Decree 21060
Encyclopedia
Supreme Decree 21060 promulgated by Bolivia
n President Víctor Paz Estenssoro
on 29 August 1985, was a legal instrument that imposed neoliberal
economic policies in order to end Bolivia's twin crises of international debt and hyperinflation.
In 1985, under the fourth (and final) term of President Paz Estenssoro
, the economic situation in Bolivia
was undermined with a galloping hyperinflation (inherited from Hernán Siles Zuazo
) and the country was unable to pay its debt to the IMF
. A plan was drawn by Jeffrey Sachs
, Professor at Harvard University
, and at that time active as economic adviser to the Bolivian government. Bolivia
was the first country where Jeffrey Sachs
could test his theories.
The plan, named decree 21060, was adopted by the Bolivian government, a move approved by the IMF
, which immediately gave Bolivia
$57 million dollars in credit. The World Bank
as well began again lending money to the country.
Whereas the inflation could reach up to 20.000%/year in 1985, when Jeffrey Sachs
left the country two years later it had fallen to 11%. But the "lateral damage" of his plan also occurred in the destruction of the already meager productive sector. The only sector which thrived was the production of cocaine
. Where in 1980 only 17% of labor market was employed in the cocaine
sector it rose to 37% in 1990.
The main "shock therapy"
measures of decree 21060 in Bolivia were:
1. The linking of The Bolivian economy to the US Dollar
. The Bolivian peso
devaluated with 93% over one night, in fact installing the US Dollar
as currency
and denying the country to commit an own monetary policy
. Accounts
in any currency
were authorized and interest rates
were freed.
2. A drastic pushing back of the government shortage. This actually meant adapting tariffs
and price
s to the "reality", resulting in a price explosion of goods and services
(e.g. petroleum prices
raised to the international level, the price of gasoline
went from 0.04 to 0.30 per liter). It meant also dismissing of two thirds of the employees of the tin
and oil
companies managed by the government and scaling back the salaries
of the remaining third part and public sector
salaries
were frozen till December 1985. This measure finally meant also the government ended all subsidies
to the public sector
.
3. The liberalization
of the market
. This meant next to the end of restrictions from above also the end of protection of certain destitute sectors by the government. The Bolivian Development Corporation, one of the largest state enterprises, and the National Transportation Authority were dissolved, passing their property on to regional development corporations. These in turn had the task of privatization
of enterprises. Restrictions on foreign commerce
were abolished with the elimination of prohibition
s and quota
s. Above that a single duty
of 20% was fixed for all importations. This resulted in the local production
of goods and services
coming under enormous press and also mainly succumbed.
4. In order not to place the Bolivian economy under unnecessary pressure the payment of the foreign debt was stopped for some years. This agreement between Bolivia
and the IMF
was done under the strict condition that the complete economic reforms, as drawn by Jeffrey Sachs
would be implemented without condition.
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Bolivia
Bolivia officially known as Plurinational State of Bolivia , is a landlocked country in central South America. It is the poorest country in South America...
n President Víctor Paz Estenssoro
Víctor Paz Estenssoro
Ángel Víctor Paz Estenssoro was a politician and president of Bolivia. He ran for president 8 times , winning in 1951, 1960, 1964, and 1985....
on 29 August 1985, was a legal instrument that imposed neoliberal
Neoliberalism
Neoliberalism is a market-driven approach to economic and social policy based on neoclassical theories of economics that emphasizes the efficiency of private enterprise, liberalized trade and relatively open markets, and therefore seeks to maximize the role of the private sector in determining the...
economic policies in order to end Bolivia's twin crises of international debt and hyperinflation.
In 1985, under the fourth (and final) term of President Paz Estenssoro
Víctor Paz Estenssoro
Ángel Víctor Paz Estenssoro was a politician and president of Bolivia. He ran for president 8 times , winning in 1951, 1960, 1964, and 1985....
, the economic situation in Bolivia
Bolivia
Bolivia officially known as Plurinational State of Bolivia , is a landlocked country in central South America. It is the poorest country in South America...
was undermined with a galloping hyperinflation (inherited from Hernán Siles Zuazo
Hernán Siles Zuazo
Hernán Siles Zuazo was a politician from Bolivia. He served as his country's constitutionally elected president twice, from 1956 to 1960 and again from 1982 to 1985....
) and the country was unable to pay its debt to the IMF
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
. A plan was drawn by Jeffrey Sachs
Jeffrey Sachs
Jeffrey David Sachs is an American economist and Director of The Earth Institute at Columbia University. One of the youngest economics professors in the history of Harvard University, Sachs became known for his role as an adviser to Eastern European and developing country governments in the...
, Professor at Harvard University
Harvard University
Harvard University is a private Ivy League university located in Cambridge, Massachusetts, United States, established in 1636 by the Massachusetts legislature. Harvard is the oldest institution of higher learning in the United States and the first corporation chartered in the country...
, and at that time active as economic adviser to the Bolivian government. Bolivia
Bolivia
Bolivia officially known as Plurinational State of Bolivia , is a landlocked country in central South America. It is the poorest country in South America...
was the first country where Jeffrey Sachs
Jeffrey Sachs
Jeffrey David Sachs is an American economist and Director of The Earth Institute at Columbia University. One of the youngest economics professors in the history of Harvard University, Sachs became known for his role as an adviser to Eastern European and developing country governments in the...
could test his theories.
The plan, named decree 21060, was adopted by the Bolivian government, a move approved by the IMF
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
, which immediately gave Bolivia
Bolivia
Bolivia officially known as Plurinational State of Bolivia , is a landlocked country in central South America. It is the poorest country in South America...
