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Working Papers
Bolivia’s Economic Pivot: Early Macroeconomic Achievements and Remaining Challenges
This paper assesses Bolivia’s macroeconomic stabilization prospects through a macro-financial scenario framework, comparing three distinct trajectories: a counterfactual absent any reforms, the path under reforms implemented or announced to date […]
This paper assesses Bolivia’s macroeconomic stabilization prospects through a macro-financial scenario framework, comparing three distinct trajectories: a counterfactual absent any reforms, the path under reforms implemented or announced to date (April 2026), and one that assumes a select set of additional reforms. Bolivia’s crisis, rooted in the absence of fiscal adjustment after the collapse of natural gas revenues, ranks among the most challenging in this century. Absent any reform, Bolivia was on the verge of a collapse, including a sharp contraction of imports, deep recession, runaway monetary financing, accelerating inflation, and a high probability of external default. The new government’s initial measures have reduced immediate risks. However, the initial reform package remains insufficient for full stabilization. The paper describes a feasible set of additional reforms to achieve stabilization and growth. An expansionary fiscal consolidation is still possible if reforms are carried out following a specific set of conditions, given Bolivia’s current economic constraints. Stabilization and growth are achievable, but the window of opportunity will narrow if critical reforms are delayed.
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Working Papers
Bolivia’s Economic Pivot: The Making of a Macroeconomic Crisis
Bolivia’s macroeconomic crisis was long in the making. A temporary commodity windfall and a gas export engine built in the 1990s delivered a decade of growth, rising fiscal revenues, and […]Bolivia’s macroeconomic crisis was long in the making. A temporary commodity windfall and a gas export engine built in the 1990s delivered a decade of growth, rising fiscal revenues, and an unprecedented buildup of foreign assets. But instead of using that window to build new sources of tradable income and productive capacity, the country adopted policies that gradually weakened the very gas sector on which the model depended. As gas production and hydrocarbon revenues fell, the state chose to preserve spending and the fixed exchange rate. The result was a sequence of increasingly costly stopgaps: first the depletion of international reserves, then the collapse of the peg, the rise of the inflation tax, and financial repression. In the process, households saw the real value of their savings eroded through the pension system and bank deposits. This paper shows how that strategy delayed adjustment for nearly a decade while making the eventual crisis more severe. Using counterfactual benchmarks for output and the real exchange rate, it quantifies the cost of delay and the scale of the distortions that any stabilization program must now unwind.
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Working Papers
Global Networks, Monetary Policy and Trade
We develop a novel framework to study the interaction between monetary policy and trade. Our New Keynesian open economy model incorporates international production networks, sectoral heterogeneity in price rigidities, and […]We develop a novel framework to study the interaction between monetary policy and trade. Our New Keynesian open economy model incorporates international production networks, sectoral heterogeneity in price rigidities, and trade distortions. We decompose the general equilibrium response to trade shocks into distinct channels that account for demand shifts, policy effects, exchange rate adjustments, expectations, price stickiness, and input–output linkages. Tariffs act simultaneously as demand and supply shocks, leading to endogenous fragmentation through changes in trade and production network linkages. We show that the net impact of tariffs on domestic inflation, output, employment, and the dollar depends on the endogenous monetary policy response in both the tariff-imposing and tariff-exposed countries, within a global general equilibrium framework. Our quantitative exercise replicates the observed effects of the 2018 tariffs on the U.S. economy and predicts a 1.6 pp decline in U.S. output, a 0.8 pp rise in inflation, and a 4.8% appreciation of the dollar in response to a retaliatory trade war linked to tariffs announced on “Liberation Day.” Tariff threats, even in the absence of actual implementation, are self-defeating— leading to a 4.1% appreciation of the dollar, 0.6% deflation, and a 0.7 pp decline in output, as agents re-optimize in anticipation of future distortions. Dollar appreciates less or even can depreciate under retaliation, tariff threats, and increased global uncertainty.
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Working Papers
Growth and Competitiveness in Kazakhstan: Issues and Priorities in the Areas of Macroeconomic, Industrial, Trade and Institutional Development Policies
Kazakhstan has achieved many of its goals and faces enormous opportunities. It has been able to transform itself into a market economy, thus unleashing the productive capacity of its citizens […]Kazakhstan has achieved many of its goals and faces enormous opportunities. It has been able to transform itself into a market economy, thus unleashing the productive capacity of its citizens and creating the conditions for the country to benefit from international trade and investment. In addition, it has discovered large quantities of oil reserves that will allow it to sustain a tripling of oil production in the next two decades.
