The Fiscal and Monetary History of Bolivia, *

Transcription

1 The Fiscal and Moneary Hisory of Bolivia, * Timohy J. Kehoe Universiy of Minnesoa, Federal Reserve Bank of Minneapolis, and Naional Bureau of Economic Research Carlos Gusavo Machicado Insiue for Advanced Developmen Sudies, Bolivia *We hank Kjeil Soresleen for his useful commens and from paricipans a he conference The Moneary and Fiscal Hisory of Lain-America a he Federal Reserve Bank of Minneapolis. The views expressed herein are hose of he auhors and no necessarily hose of he Federal Reserve Bank of Minneapolis or he Federal Reserve Sysem.

2 1. Inroducion Bolivia urns ino an independen republic in 1825, being one of he las counries in Souh America o achieve is independence from Spain. During he Spanish colony Bolivia s erriory was very imporan, in paricular he ciy of Poosi. In 165, Poosi had 16, inhabians and i was larger han Paris or New York. Is main economic aciviy was mining, in paricular silver exracion. I was said ha he amoun of silver exraced from Poosi was enormous such ha i would have been possible o build a bridge from Spain o Bolivia 1. Despie having been Poosi and is surroundings one of he mos imporan regions of he colony, when Bolivia aained is independence in 1925, i emerged as a counry wih many difficulies and lack of inegraion, wih he majoriy of is populaion being indigenous and poor. During is republican hisory, Bolivia los also more han half of is erriory, in mos cases hrough wars. Therefore, is was a counry ha had always inernal and exernal conflics, and despie having vas naural resources in paricular minerals, i never managed o consolidae an economic srucure unil 1952, where he so called Naional Revoluion ook place. The economic ransformaions ha occurred since 1952 allow us o speak of a modern economic hisory of Bolivia. A hisory marked no only by economic evens, bu also by poliical and social evens. When we speak abou Bolivia s modern economic hisory we mean speaking abou five well marked economic cycles. The firs cycle, characerized by a recession, goes from 1952 o 1957 and i is marked by he Naional Revoluion and afermah. The second cycle runs from 1957 o 1978 and i is he period of he larges economic growh in Bolivia, GDP per capia grew on average around 2.5 percen. In he opposie, he hird cycle is he cycle of he hyperinflaion and goes from 1978 o The fourh cycle is characerized by slow growh and goes from 1986 o 25. Finally, he fifh cycle ha sars in 26 and goes unil our days is characerized by an imporan paricipaion of he Sae in he economy hrough he naionalizaion of enerprises in key economic secors. There are many unanswered quesions relaed o he occurrence of hese cycles, in paricular regarding he second, hird and fourh cycles, which are he ones ha comprise his sudy. Some auhors aribued hem o he fac ha Bolivia has been always a counry dependen on expors of naural resources, mainly minerals, and as a resul, when exernal shocks occurred, 1 The ciy of Poosi was so rich, ha Miguel de Cervanes in his book Don Quijoe de la Mancha used he phrase Vale un Poosi o indicae ha somehing worh a lo. 1

3 hey generaed significan breaks in he dynamics of growh in Bolivia. Oher auhors aribued hem o he low level of indusrializaion which allocaed Bolivia as a dependen counry. For mos of is enire hisory Bolivia has depended of foreign aid eiher in erms of deb, grans or foreign direc invesmen. Cerainly a key player in Bolivia s modern economic hisory has been he governmen (or he Sae), eiher by inervening excessively in producion aciviies as in he 196s, 197s and recenly or by inervening in erms of allocaing resources as in he 199s or 2s. This means ha economic policies have played a key role in economic hisory from 1952 unil our days and herefore a comprehensive analysis of fiscal and moneary policy is needed o explain he dynamics of growh in Bolivia. In his sudy we aim o answer he following wo quesions for he period : - Did governmen policies during he rapid growh period of 1957 hrough 1978 plan he seeds of he severe crisis of 1979 hough 1985? - Did he Bolivian governmen s policy of paying off is foreign deb afer he crisis have large social coss? In paricular, did his policy dampen growh during he period 1986 hrough 25? To make a sysemaic analysis of he moneary and fiscal policies, we follow Kehoe and Presco (27) for he growh accouning analysis and Kehoe, Nicolini and Sargen (21) for he governmen budge accoun analysis. The paper is organized as follows. In he nex secion we presen a brief hisorical view of Bolivia s economic hisory. Secion 3 performs he growh accouning analysis for Bolivia. Secion 4 describes he deb evoluion over he period Fiscal policy is analyzed in secion 5. In secion 6 we perform he budge accouning analysis and he conclusions are presened in secion Hisorical Background Among he counries considered as par of he projec The Moneary and Fiscal Hisory of Lain-America , Bolivia is by far he poores and he counry wih he lowes raes of growh in GDP per capia (i is only won by Venezuela). According o able 1, Bolivia grew by.8 percen beween 195 and 2, and i reached is highes rae of growh in he decade of he 196s wih a rae of 3 percen. Table 1: Average annual per capia GDP growh (in 199 GK) 2

