DEADLY CONSEQUENCES

The International Monetary Fund and Bolivia’s

“Black February”

by Jim Shultz

Research Assistants:

Carolyn Claridge, Marcela Olivera,

and Nicholas Verbon

April 2005

BOLIVIA: Casilla 5283, Cochabamba, Bolivia – Tel: (591-4) 440-7713
USA: PO Box 22157, San Francisco CA 94122 – Tel: (415) 564-4767
E-MAIL: info@democracyctr.org
WEB: http://www.democracyctr.org

© The Democracy Center, 2005

For Luis Colque

The Democracy Center, based in Cochabamba, Bolivia and San Francisco, California, works globally to advance human rights through a unique combination of investigation and reporting, training citizens in the art of public advocacy, and organizing international citizen campaigns.

Jim Shultz is the executive director of The Democracy Center. His other books include, The Democracy Owners’ Manual (Rutgers University Press), Follow the Money: A Guide to Monitoring Budgets and Oil and Gas Revenues (Open Society Institute), Promises to Keep: Using Public Budgets as a Tool to Advance Economic, Social and Cultural Rights (The Ford Foundation), and The Initiative Cookbook, Recipes and Stories from California’s Ballot Wars (The Democracy Center).

Acknowledgements

Research and publication of this report was a group effort and the product of many hands.

Two Democracy Center volunteers, Carolyn Claridge and Nicholas Verbon, worked mightily on research and other parts of this project. Without the two of them this report would never have been written.

A number of people gave generously of their time to review and comment on various drafts of the report, including William Finnegan, Renee Comesotti, Melissa Draper, Lily Whitesell, Roberto Fernández and, as always, my wife Lynn Nesselbush. Two gifted Bolivian photographers, Aldo Cardoso and Enzo de Luca, allowed their images to give the report a Bolivian face. Ramiro Lizárraga took masterful charge of the report’s production and Carmen Sanchez patiently helped with transcriptions. Oscar Olivera and Luis Gomez helped open the door for some of our interviews.

My Democracy Center colleague, Marcela Olivera, helped with every aspect of this report imaginable, and then some, from research, to transcriptions, to translations. Two foundations, the Rockefeller Brothers Fund and the Wallace Global Fund, provided the resources to make this work possible and I thank them for believing in our work.

Lastly, thank you to Lynn and our three children, Elizabeth, Miguel and Mariana, who were unbelievably patient with me as I worked on this. Please forgive me for any grouchiness along the way.

Jim Shultz

Cochabamba, Bolivia

April, 2005

Table of Contents

Introduction..................................................................................................................................6

Act One: The International Monetary Fund

and the Politics of Economic Belt-Tightening..........................................................................8

§ Birth of a Global Vision

§ The IMF Expands Its Reach

§ The Critique: An Institution Controlled by Wealthy Nations and Unprepared to Understand the Realities of Poor Ones

§ The IMF and the Demand for Deficit Reduction

Act Two: The IMF in Bolivia, a Nation Struggles to Meet Economic Demands Issued From Abroad................................................................................................................................14

§ From Blacklist to IMF Laboratory

§ IMF Predictions vs. Bolivian Reality

§ The IMF Tells Bolivia to Reduce Its Budget Deficit

§ The Political Dance of Developing a Tax Package

Act Three: Two Bloody Days in February................................................................................23

§ Opposition from Almost all Quarters – Including the National Police

• Wednesday in the Seat of Government – An Unintended Spiral Toward Bloodshed

§ Thursday – A Militarized City and Death on a Rooftop

Epilogue................................................................................................................................... ....28

Conclusion: Lessons Learned in Blood and Fire.....................................................................31

The Dead and Wounded Of Febrero Negro............................................................................34

Notes.............................................................................................................................................36

INTRODUCTION

Through the large windows of the International Monetary Fund’s office in La Paz you can see down to the rooftop where Ana Colque was shot and killed in February 2003. Army sharpshooters sent a bullet through her chest during a military assault intended to quell public protests against an economic belt-tightening package imposed on Bolivia by the IMF.

Colque, 24, was a student nurse and single mother. She had climbed to the roof to come to the aid of Ronald Callanqui, a 25-year old repairman who lay dying, shot by soldiers an hour before. The two were among thirty-four people killed during two days of violent conflict sparked by the announcement of a new tax on the nation’s working poor.

For an afternoon, the conflict erupted into a shooting war between Bolivia’s army and police, directly in front of the National Congress and the Presidential Palace.

This report tells the story of Bolivia’s Febrero Negro, Black February. It is not just the story of two tragic days in La Paz, but also of the global economic system that set that violence in motion. All of the major actors in that system are present in this drama: the IMF, World Bank, and their economic policies toward poor countries; a government caught between those policies and the demands of its people; international corporations pressing their interests; workers and social movements taking to the streets; and individuals caught mortally in the crossfire.

Deadly Consequences traces a path. It is one that that begins on the desks of economists at the IMF in Washington, runs through the subtle dance of coercion between the IMF and poor governments, and ends with the squeezing of the poor beyond their tolerance and, finally, with death on a rooftop.

The story of Febrero Negro is Bolivia’s story but it is also one that echoes in the experiences of many other poor nations across the world.

For two decades, South America’s poorest and most indigenous nation has been one of Latin America’s chief laboratories for an experiment in market-driven economic reforms known as “The Washington Consensus.” It is an experiment that has included the privatization of natural resources and public enterprises, weakening labor protections, lowering taxes on foreign companies, and public spending cuts and domestic tax increases to reduce public debt.

These were reforms that promised prosperity by opening the nation’s doors to foreign investment. In Bolivia, as elsewhere, these policies have been adopted, not because the public asked for them, but because they have been made a condition of receiving international aid from the IMF, the World Bank and other foreign lenders.

But what have been the “real world” results of this economic experiment? This report sets out to answer that question by looking up close at one country’s experience on the ground.

The story of Febrero Negro is a real life tragedy. Like many tragedies, this drama unfolds in three acts. Act One tells the story of the IMF – of how it was born, how it grew to be a power greater than many governments, and at its role as the missionary of economic belt-tightening in poor countries. Act Two looks close up at the IMF’s role in Bolivia – at the economic policies it has sought to impose there, at the strained efforts of the Bolivian government to comply, and at how the IMF’s policies translate into cold reality. Act Three follows the story to its bloody end – a public uprising against a tax increase the poor could not afford, a series of missteps that turned the conflict violent, and finally government repression that took the life of a young mother dressed in nursing whites.

