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Bolivia Hyperinflation: Class notes 7

Terms in this set (5)

DISTORTIONS IN THE ECONOMY
• By 1984 the public deficit had risen to nearly
20% of GNP.
• The exchange rates were fixed. This produced
an overvalued exchange rate.

DISTORTIONS IN THE ECONOMY
• Exchange controls were imposed to
restrict the amount of hard currency in
the system.
• Higher demand of international
currency the black market flourish
• 1985, the official ER was 67K pesos per $1,
the black market sold $1 for 1,143,548 pesos
(overvaluation of 1600%).

DISTORTIONS OF HYPERINFLATION
• Companies shift away from production to financial
scams:
• one firm borrowed $ from the central bank pretending to M
tractors; however, the firm will bring empty crates shipped
through customs, and instead of investing in new
machinery will sell the $ in the black market.
• Underground transactions emerged. Tin miners
smuggled ore out of the country to exchange it for $s in Peru. During
this crisis Peru with no tin mines became a tin exporter.

DISTORTIONS OF HYPERINFLATION
• Inflation increased the deficit because real tax
revenues fell due to lags in tax collection. Total
government revenues fell from 9 to 1.3 percent of GNP
in first half of 1985.
• Workers left their jobs early (if they came in at all) to
join in the speculative hoarding of dollars and basic
goods.
• Bolivians intensified drug production to earn dollars.

ORTHODOX SOLUTION: STABILIZATION PROGRAM
August 1985, new President Victor Paz Estenssoro,
announced an Orthodox Stabilization Program.
Reducing Fiscal Deficit via:
• ISI and state-led development strategy was
abandoned.
• Reduction in gov deficit
• Sharp increase in public sector prices
• Reduction in subsidies to mining industry
• Public sector wage freeze

ORTHODOX SOLUTION: STABILIZATION PROGRAM
• SOEs were privatized or scaled down, reducing
the public sector wage bill.
• COMIBOL the stated tin producer, reduced employment from 20K in
1985 to 7K in 1987.
• Tax reform. Confidence in new government resulted in
higher tax compliance.
• Exchange rate stability
• Devaluating the peso

MORE ON STABILIZATION PROGRAM
Trade liberalization was implemented.
Adoption of uniform import tariff
Elimination of import prohibitions
Foreign competition coupled with exchange
rate stability played a price control role bc
domestic produces were constrained from
raising prices beyond the imported good price
in dollars.

MORE ON STABILIZATION PROGRAM
• International bankers welcomed all these
changes.
• Late 80s: public debt was negotiated.
Official debt was $3.4 billion w/131 private
banks.
• Bolivia offered to buy-back its external debt at
about 8 cents to the dollar.
• 53 banks offered $300 million debt reduction

MORE ON STABILIZATION PROGRAM
• Dollar deposits were legalized without proof of
origin, permitting the entry of coca dollars into
Bolivia.
• Repatriation of capital flight
• An Emergency Social Fund (ESF) was financed by
the Inter-American Development Bank & the World
Bank.
• This fund created jobs in infrastructure reconstruction:
nearly 41K new jobs were created.