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Financial crisis in Bolivia. “The cost of economic populism”

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Bolivia’s central bank has stopped publishing data on its foreign exchange reserves, which could mean it is dangerously low on cash. Government bond prices are falling and investors are fleeing the country. He adds that the Bolivian crisis shows the dangerous face of economic populism.

Bolivia is running out of money – this should be a warning to other Latin American countries. The central bank in Bolivia has been selling dollars directly to citizens for several weeks after it turned out that bureaux de change had run out of this currency, The Economist reported.

The crisis in Bolivia and economic populism

“Bolivia’s nightmare reflects several short-term issues such as growth interest rates worldwide and higher fuel prices due to war in Ukraine. This made borrowing more expensive and increased the cost of imports. But the real cause of (Bolivia’s) trouble is the reckless economic model that has been in place since left-wing populists took power almost two decades ago. When Evo Morales, a former coca grower, was sworn in as president in 2006, he declared the end of the “colonial and neoliberal era” and hung a portrait of Che Guevara, the brutal Marxist revolutionary, made of coca leaves behind his desk.

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Then he points out: “Today the total cost of economic populism becomes clearer, as well as three lessons that other Latin American countries that are tempted by it can learn.”

Lessons for the Bolivian economy

The first lesson, according to the weekly, is not to believe in a good commodity situation. When Morales took office natural gas prices grew rapidly, which was very beneficial for a country that currently produces 0.4% of gas in the world. Exports grew, and Bolivia was able to amass the largest foreign exchange reserves in its history: they jumped from the equivalent of 12 percent to GDP in 2003 to 52 percent. in 2012, Morales and Luis Arce, who is now president but was finance minister, used the country’s revenues lavishly. Now, as the British weekly describes, gas prices and its production in Bolivia are falling.

The second lesson is to beware of association exchange rate. In 2008, Bolivia introduced a fixed exchange rate, which since 2011 is 6.96 bolivianos to the dollar. This kept inflation at a low level in the country for a while, but over time pegging the currencies proved extremely costly and, rather than providing stability, led to an accumulation of problems, according to The Economist.

The hostility towards private capital is back to play itself out – this is the last lesson listed by the weekly. As he explains, Bolivia “went into a frenzy of nationalization” that included gas fields and an electricity grid, and the government “treated business with contempt.” As a result of this policy, the number of investments in the country fell, and inflows from long-term investments and international companies fell from a peak of 12 percent. GDP in 1999 to only 0.1 percent. over the last five years, says The Economist. According to his predictions, total investment in Bolivia in 2023 will amount to “only 14 percent of GDP, which is the lowest rate in South America.”

La PazShanti Hesse / Shutterstock.com

Economic Problems in Latin America

“Mr. Arce’s talk about attracting entrepreneurs means too little and is overdue. He has only the wrong options left,” says the weekly.

Bolivia’s government could impose austerity measures, try to borrow even more, default or sell some of its abundant lithium deposits to China.

He estimates that Latin America is currently experiencing a new “pink tide”, a wave of left-wing governments, most of which are wondering to what extent to succumb to the instinct to use strong state intervention. “The message from Bolivia, a country that is literally running out of money, is that there are limits,” concludes the British weekly.

Main photo source: Shanti Hesse / Shutterstock.com

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