Fernand Braudel Institute of World Economics Associated with the Fundação Armando Alvares Penteado

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Part III: Conclusions

9. Death and Taxes. Earlier in this report, the question was raised of whether or not, with the decline of the highland mining economy and lack of alternate forms of regional production, the urbanization of the altiplano is faced with a possible relapse into ruralism. La Paz and its altiplano hinterland form the most urbanized and densely settled region of Bolivia. However, its pace and degree of urbanization has been moderate by world standards and founded on a weak economic base.

Towns and cities simultaneously serve different purposes as centers of trade, industry, administration, ceremony, military protection, education and capital and cultural accumulation. Frequently mentioned in discussions of urbanization is "the equity concern: rural areas should not subsidize urban areas." However, cities cannot exist without net inflows of resources. Cities without such net inflows violate the law of concentration that is the basis of their existence. In the case of La Paz, net inflows do not seem to come from its hinterland. They appear to come from abroad, in recent decades on a concessionary basis. Bolivia's present financial crisis may signify a curtailment or interruption of these concessionary flows, which in recent decades have accelerated the fusion of city and village. Given the present environment of production, if these concessionary flows are reduced, then La Paz will lose the capacity to support a significant proportion of its population and may see some of its urban functions eroded further. This has happened many times in the lives of preindustrial cities throughout the world. The unusual dimension of the experience of La Paz is how far it has grown beyond the carrying capacity of its hinterland, thanks to unrequited transfers of resources from abroad, without substantial improvement in the economic quality of the city. In the course of these transfers, La Paz has absorbed the technology of consumption much more readily than the technology of production. If we may speak today of a relapse into ruralism, it is in the transformation of the fragile city by the invading economic culture of the village, attracted by this higher technology of consumption.

To a much greater extent than in the recent past, Bolivia probably will have to support its people from its own resources. At the same time, domestic production seems to be stagnating or falling in the teeth of continuing population growth and urbanization. To these economic and demographic contingencies a political issue is added: Bolivia today poses the stark and embarrassingly simple question of whether or not a national state that has lost its taxing power can survive as a governing apparatus. Throughout the world over the past 250 years. increases in government spending have been associated historically with dramatic declines in mortality. In Bolivia, this lowering of death rates has been modest. However, it is doubtful whether even this modest reduction can be sustained if the state loses its capacity to mobilize the resources that are critical for survival.

According to the 1984 World Development Report, Bolivia's taxation of income, profit and capital gain in 1981 amounted to only 15.2% of government revenues and 1.3% of GDP, against 38.4% of revenues and 8.3% of GDP for all lower middle income countries. In 1846, by contrast, when the Bolivian government was much poorer, smaller and more primitive, taxes on Indians, the bulk of the population, generated half of state revenues. The inability of the state to commandeer resources from the people has meant accelerating inflation in the face of pressure from the people for more and more transfers to them of cheap commodities at prices adjusted to their low productivity. There are only three ways out of such an inflation: The first would be another large and continuing transfer of resources from abroad such as the one that began in the mid-1950s to stabilize both the currency and supplies of basic commodities. There is no prospect of this kind of aid flow being resumed in Bolivia at present. The second way would be the traditional formula pioneered in Europe after First World War by the League of Nations and implemented in many countries, with varying degrees of success, by the International Monetary Fund (IMF) after the Second World War. Under this IMF formula, a stabilization loan is committed, and possibly accompanied by other financial inflows, in exchange for undertakings by the government to adjust prices and public spending to costs and revenues. Backed by insistent U.S. guidance and support, this IMF formula was applied in Bolivia during the 1950s with the help of massive U.S. food donations. However, with foreign aid on this scale no longer available, the IMF approach has failed repeatedly in the 1980s, provoking strikes and public disturbances, as have recent government adjustment efforts without IMF involvement. The third way is unassisted adjustment, as was practiced by most of the European countries that experienced severe inflation after the First World War. Of 24 nations forced then to control severe inflation, only five did so with foreign help. Several of them, moreover, were small, weak or newly-formed states. "Foreign loans for currency stabilization and capital reconstruction alike give rise to the problem of interest service and amortization," the League of Nations warned in a review of efforts to combat the European inflations of the 1920s. "Reliance on foreign help may undermine a country's determination to set its house in order." The critical difference between Bolivia today and the European countries that suffered high inflation in the 1920s is that Bolivia is considerably more urbanized than many of these countries, with less productive agriculture and industry. Bolivia today has about 36% of its people living in towns and cities of 20.000 or more population, about the same as all Europe in 1920 and about 50% more than the countries of southern and eastern Europe in those years.

