Bolivia's Rocky Road to Reforms
Latin America Report N°18
3 Jul 2006
EXECUTIVE SUMMARY AND RECOMMENDATIONS
The first-round victory of Evo Morales in the December 2005 presidential election profoundly altered Bolivia’s politics and the way South America’s poorest nation is seen abroad. His left-wing Movement Toward Socialism (MAS) party rolled over the traditional parties in a landslide that reflected the expectations and desires of a majority of Bolivians for far-reaching socio-economic change, institutional reform and full inclusion of the mostly rural and indigenous poor. If Morales is to succeed, however – and he must if Bolivia is to avoid serious instability and violence – the international community will need to show understanding and offer support as he grapples with explosive issues of nationalisation, constitutional reform, autonomy, drugs and development policy.
Morales immediately demonstrated he is following a drummer different from that of every Bolivian president of the past 25 years. He appointed representatives of social movements and left-wing intellectuals to key posts, nationalised the hydrocarbon sector on 1 May 2006 and arranged for the election of a constituent assembly and a referendum on regional autonomy on 2 July. In foreign policy, he closed ranks with Presidents Hugo Chávez of Venezuela and Fidel Castro of Cuba and distanced himself somewhat from the U.S. While his assumption of power in January and first months in office have been surprisingly peaceful, there are strong indications the journey to the far-reaching reforms he and his constituents want will be difficult.
The hurdles include deep-seated economic, institutional and social problems; less than full control of the legislature; the opposition of economically and politically powerful groups in Santa Cruz in the east and Tarija in the south; and the hybrid nature of the MAS – both rooted in and constrained by the social movements. The reduction of Bolivia’s grinding poverty and the creation of a more effective, inclusive and just state depend also on the relations the new government is able to build with foreign investors, South American neighbours, the European Union (EU) and the U.S.
In general, the international community reacted positively to Morales’s election, which it correctly saw as the expression of overdue political change, an important step towards at least short-term institutional stability and a chance to make headway against widespread social exclusion and poverty. Not even the thorny issue of legalising the cultivation of coca bushes, an important Morales campaign topic and a preoccupation of Washington, Brussels and other European capitals, seriously dampened the initial honeymoon.
This changed on May Day, when Morales issued a decree that foreign enterprises in the hydrocarbon sector would have to yield “control and direction” of their facilities to the state-owned Yacimientos Petroliferos Fiscales Bolivianos (YPFB) and sign new contracts stipulating higher returns to YPFB within 180 days or be barred from further operations in the country. This measure, which affected primarily Brazilian and European investments, was followed by announcements that the government would soon implement land reform and nationalise other key sectors of the economy, such as mining. Spanish business circles were most outspoken in their protest, while relations with Brazil and Argentina were strained and the volunteered efforts of Venezuela’s Chávez to mediate only complicated matters.
The referendum on regional autonomy on 2 July 2006 and the election of the constituent assembly that same day are milestones in Bolivia’s political history. If the twin processes are carried out effectively, they might enable the Morales administration’s fairly radical policies to be managed successfully and in the end produce institutional stability and a stronger democracy. But given the divisions within the country of virtually every sort – from ethnic to class to region – they also could prove to be the battlefield on which Bolivia’s stability and even its territorial integrity will be determined.
The international community – not least the EU because of its resources and relatively uncontroversial standing in the country – need to engage the Morales administration about how it can help Bolivia overcome widespread poverty and social exclusion in a reform process that protects everyone’s interest in stability. Donors’ technical and financial assistance can also help carry out the constituent assembly and regional autonomy processes. A third tier of EU and U.S. cooperation with Bolivia should stimulate alternative development as part of an expanded and integrated rural governance/development strategy. Ultimately, reduction of rural poverty through licit activities is the best option for reducing the pressure on poor farmers to grow coca leaf.
To the Government of Bolivia:
1. Avoid risking economic isolation by ensuring respect for international law in relation to all contracts and foreign private investments, in all sectors of the economy.
2. Seek consensus on land reform and ensure that credit, technical aid and marketing support accompanies land distribution to the poor.
3. Design a comprehensive energy policy addressing guidelines for gas and liquid hydrocarbons exports, gas industrialisation, internal market policy, guarantees of legal stability for foreign firms and attraction of private investment, particularly ensuring that:
a) the new contracts under Law No.3058 and Decree No.28701 do not sacrifice long-run investment and maintenance needs merely to obtain maximum immediate revenues;
b) within the framework of hydrocarbon nationalisation, control is transferred to YPFB in a way that retains competent capacity to run the sector;
c) credible audits are carried out to guarantee transparency and ensure payment of just indemnities to transnational oil and gas companies for the lost operations and direction of their subsidiaries; and
d) contact is established with the Dutch government and the Hydrocarbon Chamber of Bolivia for a comprehensive natural gas training program for the ministry of hydrocarbons and YPFB.
