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Bolivia – defiant and prosperous as a result

There was a UK Guardian article yesterday (October 15, 2014) – Evo Morales has proved that socialism doesn’t damage economies – that recounted the recent economic history of Bolivia. There has been growing awareness in the Western press of what has been happening there given that the President Evo Morales has been once again re-elected for a third time, against the opposition of the financial elites in the so-called ‘first world’. A New York Times article (February 16, 2014) – Turnabout in Bolivia as Economy Rises From Instability – also noted the way in which Bolivia resisted the GFC to become a growth powerhouse in Latin America. The experience of Bolivia is a classic case of what can be achieved if a nation defies the international elites (such as the IMF and Wall Street) and carves out a path using its fiscal capacity to increase social capital and public infrastructure. When a nation can increase the real minimum wage by 87 odd per cent in a span of 8 years and see unemployment fall and real per capita income head for the stars then you know the mainstream neo-liberal mantras are wrong. Bolivia defied them and has prospered.

To get you in the mood

After a decade of playing free jazz, the, now venerable, tenor sax player from Argentina – Gato Barbieri – started his series of albums devoted to Latin American fusion.

This video is the title track from his 2003 album Bolivia. The album came out in 1973 and by then import shops in Australia were reducing the lag between international release and availability in Australia. I had already collected his earlier albums and this one seemed like tenor sax magic.

Here is a concert recorded in 2000 with Barbieri playing the title track. He is accompanied by Mario Rodriguez – bass, Frank Colon – percussion, Robbie Gonzalez – drums and Mark Soskin – piano – a pretty handy quintet if there ever was one. Barbieri was 67 years of age at the time.

And now that your sufficiently relaxed and have the anger dispelled here is a story about the IMF.

Bolivia is the poorest nation in South America.

In February 2003, military snipers murdered a young student nurse in La Paz as part of a government response to the growing public protests against the austerity that was being imposed on the Bolivian people. The shooting could be seen from the IMF building in La Paz.

More than 15,000 people marched in the streets of La Paz on February 17, 2003 protesting against the austerity and demanding that the government resign. There had been a month of solid protesting and civil disobedience leading up to the march.

The marchers included farmers, students, and industrial workers who were all faced with impoverishment in one way or another by the austerity program being planned.

The march on the Monday was accommpanied by a 2-day general strike nationwide that was organised by the peak body of the Bolivian trade unions, the Bolivian Labour Federation.

The austerity program was designed and administered by the IMF, which had captured the government in its neo-liberal trap and used the nation as its austerity ‘test laboratory’ to see what would happen when free market policies were introduced in a nation known for its collective solidarity.

Bolivia represents another testament to the shocking failure of the IMF over the last 4 decades.

The structural adjustments and fiscal austerity that were forced onto the Bolivian society were an abject failure but along the way caused massive hardship – and loss of life and freedoms. 33 people would be slaughtered by the Bolivian military in the service of the IMF in February 2003. Many many more were seriously injured.

There were shootouts in the streets between the police force which had mutineed and defied orders to attack the protesters and the military, which did the bidding for the right-wing establishment cajoled by the IMF.

No IMF official has ever been brought to court for professional negligence or worse. Many should have been.

Latin America became caught up in the recession that struck many world economies in the early 2000s. It moved from Europe in 2000 and 2001 to the US in 2001 at the beginning of George W Bush’s presidency. The sluggish economic performance continued throughout 2002 and 2003 and spread south.

The response of the Bush administration in the US was to increase real spending (by around 7.7 per cent in 2001-02) although that was largely directed at the so-called War on Terror (even though it was hard to work out who the actual terrorists were – the terrorists or those pursuing the war on them).

But fiscal policy in the US was expansionary during this period with transfer payments to the unemployed rising by around 10 per cent from the third-quarter 2001 to the same quarter in 2002. State and local governments also ramped up spending (by around 3.2 per cent in real terms).

With tax revenue falling due to the lost private income, the federal fiscal deficit expanded quickly and the Clinton surpluses vanished.