10. A Most-Aided Nation. This report was undertaken under the mistaken impression that Bolivia forms part of a small group of most-sided nations that were singled out since the Second World War by different donors for economic support for political reasons. Besides Bolivia, this group of most-aided nations would include such diverse members as India, Israel, Egypt, Cuba, Tanzania and the Sudan. Apart from India, these countries all have suffered great distortions in their economies from incorporation of this external support, on which they have become increasingly dependent. The mistaken impression at the outset was that this group of most-aided nations can be defined in such a limited way. The array of countries that are or were large aid recipients at one time or another is much bigger. Several countries have moved in and out of these ranks quickly. Despite the small proportion of the national products of the main donor countries assigned to official development assistance (in 1983, 0.24% for the United States, 0.33% for Japan, 0.48% for West Germany), so many countries now depend permanently on such aid flows that these movements seem deeply woven into the fabric of international life. By these gross indicators, it seems that the economies of many poor countries are being sustained at very low cost to the net contributors. (See tables on following pages.)

Bolivia, however, is one of the perennials. In the three decades from 1952 to 1982, Bolivia received nearly $5 billion in foreign savings (equal to 53% of exports), of which only $506 million was direct investment. The rest came in grants ($674 million) and credits ($3.8 billion, of which 82% was contracted since 1972). In the postwar period (1946-81), it received $1.9 billion in foreign aid: $1 billion from international organizations, $820 million from U.S. government agencies and $70 million from the Soviet Union. This total omits substantial contributions from such countries as Canada, West Germany, Japan and Brazil. Divided by 1981 population, the $1.9 billion readily accessible to international comparison in per capita terms ($337) was dwarfed only by Israel ($1.665) and exceeded the flows to such major recipients among developing nations such as Egypt ($265), Yugoslavia ($245), Dominican Republic ($275), Brazil ($107), Colombia ($245) and Thailand ($88). At critical moments, these aid flows saved Bolivia from starvation and disorder. In all but two years between 1954 and 1964, U.S. government aid alone was greater than all Bolivian government tax revenues. In coming months or years, appeals renewed aid on this scale again may be forthcoming.

11. Policy Issues. When the call comes, the response from the donors may be muted and annoyed. However, in the absence of a disruption in the world economy, it is unlikely that Bolivia would be denied additional food supplies in times of severe shortage. The momentum of these contributions is well-established. Agricultura commodity surpluses in the rich countries are so large and embarrassing that deliveries may continue to be made with a certain enthusiasm. The real problem lies with the added financial support needed to sustain Bolivia's governmental operations and logistical infrastructure.

At the end of 1983, Bolivia's foreign debts totaled $3.65 billion, or $608 per capita and nearly one-fifth greater than the national product. In per capita terms, Bolivia's debts are much less than those of Brazil ($769), Mexico ($1.333) and Argentina ($1.500). In relation to national product, they are much more than Brazil's (41%), Mexico's (60%) and Argentina's (77%). The contracting of Bolivia's debts, roughly four-fifths to official creditors and during the lending rush of the 1970s, came in the teeth of warning by many critics that the country never could repay these loans. The existence of these debts, and the need for more resource flows to keep Bolivia functioning as an effective political entity, raises a clear distinction between aid for maintenance and aid for development. The existence of a Bolivian foreign debt equaling 120% of the national product partly reflects a failure by official creditors to call maintenance support by its proper name. As was pointed out in the previous section, this kind of maintenance support is provided to many countries at low cost to the donors and has become part of the structure of international life. There is a fairly clear distinction, by performance standards, between candidates for development support and candidates for maintenance support, a distinction strengthened by market experience in more than 150 years of commercial lending to Latin America. Maintenance support is meant to be doled out in small, measured doses in order to avoid stimulation of greater demand. Clearly, maintenance support cannot continue forever, hence the specters raised earlier in this report of a relapse into ruralism and inability of the Bolivian state to fulfill its basic functions.