4 Argenina Bolivia Brazil Chile Colombia Ecuador Mexico Peru Venezuela Source: The Conference Board Toal Economy Daabase Noice also ha all counries display average raes of growh above 1 percen, being Brazil, Chile and Colombia, he leading counries in Lain-America. The 195s and he 198s have been he decades of negaive growh in Bolivia and he decades where he economic cycle experienced recessions. Bolivia had also he larges drop in GDP per worker during he deb crisis of he 198s and he highes annual rae of inflaion. The percen drop in GDP per worker has been of 25.4 percen during he period (period of crisis) and he hyperinflaion has been of 11,75 percen in According o Sachs (1987), he Bolivian inflaion is he only case in hiry-five years of a rue hyperinflaion, applying Cagan s (1956) classic definiion of price increases exceeding 5 percen per monh. Table 2: Drop in GDP per worker and Inflaion 1975 GDP Percen drop per WAP in (25 USD) GDP per WAP Highes annual CPI inflaion rae Argenina 6, ( ) 3,79 (1989) Bolivia 1, ( ) 11,75 (1985) Brazil 5, ( ) 2,947 (199) Chile 4, ( ) 4 (1978) Colombia 3, ( ) 29 (199) Ecuador 3, ( ) 76 (1988) Mexico 1, ( ) 131 (1987) Peru 5, ( ) 7,481 (199) Uruguay 5, ( ) 112 (199) Source: IFS and WDI. We can compare also he pah of real GDP per capia in Bolivia relaive o ha of he Unied Saes and Chile, he leading counry in erms of growh in Souh America. The following figure shows ha relaive o USA, GDP per capia has declined from.2 o.1, bu relaive o 3

5 Chile he decline has been larger. In 195 i was above.5 and in 212 i is close o.2. This means ha Bolivia has lagged also behind he Lain American counries 2. Figure 1:.7 Bolivia Real GDP per Capia (relaive o USA and Chile).6 Real GDP per capia USA Chile Source: The Conference Board Toal Economy Daabase A key feaure of Bolivia s modern economic hisory is ha i is possible o idenify five well marked periods or cycles which are summarized in he following figure: Figure 2: 16 Modern economic hisory of Bolivia: Real GDP per working age person 14 Naional Revoluion and afermah Crisis Naionalizaion and growh index (195=1) Sabilizaion and growh Slow growh Source: Maddison The firs period sars in 1952, wih he Naional Revoluion, and runs unil The 1952 Naional Revoluion represened an imporan change in he economic policy. The Sae emerged as he main economic acor by conrolling he oil and mining companies 2 This low and decline relaive income is common o all Lain American counries and i is wha Resuccia (28) calls he Lain American developmen problem. 4

6 (naionalizaion of mines) and performing an Agrarian Reform 3. This was a period of recession and high inflaion which was a direc consequence of a remarkable fiscal defici explained primarily by he Sae Mining Company (COMIBOL). The governmen also subsidized COMIBOL by implemening a policy of exchange rae differeniaion. The consan increase in wages and oher coss pushed he exchange rae for expors o depreciae, bu he exchange rae for impors remained lagged. This period ended wih a sabilizaion program based on he financial equilibrium of he fiscal secor. Bolivia received also he exernal suppor o finance he fiscal defici and he Unied Saes was he main supporer. The second period sars in 1958 and runs unil This is a period of sabilizaion and growh, where he 1956 sabilizaion plan modified he budge procedures by including he defici of he public enerprises, esablished a mining royaly, new ariffs and resrucured he ax sysem. Beween 1957 and 1978, GDP per capia growh has been on average 2.5 percen, which can be considered a period of rapid growh. Anoher feaure is ha in his period exernal deb increased, mainly o finance he macroeconomic sabiliy and he fiscal defici, in paricular o finance he expendiures of public enerprises. This period characerized also by a favorable exernal conex in erms of oil and mining expor prices. The hird period runs from 1979 o This is a period of economic crisis wih exraordinary proporions. While during he 197s Bolivia as oher Lain American counries enjoyed large inflows of credi mainly from inernaional banks, in he 198s he siuaion reversed and exernal credi was severely consrained and cu off. This period is characerized also by an inernal poliical chaos beween 1978 and 1982, overlapped wih he onse of high ineres raes and a world recession. Beween 1982 and 1985, Bolivia experienced a democraic opening bu wih a profound crisis where he new adminisraion (lead by Hernan Siles Suazo from he UDP pary) had very lile inernal suppor, herefore i had o rely on exernal suppor. By he end of he period, he average variaion of he CPI was above 11, percen and he fiscal defici was around 25 percen of GDP. Morales (1988) and oher auhors aribue he hyperinflaion o he financing of he fiscal defici by using money prining. In 1986, he fourh period sars wih he replacemen of he sae by he marke. In fac, in he second half of 1985 a resrucuring process was iniiaed ha had wo main objecives: firs, o sabilize he economy, and, second, o implemen srucural reforms in which he naional 3 Before 1952, he economy was conrolled by landowners and privae family miners (feudalism). 5

7 or foreign enerprises should be he main economic acors. According o Anelo (2), he srucural reforms implemened in Bolivia were framed in line wih he Washingon Consensus. This period goes unil 25 and includes differen sub-periods of srucural reforms: Economic sabilizaion and 1 s Generaion Reforms ( ), deepening of he 1 s Generaion Reforms ( ), 2 nd Generaion Reforms ( ) and Pos Reforms ( ). 4 The seed of hese reforms was he so called New Economic Policy (NEP). The NEP is he second sabilizaion plan applied in Bolivia s modern economic hisory and had he primary objecive o reduce inflaion and generae foreign resources. The srucural reforms included he liberalizaion of goods and financial markes, he capializaion (Bolivian broad scheme of privaizaion), a ax reform, commercial policies in favor of expors and FDI, and fiscal decenralizaion (among municipaliies). I is a period characerized by slow growh, GDP per capia growh was on average 1.1 percen beween 1986 and 25. I can be seen in figure 2 ha here was a slighly deceleraion beween which is aribued by Jemio (2) o a credi crunch and he Brazilian crisis which generaed an ouflow of resources. The las period sars in 26 and lass unil our days. I is a period characerized by a reurn o an economy where he Sae plays he leading role by owing he main companies in sraegic secors such as oil, elecriciy and elecommunicaions. This role was acquired hrough he naionalizaion of hese companies ha were previously under privae hands. This is also a period characerized by an exremely favorable inernaional conex (high commodiies prices) and wih an average rae of growh of 2.9 percen of GDP per capia beween 26 and 212. In sum, Bolivia represens a very ineresing case sudy, no only because i is he poores counry in Souh America, bu also because i has had five well marked cycles which are closely relaed o several evens, insiuional feaures and mainly public policies. In addiion, many evens ha occurred in he pas end o repea in he presen and also here are many similariies beween he fiscal and moneary policies ha were implemened in he pas wih he ones ha are implemened oday. This is cerainly a moivaion for a comprehensive and complee sudy of he fiscal and moneary policies in Bolivia. 4 See Barja (2) for a deailed explanaion of he specific reforms ha occurred in each period. 6

