Toward a Free Economy

The country with the Western Hemisphere's worst addiction to inflation last week took the pledge and swore off abruptly. Bolivia launched a determined attempt to force its currency, lately worth around 10,000 bolivianos to the dollar, back up toward its 1951 value of 200. The tools to be used: a drastic stripping-away of artificial economic controls, and a $25 million stabilization loan.* The boliviano's inflation is not yet a classic like the German mark after World War I, when prices multiplied 1.2 trillion times. But in recent months the boliviano has been clearly and dramatically on the skids. Since March the government has imported 55 tons of freshly printed currency. Newspaper vendors in La Paz sit surrounded by such mountains of bills that they look like tellers in a bank.

Black markets flourish. Hundreds of men wait for hours in long queues to buy cheap but scarce government-subsidized commodities that they resell at high prices, turning a profit greater than an average day's wage of a worker. Perhaps half of the relief food given Bolivia by the U.S. fetches up as barter for hard currencies in neighboring countries.

Revolution that Failed. Bolivia's inflation is the tragic result of a calculated-risk policy of deficit financing. The ruling Nationalist Revolutionary Movement (M.N.R.), seizing power in 1952, set off a historic, all-embracing economic and political revolution. M.N.R. nationalized the major industry, tin mining, confiscating the properties of the powerful tin barons. It revamped land tenure, giving indentured farm hands plots of their own --"like Lincoln's freeing the slaves," says President Hernan Siles Zuazo.

M.N.R. dreamed of tin profits for the government, high wages for the miners, self-sufficient agriculture, development of Bolivia's promising oil potential. Lacking capital, the government took a chance: it printed the money to pay the miners who produced the tin that brought in the dollars needed for development. It calculated that greater farm production (lessening dependence on dollar-bought food) and greater exports of dollar-earners like oil might balance off trade before the boliviano went into a spin.

But through mismanagement, inexperience, selfishness and corruption, nearly all the plans went wrong. Many miners, freed from tin-baron discipline, now work at the shaft faces only three hours a day. A vast above-ground bureaucracy milks the treasury for wages. Worst of all, mine commissaries, begun years ago to provide miners with essentials at subsidized prices, have grown out of all proportion because miners buy commissary goods to resell in black markets. Commissary sales last year were double the entire miners' payroll, and the subsidies amounted to 77% of the cost of running the mines. On the land, the once-productive big estates became little more than the kitchen gardens of their new owners. Farm output fell off 40%. Oil exports have begun, but still amount only to a trickle.

House Cleaning. The stabilization loan announced last week came about after Bolivia, in despair, got the services of a U.S. consultant named George Jackson Eder, legal counsel for International Telephone & Telegraph Corp. and an old Latin American hand. The sum, equal at the present 10,000-to-$1 boliviano rate to nearly double the value of the 140 billion bolivianos now in circulation, should be enough, if carefully fed into the dollar market, to roll the boliviano well back. The experts guess that the boliviano's realistic rate will turn out to be 7,000 or 8,000. But the fund cannot cure the causes of the inflation, and the loan was conditioned on an economic house cleaning. Bolivia agreed to: P:Stop printing new money, and boost taxes to make up the deficit. P:Freeze all hiring in the mines, and let the payroll drop back through attrition. P:I Free all currency transactions, -abandoning the absurd official boliviano rate of 190 to the dollar. P: Dump price controls and food subsidies, including those in the commissaries.

Rough Wrench. Changing over to a free economy will be a hard wrench for many Bolivians. Some miners will lose their jobs; almost all of them will pay more for food. Black-marketeers and influence-peddlers by the thousands will have to go to work. Prices, for those who used to get subsidized commodities, will go up. Among the groups that will be hit, President Siles' popularity is bound to drop. Yet his great popularity is almost the only weapon Siles has to use in putting the reforms across; Bolivia's main armed force is not a government-directed regular army; it is the revolutionary militia set up by miners and other laborers.

Says Siles: "Inflation is a fire that is burning down our house. Stabilization will save us from the fire. But do not expect, amigos, to saunter out of the house wearing a new suit and smoking a cigarette. We will be lucky to get out at all."

-f The International Monetary Fund contributed $7,500,000, the U.S. Treasury $7.500,000, and the U.S. International Cooperation Administration $10,000,000.

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