President Luis Arce’s economic model (and its limits)

Luis Arce Catacora, the economic architect of the Movement Towards Socialism during Evo Morales’ fourteen-year presidency, will take power today as Bolivia’s sixty-seventh president. Arce and incoming Vice President] David Choquehuanca were two of the longest-serving ministers in Evo’s cabinet (both from 2006 to 2017) and they stood at the core, respectively, of the party’s socialist and plurinational projects during those years.

When the Morales government came to power, it was haunted by the spectre of economic failure under the last center-left government, the 1982 to 1985 UDP government of Hernán Siles Zuazo. Morales turned to Arce, an economist who had worked in the Bolivian Central Bank since 1987, to lead his economic policy. Arce faced an incredible challenge: to thread the needle between popular demands for redistribution and an international credit market wary of leftist populism.

The markets were already trembling: Morales was already a bogeyman of demagogic populism. He was vilified by American diplomats for the coca leaf’s connection to narcotics and stereotyped domestically as an uninformed peasant ignorant of diplomatic protocol and economic realities. Moreover, Morales proposed a “21st century socialism” as his economic project. Everything that was an anathema to neoliberal technocrats seemed to be packaged together.

And yet, the new Morales government was far from ignorant of global economic or political realities. It still needed foreign credit, still lived in a hemisphere politically and militarily dominated by the United States, and still sought international investment. The spectre of dangerous populism, and the historical shadow of the 1982–86 hyperinflation, threatened all of those relationships. The Bolivian government could not afford to be downgraded in international bond markets, isolated like a new Cuba, or spurned by transnational corporate investors. And so, the government sent clear signals to global powers about just what its brand of populism would entail.

One unlikely emissary was Vice President Álvaro García Linera, a Marxist intellectual and former guerrilla, who spoke at the Washington-based Center for Strategic and International Studies in 2006. “We are not,” the Vice President pledged, “a populist government with easily opened pockets and cheap promises.” He highlighted the government’s “austerity” with its officials, who would no longer put money in offshore accounts (unlike their notoriously corrupt predecessors), and its “responsible management of macroeconomics.” This was Arce’s portfolio.

Over the next decade, Bolivian government officials became experts at playing against type, contrasting their moderate polices with their radical reputation. They maintained small fiscal deficits, large currency reserves, and a high growth rate in GDP. Accordingly, the international capital markets have provided Bolivia with financing, while gradually upgrading its bond rating.

Arce built an economic model of fiscally responsible left populism on the foundation of the partial nationalization of resource rents, principally natural gas exports, and high commodity prices. His “Social, communitarian productive economic model” positioned the government as the redistributor of profits from the extractive sector to “sectors that generate income and employment,” such as manufacturing and public services.

In the first five years of Morales’ presidency, Bolivia re-nationalized its gas fields and infrastructure (under the state-owned YPFB), electrical grid (ENDE), telephone company (ENTEL), the Huanuni and Vinto tin mines (COMIBOL), major airports (SABSA), and the Vinto smelter (Empresa Metalúrgica de Vinto). It also created a new national airline, BoA; and a series of light manufacturing enterprises producing cardboard (CartoBol), packaged milk (LacteosBol), Cement (ECEBOL), paper (PapelBol), clothing (Enatex), and refined sugar and alcohol (San Buenaventura).

Theoretically, the new economic model of Bolivia positioned the government as the redistributor of profits from the extractive sector to “sectors that generate income and employment,” such as manufacturing and public services (see graphic).  In reality, however, resource extraction generated more jobs than the manufacturing sector, and aside from the successful airline, the service sector consisted largely of legacy employment in declining utilities. Employment in state-owned enterprises skyrocketed from 673 to 16,366 in the ten years from 2005 to 2015, but a quarter of those workers were reclassified cooperative miners in Huanuni incorporated into COMIBOL.

The “communitarian” part of this model was a promise to redistribute surplus funds to the “communitarian economy,” that is the 18% of the population involved in rural production. However, a 2015 Fundación Tierra report found “an enormous breach between what is declared in [government] proposals and the reality that small-scale agriculturalists who realize an ever less import share of national economic production.” The numerous experiments in productive employment, urban and rural, have not achieved self-sustaining growth.

