Bolivian Economy Continues to Grow

Friday, February 21, 2014 - 14:00

Turmoil and conflict is nothing new to the countries in Latin America, and the last few months some of the most prosperous countries have been experiencing problems. Argentina’s currency took a nosedive, leaving the country in crisis. Brazil’s growth rate has slowed significantly and World Cup protests are growing by the day. And oil heavy Venezuela is experiencing massive protests over inflation and shortages. Tucked between these countries that have been thriving for decades is a much smaller neighbor, Bolivia. The poorest country in South America, Bolivia is continuing to thrive despite the missteps of its neighbors. Last year Bolivia experienced an overall growth of 6.5% in the economy, which is currently one of the highest rates in Latin America, inflation hasn’t become an issue, and the overall budget is balanced1. Bolivia previously had a large amount of debt, but that level has been significantly reduced and is now under control. Furthermore, Bolivia has now amassed a huge rainy-day fund of foreign reserves that is enormous compared to the size of the economy. Ana Corbacho, the International Monetary Fund’s chief of mission said of Bolivia’s growth: “Bolivia has in a way been an outlier. The general trend is we have been revising down our growth forecast, except for Bolivia we have been revising upward.”

Recently, Bolivia has received praise from the IMF and other international financial institutions. These compliments come as a surprise considering that Bolivia’s socialist president Evo Morales has insulted and even berated these institutions numerous times. Morales often speaks out against capitalism and those closely linked to its system like big corporations, the United States, monetary fund, and World Bank. Since taking office in 2006, Morales has nationalized oil and gas industries and expropriated more than 20 private companies across all industries1. Morales, as well as his supporters, have dubbed him a revolutionary. The IMF and World Bank have praised Morales for his “prudent” macroeconomic policies. Morales, who has historically been on the left has shifted economic matters and follows a “trend away from ideological rigidity” throughout Latin America. In Peru, President Ollanta Humala went from dedicated leftist to a shift towards the center. Colombia’s President Juan Manuel Santos, once a defense minister, now plays the role of peacemaker, and has been negotiating with the country’s largest guerrilla group for the last year. In El Salvador’s recent elections, presidential candidates on both sides moved toward the center to entice voters. In Uruguay, respected President José Mujica, a leftist and a former Marxist guerrilla, has enacted very business-friendly economic policies. Maxwell A. Cameron, a professor of political science at the University of British Columbia who has studied Latin America said of the recent shifts: “There’s definitely an underappreciated element of pragmatism.”

Despite the recent progress by Bolivia, it still remains the poorest country in South America and while it has been in the news in the past because of political and economic instability, that is not the case recently, as the country has been progressing. According to the head of Bolivia's central bank, Marcelo Zabalaga, last year’s growth was the strongest in 38 years and has continued the trend of strong growth in recent years2. The percentage of people living in extreme poverty in Bolivia dropped from 38% in 2005 (one year before the election of Evo Morales) to 24% in 2011. Although Bolivia still has its problems, progress is widely visible. Bustling urban markets have appeared and new tractors are seen plowing field instead of animals pulling outdated plows. New colorful mansions can be found in El Alto, a historically working class city. This recent economic shift by Evo Morales seems be the best move for Bolivia as progress can be seen throughout the country.

Along with progress among the people, Bolivia is also building up a massive savings. Bolvia’s rainy-day funds are estimated at $USD14 billion, which is equal to more than half the GDP of the country. It is also equal to 17 months of imports, which could be useful if the economy should fail. This also means that Bolivia has the highest ratio of international reserves to the size of the economy in the world, according to the IMF1. Bolivia’s Economy and Finance Minister Luis Arce said in a statement: “We are showing the entire world that you can have socialist policies with macroeconomic equilibrium. […] Everything we are going to do is directed at benefiting the poor. But you have to do it applying economic science.” With the growing prosperity, Bolivia has taken aim at fixing the poverty problem across the country. One of the main reasons the economy is thriving are the high prices for natural gas, which have become the most important export under the Morales administration. This past November, Morales ordered that all government and some private sector employees receive double to year-end bonus (typically one full month’s pay). Some critics argued that Morales only made the move to improve his chances for re-election in October. However, it is a calculated populist move that attempts to redistribute wealth and income from natural gas to the people.