The Federal Reserve Bank also cut interest rates heavily in 2001.

It was a sensible set of macroeconomic responses given the circumstances. The fiscal drag introduced by the Clinton surpluses had finally unwound and given way to a more reasonable fiscal stance, even though the US government should have done much more to reduce unemployment.

The deficit was still to small by some percentage points of GDP given the weakness in non-government spending and the recession drag from the rest of the world.

Head due south 6203 kms – to La Paz, Bolivia and the situation could not have been more starkly different in policy response. Bolivia had also fallen victim to the world recession.

Its real GDP growth rate had fallen from around 5 per cent per annum in the early 1990s, supported by discretionary fiscal deficits of around 3.7 per cent, to close to zero by the late 1990s into the early 2000s. Their fiscal deficit jumped in 2002 to 8.8 per cent of GDP as tax revenue slumped in the face of the declining economic activity.

Enter the IMF – again. It had had its dirty fingers on Bolivia for more than two decades previously.

Helped along by Jeffrey Sachs and his ridiculous doctrine of – Shock Therapy, the IMF saw to it that Bolivian became the absolute poorest nation in Latin America. Unemployment rose from around 5.5 per cent in 1978 to 21.5 per cent in 1987 as the effects of the public sector employment cuts, wage freezes and other pernicious reforms took their toll.

Sachs now parades as a progressive. It just goes to show how bad things have become as the austerity merchants have infested the advanced world after trying out their tools in the poorer countries of Latin America and Africa.

On February 22, 2003, the IMF released the statement – IMF Staff and Bolivia Agree on Economic Framework for 2003 – which announced the plan to impose severe cuts on the Bolivian public sector and introduce a widespread privatisation program.

The details of the plan are laid out in – Letter of Intent, Memorandum of Economic Policies, and Technical Memorandum of Understanding – issued on March 21, 2003 by the IMF.

The plan required the government cut the fiscal deficit to 5.5 per cent of GDP by 2003 – which required the fiscal outlays to be cut by around 10 per cent.

Personal income taxes on the low- and middle-income earners were introduced. The riots were sometimes referred to as the ‘Bolivian tax riots’.

If the government didn’t play ball with the IMF, they would not receive the foreign reserves, which were needed to bridge the gap left by the falling export revenue (given the parlous state of the world economy).

Pay cuts were also proposed.

At the height of the riots, the President Gonzalo Sanchez de Lozada exited his palace in the back of an ambulance and later pleaded on national television for peace saying and finished with the classic line – “I ask one more thing from our Father above – God save Bolivia”.

I found a lot of interesting documents in my archives about this period and the relationship between the IMF and the Bolivian government at the time.

It was clear that the Government thought they could raise revenue by increasing taxes on foreign oil producers. The privatisation plans in the 1990s driven by the IMF had seen the major revenue streams from the oil and gas production in Bolivia dry up as the accountants of the new foreign owners did their work.

The proposal to tax these foreign companies in 2003 was soon scuppered under fierce international resistance (read the US and the IMF).

The claims were that the international finance markets would declare Bolivia a pariah and lending would dry up. Heard that one before? No?

The alternative was to tax the poor – after all they couldn’t do much. The poor, by the way, included teachers, police officers, nurses, and the tax hike was thought to be equivalent to perhaps the spending an individual in this income bracket would make on food for 2-3 days.

Pennies to the IMF officials on huge tax free salaries and living away from homeallowances in La Paz but real pain for the workers of Bolivia.

The major opposition party at the time was led by Evo Morales who had only just lost the 2002 national election. The people were already tired of the austerity. But the tax hikes were the last straw.

My records show that on that Monday in February, the IMF officials who were holed up in the five-star Plaza Hotel in central La Paz, quickly left for the airport.

They later released a statement denying any responsibility for the deaths or the riots.

And now to 2014.

The New York Times article – Turnabout in Bolivia as Economy Rises From Instability – was written in February 2014, before the national elections.

