How Blind Economic Theology Left 34 Dead: Four Years Ago Today in La Paz

Readers:

It was on this day four years ago, February 12, 2003, that the Bolivian army and a unit of the national police launched a four-hour shooting war against one another on the steps of the Presidential Palace in the very heart of the country's capital. "Febrero Negro", as it is called here, left 34 people dead and more than 150 others wounded. Among the dead was Anna Colque, a 24-year-old student nurse and single mother, shot and killed by Army sharpshooters as she came to the rooftop aid of a young repairman also killed by soldiers.

Febrero Negro was a needless national tragedy utterly created by economic blindness and arrogance – the blindness and arrogance of the International Monetary Fund (IMF) in Washington and of then-President Gonzalo Sanchez de Lozada.

In April 2005 The Democracy Center issued a painstakingly researched report on Febrero Negro, drawn from a lengthy review of economic documents, and interviews with, among others: Vice President Carlos Mesa; Sanchez de Lozada's senior economic advisors; the International Monetary Fund; the leader of the police uprising; and many others. We published that report, Deadly Consequences, in both English and Spanish and made it available in full on our Web site (here is the link).

Today, to mark the fourth anniversary of that Bolivian tragedy, we bring you a brief synopsis of how blind economic theology sparked the deaths of 34 people. We also encourage readers to have a look at the full report.

Jim Shultz

How Economic Theology Left 34 Dead

In January 2003 Bolivia's government received a warning from one of its key lenders, the International Monetary Fund (IMF) in Washington, DC. It was time for Bolivia to get its economic house in order, IMF officials told the government. The Fund told Bolivia it needed to cuts its chronic and growing budget deficit by $240 million if it was to stay in the Fund's (and other lenders') good graces.

President Gonzalo Sanchez de Lozada told his advisors to draw up a plan. The proposal they came back with suggested closing the budget gap with a new tax on foreign oil producers doing business in Bolivia. Taxing the foreign oil companies that were making record profits made perfect sense, the advisors told the President. It was, in fact, the privatization of Bolivia's oil and gas in Sanchez de Lozada's first term in the 1990s that help lead to the deficit by cutting public revenue from oil and gas. The new tax would have raised $160 million, to be combined with a new modest income tax on the Bolivia's wealthiest (to raise another $20 million).

Going against most of his key advisors, including his own Vice President, Sanchez de Lozada took any proposal for taxes on the foreign companies off the table. He warned that the companies would stop doing business in Bolivia if the country raised taxes, and that it would threaten a plan he was negotiating to export Bolivian gas through Chile to the US.

"The great alibi, the great argument of the multinational corporations is legal security," then-Vice President (and later President) Carlos Mesa told me. "The moment that you change your tax rules, you are changing the rules of the game that establish the possibility that those companies will come and invest in Bolivia. With another set of rules that are less predictable, they say, we wouldn’t have risked coming here."

Tax the Poor but not the Oil Companies

Squeezed by the IMF on the one side and his refusal to consider taxes on the corporations, Sanchez de Lozada told his budget advisors to draw up another plan, one that would extend the new income tax on the wealthy all the way down to people earning two times the minimum wage, about $100 per month at the time. His advisors warned him against it, saying that it was both unfair and also politically explosive.

Then Sanchez de Lozada asked them, one told me – How much will it cost a policeman, or a nurse, or a teacher, earning two minimum wages? Calculators in hand, they told the President that the poorest would pay about $2 more per month. The wealthy President dismissed that as pocket change and ordered the plan to move forward.

The low-income people affected by the proposed new tax did not take the same view. For them $2 was two full meals, a week of bus fares, real money. Protests broke out in the nation's capital, joined by a unit of the national police. The President refused to alter his position. On February 12th, with the police and protesters occupying one corner of Plaza Murillo and the army protecting the President's office in another corner, the standoff turned violent – first with tear gas and then with live rounds.

Thirty-four people would eventually die, from that shooting and the government's repression against the protests. Sanchez de Lozada was forced to withdraw his tax plan and the IMF mission in town from Washington fled to the airport, denying later that the Fund bore any blame.

And Now $1 Billion More from the Oil Companies

History does not often tell us how wrong a stubborn leader can be, but in this case history does. Febrero Negro woke up Bolivia's social movements to how little revenue the country was receiving from the foreign oil companies in taxes. When news finally broke that September of Sanchez de Lozada's planned gas export deal via Chile, protests exploded through much of the nation (some over the deal and some over historical animosity toward Chile). Sanchez de Lozada's efforts to repress those protests, which left more than 50 dead, sparked a national rebellion and he was forced to resign and flee to exile in Washington.

With his departure the option for taxing the foreign oil companies was back on the table. Under pressure by social movements to act, then President Carlos Mesa championed a new law in the Congress (#3058) that substantially raised taxes on the companies. That was followed by President Evo Morales, in 2006, "nationalizing" the country's gas and oil and negotiating new contracts with all the foreign companies.

As a result of the Mesa law (primarily) and the additional efforts by Morales, in 2006 Bolivia increased its national revenue from oil and gas by almost $1 billion – four times the IMF deficit reduction target in 2003. And all the foreign companies are still here and still making profits.

Sanchez de Lozada, the long-time champion in Bolivia of conservative "Washington Consensus" economic reforms, used those reforms to drive Bolivia's budget into deeper and deeper deficits. Bolivia's leftist social movements – supposedly ignorant of how "real economics" works – forced a change in political direction that has achieved fiscal solvency for the government that the IMF never even dreamed of (Bolivia will run a budget surplus for 2006).

What is the lesson? Theology and blind faith belongs to the world of religion, not public policy. The myth that the oil companies sold and that Sanchez de Lozada bought – raise their taxes and they will leave – turned out to be just that, a myth. How much a city, or a state or a nation can raise taxes on companies before they move away is not the stuff of economic religion, it is a math equation.

Four years ago this week Bolivia's government and its conservative foreign champions wouldn't even do the math and instead, Bolivia had to count up the needless numbers of dead and wounded. It turns out that in Bolivia, the social movements demanding higher gas taxes knew more about real global economics than Goni did.

Read the full report here.