8 3. Growh Accouning Figure 3 summarizes he macroeconomic hisory of Bolivia from 1952 o 212 wih he resuls of a growh accouning exercise based on hose in Kehoe and Presco (27). We use a Cobb Douglas producion funcion: α 1 α Y = A K L (1) where we cumulae invesmen deflaed by he GDP deflaor o measure capial and number of workers o measure labor. Our growh accouning rewries his producion funcion as 1 Y K 1 α L 1 α = A (2) N Y N where N is he number of working age (15 64 years) person. The advanage of his growh α /(1 α ) accouning is ha, in a balanced growh pah, ( K / ) and L / N are consan, and growh iny / N is driven by growh in A 1/(1 α ) α Y. The usefulness of his decomposiion is shown precisely in Kehoe and Presco (27) and oher papers, where by considering daa for he Unied Saes, hey show ha he U.S. growh pah is close o balanced: he growh in Y / N is close o ha in A 1/(1 α ), and ( α /(1 α ) K / Y ) and L / N are close o consan. 3 Figure 3 Growh Accouning for Bolivia produciviy 25 index (195=1) 2 15 oupu 1 capial labor Source: Auhor s calculaions A leas hree feaures are worh noing. Firs, alhough he capial and labor facor are going down, flucuaions in GDP per working age person in Bolivia are mosly driven by flucuaions in TFP. Second, during he periods of expansion ( , and ) he capial inpu declined and oupu growh was driven by an expansion in TFP, in 7

9 paricular during he 6s and 7s where we observe a remarkable expansion in TFP. Third, he labor inpu declined during he early periods, bu recovered during he las periods. The daa used o perform his growh accouning come from differen sources. The naional accoun daa were obained from he ECLAC. The populaion daa was exraced from he IMF Inernaional Financial Saisics (IFS) and he daa on employmen was exraced from Maddison. To compue he working age populaion, we used daa from he World Bank (World Developmen Indicaors) which divides he populaion beween ages. As his informaion is only available every five years, we exrapolae wih he populaion daa o obain a series for each year. I would have been possible o calculae working hours, bu unforunaely, his informaion is available only since 1988 and he only source is he Uniy of Analysis of Economic Policies (UDAPE for is iniials in Spanish). The capial sock series were calculaed using he perpeual invenory mehod, based in he law of moion for capial. K = (1 δ ) K I (3) where δ is he depreciaion rae which we assume i is equal o.5. We assumed also a value of 1/3 for he capial share in he producion funcion (α). The beauy of his growh accouning is ha we can idenify he deviaions from he balanced growh. In fac, in his paper, we aemp o relae he major deviaion from balanced growh in Bolivia o shocks, boh inernal and exernal, and o moneary and fiscal policy here. Our hypohesis is ha Bolivia followed economic policies up hrough 1985 ha lef i very vulnerable o shocks. Saring in 1985 wih is New Economic Policy (NPE, Nueva Políica Económica), he Bolivian governmen implemened a series of reforms ha successfully isolaed he economy from shocks, which coninued o buffe Bolivia. 4. Deb Evoluion in Bolivia In his secion we describe he deb dynamics in Bolivia, depending on he abiliy of he governmen o borrow in domesic and foreign markes and o negoiae he paymen of he deb, since his deermines he way fiscal and moneary policy inerac. Recall ha he focus is he behavior of fiscal, moneary and deb policy. 5 5 Alhough he analysis of he paper covers he period , in he res of he paper we will show daa before and afer his period if available. 8

10 The evoluion of deb is also well marked in he five periods described above, and is reducion is closely relaed o he implemenaion of he wo sabilizaion plans, as i is seen in figure 4. Figure Evoluion of he Exernal Deb 2nd Sabilizaion (NEP) 8 7 1s Sabilizaion percen GDP Source: Cenral Bank of Bolivia In he early periods, precisely o finance he economic ransformaion brough by he Naional Revoluion, he governmen conraced foreign deb, and in 1956 he deb o GDP raio was around 23 percen. Bu in 1959, his raio was around 58 percen. This jump occurred as par of he sabilizaion program implemened in The exernal deb increased by USD 34.7 million beween 196 and 197, bu i increased by USD million beween 197 and Saring in 1961, exernal deb accumulaion acceleraed, wih 197 he year wih he highes growh (17.9 percen). Beween 196 and 197, privae deb represened he larges source of exernal credi, alhough i showed a decreasing paern. In 196, bilaeral deb represened around 3 percen of oal deb, bu in 197 i only represened 22 percen. The mulilaeral deb increased during he 196s, bu hen decreased in 197. In fac, during he 197s and mid 198s i was no very imporan and was below he bilaeral deb and far below he privae deb (see figure 5). Figure 5 9

11 1 Composiion of exernal crediors 9 mulilaeral 8 7 percen of oal bilaeral 2 1 privae Source: Cenral Bank of Bolivia During he period beween 196 and 1978, he exernal financing was employed primarily in mainaining he macroeconomic sabiliy. In addiion, he successive ne disbursemens allowed o susain a posiive balance in he capial accoun of he Balance of Paymens, which was larger han he defici of he curren accoun, herefore here were Ne Inernaional Reserve gains. In figure 6, i can be seen ha ne ransfers from inernaional crediors were always posiive and large during he 196s and 197s. Alhough he larges ne ransfer is observed in 1959 (13 percen of GDP), in 197 and 1977, ne ransfers were 9.9 percen and 8.7 percen of GDP respecively. Figure 6 14 Ne ransfers from exernal lenders percen GDP Source: Cenral Bank of Bolivia 1