After the 2014 crash in oil and gas prices, which marked the end of an extended commodity boom, the already shaky economic model faced a fundamental crisis. As commodity prices ebbed, the government sought to compensate for lower prices with increased volume. As older gas fields began to decline in production, they sought out corporations willing to invest in new fields. And with limited gas reserves, the government is seeking to generate a new source of revenue by exporting electricity. There was no longer enough of a surplus for experiments in a diverse economy. At the peak of the “plural” model, gas producer YPFB had received 86% of the state enterprise budget. Now, the extractive sector needed all the investment it could get, just when revenues were shrinking.

Accordingly, the government shifted towards more traditional policies for attracting investment, while discarding its socialist experiments. “The era of nationalization has already finished,” Development Planning Minister Rene Orellana told prospective investors in 2015. “Now we are looking for, and we are working on, agreements and associations with private investors and private operators.” Instead of investing in small-scale agriculture, the ten-year development plan (Plan Patriotico 2025) proposed quintupling the land under cultivation in the next decade, mostly by expanding mechanized monoculture. By 2015, the government announced that it would begin to shut down state enterprises that had yet to produce a profit, leading to struggles over layoffs at clothing maker Enatex and the Ecobol postal service.

Nonetheless, the government remains committed to gradually “climbing the value chain” by converting raw materials into inputs for the country’s domestic agricultural and manufacturing sectors. Its urea plant and thus-far modest efforts to produce lithium-based compounds are examples of this path.

The engine of the model, however, remains developing Bolivia’s energy resources under the aegis of the largest state enterprises, YPFB and ENDE. . The Patriotic Plan envisioned a dramatic increase in hydrocarbon production: from 56 to 103 million cubic meters per day of gas and from 59 to 135 million barrels of oil per day. However, the gas sector has been hard hit by falling prices and state-owned gas producer YPFB has not found a major new field since the 1990s. Accordingly, the government has sought to make more of the country available for drilling and has begun to incentivize new private investment in the sector with policies reminiscent of the neoliberal era. Meanwhile debt-financed public investment is planned to build thirty-five hydroelectric dams at a cost of US$27 billion, providing 9.9 to 11 GW of power by 2025. Among the largest is the El Bala/El Chepete complex, which is set to flood parts of the Amazon basin in northern La Paz, including in the Madidi National Park. This energy is not needed within Bolivia, whose peak electricity consumption is well under 2 GW. Instead, the government hopes to make electricity into a major export commodity, sent overland to Brazil, Argentina, Chile and Peru.

Both the hydrocarbon and electricity-exporting paths pose severe environmental risks and it remains to be seen whether the new Arce–Choquehuanca government will reactivate the largest of these projects. They will certainly face new challenges in light of the further crash of fossil prices and continent-wide economic crisis.

The interruption of MAS-IPSP government temporarily derailed its economic agenda. In a recent interview after being elected president, Luis Arce lamented the paralysis of state investment during the first third of 2020, even prior to the pandemic. The Áñez government flailed economically, but seemed inclined towards privatization of the state sector and drastically diminished public investment in both public enterprises and public works. Arce plans to reverse that entirely, a course that he justifies both a matter of economic growth and of equity. Arce also remains committed to the production of industrial inputs from raw materials, a strategy he believes generates employment and reduces economic dependency. During the campaign, he proposed a new tax on Bolivia’s rich, finally diversifying the state’s income stream away from extractive exports.

Conceptually, major question remain: Was Luis Arce the architect of a new economic model that lays the foundation for community-centered socialism? Or was the real purpose of his economic theories to put a revolutionary gloss on a conventional, development policy vision? Will the country’s continued peripheral status and depedence on raw materials for external income push it back into a neoliberal dependence on foreign investors? And tragically, will the agricultural and extractive sectors continue to displace and marginalize communities with an alternative relationship between land and livelihood?

Parts of this essay have been adapted from my chapter of Beyond Populism: Angry Politics and the Twilight of Neoliberalism.

Top photo via Luis Arce Catacora’s account, @LuchoXBolivia, on Twitter.

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