Review of the report of the United Nations mission of technical assistance to Bolivia

 No. E-199 , , ' 67127 This report is not to be published nor may it be quoted as representing the Bank's views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REVIEW OF THE REPORT OF THE UNITED NATIONS MISSION OF TECHNICAL ASSISTAl\CE TO BOLIVIA January 7, 1952 Economic Department Prepared by: Cynthia Sokobin  REVIEU OF THE REPORT OF THE UNITED NATIONS EISSION OF f TECHNICAL ASSISTANCE TO BOLIVIA Evaluation of the Report i , The !lission1s most specific recommendations deal exclusively 1dth institutional reform. Although increase of proc~uction is suggested for several comrnodi ties, the r1ission does not indicate the amount of investment nor \vhether it is to be made by private or public parties. Great care has been taken not to infringe upon the functions of tech- nical agencies currently in operation in Bolivia (or under commitment) and problems are frequently delegated to consideration by such 2gencies. It seems therefore that the Nis8ion directed its efforts prima.ri1y totrJard establishing an administrative environment in Hhich u.n. s!lecialized agencies could render technical assist~mce 1,!ith reas6n~ble assurance of the '300d ·Hil1 of the Bolivian Government. The practice of de1agC'ting problems paints to ~"hat seems to be a major feature in the t1ission t s policy, namely that responsibility for deci- sions affecting allocation of resources has been dispersed rather than cen- tralized. Provision ~vas made in principle for establishment of the central authority necessary to coordinate investment decisions in that the 9r01)osed Development Bank is made responsible for statistical reform and np.tional ac- counts cludgeting. HOH8ver, the establish.'nent of this 3ank is likely to be long delayed. No other agency or institution is charged trJi th forraulating s.n investr.:.ent program. The Eission made no attempt to drat'l up such a program, ostensibly for "lent of adequate statistical 1:Jasis. The group of administra- tive assistants and 8Jmerts vlho \-Jere the subject of the Eission'sm8jor recommendation 'i18re proposed to obtain a 1'lOrkinc; atmosphere of cco;eration and agreement throur;h administrative revision, not to formulate the substan- tive ;J1en re~uired for the oT)t:~murn allocation of resources. In any case, institutional imprOV8!:1ents, es~)ecially those relatins to Government finances, may eventur..lly in tl,emsGlves hl'lve beneficial effect on the direction of in- vestment in Bolivia. Personnel and Duration of I<liission i The tIission comprised fifteen experts (includinS the chi'~f of the Nis- sian, Hr. H. 1. Yeenleyside), in the fields of agriculture, mining, nOHer, transport, public finance, fiscal administration, labor, education and social welfare. .A total of 1728 member-days Has ST)ent over the months of Hay-August 1950 and extensive field trips coverin~ most of the country were made. Function and Objectives of the (Iission Although the Hission ,,:ras formally directed lito aid the Government of Bolivia in • • • drawing up a concrete plan of economic a~d social develop- ment . . . . ft, the Report contBins no development program in detailed financial terms nor in the form of national accountS. The necessity of formulating such a program eventually is strcngWy emphasized, however, in recognition of the danger that heavy population increase can dissipate the benefits of social and economic improvements. A quantitative expression of develop- ment goals in terms of economic aggregates is therefore included as a basis for long-term policy, Thus a rate of increase of per capita national income at 3-4"6 a year, or doubling every 20-25 years, is' envisaged for some undefined period in the future on the basis of total annual savings of 20'~ of national income, 'which vlould rise at a rate of 3-6% per annum. Total savings would comprise domestic savings equivalent to 10...15% of national income and capital imports equivalent to at least of the same. In absolute terms, total savings in the initial year of an economic development program period should be equivalent to 3,000 million bolivianos, on the assumption that the U.N. Department of Economicltffairs estimate of Bolivian national income at 15,200 million bolivianos in 1946 holds relatively unchanged. A technique of simple analogy with U.S. and Swedish 1.9th century economic history '\I18.S the basis of projection. Statistical reform takes first priority in the final sumIT£ry of conclusions and long-term recon~endations, underlining the importance of national income analysis in per capita terms as a basis for economic development. ~vents subsequent to the Y~iting of the Report have made it clear, however, that the order of priority mentioned here is a logical rather than' a practical concert. The I:ission patently stressed adminis- trative reform as its primary objective. On the grounds that a visit of four months was insufficient to provide a statistical basis for national income analYSis, the Fission confined itself to reconunending changes likely to result !lin immediate practical improvements in the SOCial and economic conditions of the people of Bolivia", and urged reliance on the possibility of "the prolonged and beneficial cooperation of the United Nations and the Specialized Agencies" in all long-term phases of improve~nt. The principal problem for Boli,~a is summarized as failure of the Bolivian people to profit fully from the natural wealth of their country. This paradox is attributed to chronic administrative instability, making for conditions under 1!