12 The final effec of his chain was he susainabiliy of a fixed exchange rae beween 1959 and Beween 1959 and 1971 he nominal exchange rae was.1188 Bs per USD, beween 1972 and 1978 i was.2 Bs per USD and beween 1979 and 1981 i was.2451 Bs per USD. Regarding he real exchange rae i can be seen in figure 7 ha during he prevalence of a fixed exchange rae regime here was a coninuous real appreciaion wih a jump in Figure 7 7 Real exchange rae 6 5 index (1952=1) fixed exchange rae Source: IMF In he decade of he 197s, Bolivia enjoyed excellen economic condiions o esablish solid bases for a susainable developmen. The counry had access o vas foreign credi and he expor prices of mining and oil (he main economic secors) were high (see figure 8). Neverheless, many auhors qualified his decade as a los decade because Bolivia failed o reverse he hisorical rend of being a producer of raw maerials and he way he economy was conduced in he early 195s began o be quesioned, in par because mos of he exernal resources were used o finance he Sae Owned Enerprises (SOE) and no o reduce social inequaliy. Figure 8 6 There is a huge devaluaion in 1956 associaed also wih he crisis and he sabilizaion plan. 11

13 25 Price of in (deflaed by U.S. PPI) 8 Price of crude peroleum (deflaed by U.S. PPI) index (1952 = 1) 15 1 index (1952 = 1) In 1982, Bolivia ended a period of several miliary dicaor adminisraions. Democraic openness was accompanied by a profound economic, poliic and social crisis. The disinvesmen of he main public companies and he erciarizaion of he economy ha had occurred since 197, as well as he financial obligaions relaed o ha accomplishmen of he service of he exernal deb, were he main sources of he mos severe crisis ha Bolivia experienced in The crisis characerized by hyperinflaion, unemploymen and a worsening of living condiions. The prevailing condiions in he inernaional financial markes allowed Bolivia o increase is exernal deb by a facor of 3.4 imes beween 197 and 1978 and by a facor of 1.8 imes beween 1978 and The sock of exernal deb was USD million in 1978 and i was USD million in Over he period , exernal deb increased by a facor of 5.6. The poliical uncerainy involved in he reurn o democracy ha characerized he early 198s was refleced in he governmen s deb policy. Even hough here was an inernaional movemen in favor of a suspension of he service of deb, he Bolivian governmen renounced his possibiliy. The inernaional crediors, in paricular he inernaional banks, implemened a policy o solve he paymen limiaions of he large debors (Mexico, Brazil and Argenina), bu hey did nohing o solve he problems of he small debors. In his seing, he Bolivian governmen decided o impose discipline on is exernal financial obligaions, fearing of punishmens by he inernaional crediors and also in order o mainain is inernal legiimacy. Noice in figure 6, ha ne ransfers were negaive beween 1982 and As i is seen in figure 5, here is also a change in he crediors beween 1982 and The relaive weigh of privae crediors dropped o 22.8 percen, because he governmen iniially paid his deb. Bu simulaneously he relaive weigh of bilaeral crediors rose o 5.7 percen, 12

14 which is explained by he suppor of governmen and oher official organizaions o he democraic process iniiaed in Bolivia. Of course, his decision had drasic implicaions for he economy. The raio deb service over expors reached 42 percen in 1984, which was an unsusainable level if we consider ha here was also a large drop in ne expors due o he inernal producion crisis. 7 We can observe also ha beween 1978 and 1984 ne expors increased from -7.5 percen of GDP o 13.5 percen of GDP and hen fell abruply. This is a sign of a major sudden-sop ha he Bolivian economy experienced. Figure 9 2 Ne expors 15 1 percen GDP Source: ECLAC By he end of his period (early 1985) he mos severe economic crisis in Bolivia s hisory occurred, characerized by a hyperinflaion of unprecedened magniude which occurred as direc consequence of money prining o finance he fiscal defici. Noice in figure 1 ha also he wo sabilizaion plans applied in Bolivia, were inroduced precisely when inflaion reached high levels. When he 1956 sabilizaion plan was inroduced, inflaion was around 178 percen and when he 1986 sabilizaion plan was inroduced, inflaion was around 11,75 percen. Figure 1 7 According o he Inernaional Deb Saisics (IDS) daa, he oal deb service as a percenage of expors of goods, service and primary income was 63 percen in

15 Inflaion 1, 2nd sabilizaion plan 1, percen change in CPI 1, 1 1s sabilizaion plan Source: World Developmen Indicaors Hyperinflaion laid he counry wih no way o pay is exernal deb. Therefore he NEP aimed o promoe expors so as o generae foreign resources. Therefore he orienaion of he NEP in erms of is relaion wih he mulilaeral organizaions was linked o a soluion of his incapaciy o pay he deb. As he general governmen was he main debor (see figure 11), one of he firs asks implemened wih he NEP hrough he Srucural Adjusmen Program (PAE for is iniials in Spanish) was o reduce and conrol he fiscal defici. Therefore in May 1986, a new ax srucure was imposed. 8 Figure 11 8 Composiion of borrowers 7 general governmen 6 percen GDP sae-owned enerprises 2 cenral bank Source: Cenral Bank of Bolivia 8 This ax reform (Law 843) reduced he ax srucure o seven axes from which he Value-Added ax was he mos imporan. This Law, in is 1986 version, did no include a ax o labor nor o capial income, and unil our days he labor income ax is absen in he Bolivian ax srucure. 14

