Bolivia

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The Hyperinflation in Bolivia International Economics Prof.: Jasmina Osmanković Ass.: Hatidža Jahić Sarajevo, fall 2011 Team members: Nejla Bašić Belma Mizdrak Zerina Muharemović

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To remind: What is in flation ? Extrem ely rapid or out of control inflation. http:// www.investopedia.com/video/play/monetary-inflation#axzz1eMRLiTlf What is h yperinflation ? A rise in the general level of prices of goods and services in an economy over a period of time.

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What happened in Bolivia?

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Bolivia in 1980s Major external shocks: the rise in world interest rates the cutoff in lending from the international capital markets the decline in world prices of Bolivia's commodity exports

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The inflation in Bolivia during 1984 and 1985 was the most rapid in Latin American history and one of the highest in world history.

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Description of the Hyperinflation and the Stabilization Periods The Bolivian hyperinflation may be unique ... ...as the only case that did not arise as a result of.... ... a foreign war, or a political revolution.

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Factors of hyperinflation During the 60s and mostly of the 70s - important economic growth (boom of commodities prices and capital inflows )

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Figure 1:Real GDP per capita growth (1990=100 ) Figure 1, Bolivian growth performance has been disappointing (with a 0.75% average annual growth from 1970 to 2006). The relatively good performance of the 70s (2.78% average annual growth), was reversed by a severe contraction at the beginning of the 80s

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Table 1: Growth of prices of the main export commodities of Bolivia Prices of lead, silver and tin fell between 1979-1981, by 25.25%, 24.15% and 2.84% (annual average). All those changes in international prices had a NEGATIVE effect on export performance

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Figure 2: Evolution of Bolivian exports and imports from 1974 to 2006 . International reserves position fell 29% between 1979-1981 (annual average) This situation was no favourable to economic performance due to foreign debt begun to grow since 1978.

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Figure 3: Total debt as pecentage of GDP In the end of the 70s, increase of international interest rates that raise the cost of debt service in Bolivia.. All those shocks complicated the fiscal situation in Bolivia

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Figure 4: Revenues, expenditures and fiscal deficit as pecentage of GDP The growth of the deficit came for two sources. 1 - fiscal revenues decreased due to the decrease of the tax base and the negative effects of inflation in the value of total tax collection (so called Olivera-Tanzi effect). 2 - fixed expenditures grew as personal services and debt services. So, fiscal deficit increased (as percentage of GDP) during the beginning of the 80s.

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Table 2: Inflation and devaluation in Bolivia By the end of 1980, Bolivian access to the private international capital markets had dried upThe IMF and World Bank also ceased lending. The economic situation was so bad that the military returned to the barracks in 1982.

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Three fundamental aspects of the rise of hyperinflation: 1. the cutoff in international lending and the increase in international interest rates 2. the recourse of seignorage (inflation tax) jumped as the net international resource transfer turned negative 3. the increasing inflation cause the tax system to collapse, with total govrenment revenues falling

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The most important cuts were made in public spending and then in the international debt-servicing

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On the macroeconomic side, the program contained FOUR explicit elements, and those are :

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By August, 1985., the Us dollar and not the Bolivian peso was satisfying two of 3 classic roles of money: unit of accoun t and the store o f value. In Bolivian case, the government was able, at least temporarily, to stabilize the exchange rate because it had at least temporarily eliminated its flow budget deficit.

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There are two major pieces od evidence in support of the proposition that price stabilization preceded the credibility of program by several months: CONCLUSION We have to conclude that the exchange rate stabilization played the main role in the immediate dissinflation...

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Bolivia - Economic situation 1982-1988 http://www.youtube.com/watch?v=ittBp7z-TbM

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Thank you for your attention .

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