International recession and domestic fiscal mismanagement create a crisis. External financing from private sources ends as foreign banks reassess Bolivia's ability to service its debt. Total output declines by 4 percent per year. Siles Zuazo's government tries unsuccessfully to negotiate a series of politically controversial and tentative stabilization programs with the IMF.
The illegal coca and cocaine industry props up the economy with U.S. dollars. Paz Estenssoro introduces his dramatic New Economic Policy (NPE), a "shock therapy" program designed by Sánchez de Lozada and Jeffrey Sachs. The NPE liberalizes import policies, restructures the public sector, deregulates the economy, privatizes state enterprises, freezes public wages, and eliminates subsidies.
The NPE results in a dramatic drop in inflation, slow but steady economic growth, and increased private (domestic) investment. A strong underground economy based on contraband, coca production, and the informal sector still employs an estimated one-third of the workforce and is thought to total more than official international trade. Foreign investment is almost nonexistent.
Paz Zamora continues his uncle's neoliberal reforms, and the economy grows, albeit slowly. He promotes the NPE and works to develop agriculture and small and medium-sized industries. Investment in the private sector and mining increases. The cocaine trade, however, continues to be a major contributor to the economy.
Through an aggressive "capitalization" program, investors acquire 50 percent ownership and management control of the state oil company, the telecommunications system, and electric utilities, with the other 50 percent going to national pension funds. Private investment in the hydrocarbon and mining sectors surges. Economic growth in capital-intensive sectors emphasizes regional disparities.
Already slow annual economic growth of 2.5 percent is further affected by tight government budget policies and the fallout from the Brazilian and Asian financial crises. Income per capita falls, and unemployment rises. In 2002 incoming president Sánchez de Losada promises public works investments. His plan to increase income taxes for emergency revenue fails amid violent protests.
Years of free-trade reform fail to narrow the gap between rich and poor. U.S.-backed efforts to limit coca production through alternative crops also fail. Blocked in his effort to balance the budget by raising income taxes, Sánchez de Lozada plans to spur growth by exporting natural gas to foreign markets. Amid deadly riots he resigns, and his successor, Carlos Mesa, reverts to protectionism.
back to top