\Thich entre- preneurs cannot invest with roasonable certainty of return. 41though the proposal for inte~ration throughout the Bolivian Gmrernment of an international group of foreign administrative assistants is by now well known as the principal achievement of the Keenleyside 'lission, this was not the sole dictum of the Lission on administrative matters; all of its recommendations relate directly to institutional reform. Cuantitative analysis plays virtually no part in the formulation of proposals. Even where investment is required, the amount and source of ,funds and the public or private character of the investor are not specified; indeed, in several important proposals, these points are explicitly deferred to future decision (the Devel.opment Bank's policy on lending to government entities is an example; see p.5,2d). It will be noted that the report " makes a global estimate of capital imports from abroad, as outlined in the preceding paragraph, but that neither in the quantitative expression of development goals nor in particular recommendations does the report specify the relation of government and private components of capital inflow or of toted inV'Ootiment,·. Clear disapproval of Government invest- ment in mining is an exception. The adoption of administrative reform as the means of establishing an atmosphere of confidenceconduciv€ to inwstment of voluntary savings is regarded as essential to economic ::ievelopment. Inflation-forced saving as a source of funds for financin,; economic development is rej:,cted as a self-defeating instrument... Monetary stabiliz.ation is therefore a pre-eminently important aspect of administrative revision. During tho transition to an economy in which voluntary savings predominantly finance L~vestment, while inflation is in process of elimination as the source of savings, investment funds will have to be sought in: (I) budget surpl1.:ses and (2.) in capital import. The latter is likely always to be important (this admission conflicts with final conclusions) but especially so during the early phase of development. LiTery effort must be made to obtain budget surpluses, but development projects already started must not be jettisoned simply because a decrease of government expenditures on certain occasions would be instru'!lental in controlling an inflationary 8i tuation. The emphasis on voluntary savings and on the role of cap:l.tal imports is conspicuous, and the establishment of an institutional framework of financing by appropriately channeled voluntary savin::;s at the earliest possible date is advised. The existence of funds is not doubted; the Mission believes that a large proportion of bank notes in Circulation find their way into small private hoards, and that they will make an important contribution, but empirical evidence would not seem to sub- stantiate such an assumption, nor can it have been based on technical analysis of income distribution. (see p.S,2d) Outline of Priorities , Reorganization of administrative and economic activity, with a policy of heavy capital importation, is considered the first of three congruous and connected stages in the development program. Social over- head investj,lent \l'li til development of mining and agriculture will be characteristic of the first stage. foreign investment will be gradually tapered in the second stage, and exchange-saving industries ,'1111 l)e ',Si ven importance, especially in agricultural and forestry production and i~ foodstuffs and raw material processing industries. The third stage, characterized by a cessation of foreign assistance and capital imports, is not outlined as specifically as the preceding periods, but it is assumed Jolivia's capital needs will be provided internally and that the bulk of measures designed directly to improve social welfare and standards of living will take place in this period, The timing of these stages in relation to the five year appointments of the Administrative J\ssistants is not clear, nor is any of these stages explici tly related to the cUenti tati ve expression of development goals in national income terms set forth above. It is not clear whether the proposed objective of an annual rate of increase of 3 to L~ in per  -4- capita national income is to be achieved during or after, or po~s:ibly before the third period. In general, the Report assigns priorities to social measures on economic grounds, i,e" on the immediacy of their contrib~tion to the increase of productive capacity or of investment trends, because the urgency of social reforms is virtually uniform in all fields and does not offer a basis for priority, Reduction of wasteful expenditures by Government and also of much luxury consumption by private parties is regarded as an essential aspect of the social problem, and is omitted from the discussion of exchange reforms. The expansion of social insurance along the lines of legislation adopted in 1949 is approved specifically because a source of investment funds is thereby pro\ti.ded, although reduction of soqial and labor legislation to the actually work~ able minimum is urged. Technical and vocational training are put in the category of social problems, but are recommended for immediate attention for their economic implications, Nevertheless recom.mendations on education are virtually omitted from this Report since coIllt'11i tments had already been made for technical assistance from mJESCO. Similarly, health and sanitation measures are regarded as the area of relatively independent V,HO activities already negotiated.  