Political backlash in Latin America : a curse or blessing for the water supply and sanitation services? : a case study of Bolivia, Chile and Ecuador

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Political backlash in Latin America: a curse or

blessing for the water supply and sanitation

services?

A case study of Bolivia, Chile and Ecuador

Lisanne Soffner

10152792

Graduate School of Social Sciences

MA International Relations

Supervisor: F. Boussaid

Date: June 2015

University of Amsterdam

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Abstract

In the mid-‐2000s a political backlash occurred in Latin America. There has been much written on the causes of the backlash, but not on the effects of the backlash. This thesis focuses on the effects of the political backlash on the water sector in Latin America. The aim is to find the answers to the following questions: Did the political backlash

accompany in Latin America policy change of the water supply and sanitation (WSS) services? What explains the differences between countries? And how did the political backlash in Latin America affect the access to WSS services? The expectation is that the institutional context of a country determines if a backlash is accompanied by change and that it also determines the amount of access to WSS services before and after the

backlash. Using a case study approach this thesis discusses the cases of Bolivia, Chile and Ecuador. The conclusions drawn from these case studies partially support the proposed theory. However, it is concluded that this thesis is more an explorative research and that

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“Backlash in Latin America” was on the cover of the economist on December 6, 1996. The article described the trend of Latin American leaders cutting their budgets, while at the same time they opened their countries for the international trade market. The author argued that the pace of growth was lower than expected, which would lead to frustrations and eventually to a political backlash in Latin America (Stokes, 2009: 1; The Economist, 1996). According to the Oxford dictionary a backlash is: “a strong negative reaction by a large number of people, especially to social or political development. In this article the authors suggest a backlash against the neoliberal reforms in Latin

America. This argument was supported by the struggles of political leaders at that time; the popularity of both neoliberal presidents Fujimori (Peru) and Menem in Argentina decreased, Mexico faced guerrilla movements and president Frei of Chile had to deal with a restive public (Stokes, 2009: 1; The Economist, 1996).

In December 2006, ten years after the publication of this story, leftist candidates won the presidential elections in Brazil, Ecuador, Nicaragua, Venezuela and Peru. However, these were not the first leftist leaders winning in Latin America. The trend started in 2003 when Kirchner won in Argentina, Vázquez in 2004 won in Uruguay and both Bachelet of Chile and Morales of Bolivia won the elections in 2005. In July of 2006 the leftist candidate lost in Mexico after a close call and in 2007 was Colom elected to president in Guatemala after defeating his rightist opponent. Consequently, in 2008, 11 out of the 18 major countries in Latin America were ruled by a left-‐centred president. In other words, 65% of the countries in this region and approximately 350 million people lived under a left-‐centred president (Stokes, 2009: 1).

The many unpopular policies of the neoliberal development paradigm have contributed to this backlash. One of these unpopular policies was the privatization of the water supply and sanitation (WSS) services because in some cases it led to rate hikes, lack of transparency, cut offs to the poorest customers and poor water quality. Latin America was one of the regions, along with Africa and Asia, which experienced these negative effects. Consequently, in Latin America a lot of the WSS contracts came under attack, which led to protests to early cancelation of the WSS, contracts in Bolivia and Argentina (Baer, 2014: 141). There is much written about the backlash and its causes, but not about the consequences of the backlash. You might expect that in the countries of Latin America where the backlash occurred, the unpopular neoliberal policies would immediately be reversed like water privatization. However, reality shows that this is no indisputable fact; some countries have indeed completely reversed the policies of their water provision, some have kept the privatization measures, and others moved on to a mix of public and private provision (Baer, 2014: 144). This phenomenon raises the following questions: Did the political backlash accompany in Latin America policy change of the water supply and sanitation (WSS) services? What explains the differences between countries? And how did the political backlash in Latin America affect the access to WSS services? The aim of this thesis is to find answers to two these questions using a comparative case study. In order to answer the questions is first some background information on the political backlash in Latin America discussed.

Thereafter, there is a general chapter on the WSS services in Latin America. That chapter is followed by my theory on this topic and subsequently follows a justification for the case-‐study approach, which includes some background information on Latin America.