It noted that:

Tucked away in the shadow of its more populous and more prosperous neighbors, tiny, impoverished Bolivia, once a perennial economic basket case, has suddenly become a different kind of exception — this time in a good way.

Its economy grew an estimated 6.5 percent last year, among the strongest rates in the region. Inflation has been kept in check. The budget is balanced, and once-crippling government debt has been slashed. And the country has a rainy-day fund of foreign reserves so large — for the size of its economy — that it could be the envy of nearly every other country in the world.

It tells us that the extreme poverty rate has fallen from 38 per cent in 2005, the last year of the previous right-wing regime, to 24 per cent in 2011. These data can be manipulated. For example, the World Bank data shows that the poverty rate in 2004 was 63.1 per cent and had fallen to 52 per cent by 2011.

Whichever way you measure it though, the rates have fallen dramatically.

The New York Times reports that the real GDP “growth last year was the strongest in at least three decades” and the nation has “the highest ratio in the world of international reserves to the size of its economy” as a result of the strong prices for natural gas.

The New York Times article notes that:

Bolivia’s turnaround is noteworthy because for many years the country was a proving ground for the kind of orthodox, free market policies long promoted by the monetary fund and other international institutions … Critics say that while those policies tamed inflation, they also did long-term damage, exacerbating the unequal distribution of wealth, pushing newly out-of-work miners and farmers into coca farming that increased cocaine production, and ultimately contributing to the social unrest that helped usher in Mr. Morales as president.

The new regime under Evo Morales abandoned the cosy deals with the IMF and “other huge international lending organizations” and used the currency sovereignty it had to rebuild the nation.

The government nationalised the gas industry and has gained massive revenue flows from the sector as a result. The increased foreign reserves provide a firm basis for sustained imports. The government has secured long-term energy contracts to supply several large economies (such as Brazil and Argentina).

On the spending side, there has been a dramatic increase in spending “for social programs like cash payments to young mothers, improved pensions and infrastructure projects.”

The UK Guardian article – Evo Morales has proved that socialism doesn’t damage economies – reinforces this message.

Yesterday, Evo Morales was re-elected for a third time such is his popularity.

One could argue that it is not so much socialism that has won the day but correct application of macroeconomic policy – using fiscal policy sensibly.

But then the socialist aspirations have motivated that behaviour so we might be splitting hairs. However, the point remains that any nation could achieve what Bolivia has done if it used its fiscal capacity more progressively.

It might be argued that if the gas prices had not have boomed, the Bolivian government would not have been able to afford the significant spending increases.

But the main benefit of the export revenue has been to build foreign reserves, which provide an imports buffer. The public spending in the local currency did not require that foreign exchange bonanza.

The UK Guardian article notes (quoting another report) that:

Bolivia has grown much faster over the last eight years than in any period over the past three and a half decades

The benefits are obvious under Morales:

1. Poverty is significantly lower although remains a problem.

2. The Real minimum wage has increased by 87.7 per cent.

3. Social spending has increased by 45 per cent, improving housing, education, health care and nutrition.

4. Income and wealth inequalities which skyrocketed during the IMF years has fallen.

The following graph shows real GDP per capita (in local currency) from 1981 to 2014. The shock therapy years in the 1980s reduced the income per person dramatically and the IMF regime in the early 2000s had a similar impact.

Under Evo Morales the real income fortunes of Bolivia have risen sharply.

Bolivia_Real_GDP_Per_Capita_1981_2014

Conclusion

Bolivia is an example of a nation that has at one point walked lock step with the pernicious neo-liberal world institutions (for example, the IMF) and suffered accordingly. It has been a laboratory for the neo-liberal free market excesses and nothing good came out of that period.

It is also a glowing example as to what can be done when a government defies Washington (both the elected officials in that city and the unelected and unaccountable officials in the IMF) and pursues a more inclusive and people-centred policy strategy using the fiscal capacity it has to fund relevant initiatives.

