Bolivia Facts: The Economy in Bolivia

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Economy in Bolivia: This country is rich in natural resources. But its economic development has been limited for several reasons:

1. Traditional elites, when they have ruled, have sold natural resources for personal wealth without developing the economy as a whole.

2. Revolutionaries, when they have ruled, have tried to "divide the economic pie," but have lacked an understanding of genuine wealth creation, thus, like in other socialist countries there has been economic decline.

3. Persisting obstacles for economic competition include an inadequate transportation infrastructure and the nation's landlocked location.

Bolivia is the second-poorest economy in South America (after Paraguay) and the 5th-poorest in Latin America in terms of GDP per capita. Its 2005, gross domestic product (GDP) totaled $8.5 billion. Economic growth was about 4 percent and inflation was at 4.9 percent (it was under 1 percent in 2001).
bolivia economy industry mining
Major Trading Partners Brazil, U.S., Venezuela, Peru, Argentina, Colombia, Chile, China, Japan

Industries Mining, smelting, petroleum, food and beverages, tobacco, handicrafts, clothing, forestry, tourism in Bolivia

Natural Resources Tin, natural gas, petroleum, zinc, tungsten, antimony, silver, iron, lead, gold, timber, hydropower The revolution of 1952 brought agrarian reform based on the break-up of large agricultural estates and the nationalization of mines. These reforms, which increased wages, also resulted in a decrease in agricultural production, and a drastic drop in mineral output. The Bolivian government, facing demands from powerful leftist labor unions, failed to lay off surplus miners. It also failed to promote greater efficiency in many other sectors of the economy.

Thus, despite the political and social reforms embodied in the revolution, the rate of national economic growth remained extremely low. The economy of Bolivia, largely dependent on the earnings from tin exportation, fluctuated wildly with world tin prices. In the early 1980s, the nation's businesses stagnated as a result of falling tin prices, bad harvests, debt repayments, and inflation that became hyperinflation.

In 1985, the government of President Víctor Paz Estenssoro, which had initiated the reforms of 1952, enacted some of the continent's toughest austerity measures and dropped the inflation rate from 24,000 percent to less than 10 percent.

In the 1990s, the Bolivia economy grew rapidly, and billions of dollars in new investment came into Bolivia after the administration of Gonzalo Sánchez de Lozada (1993 – 1997) privatized nearly the entire state-run economy. However, these market-oriented reforms did not fundamentally change the government's centralized nature, fully open the Bolivian economy, or create the technical expertise and entrepreneurial spirit important for economic growth. Nearly all parties attempted to gain wealth by gaining control of the natural resources and selling them rather than using them as a national endowment.

bolivia economy protests roadblocks

Bolivia has the second-largest reserves of natural gas in South America, but the 2004 referendum which re-nationalized Bolivia's hydrocarbon industries, created chaos in the industry. In March 2005, indigenous groups led by radical activists blocked roads leading into the highland capital of La Paz, threatening gas and food supplies.

In May 2005, lawmakers passed a new hydrocarbons measure that levied a 32 percent tax on top of an existing 18 percent royalty on oil and gas production. It also forced 12 foreign energy companies to renegotiate exploration and production contracts.

As a result, citizens in gas-producing districts like Santa Cruz and Tarija began agitating for autonomy (similar to the autonomy U.S. states enjoy). They viewed the government of Bolivia as irresponsible and responding to fear. In 2006 Evo Morales Aima was elected president of Bolivia and promptly nationalized the country’s energy industry, giving companies 6 months to renegotiate their contracts, or face expulsion. Growth in GDP is expected to shrink substantially as foreign oil and gas companies invest elsewhere.

Bolivia's trade with neighboring countries is growing, in part because of several regional preferential trade agreements it has negotiated. Bolivia is a member of the Andean Community and enjoys nominally free trade with other member countries (Peru, Ecuador, Colombia, and Venezuela).

