Foreign Relations of the United States, 1955–1957, American Republics: Central and South America, Volume VII

290. Despatch From the Ambassador in Bolivia (Bonsal) to the Department of State¹

No. 114

La Paz, August 13, 1957.

SUBJECT

• Conversation Between Assistant Secretary Rubottom and President Siles
• Concerning Supplementary Aid for Bolivia²

On August 9, 1957, Assistant Secretary of State Rubottom conferred with President Siles and the principal members of the Monetary Stabilization Council concerning the current acute economic situation in Bolivia. A memorandum reporting this conversation in detail is transmitted herewith.

The President also handed Mr. Rubottom a memorandum³ embodying the salient points of the analysis presented at this meeting and renewing the request which had originally been made in March 1957 that the United States Government give consideration to a program of supplementary aid. In summary this request is as follows:

1. Ordinary aid to cover the needs of the National Budget.

2. US $20,000,000, for a single time, to provide capital for the National Institute of Supervised Credit.

3. US $10,000,000, for a single time, for the resettlement of surplus labor and solution of the problem of unemployment.

4. US $30,000,000 to US $50,000,000, distributed over three or four years, for a minimum development plan.

5. Support and facilities for the effective use of the Monetary Stabilization Fund.

6. Assistance in obtaining external credit, especially for the development entities.

It will be noted that points 1 through 4 are virtually identical with those submitted with the memorandum of March 1, 1957 (see Embassy Despatch No. 484 of March 5, 1957⁴). As the Department is aware President Siles has been informed orally that there is no prospect of supplementary aid beyond the expected FY 1958 economic development assistance program. In view of the receipt of this further memorandum instructions are requested regarding the answers to be made, preferably in writing to this latest request.

[Enclosure]

MEMORANDUM OF CONVERSATION

August 9, 1957.

SUBJECT

• Discussion Between President Hernán Siles Zuazo and Assistant Secretary
• Rubottom Concerning Current Bolivian Economic Problems

PARTICIPANTS

• President Hernán Siles Zuazo
• Foreign Minister Manuel Barrau
• Finance Minister Moreno Córdova
• President of the Central Bank, Luis Peñalosa
• Minister of National Economy, Jorge Tamayo
• Representative of the Planning Commission, Umberto Fossati
• Assistant Secretary Rubottom
• The Ambassador
• Mr. Ross Moore
• Mr. E. A. Gilmore
• Mr. Charles Bridgett

The President opened the meeting expressing appreciation for Mr. Rubottom’s visit and saying that he wished to inform the latter of a number of the serious current economic problems, amounting to an emergency, which now confront the Bolivian Government. At his request the Minister of Finance then read statistics reflecting the sharp decline which had occurred in the foreign exchange earnings in the first half of 1957 as compared with the similar period in 1956. These figures showed that exchange earnings in the latter period were $38 million as compared with $28 million for the first half of 1957. The Finance Minister said that a careful revision of the exchange budget for the second half of 1957 had been completed and that on the basis of the best estimates available there will be a balance of payments deficit for the second half of $5 million after making all possible further reductions in expenditures. The President then referred to his annual “State of the Nation” message to the Congress, which he had delivered on August 6, and stated that he had presented the foregoing situation very frankly without concealing any of the unfavorable aspects. He had done this because he wished to assure that the mining sector in particular realized the seriousness of the situation and that operating results for the second half of 1957 would improve. He went on to say that the main factors responsible for the poor showing in the mining sector during the first half had been the reduction in world prices for some of Bolivia’s leading minerals exports, the lack of adequate equipment, the progressive exhaustion of the mines, and problems of labor discipline in the mining corporation. These factors will make it necessary that the COMIBOL operated mines in Potosí, Pulacayo and Oruro must, without further delay, make a substantial reduction in personnel if they are not to close altogether. The wolfram mine at Bolsa Negra must be shut down in view of the catastrophic decline in wolfram prices. These reductions in force are creating a serious unemployment problem. In the industrial field also a decline in consumer demand has created a surplus of industrial workers. The President estimated that the combined prospective unemployment would reach 10,000. The only solution is to facilitate the return of these workers to the agricultural sector. A number were formerly agricultural workers. The Government has developed a resettlement plan entailing a capital expenditure of $1,000 per family. Hence, it urgently needs a resettlement fund of approximately $10 million. The President emphasized that this is Bolivia’s most serious current problem. He went on to say that the International Mining Company mine at Chojlla will also have to close as a consequence of the decline in the price of wolfram and thus an arrangement providing adequate severance pay to the miners is under negotiation. He said the resettlement plan which the Government hopes to put into effect has the advantage of increasing agricultural production, especially in coffee and fruit, and in addition to serving the domestic markets, it is expected that increased quantities of these products can be exported to southern Peru and northern Chile. There is, for example, a developing market for oranges in southern Peru. Coffee also has good prospects. Studies made in the National Planning Commission indicate that the net yield per hectare in other coffee producing countries varies between $800 and $900. The President does not expect to achieve this figure in Bolivia but considered that a net yield of $400 per hectare is entirely possible. The plan contemplates granting four hectares of land per family producing an estimated net income of approximately $1500 per year which, he said, is substantially above the former average earnings of such workers. The effect would be to give them economic independence and to establish a sound rural democracy. He said that unfortunately the putting of the plan into effect has been handicapped by the lack of sufficient numbers of qualified technicians. He had instructed the President of the Central Bank to take charge of the program. In the near future a committee of workers from the Chojlla mine and from the Finase textile mill (which has a substantial number of surplus workers) will visit nearby areas in the Yungas, where state lands are available, to choose appropriate resettlement sites.

