Decree 21060

In 1985, under the fourth (and final) term of President Paz Estenssoro, the economic situation in Bolivia was undermined with a galloping hyperinflation (inherited from Hernán Siles Zuazo) and the country was unable to pay its debt to the IMF. A plan was drew by Jeffrey Sachs, Professor at Harvard University, and at that time active as economic adviser to the Bolivian government. Bolivia was the first country where Jeffrey Sachs could test his theories.

The plan, named decree 21060, was adopted by the Bolivian government, a move approved by the IMF, which immediately gave Bolivia $57 million dollars in credit. The World Bank as well began again lending money to the country.

Whereas the inflation could reach up to 20.000%/year in 1985, when Jeffrey Sachs left the country two years later it had fallen to 11%. But the "lateral damage" of his plan also occurred in the destruction of the already meager productive sector. The only sector which thrived was the production of cocaine. Where in 1980 only 17% of labor market was employed in the cocaine sector it rose to 37% in 1990.

The main "shock therapy" measures of decree 21060 in Bolivia were:

1. The linking of The Bolivian economy to the US Dollar. The Bolivian peso devaluated with 93% over one night, in fact installing the US Dollar as currency and denying the country to commit an own monetary policy. Accounts in any currency were authorized and interest rates were freed.

2. A drastic pushing back of the government shortage. This actually meant adapting tariffs and prices to the "reality", resulting in a price explosion of goods and services (e.g. petroleum prices raised to the international level, the price of gasoline went from 0.04 to 0.30 per liter). It meant also dismissing of two thirds of the employees of the tin and oil companies managed by the government and scaling back the salaries of the remaining third part and public sector salaries were frozen till December 1985. This measure finally meant also the government ended all subsidies to the public sector.

3. The liberalization of the market. This meant next to the end of restrictions from above also the end of protection of certain destitute sectors by the government. The Bolivian Development Corporation, one of the largest state enterprises, and the National Transportation Authority were dissolved, passing their property on to regional development corporations. These in turn had the task of privatization of enterprises. Restrictions on foreign commerce were abolished with the elimination of prohibitions and quotas. Above that a single duty of 20% was fixed for all importations. This resulted in the local production of goods and services coming under enormous press and also mainly succumbed.

4. In order not to place the Bolivian economy under unnecessary pressure the payment of the foreign debt was stopped for some years. This agreement between Bolivia and the IMF was done under the strict condition that the complete economic reforms, as drew by Jeffrey Sachs would be implemented without condition.