Nicole Bailey Bolivia and the Global Financial Crisis Wilson Journal of International Affairs: Spring 2012

Introduction Between 1980 and 1985, Bolivia suffered from an annual inflation rate of 569.1% hundreds of percentage points higher than that of other comparable Latin American countries at the time, such as Argentina and Brazil. i Now, mere decades from a time when economic experts like Juan Morales and Jeffrey Sachs described the nations vulnerability as extraordinary, Bolivia is widely regarded as an exemplar of a developing nations positive economic potential. Simply, in order for a country to work its way up the development ladder, it needs to achieve economic growth. More importantly, however, a country must maintain this economic growth, even in the face of an adverse global financial climate. Because of globalization, the potential scale and strength of economic downturns have increased, which has simultaneously heightened the risk for all players in the international market. Developing countries must be players in the international market in order to compete and grow, further complicating economic policy decisions in these countries. Bolivia, a developing nation that not only survived the 2008 global financial crisis but also emerged in a better economic position than before the crisis, is a particularly salient case study. Bolivia is in many ways a standard developing nation. The World Bank classifies it as a lower middle income country with a relatively high, although recently reduced, percentage of the population at or below the national poverty line: 37.7%.ii Given Bolivias position on a

disadvantaged rung of the development ladder, its ability to weather a financial crisis suffered by even the wealthiest and most powerful nations is worthy of further investigation. The evidence indicates that Bolivia was better able to withstand the global financial crisis of 2008 than most other countries as a result of macroeconomic management policies oriented towards economic diversification.

Bolivia Advances during Global Crisis In the late 2000s, blows to the United States financial sector rippled through the global economy. A housing downturn in early 2007 was followed by the bankruptcy of the largest U.S. subprime lender, at a time when heavy investments had been made in securitized debt from these subprime loans. Banks and hedge funds with investment portfolios filled with mortgage-backed securities began to struggle, from the large American investment bank Bear Stearns to major banks in the European Union like Frances BNP Paribas. As a result, the European Central Bank and, later, the U.S. Federal Reserve were forced to provide low-interest credit to their member banks. Central banks around the world attempted to coordinate and inject liquid credit into the international market, but foreclosures and mortgage failures continued to rise through August 2007. At this point, nations were left little choice but to intervene with some of their most essential private institutions. These interventions ranged from the nationalization of lending firms to bank bailouts. The Dow Jones Industrial Average, measuring the thirty largest U.S. companies combined stock values, fell to less than half its market peak by February 2009. Widespread unemployment and the implementation of protectionist fiscal policy, the latter of which was contrary to G-20 Finance Summit promises made in November 2008 between the 20 nations with the largest economies, became a reality for even the most developed nations. These financial meltdowns set of a series of political collapses, the first of which occurred in January 2009 in Iceland, followed by breakdowns in the governments of Belgium and Latvia. The G-20 became established as the main global economic coordinating body in September 2009, and member states pledged greater support to the International Monetary Fund (IMF). However, the

G-20 meeting in 2010 revealed that countries widely disagreed on these policy responses and could reach little compromise. Although many developed nations were hit hard by the financial crisis, many developing nation-states felt the impact just as, if not more, strongly.iii Nevertheless, Bolivia weathered the economic meltdown relatively well according to multiple indicators. The most recent figures show that macroeconomic infrastructure spending in Bolivia has not suffered since 2007. The percentage of Bolivias rural population with access to water from an improved source continued its steady upward trend through 2009, increasing significantly faster than the worlds average and at almost twice the rate of the averages in the Latin American and Caribbean regions.iv In Bolivias urban areas, the percentage of the

population with adequate access to sanitation (excreta disposal) facilities also continued to rise through 2008. The nations poverty count has actually decreased overall since 2005. The continued decline in the mortality rate of children under five indicates improvements in the countrys health system during the financial crisis; the decrease between 2005 and 2009 was significantly steeper than the average rate of both the Latin American and Caribbean region and the world. Between 2007 and 2008, mobile and fixed-line telephone subscribers per 100 people increased by more than 30% in Bolivia, more than twice the world average. In terms of monetary factors, total external debt stocks including long-term debt, IMF credit, and the amount of short-term debt as a percentage of gross national income (GNI) in Bolivia also decreased to 34.3% in 2008, a trend that had begun in 2004. Most importantly, though, Bolivias GDP growth as an annual percentage was greater in 2009 than in 2007. In 2009, Bolivias GDP growth was marked at an annual rate of 3.4%, while the worlds average had fallen to -1.9%. v These macroeconomic improvements are evidence of Bolivias relative and surprising success despite the 2008 financial crisis.

