Here’s why socialist Bolivia thrives as socialist Venezuela collapses

Updated January 07, 2017


A man waits in line to buy food at a grocery store in La Urbina, Venezuela.— The Washington Post
A man waits in line to buy food at a grocery store in La Urbina, Venezuela.— The Washington Post

VENEZUELA’S economy is a catastrophe of Dickensian proportions. And for plenty of readers, that’s hardly a surprise. Every time I write about it, dozens pipe in with some variant on the same comment: “Socialism leading to total ruin — who would’ve thought?!” The temptation to read Venezuela’s collapse as ideological comeuppance seems to be irresistible. My country, people tell me again and again, is just the end of the line on the Road to Serfdom.

There’s just one problem with all this bashing of socialism: Bolivia.

Since 2006, Bolivia has been run by socialists every bit as militant as Venezuela’s. The country has experienced a spectacular run of economic growth and poverty reduction with no hint of the chaos that has plagued Venezuela. While inflation spirals towards the thousand-per-cent mark in Venezuela, in Bolivia it runs below four per cent a year. Shortages of basic consumption goods — rampant in Caracas — are unheard of in La Paz. And extreme poverty — now growing fast in Venezuela — affects just 17 per cent of Bolivians now, down from 38 per cent before the socialists took over 10 years ago, even as inequality shrinks dramatically. The richest 10 per cent in Bolivia used to earn 128 times more than the poorest 10 per cent; today, they earn 38 times as much.

How can this be? It’s true that Bolivia has been on the receiving end of a staggering boom in natural resources for much of the past decade, as both the volume of its gas and mining exports and the price they fetch abroad jumped at the same time. Export revenue grew six-fold in the decade after Evo Morales, the charismatic hard-left president, took power, from $2.2 billion just before of his election to $12.9 billion at the peak of the boom.

So yes, that’s a bit like putting the game settings on “easy” when it comes to development. But it can hardly explain why Bolivia thrives while Venezuela spirals: Venezuela enjoyed an even bigger commodities boom, with exports climbing from $23 billion before the oil boom to $153 billion at its peak.

Turns out it’s not the boom itself that matters, it’s what you do with it.

Fiscal prudence

Venezuela’s socialists spent the entire export windfall, and then some. Bolivia’s socialists saved much of theirs.

Venezuela ran large budget deficits every year, even as oil prices skyrocketed between 2005 to 2014. That meant the country was piling on debt even as government revenue exploded — a senseless, pro-cyclical policy that left Venezuela up a creek without a paddle when commodity prices tanked.

In the meantime, Bolivia was running budget surpluses every year between 2006 and 2014. This allowed it to draw down the public sector’s debt, which fell from 83 per cent of GDP in 2003 to just 26 per cent in 2014, even as Bolivia built up its international reserves dramatically, from $1.7 billion in 2005 to $15.1 billion at the end of the boom in 2014.

Turns out the difference between Bolivia and Venezuela has nothing to do with abstract ideological labels, and everything to do with fiscal prudence.

I know, I know, fiscal prudence sounds deadly dull, but it makes an enormous difference in real people’s lives. While Venezuela’s reckless socialists were impoverishing the country’s once thriving middle class, Bolivia’s socialists were creating an entirely new indigenous middle class, even spawning a whole new style of architecture along with it. Why? Because newly affluent Bolivians can afford it: Per capita GDP more than tripled from just $1,000 a year to over $3,200 over a decade. At the same time, new government social programmes designed to help older people, mothers and other at-risk groups saw to major improvements in social indicators. To take just one, consider this: Thirty-two per cent of Bolivians were chronically malnourished in 2003. By 2012, just 18 per cent were.

Bolivia has problems too

The point here isn’t to idealise Bolivia’s socialists: The country remains badly governed in important ways. Corruption remains endemic in Bolivia’s public sector, with most infrastructure contracts given out on a no-bid basis to ruling-party cronies. And while nowhere near as extreme as Venezuela’s turn to dictatorship, Bolivia’s political scene has seen worrying authoritarian drift, closing down the spaces for dissent that any proper democracy needs to function.

Even the social achievements have to be taken with a grain of salt. There’s a good case to be made that poverty reduction would’ve been faster and more sustainable if the Bolivians hadn’t needlessly antagonised the private sector. As it stands, facing a sometimes hostile administration, the foreign companies that actually operate Bolivia’s mines and gas fields are working aggressively to squeeze out their deposits as fast as possible and get out, investing little or nothing on risky exploration and development.

And past performance is no guarantee of future returns. Bolivia is now clearly having trouble adjusting to lower commodity prices: Since 2015 it’s been running large deficits, drawing down its international reserves far too fast as the government resists the kind of spending cuts it will take to adjust to the new normal. Keep that up for another few years, and Bolivia could find itself on the same downward trajectory Venezuela is now on.

Still, because they kept spending under control during the fat years and drew down debt, Bolivia’s socialists have many more options for dealing with the lean years than Venezuela’s could dream of.

What’s clear is that the supposedly obvious link between socialism and economic ruin doesn’t check out. It’s not just that it’s easy to find counter examples of socialist governments that fail to set off economic collapse, like Bolivia. It’s also that catastrophe has more often than not come at the hand of committed anti-socialists. Bouts of acute economic chaos ending in hyperinflation broke out in Argentina, Brazil, Peru, and even in Bolivia itself back in the 1980s, each time under centrist or right-wing governments deeply at odds with the socialist left.

Socialism, it turns out, explains nothing about why some countries turn into economic basket cases. Instead, it muddles the debate for political ends, delegitimising progressive policies that have often been shown to work while convincing conservatives that it’s okay when they recklessly overspend. After all, if it isn’t economic recklessness that causes economic chaos, but rather an abstract noun (“socialism”), why shouldn’t right-wingers overspend?

—By arrangement with The Washington Post

Published in Dawn, January 7th, 2017