Noah Smith at Noahpinion:
Regular people in countries like Bolivia depend on imported food and fuel for their daily lives. To import food and fuel you need dollars — or some other international currency like euros or yen or yuan or whatever. Bolivia can get dollars two ways — by selling exports or by selling bonds. If it doesn’t sell enough exports — for example, if gas prices drop and its exports are worth less — it has to sell bonds in order to keep importing.
The country maintains a stockpile of “reserves” — basically, bonds that pay off in dollars — that it can use to buy imports if export revenue temporarily goes down. But if the country tries to maintain an exchange rate peg — basically, declaring that its currency is worth more dollars than it’s really worth, so it can keep buying more imports than it can really afford — then the stockpile of reserves will eventually get used up. At that point there’s no way to stop the country’s currency from crashing in value relative to the dollar, as everyone desperately exchanges more and more of their local currency for dollars in order to keep buying imported food and fuel. This abruptly impoverishes the citizenry, and it tends to lead to either a sovereign default or hyperinflation (for reasons you can read about in my post about Sri Lanka’s crisis back in 2022).
So basically, I predicted that Bolivia’s economy was in danger not from socialism — which seemed to be implemented far more prudently than in Venezuela — but from macroeconomic mistakes. Socialist or not, Bolivia was in danger of the kind of standard, well-known economic crisis that resource-exporting countries tend to stumble into.
More here.
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