Economy of Bolivia - History

History

Inflation has plagued, and at times crippled, the Bolivian economy since the 1970s. At one time in 1985, Bolivia experienced an inflation rate of more than 20,000 percent. Fiscal and monetary reform reduced the inflation rate to single digits by the 1990s, and in 2004 Bolivia experienced a manageable 4.9 percent rate of inflation.

Since 1985, the Government of Bolivia has implemented a far-reaching program of macroeconomic stabilization and structural reform aimed at maintaining price stability, creating conditions for sustained growth, and alleviating poverty. A major reform of the customs service in recent years has significantly improved transparency in this area. The most important structural changes in the Bolivian economy have involved the capitalization of numerous public sector enterprises. (Capitalization in the Bolivian context is a form of privatization where investors acquire a 50% share and management control of public enterprises by agreeing to invest directly into the enterprise over several years rather than paying cash to the government).

Parallel legislative reforms have locked into place market-oriented policies, especially in the hydrocarbon and telecommunication sectors, that have encouraged private investment. Foreign investors are accorded national treatment, and foreign ownership of companies enjoys virtually no restrictions in Bolivia. While the capitalization program was successful in vastly boosting foreign direct investment (FDI) in Bolivia ($7 billion in stock during 1996-2002), FDI flows have subsided in recent years as investors complete their capitalization contract obligations.

In 1996, three units of the Bolivian state oil corporation (YPFB) involved in hydrocarbon exploration, production, and transportation were capitalized, facilitating the construction of a gas pipeline to Brazil. The government has a long-term sales agreement to sell 30 million cubic metres a day (MMcmd) of natural gas to Brazil through 2019. The Brazil pipeline carried about 21 MMcmd in 2000. Bolivia has the second-largest natural gas reserves in South America, and its current domestic use and exports to Brazil account for just a small portion of its potential production. Natural gas exports to Argentina resumed in 2004 at four MMcmd.

In April 2000, violent protests over plans to privatize the water utility in the city of Cochabamba led to nationwide disturbances. The government eventually cancelled the contract without compensation to the investors, returning the utility to public control. The foreign investors in this project continue to pursue an investment dispute case against Bolivia for its actions. A similar situation occurred in 2005 in the cities of El Alto and La Paz.

Protest and widespread opposition to exporting gas through Chile led to the resignation of President Sanchez de Lozada in October 2003. The government held a binding referendum in 2004 on plans to export natural gas and on hydrocarbons law reform. By May 2005, the hydrocarbons law draft was being considered by the Senate.