In the streets surrounding the Palacio Quemado, Bolivia's presidential palace, hundreds of striking public school teachers marched through the city center, demanding not only salary hikes but nationalization of the foreign-run oil and gas industry. But Bolivian President Carlos Mesa, 50, seemed unruffled in his understated but elegant offices inside the palace.
In the late 1970s and early 1980s, Bolivia suffered revolving-door military coups d'etat but returned to democracy in 1985. The country then underwent free-market economic reforms that conquered hyperinflation, cleaned up public finances, and privatized much of the economy.
But last October, Mesa's predecessor, Gonzalo Sanchez de Lozada, was forced from office by massive street protests in which more than 70 people died. Why? In part, because Bolivians suspected they were being ripped off by foreign oil companies exporting part of the country's huge natural gas reserves at below-market prices.
Deeper down, the discontent reflected pent-up frustration among Bolivia's indigenous majority, who since colonial times have been discriminated against and condemned to poverty in South America's poorest country. BusinessWeek Latin America Correspondent Geri Smith spoke to President Mesa on May 26 in La Paz, the capital. Following are edited excerpts of their conversation:
Q: You're holding a referendum July 18 asking Bolivians to decide whether to take back some control over the country's huge gas reserves from foreign companies that won 40-year concessions in 1996 and boost royalty payments. How important is the referendum for maintaining social peace in Bolivia?
A: It's fundamental, because the economic future of Bolivia is at stake. The international community wants to know if Bolivia is capable of sorting out a basic issue that is so essential to the economy, which is the decision to export gas or not to export it. The referendum will either open doors or close doors in our multilateral relations. And it will define whether in the future we will have the perspective of potential earnings from gas.
Q: Many believe the referendum will shut the door to foreign investment.
A: I don't see any reason for that to happen. The questions we are posing [in the referendum] don't modify at all the possibility of, or the willingness to maintain existing investments and to generate new investments. We're talking about a big business proposition, gigantic volumes [of gas]. The increase in taxes [to be paid by multinational oil companies] doesn't represent a confiscatory attitude on Bolivia's part. And, the concept of [changing the nature of] property rights [over the gas] doesn't mean nationalization. We don't believe we are closing the door to investors.
Q: You don't belong to any political party, and you don't have your own bloc of representatives in Congress. How will you reach consensus on a new hydrocarbons law, if the referendum approves that?
A: The proposed hydrocarbons law is quite advanced now, but we will make adjustments in it to reflect the referendum results. The questions posed in the referendum are very clear. Interpretation of the 50% [proposed surtax on gas production] could be flexible, but the concept of industrializing gas [for added value in Bolivia, rather than exporting it unprocessed], of gas sales [overseas], and the use of gas for Bolivians is absolutely clear.
The issue of who owns the [gas reserves] also is absolutely clear, [Bolivia owns them] starting at the mouth of the wells. So, [the referendum] can be interpreted, but we believe it will back our proposed law.
Q: The average Bolivian appears to believe that the country is sitting on immense gas wealth and doesn't seem to understand the huge expense of extracting that wealth.
A: We have to reinforce the idea that this requires a very large investment and effort. The state isn't capable of making a gigantic investment like this. A good business deal must be good for the private investor and good for the Bolivian state.
The problem is that the past has been a very dark period for our people. Many riches have been taken out [of the country], and the people haven't received any benefit. We have to find a fair compromise. People have to understand what private investment means. But the investors must understand that a poor country is waiting for these benefits to reach peoples' pockets and improve their lives.
Q: Last year, protests forced cancellation of a $5 billion gas pipeline project that would have exported liquified gas (LPG) through a Chilean port to the U.S. Bolivia isn't the only country in the world with big gas reserves. Will Bolivia lose international customers if the country endlessly debates whether it should export gas?
A: That's why the July 18 [referendum] is so key: Time is moving quickly, and the world isn't waiting for Bolivia. Once the referendum is resolved, and I hope the answer will be "yes" [that the hydrocarbons law should be revised and that surtaxes should be charged], then we immediately have to work on...negotiating with investors and defining [gas export] programs with countries like Mexico, Argentina and others. The U.S. has sufficient gas demand, so that in a relatively short period we could return to the idea of [exporting to] the California market. But we cannot afford the luxury of keeping the doors closed after July 18.
Q: The recent protests weren't just about gas exports, were they?
A: There are several things going on. Bolivia is living through a very difficult historic moment. The gas issue does reflect the need to reformulate an energy policy that will benefit our people. But there also has been a serious weakening of the state. Citizens completely lack confidence in the government and politicians, and parties have suffered a great loss of prestige. There is a great demand by our people to participate, to be protagonists -- so that the country's majority can begin to govern and decide things.
Our task is to combine ever-greater [popular] participation with reconstruction of the relationship between society and the state. Today's greater congressional representation [of previously underrepresented indigenous groups] is indicative of this. These are social groups that traditionally had been excluded.
