INTELLIGENCE MEMORANDUM BOLIVIA: ECONOMIC IMPLICATIONS OF THE MILITARY TAKEOVER

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600020139-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 27, 2016
• Document Release Date: May 17, 2010
• Sequence Number: 139
• Publication Date: September 1, 1969
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Bolivia: Economic Implications of the Military Takeover
Secret
ER IM 69-137
Sep_tember 1969
Copy No.10
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
0110UP I
Excluded from aulornallf
doentrradkra and
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
30 September 1969
INTELLIGENCE MEMORANDUM
Bolivia:
Economic Implications of the Military Takeover
Introduction
The military takeover in Bolivia on 26 Septem-
ber will not necessarily end the political instabil-
ity revived by President Barrientos's death and the
threats to economic development that it generated.
General Alfredo Ovando Candia (the leader of the
new government) and other aspiring leaders appear
to lack the popular support and political agility
needed to continue Barrientos's policies, even if
they wanted to. Those policies brought a period
of reasonably satisfactory economic growth and
financial stability. Barrientos's immediate suc-
cessor adopted a more permissive labor policy, how-
ever, and seemed to favor popular but economically
disruptive "revolutionary" changes, including moves
against foreign investors.
The new regime's economic program is not yet
clear. Although a recent Ovaldo speech condemning
"Yankee imperialism" and the 'occupation of the
country" indicates a strongly nationalistic posi-
tion, and his first act as president was to invali-
date the Petroleum Code,
he will not nationalize foreign firms but
rather will negotiate greater government participation
in resource development. It is probable, however,
that the new government will respond more to political
expediency than to economic considerations. This
conceivably could lead to nationalization of the
Note: This memorandum was produced aolely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current In-
telligence.
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Bolivian Gulf Oil Company. But Ovando probably
would try to avoid, at least initially, a confron-
tation with the United States similar to that pro-
voked by Peru, because of Bolivia's dependence on
foreign capital. This memorandum discusses the
state of the Bolivian economy and the possible
direction and consequences of the new government's
economic policy.
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Background
1. Except for Haiti, Bolivia is the poorest
and most backward country in Latin America. The
per capita income of its 4 million people is only
$230. Although it has important mineral and petro-
leum resources, development has been inhibited by
inhospitable terrain, inadequate transportation, a
shortage of managerial and tech ? is, the
small domestic market, and revo-
lutionary disturbance ven more important, per-
haps, has been the lack of domestic capital resources 25X6
and the periodically unfavorable climate for foreign
investment.
2. The 1952 revolution, which brought the
National Revolutionary Movement (MNR) to power for
twelve years, markedly altered Bolivian society and
politics and drew many people into national life
for the first time. It also brought the country to
the brink of economic disaster. Nationalizing the
large tin mines -- the major source of taxes and
export earnings -- and hasty land redistribution
resulted in dwindling production and raging infla-
tion. A harsh stabilization program in the late
1950's brought inflation under control, and the
economy grew fairly rapidly in the early 1960's,
thanks to rising export prices, increased private
foreign investment, and large inflows of foreign aid.
The MNR nevertheless lost support because it could
not meet the demands of organized labor and other
groups. I,acreasing discord in the government and
rivalries within opposition groups fragmented almost
every political party. By the time a junta led by
Barrientos (then the air force commander) assumed
power in November 1964, the military was the only
force capable of providing political and economic
order.
3. Barrientos's popularity permitted him to
pursue pragmatic economic policies. Although com-
mitted to the reformist ideals of the 1952 revo-
lution, his government dealt firmly with insurrec-
tion and began to attack economic problems. Near-
anarchy in the labor movement (which was and still
is dominated by the extreme left) and a threatened
nationwide strike in May 1965 t,rought strong govern-
ment countermeasures. Military occupation of the
tin mines and the exile of leftist labor leaders
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permitted implementation of reforms that forced
the mines to operate at a profit for the first
time since the early 1950's. After Barrientos s
election in 1966, the government kept a tight
rein on wages, public spending, and credit and kept
inflation in check (see Table 1). Because of a
relatively high investment level (about 17 percent
of GNP in 1968), economic growth averaged 5 percent
annually -- or 31/2 percent per capita -- during
1967-68. Although foreign aid remained important,
domestic savings financed about two-thirds of in-
vestment in 1967-68, compared wish one-third in
1960. Export earnings finally recovered to the
1951 level in 1966 and have since increased further.