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Then the three cases of Bolivia, Chile and Ecuador are discussed. Finally this thesis ends with a discussion and some conclusions.

Backlash

It was widely assumed that the backlash that started in 2005 in Latin America occurred as a reaction to the unpopular neoliberal policy reforms in the 1980s and 1990s.

However, this common narrative oversimplifies the relationship between neoliberalism and populism because it is “based on static conceptions of neoliberal reforms” and sees “these phenomena as mutually exclusive and antagonistic forces.” (Haarstad &

Andersson, 2009: 1). It is stated by various authors that the relationship between neoliberalism and populism is more complex than a simple binary division (Haarstad & Andersson, 2009: 1).

For example Weyland (2003: 1112) argues that neoliberalism and populism can coexist in one system and calls this ‘neoliberal populism’. His argument is, that under some circumstances, populist politics can go hand in hand with neoliberal

socioeconomic policy approaches because they have various affinities. An example of these affinities is that successful market reform can strengthen the position of a populist leader (Weyland, 2003: 1100). However, he acknowledged that the definition of

populism explains the differences between authors who argue that neoliberalism and populism can coexist together and the authors who argue that there is an

incompatibility between neoliberalism and populism (Weyland, 2003: 1096). In a later written article Weyland (2009: 145) adds on to his previous argument and he argues that the leftist wave that emerged in Latin America is not uniform; “The new

governments range from the cautious Concertación, a solid coalition of centrist and left-‐ wing parties in Chile, to the radical populism of Hugo Chávez in Venezuela. Other governments align between these extremes.” (Weyland, 2009: 145). He bases this argument on the rentier theory and states that the fundamental cause of the rise of the radical left in Latin America is the availability of natural resource wealth (Weyland, 2009: 151).

Haarstad and Andersson (2009: 22) argue that the historical traditions of the indigenous community have contributed to the backlash in Latin America, but argue that there probably are more factors influencing the backlash. Doyle (2011: 1467) states that the current emergence of populism in Latin America is due to the lack in trust of political institutions of liberal democracy. This would explain the varying degrees of popularity for populism within Latin America.

Another view on the Latin American backlash comes from Burgess (2003: 906). She argues that both external incentives and organizational capacity explain the adaptation of Populist Parties adaptation in Latin America. It should be noted that the research found that not both the external incentives and organizational capacities need to be strong in order to have a positive effect on the adaptation of Populist Parties. In addition, the amount of adaptation varies per country.

Roberts (2007: 3) finds in her research that the revival of populism in Latin America is mainly caused by the institutional weaknesses and the market insecurities. She argues that these conditions have made the region vulnerable to new patterns of social and political mobilization.

In sum it can be said that there is little consensus on the causes of the backlash in Latin America. However, from the existing literature we can conclude that the backlash

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was not uniform and that it varied per country. This might explain why different Latin America countries pursued different policies on their WSS.

In order to answer the second question we first need to look at the privatization debate. The provision of water services to poor people has been a thorny issue. It can be stated that both the private and public sector have failed in the provision of water

services to poor people (Bakker, 2007: 441). Bakker (2007: 442) points out that water is an “uncooperative commodity” and states that the privatization of water services will always be full of difficulties. Furthermore, the critics of privatization argue that the commercialization of public goods is solely based on profits and therefore will increase the inequality gap across metropolitan regions (Warner & Hefetz, 2002: 446).

The empirical evidence of Bayliss (2002: 603) shows that privatization negatively affects the livelihood of the poor. Privatization takes away employment and income and it reduces, and sometimes even excludes, poor people from access to WSS. In theory privatization will stimulate economic growth and reduce poverty. However, in practice there is no empirical evidence of a relation between privatization and economic growth (Bayliss, 2002: 607). Another reason why privatization harms the poor is that

governments must provide some incentives to attract investors. These incentives are often concessions so the country meets the requirements of donors (Bayliss, 2002: 608). Mr Talbot is the Chief Executive Officer (CEO) of SAUR (one of the largest water companies in the world) and a strong proponent of private sector participation (PSP) in the WSS. He claims that the public sector has failed in the provision of WSS and argues that there is an “unrealistic demand” in developing countries. He stated that SAUR “cannot provide services to the poor without government subsidies and guarantees and

public sector investment.” (Hall & Lobina, 2002: 4). Budds and McGranahan (2003: 112)

are in line with this argument claiming that neither the private nor public sector on its own is able to provide sufficient WSS to the poor because both economics and politics need to be included in order to provide adequate services. Other scholars contend, that some government intervention is needed to ensure that the externalities of uneven fiscal capacity are internalized (Warner & Hefetz, 2002: 446; Lowery, 2000).