In telling this story we have taken seriously our responsibilities to get the facts right and to hear from diverse perspectives. This report draws on numerous and varied interviews – with Bolivia’s current President and senior government advisors, with IMF officials, with economists of varying points of view, with Bolivian human rights leaders, participants in the events on the ground, and with the families of victims. We have reviewed dozens of original documents, ranging from signed agreements between the IMF and Bolivia, to Bolivian budget analyses, to heart-wrenching personal testimonies.

Whether readers of this report count themselves as cheerleaders for IMF and World Bank policies, as critics, or simply as people seeking to better understand the issues involved, the story of Febrero Negro offers important lessons. They are lessons paid for in blood and to which we owe our serious attention.

ACT ONE

THE INTERNATIONAL MONETARY FUND

AND THE POLITICS OF ECONOMIC BELT-TIGHTENING

Birth of a Global Vision

In 1944, with the end of World War II visible on the horizon, the powers of Europe and the Americas set out to develop a group of global institutions through which they hoped to bring peace and economic prosperity to the community of nations. To protect the peace, the victors of the war established a new United Nations. To chart a course toward global economic prosperity, delegates from forty-four nations gathered that June in the small New Hampshire town of Bretton Woods.

The IMF and World Bank were born of the same global vision that created the United Nations.

In forming the UN, it was the failed aftermath of World War I and the Treaty of Versailles that was on the minds of its founders. At Bretton Woods, the ghost in the shadows was the memory of the Great Depression and delegates hoped to create a world economic order that could avoid the kind of global economic collapse suffered just a decade before.[1]

Out of these negotiations two global institutions were born. One was the World Bank, which was given the responsibility of financing large-scale infrastructure projects, beginning with the reconstruction of post-war Europe. The other institution born that summer in New Hampshire was the International Monetary Fund. The role given to the IMF was to promote a stable international demand for goods. The Fund would do this by stabilizing international currency exchange rates and by making short-term loans to governments that would otherwise have trouble meeting their international payments, for trade or debt, to other countries.[2]

While today both the IMF and the World Bank suffer a blizzard of criticisms, it is important to remember that, in the eyes of their founders, the establishment of the Fund and the Bank was equally important as the establishment of the UN that same year. “The IMF was founded on the belief that there was a need for collective action on a global level for economic stability, just as the United Nations had been founded on the belief that there was a need for collective action at the global level for political stability,” writes economic Nobel Laureate, Joseph Stiglitz.[3]

John Maynard Keynes, the British economist who led the UK’s delegation to Bretton Woods and is credited as a chief architect of the institutions born there, said at the conference’s end:

We have shown that a concourse of 44 nations are actually able to work together at a constructive task in amity and unbroken concord. Few believed it possible. If we can continue in a larger task as we have begun in this limited task, there is hope for the world. The brotherhood of man will have become more than a phrase.[4]

The IMF boasts a series of important successes over its history, among the more recent: buttressing South Korea with $21 billion in loans during the 1997-98 Asian financial crisis; helping Kenya with a $52 million loan to combat the effects of a national drought in 2000; and helping set up treasury systems in the countries of the former Soviet Union after its political collapse in the 1990s.[5]

The IMF Expands Its Reach

Six decades after its birth, the IMF has a staff twenty-eight hundred and a global mission that goes far beyond the one given to it by Keynes and the other founders who gathered at Bretton Woods. Headquartered in Washington, the IMF describes its role this way:

It aims to prevent crises in the system by encouraging countries to adopt sound economic policies; it is also – as its name suggests – a fund that can be tapped by members needing temporary financing to address balance of payments problems.[6]

In many countries, the IMF is more influential in setting economic policy than the elected governments of those nations.

The Fund declares, “By working to strengthen the international financial system and to accelerate progress toward reducing poverty, as well as promoting sound economic policies among all its member countries, the IMF is helping to make globalization work for the benefit of all.”[7]

How did the IMF evolve from a limited mission dealing with currency exchange and balance of trade payments to become a key setter of global economic policy?

First, the Fund’s original work became largely obsolete. When the IMF was born, global currency exchange was based on the gold standard. When the gold standard was abandoned in 1971 the Fund lost its core function and soon began hunting for another.[8] It found that new purpose in the 1980s in the conservative economic movements led by US President Ronald Reagan and British Prime Minister Margaret Thatcher.

In their respective countries, Reagan and Thatcher were leading battles to remake the economic rules, aimed at creating more freedom for corporations and more limits on the role of government. The IMF became a main vehicle for exporting those policies to the rest of the world, with conditions on lending being the Fund’s chief tool. “The IMF and the World Bank became the reluctant missionary institutions, through which these policies were pushed on the reluctant poor countries that often badly needed their loans and grants,” writes Stiglitz.[9]

The resulting package of IMF-pressed economic reforms became known by a variety of names – Structural Adjustment, The Neoliberal Economic Model, The Washington Consensus. As a condition of IMF, World Bank, and other international aid, countries were required to privatize their natural resources. They were coerced to sell off state-owned enterprises, from airlines to telephone companies. Labor protections needed to be scaled back. Public spending had to be cut and taxes raised to reduce public budget deficits.

Today the IMF is no longer a simple economic advisor sitting on the sidelines. It is a political power that, in many countries, wields more influence over economic policy than elected governments.

The Critique: An Institution Controlled by Wealthy Nations and

Unprepared to Understand the Realities of Poor Ones

To its critics, especially those looking at the Fund and its activities from the perspective of low-income countries, the IMF was designed from its start to protect the economic interests of the wealthiest nations, often at the expense of poor ones.

Officially, the Fund’s highest authority is its Board of Governors, composed of all 184 member countries. In reality, however, the IMF is run by a much smaller Executive Board dominated by its permanent members: the US, Japan, Germany, France, the UK, China, Russia, and Saudi Arabia, plus a handful of other wealthy countries that hold the largest shares: Canada, Italy, Sweden, Belgium and Holland.[10]

The US can effectively veto any major decision, the only nation in the world to wield such power.

