But jobs-destroying `shock treatment' is not the answer [ cf. Government control sapped Bolivia's economic vitality ]
How to Jump-Start Moribund Economies
IN the mid-1980s, Bolivia was in the grip of five-digit inflation, largely the product of an economy pillaged by speculators, drug dealers, and corrupt military officials - even as a nominal center-right regime held the reins of government. The wage of the better-paid tin miners averaged less than $30 a month, while many peasants reverted to a subsistence economy and barter exchanges. Bolivian generals and bankers regularly transferred their illicit and ill-begotten incomes to banks overseas, while policymakers sought a stabilization formula that would least adversely affect their colleagues in the private sector.
Enter Harvard professor Jeffrey Sachs with a solution to hyper-inflation that was not only painless for the wealthy but opened a whole range of new opportunities: the sell-off of public property at bargain basement prices, cutbacks in state expenditures and public works, cutbacks on employment, and drastic wage reductions.
A large pool of unemployed workers was created to keep wages down and the new economic order working.
To one member of the Bolivian elite, Professor Sachs was a ``formidable, brilliant'' economist. And so was he written up on the financial pages in the United States.
For the great majority of Bolivians, his policies were an unmitigated disaster.
Those fortunate enough to retain employment saw their meager salaries halved in weeks. Malnutrition, always a threat, became endemic.
Tens of thousands of redundant wage workers, including 30,000 tin miners, were given a pittance of a severance pay and put in the street - victims of Sachs' shock treatment. And they continued out of work for months on end - as did many others who drifted from mining towns to bigger cities.
Families were separated, household budgets were disrupted. In short, Sachs' stabilization policies for the elite destabilized the everyday life and economy of the Bolivian working people.
More significantly, Sachs wrongly assumed that employment, and income derived from public activity, would automatically be replaced by a more dynamic and efficient private sector.
Lacking any practical sense of real, existing markets and entrepreneurs in Bolivia, Sachs' assumptions and doctrinaire policy advice merely increased the divisions between the wealthy property owners and wage earners, and Indian peasants - without stimulating any major new enterprises.
Except one. And that sector was not one that came out of one of Sachs' elegant equations: Coca farming.
Thousands of tin miners, after searching in vain for alternative employment (the kind promised by free market doctrine), invested their indemnification funds into land and began to cultivate coca.
Even their former union leaders turned their hand at organizing the coca growers to obtain fairer prices from the drug barons.
Intended or not, the policies of the peripatetic Harvard professor have transformed a whole strata of productive workers, employed in public enterprises, into efficient growers of the very drug that is destabilizing neighborhoods just a few miles from Harvard Yard.
Professor Sachs is now reputed to be an influential adviser of the Solidarity government in Poland.
If he repeats the same economic formula he applied in Bolivia to Poland, we can expect a great leap in the unemployment figures, a precipitous decline in living standards, and the closing of numerous public enterprises.
Sachs's expectations that the market will generate new enterprises, jobs, and higher incomes are not anchored in any understanding of Polish realities. There are no entrepreneurs willing and able to invest in long-term, large-scale firms capable of creating jobs for the displaced workers.
The shock treatment cures the illness (inflation) by killing the patient (productive workers).