Other strong proponents of privatization in the WSS are Anderson and Hill (1997). They argue that water privatization is the most efficient way in providing WSS. The market allocates water more efficiently and is flexible with regards to the change of price in the WSS (Anderson and Hill, 1997: 88).

Galiani, Gertler and Schargrodosky (2005: 87) argue that the advantage of PSP is that it provides a strong incentive for cost reduction and effectiveness. These incentives of cost reduction and innovation are weak under public ownership because public ownership does not benefit from more efficient and innovative provision of WSS. According to their empirical evidence there is an increasing rise in profitability,

productivity and quality in sectors that made a shift towards privatization (Galiani et al. 1997: 87; Megginson et al. 1994; Barberis et al. 1996; Frydman et al. 1999; La Porta and Lopez-‐de-‐Silanes 1999). When states have a non-‐benevolent leader arguments

described above favour the PSP even more because there is a great chance that non-‐ benevolent leaders will use their political power to benefit themselves and their supporters (Giliani et al., 2005: 88).

Besides this strong debate between state led and private led water provision is there is also an approach, which is an in-‐between method: public private partnerships (PPP). The argument is that both the public and private sector can deliver meaningful contributions when establishing water regulatory institutions. Hence, the best approach is the PPP (Akhmouch, 2012: 13).

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The next paragraph elaborates more on the structure of the water sector in Latin America. There is explained what the general trend in organization of the water sector has been over time. In addition, it will be clear whether the water sector in Latin America is privatized, regulated by the state or organized through PPP.

WSS services in Latin America

In the beginning of the 1990s there was a major reformist wave of the water supply industry occurring in the Latin American region. The reform of the water supply

industry started in 1988 in Chile when the country adapted new legislation considering the water sector. Thereafter, in 1991 both Mexico and Argentina started experimenting with private sector participation (PSP). The second reformist wave started in the mid-‐ 1990s and led to the implementation of new legislation in Bolivia, Colombia and Peru. After these countries Brazil and Central America followed and by the end of the 90s nearly all Latin American countries had reformed their water sector or were in the process of reform (Foster, 2005: 1).

Sectoral policy

The condition of the WSS services in a region is reflected in the implemented public policies. Regarding Latin America, two different types of sectoral policies can be distinguished and these two different sectoral policies are linked to different

institutional models (Foster, 2005: CAF, 2012: 18). The first model is the ‘traditional’ model, also called the “clientalist” model (figure 1), and is characterised by the strong power of the provider. Both the provisional services and the sectoral functions are in the hands of the provider companies, which act based on political interests (CAF, 2012: 21).

Figure 1. Traditional model (Foster, 2005: 2).

The second model is called the modern model (figure 2), and is characterised by

dispersed power. The provision, regulation, planning and policies of the WSS sector are the responsibility of multiple actors, which is contrary to the traditional model. The idea behind this model is that all the actors should respect the rules, and not following the rules will have consequences (CAF, 2012: 21).

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Figure 2. Modern model (Foster, 2005: 2).

Currently countries are moving from a traditional towards a modern model.

Nevertheless, the traditional model is still the dominant model in the Latin American region (CAF, 2012: 19).

Sector structure and institutional organization

Besides the division between the traditional and modern models, we can distinguish three ways in which the water sector is structured; local monopoly, regional monopoly and national monopoly. In the 1990s the water industries of most Latin American countries were organized in national monopolies that were directly controlled by the government. However, the performance of the national monopolies was often

disappointing and combined with the political pressure for devolution among all governmental sectors, this led to decentralization of the water sector in various countries. It should be noted that the decentralization of the water sector was not caused solely by its bad performance, but that is was part of a wider reform of the state (Foster, 2005: 3).

The water sector providers discussed above can be organized in different organizational forms. Table one shows the various models of institutional organization of the water sector.

