Daily Archives: February 26, 2019

Bolivia’s Problem Is Macroeconomics, Not Socialism [evo is the F problem! with his lies, corruption, incompetence!]

Bolivian Thoughts opinion: evo has manipulated macroeconomic statistics, has destroyed the INE, inserting acolytes that will tamper data and use other “indicators” to produce the populist mirage … After 13 years of absolute control of ALL State powers, after receiving loan forgiveness from the international community, after extraordinarily high international prices on all our commodity exports, that is over $180 billion dollars in revenues for the Bolivian government, name a single sustainable job crated? name a successful billionaire state-owned enterprise he “created”?! name one! Instead we witnessed bonuses that are pure demagogue and cannot be sustained now that the markets have low prices on our raw materials … however, we can witness how narcotrafficking bloomed nationwide, attached with money laundering, kidnappings, violent murders and rampant smuggling. That is evo’s legacy! Author of the article below tries not to refer to “socialism” and blame macroeconomics?! certainly has not read about why Lula is in prison, how poor and hungry are the Venezuelans … Nicaraguans, Argentinians … it is the manipulation, robbery of the so-called “socialists of the 21st century” … their demagogue along with the stupid manipulations of the socialism that hit Latin America! Bolivia’s problem is the large majority of voters who ignore all that I outlined here, it is because of that people that we ended up with these corrupt, demagogue regimes!

Noah Smith reports for Bloomberg:

Countries that rely on commodities, external financing and currency pegs are always vulnerable to turns in markets.

Bolivia might be the world’s most successful country that calls itself “socialist” (the Nordic countries generally eschew the label). When Evo Morales was elected president in 2006, he explicitly repudiated capitalism and aligned Bolivia with Hugo Chavez’s Venezuela and Fidel Castro’s Cuba. Since then, Morales has redistributed income through various government programs, raised minimum wages substantially, and nationalized industries such as telecommunications, oil and electricity.

Much to the chagrin of socialism’s detractors, the strategy worked. Even as Venezuela fell into economic ruin, Bolivia entered an unprecedented period of sustained rapid growth:

By 2017, Bolivia was 42 percent richer than when Morales took office. But for the average Bolivian, the results were even better — the country’s Gini coefficient, a measure of income inequality, fell by more than 19 percentsince Morales took office. Poverty has declined by 25 percent since he was elected. Although Morales has showed some disturbingly authoritarian tendencies, including doing away with presidential term limits, economically he seems to have turned his country around.

But Bolivia’s success may not prove durable. The country is at risk of falling victim to a force that bedevils socialist and capitalist economies alike — macroeconomics.

This is the argument in a new working paper by economists Timothy Kehoe, Carlos Gustavo Machicado, and José Peres-Cajías. They note two disturbing facts about Bolivia. First, since 2008, its exchange rate has been effectively pegged against the U.S. dollar:

This could set the stage for a currency crisis if Bolivia isn’t careful.

In order to maintain a dollar peg, a government has to buy and sell dollar-denominated assets. When there is pressure for the dollar to strengthen — and thus for the domestic currency to weaken — the government has to sell dollar-denominated assets and then swap those dollars for the domestic currency (in this case, the boliviano). If Bolivia ever runs out of dollar assets, it won’t be able to stop the boliviano from depreciating, resulting in a very rapid crash in the currency’s value.

Bolivia is not running out of foreign exchange reserves yet. It accumulated reserves from the start of Morales’s tenure through late 2014, when the trend reversed:

Reserves have now fallen to about half of their peak levels. That’s not in the danger zone yet, but if the trend continues, things will get worrisome.

A currency plunge is an especially frightening prospect because of Bolivia’s increasing external debt. Though Bolivia hasn’t yet borrowed nearly as much from other countries as it did in the 1980s (relative to the size of its economy), the amount that Bolivia’s government owes in foreign currencies has approximately quintupled since 2007. The country’s total external debt has gone up by about 30 percent:

If Bolivia is ever forced to abandon the dollar peg and the boliviano drops in value, this foreign-currency debt could become very costly to service. Bolivia could then be forced to choose between two disastrous alternatives — a sovereign default, or Venezuela-style hyperinflation. A default would probably be less damaging in the long term, but in the short term it would bring an end to Morales’s economic boom.

What could put so much downward pressure on the boliviano that the government runs out of foreign-exchange reserves? A commodity price drop. Bolivia, though much more diversified than oil-dependent Venezuela, still relies on commodities for the majority of its exports, with natural gas and zinc ore taking the largest shares. Lower global commodity prices are probably the reason that Bolivia has been running down its reserves since 2014 If those prices don’t recover and Bolivia isn’t foresighted enough to slow its external borrowing and adjust its currency downward, it could suffer the classic fate of resource-dependent emerging markets — a sudden stop of private investment, followed by abandonment of its exchange rate peg, a government default and a deep recession.

In other words, there are economic forces that no system — either socialist or capitalist — can overcome. Bolivia’s fundamental limitation is that it’s economy depends on exploiting natural resources instead of industry. Resource-dependent economies tend to spread the wealth around, which is generally a good thing. But when the populace gets used to a certain standard of living, governments often respond by trying to overvalue the currency so as to be able to afford lots of imported goods. That can set countries up for a fall when the commodity cycle turns, as it always does. This is one aspect of the political-economic difficulties that tend to afflict resource-exporting countries — the so-called resource curse.

So unless commodity prices turn around, the world’s most successful socialist country could be in trouble. Opponents of socialism will no doubt cry victory in the event of a Bolivian collapse. But the real culprit will be the iron laws of macroeconomics.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net