The President then turned to the problem of the Stabilization Fund. He said that week after week the Stabilization Council has been performing miracles to secure the necessary supplies of dollars to keep the exchange market open. He expressed his profound appreciation for the close collaboration of the Embassy and the USOM Mission in this connection. He said experience had demonstrated that the Stabilization Fund must have more “flexibility” and more resources if the serious risk that it may be necessary on occasion to close the exchange market is to be avoided.

He then turned to the problem of economic diversification. He remarked that Mr. George Eder, former Executive Director of the Stabilization Council, had collaborated very closely with his Bolivian colleagues during the planning state of the Stabilization Program to make the necessary reductions in the internal investment budget. He paid tribute to Mr. Eder’s work and expressed regret that as a consequence the latter had become the object of strong political attack from certain quarters. The plan followed had been to eliminate so far as possible all projects where there was no prospect of an immediate return in the form of new exports or in the saving of exchange for imports. Experience had shown that despite drastic initial cuts it would be necessary to cut back Government investment even further. A special problem had arisen in connection with YPFB, the State oil company. Its development dollar budget was originally fixed at $12.6 million for the year but the company has encountered difficulties in availing itself of the dollars thus provided, partly because it lacked sufficient bolivianos to make the exchange purchases and partly as a result of technical difficulties in placing orders for needed equipment. The Government is much concerned lest YPFB fall in the same condition as COMIBOL. Its development expenditures must continue, since the yield of existing wells is declining and unless new wells are brought in it may again be necessary to import the petroleum products.

Turning to the problems of COMIBOL the President referred to a recent roundtable meeting of mine managers, union leaders and COMIBOL executives which had been called to consider measures to reduce current operating deficits. This meeting had recommended that COMIBOL must have an immediate additional investment of $3 million to maintain its existing equipment, which is badly depreciated, and an additional $5 million for essential plant expansion.

The President then referred to the recent settlement with the foreign bondholders and also mentioned the negotiations with the owners of the expropriated mines. He said the Government is anxious to reach a settlement but that the propaganda being conducted both in the United States and elsewhere by the ex-mine owners against the Bolivian Government will make any settlement most difficult. He said the Bolivian Government wishes to indemnify them but that it will not tolerate their interference.

Summarizing the economic situation the President said there appeared to be two possibilities: (1) an increase in the amount of aid and (2) possible further stimulus to private investment in the petroleum, mining and agricultural fields. He then referred to the political situation saying that two aspects of recent developments should be especially noted. The first is the common fight against communism. Communists in Bolivia are currently saying that the Siles administration has won the test of strength involved in a recent general strike issue, but that they expect new opportunities to attack the Government. The President said that if incomes and exchange earnings decrease further these new opportunities will certainly become available to them. The second factor which seemed to him to deserve emphasis is the progress that had been made in recent months in strengthening democracy in Bolivia. He compared the recent outbreak in Chile with the threatened general strike in Bolivia at the end of June. He noted that there had been no arrests or shooting of people in the streets here and that the general strike threat had been avoided solely through democratic persuasion. The Government has no fear of the political opposition in the Congress, and he felt it could be justly said that Bolivia had advanced more than other countries in spite of its unsatisfactory economic situation. This, he submitted, is a justification for further aid. He went on to express his deep appreciation for the aid that had already been given.

