The resulting over-rapid domestic absorption of the mineral windfall caused the real exchange rate to appreciate through the 1970s and early-1980s. This intensified the country's reliance on minerals, even as the mining sector was being squeezed in order to transfer resources to the non-tradable sector. Price repression led to an over-rapid depletion of oil reserves, and underinvestment in the state-owned hard mineral sector corroded its competitiveness still further. When foreign capital ceased to bridge the fiscal and trade deficits, the economy imploded into hyperinflation. Although the trauma of hyperinflation acted as a catalyst for transforming the political state into a consensual democracy and also for economic reform, economic recovery was slower than policy advisers expected.
The problems of economic development in Bolivia are compounded by inadequate public investment in internal transport and difficult terrain. But Bolivia also shows that being landlocked is less problematic if the economies of neighbouring states are soundly managed and the transport infrastructure is maintained so that the landlocked country can specialize in its comparative advantage. Geography is providing new economic opportunities through the revival of the neighbouring large economies of Brazil and Argentina. Bolivia will only realize these opportunities if its government adheres to the basic principles of EARA and does not relax market discipline. A consensual democracy should be able to achieve this. The next chapter shows with reference to Saudi Arabia what happens when the basic principles of EARA are espoused, but market discipline is relaxed by a paternalistic autonomous benevolent state.
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