Infrastructure Spending Led to Hyperinflation in Bolivia

January 1, 2012

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Before the Latin America debt crises in the 1980s, "large government spending, driven mainly by ambitious public investment programs and populist polices resulted from the fact that, in these countries there is a very unequal income distribution between very rich with enough political power to avoid heavy taxation and very poor who are in high demands for public spending."

Most of the Bolivian external debt was related to the rapid growth of mega investment projects. Foreign borrowing turned into money printing once they were cut off from external debt markets.

Jeffrey Sachs research noted the structural problems that led to Bolivia’s hyperinflation, specifically:

  1. The very short time horizon of Bolivian governments.
  2. The use of state enterprises as a vehicle for political control.
  3. Use of state enterprises as a conduit to monitor investment projects
  4. The overvaluation of the exchange rate,which led to a misallocation of investment spending into highly capita intensive projects and which increased the budget deficits of the public enterprises.
  5. The use of state enterprises as buffers for macroeconomics shocks.

A shift in US monetary policy was the catalyst that pushed Bolivia to hyperinflation, but the ground had been made fertile by government spending. Deficits, indexed wages, and political chaos let to monthly inflation hit 182.8% at the zenith.

“Misjudgment about the country’s true macroeconomic situation;” specifically, “from the fact that Bolivia’s strong economic performance of in the 1970s reflected a temporary terms of trade improvement…“

“The low interest rates on international loans were perceived as permanent when in fact they turned out to be temporary.”

HS: Which country or countries fit this profile? There are several.

Source: inflation and hyperinflation in the 20th century causes and patterns (PDF)
 
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