Investing & Day Trading Education:  Day Trading Academy

The Economic Third Way In Bolivia Is Under Pressure

220px-LaPaz_Plaza_Pedro_Di_Murillo_10.2004Bolivian President Evo Morales is observing with increasing alarm, as one socialist government after another falls to the forces of democracy in Latin America. Brought low by collapsing commodity prices and ill advised economic policies, the leftist regimes around South America are coming under increasing pressure to make reforms. Slowing global growth offers little hope, that these nations will be able to engineer a turn around, without abandoning some long held principles.

The business sector remains weak in Bolivia, conveyed by years of government interference and a weak judicial system. Artificially low prices for gas within the country, have become a burden to a government attempting to remain solvent. Bolivia has so far escaped some of the worst effects of a region wracked by an economic downturn, that threatens to topple the remaining leftist leaderships.

Macri in his inauguration as President of Argentina, on 10 December 2015.

Macri in his inauguration as President of Argentina, on 10 December 2015.

The populist government of Argentina lost re-election in November. After 12 years of steady government intervention in the domestic economy, the voters finally tired of the relentless propaganda that in the end failed to deliver what was promised. The tightening grip on power by former President Cristina Fernandez de Kirchner, was constricted by imposed term limits. Unable to secure power for her hand picked successor, she now is observing the about-face of many of her socialist policies.

Elections in Venezuela, have returned the National Assembly of the country to the opposition. Although the government there is attempting to deny the coalition the needed two thirds majority in the legislature, the balance of power has already begun to shift away from the leftists Bolivars in power since 1999. The use of the Supreme Court in denying 4 delegates from taking their seats in the Assembly does buy the government time, but to what end? It is unlikely economic prospects will change much, before new deputies are elected and seated.

Brazilian President Dilma Rousseff receiving a Hugo Chávez picture from Nicolás Maduro at the Palácio do Planalto, in Brasília, Brazil.

Brazilian President Dilma Rousseff receiving a Hugo Chávez picture from Nicolás Maduro at the Palácio do Planalto, in Brasília, Brazil.

In Brazil, leftist President Dilma Rousseff managed to be re-elected in 2014. However, she is now being accused of manipulating the federal budget, to hide the rising deficits in the run-up to the vote. Facing impeachment against the backdrop of an economy in full decline, her political survival is in doubt.

Tough decisions are needed to reverse a fiscal crisis, that is largely of her own making. Massive government spending during her first term, has brought financial ruin to her country. She seems to have little enthusiasm to move in a new direction, as her government deals with charges of corruption and general incompetence.

In Ecuador, President Rafael Correa has already determined that it might be best that he sit out the next election cycle. Due in 2017, the wily Correa would rather not be held responsible by the voters for the economic results of a mismanaged economy. He is hopeful that by 2021 when he will be eligible to run again, prospects for his country will have improved. President Correa is now proposing changes to the constitution that will allow him to be re-elected indefinitely, assuming he returns to power later.

Current President, Evo Morales

Current President, Evo Morales

President Morales who won a third term in October 2014, is presiding over a better economic situation in Bolivia. He is therefore unwilling to release his grip on power, even temporarily. Instead he is preparing for a referendum to be held in February. The national vote will propose a constitutional amendment, that will permit the indefinite re-election for Mr. Morales. The bold move does risk social unrest, in the open grab for even more authority by the government.

Morales has maintained a public approval rating above 50% by wisely implementing some fiscal reforms, that prevented the economic disaster seen in other countries like Argentina, Brazil and Venezuela. This has somewhat alleviated the pain caused by the near collapse in global commodity prices. Unlike his colleagues in the aforementioned countries, he labored to keep debt levels lower, thus allowing his government some breathing space. Public debt is only 33% of the domestic economy.

The restrained policy also permitted the government to maintain a higher level of foreign exchange reserves, than all other nations in Latin America. Bolivia already has the money necessary to pay the bill on imports for all of 2016.

