The Rise and Fall of Bolivia’s Socialist Model

“We thought we had a Qatar of gas,” said Bolivia’s Minister of Energy and Hydrocarbons, Franklin Molina Ortiz in October 2024 to describe the country’s economic unraveling. Bolivia holds some of the largest natural gas reserves in South America, which fueled a period of rapid growth during the 2000s and early 2010s. It is also part of South America’s Lithium Triangle, home to vast reserves of one of the world’s most sought-after resources, making it central to the global energy transition. Yet, this boom masked deep structural weaknesses, including rigid labor markets, a lack of diversification beyond extractives, and institutional incapacity to manage public resources effectively. Today, the country, once hailed as a socialist success story, is facing one of the worst economic crises in its history. How did Bolivia's promising economy unravel so quickly?

2005 marked a turning point in Bolivia’s political landscape with the election of socialist president Evo Morales. His election was part of Latin America’s “Pink Tide,” a political shift towards left-wing governments in the late 1990s and 2000s, including Hugo Chávez in Venezuela (1999), Lula da Silva in Brazil (2002), and Michelle Bachelet in Chile (2006), among others. Evo Morales gained international recognition as Bolivia's first indigenous president, marking a historic break from decades of political dominance by the country's white elite. His political party, the Movimiento Al Socialismo (MAS or Movement Toward Socialism), was particularly influenced by Venezuela under Hugo Chávez, while also placing strong emphasis on indigenous social inclusion.

As soon as Evo Morales assumed office, Bolivia launched a broad nationalization process aimed at reclaiming control over key sectors, especially hydrocarbons, mining, electricity, and telecommunications. Beginning with the 2006 nationalization of oil and gas, foreign companies, including oil giants Petrobras and Total, were forced to renegotiate contracts, while Bolivian state-owned company Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) took control of production and commercialization, becoming the dominant player in the sector. Similar actions followed in the mining and energy sectors, with the state expanding its role while allowing some private and cooperative activity. The nationalization of strategic sectors, along with high commodity prices, significantly boosted state revenues.

In the 2010s, Bolivia was often cited as the "socialist success story" of Latin America, in stark contrast to the economic collapse of Venezuela. Bolivia experienced several years of strong economic growth, particularly between 2006 and 2014, mainly fueled by high commodity prices. Between 2006 and 2014, Bolivia had one of the highest GDP growth rates in South America, averaging around 5% annually, compared to just 0.9% between 1994 and 2005. In 2013, Bolivia also recorded the highest level of foreign direct investment as a percentage of GDP in South America, despite Evo Morales' nationalization program.

Through revenues generated from the nationalization of the gas and mining sectors, Evo Morales implemented several flagship social programs aimed at reducing poverty, improving education, and promoting social inclusion, especially for Bolivia's indigenous majority. According to the International Monetary Fund, between 2005 and 2023, Bolivia’s general government expenditure rose significantly, increasing from just under 30% of GDP to consistently ranging between 35% and 45%, reflecting the state’s expanding fiscal role through growing social spending, subsidies, and public investment. As a consequence, under Evo Morales’ presidency, Bolivia's extreme poverty rate fell from 38.2% to 15.2%, while moderate poverty declined from 60.6% in 2005 to 36.4% in 2017.

Yet, despite notable economic progress, Bolivia has remained one of the poorest countries in Latin America. Its GDP per capita ranks only above Honduras, Nicaragua, and Haiti. Moreover, under nearly two decades of Movement Toward Socialism rule, Bolivia’s labor informality surged from 62.4% in 2005 to 84.2% in 2024, giving the country the highest rate of informal employment in Latin America. This surge has been driven by rigid labor regulations, a dominance of low-productivity sectors, weak enforcement capacity, and complex bureaucratic barriers to formalization. This has led many Bolivian workers to operate outside the formal economy, often out of necessity. Despite legal frameworks aimed at formalization, the country has not adopted specific policies for informal workers. Instead, the government has promoted forums and roundtables to address informal workers' issues, which function more as declarative spaces rather than concrete actions to reduce informality. Bolivia’s persistently high informality stems from a failure to implement structural reforms, undermining productivity, social protection, and economic diversification.

Bolivia's economy has become increasingly dependent on natural resources, particularly natural gas and minerals. Hydrocarbon revenue as a percentage of the nation’s GDP rose dramatically from 9.8% in 2005 to 35.0% in 2013. By 2022, hydrocarbons still accounted for about 22% of Bolivia's exports, totaling USD 2.9 billion. State and local governments heavily rely on revenue from the hydrocarbon sector, with public taxes and royalties on gas companies averaging around 80%.

