Memorandum by the Deputy Director of the Office of South American Affairs (Atwood) to the Director of That Office (Warren)1
Subject: Considerations Bearing on Further Assistance to Bolivia
The Bolivian request for further financial and technical assistance must be considered in relation to the following factors, among others:
- The pattern of Bolivia’s present economic development program and our present assistance in that program;
- The capacity of the Bolivian economy to service further loans;
- Steps which must be taken by the Bolivian Government to complement measures taken by us for the attainment of common objectives;
- The relation between additional assistance to Bolivia and the recommendations of a United Nations mission which surveyed the Bolivian economy last year;
- Dangers inherent in increasing the resources of Bolivian Governmental agencies.
1. Present Development Program
Those aspects of Bolivia’s present economic development program which are logical and integrated are based on the report made in 1942 by the Bohan Mission,2 which had been sent to Bolivia by the United States Government. This Mission recommended, in brief, that Bolivian dependence on mineral exports should be greatly reduced by the development of her agricultural and petroleum resources.
Agricultural and forest production were to be increased particularly in the Santa Cruz area, and to this end a highway was to be constructed between Cochabamba and Santa Cruz and the Bolivian Development Corporation was to undertake the establishment of pilot projects for [Page 1147] the production of meat, rice, sugar, and lumber. The highway has been under construction for several years. The Eximbank has already lent $10,350,000 for this purpose, and has established an additional line of credit of up to $16,000,000. The Bolivian Government has spent about $8,000,000 and is committed to spend an additional $8,000,000 or whatever more may be required to complete the road. Construction should be finished in 1953 or early 1954.
The agricultural projects of the Bolivian Development Corporation have not flourished, largely because insufficient investment has been made, and little private capital is now flowing into Santa Cruz. Unless a substantial investment program is undertaken in the Santa Cruz area promptly, little production potential will have been developed by the time the highway is concluded.
Some technical assistance for development of the Santa Cruz area is being supplied by the Office of Foreign Agricultural Relations of the U.S. Department of Agriculture. It is hoped to increase this aid under the 1952 Point IV program.
The Bolivian petroleum program has consisted principally of increasing crude production at Camiri, building refineries at Cochabamba and Sucre, and constructing a pipeline from Camiri to the refineries. The Eximbank has lent $8,500,000 for this program, and the Bolivians have invested about $14,000,000. They have now applied for a new loan of $3,000,000 for a drilling program to bring Camiri production up sufficiently to supply domestic requirements.
The Bolivian Government has tended to dissipate its very limited developmental resources rather than concentrating them on the integrated program described above. Considerable sums of money are spent annually on the construction of two railroads (La Paz-Beni and Cochabamba-Santa Cruz) which are not at present economically practicable. Large debts to Brazil and Argentina are being incurred for the construction of two other railroads and a highway which are of doubtful immediate economic value. The Bolivians would like to borrow $20,000,000 for immediate investment in irrigation projects in areas outside the Santa Cruz region—although they have insufficient resources to develop the latter region (which does not require irrigation).
For some years to come, minerals production must supply most of the foreign exchange which Bolivia will need to finance her development program. Current high prices and full demand for her minerals afford an opportunity to build up reserves for this purpose. Maximum production of minerals is thus an essential part of her development program, quite aside from the interest which both Bolivia and the United States have in making maximum quantities of strategic materials available for defense use.[Page 1148]
Except for one small technical assistance project (which it is hoped to expand under Point IV) we are not now giving Bolivia any assistance in the minerals production aspect of her development program. However, there has recently been considerable exploration of possibilities for such assistance, including loans to producers, long-term contracts, extensive technical assistance, and export priority rating for mining equipment.
2. Capacity to Service Further Loans
Such incomplete studies as have been made and such data as are available suggest that Bolivia’s middle-term balance of payments prospects are exceedingly gloomy. There is a very serious question as to whether, when the present boom in minerals prices has ended, Bolivia will be able to service even the obligations which she has already incurred or has already committed herself to incur. Careful and professional study of her international payments prospects is therefore needed in connection with consideration of her requests for further loans. Such study might also throw valuable light on the question of the most suitable terms for any additional loans; for example, it might be desirable to schedule amortization of such loans over the short period during which minerals prices may be expected to remain high, and thus force the employment of bonanza earnings in development projects rather than in increased imports.
Aside from the balance of payments question there is also serious doubt about the ability of the Bolivian Government to raise revenues sufficient to cover financing of additional loans.
3. Complementary Bolivian Measures
Our defense agencies consider it essential that Bolivian production of tungsten for sale to the United States be sharply increased—an objective which is also in the interest of Bolivia. Various agencies of the United States Government are in position to render substantial assistance toward such an increase, probably including assistance to the Bolivian Government’s Banco Minero. The Bolivian Government, however, must modify its exchange controls relating to tungsten in such a way as to make an increase in production profitable and attractive to the private companies which control the most important tungsten properties.
