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Article Summary

Kohl, Benjamin, 2004. Privatization and Regulation: A cautionary tale from Bolivia, submitted to International Journal of Urban and Regional Research, forthcoming 28(4) 2004.

The author, Ben Kohl, uses Privatization in Bolivian experience to illustrate that there are limitations of privatization in poor market regulations. On one hand, Kohl points out several advantages of privatization from both economic and political terms. They are increases in market operation efficiency as well as individual freedom, decreases in occurrences of corruption in state-owned-enterprises (SOEs), and liberalized market environment that promotes economic growth. On the other hand, however, Kohl also warns the disadvantages that accompany with privatization, which are the decreases of governmental services and revenues (p. 1-2).

Bolivia is one of the poorest countries in Latin America. The main revenue of the country depends on the export of raw materials. Since 1980, Bolivia has experienced two major economic breakdowns. In 1985, its inflation rate also rose to 20,000 % (p. 4). One of the idiosyncrasies of Bolivia is its informal economy, which includes the contraband and remittance of cocoa-cocaine. Scholars estimate that these underground economic activities count nearly as much as half of the whole nations economic activities, which are employed around 2/3 of all Bolivians (p. 7).

The path of Bolivian privatization began in 1985, when the New Economic Plan succeeded in bringing hyperinflation under control. The privatization became aggressive after Sanchez de Lozada won the election in 1994. The Law of Capitalization allowed the six largest state-owned firms to be privatized. These firms included businesses in oil, gas, telecommunications, airlines, power generation, and railroad (p. 10). The Bolivia government sold out 50% of its SOE shares and kept 49% of remaining shares into pension fund administrators (AFPs). The reason behind holding the remaining SOE shares was to pay a universal old age pension called Bonosol. The government administration believed that foreign investments would not only enable increase in economic development from 4% to 11%, but also create 500,0000 new job opportunities over a four- year period. Sanchez had three goals in capitalization. They were:

(1) To create a privatization program with a social content

(2) To increase rates of economic growth over the medium and long term

(3) To change the governments role as the primary economic actor (p.3).


However, Sanchezs administration could not achieve his goals after all for six main reasons. Firstly, policy makers failed to consider that the quality of economic growth counts as much as the quantity in job creation. Secondly, the capitalization led to massive firings of unionized workers. Thirdly, the pension fund did not work. The AFPs had to borrow 44 million dollars with the interest rate at 11%. The AFPs could not raise the cash by selling its stocks due to the difficulties in establishing the Bolivian stock market. Fourthly, poor market regulatory and high social risk led investors to look to the short term and expect to earn risk premiums. Fifthly, the government was short of revenues because of the selling of its SOEs. The government also had difficulty to tax its citizens, as the most accepted business practice to most Bolivians was to avoid taxes. Lastly, the unhealthy ownerships of privatized companies allowed certain personals to obtain internal business information, and therefore, easily to anticipate changes in stock prices (p. 14-17).

In conclusion, the Bolivian government failed to capitalize state-owned companies as a whole, although the capitalization succeeded in both attracting foreign investment and reducing the governmental interference in economics. The Bolivian economy failed to respond as predicted to the influx of foreign investment capital. Thousands of anticipated jobs never materialized, which instead caused the outflow of talent. The foreign investors reinvested and transferred the profits out of the country instead of distributing their earnings to the local government and paying taxes in Bolivia. Facing the sharp drop in revenue, the only option that the government had was to reduce its expenditures on health and education. Bolivian privatization failed in the absence of appropriate regulatory and market infrastructure (p.27-28).