Commodities Economy in Times of Crisis: Bolivia after the Global Financial Meltdown

Abstract

During the last two decades of the 20th Century the economic reality of many Latin American nations changed after a disappointing period of neoliberal policies that aggravated their macroeconomic performance and stability. The 21st Century has witnessed increasing criticism and concerns about the effectiveness of these policies, as well as a raise of leftist governments in the region. Among them, Bolivia has implemented during the administration of Evo Morales of the Movimiento al Socialismo (MAS) a set of policies aimed to change the country's institutional and economic arrangement, and has embraced alongside Venezuela and Ecuador a development strategy that is usually referred as 21st-century socialism. This strategy has focused on balancing the interest of the diverse country's ethnicities and re-organizing institutions that have historically marginalized the indigenous sector. The government has shifted from past neoliberal policies to giving the state a more relevant role in the economy, nationalized the hydrocarbons sector, increased transfer payments to help a vast segment of the population living in poverty, and passed a new Constitution. In 2008 the international financial system was heavily tested by a major financial crisis that originated in the United States. Millions of American borrowers failed to pay back the mortgage loans that had been easily acquired in the previous years during the so-called real estate bubble. The banking system was shaken and liquidity issues forced federal regulators in the U.S. to rescue several financial institutions trying to provide stability to the financial system and the American economy. In a globalized economy it was just a matter of hours for this financial disruption to expand worldwide. This global financial crisis caught Bolivia in the middle of its reform process, and its economy was heavily exposed to the imbalances of the financial system, but the country has managed to overcome this situation with relative success. The main objective of this chapter is to explore the factors that made it possible for the Bolivian government to pass through this critical situation. The study argues that rather than a sound and specific economic plan Bolivia has enjoyed a period of high commodity prices, which has allowed the Morales administration to obtain huge revenues from the state-controlled natural resources, and use large government spending in social programs to alleviate the negative consequences of the crisis. In other words, while many developed countries have been suffering the consequences of the shocks in global financial markets and have faced serious liquidity problems, Bolivia has enjoyed a period of large inflows of cash from the high price of its export commodities. This has served to lessen the negative effects of the crisis, but also to hide some of the structural problems of the Bolivian economy, which have not been resolved yet.The first part of the chapter goes through the economic reforms implemented under the Morales administration. The second section explores how Bolivia has experienced this crisis, and the final part summarizes the main findings and possible future implications for the Bolivian economy.