16 years. 11 In erms of he bilaeral deb, he deb policy concenraed in appeal several imes o he In figure 11 we can see also ha while he general governmen reduced is deb during he 196s and mid 197s, he public enerprises increased heir deb from 8.4 percen of GDP in 1969 o 24.2 percen in 1973, remaining a he 2 percen of GDP by he end of he 197s. General governmen deb ha includes local and cenral governmen deb became imporan he years before and afer he hyperinflaion. In fac, since 1994 he sae-owned enerprises reduced all heir deb due o he capializaion program. 9 Cerainly, a prioriy of he NEP was he reducion and paymen of he accumulaed foreign deb. Therefore, in February 1987, he 131 credior banks of Bolivia approved an old refinancing agreemen (Enmienda al Convenio de Refinanciamieno) from 1981 where hese banks had he possibiliy o purchase bonds in he secondary marke and also o exchange he deb wih invesmen bonds. The soluion consised in he build up of a fiduciary fund adminisered by he IMF so ha i can collec he resources donaed by he developed counries and conduc hem o he secondary marke in order o acquire he deb priced a a lower price. This way, Bolivia reduced is deb by purchasing i in he secondary marke a 11 cens per dollar. This form of reducion was also suppored by he approval of he Brady Plan. 1 The success of his repurchase of deb lead o a second round. Beween 1992 and 1993 he exernal deb was bough in he secondary marke a a value of 16 cens per dollar. This operaion allowed also exchanging deb wih bonds of shor and long run. In sum, hese operaions conribued o reduce he exernal deb by USD 17 million. Furhermore, in 1989 he Bolivian Cenral Bank issued invesmen bonds wih he aim o exchange hem wih inernaional privae deb. The bonds had a presen value of 11 cens per dollar, and hey were redeemed in 25 Paris Club, in order o reprogram he deb wih governmens and official organizaions. Due o he fiscal crisis, on July 1988, he governmen subscribed an agreemen wih he IMF named Servicio Reforzado de Ajuse Esrucural (SRAE). This program allowed coninuing wih he 9 I is likely ha he picure for he general governmen in he 195s and early 196s also includes he borrowings of he public enerprises. Recall ha since he sabilizaion plan in1956 he accouns for he cenral governmen and he public enerprises were separaed. 1 A criique o his form of deb reducion can be found in Bulow and Rogoff (1988). 11 They were equivalen o bonds Triple A. This ransacion was aken ino accoun by he inermediaion of Merrill Lynch. This company bough fiduciary documens from inernaional organizaions (World Bank and IMF) and from he Federal Reserve Bank. 15

17 policy of rescheduling he deb a he Paris Club. As a resul of all hese negoiaions ha sared in 1985 and ended in 1999, Bolivia managed o reduce is exernal deb significanly. In paricular subsanial resuls were obained wih he privae inernaional banks, Argenina, he Unied Saes and he Paris Club VI, as i is seen in able 3. Table 3: Exernal Public Deb Reducion (in millions of dollars) Credior Forgiven Amoun Percenage 1. Inernaional privae banks Argenina Brazil Unied Saes Neherlands France Belgium Sovie Union Denmark Ausria Club of Paris III Club of Paris IV Club of Paris V Club of Paris VI Toal 3, Source: Cenral Bank of Bolivia Laer, as a resul of he srucural reforms, in paricular he privaizaion (capializaion) of public enerprises, in he decade of 199, here was an inflow of foreign resources in he form of foreign direc invesmen (FDI) of considerable magniude. The enrance of foreign enerprises in sraegic secors like oil, energy, and elecommunicaions allowed he economy o recover is growh. On average he economy grew by 4 percen beween 1985 and In year 1994 he rae of growh has been 4.7 percen as a resul of he capializaion. The raio of exernal deb o GDP reached also a maximum value of 74.9 percen. Since ha year his raio declined o 54.8 percen in 1998, a value ha was sill high for a counry ha needed o reverse is povery levels. The raio of exernal deb service over expors reached a criical poin in 1993 (27.4 percen). The disbursemens of new deb were used in a large proporion for paying he service of he exernal deb. In his decade he counry commied beween 68.1 percen and percen (199 and 1998 respecively) of he disbursemens for his purpose. Cerainly, his policy did no conribue o he generaion of foreign resources and he accumulaion of inernaional reserves. The counry coninued wih he crawling peg policy for he nominal exchange rae ha 16

18 was very successful indeed in eliminaing he gap beween he parallel and official exchange rae. The composiion of debors changed also dramaically since he implemenaion of he PAE, as i is seen in figure 11. Since 1985 he general governmen, and in paricular he cenral governmen appears as he principal debor, absorbing 73.6 percen of oal deb in The cenral governmen allocaed hese resources primarily o public invesmen, because he ax policy so far did no generae sufficien inernal resources o cover capial and curren expendiures. The financial public secor (Cenral Bank and Specialized Banks) appear as he second debor. Is relaive weigh doubles in 1 years and i represens 17.4 percen of oal deb in year The sock of foreign deb as a share of GDP declines from 55.2 percen in 1999 o 51.7 percen in 25 (see figure 4). Bu, he larges decrease occurs since 26, he sock of deb reduces o 28.4 percen of GDP by 26 and o 16.8 percen of GDP by 27. I is imporan o menion also ha beween 2 and 23, Bolivia experienced a social crisis, wih poliical consequences. The reducion of he mulilaeral deb is explained by he High Indebed Poor Counries (HIPC) iniiaive. In Sepember 1996, he IMF and he World Bank creaed he HIPC program o give financial suppor o a limied number of counries characerized by being poor and by having medium erm exernal financial obligaions in erms of deb service ha were higher han wha hese counries were able o afford. The argumen was ha by reducing he exernal deb for hese counries, here would be a larger amoun of resources ha could be used o aack povery. This was he firs ime ha a deb forgiveness program included mulilaeral deb ha, as we saw, was he main deb of Bolivia by he end of he 9s. The concession of he HIPC was condiioned by he mulilaeral agencies o he execuion of several measures of macroeconomic sabiliy and o srucural reforms. Bolivia fulfilled all hese asks and as i was a poor counry, i was seleced o paricipae in his iniiaive. Through he HIPC I program, implemened since 1998, he accorded reducion of he mulilaeral deb was equivalen o 24 percen of he sock deb by he end of 1998 in he nex 4 years, alhough he larges par of his reducion should be effecive in he firs years. The applicaion of his program managed o reduce he deb service over expors o 25.5 percen in Neverheless he adverse economic conex ha begun in 1999 (pos reforms period) aced in opposiion o he 17