Moreover, IMF governing power is not based on “one nation, one vote”, as is the UN General Assembly, but a “one dollar, one vote” scheme based on the size of each country’s economy. The US’ voting power, for example, is two hundred times Bolivia’s.[11] IMF rules also give the US unique control over the Fund’s most important choices. The IMF’s Articles of Agreement require an eighty-five percent super-majority to make major decisions. Not coincidently, the US holds a voting share of 17.6%. As a result, the US can effectively veto key Fund decisions, the only single nation in the world to wield such control.[12]

Not surprisingly, the pro-market policies imposed by the Fund and the World Bank also directly benefit the economic interests of the wealthy countries who control those institutions. Privatization of public resources has opened up new markets for corporations such as Bechtel and Enron of the US, British Petroleum of the UK, Shell of Holland, and Suez of France. Pressure to hold down public spending to free up funds for loan repayment also benefits wealthy nations and their major banks, which have made billions of dollars in loans to poor countries.

US officials admit openly that Fund and Bank policies offer a direct benefit to US corporations. As the writer William Finnegan observed:

Testifying before Congress in 1995, Lawrence Summers, then of the Treasury Department (now president of Harvard), disclosed that American corporations received $1.35 in procurement contracts for each dollar the American government contributed to the World Bank and other multilateral development banks.[13]

For the US and other wealthy nations, support for the Fund and the World Bank is not simply an act of charity, or an extension of conservative economic ideology. That support is also a calculated and lucrative opportunity for return on investment. Bolivian economist Roberto Fernández writes, “Through its own constitution and the distribution of internal power since its birth in Bretton Woods in 1944, the Fund has always favored the economic and political interests of the United States and the countries of the current European Union.”[14]

Critics also charge that the Fund is either unable to understand the impact that its policies have on poor countries or is deliberately unconcerned. This includes, critics note, the narrow makeup of the Fund staff. A full two thirds of the IMF’s staff are economists. More than ninety percent of the IMF’s staff are based in the Fund’s headquarters in Washington. Typically the IMF’s permanent staff in a country is limited to a single person.[15]

In Latin America, Asia, and Africa, the Fund finds itself and its policies under attack, in both intellectual circles and in the streets. The models that promise economic prosperity when presented in Power Point in Washington have, time after time, failed to deliver the goods when actually implemented on the ground.

Among IMF policies, one that has often provoked the deepest damage and the most bitter protest is the IMF’s insistence that poor governments reduce public spending and increase taxes in the name of reducing public deficits.

The IMF and the Demand for Deficit Reduction

The IMF’s interventions related to debt and deficit reduction have their roots in the Latin American debt crisis of the 1980s. As a result of heavy borrowing and the skyrocketing interest rates at the time, many countries found themselves so overburdened by debt and so incapable of paying their lenders that a number of major international banks veered close to bankruptcy.[16]

The Fund describes its role in the debt crisis this way, “The IMF helped debtor countries design medium-term stabilization programs, provided substantial financing from its own resources, and arranged financing packages from creditor governments, commercial banks, and international organizations.”[17] Translated from Fund jargon, this means that the IMF loaned countries emergency aid so that they could keep up with their payments to banks and other lenders. Roberto Fernández, a Bolivian economist, adds, “Of equal importance, [the Fund] took advantage of the circumstances to apply longer-term policies on poor countries, aimed at making them more subordinate to the larger economies and their political power.”[18]

A public deficit, simply put, is the amount that a government spends in a year over and above what it will take in as taxes, foreign donations, and other revenue. Deficits are the part of the budget that must be borrowed and paid back with interest. Poor nations borrow money from many sources, including international financial institutions like the World Bank and the IMF, private banks, and other governments.

Deficit spending is common practice among many governments, not just those of poor countries. The US has run budget deficits, from small to gargantuan, for all but five of the past forty-three years.[19] In 2004 the US budget deficit topped $412 billion, which amounts to 18% of all federal government expenditures and 3.6% of the US national gross domestic product[a].[20]

Reducing public deficits is a cornerstone of IMF policy and a central condition that governments must meet in order to receive IMF loans and other aid. The Fund argues that deficit reduction is essential to help poor countries achieve economic stability. It writes, “One of the central insights from past research on developing countries is that prudent fiscal policy—that is, low budget deficits and low levels of public debt—is a key ingredient for economic growth, which in turn is essential for reducing poverty and improving social outcomes.”[21]

Fund officials argue that their real concern is not about helping lenders but about helping poor countries obtain the resources they need from abroad in order to develop. The Fund says that heavily indebted countries are like a family that repeatedly borrows from the bank or the local store, until one day it is told that it is too far in debt to receive any more credit. Fiscal discipline, the IMF says, is about making tough choices now in order to avoid tougher choices down the road and, ultimately, about assuring long-term economic sustainability.[b]

In many countries, the IMF’s demand for deficit reduction pushes an already fragile economy right over the edge.

By definition, reducing budget deficits means that governments must either cut public spending, raise taxes, or both. While the IMF touts such action as important to support long-term economic growth, many researchers and poor governments argue that the economic squeezing forced by the Fund takes already-fragile economies and pushes them over the edge. As Arthur MacEwan, Professor of Economics at the University of Massachusetts writes:

The IMF mania for reductions of government spending in times of crisis has been rationalized by the claim that balanced budgets are the foundation of long term economic stability and growth. The IMF officially laments the fact that these policies have a severe negative impact on low-income groups (because they both generate high rates of unemployment and eviscerate social programs). Yet, fund officials claim these policies are necessary to assure long-term stability. Nonsense. In recessions, moderate government deficits (like those in recent years in Argentina) are a desirable counter-cyclical policy, and balanced budgets only exacerbate downturns. Also, curtailing social spending—on education, health care, physical infrastructure projects—cuts the legs out from under long-term economic progress.[22]

Joseph Stiglitz goes further, saying that the IMF’s strict rules about deficit reduction go directly against its original mission, to foster economic expansion.