But the gas issue also is being used as a political instrument by radical minorities who don't believe in democracy and who want to push things to a level of unsustainable tension. The people you see in the streets every day are noisy, "efficient minorities" -- they don't represent the majority but they are very well organized. They take advantage of the philosophy of my government -- which is of dialog, not repression -- and they try to provoke violence. That's a game we do not play
Q: The government doesn't have the money to give the salary increases the teachers have been demanding, does it? Your fiscal deficit is at least 6.5% of GDP this year.
A: Absolutely not. There's an intentional irrationality. I have tried to explain this to the country, and the vast majority has understood that we still have a very high fiscal deficit. The cost of pension reforms has been perhaps the biggest error committed in the process of modernizing Bolivia's economy. There were other positive aspects to the [economic] reforms, but the pensions issue has placed an extremely heavy mortgage on our backs.
Q: Bolivia carried out a number of important economic reforms in the 1980s and 1990s. In your opinion, which worked well and which didn't?
A: The most important, revolutionary measure that President [Gonzalo] Sanchez de Lozada took was "popular participation." [Political reforms during his first presidential term in the mid-1980s that decentralized power and resulted in the election of more indigenous representatives to Congress.] That was an extraordinary qualitative jump. Since the 1952 [Bolivian] Revolution, I don't believe that anything that ambitious or important had been done to respond to popular demands.
The "capitalization" [Bolivian-style privatization of state-run companies] has its good and bad parts. Capitalization was an interesting concept [the fact that money raised through selling off 51% shares in state companies financed social investment].] Because of capitalization, we went from 5 trillion cubic feet of gas reserves to 55 trillion.
That was a correct use of the [hydrocarbons] law, but there wasn't sufficient transparency. Capitalization schemes were excessively liberal and those mechanisms are questioned today. It wasn't necessary for us to have a hydrocarbons law that practically handed over our resources to investors on a tray. I believe it could have been done in a more balanced way.
Q: One of the referendum questions asks Bolivians if they support linking future gas exports via a pipeline through Chile, to talks with Chile about possibly returning to Bolivia a strip of Pacific Coast that Chile seized in a war nearly 200 years ago. Bolivia has been landlocked ever since. Chile has refused such talks. How optimistic are you that you'll make any progress?
A: It's not my objective to recover our access to the ocean in my mandate [which runs through 2007]. That would be excessively pretentious. Of course, it's something to which any Bolivian President would aspire. What I do believe is that history has brought us to this juncture: The issue of ocean access is a question that Chile and Bolivia must resolve. Chile must understand that the process of [regional] integration, the Atlantic-Pacific integration, requires the solution of this problem.
Q: Bolivia's relations with the U.S. have for many years been linked to the country's status as a big producer of coca leaves, the raw material of cocaine. During the 2002 elections, the U.S. ambassador was very outspoken, openly criticizing one of the leading presidential candidates, Evo Morales, who headed the coca leaf growers association. Do you think the issue of coca eradication should be delinked from other aspects of the bilateral relationship?
A: It cannot really be delinked because for the U.S. this is an important issue. But I believe [the U.S. must take into account] the new role that Bolivia can play today with its huge gas reserves.
Now, Bolivia is a strategic place for energy and the relationship with the U.S. will have a new dimension. Coca is important, but I believe it is less and less important for the U.S. Bolivian coca is no longer destined for the U.S.. [Cocaine produced from Bolivian leaves ] is consumed more in Europe. Bolivia will continue its policy regarding [eradication of] coca. Coca leaves should be only for traditional consumption [Bolivians chew the leaves to kill hunger and boost energy and drink coca-leaf tea to reduce the effects of altitude].
But coca eventually will have a less important role than it has now in the bilateral relationship. If we can diversify the relationship, I think both sides will win.
Q: In the early 1980s, Bolivia was plagued by political instability, but then it enjoyed a stable decade. Now, with the recent riots, the President's ouster, and the daily protest marches, things seem wobbly again. Is this a period of chaos or a period of creative destruction that will have a positive outcome?
A: It's a strange situation, because I'm backed by 70% of the population. I'm among two or three Presidents in the region with the highest popularity ratings in all of Latin America, and those ratings have not diminished in my seven months in government. At the same time, I'm under a lot of pressure that no other President is under, when it comes to street protests and threats of violence from a minority that does not represent the desire of the majority.
The majority is frightened because they see that these groups are very powerful. After the extreme violence that occurred in October, it would be crazy to think we can reestablish order through [more] violence. We have to reestablish order by moral imperative. It's not easy. This is a process that may require my entire term in office.
My biggest personal challenge will be to regain the moral strength of a credible state in the eyes of society by the end of my term. So, we still face difficult and tough times. I believe that if we win the referendum, we will have more legitimacy in the eyes of society.