Andean Socialism, once touted as the way forward for Latin America, and an alternative to “neoliberal” policies and markets, has collapsed once again. Bolivia is going through a severe economic crisis, marked by a currency shortage, rising inflation (7.94 percent annually as of October 2024), and increasing shortages of essential goods, particularly fuel.

Bolivia’s economic difficulties are not new. They can be traced back to policies implemented decades ago that led the country to become overly reliant on its natural resources, particularly oil and gas exports. Indeed, energy policy in Bolivia has historically been used as a fiscal policy or political lever. In the early 2000s, the government established a price band for oil, which would serve as a benchmark for future subsidies. Since then, the government has heavily subsidized fuel, spending more than $2 billion annually to maintain low prices for consumers (a subsidy equivalent to 4 percent of GDP). As with any subsidy, this may have provided temporary relief to the population; but it also created long-term distortions in the economy,  including the overconsumption of fuel and increased demand without a corresponding increase in domestic production. From 2014 to 2023, imports of fuel increased by 127 percent, while the national production of oil fell by 54 percent, and exports of natural gas decreased by 69 percent. The government has been financing these subsidies as part of an ongoing fiscal deficit, at an average level of 8.7 percent of GDP since 2014.  Meanwhile, it has been funding its overconsumption with debt, and consuming foreign exchange reserves down to their lowest level in 15 years. The country is now facing fuel shortages, long lines at gas stations, and the collapse of vital production chains, which are vital for the Bolivian economy. As the CEO of an agricultural trade association recently complained: “we are in a critical situation…, where the shortage of diesel is putting at risk not only the current harvest, but also the planting of 1.5 million [more] hectares…that we should have started in the summer.”

Alongside public spending, Bolivia’s public sector has been expanding at an unsustainable rate. With more than 500,000 public employees (for a population of about 12 million), the state has become a massive bureaucratic machine. Additionally, the state’s policy of maintaining a fixed exchange rate at 6.96 Bolivianos to the US dollar/USD since 2011 has caused a shortage of foreign currency.  It has also created a parallel market for the dollar, which is currently trading between 10.50 and 11.50 Bolivianos in private exchange houses.

Bolivia’s economic instability is part of a bigger problem.  Bolivia now ranks in the third quartile in the Economic Freedom of the World index.  It is especially weak in the areas of legal framework and regulatory environment; businesses often face arbitrary decision-making, unpredictable regulations, and corruption. This situation discourages both domestic and foreign investment, leading to a stagnant private sector that is unable to create the wealth and jobs necessary to support economic growth. Without a vibrant and competitive private sector, the state continues to expand its control over the economy, further exacerbating the problem. As of October 2024, Bolivia’s country risk was second in Latin America with the worst country risk index… surpassed only by Venezuela.  

After a difficult period in the 1970s and 1980s, Bolivia reformed its economy and rose to the second quartile of economic freedom in the early 1990s.  It remained there until 2005, when it fell back into the third quartile, under the Andean socialism of President Evo Morales.  Since 2005, Bolivia has been stuck in the third quartile, with the occasional dip into the bottom quartile of countries with the least economic freedom.

The solution to Bolivia’s crisis is not simply a resolution of the shortage of dollars. While that shortage is a key symptom of the larger problem, it is not the root cause. The real problem is the state’s role in the economy, including overreliance on state-controlled sectors, excessive public sector growth, lack of economic freedom, and lack of institutional support for the private sector. The state’s control of the economy has led to inefficiency, misallocation of resources, and a failure to incentivize the private sector to diversify sources of income. To address the country’s economic challenges, Bolivia will have to focus on reducing the state’s influence in economic matters, promoting legal certainty for businesses, and encouraging private sector investment through savings.

Bolivia must begin by reducing government subsidies, especially for fuel, and focus on allowing market-based solutions that allow for more competition and efficiency. Legal reforms are also needed to create a more predictable and transparent business environment, which will encourage both domestic and foreign investment. In addition, the government must prioritize economic diversification to reduce the country’s dependence on oil and gas exports and create new sources of revenue by liberating markets.  Alas, the Bolivian government is moving in the opposite direction. The General State Budget, presented in late November, projects an annual inflation rate of 7.5 percent in 2025, a public deficit of 9.2 percent of GDP, and, above all, poor expectations for the economy.

If Bolivia is to overcome its current crisis, it must address the real problem: the role of the state in the economy. By reducing state control, improving legal security, and fostering a more dynamic private sector with free markets, Bolivia can lay the foundation for a more stable and prosperous future.