Bolivias Historical Perspective To give Bolivias latest success some context, one must only look back a few decades in order to see a contrasting example of the countrys economic failure. While the 1980s proved to be a tough economic period for the Latin American and Caribbean region as a whole, Bolivia was disproportionately shaken, as shown by the severe inflation mentioned above. The Bolivian hyperinflation of 1984-1985 was unique in that it was the only hyperinflation incident not caused by war or revolution in the 20th century. vi Development expert Jeffrey Sachs asserts that this phenomenon resulted from the chronic political instability in Bolivia at the time, which was responsible for highly inconsistent and extreme fiscal policies. The massively unequal

distribution of wealth within the nation and the lack of coordination among its economic sectors only increased sector antagonism. In other words, all industries within the country competed against one another for shares of the profit instead of the general developed world model in which industries synchronize to operate within a whole national system. The classic example of a smoothly operating system is the network of relatively coherent large-scale commerce regulations in the U.S. In particular, the mining industry suffered, and Bolivia was unable to take advantage of much of its raw export potential in commodities like tin. This turmoil only exacerbated the economic state by discouraging private investment and strengthening a positive feedback loop for long-term failure.vii The Bolivia that floundered helplessly in the crisis of the 1980s was not the same Bolivia that effectively addressed the global economic downturn, which had the potential to be the worst financial meltdown in the nations history. In order to determine what most contributed to Bolivias resiliency in this global crisis, an examination of the nations recent economic and political history is necessary. Bolivia,

officially the Plurinational State of Bolivia, currently has a population of about 9.7 million and a GNI per capita of $1460.viii Although it has a history of political and economic exclusion, Bolivias political and social climate has changed since Evo Morales was elected as Bolivias first indigenous president in 2006. Moraless campaign platform and subsequent policies have included measures to empower formerly excluded groups, such as the rural populations, and to decentralize the government. The fact that he was indigenous added legitimacy to his popular appeal, and that popularity secured him reelection in late 2009. Furthermore, the government party has since gained power in the Plurinational Assembly, the main legislative body, and in various departmental and municipal positions.ix In the late 2000s, Bolivias relative political stability also contributed to economic growth. Because the nation is a major exporter of many natural resources, it had the latent potential to be economically successful in certain industries.x Until recent years, however, Bolivia lacked the state effectiveness to implement strong macroeconomic policy. By

centralizing economic coordination to some degree, Bolivia could alter the status quo, which involved each sector ignoring the adverse effects its actions might have on other sectors within the Bolivian economy. The new government was able to encourage relatively healthy and stable growth across the market by correcting for these externalities outside of the realm of specific sectors and by regulating on a larger-scale than ever before.

Managing the Meltdown It was Bolivias fiscal policy during the global financial crisis that enabled it to more effectively avoid the economic meltdown experienced by other countries. For example,

Bolivias hydrocarbon trade boomed until 2004, when natural gas exports to Brazil reached

contract-established levels.xi At that point growth rates declined but remained positive for an annual average of 6.5% between 2005 and 2008. However, in 2009, natural gas exports fell dramatically (-12%) due to reduced demand from Brazil and Argentina, both of which were struggling with the global financial crisis. What enabled Bolivia to survive such a significant drop in demand for one of its major exports was the large increase in hydrocarbon tax revenues, which the Bolivian government drew during the 2000s. As a result of this policy the

hydrocarbon tax share of total Bolivian tax revenues rose from 11% to 33% between 2004 and 2008. By keeping debt levels under control, the countrys government was able to stockpile the account surpluses from natural gas exports prior to the global financial crisis. These surpluses led to a massive increase in the foreign exchange reserves in the Central Bank Of Boliviafrom $1.1 billion in late 2004 to $7.8 billion in September 2008. xii Bolivias success in compensating for short-term losses during the economic meltdown of the late 2000s by drawing upon reserves from previous surpluses is a model that many developing nations which export major commodities like natural gas could emulate. To offset the slowing of economic growth due to the reduction in demand for its natural gas by Brazil and Argentina, Bolivia was also able to fall back on other industries that had recently experienced a boom. Its construction and mining sectors were a significant source of economic growth in Bolivia at the end of the decade. Increased investment in both public and private residential spheres, likely the reason for the populations aforementioned improved access to sanitation and clean water, yielded very high construction growth in 2009. xiii Another initiative by Moraless government was the development of a major mining projectthe San Cristobal. The mine is now operating at maximum capacity, and the increase in export volumes has coincided nicely with rising international prices for raw materials. As a result, Bolivia has

