Growth and Structure of the Economy

Growth and Structure of the Economy

The Spanish arrived in what is present-day Bolivia in 1532 and replaced an Inca economic system based on collective agriculture, the ayllu, and economic tributes to a socio-religious hierarchy with a system dominated by the conquistadors and the Spanish crown. They organized the Indians into an encomienda system in which they again paid tributes, now to conquistadors, and toiled in the silver mines of Potosí under a compulsory labor system called the mita. Through the exploitation of Indian labor, the Spanish by the mid-1600s had converted Potosí into South America's most populated metropolis.

Independence in 1825 did little to improve the economic lot of Bolivia's Indian majority. Indeed, the already unfair distribution of land, a legacy of the encomienda system, was worsened when the government abolished the land tenure system of the Indian communities in 1866. The system that emerged was dominated by nearly feudal peonage rather than wage labor.

By the late 1800s, the silver industry had suffered a sharp decline and was replaced by tin mining. The tin industry benefited from the new rail access linking the country's mines to Pacific Ocean ports for the first time. The rail access to ocean ports had become crucial to the Bolivian economy by the early 1880s because Chile had seized the country's outlets to the sea during the War of the Pacific, 1879-80.

Bolivia's tin industry boomed in the early twentieth century as the invention of the vacuum-packed tin can and the assembly of the automobile raised world demand for tin. By the end of World War I, the country was the world's second-leading producer, mining a fifth of global output. The unprecedented international demand for tin, the high concentrations of easily accessed tin in the new mines, low taxation, and cheap labor made the industry highly lucrative. The nation's tin industry and the economy at large became completely dominated during the 1920s by the Patiño, Hochschild, and Aramayo tin-mining families, who, along with the lawyers who defended them, were collectively known as the rosca. The rosca not only dominated economic affairs but politics as well, and it constituted a formidable elite in conjunction with the landed oligarchy that had developed since 1866. This class contrasted sharply with most of the country's poor citizenry who worked the marginal agricultural plots of the highlands or labored under appalling conditions in underground tin mines.

The Great Depression in 1929 and the devastating Chaco War (1932-35) with Paraguay marked the beginning of a period of growing disdain for the country's elite. The Great Depression caused tin prices to plunge, thereby hardening the plight of miners and lowering the profits of the rosca. During the Chaco War, highland Indians were enlisted to defend Bolivia's vast Chaco lowlands, with its rumored oil reserves. The war exposed highlanders for the first time to their nation's vast tracts of land. As Indians and organized labor began to play a more prominent role in national life after the Chaco War, mining and landed interests could no longer stop the momentum for social, economic, and political reforms.

The principal economic goals of the 1952 Revolution were land reform and the nationalization of the tin mines, both of which were swiftly enacted. Even before the Nationalist Revolutionary Movement (Movimiento Nationalista Revolucionario--MNR) could implement its Agrarian Reform Law on August 2, 1953, the long- oppressed Indians began to seize the latifundios. Two years into the reform program, the government accommodated 49 percent of all farming families who had claimed their traditional land.

The state also expropriated underutilized arable land. On October 31, 1952, the government nationalized most of the tin mines and legally transferred them to the Mining Corporation of Bolivia (Corporación Minera de Bolivia -- Comibol), which dominated mining activity until 1985. Much of the elite fled the country or resettled in the underpopulated department of Santa Cruz.

The MNR's postrevolutionary economic policies focused on the public sector, especially Comibol and the Bolivian State Petroleum Company (Yacimientos Petrolíferos Fiscales Bolivianos-- YPFB), as the spearhead of economic growth. The MNR also promoted cooperatives, particularly in mining and agriculture, as an alternative to the latifundios. The government enacted social reforms, such as universal suffrage, and forged a greater role for organized labor in society. Although most of its economic policies were not conventional, the revolutionary government did accept a stabilization plan backed by the IMF in 1956 and 1957 in an effort to reverse negative growth and serious inflation.

Economic growth averaged 4.5 percent from 1965 to 1980, lower than the growth rate in most Latin American economies. Minerals still dominated the nation's economy, however; tin accounted for 40 percent of exports and 15 percent of government revenues as late as 1980. Natural gas and oil reduced that dependency somewhat beginning in the early 1970s, but not enough to insulate the economy from commodity price swings. Protracted disputes between the government and labor also characterized this period.