Today the IMF typically provides funds only if countries engage in policies like cutting deficits, raising taxes, or raising interest rates that lead to contraction of the economy. Keynes would be rolling over in his grave were he to see what has happened to his child.[23]

What does the IMF policy of deficit reduction mean in practical terms for the people who must live with the results? In the African republic of Cameroon, Oxfam reports, the IMF has required the government to achieve a fiscal surplus by 2005. The cuts in public spending required to accomplish that goal would be enough to double the country’s health budget in a country where infant mortality still remains a profound problem.[24] Failure to agree to the IMF’s terms can also cost a country dearly. When Honduras had a dispute with the IMF over teacher salary increases, it cost the government $194 million in delayed debt relief and donor aid. That assistance was more than three times what the country needed to fill the gap in providing universal education to all the nation’s children.[25]

In Bolivia in 2003, the IMF’s demands for deficit reduction meant not only higher taxes for the country’s poor, it also set in motion a chain of events that left thirty-four families burying their dead.

ACT TWO

THE IMF IN BOLIVIA

A NATION STRUGGLES TO MEET ECONOMIC

DEMANDS ISSUED FROM ABROAD

For two decades the IMF and the World Bank have been primary architects of Bolivia’s economic policies. Many would argue that the Fund has been more influential than the Bolivian government itself. John Williamson of the Institute for International Economics, the economist who coined the phrase “The Washington Consensus,” calls Bolivia the “Big Bang” in Latin America’s experiment with the IMF/World Bank market-driven economic formula.[26] From 1986 to 2001 Bolivia received $350 million in IMF loans in exchange for adopting a specific prescription for its economic policies.[27]

From Blacklist to IMF Laboratory

The IMF’s deep involvement in Bolivian economic policy can be traced back to the country’s battle with hyperinflation in the mid-1980s. The late 1970s and early 80s were years of extraordinary political instability in Bolivia; from 1978 to 1982, Bolivia had nine different presidents – some elected, some brutal dictators.[28] This instability, combined with a collapse of world prices for tin – the base of the Bolivian economy at the time – took a huge economic toll.[29] From 1970 to 1980 Bolivia’s foreign debt exploded by more than six fold, to over $3 billion. The national economy was collapsing on itself.[30]

Blacklisted for aid from the IMF and World Bank, the government stopped servicing its foreign debt and started printing money to keep up with its commitments for public spending.[31] It also allowed its currency to float in value against the dollar, sparking inflation that, for a time in 1985, hit levels equal to an annualized rate of 25,000 per cent per year.[32]

In 1985, a newly elected government led by President Victor Paz Estenssoro implemented a series of extreme measures to bring inflation under control. These included the devaluation of the Bolivian currency, elimination of producer subsidies, deregulation of interest rates, and repressive actions against labor unions to prevent demands for higher wages.[33] Two years later, inflation was under 20% and Bolivia’s economic growth had climbed back to a rate of 2.4% per year.

A year after Bolivia’s self-imposed shock therapy, the IMF offered the country limited aid, support for a Social Emergency Fund to help generate employment for some of those hardest hit.[34] Through that door the IMF and World Bank would enter Bolivia and over the next two decades, bring with them the full array of “structural adjustment” reforms, as conditions of economic assistance. IMF and Bank policies would become the Bolivian government’s economic blueprint, through administration after administration.

IMF Predictions vs. Bolivian Reality

In August 1998, the IMF, the World Bank, and the Bolivian government unveiled a joint “Policy Framework Paper” which laid out a comprehensive plan for overhauling the nation’s economy.[35] Policy papers and letters of intent such as these are the mechanism by which IMF officials secure promises from governments about the reforms they will implement in exchange for aid. They are also the only public paper trail of the closed-door negotiations between the IMF, the Bank, and governments.

The gap between what the IMF predicts and what actually happens could hardly be wider.

The 1998 paper laid out the specifics of the overhaul – widespread privatization, labor reform, deficit reduction – and then predicted a rosy picture of the economic results that Bolivia could expect:

Against this background, a key objective...is to achieve a significant reduction in poverty by 2002 through faster economic growth and stronger social programs. Specifically, the program aims to raise economic growth from 4½ percent in 1998 to 5½– 6 percent by 2001, reduce inflation gradually to 5 percent in 2001, achieve moderate gains in reserves, and keep the external current account deficit on a sustainable path.[36]

Bolivia implemented virtually the entire program. But instead of it making the Bolivian economy more prosperous, the program made Bolivia’s economy even worse. Four years later the Bolivian government reported gloomily to the IMF:

The government that took office in August 2002 inherited a situation of prolonged economic stagnation. Economic growth averaged only 1½ percent a year in 1999-2002. The resulting fall in per capita income and employment, and the contraction of the informal economy...have contributed to rising social tensions that erupted recently. Moreover, the weak economy has undermined government revenues, raised the fiscal deficit, and placed a heavy financing burden on the public sector. The prolonged economic stagnation has also weakened the financial and corporate sectors.[37]

The gap between what the IMF and Bank predicted and what actually happened on the ground could hardly be wider.

Two decades into the IMF and World Bank Bolivian economic experiment, the results have been dismal. In 2005, the poverty rate is at sixty four percent of the nation and climbing.[38] The unemployment rate is fourteen percent of all workers, higher than at any time in fifteen years, and has more than quadrupled over the last decade.[39] Nearly two thirds of the nation’s budget is financed from debt and donations.[40] Economic growth, when it does come, mostly benefits a few specific industries, such as oil and gas export, owned mainly by foreign corporations.[41]

What has been true for the Bolivian economy as a whole has also been true with specific reforms required by the IMF and World Bank, among them privatization of its gas and oil industry and its public water systems.

Oil and Gas Privatization

For more than sixty years the oil industry in Bolivia was owned and controlled by the government.[42] Foreign companies participated in petroleum exploration and production, splitting the benefits with the Bolivian government 50/50.[43] Those oil and gas revenues were also an essential part of financing Bolivia’s public budget. From 1985 to 1996, public revenue from the national oil and gas industry averaged more than $339 million per year, forty percent of all the funds coming into the national treasury.[44]

After Bolivia privatized its gas and oil industry, it took in $40 million less in yearly revenue.

Privatization of the oil and gas sector was part of the IMF and World Bank master plan for Bolivia, which called for “privatizing all remaining public enterprises.”[45] The theory behind oil privatization was that if Bolivia reduced its share of oil profits from 50% down to 18% – and increased the share of the foreign oil companies accordingly – investment and production would expand dramatically and Bolivia would actually make more money than if it retained ownership.[46] Unfortunately, that prediction, like many others from the IMF and the Bank, did not turn out as promised.