Ownership Control

Direct provision State

Corporatization State Public corporation

PSP contracts State Private corporation

Mixed enterprise State and private investors Private corporation Private enterprise Private corporation

Cooperative Customers

Table 1. Different models of institutional organization (Foster, 2005: 5).

Before the 1990s, the water services in Latin America were almost completely state-‐ owned with different degrees of corporatization among different countries. The institutional form of the water sector influences the interests of the managers of the

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sector; public sector managers are most likely influenced by political pressures, while an increased amount of corporation strengthens the political independence of a publicly owned corporation because it helps to become financially self-‐sufficient. Contrary, the motivation of private sector managers is profit making. Therefore, their interests are the reduction of costs and the expansion of sales revenues. Taking this into account, it is argued that it is easier to regulate private operators than public ones, because regulatory instruments can be designed and implemented to make it attractive for private enterprises to act in a way that is positive for the consumers (Foster, 2005: 5). However, the practice shows that a lot of difficulties are involved with the

implementation of private sector participation (PSP). In rural areas there is the problem of commercial viability; water provision is not profitable in these areas. In the larger urban areas the problem is often public opposition. Privatization in some cases leads till a significant tariff hike, which is highly undesirable by the citizens (Foster, 2005: 6).

Theory

It is hard to find an answer to the question why the backlash in Latin America emerged. However, it might be possible to find the factors that influence the change or

preservation of water policy among countries in Latin America.

In this thesis I want to build further on the institutional weakness argument. This argument is proposed by various (most) actors and is both mentioned as main cause or as one of the causes that influenced the revival of populism in Latin America. I want to use this theory to explain the different policy outcomes of the WSS in various countries in Latin America. When a countries water provision is poorly institutionalized, this will have a negative effect on the WSS services in a country. Even though Latin America can be seen as a water abundant continent, there are large water asymmetries within countries in this region. Water resources are mostly located in the inland of the continent, while urbanization and land development are concentrated near the coast. These developments stem from the colonial time (Meija, n.d.: 6). Countries with poorly institutionalized WSS services will not be able to overcome these water asymmetries and will therefore be affected by the backlash and change their water policies. On the other hand are countries with good institutionalized WSS, which are able to overcome the water asymmetries. The WSS services are working properly and therefore these countries will not be affected by the backlash.

The core of this argument is that the water sector in Latin America remains stuck in traditional forms of the exercise of power and problematic accumulation models. The power within the water sector is often highly dispersed, which causes deep structural problems that are not solved by a political shift from right to left (Terhorst et al., 2013: 66). Institutions in the water sector are conceptualized in the following way: institutions that are responsible for the policy design and implementation of the water resource management, water supply (domestic, agriculture, industrial) and wastewater treatment.

Based on previous research it can be stated that there are two factors under which the political backlash is accompanied by policy change of the WSS services. The first factor is the general institutional context of a country. The operationalization of the institutional context of a country is derived from a publication of Rice and Patrick (2008). In their book ‘Index of state weakness in the developing world’ they have used four categories with several indicators to measure the weakness of a state. One of these categories is political and the indicators in this category “assess the quality of a state’s

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political institutions and the extent to which its citizens accept as legitimate their system of governance.” (Rice & Patrick, 2008: 8). The political basket consists of five political indicators:

1. Government effectiveness: “this indicator is among the most direct measures available of the strength and quality of state institutions, which are essential for the provision of public goods and the formulation and implementation of sound policies.” (Rice & Patrick, 2008: 30).

2. Rule of law: “The state’s ability to govern on the basis of legitimate public norms and institutions is a strong indicator of the likelihood of long-‐term political stability.” (Rice & Patrick, 2008: 30).

3. Control of corruption: “Responsibly governed states are able to prevent the diversion of public resources from core state functions. Extensive corruption erodes state institutions and curtails investments in public goods.” (Rice & Patrick, 2008: 30).

4. Voice and accountability: “states that have mechanisms in place for peaceful dissent, transfer of power and policy reform, and are less prone to political instability in the long term.”(Rice & Patrick, 2008: 30).

5. Freedom: “states with fewer civil liberties and political rights tend to be more susceptible to destabilizing events.” (Rice & Patrick, 2008: 30).

