Crisis in Bolivia?

Economic turmoil as elections loom.

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Commentary

Bolivia’s economy is on the brink of collapse. The country is experiencing its highest inflation in 38 years: in June alone, prices rose by 5.2 percent, which is not only three times higher than Argentina’s inflation, but also equivalent to what Peru records in two or three years. Bolivia is also facing a shortage of U.S. dollars and a wave of protests and road blockades, which exacerbates another problem: the lack of goods. From medicines and chicken to cooking oil and gasoline, Bolivians struggle to find basic products, and when they do, they pay exorbitant prices.

This is happening in the midst of an election year. The current president, Luis Arce, has an 80 percent disapproval rating according to a Delphi survey, and former president Evo Morales (from the same party) cannot run for office because the Constitutional Court has barred him from seeking yet another term. This has fueled an open power struggle between the two leaders, both wanting to control the party and the country. Each accuses the other of the economic collapse and undermining democracy, while Morales’s road blockades and demonstrations have deepened the shortages. Some polls suggest that if the economic situation persists, there could be a massive wave of migration to neighboring countries.

In 2021, Bolivia had the lowest inflation rate in South America, even lower than that of the United States, and one of the region’s fastest-growing economies over the last 30 years. To understand the current turmoil, we need to go back to 2006, when Evo Morales and his party, the Movement for Socialism (MAS), won the elections. This was a turning point for Bolivia—not only because he broke away from the country’s aspiring free-market economic model, but also because he won over 50 percent of the vote in the first round (a historic feat since democracy returned in the 1980s). Morales also became Bolivia’s first indigenous president.

With a strongly anti-imperialist and nationalist discourse, Morales, alongside his then-Economy Minister Luis Arce (now president), turned Bolivia’s policies around. A key move was the nationalization of natural resources: the state took control of energy companies, telecommunications, the Bolivian national airline, water utilities, and, most importantly, minerals and natural gas—Bolivia’s main exports.

Morales also reformed the Constitution, turning the country into the Plurinational State of Bolivia. This granted greater recognition to indigenous peoples and strengthened the state and cooperatives at the expense of large corporations and the private sector. This new Constitution also undermined the rule of law, made private property conditional, and stripped away individual rights.

Lastly, Morales openly criticized the United States, expelling the U.S. ambassador and the DEA, while aligning Bolivia with Hugo Chávez and Nicolás Maduro in Venezuela, Cuba’s Communist Party, and received support from China, Russia, and Iran.

Between 2006 and 2014, Bolivia’s model appeared as a success story, much like most Latin American nations at the time, largely due to historically high prices of commodities such as minerals and natural gas. The economy grew at rates of 4–6 percent per year, and because the government had nationalized resources, all export and production revenues from gas and mining flowed directly into state coffers. This allowed Bolivia to accumulate U.S. dollars in its central bank, maintain fiscal surpluses (spending less than it earned), and undertake massive public spending in infrastructure and social programs. The state funded sewer systems, hospitals, schools, and social assistance programs for mothers, children, and precarious workers.

During Morales’s administration, access to electricity rose from 68 percent to 92 percent, illiteracy dropped from 13 percent to 2 percent according to the World Bank, and extreme poverty fell, according to national data, from 38 percent to 12 percent. These achievements were referred to as the Bolivian Miracle.

In 2011, the government pegged the boliviano to the U.S. dollar, at a rate of 6.96. The goal was to lower import costs, indirectly subsidize gasoline, curb inflation, and increase public trust in the national currency.

Unfortunately, Bolivia’s economy lacked a solid foundation. Unlike neighbors such as Paraguay or Peru, which used the boom years to build more resilient systems, Bolivia became overly dependent on high gas prices. In 2014, global commodity prices plunged, including oil, soybeans, natural gas, and minerals. Between 2014 and 2015 alone, natural gas prices dropped by 39 percent, a devastating blow.

Bolivia’s foreign reserves began to fall, and the fiscal balance flipped from surplus to deficit as export revenues collapsed. The state spent heavily on exploiting existing gas fields but failed to explore new reserves. As older fields dried up, production fell. Private companies, discouraged by nationalization and restrictions, reduced investments. By the time global prices crashed, foreign investment had not only dried up but, in some years (2018–2019), even saw negative net investment.

From 2014 to 2019, Bolivia’s central bank reserves dropped by more than 50 percent, from $15 billion to $6 billion. The fiscal balance shifted from a 0.6 percent surplus to an 8 percent deficit, one of the highest in Latin America. The government belatedly increased spending in gas exploration, but such projects require years to yield returns. Meanwhile, no public spending cuts were made, adding pressure to the legally fixed exchange rate, which became harder to sustain with shrinking reserves.

Corruption scandals tarnished Morales’s administration. He changed the Constitution in 2009, ran and won a third time in 2014, and was able to run a fourth time in 2019 despite being rejected in a 2016 referendum. That year, election day was marred by controversy: the vote count was suspended for hours while Morales trailed, then resumed with him in the lead. The opposition denounced the fraud, and the Organization of American States (OAS) confirmed irregularities. Massive protests ensued, and Morales, abandoned by the military, resigned and went into exile in Mexico.

Jeanine Áñez served as interim president for a year and was later imprisoned in 2021 for conspiracy. A new election was called in 2020, and MAS candidate Luis Arce won with 55 percent of the vote. Despite the change in leadership, the economic model remained the same, and problems worsened. The brief boost from higher gas prices in 2022 due to the Russo–Ukrainian War faded by 2023. That year, Bolivia’s fiscal deficit surpassed 10 percent of GDP, and public debt kept climbing. By 2024, Bolivia had become Latin America’s second-riskiest borrower after Venezuela, with debt exceeding 90 percent of GDP, raising fears of insolvency.

Reserves fell below $2 billion in December 2024—eight times lower than in 2014. The government admitted that it lacked enough dollars to meet demand. Years of declining foreign investment and gas production had caused a persistent trade deficit since 2015, meaning that Bolivia spends more on imports than it earns from exports.

Facing reelection, Arce refused to cut public spending, reduce subsidies, or liberalize the economy. Instead, the government imposed price controls, stricter currency regulations, and restrictions on importers’ access to dollars. This led to severe shortages of fertilizers, medicines, fuel, cleaning supplies, and food. Prices skyrocketed, and distrust in the boliviano grew. People rushed to exchange bolivianos for U.S. dollars, which were scarce. The central bank imposed further restrictions, pushing demand to the informal market—common in countries like Venezuela or Argentina. Two exchange rates emerged: the official one at 6.96 bolivianos per dollar and the informal one at 12–14 bolivianos, roughly double, signaling expectations of devaluation.

Meanwhile, Evo Morales has been mobilizing his supporters to block roads and disrupt supply chains, blaming Arce for the crisis and deepening the shortages. Many Bolivians are buying into the narrative that the country was prosperous under Morales and the downturn began with Arce.

The elections are scheduled for Aug. 17, and neither Luis Arce nor Evo Morales will be a candidate—Arce by choice, and Morales due to legal disqualification. The MAS candidate, Eduardo Del Castillo, has less than 2 percent vote intention.

Given the current trajectory, Bolivia could be headed for a crisis similar to Argentina’s in 2001 or even Venezuela’s, with annual inflation soaring from 3 percent to 25 percent in just one year. Yet markets seem more optimistic: Bolivian bond prices have surged by 20 percent in dollar terms this year. Analysts attribute this to polls suggesting that after 20 years in power, MAS could lose the presidency, opening the door for an opposition government.

From the Foundation for Economic Education (FEE)