If foreign donors had not stepped in to make up for the food shortfalls caused by the 1983 droughts and floods in Bolivia, then biological control mechanisms would have operated, as they had regularly, in the past , to wipe out excess population and remove ecological imbalance. This is not a pretty prospect, but now is a perpetual threat. However, even if these maintenance doses continue, the foreigner cannot assume the main responsibility for raising production sufficiently to diminish this threat. The misuse of capital in Bolivia is part of the degradation of capital worldwide. It is very hard to moralize about the waste of capital in Bolivia when a sum equal to four times Bolivia's national product or foreign debt is spent on the leveraged takeover of a major oil company amid a wave of such transactions amounting to one of the biggest misallocations of capital ever seen. However, each community and nation must live with and learn from its mistakes. In the individual struggles for survival witnessed by this investigator in El Alto, some of which are related in the appendix to this report, people are dealing with the consequences of such mistakes. If solutions are to come, they must come through struggles such as these.

In his book, The Preindustrial City, Sjoberg observed:

The slowness of technological innovation limits capital formation, technology itself being one of the most potent forms of capital available. Conversely the dearth of capital, combined with the considerable underemployment, cheap labor, etc., hinder technological advanced.... Credit is not easily available in preindustrial cities....Most persons lack any form of collateral; the impoverished urbanite has little more than a hovel and the shirt on his back to call his own. Besides, a host of unforeseen disasters can befall any debtor; morbidity and mortality rates are high, and the possibility of property destruction through the vagaries of nature is ever present.

In E1 Alto, as in other preindustrial cities of today, some capital formation does take place that is very dimly understood. During the crisis of the early 1980s, several new commercial bank branches opened next to E1 Alto's burgeoning 16 de Julio market, which apparently did a healthy deposit-taking business until the banking system was brought to its knees by hyperinflation and bank employees’ strikes. In the late 1970s, a similar array of bank branches opened in the downtown market district of El Gran Poder, founded in 1915, "the only La Paz district with so many bank agencies. The movement of money in these branches even exceeds the turnover in the headquarters of these banks, located in the political-administrative center of the city."

The capital-formation process in poor cities is so dimly understood that it may be very useful for some of the best minds on the World Bank staff to devote some time and effort in trying to explain this process better. A reading of some World Bank poverty reports in preparation for this study leaves the impression that this work has been strong on measurement and weak on process analysis. The results of gratuitous supplying of capital, in Bolivia and in many other countries, have been so bad that a better understanding of creative economic powers of poor people is urgently needed so that areas of strength can be defined and supported with greater discretion. At the same time, after four decades of international aid to many different nations under many different programs and conditions, there seems to be no coherent body of knowledge defining what has worked and what has not worked in these ongoing efforts. Comparative analysis of experiences in a small group of most-aided nations, including Bolivia, might yield some guiding principles for more successful efforts in the future.

In the end, the resources of land and people will be decisive. One of the enduring strengths of people of the altiplano is the resilience and mobility of the survivors. Even in the poorest and most remote communities of this highland plateau, people spend much of their time on the move, trading and offering their labor in distant regions. These movements resemble those of ancient networks of pre-Conquest times in which communities would supply their diverse needs by sending members to form permanent colonies (mitmaqs) in different ecological zones along steps and pockets of the ascent to the Andes from the Pacific coastal deserts and from the lowlands of the Amazon basin. These distant mitmaqs maintained strong political and economic ties with their home communities, implementing a survival and wealth-creation strategy that heightened the economic flexibility of the people as a whole.

In the event of a relapse into ruralism, the Aymara again may rely heavily on a modern variant of this survival strategy. In this event, the World Bank may be able to help critically in reducing the casualties of such a relapse by supporting maintenance of Bolivia's transport and communications infrastructure, in this way providing survivors with more economic and territorial options.
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