267. Memorandum of a Conversation, La Paz, August 7, 19561
PARTICIPANTS
- His Excellency Señor Don Hernán Siles Zuazo, President of Bolivia
- Mr. Gerald A. Drew, American Ambassador
- Mr. Henry F. Holland, Assistant Secretary of State
SUBJECT
- Conversation with the President on Bolivian Problems
I made more or less the following statement to the President:
The United States seeks the same objectives in Bolivia that we believe his Government seeks. That is a stable government and a stable and progressing economy. We seek this objective because the interests of the people of the United States are served if these objectives can be attained in Bolivia.
It seems to me that the current problem of the Government in Bolivia can be divided into two phases. The first is the protection and strengthening of the existing economy. The second is to enlarge and expand that economy once its preservation has been assured. Measures that serve one of these two objectives may or may not have some effect on the other.
Referring to the first objective, i.e., the preservation of the existing economy, conferences which I have had with representatives [Page 548] of our Government lead me to believe that the economy is now imperiled by three problems.
The first of these problems is that arising from the fact that the mining industry is not operating on a self-sufficient basis. Since its operations produce very large monthly deficits and these deficits are met by the issuance of Central Bank notes we have a continuing factor producing an accelerating inflationary spiral. There is no prospect of checking this inflation until the mining industry is placed on a self-sustaining basis and the continuing issuance of new Central Bank notes is stopped.
The second problem is that of the completely artificial exchange rate of 190 bolivianos to the dollar. This greatly underprices all imports and is a deterrent to exports.
As a feature of the second problem is the third which is the rate at which agricultural products supplied by the United States are sold. At a rate of 190 bolivianos a dollar’s worth of wheat is sold for less than 1 cent. This has two inevitable results. The first is that the purchaser of these products will re-export it to surrounding countries where it can be sold at world prices for a large speculative profit. The second result is that the presence in the market of agricultural products at such ridiculously low prices effectively stifles all effort on the part of local agriculture to produce the foodstuffs which could replace those imported from the United States.
I am told that the solution of all three of these problems, while difficult, is practical and can be achieved within a reasonable period of time. The exchange problem and the related problem of the prices at which our agricultural products are sold can be cured by freeing the exchange rate. The problem of the uneconomic operation of the mines is more complicated, but I am told that it, likewise, can be solved. The solution would include such measures as termination of the subsidized commissaries (or pulperias), a situation related to the price of our agricultural products to which I have already referred. The correction of the situation in the mining industry would also require that the Government pay to the mining industry for dollars earned by it a number of bolivianos having some realistic relation to the value of the dollar. By the present exchange basis used in the mining industry the Government is stifling the industry. These corrections would necessitate raising the salaries of the miners very substantially to compensate them for the loss of their commissary privileges. However, this increase in operating cost could be met if the mines were allowed a realistic number of bolivianos for each dollar that they earn in the export market.
I believe that these measures, which in very general terms indicate the road to protect and preserve the existing economy, can be taken during the next few months. From the point of view of the [Page 549] United States it is very important that they be taken during the next few months. The reason is that the Congress of the United States, while generous in its attitude toward Bolivia’s problems, wants to feel that United States funds appropriated as aid to Bolivia are going into the preservation of a viable national economy. The Congress of the United States is reluctant to appropriate aid if there is no reasonable certainty that the national economy into which that aid goes is, or can become, a self-sustaining economy. I have now appeared before Congressional Committees on three successive years to discuss aid to Bolivia. On each occasion I am questioned as to how long it is reasonable to expect that this aid will be required and what results are being achieved by it in terms of establishing a self-sustained Bolivian economy. Each year the interest of the Congress in this subject is reasonably more intense. I anticipate that during the next session, when the question of appropriations for aid to Bolivia come up, the Congress will be even more exacting in its inquiries than it has been in the past.
I mentioned parenthetically that the Patiño Mines & Enterprises Consolidated had written to each member of the Senate Foreign Relations Committee to state that any previous assurances that it was engaged in negotiations with the Bolivian Government for renewal or extension of the Retentions Agreement were no longer valid. I said that in the past when inquiries were received from members of our Congress, the Department had been in the position of being able to state that negotiations were under way with the only American interest concerned, namely, Patiño Mines. I feared that unless a settlement were reached with this company, or at least unless negotiations looking to that end were under way, my task before the Committees of Congress in the spring of 1957 in attempting to justify further aid to Bolivia would be made infinitely more difficult. I said that we in the Department did not wish to become involved with the substantive details of the negotiations, but that we felt very strongly that it was in Bolivia’s own best interests to reach a mutually acceptable settlement with the former owners of the nationalized mines.
I continued that these hearings need not be a cause for great concern if the Bolivian Government with our cooperation undertakes immediately the steps which it is apparent must be taken in order to put the economy on a self-sustaining basis. We are entering into Fiscal Year 1957. Almost 11 months remain of that fiscal year. The appropriation of aid to Bolivia by the last Congress assures that our programs of aid will go forward adequately financed for the next succeeding 11 months. Hearings on new appropriations for aid to Bolivia will probably begin about April of 1957. It is essential from the Bolivian point of view that before that day, Bolivia have [Page 550] completed a sufficient amount of progress along the path that I have indicated for the Congress of the United States to have confidence that further aid to Bolivia will, in fact, assure a self-sustaining national economy.