Rice and Patrick (2008: 9) have standardized these indicators ranging from 0.0 (worst) to 10.0 (best). It is expected that when a country has a weak institutional context, it is more likely that the backlash in this country is accompanied by policy change. More information on the political indicators of Rice and Patrick (2008: 30) used in this thesis can be found in the appendix.

The other factor under which the political backlash accompanied by policy change of the WSS services is the structure of the WSS services. The WSS services in Latin America are structured according to the traditional or modern model. The trend in Latin America is that countries are moving from a traditional towards a modern model (CAF, 2012: 19). Hence, when countries followed the traditional model prior to the backlash it is likely that after the backlash a transition towards the modern model takes place. Nonetheless, it should be noted that the water sector structure is interrelated with the institutional context. A strong institutional context leads to a proper organized water sector, no matter which kind of model the country is using. However, when the

institutional context of a country is weak has this has negative effect on the water sector. In this case the water sector is often poorly organized because the institutional context is weak and not able to support the water sector.

The last question that this research tries to answer is: how did the political backlash in Latin America affect the access to WSS services? In order to answer this question two indicators are taken into account:

1. Access to water and sanitation. 2. Water tariffs

The first point will be measured based on the data from the World Bank (2014) on access to water and sanitation. Besides looking at the hard data on access to water and sanitation, I will look at the improvement in access. The amount of improvement during

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the neoliberal period and the improvement after the backlash are compared. It is likely that a countries institutional context has an effect on the access to water and sanitation. In addition the place of the case countries is examined in the ranking of the

Environmental Performance Index (Environmental Performance Index, 2014) on the issue of water and sanitation. This is a database that has ranked all countries from 1-‐ 178. With this information it can be determined whether a country has an adequate access to water and sanitation or not. Based on the institutional weakness theory the expectation is that countries with a weak institutional context have a lower access to water and sanitation than countries with a strong institutional context. However, it should be noted that from the data of the World Bank (2014) on access to water and sanitation we cannot draw firm conclusions. There are several reasons why this is not possible. The first is that the data used are from 1990 (beginning of the neoliberal period) until 2012. The neoliberal period lasted until 2005, which is 16 years, while the period after the backlash is still in process. Of the period after the backlash is only the data of the following seven years available. It is impossible to compare 16 years with seven years, because you cannot predict with certainty what is going to happen the upcoming nine years. In addition, it can also be the case that the effects of the changes made after the backlash are only visible in the long term. Besides that it can also be the case that during the neoliberal period the access increased rapidly because it was relatively easy to provide a large part of the population with access. While it are the last few percentages of the population without access that are the hardest to reach. For example, it is harder to provide access to people that live a few hundred kilometres from urban areas than to reach the millions of people living in the urban areas. To obtain a more nuanced view on the data on access if water and sanitation I also look at the water tariffs. The tariffs of water over the years give us valuable information in the

affordability of clean water and sanitation over the years.

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Fig ur e 3 . A rg um en t f lo w

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A case-‐study approach

In this thesis I use a qualitative case method approach. This approach is commonly used in the field of comparative politics because scholars in this field apply rational actor assumptions in a nonmathematical approach. This is done to develop hypotheses and theories that are applicable to a small number of cases (Mahony, 2007: 123; e.g., Bates, 1981; Geddes, 2003; Laitin, 1999; Munck, 2001).

The countries chosen for exploration in this study are most different pathway cases (Gerring & Cojocaru, 2015: 8). A pathway design is used to identify the causal mechanisms. This is possible because both X and Y, in this research the political backlash and water sector policy, are known (Gerring & Cojacaru, 2015: 8). Pathway cases contain both treatment and outcome of interest while confounding factors are excluded (Gerring, Kingstone, Lange & Sinha, 2011: 1736).