4. Engage with the new Chilean government with a view to selling Bolivian gas directly to the Chilean market.
5. Organise the Constituent Assembly (CA) and referendum on regional autonomy (RRA) in a transparent way that promotes real dialogue and consensus; support the activities of the Presidential Representation for the Constituent Assembly (REPAC); and in order to guarantee the integrity of the process, President Evo Morales agree to step down as MAS leader during the CA deliberations.
6. Ensure that the alternation of gender rule is applied effectively in the CA electoral process.
7. Speed up the study on traditional use of coca leaf and abrogate the 17 June 2006 regulation that allows coca producers to sell unprocessed coca leaf directly in national markets not covered by retail traders.
8. Promote alternative development not only in the Chapare and the Yungas, but also in the new coca growing regions of Caranavi and Apolo, and continue to cooperate with the Organization of American States, Brazil, Argentina, the U.S. and others on law enforcement and interdiction of cocaine exports.
9. Implement thorough controls on the legal coca markets in Villa Fátima and Sacaba as well as the new Caranavi market.
10. Reestablish a broad donors group led by the EU that includes the Inter-American Development Bank, the World Bank, the UN, regional organisations and as many bilateral donors as possible.
11. Complete the technical dialogue with the U.S. to take advantage of Millennium Challenge Account (MCA) assistance as soon as possible.
12. Reinforce the integration of the Andean Community of Nations (CAN).
To the Political Parties, Citizen Associations, Social Movements and Trade Unions:
13. Engage in all REPAC activities; respect the results of the RRA and keep hardliners in the western highlands and eastern lowlands in check during the CA.
To the European Union and its Member States:
14. Pursue timely implementation of the Action Plan for Bolivia, in particular:
a) urge the Bolivian authorities to present as soon as possible a revised Poverty Reduction Strategy Paper and offer them technical expertise and assistance; and
b) strengthen support and technical assistance to civil society, political parties and the media.
15. Train newly elected CA delegates on constitution and institution building, with priority for female delegates.
16. Work with the government to speed up the study on traditional use of coca leaf.
17. Take due account of Bolivia’s new national development strategy while elaborating the Country Strategy Paper 2007-2013, and in particular:
a) engage the government in implementation of the national development strategy, giving priority to programs that fight poverty through creation of higher quality jobs and empower local communities as a means to strengthen social cohesion;
b) maintain existing health, education and basic sanitation programs, and additionally provide trade-related technical assistance that complements the national development strategy to diversify export based on the long-term development of small and mid-sized enterprises;
c) strengthen coordination between the EU, its member states and other donors within the framework of the Bolivian government’s donor coordination mechanism; and
d) search for ways to carry on a dialogue with Cuba and Venezuela regarding cooperation with Bolivia.
To the Organisation of American States:
18. Collaborate with the EU observer mission during the CA and the RRA polls.
19. Cooperate with the EU to encourage early completion of the study on traditional use of coca leaf.
To the Government of the United States:
20. Extend the Andean Trade Promotion and Drug Eradication Act (ATPDEA) for three years.
21. Give significant support within a coordinated donor cooperation arrangement for rural governance, infrastructure investment and poverty reduction, and continue the dialogue with the government to finance, as soon as possible, the MCA compact in support of priority areas of development.
22. Maintain emphasis on the strategic objective of reducing cocaine trafficking by continuing to offer cooperation to the government on expanded alternative development, law enforcement, interdiction and demand reduction, avoiding, so far as possible, confrontation over eradication issues.
To the Governments of Venezuela and Cuba:
23. Engage in dialogue with other donors on maximising cooperation for Bolivia.
24. In the case of Venezuela, refrain from upsetting the financial sector, especially the well-established micro-credit sector, by introducing capital at undervalued interest rates, and refrain from intervening in Bolivian internal political affairs, especially those concerning the CA.
To the Governments of Brazil and Argentina:
25. Remain engaged and facilitate dialogue between Bolivian authorities and transnational oil and gas companies; help Bolivia with information exchange and law enforcement cooperation in its efforts to restrict cocaine production and trafficking; and keep Bolivia included in the energy infrastructure projects that are being planned in South America.
Bogotá/Brussels, 3 July 2006