Has Evo Learned His Lesson?

Overwhelmed by violent protests, Bolivian president Evo Morales announced last Friday that he was reversing his controversial decision to abolish fuel subsidies. The removal of those subsidies had caused an abrupt spike in gasoline and diesel prices (which immediately jumped by 73 percent and 83 percent, respectively, according to the Los Angeles Times). It had also triggered anti-government riots across the country. “This measure isn’t necessary,” Morales declared on December 31. “I understand the recommendations of the workers.” He also understands that two previous Bolivian governments were toppled by energy-related protests (led by Morales, among others) in 2003 and 2005.

In the short term, the former coca farmer may have saved his leftist government and temporarily fortified his political base among the indigenous poor, who were at the forefront of the recent protests. But Morales is now greatly weakened and vulnerable to future challenges. Moreover, unless he changes course on economic policy, Bolivia will continue to experiences major difficulties.

Indeed, the real story behind the fuel-price riots is the failure of Hugo Chávez–style socialism. Bolivia is rich in natural gas, boasting the second-largest reserves in South America. But Morales nationalized the industry shortly after taking office in 2006, and the consequences have been disastrous. “We have shrinking reserves,” Bolivian Chamber of Hydrocarbons (CBH) president Carlos Delius told the Financial Times in August. “This is not due to geological reasons, but because there have not been any significant investments in the past five years.”

The government’s nationalization of oil and gas was a piece of its broader economic strategy. Mimicking his benefactor in Venezuela, Morales has launched state takeovers of several key industries, including mining and telecommunications. On May 1, he announced the nationalization of four large power companies. This was necessary, Morales argued, “to comply with the new constitution of the Bolivian state,” which was formally adopted in early 2009. “Basic services cannot be a private business,” he added. “We’re recovering the energy, the light, for all Bolivians.”

In the process of “recovering the light,” however, Morales has scared off foreign investors and discouraged free enterprise. His attempt to remake Bolivia in the image of socialist Venezuela has earned him a close ally in Caracas, but it done massive damage to the Bolivian economy, and to the country’s global reputation. The World Bank’s 2011 “Doing Business” survey ranks Bolivia 149 out of 183 economies, behind even Sierra Leone and Syria. “The government has a foreign-investment phobia, and its nationalization processes and the lack of clear rules are creating lack of confidence,” Bolivian economist Waldo López said last year.

By scrapping the fuel subsidies, Morales was trying to promote greater investment. He was also trying to end—or at least reduce—the smuggling of Bolivian fuel to foreign countries (such as Chile and Brazil) with higher prices. Speaking to CNN, Morales pegged the annual loss from such smuggling at $150 million. “For a small country, that’s a lot of change,” he said. Morales needs the money to help repay his debt to Chávez, who has furnished Bolivia with generous economic assistance but now faces a severe domestic crisis at home in Venezuela.

“In the past three years, Bolivia has moved from being a net exporter of hydrocarbons to a net importer,” the Wall Street Journal reports, citing a CBH analysis. The annual cost of government subsidies for imported gasoline and diesel comes to roughly $380 million—which, as the Journal points out, represents about 2 percent of total Bolivian economic output. Given the country’s enormous natural-gas reserves, these numbers are quite remarkable. Through his radically anti-business agenda—designed, supposedly, to aid the poor—Morales has succeeded in crippling the Bolivian energy sector. Canceling the subsidies was an attempt to mitigate the damage and lure back private investment.

When the decision sparked massive upheaval and threatened to topple the government, Morales reversed himself. He quelled the turmoil and averted what could have become an existential threat to his presidency. Yet Bolivia’s underlying energy and economic problems remain unfixed. The government is hopelessly corrupt and prone to wasteful spending; last year, for example, Morales purchased a $39 million presidential plane and signed an agreement with China to acquire a $300 million satellite. Keep in mind that Bolivia is the poorest country in South America.