Table 1
Economic Indicators
Annual Percentage Increase
1952-60
Average
1961-64
Average
1965
1966
1967
1968
Estimated
Cost of living
64
51/2
21/2
7
71/2
6
Gross domestic
product in
real terms
- 1.1
5
4
61/2
51/2
41/2
Gross domestic
investment
N.A.
101/2
201/2
6
7
18
Exports (f.o.b.)
-9
14
17
161/2
131/2
51/2
4. Recognizing that outside capital was badly
needed to develop Bolivia's resources, Barrientos
moderated nationalistic opposition to foreign invest-
ment. Liberal tax and amortization arrangements
prompted increased foreign investment during 1965-67
in medium-sized mines and joint ventures with COMI-
BOL -- the state mining enterprise that holds the
largest ore deposits. However, weakening mineral
prices and legislation in late 1967 requiring COMI-
BOL to retain 51 percent control in joint ventures
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combined to discourage foreign investment. In early
1969, Bolivian Gulf's oil operation still was the
largest foreign investment, and its plan to exploit
a large gas deposit was the most promising develop-
ment effort.
Policy Changes since Barrientos's Death
5. Barrientos's death in a helicopter crash
in April 1969 left the nation with a weak and
divided leadership. Upon assuming the presidency,
Siles (the former Vice President) began maneuvers
designed to win popular support and forestall an
expected coup by General Ovando, the armed forces
commander and Barrientos's presumed successor. On
29 August, Siles approved pay increases for the
miners -- still a major potential source of politi-
cal power -- that probably will raise tin production
costs. Bolivian tin already is barely competitive
in world markets.
6. Moves against foreign enterprises also were
politically attractive. Two months after taking
office, President Siles issued a decree turning over
all unleased oil-bearing ground to YPFB, the state
oil company. He stressed that this "revolutionary"
measure marked a "return to nationalization of
petroleum." His replacement of YPFB's highly re-
garded president with a left-leaning nationalist was
a further retreat from Barrientos's policy and
already has seriously impaired its cooperative re-
lationship with Bolivian Gulf.
7. Congressmen also began to get into the act.
By objecting to the award of the construction con-
tract to Williams Brothers, a US firm having a 9 per-
cent interest in Bolivian Gulf, a congressional com-
mission temporarily jeopardized a $23 million World
Bank loan to YPFB and Bolivian Gulf for a gas pipeline
to the Argentine border. Moreover, in a "preliminary"
vote on 22 August the Senate called for uncompensated
nationalization of all natural gasfields. Although
President Siles and General Ovando privately voiced
opposition to the bill, neither did so publicly. In
what may be only a temporary compromise on the
nationalization issue, Bolivian Gulf has agreed to
supply YPFB with 20 million cubic feet of gas daily
at zero wellhead cost.
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Further Possible Changes
8. Although Ovando may claim economic problems
as partial justification for the coup, there is no
indication that he has any deep understanding of
them. In his infrequent public statements on such
subjects, he has stressed the need for heavy indus-
try in terms more demagogic than economic. Ovando
has told US officials that he would follow Barrien-
tos's program, and would revise the 1956 Petroleum
Code in Bolivia's favor but would not nationalize
foreign companies. Few observers believe, however,
that he will sacrifice short-term political goals
to economic requirements. Ovando, like Siles, lacks
the popular support to rule in the Barrientos man-
ner. He has little support among the Aymara Indian
peasants around La Paz and his popularity with the
Quechua Indians in the Cochabamba area is slipping.
Foreign investors have little reason to be sanguine
regarding his willingness to use nationalization as
a political weapon.
9. Although nationalism has focused on the
petroleum industry thus far, foreign mining interests
(mainly US) offer another target. The liberal 1965
mining code attracted investments by several US
firms, the most important of which is the Matilde
Mining Corporation -- a subsidiary of Phillips Bro-
thers and the US Steel Corporation. After invest-
ing $12 million, this firm started producing zinc
and other minerals in April 1969; by 1970 it should
he paying royalties to the government of $2 million
annually. Another recently established US enterprise,
Sociedad Lipea Minera e Industrial (SOLMIN), is the
principal sulfur producer. Political moves against
such companies also would further discourage exploi-
tation of other mineral deposits such as the Mutun
iron fields, a 40 billion ton deposit of high-grade
ore -- 10 percent of known world reserves -- that has
not been tapped so far because of its remote location
and high silica content.
