Bolivia's economy under Evo Morales

By Laura Zaccagnino
December 14, 2012

“Everything in the economic policy making of the Morales government goes against growth, yet the numbers are still extraordinarily good,” argued Juan Antonio Morales, former president of the Central Bank of Bolivia (1995-2006) and one of the country’s most respected economists.  In a public discussion at the Inter-American Dialogue on December 14, 2012, Morales unpacked this “paradox” embedded in the Bolivian economy under President Evo Morales.  

 Since 2000, Bolivia has experienced stable growth at rates of four to five percent per year—exceeding the regional average. Macroeconomic indicators are solid, fiscal restraint is the new norm, and the runaway hyper-inflation that plagued the country for so long is vanquished.  The economic turnaround shows. La Paz looks completely different than it did twenty years ago, with a booming service sector and more and more Bolivians living “the good life.”

However, when one looks beneath the surface, the situation is not as rosy as it appears. Morales argued much of Bolivia’s growth can be explained by an international context favorable to its wealth of primary commodities. He cited an eight-fold increase in exports from 1990 to 2001 alone. As the price of natural gas and metals, two of Bolivia’s main natural resources, skyrocketed, Bolivia has benefitted from a huge “export premium,” rewarding the country “beyond its efforts.” However, the problem with commodity-driven growth, he argued, is it is volatile and hence, unsustainable.

Former Bolivian minister of finance and mayor of La Paz, Ronald MacLean Abaroa, agreed that the recent commodities boom is masking the deleterious effects of the government’s populist “anti-development” policies. In an effort to redistribute income, for instance, the government has nationalized various sectors, creating an environment of uncertainty, which discourages private sector investment. Despite a huge increase in the national median income, investment rates remain at the same low levels of the 1990s. Also problematic is the economy’s lack of diversity—9 0 percent of Bolivian exports are commodities. To make matters worse, Bolivia is still highly protectionist. The Evo Morales government has refused to sign free trade agreements with both Europe and the United States and retains high tariffs on imports.

Although both experts commended the government’s efforts to reduce poverty through its conditional cash transfer programs, they warned its redistributive focus is unsustainable and ineffective.  Bolivia is one of the few countries in the world without a personal income tax, even though the government spends wildly on pensions and subsidies for selective groups, like coca growers. The main problem, Morales argued, is that the Bolivian government has pursued such redistributive policies at the expense of much needed systemic reform. He cited the example of education. Although the government has increased school access, it has done little to actually improve the quality of education students are receiving, which is essential for building human capital.

Bolivia’s economy is “a train about to crash,” warned Abaroa, as long as it continues down the path followed by the rest of Latin America’s 20^th century populist experiments.  To avoid this Bolivia must work to diversify its exports, increase investment, pursue meaningful institutional reform, and further open up its economy concluded Morales.