SUMMARY OF PRINCIPAL SPECIFIC RECOMMEI-rDATIONS OF, THE HISSION The general recommendations of the Mission are summarized in order of priority as: (1) statistical reform towards making possible natioI1al income analysis and national economic budgeting; (2) administra.... tive reform, vdth monetary stabilization an important aspect; and (3) social reform~ A summarized Hst of specific recol1l'1lendations follows; 1. Administration I (a) Integration of an international group of foreign administrative assistants throughout the Bolivian Government in responsible positions ~~ one assistant for each cabinet portfolio and for the Director of the Budget and Comptroller -- under an agreement or contract with the United Nations for five years. A coordinator~general of the group to be of Bolivian nationality and to have cabinet rank, (b) .Establishment of a National Economic Administration comprlsJ.ng 1;.I1e cabinet, high officials of government departments" presidents of principal national financial institutions, the international ad'1linistrattve group, Director of the Bud6et, Comptroller General, and head of Civil Service Administration. Tne Administration is to deal solely with crises or questions of fundamental policy, as an agency of last reserve. (0) Lstablishment of a non"!"political, technically-staffed civil service administration headed by a National Council on Public Service whose members shall be appointed by the President of the Republic from nOMinations by specified government and non-gover~~ent institutions. (d) Reorganization of lines of authority to relate a.cti vities of government and semi-independent agencies to appropriate ministries. 2. Monetary and F'inanci81 Policy (a) A program of monetary and exchange stabilization (the latter directed towards eliminating subsidy effects 'which make imports cheaper than domestic products, and tax effects unduly burdening enterprises which are forced to sell exchange at loY[ rates; for monetary reforms, see (e), (f) and (g) belmvJ. (b) Promulgation of an investment code designed to attract foreign investment (Bilateral treaties may be an alternative, or may supplement the code). (c) Resumption of service on foreign debt. (d) Establishment of a development bank replacing the development banking functions of the existing commercial department of the Cen":,ral Bank, the Banco Agricola, the Ban~o Minero, and the Bolivian Development Corporation~ The Bank will function primarily as a source of medium-term credit .(up to 20 years) for self-liquidating projects, and should probably not hold equities or even marketable bonds. The chairman of the Bank should be nominated by the United I,rations (no mention is made of foreign nationality). The Bank should operate to stimulate a domestic bond market by issuing bonds repayable in Bolivianos at the highest rate of exchange for the dollar at the time payment is made., (Potential and existing savings which vall be channeled through this Bank are estimated as follows: (1) hoarded banknotes, "variously estimated from 500 to 1000 million" out of a total note circulation of 2.5 billion bolivianos in 1950; (2) social security funds, estimated to reach eventually 16% of the total wage bill if legislation enacted in 1949 enters fully in effect; (J) forced sales of eXChange by foreign mining companies; (4) workers' bonuses, indemnities and other lump""'5Unt allow- ances paid under social legislation and custom). Lven if voluntary investment in the Jank's bonds does not raise required capital, gbvern~ ment financial contribution to the bank should take the form of bond purchases _ rr It is an open question ,mether the Bank's lending would be predominately to private or to semi-public or public enterprise" (p~17, published Report). In order to enable the9ank to serve as an inter... mediary between the Bolivian and foreign capital markets, the Bank should have an option to buy a percentage of the national gross foreign exchange receipts, which might be resold to the public for increased imports of consumption soods whenever investment for development impinges on consumer supply. The research department of the Bank is to have the continued responsibility for drawing up the proposed national economic budget and Itthe long-term investment plan lt , collaborating in all research problems with other appropriate government agencies. (e) Abolition of the commercial department of the Central lank, making that agency solely a bank of issue. (f) Strengthening of the commercial banking system (specific recommendations on this score are regarded as outside the scope of tlJ.e Mission I s terms). ~s tablishment of branches by foreign banks would be of assistance. (g) l:.stablishment of a widespread netw'ork of savings banks and savinGS funds and institutions such as a postal savintss system. 3~ Budgeting and fiscal manag~ (a) Establishment of the direct responsibility of tJ1e Director of the Judget to the President of the H.epublic; establishment of adequate postftauditing powers of the Comptroller General and supervision by JJirector of tne Budget of bud5~ts of agencies. (b) Elimination of d~dicated taxes. (0) Separation of Government salaries and similar current expenses from capital outlays.  (d) Abolition of departmental and municipal taxes, custom houses, etc. ,unless nece~sary revenue of local governments is impaired. 4. Taxation and Public Finance (a) Short-run measures to increase tax revenues by some 30 to SO,s: (1) education and facilities (publications, etc.) to improve tax compliance; (2) temporary increases in taxes on domestic consumption, imports and production; and (3) temporary increases in existing income and profits taxes by establishing unearmarked surcharges. (b) Long-term measures to increase tax revenues -: increase of the following taxes: (1) property taxes on the basis of proper assessment, (2) export taxes except on minerals (establishment of a single royalty), 0) domestic consumption taxes on a few items such as alcohol and tobacco, and (4) income taxes ...- establishing a normal income tax with appropriate family exemptions, an individual surcharge tax, a flat corporate tax and a corporate tax of 10 -: on dividends !:laid. (c) Simnlification and codification of tax legislation. (d) Eliminat on of earmarking of tax receipts; all receipts to accrue to general revenues. s. Mining (clearly labeled a field exclusively for private investment) (a) Establishment of a linistry of ~ ines, Petroleum and :conomy to handle mining, petroleum development and power. (b) Eeduction and consolidation of mining taxes, which should be based on net profits after deduction of depreciat:ton and depletion; cor- porate taxes paid by the mininb companies should be the same as taxes paid by other industries. (c) Lxchange surrender by miners should be proportionate to needs of miners, not to grade of concentrate. (d) l:ine operators and labor should be consulted on any proposed legislation affecting their interests. 6. Agriculture (a) The type of soil conservation practice suitable for each major area of Bolivia is specified, but recommendations do not reach the project stage .. (b) Irrigation by pumping rather than by large storage dams is favored; but in general, transport, labor, drainage and land clearing problems take priority over irrigation. Completion of existing major irrigation projects is recommended, however, in vievv of the investment  -8- already made, and again, no projects in the other fields are mentioned. (0) In line with its acceptance of tha principle that agricultt~al development should center around crops already developed on a small scale, agricultural credit should be the resJ;onsibility of the Development Bank and should be decentralized in administration (though care should be t1.ken not to dissipate resources among too many borrowers). eredi ts should be primarily for short~term and for specific crops, and technical supervision should be offered by the credit agency. (d) I Tarketing assistance in the form of public buying, government- established markets, storage facilities and official grading systems, particularly for agricultural exports, are needed, but should be the subject of further study and investigation. (e) Effective resettlement and colonization requires lIa carefully planned central Government policy", formulated with the cooperation of all agencies concerned with economic development; the Report does not, however, propose any institution or project, and limits its rec~~ndation to the suggestion that United Nations technical assistance be sought. (f) The ,Iinistry of Agriculture should be reorganized and the existing uServicio de Fomento Agricola fl should be abolished. The :.Iinistry should have three departments: Division of Agriculture, comprising branches for extension services, economics and statistics, plant industry, animal industry, rural structure and soils; a Division of Lands, to be concerned with developing information on productive or potentially pro- ductive land and establishing policies of land use, and to make reco~~en­ dations with respect to changes in land tenure; a Division of Water Con- servation, to plan a comprehensive national water-use system and perform related functions. (g) Specific crop recommendations; 1'lheat, cotton and fiberpro- duction should be developed for import replacement; coffee, cocoa and rubber production afford the most important export possibilities. Tobacco, sugar, cotton, rice, corn, edible oil seeds and livestock offer eventual export prospects.ith respect to wheat, the recommendations of an FAO expert, Dr. H."G. Dion, entitled flAgricu1ture on the Altiplano",. are accepted. Detailed discussion of proposals for sugar refineries is included and the i'fission recommends that the Government undertake to guarantee a foreign loan for the mill proposed near y.,Tontero (Sta. Cruz). The Liission also recommends starting a pilot project for fiber production on a certain hacienda, apparently privately otvned, but does not assign responsibi1i ty. All other recommendations are limited to mentioning suitable areas and crop typeso 7. Forestry The Bolivian Government should employ temporarily at least three  ... 9- foreign foresters nominated by t te ,Uni ted Nations. Of these the Chief Forester should have the status, f Administrative Assistant. The Mission justifies this recommendation on the basis of the magnitude of the fuel and erosion problems in Bolivia, as well as on the possibility of exports. 