grown as a major exporter of zinc, gold, and silver. xiv The countrys success in diversifying its economy shows that developing nations can benefit from the expansion of export trade beyond single-commodity natural resources. Diversification has also been emphasized in Bolivias agricultural sector, where soybeans and sugar have historically been the states most important commodities, with soybean products making up a slight majority (~51.6%) in terms of dollar value for total major Bolivian agriculture or food exports in 2008.xv As recently as 2005, soybean products made up about 63.4% of Bolivias top 20 agricultural exports in terms of dollar value. When Evo Morales became president in 2006, the soybean domination of the market weakened greatly, dropping to under 60% within a year.xvi At this rate, the soybean product share of the Bolivian agricultural export market will soon no longer be a majority. The shrinking dependence on a single form of produce enhances Bolivias capacity to effectively address a potential economic food crisis. More

broadly, Bolivias increasing agricultural economic diversity encourages the representation of numerous agrarian interests in the international economy, thus promoting rural participation in the political process and strengthening` the authority of the state to implement its macroeconomic policy.

Bolivian Stimulus and Surplus Aside from the previously discussed general measures towards diversification of Bolivias economy, the government took direct responsive action to the perceived potential strains caused by the global financial crisis countercyclical fiscal policies. Minor sector-specific losses that may have occurred in 2008 were already beginning to reverse with general increasing activity growth and employment in 2009. The most recent figures show that Bolivia was able to

secure a fiscal surplus 2.25% of GDP in the first quarter of 2009. Household incomes may have experienced short-term decreases, but remain significantly higher than those of 2005 prior to the peak of Bolivias export boom growth.xvii In other words, the most recent Bolivian policies have been largely successful. In order to offset the negative impacts of the economic downturn, countercyclical fiscal policies had to be implemented. Specifically, the government took advantage of the stockpiled surplus by establishing three types of financial bonuses that would support the nations most struggling groups. The fiscal cost of the bonus program amounted to about $363.9 million (2.27% GDP) and included Renta Dignidad, a transfer to the elderly, Bono Juancito Pinto, for schoolchildren, and Bono Juana Azurduy, for pregnant women.xviii In addition, other

government-created bonuses were designed to provide incentives to increase public consumption and aggregate demand and to promote domestic economic stability. Deposits and lending in the Bolivian financial system have since increased and financial entities were able to accumulate liquidity reserves during the 2000s.xix These economic incentives have stabilized the government and the economy. As a result, Bolivia is not immediately threatened by collapse and the government has not been forced to nationalize or bail out private institutions. Bolivia was able to increase public spending and further protect its population from the harshest shocks of the global financial crisis while only moderately increasing public debtthe ideal consequence of implementing the countercyclical fiscal policy.

Potential Objections There is sufficient reason to reject other, non-internal explanations for Bolivias described economic success. Although one might propose the counterargument that external

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monetary policy is responsible for Bolivias recent economic success, the evidence shows that private investment cannot be the primary cause. In fact, private investment remained modest throughout the late 2000s, likely due to the uncertainty created by the Bolivian governments structural reforms.xx The net development assistance received by Bolivia during this period was far below the world average, as it had been for several decades. Foreign direct investment (i.e., FDI, long-term participation) and portfolio investment (e.g., the purchase of stock or acquisition of assets) flows in Bolivia actually fell significantly during the crisis, contrary to the relative consistency expected for these flows.xxi Remittances also declined somewhat as a result of the global crisis. In addition, the United States suspended Bolivia from the Andean Trade Promotion and Drug Eradication Act in 2008, meaning that Bolivian exports lost some preferential treatment in U.S. markets and faced a weaker international economic position. xxii International fiscal policy, therefore, acted as a barrier to Bolivias economic growth and development. Bolivian success occurred not as a result of remarkable international support, but more likely in spite of its absence.

