kadir van lohuizen/NOOR/Red​ux

Bolivia’s Populist Experiment

by robert looney

bob looney teaches economics at the Naval Postgraduate School in California.>

Published August 10, 2021


Latin America has a long history of populist experiments catalyzed by inequity, nationalism and personal political ambition, the best known of which is Argentina’s on-again, off-again obsession with Peronism. The episodes almost always set in motion a destructive cycle, beginning with the adoption of expansionary macroeconomic policies including higher public expenditures, mandated wage increases, and a manipulated foreign exchange rate designed to reduce import costs.

These policies initially increase consumption and investment, spurring higher growth — and popular support. Then bottlenecks such as a lack of foreign exchange set in, leading to current-account and budget deficits. To mask the bad news, the government expands the money supply, business-as-usual inflation morphs into hyperinflation and the economy eventually slips into free fall.

Is Bolivia the Exception?

Bolivia, under the leadership of Evo Morales, the first indigenous Bolivian to run the country, looked like a prime candidate to ride the boom-and-bust cycle. But Bolivia has escaped the trauma (at least so far). That’s in part thanks to the fact that while Morales certainly talked the populist talk — he had been a labor organizer and defender of coca farmers — he generally didn’t walk the walk. Indeed, beginning in 2006, his newly elected administration pursued a pragmatic economic strategy that for the first time in the country’s history focused on the needs of Bolivia’s poor. Equally important, then Finance Minister Luis Arce managed to hold the line with an orthodox monetary policy to minimize the risk of serious inflation.

True to the rhetoric that propelled him to office, Morales undertook sweeping constitutional reforms that fundamentally altered the role of the state, tax structure, private property rights and management of Bolivia’s natural resources. As described in its initial five-year development plan in 2006, the government aimed to redistribute wealth and income — in particular, the export earnings from the oil, gas, hard-rock minerals and agricultural land held by the elite — to Bolivia’s oppressed masses. That was used to justify nationalization of key export industries along with the seizure of idle land.

The plan’s early success at boosting Bolivia’s economy should not have been a surprise — remember, Latin American populism generally flourishes until the bills come due. And in any event, the initial boom was aided by the global 2005-2014 commodity supercycle. Export earnings rose from $2.9 billion in 2005 to $12.9 billion in 2014, which enabled Bolivia to generate strong surpluses both in its balance of payments and its budget.

But luck was only one source of Morales’s success. While virtually every government has a hard time resisting white elephant investments in flush times — the investments that cement political support with jobs, profits and bribes — this government largely resisted the impulse. And the accumulated nest egg that remained after the commodity boom ended allowed the government to buffer the shock and continue to ramp up investment, notably in physical infrastructure. Public investment reached $7.4 billion in 2017, up from $1.0 billion in 2006.

The bottom line was impressive. Economic growth, which averaged 2.1 percent annually for 1980-2005, increased to 4.7 percent for 2006-2019 — a remarkable number for Latin America. Overall investment rose from 16 percent of GDP to 19 percent. Meanwhile, the price pressure that has signaled the end of previous Latin American experiments in populism, was conspicuously absent. Inflation averaged just 4.8 percent.

Wait, there’s more good news. Rapid economic development in the past half-century has almost always been accompanied by a widening of the gap between rich and poor. Morales beat the seemingly inevitable through targeted poverty reduction programs that included cash transfers to pregnant women, the elderly and low-income families with children, along with substantial increases in the minimum wage. World Bank data show the poverty level declined from 62 percent of the population in 2002 to 35 percent in 2018, and extreme poverty fell from 37 percent to 15 percent.

While Morales clung to power through a convoluted series of political power plays until the election of 2019, his economic model hit diminishing returns. Arce now faces familiar problems that Morales had so long been able to finesse.
Winter of Discontent

Bolivia’s economic fortunes did begin to wane late in the past decade — and, by no coincidence, so did Morales’s popular support. While Morales clung to power through a convoluted series of political power plays until the election of 2019, his economic model hit diminishing returns. Public spending on investment continued, but so did the decline in export revenues resulting from falling global oil prices, to which Bolivian natural gas exports to Argentina and Brazil are pegged. Other sources of revenue were scarce, given that Morales’s policies, with their forcible seizure of land and nationalization of industries, had alienated both the business sector and foreign investors reluctant to take their chances on promises of “reasonable” compensation.

Foreign direct investment as a share of GDP declined from an annual average of 5.3 percent in the 1990s to 2.3 percent from 2010 to 2020. By the time of the chaotic 2019 elections, FDI had actually turned negative. The magnitude of the problem is reflected in the 2021 Heritage Index of Economic Freedom, where Bolivia ranks 172nd of 178 countries, just ahead of Eritrea and Zimbabwe.

Luis Arce, Bolivia’s new president (Morales’s minister of economy and public finance from 2006 to 2017 and now leader of Morales’s old party) has promised to return to state-led development and restore programs suspended under the more conservative interim government, particularly those aimed at poverty reduction. But this time he will not have the tailwinds from a global commodity boom to ease the pains of redistribution. Actually, he faces a new and ominous headwind: thanks to the pandemic, the economy contracted by 7.7 percent in 2020. And, with just 12 percent of the population fully vaccinated, the shadow of Covid-19 isn’t going away anytime soon.

With or without Covid-19, the force behind Morales-style populism is losing vitality. The electoral strength of the rural protesters that helped boost Morales to power 15 years ago has been diluted by flight to the cities. And an increasingly urban electorate will use the ballot box to vent their frustrations over any shortcomings in state provision.

Arce now faces familiar problems that Morales had so long been able to finesse. The new president’s commitment to rule for all Bolivians will be difficult to turn into practice, as it requires reconciling the interests of the poor and the already alienated business class. Economic management may need to be more orthodox than under Morales, given that the socioeconomic damage from Covid-19 could persist for years.

Arce’s ace in the hole is Bolivia’s deposits of lithium, a key component of the batteries that underpin the global transition from fossil fuels to wind and solar power. That Bolivia has great potential as a lithium producer is beyond question: It’s located (along with Chile and Argentina) in South America’s “lithium triangle,” which accounts for almost 45 percent of global reserves.

But this ace is likely to stay in the hole a while longer. Landlocked Bolivia lacks the infrastructure to connect remote lithium-rich areas in its south with the nearest ports, which are in Chile. What’s more, it lacks the capital and the (largely foreign) know-how needed to mine and refine lithium without major environmental costs.

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It is hard not to conclude that the chickens have come home to roost, that a Bolivian government drawing its legitimacy from populist promises seasoned with a dash of anti-Americanism and anti-colonialism was doomed to failure. But it is also hard not to conclude that, unlike most Latin American populists, Morales had his heart in the right place — and that his charisma and administrative competence kept the peaceful Bolivian revolution on track much longer that his critics predicted. His successor deserves the benefit of a doubt.

main topic: Region: Latin America