-Analysis-

LA PAZ — People in Bolivia appear to be waiting for everything to fall apart before they accept that their economy faces a crisis.

Bolivia wouldn't be the first Latin American country to be in this situation. Other socialist countries like Venezuela, Argentina, Brazil and Ecuador have faced these exact same questions.

I was recently asked when an economy is deemed to be in crisis. I believe that it happens when resources are poorly allocated. Contrary to conventional thinking, economic crises are generated during the boom period that precedes stagnation, when people think that wealth abounds. It doesn't start with the recession.

The problem with resource allocation in socialist countries is that the government appropriates the country's core businesses and allots resources to enhance their electoral prospects. The basis for assigning resources should instead be economic criteria like deciding what would be the most competitive. This would put an end to financing loss-making projects or enterprises. It would involve respecting the nation's own capacity for generating resources through the issue of debt, taxation and inflation. There are no precise figures on how much loss is generated by poor resource allocation but it will certainly be large numbers.

The problems that arise from misspent government funds engulf all sectors and businesses not just the private firms that are linked to state projects or big public works.

Bolivian President Evo Morales at gas pipeline in Carrasco Plant — Photo: Fernando Cartagena/DPA/ZUMA

Over the years, as the Bolivian government nationalized its currency, decimated the central bank's independence and manipulated inflation figures, the public has taken greater risks than they should in investments.

At the early stages of public-private partnerships, officials made the grandest political promises and assured people there were guaranteed profits for any and all investments. But in time, as the market began to detect lower quality projects or those that could not be completed and would have to be liquidated, the economy began to slow.

Bad resource allocation include all state projects financed by revenues from oil and gas and initiatives in the private sector fed by overgenerous credit flows. These efforts began to disrupt financial markets in a manner that cannot be remedied with short-term or palliative measures but only with a painful, structural turnaround of the economy.

It's true that falling oil prices have affected the economy. But they exacerbated, rather than caused, this situation. In countries with economic policies similar to Bolivia like socialist Venezuela, Argentina under the two Kirchner presidents, Brazil in recent years and Ecuador, the economy entered a slump long before commodities prices fell in 2014. Bolivia's economy, for instance, first started to slow down in 2013.

To avoid the same mistakes other socialist countries have made, Bolivia must first recognize that its problems are due to the way it has designed its economy, namely, by giving priority to short-term payoffs and encouraging risks in investment. This was clearly a set-up that did not allow people to adapt to reality. Gas from Bolivia should have replaced energy from Russia for the European market by now. It should have also become the Bolivia's buffer against the vicissitudes of the global economy.