Bolivia's tin and natural gas crises of 1985 - 1989

This paper is concerned with the negative shocks that affected Bolivia’s two main exports, tin and natural gas, in the second half of the 1980s, and with their effects throughout the economy. The shocks started shortly after a drastic stabilization program that the government had launched to tame a devastating hyperinflation (unrelated to the trade shocks). The interaction of the shocks with the anti-inflationary policies gives distinctive features to the Bolivian case. An additional element that distinguishes the Bolivian experience from others is that an ample liberalization of markets accompanied the stabilization program. For most of our analysis, the frame of reference is the theory of the construction booms developed by Bevan et.al (1989a, 1989b). However, in contrast with their approach, this study deals with: (a) negative shocks, and, (b) happening in the context of a significantly deregulated economy. The theory of the construction booms usually deals with positive shocks. Also, the fact that factor intensities in countries with minerals as main exports differ from the usual assumptions for developing countries adds a distinctive feature to the analysis. We started our study with a scrutiny on the perceptions of the economic agents on the nature of the shocks. We found that neither the timing nor the magnitude of the shock was anticipated. Once it happened it was not either considered permanent, although expectations on its duration varied across agents. With this building block, we investigated the responses of the economy. A main instrument for this task was the construction of counterfactuals that aim at capturing the situation had the trade shock riot happened.