$57 million dollars in credit. The World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
as well began again lending money to the country.
Whereas the inflation could reach up to 20.000%/year in 1985, when Jeffrey Sachs
Jeffrey Sachs
Jeffrey David Sachs is an American economist and Director of The Earth Institute at Columbia University. One of the youngest economics professors in the history of Harvard University, Sachs became known for his role as an adviser to Eastern European and developing country governments in the...
left the country two years later it had fallen to 11%. But the "lateral damage" of his plan also occurred in the destruction of the already meager productive sector. The only sector which thrived was the production of cocaine
Cocaine
Cocaine is a crystalline tropane alkaloid that is obtained from the leaves of the coca plant. The name comes from "coca" in addition to the alkaloid suffix -ine, forming cocaine. It is a stimulant of the central nervous system, an appetite suppressant, and a topical anesthetic...
. Where in 1980 only 17% of labor market was employed in the cocaine
Cocaine
Cocaine is a crystalline tropane alkaloid that is obtained from the leaves of the coca plant. The name comes from "coca" in addition to the alkaloid suffix -ine, forming cocaine. It is a stimulant of the central nervous system, an appetite suppressant, and a topical anesthetic...
sector it rose to 37% in 1990.
The main "shock therapy"
Shock therapy (economics)
In economics, shock therapy refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large scale privatization of previously public owned assets....
measures of decree 21060 in Bolivia were:
1. The linking of The Bolivian economy to the US Dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
. The Bolivian peso
Bolivian peso
The peso boliviano , divided into 100 centavos, was the currency of Bolivia from January 1, 1963 until December 31, 1985. It replaced the boliviano at 1 peso boliviano = 1000 bolivianos...
devaluated with 93% over one night, in fact installing the US Dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
as currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
and denying the country to commit an own monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
. Accounts
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
in any currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
were authorized and interest rates
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
were freed.
2. A drastic pushing back of the government shortage. This actually meant adapting tariffs
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
and price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
s to the "reality", resulting in a price explosion of goods and services
Goods and services
In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility. It is often used when referring to a Goods and Services Tax....
(e.g. petroleum prices
Price of petroleum
The price of petroleum as quoted in news generally refers to the spot price per barrel of either WTI/light crude as traded on the New York Mercantile Exchange for delivery at Cushing, Oklahoma, or of Brent as traded on the Intercontinental Exchange for delivery at Sullom Voe.The price...
raised to the international level, the price of gasoline
Gasoline
Gasoline , or petrol , is a toxic, translucent, petroleum-derived liquid that is primarily used as a fuel in internal combustion engines. It consists mostly of organic compounds obtained by the fractional distillation of petroleum, enhanced with a variety of additives. Some gasolines also contain...
went from 0.04 to 0.30 per liter). It meant also dismissing of two thirds of the employees of the tin
Tin
Tin is a chemical element with the symbol Sn and atomic number 50. It is a main group metal in group 14 of the periodic table. Tin shows chemical similarity to both neighboring group 14 elements, germanium and lead and has two possible oxidation states, +2 and the slightly more stable +4...
and oil
Oil
An oil is any substance that is liquid at ambient temperatures and does not mix with water but may mix with other oils and organic solvents. This general definition includes vegetable oils, volatile essential oils, petrochemical oils, and synthetic oils....
companies managed by the government and scaling back the salaries
Salary
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis....
of the remaining third part and public sector
Public sector
The public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...
salaries
Salary
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis....
were frozen till December 1985. This measure finally meant also the government ended all subsidies
Subsidy
A subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor A subsidy (also...
to the public sector
Public sector
The public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...
.
3. The liberalization
Liberalization
In general, liberalization refers to a relaxation of previous government restrictions, usually in areas of social or economic policy. In some contexts this process or concept is often, but not always, referred to as deregulation...
of the market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
. This meant next to the end of restrictions from above also the end of protection of certain destitute sectors by the government. The Bolivian Development Corporation, one of the largest state enterprises, and the National Transportation Authority were dissolved, passing their property on to regional development corporations. These in turn had the task of privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
of enterprises. Restrictions on foreign commerce
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
were abolished with the elimination of prohibition
Prohibition
Prohibition of alcohol, often referred to simply as prohibition, is the practice of prohibiting the manufacture, transportation, import, export, sale, and consumption of alcohol and alcoholic beverages. The term can also apply to the periods in the histories of the countries during which the...
s and quota
Import quota
An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time....
s. Above that a single duty
Duty
Duty is a term that conveys a sense of moral commitment to someone or something. The moral commitment is the sort that results in action and it is not a matter of passive feeling or mere recognition...
of 20% was fixed for all importations. This resulted in the local production
Production, costs, and pricing
The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
of goods and services
Goods and services
In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility. It is often used when referring to a Goods and Services Tax....
coming under enormous press and also mainly succumbed.
4. In order not to place the Bolivian economy under unnecessary pressure the payment of the foreign debt was stopped for some years. This agreement between Bolivia
Bolivia
Bolivia officially known as Plurinational State of Bolivia , is a landlocked country in central South America. It is the poorest country in South America...
and the IMF
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
was done under the strict condition that the complete economic reforms, as drawn by Jeffrey Sachs
Jeffrey Sachs
Jeffrey David Sachs is an American economist and Director of The Earth Institute at Columbia University. One of the youngest economics professors in the history of Harvard University, Sachs became known for his role as an adviser to Eastern European and developing country governments in the...
would be implemented without condition.
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