8. Transport (a) Reorganization of the ~irinistry of Public,:orks to include adequate administration of transport. (b) The :Ussion' s classification of roads in order of national eCQnomic importance should govern construction and future allocation of resources, for which an annual cost estimate of ten million 301ivianos is presented (the only case of financial reckoning to be found among the recommendations). (c) Coordination of rail and road construction. (d) Unification of operation of all railroads,. at present pri- vately operated, under a single agency in which existing companies would be represented. A United Nations expert could preside over t..'1e board of this agency_ The ?lission believes this action would result in substantial savings which would be used for transport development. (e) Detailed recommendations already presented to the Bolivian Government vIi th respect to railway construction are outlined. (f) State operation of airfields is reconunended, but leaSing of airfields to private compantes presently operating them is considered acceptable. State supervision and standards cf service should be established. (g) A small inland we.tenvay system should be established, and could be "entrusted" to Lineas Aereas 30livianas. 9. Power (a) The existing Director General of Hydraulics and Energy should be expanded and transferred from the j.,iinistry of Public Works to the nE'." Ministry of L;ines, Petroleum and Economy, and should undertake a survey of Bolivian pOliver potential and facilities~ An Administrative Assistant should be nominated by the lmited ~~ations for this Division. (b) A semi-public Bolivian Power Corporation should be established to operate under the ~,inistry of :dines, Petroleum and Bconomy, with the function of supplying electric power at reasonable prices in step with the needs of the development of the Bolivian economy. The Corporation will be a limited stock company with power to issue bonQs at home and abroad, and to take up loans from foreign and Bolivian banks. The Government should undertake to supply foreign exchange required by the  -10- Corporation to finance the foreign debt it may assume. Chairman of the Corporation should for an interim period be nominated by the Uni ted !Ja tiona. 10~ Industry The Mission apparently believed specific recommendations to be irrelevant in the present stage of development of Bolivian industry; measures for t8~ revision, trade and exchange policies, etc., applying to industry, are subsumed under other divisions of the Report; the }fission therefore confines its proposals with respect to indnstryto recommending adoption of a policy of fostering decentralized small scale industry supplying everyday consumption needs and the raw materials for construction of roads, industrial building, housing, etc. A U .N.- nominated il.dministrative Assistant should be appointed within the Ministry of Hines, Petroleum and ?conomy to be responsible for planning industrial development. ll~ ~ocial ?e;relopment: standards of.li ving (a) Development of statistics on national income, income dis- tribution and family budget, etc. (b) Educational campaigns to discourage alcoholism, coca addiction, and to promote better habits of nutrition and housing and to improve vocational training. m~ technical assistance is recommended. (c) Public authorities and private companies IIshould continue on a limited scale to supply nuclei of modern housing, to serve as patterns". 12. Labor (a) The :ilission approves labor and social security legislation in general, but believes it should be partially revised so as to eliminate provisions that are not at present enforced or that represent an excessive financial or administrative burden. Operation of penSion funds should be thoroughly reorganized, both in relation to payments and investments. (b) Government intervention in labor relations should be minimized. (c) Dual functions of conciliation and facto~J inspection now carried out by Government labor inspectors should be separated. (d)' Hours of "IOrk of women and children should be raised to eaual those of 'men; shorter hours for women and minors are regarded as hidden wage discrimination. Overtime rate should be reduced to a more "rea.listic level ll , e ,g. one that will not encourage dawdling. Christmas bonuses should be eliminated, on the grounds that the Bolivian workers tend to  -11- misuse these funds anyway. (This proposal conflicts with the assumption in a preceding section with respect to savings available from such payments for channeling into investment). (e) A Labor Research Institute should beestablished. (f) An extensive list of advisory personnel, ffmany of whom might be provided by the United Nations or its Specialized Agencies" is re..- commended to be employed by the Finistry of Labor, the Hinistry of Hines, Petroleum and Economy, the Social Security Administration, etc. (g) The !La Immigration Office in Sao Paulo should be requested to provide assistance in immigration. 13. Social Welfare (a) An Administrative Assistant should be appointed to the lliinistry of Labor and Social \,elfare) and foreign experts should be employed for specified fields. (b) Social "elfare training organizations should be expanded. (0) Local (primarily departmental) social welfare boards should be established. (d) Supervision of child care organizations should be intensified. (e) Care of the handicapped, especially the deaf, mute and blind, should be consolidated.