Conclusion The case study of Bolivia has larger implications for the economic policies of the worlds developing nations. Other countries could use Bolivia as an example and implement similar policies to better protect their domestic economies from global financial shock. In Bolivia, natural gas export surplus reserves were used to stimulate the economy and support the national population instead of solely filling the pockets of international corporations. The countrys national budget for 2009 included a 20.6% increase in public investment and a 12% rise in the wages and salaries of public servants.xxiii The only requisite macroeconomic successes yet to be

realized in Bolivia are in large part remnants of the failed regime of decades past, which failed to effectively protect Bolivia from financial crisis in the 1980s. Among these goals are the creation of a more stable climate to encourage private investment as well as a focus on developing laborintensive export products for foreign markets to create long-term jobs. In addition, Moraless high popularity is boosted by activists of the international community, who hope that he will maintain his public spending priority and perhaps even take additional measures to eradicate Bolivias extreme poverty.xxiv Given the effectiveness of the policies already implemented, further reforms are likely soon to follow. Many developing countries are already turning towards economic diversification as an economic model. In 2010, the UAE Minister of Economy declared that the development of nonoil industries would be a priority. xxv The growing technology and education sectors in Abu Dhabi have also encouraged its government to minimize single-commodity dependence.xxvi The evidence suggests that developing countries with adequate resources to implement countercyclical fiscal policy may be able to withstand an economic downturn by reducing their international debt and their dependence on the International Monetary Fund while simultaneously working towards diversifying the economy and building resource reserves. A closer analysis of the nature of economic diversification is necessary to understand the implications of Bolivias policy during the economic downturn. Making a distinction between rural or agrarian factors from urban or industrial ones could prove very useful in understanding national variations in potential among developing nations to manage such a policy. Moreover, this analysis is limited to a focus on the domestic circumstances of Bolivias recovery. A more detailed examination of external factors such as the history of the countrys dependence on the IMF, the relative presence of NGOs, and changes in foreign aid amounts and sources over time

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must be applied to Bolivia and other developing nations. Expanding this literature is crucial not only for understanding the factors and policy prescriptions surrounding the 2008 global financial crisis in historical context, but also for providing wealthy nations like the U.S. with a basis for a more sophisticated and informed picture of the conditions of growth and progress in developing nations. A more comprehensive analysis will contribute to a healthier collaboration between the richest and poorest countries of the world.

Morales, Juan Antonio & Jeffrey D. Sachs. Bolivias Economic Crisis. Developing Country Debt and the World Economy, 1989. The National Bureau of Economic Research. Web. 28 Nov. 2010. <http://www.nber.org/chapters/c7520>. ii World Development Indicators. Bolivia. The World Bank Group, 2010. Web. 28 Nov. 2010. <http://data.worldbank.org/indicator/all>. iii Teslik, Lee Hudson. Timeline: Global Economy in Crisis: Meltdown. Council on Foreign Relations. Web. 28 Nov. 2010. <http://www.cfr.org/>. iv World Development Indicators. v Ibid. vi Morales and Sachs. vii Ibid. viii World Bank. Latin America and Caribbean: Bolivia. The World Bank Group, 2010. Web. 28 Nov. 2010. <http://www.worldbank.org>. ix Ibid. x Ibid. xi Te Velde et al. The global financial crisis and developing countries: Phase 2 synthesis. Overseas Development Institute, March 2010. Web. 28 Nov. 2010. <http://www.odi.org.uk>. xii Ibid. xiii Ibid. xiv World Bank. xv FAOSTAT. Commodities by Country: Bolivia. Food and Agriculture Organization of the United Nations. Web. 28 Nov. 2010. <http://faostat.fao.org>. xvi Ibid. xvii Ibid. xviii Te Velde, et al. xix Ibid. xx World Bank. xxi Te Velde, et al. xxii Kozameh, Sara. Bolivias Economic Success. Center for Economic and Policy Research. YES! Magazine. 16 Dec. 2009. Web. 28 Nov. 2010. <http://www.yesmagazine.org/new-economy/bolivias-economic-success>. xxiii Te Velde, et al. xxiv Kozameh. xxv Al Baik, Duraid. Diversification helped UAE survive crisis. Gulf News. Al Nisr Publishing LLC, 2010. Web. 28 Nov. 2010. <http://gulfnews.com/business/economy/diversification-helped-uae-survive-crisis-1.719341> xxvi Mesbah, Rana. Prime Minister of Saxony meets with ADEC to discuss scholarship opportunities. AME Info FZ LLC/Emap Limited, 2010. Web. 28 Nov. 2010. <http://www.ameinfo.com/249882.html>
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