19 beneficial resuls of he HIPC I. The service of he exernal deb bu in paricular he worsening of he erms of rade reduced drasically he level of naional savings. There was a huge drop in oupu and expors and he negaive balance of he curren accoun could be compensaed only wih he inflow of FDI. The possibiliy o obain addiional resources hrough he forgiveness of he deb under he HIPC II iniiaive was possible wih he approval of he so called Bolivian Sraegy for Povery Reducion. The HIPC II sraegy consised in he reducion of mulilaeral deb in 15 years, saring in 21. The applicaion of he HIPC I and HIPC II iniiaives allowed o increase he forgiveness of he average deb of by 44 percen. There is no doub ha he HIPC iniiaive has been very successful in erms of reducing he exernal deb, bu i was no sufficien. Surprisingly, in 25 during a meeing of he G8 counries, i was announced a complee forgiveness of deb for he HIPC counries (Bolivia included). This program was called he Mulilaeral Deb Relief Iniiaive (MDRI). This program explains he noeworhy reducion of Bolivia s mulilaeral deb and o his we have o add he change in he exernal economic condiions since 25 ha coincided wih he end of he social crisis ha Bolivia experienced beween 2 and 23 and he end of he so called neoliberal period, where he economy was based in he free marke. Finally, i is imporan o say somehing abou he credi condiions under which Bolivia conraced is foreign deb. Figure 12 shows he average ineres raes per year of exernal credis and figure 13 displays he average mauriy of deb. In boh figures, we display he ineres raes and mauriy compued wih he Cenral Bank daa and hose repored by he World Bank in is Inernaional Deb Saisics (IDS). The rajecory of he ineres raes is similar under boh daabases, bu he mauriies differ. 12 Figure I is likely ha his divergence could be explained by he fac ha he World Bank daa considers only new exernal deb commimens. 18

20 11 Ineres Rae Average (%) Bolivian Cenral Bank World Bank Source: Cenral Bank of Bolivia and World Bank Our analysis will consider he Cenral Bank daa, because i is longer. Noice, ha when ineres raes rise, mauriies decrease. In he 196s ineres raes were low (below 4 percen on average) and mauriies were long, mos of he credis were conraced for an average of 3 years. In he 197s he Bolivian deb increased and also is cos. According o Requena (198), in 1979 around 45 percen of he ne deb had a mauriy below 1 years and 3 percen of i had an ineres rae above 18 percen (considering a Libor rae of only 16.5 percen) Figure 13 4 Mauriy of Deb 35 3 Years (average) Bolivian Cenral Bank World Bank Source: Cenral Bank of Bolivia and World Bank 19

21 Recall ha during he 197s here was a mayor paricipaion of privae lenders. The capaciy of negoiaion wih hese crediors became difficul as he counry increased is deb. Therefore, Bolivia had no oher opion o conrac credis wih more severe condiions, which means ha ineres raes were higher and mauriies were lower. This is exacly wha happened in he early 198s, here was a rise in world ineres raes and mos of he loans ha Bolivia conraced in he 197s reached heir mauriy. This fac, associaed wih he incapaciy of he counry o generae foreign resources and a fiscal defici configured a scenario of a profound crisis. In he 199s, wih he consolidaion of he srucural reforms and he change in inernaional crediors, mauriies sared o rise and ineres raes decreased. By he end of he decade ineres raes were on average 3 percen and mauriy was of 15 years on average. I is imporan o menion also ha hese credi condiions changed wih he deb forgiveness and reducions ha Bolivia benefied during he 199s. 13 Finally, figure 14 shows he denominaion of public and publicly guaraneed deb. I can be seen ha mos of his deb was conraced in U.S. dollars. Beween 1988 and 2 here is an increase in deb conraced under muliple currencies, bu hen again mos of he deb has been in dollars. In 25, 75 percen of oal deb was in dollars. Deb conraced in Deusche Marks never reached more han 1 percen of oal deb and deb conraced in Yens reached he highes share in 1994 (13.7 percen). Figure 14 1% Deb Denominaion (PPG) 9% 8% 7% 6% 5% 4% 3% 2% 1% % DM EUR FRF JPY Mul. GBP SDR CHF USD Oher Source: IDS - World Bank 13 For a complee review of Bolivia s deb hisory, see Abendroh, el.al. (21). 2