Bolivia’s fragile institutional architecture has played a central role in undermining the sustainability of its development model. While state revenues increased during the commodity boom, the quality of institutions tasked with managing those funds did not improve accordingly. Bolivia ranks consistently low in global governance indicators, particularly regarding rule of law, control of corruption, and government effectiveness. In 2024, Bolivia ranked 131st out of 142 countries in the Rule of Law Index, reflecting persistent institutional weaknesses. Its overall score declined from 0.41 in 2015 to 0.37 in 2024, indicating a steady erosion of legal and institutional trust over the past decade (on a scale from 0 to 1, where higher values reflect stronger institutions and greater trust). These institutional weaknesses contributed to the poor execution of infrastructure projects, a lack of transparency in procurement, and a general climate of uncertainty for investors. The absence of credible checks and balances, exacerbated by MAS’s long dominance over state institutions, eroded both public trust and long-term investor confidence, limiting Bolivia’s ability to leverage its resource wealth for transformational development.

While Bolivia once thrived on its gas exports, production has been steadily declining since 2014 due to a lack of reinvestment, limited exploration, and aging fields. Bolivia's natural gas exports plummeted to a 20-year low of approximately USD 100 million in November 2023, a sharp decline from the peak of nearly USD 550 million recorded around 2013. Consequently, Bolivia has regularly struggled to meet its export commitments to Brazil and Argentina. The current gas export agreement with Brazil is set to run through 2026, while the contract with Argentina expired in 2024, reflecting the country’s diminished capacity to supply the region. Bolivia may even soon become a net importer of gas, a stunning reversal for a nation once hailed as the "Qatar of South America".

Despite holding the world’s largest lithium reserves, Bolivia has struggled to capitalize on this strategic resource. The country produces just 600 tons annually, far behind neighbors Chile (39,000 tons) and Argentina (6,000 tons), largely due to political instability, weak infrastructure, and technological hurdles. Unlike its Lithium Triangle partners, Bolivia has pursued a state-led extraction model, limiting foreign investment and complicating progress with bureaucratic red tape. The state-owned company Yacimientos de Litio Bolivianos (YLB) has made only modest advances, while partnerships with international firms have faced repeated delays. In 2024, the Bolivian government signed major contracts with China-based consortium Hong Kong CBC Investment Limited and Russian state-owned enterprise Uranium One Group for the extraction of lithium, signaling a pivot toward diversifying its international alliances beyond traditional South American ties. However, both projects are currently on hold in Bolivia due to required public and indigenous consultations, and a court-ordered suspension linked to environmental concerns.

The signing of lithium partnerships with Russia and China reflects the shifting geopolitical landscape surrounding critical minerals. As global demand for lithium accelerates with the energy transition, Bolivia finds itself at the center of intensifying international competition. The United States has recently expressed growing concern over Chinese and Russian influence in South America’s lithium sector. In 2022, the American company EnergyX and Argentina’s Tecpetrol were both disqualified from a lithium mining tender, raising concerns about the shifting balance of international influence in Latin America's lithium-rich region. Relying on deals with authoritarian regimes like China and Russia poses serious governance risks for Bolivia, including reduced transparency, weakened institutional accountability, and the erosion of legal and environmental safeguards. Such agreements often bypass public scrutiny, enabling corruption and elite capture, while locking the country into long-term, inflexible contracts that limit future renegotiation.

While Bolivia struggles to profit from lithium extraction, Chile continues to attract investment thanks to its more established regulatory framework and greater political stability. The country is the world’s second-largest lithium producer and benefits from favorable natural conditions, making its production particularly efficient and cost-effective. In 2025, multinational company Rio Tinto announced an investment of up to USD 900 million for a 49.99% stake in Chile’s Maricunga lithium project, the country’s second-largest reserve, in partnership with the state-owned company Codelco. This stands in sharp contrast to Bolivia’s troubled approach to lithium development.

Bolivia’s crisis is not unique in Latin America. Several countries in the region have experienced similar tensions between resource dependence, institutional fragility, and political volatility. Venezuela, for instance, illustrated in the 2010s the devastating consequences of economic mismanagement and political authoritarianism. An overreliance on oil revenues, combined with the erosion of democratic institutions and a centralized rentier state, precipitated one of the most severe economic and humanitarian crises in modern Latin American history. Argentina, like Bolivia, has struggled with persistent inflation, a volatile currency, and recurring debt crises. While it shares Bolivia’s reliance on subsidies and populist spending, Argentina has at times permitted greater private sector involvement in strategic sectors such as energy, though with frequent regulatory shifts that have undermined investor confidence. In contrast, Chile has taken a more market-oriented path, particularly in its approach to lithium. The country has succeeded in attracting large-scale investment and integrating more effectively into global supply chains. These contrasting experiences underscore the importance of effective governance in transforming resource wealth into sustainable and inclusive development.