10. To win popular support, the new government
also might call for redistribution of land in Santa
Cruz Department, in eastern Bolivia. Relatively
small commercial farms established in the area by
Bolivian citizens and Asiatic immigrants with
government encouragement have been the one success
story of Bolivian agriculture in the last decade.
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But overcrowding of peasants on subsistence plots
has made these farms a new target for "reform."
Their break-up would materially reduce commercial
production of such products as rice, cotton, and
sugar.
Importance of the Petroleum iEsue
11. Because it is presently the major force for
expansion, the petroleum industry is important to
the Bolivian economy. During 1955-65, when YPFB
was the main producer, crude oil output stagnated
at about 3 million barrels annually -- little more
than domestic requirements. Since 1965, when
Bolivian Gulf extended the trans-Andean pipeline
to its Santa Cruz oilfields, output has risen to
about 15 million barrels annually. Crude oil made
up 15 percent of exports in 1968, compared with
one-half of one percent in 1965. Growing exports
of oil, zinc, silver, and copper have helped consid-
erably to reduce dependence on tin exports (see
Table 2). Oil exports could be doubled if two
pumping stations were added to the pipeline and
Chile allowed additional storage capacity at Arica,
the line's terminus. Bolivian Gulf also has begun
a joint exploration effort with YPFB in the Alti-
plano area.
12. The recent discoveries of important gas
deposits -- almost all in Bolivian Gulf's conces-
sions -- offer the means to offset a possible level-
ing-off in oil production. Known gas reserves now
are estimated at about 4 trillion cubic feet -- a
small amount by world standards -- and are expected
to more than double as a result of current exploration.
YPFB and Bolivian Gulf already have signed a 20-year
contract with Argentina for sales of 140-160 million
cubic feet per day at a minimum price of 221/2 cents
per thousand cubic feet. YPFB is to supply up to
half of the gas if it can develop sufficient reserves.
The balance of payments would benefit by almost $7
million annually after allowing for debt service on
the planned pipeline and other foreign exchange costs.
Argentina's gas requirements soon will exceed twice
the contracted amount, and Brazil and Chile are
other potential export markets.
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Table 2
Bolivian Exports a/
Million US $
Year
Total
Tin
Other Minerals
Petroleum
Other
1951
150
93
42
Negl.
15
1960
68
43
17
4
4
1961
76
51
18
2
5
1962
76
54
16
1
5
1963
86
57
23
2
4
1964
114
81
27
1
5
1965
131
93
31
1
6
1966
151
93
38
7
13
1967
166
90
41
26
9
1968
176
93
46
26
11
esti-
mated
a. The data include freight and costs of smelting
metals abroad, which accounted for 13 percent of the
total in 1968.
13. Since 1957 the Gulf Oil Company has spent
some $150 million in developing its Bolivian proper-
ties. Gulf did not begin to realize a profit from its
Bolivian investment until 1967, when the pipeline exten-
sion had been completed and there was a full year of
production in the Santa Cruz oilfields. Direct invest-
ment in Bolivia (reflecting mainly Gulf's operations)
averaged $11 million annually during 1957-65. With
the completion of Bolivian Gulf's pipeline, direct
investment fell to $2 million in 1966 and to negligible
amounts in 1967-68. In 1967, when oil exports reached
$26 million, profit remittances from Bolivia -- almost
entirely by Bolivian Gulf -- rose to $9 million, and
repatriation of depreciation allowances amounted to
$2.5 million. Profit remittances decreased to less
than $7 million in 1968, however, because the company
agreed to relinquish its 27 percent depletion allowance.
Expected profit remittances of $9 million and capital
depreciation outflow of $3 million in 1969 probably
will be balanced by an inflow of funds for initiation
of work on the gas pipeline to Argentina.
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14. Bolivian Gulf's tax arrangements under the
1956 Petroleum Code are favorable compared with
those elsewhere in Latin America. Its taxes
amounted to $8 million in 1968, or about 12 percent
of the central government's revenues. When gas
exports to Argentina are initiated, the company's
taxes are expected to rise to at least $13 million
annually.