22 5. Fiscal Policy in Bolivia In he previous secion we saw ha mos of Bolivia's exernal deb is deb owed by he governmen, herefore, o undersand he dynamics of deb i is necessary o undersand how he governmen conduced is fiscal policy (and obviously is ineracion wih moneary policy). In he firs period, according o Cosanzo (1961), he revoluionary governmen ignored an essenial elemen of economic policy, namely moneary and fiscal policy, and his siuaion endangered he exisence of he regime in lae The high inflaion combined wih he price and exchange rae conrols generaed an unprecedened economic collapse unil ha ime. As noed earlier, high inflaion emerged as a direc consequence of he fiscal defici, which was mainly explained by he expendiures of he newly naionalized sae mining company (COMIBOL). However, in he las sages of inflaion he exchange rae sysem was an imporan addiional facor. While he seady increase in wages and oher coss forced adjusmens in he exchange rae for expors, in order o preven a complee collapse of he expor indusries, impor exchange raes remained lagged. Therefore, he sabilizaion plan consised in he eliminaion of he dual exchange rae sysem and all sor of conrols. Mos of he reforms were aimed a esablishing he financial equilibrium of he public secor in general. The equilibrium of he fiscal budge implied several reforms bu, in he firs year he governmen employed USD. 15 million of counerpar funds form he aid of he Unied Saes. In his manner approximaely 4 percen of he fiscal budge of 1957 was financed. Beween 196 and 197, he curren revenues of he general governmen increased from 8 percen of GDP up o 1.3 percen of GDP, while he expendiures increased from 6 percen of GDP o 9.4 percen of GDP, as i is seen in figure 15. This allowed he fiscal defici o decrease as a share of GDP. I decreased from 2.1 percen of GDP in 196 o.9 percen of GDP in 197. The cenral governmen was he main debor, and i used he exernal deb o finance is defici. Public enerprises also began o use he exernal credi o finance is expendiures. Figure 15 21

23 General Governmen expendiure and revenue percen GDP expendiure revenue Source: Memories from he Cenral Bank ( ), UDAPE (198-28) In he decade of 197s he rend in he defici of he general governmen reversed. See in figure 16 ha insead of diminishing, i increased from 2.4 percen in 1971 o 5 percen in 1978 (as a share of GDP). In all he years he exisence of global deficis and primary deficis is explained mainly by a boom in public invesmens financed by a large inflow of exernal resources. According o Oalora (22), during he years , here were curren surpluses ha financed only a minor par of he public invesmens. Figure 16 1 Global and primary defici of he General Governmen 5 global defici percen GDP primary defici Source: Memories from he Cenral Bank ( ), UDAPE (198-28) 22

24 The decline in ax revenues, herefore, of curren revenues and he increase in curren expendiures during he years had a grea impac on he global defici. This siuaion coincided wih a decline in expors as a percenage of GDP, an increase in exernal deb service and a decline in disbursemens. All hese facors conribued o he deerioraion of he financial posiion of he Naional Treasury (TGN for is iniials in Spanish), which manifesed also in he occurrence of primary deficis, no only in he las years of he 197s, bu also during he following years. Noice how he global and primary defici raised in he early 198s, reaching levels of 15 percen and 17 percen of GDP respecively. If we look a he defici of he Non-Financial Public Secor in figure 17, we can observe ha i increased afer In 1983 i was 17 percen as a share of GDP, and afer a year i rose o 21.1 percen of GDP. This growh is explained in par by he Olivera-Tanzi effec and also by an increase in governmen spending due o he wage policy ha was implemened. In he figure we can see also ha he expansion of money supply allowed he governmen o cover is defici. 14 Figure Seigniorage and defici of he NFPS 2 15 percen GDP 1 5 defici seigniorage Source: UDAPE and Cenral Bank of Bolivia There are wo aspecs o be menioned in relaion o he economic insabiliy in he lae sevenies and early eighies. Firs, as he crisis deepened and exernal financing opions were limied (mainly because of he deb crisis of 1982) he governmen developed a greaer confidence in he inflaion ax as a mechanism of financing. This aiude reinforced he capial ouflow and increased he public's preferences for he use of foreign currency (dollars). Second, 14 The increase in inflaion reduced he fiscal revenues in real erms hrough he lag in he paymen of axes. Tanzi (1977) 23

25 because he banks had guaraneed access o dollars, hey rejeced he paymens in naional currency for foreign currency denominaed deb, hus creaing a parallel exchange marke where borrowers kep buying dollars which hey sored as sore of value in order o proec agains he devaluaion and he inflaion. 15 The lack of fiscal discipline led he governmen o eliminae he deposis in foreign currency in he domesic financial sysem and o impose capial conrols. Therefore, in November 1982 i launched a de-dollarizaion program whereby all obligaions in foreign currency or wih value mainenance should be honored only in domesic currency (peso boliviano). Anelo (1996) indicaes ha he main reasons for he de-dollarizaion program were: Firs, o reduce he demand for dollars giving back he governmen he conrol over he money supply and concenrae he sock of dollars in exernal deb repaymens. Second, he program aimed o resore he governmen's abiliy o raise funds hrough inflaion. Third, i aimed o encourage secors sifled by is dollar debs. Forh, i aemped o lower invesmen coss in he indusry, whose debs denominaed in dollars depreciaed wih inflaion. Neverheless, shor of is objecives, he de-dollarizaion program failed causing a srong financial disinermediaion and becoming a phenomenon of informal dollarizaion. The NEP allowed he possibiliy o ransac in U.S. dollars wihin he financial sysem and wih he reesablishmen of foreign currency deposis a formal financial sysem based on he U.S. dollar was esablished. This bi-moneary sysem remains unil our days, alhough dollarizaion has reduced in he lae 2s as i is seen in he following figure. 16 Figure See Anelo (1996). 16 Dollarizaion is measured as he raio of deposis in dollars over oal deposis in he banking sysem. 24