Our defense agencies also require a continuing high level of production of Bolivian tin ores for the Texas City smelter. Such production can be maintained only if the producers can expect a reasonable degree of stability in Bolivian Governmental exchange controls and tax measures. A high level of tin exports is also of course in the interests of Bolivia and of the Bolivian economic development program.
Steps to increase minerals production are the Bolivian measures of greatest immediate interest to the United States. However, there are [Page 1149] many other measures which the Bolivian Government ought ideally to take if United States long-term economic assistance is to be fully effective. In fact, there is some doubt as to whether piecemeal assistance to Bolivia, in the absence of complementary Bolivian efforts at self-help, may not be largely useless and actually harmful in the sense of increasing a debt burden which Bolivia will not be able to carry unless she undertakes certain reforms. If the Committee plans to give serious consideration to the desirability of advocating further large loans to Bolivia, it may also wish to study the possibility of persuading the Bolivians to adopt some or all of the needed reforms. Examples of measures which the Bolivian Government should take are as follows:
- Tax reform, including some immediate measures to effect substantial increases in revenues;
- Reform of other aspects of the fiscal system, including its administration;
- An effective campaign against inflation, including the above and other measures;
- An effective program to build up foreign exchange reserves during the present bonanza period;
- Progress, in consultation with the International Monetary Fund, toward reform of the exchange rate system;
- Concentration of resources on an integrated and practicable economic development program;
- Perhaps an attempt to settle the basically important conflict between the Government and private minerals exporters over the foreign exchange needs of the latter through a thorough investigation by a foreign accounting firm acceptable to the two parties.
4. The United Nations Problem
In 1950, at the invitation of the Bolivian Government, a technical mission of the United Nations surveyed the Bolivian economy and prepared a report recommending a program of action which it felt offered the only possible solution for Bolivia’s basic economic problems. In anticipation that it might be “necessary … to force Bolivian compliance with the details of the program,” Dr. Hugh Keenleyside, the chief of the U.N. mission, called at the Department twice during the fall of 1950. On his first visit he expressed the hope “that the United States will make it clear to Bolivia that it cannot back out of the perhaps onerous reforms needed and trust the United States to come to its assistance again.” Assistant Secretary Miller told him that “provided the UN program was in harmony with US objectives and policies and met with our approval, we would make it most clear to Bolivia that we would not continue ‘handouts’ if it decided the recommended reforms were too unpalatable.” On his second visit Dr. Keenleyside hinted at a hope that “the State Department would not undermine the work of the mission by offering to solve Bolivia’s problems for them if they do not accept the report.” Assistant Secretary Miller replied that “we had no intention of doing so.”[Page 1150]
5. Dangers in Assistance to Bolivian Government Agencies
In requesting financial assistance the Bolivians are apparently thinking exclusively of loans to Bolivian Government agencies. Some consideration must be given to three dangers inherent in such loans.
First there is the question of the efficiency of Bolivian Government agencies as opposed to private companies which would invest their own capital along with United States loans. Other things being equal, the records of such Bolivian agencies as YPFB, the Bancos Minero and Agricola, and the Bolivian Development Corporation indicate that private companies would be more efficient.
Second there is the question of conflict between such loans and our general policy of favoring private enterprise. There exists in Bolivia today a strong tendency toward excessive State control of the means of production. In the absence of other overruling considerations we of course do not wish to encourage this tendency.
Finally, it must be realized that Bolivian domestic private capital would probably flow into privately-controlled enterprises which had the promise of loans from us, whereas there is little possibility of substantial private capital participation in enterprises controlled by Bolivian Government agencies. This is an important consideration because the presently untapped resources of Bolivian private capital are vitally needed in the economic development program. Some foreign private capital might also participate in projects controlled by private enterprise.
For various reasons the foregoing considerations concerning private capital do not apply very strongly in the case of the pending YPFB loan application, but they are particularly pertinent to the problem of the best method of financing food-processing projects like sugar and rice mills.
- Addressed also to Mr. Merwin L. Bohan, United States Representative to the Inter-American Economic and Social Council, and Mr. Winthrop G. Brown, Acting Director of the Office of International Materials Policy. Mr. Warren, Mr. Bohan, and Mr. Brown represented the United States on the recently formed United States-Bolivian Joint Economic Committee. The memorandum was drafted by Mr. Hudson.↩
- For documentation on the United States Economic Mission to Bolivia (popularly known as the Bohan Mission, for the Chief of the Mission, Merwin L. Bohan), see Foreign Relations, 1942, vol. v, pp. 592 ff.↩