Foreign Minister Barrau then spoke, emphasizing especially that the future of Bolivia lies in the further development of the mining industry. He said that, including private mining, the number of workers involved may approach 100,000 and that he considered an estimate of 10,000 excess workers at the present time to be very low. Some can return to farms on their own initiative but he placed the numbers who might need assistance as nearer 15,000 than 10,000. To avoid this amount of displacement of workers and because mining offers the best prospects for early exchange returns, he emphasized especially that there should be substantial immediate investment in this field. With reference to the estimated exchange budget deficit for the second half, calculated by the Ministry of Finance at $5 million, he expressed the opinion that the short fall would be nearer $10 million. He said private miners had been particularly hard-hit by lack of credit. More than $3 million worth of necessary mine supplies are in the ports because private miners cannot take up import collections. With the drop in world minerals prices many mines today are operating at a loss. He cited especially Pulacayo, which will have a loss this year of approximately $500 thousand, and the San Jose Mine, which is currently losing $10,000 per day. He emphasized that the mining prospects are very alarming. COMIBOL must have $3 million urgently to maintain its existing equipment. In addition it must have new investment if production is not to drop further. He referred to negotiations with IBRD for a loan to COMIBOL and expressed the opinion that the resulting increase in production would permit the re-payment of such a loan within one year. He emphasized again that Bolivia’s future lies principally in mining, that returns in this industry will be the most rapid, that petroleum and agricultural diversification will provide slower yields, and that the current situation is critical.

The Minister of National Economy then spoke reiterating a number of the points made by the President and the Foreign Minister. He called attention especially to the probability that if the sales of dollars to the private sectors continue at the rate which prevailed in the first half of 1957, the deficit in the exchange budget will be substantially higher than the $5 million estimated by the Ministry of Finance. He spoke particularly of the decline in wolfram prices and urged that the contracts with GSA which are now maturing be renewed. He said that some 8,000 families are affected and that the resulting unemployment is Bolivia’s principal current problem. He emphasized that the Government had foreseen the development of this situation as early as March of 1957 and that he saw no solution for it except granting of supplementary aid to forestall an economic collapse.

The Foreign Minister then referred to a memorandum of March 1, 1957 (see Embassy Despatch No. 484 of March 5, 1957).⁵ He said the plan presented therein would permit Bolivia to be economically independent within three or four years. The present level of aid offers no prospect that Bolivia can eventually stand on its own feet. He said also that an additional current difficulty is the fact that a substantial part of the US aid arrives in the form of food. These food products are in part competitive with locally produced agricultural products with the result that Bolivia’s own production cannot increase. The Government is most anxious to stimulate agriculture and is alarmed by the developing surpluses in some of the US aid products. It hopes that some means may be found whereby the value of these products can be made available as cash grants to increase investment.

The Foreign Minister then referred to the problem of the court attachments against Bolivian funds deposited in the United States banks. He said that unfortunately the GOB had been unable to pay all of its commercial debts maturing during the first half of 1957, and that although a new settlement plan had been proposed to the creditors not all had accepted it. He emphasized the strong opinion of the Bolivian Government that the funds of the Central Bank should be immune from attachment. At the forthcoming Buenos Aires conference the Bolivian delegation will propose a clause in the proposed Inter-American Economic Agreement guaranteeing the immunity of the funds of all state banks. He said GOB considers that action taken by the United States courts in this matter to be an infringement of sovereignty and that such funds should not be subject to the courts in other countries. He expressed the hope that the State Department would support this position and he said that Bolivia is also requesting the support of the International Monetary Fund. He remarked that there are increasing numbers of state banks in the various Latin American countries and that it will be an impossible situation if any United States resident can obtain a court attachment against these foreign bank funds.