With declining hydrocarbon export volumes, Bolivia has struggled to maintain its foreign income. As a result, the country’s foreign currency reserves, especially US dollars, have dwindled, falling from over USD 15 billion in 2014 to under USD 2 billion by 2024. This sharp decline has made it increasingly difficult to sustain the fixed exchange rate regime, prompting restrictions on dollar access, import controls, and the emergence of a black market for foreign currency. As of July 2025, the black market price for US dollars exceeded 15 Bolivianos per USD, more than twice the official exchange rate of 6.96 Bolivianos per USD. The shortage of foreign currency has also hampered the government’s ability to import fuel, leading to widespread shortages and long queues at petrol stations across the country. Since the foreign currency shortage worsened, Bolivia has also been limiting access to dollars abroad: some banks allow Bolivians abroad to withdraw only USD 50 per month, while others prohibit any card usage overseas. This shortage has also severely impacted Bolivian businesses, many of which struggle to access hard currency needed for imports and operations.

Facing these pressures, Bolivia’s private sector and civil society have had to adapt with little state support. Entrepreneurs have responded by shrinking operations, turning to informal trade networks, or in some cases shifting business activities to neighboring countries. Meanwhile, civil society responses have been fragmented. While Indigenous organizations and some NGOs have mobilized around local grievances, few have articulated coherent policy alternatives at the national level. Part of the reason lies in how the MAS government has systematically weakened independent unions and co-opted traditional popular organizations, blurring the lines between state and society. Once-powerful actors like the Central Obrera Boliviana (COB) now often echo government talking points, limiting their role as autonomous forces for reform. This fragmentation and co-optation help explain the absence of meaningful bottom-up pressure despite widespread discontent.

As the economic situation worsens, frustration among Bolivians has intensified. The country has now one of the highest inflation rates in South America, ranking just behind Venezuela and Argentina. Bolivia’s year-on-year inflation soared to a 34-year high, increasing to 23.96% in June 2025, up from 18.46% in May. Food and fuel shortages have sparked protests in urban and rural areas alike. Amid mounting economic pressures, an increasing number of Bolivians have sought opportunities abroad, with migration to neighboring countries and Spain on the rise. According to the National Institute of Statistics (INE), between 2008 and 2023, the number of Bolivians leaving the country steadily increased, rising from around 770,000 in 2008 to nearly 1.85 million in 2023.

In parallel, Bolivia has been grappling with political instability, marked by a history of frequent coups d’état and power struggles since its independence in 1825. This legacy of unrest resurfaced sharply in recent years following Evo Morales’ contested reelection bid in 2019, which triggered mass protests and ultimately forced his resignation and exile. Although MAS returned to power in 2020 with the current Bolivian President Luis Arce’s election, the party has been weakened by disillusionment and contentious debates over Evo Morales’ ongoing influence, all of which have eroded political legitimacy. Allegations of widespread corruption and weak institutional oversight have further undermined investor confidence and public trust, hampering the effectiveness of public spending and deterring foreign capital. Moreover, since 2024, widespread protests over economic mismanagement have been bringing the population to the streets. If the crisis deepens without reforms, Bolivia could face prolonged social unrest.

The ruling MAS party has also recently been facing internal fractures. President Luis Arce withdrew from the presidential race in May 2025, while Evo Morales, barred from running by the Constitutional Court, has launched a new political movement in defiance. These divisions have deteriorated the socialist party’s electoral dominance and opened space for opposition. As Bolivia heads into a decisive presidential election, three paths lie ahead: a reformist coalition that restores investor confidence and stabilizes the economy; a fragmented government that deepens polarization and stagnation; or renewed authoritarian drift under MAS leadership.

Bolivia’s presidential election, scheduled for 17 August 2025, will not just be a simple transfer of power; it will serve as a referendum on the survival of its developmental model. After years of dependence on declining gas exports, stalled lithium ambitions, rampant informality, and dwindling foreign currency reserves, Bolivia stands at a crossroads. The result of the election will shape whether the nation embarks on deep structural reforms, such as market liberalization and economic diversification, or doubles down on its statist past. Given the intensity of social unrest and economic hardship, political consensus and credible solutions are urgently needed. If not achieved, Bolivia risks entering a prolonged period of stagnation, foreign debt defaults, and further social upheaval.