Under the new privatization scheme, called “capitalization,” the Bolivian government surrendered control of oil and gas to foreign corporations such as Shell, Enron, British Petroleum and others. In place of the 50% share that Bolivia received before, the government was to receive a complex package of taxes and royalties.

By 2001 the government’s income from oil and gas had fallen by $40 million annually.[47]

In addition, a large portion of those oil and gas taxes were now being passed onto Bolivian consumers as higher energy prices and new taxes on domestic use.[48] While depleting a non-renewable resource even faster, Bolivians were actually paying more and earning less. The promises that were made about enormous collections of new revenue hadn’t even come close to coming true.[49]

By complying with the IMF’s demands for privatization, Bolivia ended up reducing its public revenue and started acquiring higher public deficits. Later the IMF would return to Bolivia and pressure it to reduce those deficits, not at the expense of foreign corporations but of Bolivia’s working poor.

Water Privatization

Bolivia’s experiment with water privatization, another part of the World Bank and IMF reforms, proved no less a failure. In 1995 the World Bank made privatization of public water systems in two of Bolivia’s largest cities, Cochabamba and El Alto/La Paz, a condition of Bank assistance for water development.[50] The Bank argues that handing water over to foreign corporations is essential in order to open the door to needed investment and skilled management.[51]

In Cochabamba, the order to privatize led to a forty-year contract with a company jointly controlled by the Bechtel Corporation of California and the Abengoa Corporation of Spain. Upon taking over, the corporations immediately forced rate increases averaging more than 40% for the poorest water users, and in many cases much higher.[52] Citywide protests ultimately led to the company’s ouster in April 2000, but only after a declaration of martial law by the government, aimed at protecting the companies’ contract, left one teenage boy dead and more than one hundred people wounded.[53]

In El Alto/La Paz, the privatization deal struck with a company controlled by the Suez Corporation of France and co-owned by an arm of the World Bank, left tens of thousands of poor families locked out of the water system. The price for new water and sewage hookups increased dramatically, to almost $450 per household, an amount exceeding half a year’s income at the Bolivian minimum wage.[54] In January 2005 a citywide uprising in El Alto led to a cancellation of the contract by Bolivia’s President.[c]

The IMF Tells Bolivia to Reduce its Budget Deficit

Bolivia, like many poor countries and a good many rich ones, relies on borrowing to finance its annual public budget. In the years leading up to Febrero Negro, however, Bolivia’s budget deficit had shot through the roof. In 1997 Bolivia’s budget borrowing equaled 3.3% of the country’s Gross Domestic Product (GDP). By 2002 it had leapt to 8.7%.[55]

That borrowing means that each year a larger portion of the budget has to be spent on financing debt instead of providing services like heath care and schools. In 2002 Bolivia owed a debt payment of more than $496 million, 16% of the nation’s total budget.[56]

For years the IMF had been pressuring Bolivia to take drastic action to reduce its deficit, a demand reflected in the formal memoranda exchanged between Bolivia and the Fund. In 1999 the Fund and the government agreed to a target. By 2002 Bolivia would bring down its deficit to just 2% of GDP.[57] Bolivia missed that target by more than $400 million.

Echoes of the Deficit in the US

How did Bolivia’s deficit grow so much so fast, and how much of a problem was that deficit growth?

In many ways, Bolivia’s ballooning deficit was an Andean echo of the deficit explosion underway just around the corner from the IMF headquarters in Washington, in the Bush White House. In 2000, the year before George W. Bush took office, the US had a healthy budget surplus of 2.4% of GDP. By 2004 that surplus had disappeared and become a deficit of 3.7%, a fiscal nosedive more drastic than Bolivia’s.[58]

President Bush justified the mounting US deficit this way:

I remember campaigning in Chicago, and one of the reporters said, would you ever deficit spend? I said only – only in times of war, in times of economic insecurity as a result of a recession, or in times of national emergency.”[59]

The US dismisses the danger of deficits at home but the IMF demands that the poorest nations in the world cut their deficits by raising taxes and cutting public spending.

Vice President Dick Cheney went farther, saying, “Reagan proved deficits don’t matter.”[60]

During the same period, Bolivia’s economy was also in trouble, in part because of forces coming directly from the US. One was a US-backed program to eradicate Bolivia’s coca leaf crop, a base ingredient for cocaine. The other was the US recession and its negative impact on US trade and investment throughout Latin America. As 2003 began, Bolivia’s economic growth lagged at just 1.5% and the informal sector, where the poor find much of their employment, was actually contracting.[61]

Bolivia today is in almost exactly the same kind of economic situation used to justify high deficits in the US and serious economic experts have counseled that running deficits instead of cutting spending is exactly the economic medicine needed to jump-start the Bolivian economy. During an October 2001 visit to Bolivia, Joseph Stiglitz, the Nobel Laureate told government leaders:

Now Bolivia is in a recession...That is why I believe that there are ways to use the resources of the future to help resolve current problems...one of the most common methods for attacking a recession is to increase public spending.[62]

IMF officials would not take the same generous view toward Bolivia’s deficit problems as the US reserved for itself.

The IMF Sets a New Target

As 2003 began, IMF officials decided that it was time for Bolivia to get tough and tackle its deficit with serious action. The Fund demanded that the budget shortfall be cut in a single year, by almost a third, down to a target of 5.5% of GDP. Reaching that target would be a condition of receiving long-term support from the Fund. To comply, the government would have to come up with a combination of budget cuts and tax increases totaling more than $250 million, eight percent of the country’s total budget.[63]

After the February fiasco, IMF officials insisted that the Bolivian government had been in full agreement with the Fund’s 5.5% deficit target. A Fund spokesman in Washington said, “The fiscal deficit target of 5.5 percent of GDP was mutually agreed between the government and Fund staff as a way to restore sustainability.”[64]

Yet high-level Bolivian officials, from the current President on down, say that the Fund insisted on the 5.5% target, despite government warnings that it was both economically and politically impossible. Government officials also warned the IMF that forcing such a cut could lead to exactly the kind of violent social upheaval that struck Bolivia that February.

