Over the years, Bolivia has been known as the focal point of political and economic instability, and although it still remains South America’s poorest country, much has changed.
The International Monetary Fund (IMF) reports that Bolivia’s economic growth last year was the strongest in at least three decades. With an estimated 6.5 percent, the country’s economic growth represents the strongest in the region. The country has continued to grow economically for several years now, and its growth has been supported by soaring hydrocarbon exports, strong private consumption, and accommodative macroeconomic policies. Extreme poverty fell to 24 percent in 2011, down from 38 percent in 2005. One of the most interesting developments, however, is how Bolivia has amassed foreign currency. With about $14 billion, it now has an amount equal to more than half of its gross domestic product (GDP). That makes Bolivia the country with the highest ratio in the world of international reserves to the size of its economy, having surpassed China in that regard. Growth is projected to remain above potential again in 2014, sustained by hydrocarbon exports and a moderate fiscal impulse.
Bolivia’s economy is doing well due to relatively high prices for natural gas, its most important export. This revenue enabled President Evo Morales to order all government and private sector workers to get double the customary year-end bonus of a full month’s salary. “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,” said Economy and Finance Minister Luis Arce.
During his presidency, Mr. Morales has benefited from high commodity prices throughout the region. He nationalized the energy sector and took a greater stake in the companies that extract the nation’s gas, and demanded a bigger share of the revenues. Thus, the government’s revenue increased significantly, giving it enough money to pay for social programs like cash payments to young mothers, improved pensions and infrastructure projects.
Some investors were ‘rattled’ by Mr. Morales’ nationalization however, the president now gets good marks for the way he handled the situation. “You could mismanage this opportunity, and the reality is they have not,” said Faris Hadad-Zervos, the resident representative of the World Bank in La Paz, who cited the large foreign reserves stock and substantial increases in government spending on infrastructure.
According to the New York Times, Bolivia’s ‘turnaround’ is noteworthy because, for many years, the country was against the kind of orthodox, free market policies long promoted by the monetary fund and other international institutions. “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, a research group based in Bolivia.
Mr. Morales still remains in Latin America’s leftist camp, however, on many economic matters, there seems to be a sharp contrast to some of its leftist allies: Venezuela, Ecuador and Argentina. Bolivia fits within a broader trend away from ideological rigidity in the region and has better relations with the monetary fund and the World Bank. Indeed, Bolivia is part of the annual economic reviews by the monetary fund. Both the monetary fund and the World Bank, in recent reports, praised what they called Mr. Morales’s “prudent” macroeconomic policies. Fitch Ratings, a major credit rating agency, cited his “prudent fiscal management.”
But despite Mr. Morales “prudent” macroeconomic policies, both the monetary fund and the World Bank say much more should be done to encourage private investment. “Bolivia has less than half the rate of private investment of most other countries in South America. There are also worries about what will happen if natural gas prices fall significantly, and whether Bolivia is simply in the midst of the typical boom-and-bust cycle that often bedevils poor countries. Bolivia’s gas exports go entirely to Brazil and Argentina on long-term contracts, meaning that sustained economic problems in those countries could eventually spell problems for Bolivia. But a greater concern is over a low level of investment in gas exploration, which could endanger Bolivia’s ability to maintain production levels in the future.” “This is not sustainable in the long term,” said Jose L. Valera, a lawyer based in Houston who has represented energy companies doing business in Bolivia. “The model is not designed to generate substantial profits for an oil industry that is going to then be incentivized to reinvest in Bolivia.”
Expect Parts 2 and 3 of this series to be posted on The Network in the coming days.