26 1 Dollarizaion in Bolivia.9.8 Deposis in dollars / oal deposis Source: Cenral Bank of Bolivia Due o he implemenaion of a ax reform and he reversion of he Olivera-Tanzi effec since 1987, we observe a subsanial improvemen in ax revenues which helped o reduce he fiscal defici of he NFPS from 8.1 percen in 1985 o 4.4 percen in 199 as a share of GDP. During he 199s, all he privaizaion programs ha he Bolivian governmen implemened helped o reduce he defici o 1.8 percen of GDP in In he period he economy enered a slow down phase, induced by exernal shocks, such as he fall in he erms of rade and he reversal in capial flows. During his period, financial flows, wih he excepion of FDI, reversed significanly. FDI remained a relaively high levels (USD 77 million on average per year), because he capialized companies were sill accomplishing heir invesmen commimens. Public exernal deb increased in order o finance he growing fiscal defici resuling from he economic slowdown and he implemenaion of srucural reforms. Among hem, he pensions reform implemened in 1996 had a significan fiscal impac. Bolivia passed from a sysem of muual fund o a sysem of individual capializaion. For insance, in 1999 he global defici of he NFPS was 3 percen of GDP, bu he global defici wihou pensions was indeed a surplus of.7 percen of GDP. In 22 he global defici was of 8.5 percen, from which half represened pensions. The slowdown ha began in 1999 creaed a climae of social and poliical conflic, which became criical afer 23. This climae of conflic creaed a climae of uncerainy for invesmen. However, during his period, he inernaional economic condiions began o improve 17 See Garron, e.al. (22) for a review of he hree waves of privaizaion in Bolivia. 25

27 significanly. In paricular, he rise in exernal prices of Bolivian expors produced an expor boom. In his period he curren accoun recorded a surplus of USD 152 million per year on average. The windfall of funding received by he NFPS and he exernal surplus allowed he financial sysem o accumulae inernaional reserves o amouns never seen before. These excellen inernaional economic condiions, associaed wih he naionalizaion of he former Sae Owned Enerprises, allowed he NFPS o record surpluses in he las years. 6. The Budge Accouning Analysis for Bolivia From he previous secions i is clear ha he main classificaion of deb in Bolivia is he exernal deb, and in paricular he exernal deb in dollars. Therefore here we modify he budge equaion in Kehoe, Nicolini and Sargen (21) o incorporae only he exernal deb. However i is worh menion somehing abou he inernal deb ha could and should be considered in a fuure analysis. Regarding inernal deb, he governmen sared o issue i since 1988 and i became imporan since 1996 afer he pensions reform. Wih he new Pensions Sysem he newly creaed Pension s Funds had in he reasury bonds he mos aracive way for invesing heir funds. In fac, he Pensions Sysem was hough in a sysem ha could serve as source of financing of he governmen and also as a sysem ha could generae he incenives for he creaion of a capial marke in Bolivia. Beween 1988 and 2 mos of he inernal deb was also deb from he Cenral Bank. This deb was issued o serilize he moneary effecs of he high accumulaion of Inernaional Reserves, hrough open marke operaions (OMAs). This is an imporan fac, because i means ha in Bolivia here is an imporan share of inernal deb in local currency ha i is no issued for financing needs, bu o conrol he excessive liquidiy. Figure 19 26

28 8 Exernal vs Inernal Deb 7 6 exernal deb percen GDP inernal deb 1 Source: Cenral Bank of Bolivia Noice in figure 19 ha since 23 he sock of exernal deb as a share of GDP showed a decreasing paern, while he sock of inernal deb as a share of GDP showed an increasing paern unil 25 and i even surpassed he exernal deb in 27, bu decreasing again o equalize he exernal deb in 212. Even hough, inernal deb is relevan in he las years, we have no included i in he budge accouning analysis, because our ineres is more in he periods of growh and crisis beween 196 and 25. The modified period by period budge consrain of he governmen in nominal domesic currency is: M (p) + b E = E (4) * * * ( DG + DPE ) P + M + 1 b 1r 1 where M is he sock of money, b * is he dollar denominaed deb, P is he price level, E is he nominal exchange rae, r * is he gross reurn on exernal deb, DG is he general governmen s defici ha includes ransfers and DPE is he defici of he public enerprises. Remark ha DG +DPE represens he defici of he Non-Financial Public Secor and from he previous secion we know ha we have informaion of he NFPS only since 198. Bu, as we have informaion of he General Governmen since 1952, we calculae DPE as a residual. This residual is very imporan, since i validaes he budge equaion every period. The budge consrain can be wrien in erms of real GDP as: * * * * r 1 ξ = + + ( θ θ 1) ( m m 1) m 1 1 dg dpe ξθ 1 1 W (5) gπ gπ 27

29 where he firs erm on he lef hand side represens increases on he foreign deb o oupu raio, he second erm represens increases on high powered money and he hird erm measures seigniorage. The firs wo erms on he righ hand side represen he defici of he general governmen and he public enerprises as a fracion of oupu, respecively, and he final erm represens he real reurn on foreign deb. 18 In each year we compued he erms in equaion (5) and he respecive accouning resuls are repored in able 4. The analysis will concenrae in he hree sub-periods beween 1957 and 25, bu we repor also he resuls for he las period o highligh some problems of compuing he defici of he public enerprises as a residual. 19 Table 4: Accouning Resuls across Sub-periods Period Sources (1) Exernal Deb (2) Money Issuing (3) Seigniorage Toal Obligaions (1) Exernal Reurn (2) General Governmen Defici (3) Public Enerprises Defici Toal Source: Auhor s calculaions During he period of sabilizaion and growh ( ) he financing needs were an average of 1.2 percenage poins (p.p.) and half of hem were covered by seigniorage. The reason why his seigniorage did no produced inflaion is ha GDP growh was imporan in his period. Exernal deb was also an imporan source of financing, covering around 32 percen of he financing needs. Regarding he obligaions ha had o be covered in his period, he general governmen defici and he public enerprises defici share an equal proporion and ogeher hey represened 4.4 p.p. of he financing needs. However hese needs were highly compensaed by negaive reurns o deb of 3.2 p.p., so he overall financing needs were of only 1.2 p.p.. 18 π W is he inflaion of he dollar price level of raded goods consumed in Bolivia, as we don have ha informaion we used he inflaion of he US. 19 In appendix A we display he accouning resuls using he World Bank (IDS) daa for he periods beween 1972 and