“The IMF insisted on 5.5%. I told them right here in this office that [the taxes and cuts required] could provoke serious social problems.” Edwin Alduante, Bolivia’s National Budget Director

Bolivia’s current President, Carlos Mesa, who was Vice-President at the start of 2003, said that the government was explicit in its conversations with IMF officials, “The Minister of Finance, who met [with IMF officials] explained to the International Monetary Fund the impossibility of making so large a leap.”[d] The government proposed an alternative target of 6.5%, still a substantial decrease from the prior year’s deficit of 8.7%.[65]

Bolivia’s national budget director, Edwin Aldunate, who also negotiated with the Fund, says that IMF officials were unrelenting. “The IMF insisted on 5.5%. We explained that 5.5% wasn’t viable. I told them right here in this office that [the spending cuts and tax increases required] could provoke serious social problems.[66]

Can a Poor Country Say “No” to the IMF?

Exactly how obligated is Bolivia, or any poor country, to follow the IMF’s suggestions?

Fund officials say that they only give countries advice, not orders. Countries are sovereign, says the Fund, and it is the country, they claim, that makes the actual decision to accept or reject an IMF recommendation.

But in reality Bolivian officials have little choice but to follow the IMF’s suggestions. Not doing so, they warn, could cost them dearly in international aid that the government needs in order to survive. The Fund is skillful, however, in the art of pretending flexibility on the one hand while essentially eliminating it on the other. That false flexibility is well-remembered by one of the Bolivians who dealt most closely with the IMF in the months leading up to Febrero Negro.

George Gray Molina, as a senior staff member at UDAPE (the Bolivian government’s research office on economic issues) was involved in negotiations with the Fund both in Washington and Bolivia. At one point, he says IMF officials told he and his Bolivian colleagues, “We don’t want there to be violence. Are you sure this is the moment to do this?” Despite those words, however, the position that the Bolivian government was being put in by the Fund was clear.[67]

In the same meetings where IMF officials expressed those concerns, they were also making it clear that if the government didn’t meet the 5.5% target the IMF would refuse Bolivia a long-term lending agreement (known in IMF jargon as a Poverty Reduction and Growth Facility - PRGF). Without such an agreement, Gray says, the government risked not only assistance from the Fund but also budget assistance from key donor governments such as Germany, Denmark, and Sweden.[68]

Molina explained the IMF’s approach this way:

[IMF officials] tell you that we own the agenda. Strictly speaking that is true. But if we don’t close a deal we can’t pay the salaries for education. Are they going to help us? No, no, they are not going to give us one more bridge [of economic aid]. We are up against the wall every month.

The Political Dance of Developing a Tax Package

Up against that wall, and looking for a way to cut Bolivia’s deficit by a quarter of a billion dollars, UDAPE, the Tax and Treasury departments, and others began drawing up some options for the government to consider.

“The IMF forces you to cut your deficit by almost half. It is clear that the tax proposal was very difficult for a society in crisis but the President [Sanchez de Lozada] didn’t have any option. The options only opened up, regrettably, after 30 people had died.” Bolivian President Carlos Mesa

The first alternative they developed was for new taxes on Bolivia’s gas and oil industry. This made sense from a variety of perspectives. First, it was the privatization of oil and gas in the 1990s that helped plunge Bolivia into deep deficits. Second, by applying those new taxes to exported gas and oil products, the cost would be passed onto foreign companies rather than Bolivian consumers. The proposals developed would have generated as much as $160 million per year, more than half of what was needed to meet the IMF’s demands.[69]

The second alternative that UDAPE and the Vice Ministry of Tax Policy proposed to the President was a new progressive income tax, which would be paid by the wealthiest four percent of the population.[70] The tax would apply only to incomes of ten times the minimum wage and higher, with graduated rates rising along with income. Because it affected so few people, the new tax was not a big revenue generator, however. Estimates were that it would generate only about $20 million each year.

Advocates for the tax, which included UDAPE, Vice-President Mesa and others, saw it as a way to begin to make Bolivia’s overall tax system more progressive – placing the tax burden on those most able to pay. Over time they also hoped it could begin to replace the country’s regressive value added tax (similar to a sales tax).

Plans for the new gas and oil tax were soon upended. That same month, Bolivia’s oil and gas minister flew to Mexico City to meet with an international consortium, Pacific LNG, to discuss a plan to export Bolivian gas to California. When he returned and heard about plans for the new gas and oil tax, Molina says the minister told the President and his budget advisors, “This is impossible, this is crazy.” He warned that the tax would make closing a gas export deal even harder.

President Carlos Mesa explained the argument made by foreign oil companies and their Bolivian allies against raising the taxes:

The great alibi, the great argument of the multinational corporations is legal security. 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. This would demonstrate that this isn’t a serious country [in which agreements are respected] and would send a signal – Don’t come and invest in Bolivia because they say one thing and do another.[71]

In Mesa’s view and others’, the demand for higher taxes on foreign oil companies was a legitimate one.[e] In the US and elsewhere, raising corporate taxes is always considered a legitimate issue for discussion in making budget and tax policy. President Sánchez de Lozada, however, sided with his minister and quickly took oil and gas taxes off the table.

It is worth noting that, if projecting an image of stability to foreign investors was Sánchez de Lozada’s goal, it is unlikely that he accomplished it by setting off the international spectacle of the nation’s army and police firing at one another in front of the Presidential Palace.

Looking for an alternative way to bridge the deficit, Sánchez de Lozada cast his eye toward the progressive income tax proposal developed by the analysts at UDAPE. Molina says that when they brought the proposal to the President he wanted to see how much the government could earn under a variety of tax alternatives, including expansion of the tax to people earning two times the minimum wage, salaries equal to about $110 per month.

After the February deaths the Fund would claim that the Bolivian government was in complete agreement with the 5.5% deficit target.

When we went to discuss this with the President he was very interested in seeing the whole range, that is all the possibilities. The tax plan that we proposed from UDAPE raised very little money, less than $20 million. In contrast the simulation [extending the tax down to people earning twice the minimum wage] went from $20 million up to $80 million, $90 million.

In early February, Sánchez de Lozada and his chief political and economic advisors engaged in an intense debate over whether to move forward with the broader income tax plan. Those against it argued that it would create a new burden on the poor and could set off fierce public resistance, an opinion backed up by polls commissioned by the government. UDAPE prepared charts for the President showing who would be affected by the new tax – teachers, police, nurses, and other low-income workers.