Having outlined the program that we thought the Government should follow in order to improve the existing economy, I undertook to indicate certain obstructions or obstacles which might make this difficult. The first one is the domestic political situation. Does the MNR have sufficient political cohesiveness to undertake a difficult program successfully? I told the President that the Ambassador and I had had a long talk with Juan Lechin in which we described the problem as we saw it and the remedies indicated. Lechin had told us that he and his group were willing to support such a program.
As another possible obstruction to an effective stabilization program, I said that in all probability the Communist Party will do its best to block the Government. The recent elections show that numerically the Party is not a political factor of importance. However, using their clandestine organization and all other resources, they will try to prevent a stabilization program because their objective is to create chaos, drive a wedge between the Government and the people, identify themselves with the people and undertake to overthrow the Government. I explained that measures which were effective in combating Communism on the ideological front were often completely ineffective in combating Communism on the subversive front. On the latter point, the job can only be done by relying on trained individuals who are professionally prepared in the field of counter-espionage and anti-subversive work.
As regards the second of the Government’s two problems, that is, the problem of expanding and diversifying the country’s existing economy, I said that it appeared to us that the steps now planned by the Government are adequate. These include the existing Investment Guaranty Agreement,2 the Petroleum Code,3 the proposed Mining Code, and the proposed Investment Code. It is our judgment that if these measures are added to a program of basic stabilization, they will surely achieve substantial expansion of the country’s economy.
I said that we had been impressed by the need to coordinate closely all of the different steps comprising a stabilization program. If these are taken in an erratic or uncoordinated manner they might [Page 551] well work against each other. I urged, therefore, that the President coordinate closely with the Ambassador, Mr. Eder, Mr. Moore 4 and the representatives of Ford, Bacon and Davis and, particularly, that no measures be undertaken by the Government in this field without prior coordination with our representatives.
To all the foregoing the President replied as follows:
Communism. The Government has a Communist problem. The Communists, ever since the Revolution, have attempted to distort constructive measures taken by the Government to make them actually harmful to the Government’s program. For example, when the Government undertook the land reform program, the Communists insisted that the estates which were mechanized and being operated successfully be broken up. This meant that agricultural units which had been productive became unproductive.
The Communists also sought to force the Government into a policy of expropriation without compensation both as regards the mining companies and the land reform program.
. . . . . . .
The President complained of the lack of support among his own party leaders. In private conversations they would agree to support necessary programs, but would thereafter openly oppose them for political reasons. However, he said that he did feel that he could muster sufficient support from Lechin and other elements of the party to succeed in a stabilization program such as that which we had outlined.
He said that he felt confident that by January of 1957 he could have developed and placed in operation a stabilization program which would strengthen the position of the Department of State in discussing the Bolivian aid program with Congressional Appropriations Committees. He agreed that he would immediately resume negotiations with the tin companies and would insist on the continuation of those negotiations so that, even if he fails to reach an agreement as to the amount of compensation, he would build up a record of vigorous and good faith efforts to reach an agreement.
The President then outlined some of his own ideas in the economic field. One of these was a proposal to tax retroactively large incomes earned since the 1952 Revolution. He explained that this would affect the people of means like himself rather than the working elements. He believed that such a measure, while hard on the group affected, would convince the union groups that the balance of the party, and particularly Government leaders, were willing to share the hardships of a stabilization program. This he [Page 552] believed would insure support from the union groups for the Government’s program.
He then explained a proposal to divide up state-owned agricultural land near the principal cities and give plots of land to Government employees for them to work in their spare time. He believed that this would make them into small capitalists who would enthusiastically support the Government’s programs to stabilize the national economy.
We did not comment on either of these two proposals other than to urge that nothing be done without prior close coordination with our own experts.
Fearing that the Government might try to influence Ford, Bacon and Davis to reflect a rosy picture of the nationalized mines in their report, I pointed out to the President the possible significance of that report in his negotiations with the tin companies. If, in fact, the mines are approaching a state of exhaustion, then this should be frankly stated if, for no other reason, because of the effect that it will have in negotiations regarding compensation for the mines. He said that he would urge that Ford, Bacon and Davis reflect faithfully in their report the actual situation of the mines.
- Source: Department of State, Central Files, 824.00/8–756. Confidential. Drafted by Holland.↩
- For the exchange of notes constituting the referenced agreement, signed at La Paz, September 23, 1955, and entered into force on the same date, see 6 UST 3948.↩
- The Petroleum Code was issued as an Executive decree on October 26, 1956, and enacted into law by the Bolivian Congress on October 25, 1956. It was drafted with the assistance of Worth Davenport, senior partner of the New York law firm of Schuster and Davenport, who was under contract with ICA. Documentation on the subject is in Department of State, Central File 824.2556.↩
- Ross Moore, Director of the U.S. Operations Mission in Bolivia.↩