This recent turnaround and prosperity is so significant because of past problems in Bolivia. In 1985, hyperinflation reached a monumental high of 24,000%. To attempt to fix this level of inflation (which was thought to be caused by the free market) the government cut spending, eliminated free subsidies, fired workers, and privatized some government own companies. Critics argue that these moves slowed inflation but also led to significant and lasting problems. The unequal distribution of wealth grew and unemployed miners and farmers began coca farming, which in turn led to an increase in cocaine production1. All of these issues caused conflict and unrest leading up to the election of Evo Morales. “The Morales administration has basically cast off the recommendations of the IMF. and other huge international lending organizations, and for the first time, during his tenure, you see those macroeconomic indicators improve significantly, which finally gains the approval of organizations like the IMF,” said Kathryn Ledebur, director of the Andean Information Network. Although the recent policy changes by Morales are benefiting the country now, the long terms effects are unknown.

The recent high prices of oil and gas have helped the economy grow and by nationalizing the energy sector, the Morales administration has assisted in production while also demanding more of the revenues in return. In turn, this has led to more income for the government, which has put the money towards social programs that assist young mothers, improved pensions, and created infrastructure projects1. Initially, foreign investors heavily criticized this move, but now as the benefits continue to unfold many agree with the change. Faris Hadad-Zervos, the resident representative of the World Bank in La Paz is one of the critics who has changed his tune: “You could mismanage this opportunity, and the reality is they have not.” Despite the current prosperity of Bolivia, critics continue to voice their concerns.

The IMF and World Bank are encouraging Bolivia to push for more private investors. Currently, Bolivia operates with less than half the rate of private investment than most of Latin America. There are also concerns over the stability of natural gas prices. All the positive effects that Bolivia has experienced could all disappear if gas prices fall. Others believe Bolivia is just on a short upturn that could end just as quickly as it started, a cycle that often plagues poor nations1. Furthermore, Bolivia is locked into export contracts with Brazil and Argentina. Any economic issues in those countries would certainly trickle down to Bolivia. Also, Bolivia has failed to invest in gas exploration. Lacking knowledge of future options leads many to believe that Bolivia won’t be able to continue production at the same level. Jose L. Valera, a Houston lawyer who has represents energy companies doing business in Bolivia said: “This is not sustainable in the long term. The model is not designed to generate substantial profits for an oil industry that is going to then be incentivized to reinvest in Bolivia.” If this trend should end in Bolivia, help from the IMF and World Bank will not come quickly.

Bolivia has a unique and not necessarily good relationship with the IMF and World Bank. Morales has openly criticized both organizations. In the past, he has accused the World Bank of attempting to blackmail him into changing economic policies. Morales is not alone in this conflict with the World Bank and IMF. Other countries like Ecuador, Venezuela, and Argentina have also refused to participate in the annual economic reviews of the monetary fund. In December 2012, Morales called for the dismantling of “the international financial system and its satellites, the IMF and the World Bank.”1 However, eight months later in July, Morales changed his stance significantly after a World Bank project was put into place to support quinoa farmers: “The World Bank does not blackmail, or impose conditions, not anymore.”

In a region that is constantly changing, many are wondering if the upturn in the Bolivian economy is permanent. While Bolivia is currently thriving, they are also dodging issues that are affecting Brazil and Argentina that could affect them in the near future. However, while other countries in Latin America prospered heavily over the last few decades, Bolivia has remained a very poor nation. With the changes made by Evo Morales that have turned the country’s economy around, many are wondering if it is their time to prosper.

 


 

Works Cited

1. Neuman, William. “Turnabout in Bolivia as Economy Rises from Instability.” The New York Times. 16 February 2014. Pg 1-6. Web. 17 February 2014.

2. “Bolivian Economy to Grow 5.7 Percent in 2014.” Prensa Latina. Pg 1. Web. 16 February 2014.

About Author(s)

Kelcey Hadden-Leggett
Kelcey Hadden-Leggett is an undergraduate student at the University of Pittsburgh pursuing a degree in Spanish, a Certificate in Latin American Studies, and a related area Certificate in Portuguese. She recently completed the Pitt in Ecuador program in the Amazon.