Then, says Molina, the President asked about the impact of the tax on various groups, including teachers and nurses. According to UDAPE’s analysis people with the lowest incomes would have to pay an added fourteen Bolivianos per month, about two dollars. For people like the President and his advisors that was pocket change. For many other Bolivians it was enough to buy food for three days.

Sánchez de Lozada made his decision to back the tax and on the evening of Sunday February 9 announced it in a speech to the nation. To the Bolivian people it seemed like the government was trying to balance the budget on the backs of the working poor. “Ninety percent of the population was still exempt from the tax,” says Molina, “but it was a terrible error, an error of politics and of economics.”

How grave that error was would soon be demonstrated in blood and violence.

ACT THREE

TWO BLOODY DAYS IN FEBRUARY

It was as if the Washington, DC police and the US Army had begun firing at one another from across Lafayette Park in front of the White House. In the heart of the nation’s government, on the steps of the Presidential Palace and the National Congress, Bolivia’s two main armed forces, the army and the security unit of the national police, were engaged in open warfare. How did the announcement of a tax increase by the nation’s President spark a chain of violent events that would end with the deaths of thirty-four people?

Opposition from Almost all Quarters – Including the National Police

Popular reaction to the government’s proposal to tax the working poor was as swift as it was negative. The following morning the country’s main opposition leader, Evo Morales – who finished just two points behind Sánchez de Lozada in the Presidential elections seven months earlier and who led the second largest voting block in the Congress – called on the Bolivian people to reject the tax proposal. He also called for national protests, including marches and other acts of civil disobedience.[72] Over the course of the next twenty-four hours that call for resistance was joined by the country’s main national labor organization, Central Obrera Boliviana, labor and civic groups in Cochabamba, and a key unit of the national police force, Grupo Especial de Seguridad – GES.[73]

“The proposed tax increase was the last straw.” Police Major David Vargas

The police force was also already locked in battle with the government over not receiving its January salaries and over the President’s rejection of its demand for a 40% salary increase.[74] “The proposed tax law was the last straw,” said David Vargas, the GES Major who led the police protests.[75]

According to Vargas, the police (taking into account the large number of uncompensated overtime hours they were expected to work) ended up earning the equivalent of fifteen cents ($US) per hour. Even though many low-ranking police earned less than twice the minimum wage, and would not be immediately affected by the tax, he said police believed that the tax would someday affect them and that it would have an immediate effect on other members of their family. “The police have brothers and sisters who are teachers, brothers and sisters who are factory workers, brothers in different areas of social work and obviously they were also going to be affected.”

As soon as the President made his tax announcement, it became the main topic of discussion at police stations throughout the capital. Vargas recalled that reaction among the rank and file officers was reflective of the indigenous Aymara culture to which many belonged. In Aymara pueblos, community decision-making is deeply respected, closed to outsiders, and given the final word.

“They remained silent, waiting for those who weren’t part of their social class to leave. They told me, ‘Thank you Major, we will call you if we need you.’ I left and they began to meet.” Emerging from their discussions, the rank and file cops announced that they would oppose the government’s tax proposal and immediately demanded a meeting with the Minister of Government, Alberto Gasser.

That Tuesday, February 11, Gasser declared that he would not hold talks under pressure from police and that the government’s tax proposal was “non-negotiable.”[76] But at six o’clock the next morning, Wednesday, February 12, Gasser entered the GES police headquarters to begin negotiations.

The GES headquarters, a building painted in fading green, sits just across the capital’s central square, Plaza Murillo, from the Presidential Palace and National Congress building. As the Minister of Government entered he encountered a police force fully armed with pistols, tear gas, rifles and a variety of assault weapons. Major Vargas and other police leaders laid out thirty specific demands, leading with a rejection of the proposed tax increase but also including a salary raise and other issues.[77]

President Mesa and others charge the police with blatant opportunism. “The police looked for the moment in which the government was weakest, as a way to pressure the government to give them a positive response,” he said.[78] From this point forward, the government referred to their actions as “a police insurrection.”

Said Vargas, “The other points were born when we said, ‘We are going to talk with the Minister. We said, since we are going to talk with the Minister, let’s take advantage. Let’s talk about other things that affect us.” Vargas insisted, however, that there was never any question that the central demand of the police was the withdrawal of the tax proposal, which the police suggested be modified to affect only those earning five thousand Bolivianos – the equivalent of $660 per month – and higher. If the government had said yes to that, he claimed, the police would have ended their protests.

Vargas said that the Minister’s response to each of their demands, most notably the withdrawal of the new tax, was to repeat over and over, “No se puede” – It isn’t possible. Vargas said that the minister told them, “It can’t be withdrawn. The President can’t do that. We have a commitment with the International Monetary Fund. We can’t go back on this because it would say that the government isn’t serious.”

Wednesday in the Seat of Government – An Unintended Spiral Toward Bloodshed

With the failure of the sunrise negotiations, events in Plaza Murillo began to spiral out of control in a way that neither the government, headquartered on one side of that plaza, or the police, headquartered on the other, had ever intended.[79]

Throughout the morning, police around La Paz abandoned their posts and headed for the headquarters at the plaza. At least two hundred of them would fill the building, just steps from the President’s office. At ten o’clock about one hundred police, some dressed in uniform and others in civilian clothing, began to march into the plaza itself, chanting their demands at the windows of the Presidential Palace where Sánchez de Lozada and his cabinet were meeting to discuss how to resolve the growing crisis. At this point the protests, while angry, remained nonviolent.

At noon, students from a nearby high school, Colegio Ayacucho, entered the plaza to join the protests. Approaching the Presidential Palace they began to throw rocks at the windows, drawing cheers and applause from the police. Military guards from inside ran out onto the Palace balconies and began firing tear gas at the students in the plaza and in the direction of the police headquarters. The students ran to the other side of the plaza and called on the police to protect them. “The firing [of the tear gas] reached the police headquarters and was taken as an act of provocation and [the police] fired tear gas back,” said Vargas.