Bolivia began to implement an association agreement with Mercosur (Southern Cone Common Market) in March 1997. The agreement provides for the gradual creation of a free trade area covering at least 80 percent of the trade between the parties over a 10-year period, though economic crises in the region have derailed progress at integration.

Economy in Bolivia

The U.S. Andean Trade Preference and Drug Enforcement Act (ATPDEA) allows numerous Bolivian products to enter the United States free of duty on a unilateral basis, including alpaca and llama products and, subject to a quota, cotton textiles. (2009 update: Bolivia has not complied with the conditions of this trade preference; therefore the U.S. did not extend it upon expiration).

The United States remains Bolivia's largest trading partner. In 2002, the United States exported $283 million of merchandise to Bolivia and imported $162 million. Bolivia's major exports to the United States are tin, gold, jewelry, and wood products. Its major imports from the United States are computers, automobiles, wheat, and machinery. A bilateral investment treaty between the United States and Bolivia came into effect in 2001.

Since his election in December 2005 President Evo Morales Aima has made many changes in the government's structure and in the economy in Bolivia. The nation's oil and gas industries were nationalized, for example. Four of the country's nine departments in the Eastern half of Bolivia (where the oil and gas are produced) demanded and won departmental autonomy, much like each state in the U.S. is autonomous. They want each department to have control over its own budget, similar to the U.S. system.

The Bolivian government interprets this as separatism and an effort to divide the country. It has declared the demand for autonomy illegal and has taken economic measures to pressure the four departments (Santa Cruz, Beni, Pando and Tarija) to desist. For example, it has prohibited them from exporting certain agricultural goods produced only in those departments in an effort to weaken their economies.

On May 4th 2008 Santa Cruz held a referendum (town hall meeting) in which citizens of that department were being asked to vote YES or NO to departmental autonomy. Over 500,000 citizens (over 80% of the population) voted YES to autonomy.

Economy of Bolivia

Eastern Bolivia held its referendum in May of last year and overwhelmingly voted in favor of autonomy. However, the government declared the autonomy statutes illegal. On January 2009 the entire nation voted on a new Bolivian constitution proposed by President Evo Morales. Just over 50% of the population voted for the constitution and in the four Eastern opposition states it was widely defeated. However, the Bolivian constitution did pass, albeit barely; therefore it will be applied.

Bolivians voted PRO autonomy and it must now be included in the new constitution. Over the past year the Bolivian government has continued to nationalize other industries and companies. It is now looking at nationalizing the telephone companies, hotels, and water and electric companies. The Bolivian government has also centralized autonomy and has created an "Autonomy Ministry" although this appears to be an oxymoron since the whole point of giving each state autonomy is to decentralize government spending, not centralize it.

Bolivia's economy has been robust since 2010, mostly due to the rapidly increasing prices of some of the primary commodities and consumer goods that Bolivia exports, such as oil and gas, minerals and soybeans. However, Bolivia has also suffered some setbacks due to some of the limitations the country has placed on exports, and the continued perception that Bolivia is a risky country to invest in. For example, the 2012 exit of Indian steel giant JINDAL, which was to have mined the world's largest iron ore mine, and which claims the Bolivian government did not fulfill its part of its contract, has done little to improve the negative view potential investors have. The country also continues to face challenges in the areas of transportation, although the Bolivian government has dramatically increased its expenditures on roads and other infrastructure needed to facilitate exports. In addition, the first half of 2012 was plagued with strikes, protests, road blocks and other forms of pressure from labor unions and other key sectors.

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Currency: The peso was the currency of Bolivia between 1963 and 1987. It was divided into 100 centavos. Officially called the peso boliviano, it replaced the old boliviano at a rate of one thousand to one. The peso boliviano suffered hyperinflation in the mid-1980s and bills looked like these (Bs. 5 million and Bs. 10 million - at the time worth about US$1.50 and US$3.00, respectively). It was replaced by a new boliviano in 1987 at a rate of a million to one (Bs. 5 million became Bs.5 and Bs. 10 million became Bs. 10).

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