Bolivia and Santa Cruz

Hi Class,

Just in case you want to access more information on Bolivia's conflict with the province of Santa Cruz, I am writing here some data and providing some hyperlinks. Not all is in English, but try your Spanish, I am sure you will learn a lot.

Keep in mind that Bolivia is a country with a long standing history of regional rift, ethnic tension, and foreign intervention, and that up until today has territorial disputes with Chile and Peru. Here you can see a map of the territories lost by Bolivia over time.

The conflict, as many other conflicts in World history, has a complex history. On top of the geographic isolation of La Paz and the relatively privileged position of Santa Cruz as food producer and now as natural gas producer, the national government of Bolivia recently passed an increase in the price of diesel. The measure has come to be known in the country media as the "dieselazo".

(In Spanish when you add the suffix -azo to a word it means that you were hit with that thing: martillazo means that you were hit with a hammer, trapazo means that you were hit with a rag, so diesel-azo means that you were hit with an increase in the price of diesel).

The "dieselazo" came as a consequence of policies aimed at keeping "fiscal discipline". Fiscal discipline is a big thing for the international lending institutions (International Monetary Fund and Inter-American Development Bank) and risk rating firms (I give you more information on them at the end). Fiscal discipline seeks to keep prices of nationally produced goods (such as gas or oil) "real" by adjusting them to the prices of the foreign markets in US dollars or euros. Bolivia has had a very bad experience with "fiscal discipline" as you were able to read in "Economics of Empire".

Moreover, the dieselazo came at a bad timing, and as any increase in fuels all over the world has a direct impact on the prices of transportation, and also on the prices of food. This is critical for a country like Bolivia where is so expensive to take the food from lower regions as Santa Cruz to regions in the hills.

As I mentioned in class Santa Cruz is pretty much at sea level, while all the other major cities in the country are above the 2 500 metres mark: La Paz: 3 658; Cochabamba: 2 558; Sucre: 2 790; Potosí: 4 200. The issue with transportation in countries like Bolivia, Peru, Ecuador, Colombia, México, and Chile is then not only distance from point A to point B, but the amount of fuel required to go from sea level to 2500 or 3000 metres above sea level. That is why a hike in the price of diesel will have a chain-reaction effect on the entire economy, from fares in the public transportation to prices of food and other goods (here you can get some pictures of Bolivia).

After the "dieselazo" was announced by the government in La Paz, different groups in Santa Cruz started a "civic" movement to seek autonomy, and ultimately independence from Bolivia. The "civic" movement has scheduled a mobilization for this coming weekend.

As I mentioned in class today one key aspect that we should considered when analyzing this kinds of social or political movements is the institutional design of the country. For this case is more relevant because unlike what happens in Argentina, Brazil, or Mexico (federal republics, like the United States) Bolivia (like Chile) is a central republic. That means that the President has a great deal of power to appoint the prefect of the province. The movement originally started with demands to elect a governor.

Bolivia's case also allows me to introduce the issue of the qualification of risk. This "grading" is given by firms like PNC
and CRG. For a more academic take on country risk analysis you can go to the website of the Fuqua School of Business at Duke University.

All Latin American countries are heavily scrutinized by these firms and, as a consequence of the political instability in Bolivia, their country risk rating was increased. This rating is so important for some countries, that--as an example--Argentinean newspapers will include it in the frontpage of their daily editions. You can see here
La Nación Argentina's most influential newspaper. Go to where it says "Índices de Mercado" (Market Indices) and see the 5022 points of Risk Country given to Argentina.

Risk country ratings are given sometimes as points, some times as grading letters (AAA for very good countries), and some times as groups (Group III for a country like Mexico, Group V for a country like Argentina). Almost always the rating tries to capture how risky is for a private foreign investor to put his/her money in that specific country. The higher the country risk the bigger the premium a country will have to give to investors going to their country.

Lets say that Mexico, Argentina, and Bolivia want to attract investment, Mexico is a group III or a B+ country in most ratings, while Argentina and Bolivia are group V or C in others. That means that if the Federal Reserve here in the States is paying 1.25 to investors of its bonds, Mexico will have to give more than that, and Argentina and Bolivia much more than that (if they are actually able to find investors willing to take the risk of investing there).

It is important to emphasize that there are many valorations of Risk Country and that none is totally objective. The most recent published by The Economist Intelligence Unit, a special division of The Economist Group in London puts Chile with 20/100, Mexico with 42/100, and Argentina with 76/100. Moody's, as an example, gave Mexico in January 2005 a "Baa1", up from a "Baa2" rating in August 2004.