15. Nationalization of all or part of Bolivian
Gulf's properties probably would cause an economic
setback for Bolivia, at least for a few years. It
would halt the expansion of the oil industry -- the
single most important development project -- would
damage prospects for other much-needed foreign
investment, and would jeopardize a substantial
portion of foreign aid. Even if compensation were
not paid, Bolivia almost certainly would gain less
than the amounts Gulf is repatriating. Production
costs probably would rise because of inefficient
operation of the oilfields and pipeline, and short-
term marketing difficulties would occur because all
exported crude oil now goes to California for
processing. Nationalization of the gasfields almost
certainly would stop construction of the pipeline
to Argentina. The World Bank's $23 million loan
for the line is contingent upon the Gulf-YPFB-Argen-
tine agreement, and Gulf's planned investment
necessarily would be lost. For a country just
beginning its resource development, the long-run
loss of foreign investment would be even more
serious. Bolivia has not been able to lure much
foreign capital under the best of circumstances,
and nationalization of Bolivian Gulf would be a
further strong deterrent.
Economic Relations with the United States
16. Should Bolivia nationalize US investments
without compensation, it also would risk loss of
aid from the United States and international
financial institutions relying heavily on US funds.
These sources still provide most of Bolivia's
foreign capital inflow. Gross receipts of capital
from them in 1968 totaled some $62 million -- about
$30 million from the US government and the remainder
mainly from the International Development Associa-
tion and the Inter-American Development Bank. In
1969 these receipts should come to $70 million.
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Loss of the funds probably would mean a severe
cutback in development efforts because Bolivia
depends heavily on imports for investment goods.
With foreign exchange reserves of only $30 million,
it is in a poor position to pay for capital equip-
ment and intermediate products now being obtained
on credit. Deteriorating relations with the United
States also could cause consumer difficulties
because Bolivia must import three-fourths of its
wheat supplies, a large part of which comes in under
PL-480.
17. Bolivian Gulf is a small part of the Gulf
Oil Company's operations; in 1968 it represented
only about 2 percent of its total investment and
one-half of one percent of its gross earnings.
Gulf Oil probably would be willing to give Bolivia
a larger profit share but can be expected to con-
test a takeover strongly because the operation has
just begun to pay off after a decade's expenditure.
Even if its gas deposits were nationalized, Gulf
might stay on in the oil industry if this appeared
to be the best way to recoup its investment. In
this event, the company undoubtedly would try to
repatriate its investment as quickly as possible
and would send no new money into the country. Gulf's
investment is not covered under the US investment
guaranty program, but the company might seek US
government support in negotiations with Bolivia and
request application of the Hickenlooper Amendment
if dissatisfied.
Conclusions
18. Since the death of President Barrientos in
April 1969, a revival of political instability has
posed some threats to economic development. The new
government led by General Ovando will not necessarily
be willing or able to reinstitute the sound policies
of the Barrientos administration. Political expe-
diency may bring higher budget deficits, permissive
labor policies, accelerated inflation, and disruptive
"revolutionary" changes, including moves against
foreign firms.
19. The US-owned segment of the petroleum industry,
still one of Bolivia's best hopes for economic ad-
vance, is the object of nationalistic attacks. Dur-
ing his first two months in office, Siles issued a
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"revolutionary" decree reserving all unleased oil-
bearing ground for the state petroleum company and
replaced its competent director with a left-leaning
nationalist. Not to be outdone, a majority of the
Bolivian Senate recently called for uncompensated
nationalization of Bolivian Gulf's gas deposits.
Ovando is now hinting at nationalization but
privately saying he will not nationalize.
20. The economic improvements achieved under
Barrientos could easily be undone by weak policies
and nationalistic gestures. Expropriation of
Bolivian Gulf probably would halt the nation's most
important development project, which already has
helped to reduce the heavy dependence on tin exports
and promises further benefits in foreign exchange
earnings and tax revenues as the newly discovered
gasfields are exploited. Nationalization of Bolivian
Gulf or the other, smaller US companies without just
compensation would jeopardize continued aid from the
United States and (perhaps) from international financial
institutions, which together provided funds equal to
two-fifths of export earnings in 1968. Still very poor
and badly in need if capital, Bolivia has attracted
few foreign investors since the 1952 revolution (when
the large tin minas were nationalized) and may now
aggravate its economic development problems with nationa-
listic or otherwise short-sighted policies.
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