The region this research is interested in is Latin America; hence all the case studies are located there. I have chosen three different countries in the region of Latin America to discuss in this thesis: Bolivia, Chile and Ecuador. These countries do not share all the same characteristics like country size, population size, available water, population or type of government. However, the expectation is that the institutional context of a country determines whether or not the political backlash leads to policy change. Both Bolivia and Chile elected a leftist president in the mid-‐2000s but

completely but Bolivia changed its water policy drastically and Chile did not. In order to diversify the sample I have added Ecuador. Qua characteristics is Ecuador situated in the middle of the extremes Bolivia and Chile but has changed its water policy after the backlash. I want to use this case to confirm or reject the hypothesis that the effects of the backlash are dependent on the institutional context. In addition the cases are used to identify other factors that influence policy change after a backlash.

A case study method with a small N is the most appropriate approach to address the questions of this thesis within the timeframe.

Each case study begins with a paragraph on the general context of the country. Thereafter is the restructuring of the state and institutional context in the neoliberal period and period after the backlash discussed. Thirdly, the management of the WSS services is discussed in depth and the situations before and after the backlash are compared. Subsequently, the access to WSS services is discussed and this narrative is supported with data of the World Bank (2014), Environmental Performance Index (2014) and data on the water tariffs in each country. Finally, each case ends with a short sub-‐conclusion.

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Background Latin America

Before the reformist wave in Latin America can be discussed, it is necessary to look at the context in which the wave took place. In the post-‐war period the Latin American region followed the import substituting industrialization (ISI) model. This model changed the entire Latin American economy and therefore also the institutions and society (Forteza & Tommasi, 2005: 5). In short, this model implies state regulation to control the impact of the global market by encouraging the domestic industry to

enhance domestic innovation, enhance competitive capacities and limit/prevent import of manufactured goods (Greig et al., 2007: 87). However, in the 1960s this inward-‐

oriented development strategy started to show the first cracks; the performance of Latin America was disappointing compared to the performance of South-‐East Asia, which adopted an opposite economic model (Forteza & Tommasi, 2005: 5). The production in Latin America was inefficient; there were high unemployment rates, balance of payment deficits, inflation and sectoral imbalances (Greig et al., 2007: 103; Kiely 1998; Norberg 2003). These negative effects led to the gradual erosion of support for the ISI model and the debt crisis starting in 1982 was a tipping point and strengthened the view that the ISI model was not working and unsustainable. At this point the policy reform in Latin America started and this reform was revolving around the ideas, wich later became known as the Washington Consensus (Forteza & Tommasi, 2005: 5).

The Washington Consensus is a concept that was first used by John Williamson in 1989. It was a new development model for developing countries that were affected by the crisis (Forteza & Tommasi, 2005: 5). The Washington Consensus consisted of a list of neoliberal policy descriptions that would ‘help’ developing countries. The policies are: fiscal discipline, public expenditure priorities, tax reform, interest rates, unified

exchange rates, trade liberalization, foreign direct investment, privatization,

deregulation and property rights (Greig et al., 2007: 120). The idea behind these policies was, as described by Sachs (2005: 81): “Be like us (or what we imagine ourselves to be – free market oriented, entrepreneurial, fiscally responsible) and you, too, can enjoy the riches of private sector-‐led economic development.” In the end of the 80s and the beginning of the 90s a second reformist wave took place towards this neoliberal development model (Forteza & Tommasi, 2005: 5). However, after implementation of the pro-‐market reform policies it became clear that this reform brought both positive and negative effects. The economic outcomes were ambiguous; while the inflation in the Latin American region significantly declined, the policies could not insolate the region from macroeconomic shocks (Forteza & Tommasi, 2005: 8). Also the two main goals of the Washington Consensus, economic growth and increased productivity, were not fulfilled as expected. Economic growth was higher than during the lost decade in the 80s, but far below the economic growth the country experienced in the 60s and 70s and still way below the growth of the South-‐East Asian region (Forteza & Tommasi, 2005: 9; Lora and Panizza, 2002; Loayza et al. 2005). Likewise, the Washington Consesus policies did not raise productivity as expected and can be neglected as a factor that contributed to the economic growth during the nineties (Forteza & Tommasi, 2005: 9). The social outcomes of the economic reform were also not as expected. While some scholars argued that the reform had a positive effect on poverty and income distribution, most scholars state that this is not the case and that it had little effect on inequality and poverty reduction (Forteza & Tommasi, 2005: 10).