Under these conditions, the recent performance of the economy has been characterized by rapid growth with declining unemployment. The economy has been propped up by increased fiscal spending and by private investment. Macroeconomic management has been prudent in the sense that inflation has been kept low, the government has accumulated significant fiscal savings in the National Fund and the Central Bank has built up a significant stock of international reserves. The question is how to make this situation last over the medium and long term and how to make the economy resilient to the shocks that may come.
This report is a collection of policy memos that deal with the choices the government faces going forward in the broad area of macroeconomic policies, including fiscal policy and institutions, monetary and exchange rate arrangements and policies, financial policies, industrial policy, trade policy, and broad issues in institutional development.
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Working Papers
Growth Diagnostic: Paraguay
Paraguay’s growth history is characterized by prolonged periods of stagnation, interrupted by a few small recessions and growth accelerations. These dynamics reveal that growth in Paraguay has been dependent on […]Paraguay’s growth history is characterized by prolonged periods of stagnation, interrupted by a few small recessions and growth accelerations. These dynamics reveal that growth in Paraguay has been dependent on latching on to particular export goods enjoying favorable external conditions, rather than driven by macroeconomic or political cycles. Moreover, the country currently has significant room for further export growth in existing products, as well as many new export products that are nearby and have high potential. But these available channels to generate sustained growth have all gone unexploited. Our growth diagnostic indicates that the underlying obstacles that have prevented the country from developing many of the available opportunities are related to two constraints: the provision of infrastructure and a lack of appropriability due to corruption and a poor regulatory environment. The current environment is one where the only activities that can survive have to be un-intensive in infrastructure, and either unintensive in transactions requiring an efficient business environment or at least at a scale where informality and corruption is a viable alternative to institutional blockages. We provide policy recommendations that will help alleviate these problems, focusing on not only on institutional and infrastructure reforms in the abstract, but outlining a process of learning from the relevant private sector actors what sector-specific needs in the areas of regulations and infrastructure are the most important for achieving accelerated growth in Paraguay.
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Web Articles
How would dollarisation affect Argentina’s competitiveness?
Economics Observatory
Argentina is in the middle of substantial economic reforms, both on the fiscal and monetary side. The country’s monetary policy programme aims to introduce a free competition of currencies, which […]Argentina is in the middle of substantial economic reforms, both on the fiscal and monetary side. The country’s monetary policy programme aims to introduce a free competition of currencies, which would mean allowing multiple currencies to be used and to compete freely. Although official dollarisation (replacing the local currency with the US dollar) is unlikely to happen, according to recent government announcements, it might emerge as a potential outcome considering that it was a central part of the president’s economic agenda during the election campaign.
Research on optimum currency areas (which explores the extent to which geographical regions should share a common currency) does not show conclusively that dollarisation decreases exports or undermines external competitiveness. Yet insights from both economic theory and Argentina’s history indicate that dollarisation is likely to have a negative impact on the country’s ability to achieve export-led economic growth.
In this article, the authors examine:
- President Milei’s plan for monetary policy
- What would dollarisation mean for Argentina’s export competitiveness?
- What lessons can we draw from Argentina’s economic history?
The Economics Observatory (ECO) is a new project that bridges the gap between academic research, government policy and the general public. It’s led by Richard Davies, Professor in Practice at the London School of Economics’ School of Public Policy and director of the Growth Lab’s research collaboration at LSE.
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Working Papers
Macroeconomic Adjustment in the Euro Area
Macroeconomic adjustment in the euro area periphery was more recessionary than pre-crisis imbalances would have warranted. To make this claim, this paper uses a Propensity Score Matching Model to produce […]Macroeconomic adjustment in the euro area periphery was more recessionary than pre-crisis imbalances would have warranted. To make this claim, this paper uses a Propensity Score Matching Model to produce counterfactuals for the Eurozone crisis countries (Greece, Portugal, Ireland, Cyprus, Spain) based on over 200 past macroeconomic adjustment episodes between 1960-2010 worldwide. At its trough, between 2010 and 2015 per capita GDP had contracted on average 11 percentage points more in the Eurozone periphery than in the standard counterfactual scenario. These results are not dictated by any specific country experience, are robust to a battery of alternative counterfactual definitions, and stand confirmed when using a parametric dynamic panel regression model to account more thoroughly for the business cycle. Zooming in on the potential causes, the lack of an independent monetary policy, while having contributed to a deeper recession, does not fully explain the Eurozone’s specificity, which is instead to be identified in a sharper-than-expected contraction in investment and fiscal austerity due to high funding costs. Reading through the overall findings, there are reasons to believe that an incomplete Eurozone institutional setup contributed to aggravate the crisis through higher uncertainty.