Mr. Rubottom then spoke, saying first that he wished to thank the President and the Ministers for the foregoing very clear presentation of their problems. He referred also to the successes of the Stabilization Program. He went on to say that it would be difficult for him to comment in detail on all of the matters which had been mentioned but that it had been apparent for some time that a reappraisal of the program is definitely called for, and for this reason he had taken advantage of his trip to Buenos Aires to stop in Bolivia to become better acquainted with the Bolivian officials and to have an opportunity to discuss their problems with them. He said he would comment on two aspects of the situation; first the political and secondly the economic. With regard to the political aspect he said that he was most pleased with the developments which had occurred and wished to congratulate the President on his recent successes in this regard. It should be recognized, however, that the political situation can easily deteriorate if the economic problems are not solved. He felt that the analysis presented by the Bolivian officials was essentially correct. He said he had just finished his presentation of the proposed Bolivian aid program for FY 58 to the United States Congress, and that he saw a distinct possibility that the Congress would act favorably on the Bolivian aid program submittals. He had encountered considerable sympathy in Congress for Bolivia’s efforts to stabilize its economy, and he was confident that the Bolivian aid program would be continued. There is a general realization, he said, that the United States and Bolivia are in partnership in this matter and that while the problem is Bolivia’s in the first instance, it will become a problem for the United States and for the continent as a whole if adequate solutions are not found.

With reference to the details of the program, Mr. Rubottom said that consideration has been given and is being given to some changes in the form of aid. Efforts are being made to ensure that the amount of aid granted shall more effectively accomplish its purposes.

He remarked that the President’s plan to resettle 10,000 heads of families is similar to programs undertaken in other countries and that the latter have encountered numerous problems in attempting to carry out these programs. He expressed the opinion that the cost of such a resettlement plan would be considerably higher than that estimated by the Bolivian Government and noted also that the plan to grant four hectares of land to each family is much more modest than similar plans in other countries. (The President interjected at this point that land to be allocated per family would cost the state nothing.) Mr. Rubottom went on to say that the plan to develop exports of citrus fruits seemed to him very constructive and that he hoped that the United States might be of some assistance in this regard. With reference to the problems of the mining industry, especially as regards the recent decline in world prices, he said the situation as regards lead and zinc has been particularly troublesome to the United States. He referred to the serious condition of mining in the twelve states in the United States and to the political pressure which had been developing in the Congress. For example, Senator Mike Mansfield of Montana, normally a strong advocate of free trade principles, has taken the position that additional protection to domestic mining is essential under present circumstances. It is hoped that the low prices will be temporary and that revived demand will somewhat reduce the seriousness of the problem. He said that Mexico is planning to call a meeting of the chief lead and zinc producing countries with a view to developing a production control agreement. While this may not be the best approach to the problem it is indicative of the seriousness with which it is viewed. With regards to wolfram the GSA has currently a very large reserve. It will be most difficult to renew the maturing wolfram contracts. The decline in the price of copper is also serious but has not created an acute problem as is the case with the other metals.

Mr. Rubottom then referred to the recent bondholders settlement saying that this action had made a favorable impression on the Congress. Some members of the Congressional committees had asked, however, concerning the mineowners settlement. Mr. Rubottom stated that he did not accept the mineowners propaganda, but that nevertheless they received some hearing in US Congressional circles, and that it would be most desirable to reach an equitable settlement. He emphasized especially that official Washington has never considered that this matter should be treated on a quid pro quo basis. Good faith negotiations are sufficient from our viewpoint. If the negotiations are currently stalled, he expressed the hope that they might be renewed and pushed to an early conclusion. As regards Bolivia’s current efforts to secure IBRD financing, he stated he would discuss the matter with President Black upon his return. He added he did not believe that IBRD was thinking in terms of a quid pro quo for its financing. Regarding the problem of stimulating private investment he noted that a very good impression had been created by the acceptance by Bolivia of the investment guarantee program and by the favorable reception accorded the oil companies and other interested private investors. One problem, he noted, is the 37.5 percent social security contributions required in Bolivia. He expressed the opinion that if these cannot be modified it cannot be expected that private investment will develop substantially.

Turning to problems of COMIBOL and YPFB, he said that discussions are going forward in Washington on the possibility of assisting these two entities. He hoped that a formula might be found, especially as regards YPFB, and he stated that the recent decisions taken in the Stabilization Council regarding the exchange problems of the latter had been favorably noted in Washington. With regards to the Stabilization Plan he remarked that its results in many respects had been almost miraculous, but as in other human affairs it could always be re-examined and improved. In the US Treasury and the International Monetary Fund there is great anxiety to maintain the free exchange market. It is hoped that revised tariff, tax measures and further credit controls may be effective in reducing the demand in the private sector.

