Does it hurt your pocket?

CG_MachicadoAfter the hyperinflation of year 1985, Bolivia started a new economic cycle characterized by an economic stability but with a slow growth. This cycle has not ended yet although important transformations took place, in particular in year 2003 where a profound social and political crisis ended with the upcoming of the actual president and the implementation of a new economic vision based on the State intervention in the economic activity.

Nevertheless, during this period an important break occurred in year 1999 as it is seen in the following figure. Notice that between 1990 and 1998 Bolivia’s real GDP per capita has been above its trend and in 1999 it suddenly dropped and recovered its path above trend only in 2007. In 1992 there is also a fall in this indicator, but GDP per capita remained above its trend.

Figure 1
Bolivia Real GDP per capita
bolivia real gdppercapita
Source: Author´s elaboration based on INE´s information.


Definitely, Bolivia experienced a crisis in 1999, not a longstanding one since its economic effects were only transitory, but a crisis that certainly questioned the way the economy was working and probably with permanent social and political effects.

It is certainly difficult to prove this, but it is commonly said that only when “something hits your pocket, is that people ask for changes”1 The most direct way that a crisis can hit people’s pocket is by a decay in labor conditions. Figure 2 depicts the evolution of annual rates of job creation, destruction and net employment growth from 1988 to 2001 constructed by employing firm-level data from the Bolivian Annual Manufacturing Survey.2

Figure 2
Net and Gross Job Flows RaTES IN mANUFACTURING, 1988-2001
manufacti
Source: Author´s elaboration based on the Bolivian Annual Manufacturing Survey

 These figures point to distinctly different cyclical patterns for job creation and destruction. As expected job creation fell in 1999 and job destruction rose. But the cyclical behavior of these two series has not been symmetrical. Job destruction rose dramatically in 1999 implying a huge fall in the rate of net employment growth. In fact this rate fell by -6.7 percent. Even though this rate recovered in the next year (9.5 percent) we claim that the effects on people remained and this is one of the reasons why the development model was questioned and changed in 2006.

What were the determinants of the 1999 crisis is a question that has not been completely answered yet. Some authors attribute it to the Brazilian crisis (see Calvo, 2006)3and other

also to the reduction of the Foreign Direct Investment and the reduction in the plantations of coca leafs (see Chávez and Muriel, 2006)4. But, independently of the reasons, this episode reveals the fragility of the Bolivian economy to crisis, in particular, when the crisis hurt people’s pockets.

Do you think the current financial crisis may be hurting different people’s pockets to varying degrees? Share your thoughts below.

Carlos Gustavo Machicado has worked as a macro-sector analyst for the Unit of Economic Policy Analysis (UDAPE). His areas of interest are Macroeconomics, Economic Growth, Productivity, General Equilibrium Models and Economic Policy.

[1] In Spanish “cuando a la gente le duele el bolsillo es que pide cambios”.
[2] The net employment growth rate is the difference between the job creation rate and the job destruction rate.
[3] Calvo Sara (2006), “Applying the Growth Diagnostics Approach: The Case of Bolivia,” The World Bank.
[4] Chávez Gonzalo y Beatriz Muriel (2006), “El Circuito Coca-Cocaína: Implicaciones Macroeconómicas,” mimeo.


* Senior Researcher, Institute for Advanced Development Studies, La Paz, Bolivia. The author happily receives comments at the following e-mail: cmachicado@inesad.edu.bo.

 

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