It has a long way to go, not the least in the area of human rights and press freedoms, but the two images of now and February 2003 should be beacons for progressive everywhere.

The only path forward is to defy the IMF and its rogue ideology and take control of the policy levers and pull them in the interests of the people.

And to close

Here is a little snippet from one of my favourite Barbieri albums – Chapter One: Latin America – It is the closing track – To Be Continued. It came out in late 1973.

I love it when the guitar comes in and then he starts wailing on the extreme upper register of the tenor.

Bolivia – improved, free of the IMF, and musical …

That is enough for today!

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.

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    This Post Has 7 Comments
    1. Fantastic! Todays blog and yesterdays are two of the best in a while; Im trying to think of the best ways to share this one (its still impossible to persuade most people to read something longer than about 12 words) But I’ll do what I can. The graph will make a good start, with a nice big arrow indicating the Morales/IMF divergence !

    2. Hi Bill,

      Bolivia has also benefited from high commodity prices, which helped it amass a huge amount of foreign reserves.

      As an MMTer, what do you think of this reserve accumulation by a government issuing fiat money?

      Thanks,
      Alex

    3. Dear Bill

      Bolivia has become a big soybean exporter. China’s growing appetite for soybeans must explain part of Bolivia’s ability to accumulate foreign reserves.

      Regards. James

    4. You mentioned the dreaded “S” word – socialism. That will instantly condemn it in the USA and it’s conservative dominated agenda.
      Pity though, it’s great news!

    5. Seamus Coffey a neo liberal cork based economist that publishes data on the Irish economy admits “the economy in Ireland” (the conduit economy) is growing but “the irish economy” we see around us is not.

      In fact its much worse then that – the true Irish economy continues to shrink according to consumption levels as published in the official national accounts.
      We can see that the conduit rentier economy of ireland has been feeding off the fat and muscle tissues of ireland for many decades and is now biting into its heart muscle.

      http://www.irisheconomy.ie/index.php/2014/10/15/budget-2015/#comment-1473708

      Anybody who looks at how energy is used in this brownian motion economy can see this.
      For example 21% of our oil consumption is Jet Kerosene alone.

      The only purpose of the euro system has been to take ever increasing amounts of our purchasing power and stuff it into corporate conduit products of little utility.
      I for one cannot see how MMT changes this.
      it is merely another centralizing vortice perhaps at a more local(national level) but its the same phenomena.

      Its propable the good people of Bolivia have lost all local redundancy in this socialist phase of centralization – perhaps the rug is being readied to pull from under them ??

      The lesson is always the same
      Centralization at either a national or supranational level (rule by the banks) leads to eventual destruction.
      Its merely a question of time.

    6. Evo Morales has been fantastic for the people of Bolivia.


      I suspect he needs to walk the finest of lines as history tells us that one can’t fight the Washington consensus too strongly, else they will be subjected to regime change.


      i.e. the attempted coup in Ecuador and the successful coup in Honduras, just to pick two of many.


      Great article professor!

    7. Hello Bill, so happy to stumble onto your “billy blog!” I really enjoyed reading your blog. Probably the best I’ve ever read on Bolivia. You describe a Bolivia that is certainly different from when I was there! I entered Bolivia from Iquique, Chile to Oruro (on train) in 1980 and when I finally reached La Paz, friends informed me that the dictator Garcia Meza had imposed a curfew which was now on it’s 6th month. I was there 3 months and yes, you could feel tension everywhere, even in the working class restaurants, US Embassy, schools and countrysides. It was then that I found out (from locals in La Paz), about the “disappearance/murder” of the popular unionist/congressman Marcelo Quiroga Santa Cruz and the many progressive church leaders that were killed. I only left because I ran low on money and needed to get back to Bogotá to make good on my plane ticket back to Guatemala. Anyway, I will continue to follow your blog and thanks for the wonderful Gato Barbieri music! You may want to check out Benjo Cruz! link: https://soundcloud.com/dj-e1ma35tr0/benjo-cruz-camba-taitetu-viva

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