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Bolivian case

Context

Bolivia is a lower middle-‐income country in Latin America and has a population of 10.67 million people (World Bank, 2013). It is a resource rich country and the Bolivian export is highly dependent on the raw materials that are produced by a small part of the workforce. Therefore, the export of raw materials is not able to support the entire population (Kohl& Farthing, 2006: 62). The country is characterised by inequality and the poorest part of the population is the most deprived from goods and services (Nickson&Vargas, 2001: Bustamante, 2004: 38).

Like most Latin American countries Bolivia followed the import substitution industrialization growth model (ISI) in the post-‐war period. This model dominated the region until the

‘80s. However, following the ISI model did not help Bolivia to become more independent of the developed countries for capital and manufactured goods. Besides that the model was far more inefficient than in that it was in South East Asia. The ISI policies were more restricted and therefore led to inflation and generated frequent balance of payment crisis (Kohl&Farthing, 2006: 61). By the 1970s it became clear that the ISI model had failed in Latin America and the critics started to develop a new economic model that was in line with the logic of trade liberalization and globalization. This alternative economic model was later known as the Washington Consensus or as the New Economic Policy (NEP). Following this NEP had various consequences for Bolivia. With regards to the political and economic sphere there was an attempt in the end of the 80s to establish the foundations for a market democracy by opening the market and introducing municipal elections and other electoral reform. However, due to the long Bolivian history of resistance, confrontational politics and multiple parties made this very hard. After the attempt to political reform the process of redefining the tasks of both the state and the market started. This led to the withdrawal of the state from the economy. Consequently, the economic sector got privileged in the policy-‐making process (Kohl&Farthing, 2006: 82). Secondly, the NEP led to the closing of the state mines, which were the most

powerful symbol of the State of 52’ (the name for the society created by the ISI model). State-‐owned enterprises were privatized and these put an end to the protectionist policies that Bolivia had followed under the ISI model. Bolivia was also one of the first countries where these neoliberal policies were implemented under the name of structural adjustment programs (SAPs). The SAPs soon became one of the most

favourite tools of the international financial institutions (IFIs), like the World Bank and Figure 4. Map of Bolivia. (The World Factbook, 2015)

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the IMF, to use in developing countries (Kohl & Farthin, 2006: 61). It is important to notice that the NEP laid the foundation for more economic reform and for the political decentralization that happened in Bolivia

At first, the impact of following the NEP had better results than Bolivia could have hoped for; within a couple of months inflation in the country dropped from the annual rate of 20,000% to 9%. Bolivia soon became known as one of the success stories of neoliberalism’s ability to stabilize the macroeconomics of a country. However, the implementation of the NEP also had some negative effects: due to the closing of the mines over 20.000 people lost their jobs within the first year and in addition another 35.000 workers lost their manufacturing job over the next five years (Crabtree et al. 1987; Farthing, 1991; Kohl&Farthing, 2006: 61). The achievement of attaining economic stability was the greatest accomplishment of the NEP in Bolivia because macro economic stability is a necessary condition to obtain sustainable growth. It should also be noticed that the main reason of the NEPs fast stabilizing ability was the tacit legalization of cocaine profits, which allowed US dollar accounts at the central bank (Kohl&Farthing, 2006: 73). Nevertheless, the greatest disadvantage of the NEP was that it widened the gap between rich and poor and Bolivia was already a country with a tiny middle-‐class. The new neoliberal policies favoured the few rich at the top and exploited the poor. To minimalize this negative effect of the NEP the government followed their long tradition of dividing popular forces and made different deals with the indigenous campesinos and the people living in the cities. Hence the NEPs new property tax was only applied on the city and not the rural areas (Kohl&Farthing, 2006: 81).

In 1985 it could be concluded that the Paz Estenssorro government was the first government since 1952 that, more or less successful, created a new paradigm for the Bolivian society. By balancing coercion with consent they were able to, as we currently know temporarily, establish a neoliberal paradigm that was accepted by heterogeneous society. Dunkerley argues that the main reason for the failure of this hegemonic

neoliberal consensus lies in the inability of the government to institutionalize and control the new neoliberal regime (Dunkerley, 1990; Kohl&Farthing, 2006: 82).

