Socialists Made a Comeback in Bolivia, But the Boom Times Are Over
(Bloomberg Businessweek) -- It looked like regime change. In November 2019, after the armed forces’ chief called on him to step down, Evo Morales, Bolivia’s first indigenous president, boarded a plane and fled to Mexico, ending 14 years of socialist rule. He called it a coup.
Days later, Jeanine Añez, an opposition senator, seized control of the presidency, brandishing a giant Bible to symbolize that Christianity rather than indigenous rituals would guide Bolivia’s new rulers. Doctors from communist Cuba were expelled, and the country switched overnight from being a friend of Venezuela to an ally of the U.S.
One year later, the events of 2019 look like a temporary blip. The government of Añez became so unpopular that she withdrew her candidacy in the presidential election, and Morales’s socialist party, MAS, now under the leadership of Luis Arce, regained power. Arce got more votes on Oct. 18 than all his rivals combined, while his party won a majority in both houses of congress.
MAS owes its dramatic resurrection in part to Arce, who appealed to voters who’d tired of Morales after he ignored a referendum defeat on term limits to try to stay in power. Arce has a very different style from Morales: more academic and less confrontational. Corruption scandals that roiled the transitional government also gave MAS a boost. And even though Morales had resigned amid violent protests, the timing was in one way lucky. It meant the party dodged responsibility for managing the coronavirus pandemic, which sent the Andean nation into its deepest economic slump since the Great Depression.
The transition government blundered by trying to cling to power rather than simply organize elections, says Eduardo Rodriguez, who was president in 2005. The vote was postponed twice because of the pandemic. The more people lost their jobs or got sick with Covid-19, the more they missed the relative prosperity of the Morales era.
Arce, an economist who studied at the U.K.’s University of Warwick, has pledged to revive public investment, cut value-added taxes, and impose a wealth tax on the country’s millionaires. He oversaw fast growth as Bolivia’s finance minister from 2006 to 2017. That was an era mostly characterized by buoyant natural gas revenue, which allowed him to run a budget surplus while also ramping up welfare spending. Arce is unlikely to be anywhere near as fortunate as he takes over an economy in crisis, with soaring debt and poverty, dwindling dollar reserves, and lower prices for energy exports.
“Obviously, the good times aren’t coming back,” says Napoleon Pacheco, an economist who teaches at the Universidad Mayor de San Andrés in La Paz. “Those factors that gave such extraordinary benefit to Evo Morales don’t exist anymore.”
Bolivia, the poorest country in South America after Venezuela, is set to suffer an economic contraction of 7.9% this year, according to a forecast from the International Monetary Fund. The main credit ratings companies have cut Bolivia deeper and deeper into junk.
One of the risks they cited—political instability—has receded with Arce’s landslide and his new majority in congress. The October 2019 election, in which Morales won a short-lived victory, unleashed three weeks of violent chaos as the opposition alleged fraud and took to the streets, and there were fears that another contested vote this year would trigger more unrest.
Bolivia, a landlocked country of 11 million people, has a long history of coups and military interference in politics. MAS and its supporters never accepted the Añez government as legitimate.
But if the political crisis has now been resolved, other risks such as an overvalued currency and inadequate foreign exchange reserves remain to plague Arce after he takes office on Nov. 8.
The Morales government failed to diversify the economy to cut its dependence on commodities exports, Pacheco says. That’s hurting the country now that both volumes and prices have fallen for its natural gas exports to Brazil and Argentina.
Many Bolivians, including Arce himself, believe the next boom may come from the nation’s massive lithium deposits. During the campaign, he stood on the blinding white plain of the high-altitude Uyuni salt flat and said its lithium wealth could transform Bolivia into “that dignified and rich country we have always wanted to be.” Automakers need the metal to produce batteries for electric vehicles.
But the lithium-rich region of southern Bolivia is so remote, so far from the nearest port in Chile, and so poorly served with infrastructure that the nation is still nowhere near ready to cash in on this boom. “Bolivia keeps talking about lithium, but there are plenty of better options for any company seeking to develop a resource,” says Joe Lowry, president of Global Lithium LLC, which provides advisory services. The country is unlikely to become a significant producer of the metal in the next 10 years, he says.
Arce has also highlighted the potential of food produced in the rich farmlands in the eastern lowlands, though the sector is being held back by Bolivia’s overvalued currency, which makes exports expensive. The central bank has burned through more than half its reserves over the last five years to defend the boliviano’s peg of about seven per U.S. dollar.
Arce said during his campaign that it wouldn’t be appropriate to adjust the exchange rate but that doing so may depend on whether Bolivia’s neighbors see further devaluations in their currencies. The Brazilian real and the Argentine peso have both weakened more than 20% this year.
During the boom years, Bolivia’s international reserves peaked at almost $16 billion, giving the nation a solid buffer against crises. Now, at $6.6 billion, its reserves aren’t adequate “to provide a lot of flexibility or really buffer the economy from external shocks,” according to Fitch Ratings analyst Todd Martinez.
When gas prices fell in 2015, Arce boosted public spending to support the economy. Bolivia no longer has the “war chest” to do that, Martinez says. MAS’s departure from power may have proved temporary, but Bolivia’s economic crisis is likely to be more long-lasting.
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