“The two most important institutions of any nation, two armed forces, confronted one another in the very center of political power.” Sacha Llorenti, Asamblea Permanente de Derechos Humanos

Moments later, as many as a thousand military troops, armed with M-16 rifles, rocket launchers, and other sophisticated assault weapons, began to occupy the half of Plaza Murillo closest to the Presidential Place. Police and civilian protesters, who filled the other half of the plaza nearest to the police headquarters, began to shout obscenities at the soldiers. In the chaos a soldier positioned in front of the National Congress fired a rubber bullet into the crowd, hitting a policeman in the face.

As the afternoon began each side occupied half of the plaza. Police families, retired police, and other supporters streamed in from other parts of La Paz. Shortly after one o’clock the leaders of the Asamblea Permanente de Derechos Humanos, Bolivia’s leading human rights organization, mediated a meeting between the government and the GES police, held nearby in the offices of the Defense Minister. Political leaders, including Evo Morales, went on television to reiterate their demand that the government’s tax proposal be withdrawn. Some leaders, including Manfred Reyes Villa, leader of the third largest political party in the Congress, called for the President’s resignation.

At two o’clock, as the negotiations continued, the tense situation in the plaza finally reached a flashpoint. Police and soldiers again began launching tear gas at one another, and then tear gas turned to live rounds. A subsequent report by the Organization of American States claims that it was the police who fired bullets first. The police claim it was the army. By the end of the day eighteen people would be dead from the exchange of fire – police, military and civilians.[80] Among them was a sixteen-year-old boy killed by an army sharpshooter.

Just after four o’clock President Gonzalo Sánchez de Lozada went live on television and radio to announce that he was withdrawing his tax plan. By this time it was too late. The combination of public rage at the killings in the Plaza and the absence of police throughout the city triggered a wave of rioting and vandalism.

Sánchez de Lozada and Vice President Mesa left their offices for more secure locations. Rioters entered the vice-presidential offices, throwing computers and other equipment out windows. The headquarters of the two major political parties in Sánchez de Lozada’s government were sacked and burned. Other incidents occurred at the Ministry of Labor and at targets including a Burger King outlet, owned by one of the President’s key political allies.

Thursday – A Militarized City and Death on a Rooftop

On the morning of Thursday, February 13, the residents of Bolivia’s capital awoke to streets filled with soldiers and a swirl of public protests demanding the President’s resignation. Plaza Murillo was now guarded with Army tanks on its four corners. Protests calling for Sánchez de Lozada’s departure were also underway in the cities of Santa Cruz, Cochabamba, and Oruro.[81]

Many of the protests targeted the symbols of international power in Bolivia. Above La Paz, in the city of El Alto, a huge march sought to occupy a Coca Cola bottling plant. Soldiers were brought in by helicopter, opened fire on the crowd, and killed four people. Ten others would be killed before the day was over, as the military repressed the protests with tear gas and live rounds.

“On the thirteenth not a single police officer was killed, not a single soldier. All of the victims were civilians, a product of the government’s repression,” said Sacha Llorenti, President of Bolivia’s National Permanent Assembly on Human Rights, who also played a key mediating role between the government and the protests.[82]

In La Paz another crowd of protesters assembled outside the doors of a sixteenth century Catholic Church in Plaza San Francisco. Throughout the morning military police sought to break up the gathering with tear gas and rubber bullets.

“[The President] with a single word could solve this, but he just refuses to.” Ana Colque to her mother, the night before she was killed

Just across the street from the church sits a three-story-high building covered in crumbling green stucco. Its bottom floor houses a photo-developing store, its second floor offices, and its top floor a gymnasium also used as a dance studio. Just after noon a 25 year-old handyman, Ronald Collanqui, climbed to the roof, where he had been doing repair work, to recover his tools. He was shot and killed by army sharpshooters firing from a window across the street. As Collanqui lay dying on the roof, the building’s doorman called for an ambulance.

Ana Colque was a 24-year-old student nurse. A single mother with a 22-month-old son named Luis, she lived with her mother and father. The whole day before, according to her mother, Ana had been dispensing first aid to the wounded. On Thursday morning she told her family she was going out again.

Her mother recalled that Ana had been involved just before in a special medical project and because of it had a batch of hard-to-get medical supplies on hand. “She had tweezers, bandages, equipment to apply intravenous tubes, injections, pain killers. The day before she said that the wounded didn’t have painkillers, they suffered and cried, she said.” Her family asked her not to go out, but Colque left early, telling her mother to take good care of her baby son.[83]

“Fortunately, officials of the IMF were in La Paz when these events took place. They saw it with their own eyes.” Bolivian President Carlos Mesa

At 1:20 that Thursday afternoon Colque arrived at the building where the handyman’s body lay on the roof. She pulled up in an ambulance marked with a red cross and was wearing a white nurse’s uniform. She climbed up the stairs to the roof, accompanied by a doctor, Carla Espinosa. As Colque approached the handyman’s body a military sharpshooter fired from a small window of a building just a short distance away. The shot pierced her chest. Ten minutes later she left in the same ambulance in which she arrived and died shortly afterwards in the hospital.

The soldiers responsible for both deaths would later claim that they had mistaken both the repairman and the uniformed nurse as sharpshooters and had shot in self-defense.[84]

IMF officials from Washington were in La Paz during the days of violence sparked by their demands for deficit reduction. According to several people who met with the IMF mission, as violence overtook the streets the officials checked out of their rooms at the five-star Plaza Hotel, headed for the La Paz airport, and left Bolivia. Their route to the airport would have taken them by the building where Ana Colque was shot and killed.[85] The next day the IMF issued a public statement saying that it “regretted the tragic events in Bolivia,” and expressing its interest in continuing to negotiate with the Bolivian government.[86]

EPILOGUE

By Friday morning both the violence and the protests had ceased. President Sánchez de Lozada took out full-page ads in the nation’s major newspapers to declare, “Happily I can report that peace and calm have been restored.”[87]

With its proposed tax package so soundly rejected, the government withdrew both it and its targets for deficit reduction for the year. It opted instead for a series of symbolic gestures aimed at assuaging the public’s anger. Sánchez de Lozada announced that he would start donating his $3,900 monthly salary to an orphanage. He eliminated a collection of minister and sub-minister positions in the government, proclaiming the cuts part of a new commitment to public efficiency.[88] He fired the members of his cabinet most closely associated with the government’s repression. Finally, the President declared to the nation, “Our budget will not be a budget of the International Monetary Fund.”