However, it is important to notice that the neoliberal reforms in Bolivia seldom had an outcome that corresponded with the policy objectives. And this mismatch between outcomes and political objectives led to frequent resistance of the population. (Perreault, 2005: 266). The transition period towards a neoliberal paradigm reveals some major weaknesses of the Bolivian government and their policies. Firstly, for the political system to work political patronage needs to be divided among the ruling parties. This is not in line with the neoliberal wish to diminish government power Secondly, the NEP did not spread the benefits of neoliberal market development equally over the population. The rural and indigenous people have a long and perpetuating history of exclusion. When the NEP was implemented the policy makers did not include these people. These weaknesses mainly contributed to the fragility of the neoliberal system and this fragility started to become visible in the second half of the 1990s (Kohl&Farthing, 2006: 83). Subsequently, in 2005 Evo Morales used these weaknesses to his advantage and was elected president with the promise to end the past two

decades of neoliberalism (Spronk, 2014: 2). The next paragraphs elaborate more on the state restructuring taking place in Bolivia from the 1990s until the years after the political backlash.

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State restructuring and institutional context

State restructuring in the 1990s

In 1993 Gonzalo Sánchez de Lozada became president of Bolivia. Before his election Sánchez de Lozada had already been Minister of Planning. During his time as minister he had both designed and implemented some of the more radical policies of the NEP.

Besides that he had also thoughts about further political and economic reforms for Bolivia. Sánchez de Lozada felt structural economic and political reform were necessary to reassert authority of the weakened state because it would reduce the corruption, renew legitimacy of the government and attract foreign investors. When Sánchez de Lozada became president these ideas were clearly reflected in his policy. First he

implemented his Plan de Todos (Plan for everyone), which was a radical reformist policy package in order to drastically change both the economy and the state (Perreault, 2005: 272). The Plan de Todos consisted of seven mechanisms:

1. “Constitutional reform” (Perreault, 2005: 272; Kohl, 1999; MNR-‐MRTKL, 1993). 2. “Administrative decentralization through the Law of Popular Participation and

the Law of Decentralization” (Perreault, 2005: 272; Kohl, 1999; MNR-‐MRTKL, 1993)

3. “Privatization of state industries” (Perreault, 2005: 272; Kohl, 1999; MNR-‐ MRTKL, 1993).

4. “A second agrarian reform through the Law of the National Institute of Agrarian Reform” (Perreault, 2005: 272; Kohl, 1999; MNR-‐MRTKL, 1993).

5. “Education reform” (Perreault, 2005: 272; Kohl, 1999; MNR-‐MRTKL, 1993). 6. “Restructuring of the pension system and introduction of social insurance

payments for citizens over 65 years of age” (Perreault, 2005: 272; Kohl, 1999; MNR-‐MRTKL, 1993).

7. “Reforms of the judicial system.” (Perreault, 2005: 272; Kohl, 1999; MNR-‐ MRTKL, 1993)

The first point, constitutional reform, was to clear the way for the other reforms. The new constitution of 1994 stated that Bolivia was a multi-‐ethnic and pluri-‐cultural country. In addition the constitution acknowledged the rights for campesino and indigenous people (Perreault, 2005: 272; Healy and Paukson, 2000; Van Cott, 2000; Zimmerer, 2000b).

Not all the reform measures were drastic; the majority of the measures were implemented more gradually. These measures included the reduction of social spending and the freezing of wages. However, these piecemeal measures fueled an almost

continuous political unrest during the 90s. Plan de Todos was not only implemented to reform the economy, it had a much bigger purpose. It was designed to restructure the state by reforming social service, fiscal and administrative structures, industry, agriculture and land markets. Plan de Todos gained its legitimacy because of the rewritten constitution of 1994 (Perreault, 2005: 272; Van Cott, 2000). The main

innovation of the Plan the Todos compared to former reforms was that it simultaneously tried to address the autonomy that the subnational regions asked for with the opening of their markets, which the international institutions like the IMF demanded. So the Plan de Todos transferred the authority over decision-‐making and state revenues from the central government towards the local level, while it at the same time supported foreign investments in their economy. Two of the seven mechanisms of the Plan de Todos had

Political backlash in Latin America : a curse or blessing for the water supply and sanitation services? : a case study of Bolivia, Chile and Ecuador