

Moreover, not all formerly state-run operations have improved. The Andean rail company shut down passenger service on several lines and the privatization of two oil refineries in 1999 led to an immediate 15% hike in gasoline prices--and transportation strikes.

Prospects for future investment remain bleak. Between 1989 and 1998, $5.25 billion flowed into Bolivia through investment, loans and donations. But the capitalizing companies completed most of their contract-mandated investments last year. And foreign investment has skipped over value-added industries. In 2000, the most prominent new businesses were fast food restaurants.

"If we continue as we are, we will live with great social tension," says Carlos Villega, a researcher with the La Paz-based Center of Studies for the Development of Labor and Agriculture, "which will turn into unmanageable conflicts."