Economic growth accelerated during the 1970s, averaging 5.5 percent a year, one of the fastest rates of expansion in Bolivian history. This expansion resulted primarily from higher export commodity prices. Large public sector spending also spurred economic output as external financing cushioned budget deficits. The brisk rise in output also occurred in part because of sharp restrictions on organized labor imposed by the military government of Hugo Banzer Suárez (1971-78). Political stability and higher commodity prices in turn favored greater foreign investment, which also improved national accounts. Moreover, the government announced large reserves of oil during the 1970s. Although revised downward years later, the oil discoveries improved Bolivia's creditworthiness with foreign commercial banks.

The economic expansion of the 1970s also contributed to rapid growth of the Santa Cruz area. Partly because the government favored that region, but also because of increased colonization, higher cotton and soybean prices, and infrastructure developments, the area flourished. For a time, the city of Santa Cruz threatened to overtake La Paz as the nation's most important financial center.

By the 1980s, the public sector had ballooned to encompass 520 agencies, including 120 federal agencies and 50 state-owned enterprises or financial institutions. Comibol accounted for 65 percent of all mineral production, YPFB produced 80 percent of all oil and natural gas, and the government owned over half of the banking system's assets. The government also controlled the manufacture of glass, textiles, cement, dairy products, oils, and sugar, mostly through the Bolivian Development Corporation (Corporación Boliviana de Fomento--CBF), then the nation's principal development bank. Public sector corruption had become common, and certain government agencies increased their scope solely to expand their influence in the bureaucracy.

Bolivia's minor "economic miracle" of the 1970s began to weaken in 1978 when political instability returned in force. Several foreign commercial banks reassessed Bolivia's ability to service its nearly US$3 billion debt, most of which had been acquired by the Banzer government. External financing from private sources came to a complete halt by the early 1980s; in the absence of external financing to cover increasingly large budget deficits, the government opted for the inflationary policy of printing more money. The value of the peso dropped rapidly, and high international interest rates multiplied the debt.

By 1985 the nation's per capita income had fallen below 1965 levels, and rampant hyperinflation ravaged the Bolivian economy. Prices escalated so rapidly that inflation reached over 24,000 percent by 1985. Barter flourished as money was seen as virtually worthless. The coca and cocaine industry propped up the economy and flooded the financial system with United States dollars. In order to restore public confidence in the national currency, the Hernán Siles Zuazo government (1982-85) announced a "dedollarization" decree that outlawed the dollar deposits and loans used by 90 percent of the economy. The policy caused massive capital flight, burdened the banking system by forcing it to convert into greatly overvalued and essentially worthless pesos, and destroyed the nation's deposit base. From 1979 to 1985, successive Bolivian heads of state negotiated six tentative stabilization programs (paquetes económicos) with the IMF, but none was implemented because of the lack of political continuity and the strength of the political opposition.

In August 1985, President Paz Estenssoro promulgated Bolivia's New Economic Policy (Nueva Política Económica--NPE). The NPE's main feature was the floating of the peso with the United States dollar. The plan also liberalized import policies by introducing a uniform tariff of 20 percent. In addition, the NPE called for a radical restructuring of the public sector, including the dismantling of the CBF, the laying off of 20,000 of Comibol's 27,000 employees, the partial privatization of the Mining Bank of Bolivia (Banco Minero de Bolivia -- Bamin), the reduction by one-third of YPFB's work force, and a virtual spending freeze for all state-owned enterprises. The policy also deregulated the economy, legalized dollars, eliminated subsidies, and lifted price controls. Although drastic, the NPE succeeded in suffocating rampant hyperinflation; within a few months, inflation had dropped to an annual rate of 10 to 20 percent.

The international tin market collapsed in October 1985, adding to Bolivia's problems with hyperinflation, recession, and austere stabilization. Declaring an end to the tin era, the government further encouraged the diversification and privatization of the economy. It also enacted a major tax reform measure in May 1986 that lowered the country's highest tax bracket from 30 to 10 percent and simultaneously instituted a general value-added tax. Economists generally perceived the 1986 tax reform as an important policy tool in continuing to stabilize the economy.

The crash of the tin market and the NPE's austerity program led to an estimated unemployment rate of 21.5 percent by 1987 (the unemployment rate had risen steadily from 5.5 percent in 1978 to 10.9 percent in 1982, 15.5 percent in 1984, and 20 percent in 1986.) In response, the government promulgated the Reactivation Decree in July 1987. Under the decree, the government created the Emergency Social Fund--financed in part by West European and Latin American governments as well as the World Bank --to develop public works projects to activate the unemployed. The decree also fostered export activity by introducing tax rebates for exporters and by establishing the National Institute for Export Promotion. In addition, the 1987 reactivation measures included sophisticated financing schemes aimed at eliminating the country's debt with commercial banks.

Country Studies main page | Bolivia Country Studies main page