The Economic Model of the Fixed Exchange Rate in Bolivia: Towards Price Stability and Economic Instability

Abstract

The objective of this article is to demonstrate and analyze whether the fixed exchange rate is a variable that benefits or harms the Bolivian economy in the short term, medium term and long term. Because it is a fundamental economic variable, mainly to keep prices stable, that is, low and controlled inflation in national prices, this fixed exchange rate has been frozen since 2011. In addition, it regulates or affects foreign trade, i.e., imports and exports, which have been dragging a deficit in the trade balance, which favors imports and smuggling to the detriment of national production and a growing informal labor market. The Bolivian economy is especially dependent on exports without specialization and added value, such as natural gas, minerals, mainly gold, legally and illegally, among others. In addition, the significant deterioration of macroeconomic variables, as reflected in historical data, such as the collapse of savings due to the gradual fall in net international reserves since 2014, leaving the vaults of the Central Bank of Bolivia with scarce reserves in gold and foreign currency, as well as the significant increase in internal and external public debt, Both of them have reached the Gross Domestic Product, at the same time, the increase in public spending in the public sector and public administration in general and the addition of public strategic companies, the latter seeking to replace imports of the productive apparatus, generating a more robust state apparatus and with levels of fiscal deficit recorded in the last ten years and taking into account the progressive subsidies for imports of fuels such as gasoline and diesel in the face of the growing demand for these fuels legally due to the growing vehicle fleet and illegally due to drug trafficking, generating a deficit in the balance of trade. Finally, the levels of corruption and country risk reflected in recent months by specialized institutions in 2023 show a deterioration of the Bolivian economy. Thus, this research will demonstrate the effects of the economic, social, community and productive model with a fixed exchange rate on the Bolivian economy and the effects on macroeconomic variables.