On the problem of fund attachments he remarked that Ambassador Andrade had been asked to supply additional data concerning the nature of the debts and the claims made by the creditors, and that with these data at hand it is hoped a decision can soon be reached regarding the Department’s position on immunity. He had discussed the matter in detail with the State Department legal advisor and with Secretary Dulles. In general, the Department has followed the policy that the use to which foreign funds are devoted shall determine whether they may be accorded immunity from court action. Foreign Minister Barrau commented at this point that the International Monetary Fund has suggested that COMIBOL foreign accounts be centralized in the National Bank of Washington and that Banco Minero accounts be transferred to the Riggs National Bank, both accounts to be carried in the name of the Bolivian Embassy. This would solve the problem of future attachments of the funds of these two entities.

Mr. Rubottom went on to say in conclusion that he wished the Bolivian officials to realize that the Department is fully supporting the Bolivian Government in its efforts to stabilize its economy. Much personnel and substantial funds have already been devoted to this problem. He stated that it had been most useful to him to have had the opportunity to discuss the problem in detail with the Bolivian officials and he again expressed appreciation for their analysis and comments.

The Ambassador stated that he wished to thank Mr. Rubottom for his kind words about the staff here and to add that never before in his career had he encountered so inspiring and favorable an atmosphere for collaboration on a difficult problem as he had found in Bolivia. With reference to the mining situation he said that the Ford, Bacon and Davis report, while excellent, did not in his opinion give sufficient credit to the efforts which had been made by the miners in a very difficult situation to maintain production. He noted that Bolivia’s quota under the international tin agreement is 32,000 tons and that this year production may not reach 27,000 tons. There is thus the possibility for a substantial expansion and he is hopeful that with additional efforts the international quota might be reached. He remarked also on the interest in Bolivia expressed by various international mining firms. He emphasized that he was not speaking as the advocate of any specific firm but that he hoped that conversations that had taken place some time ago with various of them might be renewed and vitalized. These firms, he said, operate on the basis of long-range plans and are not alarmed by the recent decline in minerals prices. He hoped that something could be done to conclude constructive arrangements with them. In this connection he suggested that the Ford, Bacon and Davis report should be released in its entirety. This detailed exposition of the mining situation would, he believed, be helpful in enlisting the interest of private mining firms.

With reference to Mr. Rubottom’s comments the President then said that he wished to emphasize that the Bolivian Government is firmly determined to reach an agreement with the former mineowners. He noted, however, that press reports indicated the value of the Suez Canal, the compensation for which is now under discussion with the Egyptian Government, is placed at only $45 million whereas the Patiño group alone has placed a valuation of $60 million on its former properties. The Bolivian Mineworkers Federation has been insisting that, quite apart from receiving compensation, the Patiño Company should make payments to the Government of Bolivia for substantial past frauds in the illegal transfer of exchange abroad and the avoidance of social security taxes. The Government thus finds itself between two extreme positions. He hoped, however, that a formula could be reached which would reconcile the divergent viewpoints. He then mentioned a recent investment proposal involving the grant of a substantial area in eastern Bolivia for the exploitation of forest products. He said in questions like this the Government must take into account political opinion in Bolivia which still fears the creation of super-states within the country. He mentioned in this connection the alleged United Fruit empire of some years ago in Central America. Despite the risks of arousing adverse public reaction he felt, nevertheless, that conversations should be renewed with a view to granting some such concessions. He mentioned also the negotiations with the National Lead Company for the Mathilde property and described briefly the status of the Madrejones project, saying that among the three principal bids which had been submitted the ultimate decision would have to be taken by the Congress.

Mr. Rubottom referred to the desirability of the early adoption of a mining code and remarked that Mr. Wortham Davenport is expected to return to Bolivia shortly to resume work on this project.

The President said that the Bolivian Government is fully prepared to push ahead with an investment law and the new mining code. He hoped that substantial progress could be made on both projects within the next few months.

1. Source: Department of State, Central Files, 824.00–TA/8–1357. Confidential.
2. Rubottom visited Bolivia August 8–10. Documentation is ibid., Rubottom Files: Lot 59 D 573, Bolivia.
3. Attached to the source text, but not printed.
4. Not printed. (Department of State, Central Files, 824.00–TA/3–557)
5. See footnote 2, Document 285.