Hot spots: Bolivia.(economy)(Country overview)

The regime of President Evo Morales, the man who emerged from last December's elections as the nation's first indigenous Head of State, inherited an excellent economy. Growth was at an annual clip exceeding 4%. The fiscal deficit had narrowed to 2.9% of GDP. Inflation was contained at under 5% per annum. With bank deposits and credits having increased for the first time in several years, the financial sector showed improved stability. The balance of payments was strong, and international monetary reserves had risen to $1.3 billion from $872 million a year earlier.

At this point, Bolivia's prospects for the rest of 2006 still look good, as the economy has maintained positive trends. GDP growth remains brisk and should come to at least 4.0% for 2006. Inflation has stayed in the low single digits. The current-account balance of payments remains in surplus, and hard-currency reserves are still rising. It is worth noting, though, that high oil & gas earnings are virtually the only thing maintaining the economy's strength. Sound official policies have given way to populist and socialist nostrums, and even these are not being implemented consistently. The regime has delayed the nationalization of the oil & gas industry because the state-hydrocarbons company, Yacimientos Petroliferos Fiscales de Bolivia (YPFB), has neither the money nor the staff to run the sector. It is at odds with all the foreign oil companies operating in Bolivia, which were given 180 days from May 1 this year to renegotiate their contracts.

Because of all the uncertainty, investment in Bolivia's oil & gas industry dropped to a mere $60 million in the first half of this year from an already woefully insufficient $103 million in the 2005 span. Mr. Magela Bernardes, the president of the Bolivian Hydrocarbons Chamber, the country's oil lobby, predicts that in 2006 "companies will invest in Bolivia five times less than five years ago," and this at a time when the country should be taking advantage of what has been one of the biggest oil & gas booms in history.

There are some indications that President Morales is trying to backpedal in his aggressive nationalization drive, but he was seen, before he left for the UN meetings in New York, posing on a Chinese tractor and officially launching his ambitious agricultural reform program by handing out 2,301 titles to state-owned land as part of a promise to redistribute 50 million acres, including privately owned ranches defined as "unproductive," obtained "illegally," or "used for speculation."

A good case can be made for land reform in a country in which 90% of the arable terrain is owned by 50,000 families. But the "agrarian revolution" focuses mainly on the Eastern lowlands, where commercial farmers produce soya, cotton, and other cash crops worth $600 million a year, mostly for export. The planned redistribution of properties has already caused banks to curb their lending and has scared off foreign investors. Most of the beneficiaries of the reform will, presumably, be migrants from the Altiplano, who have little idea of lowland farming. There are ...