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Journal Articles
Macroeconomic Rationales for Public Investments in Science
Economic Inquiry, 59
What is the economic rationale for investing in science? Based on an open economy model of creative destruction, we characterize four key factors of optimal investment in basic research: the […]
What is the economic rationale for investing in science? Based on an open economy model of creative destruction, we characterize four key factors of optimal investment in basic research: the stage of economic development, the strength of the manufacturing base, the degree of openness, and the share of foreign‐owned firms. For each of these factors, we analyze its bearings on optimal basic research investment. We then show that the predicted effects are consistent with patterns observed in the data and discuss how the factor‐based approach might inform basic research policies. -
Working Papers
Macroeconomic risks after a decade of microeconomic turbulence: South Africa 2007-2020
This study analyses the performance of macroeconomic policy in South Africa in 2007–2020 and outlines challenges for policy in the coming decade. After remarkable economic growth in 1997–07, South Africa’s […]This study analyses the performance of macroeconomic policy in South Africa in 2007–2020 and outlines challenges for policy in the coming decade. After remarkable economic growth in 1997–07, South Africa’s progress slowed dramatically in 2009 with the global financial crisis. Real GDP growth decelerated more than in other emerging markets and mineral exporting peers and never recovered pre-crisis levels. In addition, the budget deficit that provided counter-cyclical support to the economy was never reigned in, leading to a rapidly rising public debt load. The study assesses three accounts of South Africa’s post-GFC growth and fiscal slump: (1) an external story; (2) a macro story; and (3) a microeconomic story. Evidence of strong linkages between micro- and political developments and growth performance is provided. -
Working Papers
The Devil’s in the Dance: Elements of a Growth Diagnostic in Bolivia
Bolivia’s economy stands at a crossroads. Weakened by the fiscal and external imbalances triggered by the 2014 fall in gas prices and exacerbated by the COVID-19 pandemic, the country faces […]Bolivia’s economy stands at a crossroads. Weakened by the fiscal and external imbalances triggered by the 2014 fall in gas prices and exacerbated by the COVID-19 pandemic, the country faces a complex challenge: how to reignite economic growth while restoring macroeconomic stability. This paper applies the Growth Diagnostic methodology to identify the most binding constraints to growth in Bolivia and proposes pathways forward for policy reform.
The paper presents Bolivia’s growth syndrome as “La Diablada” or the dance of the devil—a dance between opposing priorities. On one side lies the need for fiscal consolidation to address mounting imbalances; on the other, an urgent need to stimulate demand and support recovery after the COVID-19 shock. This collision of policy needs creates a situation where missteps in either direction could be highly disruptive, risking either prolonged stagnation or macroeconomic crisis.
The paper finds that Bolivia’s current growth model—heavily reliant on commodity-led rents and public sector-led investment—has reached its limits. The economic challenge is that the historical engine of growth in Bolivia—net government spending fueled by rising gas prices—cannot drive growth in the current period. Even a short-run recovery in gas prices belies the structural challenges in demand for gas exports in Argentina and Brazil, along with the supply of gas, in the lack of investments in new discovery. Structural weaknesses also include a rising wage bill dominated by public employment, the lack of foreign investment, and a lack of economic diversification into higher complexity sectors. Political uncertainty and institutional inefficiencies, especially among state-owned enterprises (SOEs), further erode the country’s fiscal space and growth potential.
To manage current macroeconomic imbalances and lay the groundwork for inclusive growth, the government must prioritize the sequencing of actions across four key policy fronts:
- Fiscal Response: Focus on increasing fiscal space to allow for stimulus to drive economic recovery, including smart fiscal consolidation, cutting unproductive spending—especially in loss-making SOEs and an inflated wage bill, while guarding against the recessionary pressures of fiscal consolidation.
- External Finance Response: Maximize access to external finance while balancing debt sustainability. Foreign reserves risk not being able to cover medium-term debt obligations, if no action is taken.
- Monetary Response: Restore confidence in monetary policy by preparing for a gradual move toward a more flexible exchange rate regime, supported by stronger institutions and clearer communication. Not addressing the overvalued boliviano risks a currency crisis, a balance of payments crisis, or both.
- Private Sector Response: Shift the growth model by enabling private sector-led diversification, removing investment bottlenecks, and targeting support to export-oriented, higher-complexity sectors.
At stake is whether Bolivia can shift from managing crises to enabling a more resilient, inclusive, and sustainable future.
Last updated on 05/20/2025