People in La Paz city centre.

People in La Paz city centre.

Surprisingly, Bolivia managed the fastest rate of growth in the region last year. It has a low inflation rate of 5% and is keeping a handle on government debt. President Morales in power since 2006, has politically benefited from the 25% reduction in poverty since 2001 and the corresponding 307% rise in average income.

However, the country now faces the same dilemma as its neighbors. Dependent on natural gas for 45% of total exports, there will inevitably be the need for far larger cuts in social welfare programs. Public spending at present constitutes 36.1% of GDP (Gross Domestic Product). Tax revenue only equals 22.9% of GDP. What effect these unpopular actions will have on the government is not in doubt. It will obviously increase voter dissatisfaction.

The temptation to follow the path of least resistance will be hard to avoid. That would be a running down of international reserves and then creating money just to stay solvent. This ushers in hyperinflation, which is the final act before the widespread social unrest arrives.Bolivia_(orthographic_projection).svg

Luckily for Bolivia, Morales did not spend wantonly during the years of the commodity boom. He did not saddle the country with unsustainable domestic and international debt. In a wholesale rejection of the IMF (International Monetary Fund) and the World Bank he was unwilling to take out loans that were easily available during the years of plenty.

Morales as Bolivia’s first indigenous leader, has embarked on what has been described as a Third Way. Although it is true that there is full state control over the natural resources of the country, the vast majority of economic activity and employment remains outside government management. The informal part of of the economy is mostly made up native Indians, who have benefited the most from this benign neglect.

Young miners at work in Potosí

Young miners at work in Potosí

These small enterprises have flourished under an environment of a banking system that has extensive savings and low levels of overall debt. In Bolivia as in Peru, the poor underclass still has the opportunity to turn a little business into a much larger concern. This phenomena is what permits Bolivia some insulation from the turbulent world markets.

President Morales has also refrained from the wholesale government expropriation of foreign owned businesses and property. He has been selective in this endeavor, focusing mostly on natural resources especially natural gas and oil. Nationalization of just over 20 main companies is the extent of the effort. This compares favorably to Venezuela, where 1,168 foreign and domestic companies were confiscated by the government between 2002 and 2012.

The Bolivian government under Morales had already imposed a new constitution on the country in 2009. This measure expanded the executive authority of the president and nationalized various sectors of the economy. President Morales had previously been limited to serve just two terms.

The Supreme Court Building in the capital of Bolivia, Sucre.

The Supreme Court Building in the capital of Bolivia, Sucre.

The rate of private investment inside Bolivia is still among the lowest in Latin America. Foreign direct investment remains concentrated in natural resources. This situation is unlikely to change in a era of declining prices for commodities and general resource extraction.

It is important to note that half of all Bolivians still live in poverty and 60% of all employment in the country remains informal. As a result, fuel prices are controlled and subsidized by the government. It is the same case with electricity. This is the reality that faces the government when there is a need to reduce social spending, due to rapidly declining revenues from the sale of natural gas.

New legislation passed in 2013 increases the state involvement in the financial sector. There are far more controls and direction coming from the government now. For example, banks are told what sectors of the economy are to be given priority in the availability of credit.

Evo Morales' inauguration as President.

Evo Morales’ inauguration as President.

Bolivia is also one of the world’s 3 main cocaine producing countries. Thanks to geography Bolivia has become a important transit zone for cocaine originating from Peru. This state of affairs contributes to the significant corruption that exists throughout the country. There is the additional problem of the lack of protection for private property interests. There are incidences of mob invasions of a number of rural and mining holdings where local authorities did little to combat or prevent.

There is no doubt that Bolivia as well as the rest of Latin America, will be facing new economic challenges moving ahead. Unlike much of the rest of the region, the country is still blessed with a stable government. The question remains how lasting will the present public arrangements be in the face of a declining economy, coincided by a government attempting to tighten its grip even further.

Post a Comment

Your email address will not be published. Required fields are marked *