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Chapter Summary

Graham, Carol. 1998. Private Markets for Public Goods: Raising the Stakes in Economic Reform. Washington DC: Brooking Institute Press.

Chapter 4: The Capitalization and Popular Participation Programs in Bolivia


The capitalization and Popular Participation programs in Bolivia addressed inefficiencies in the government. The highly centralized system could not adequately meet local needs or address major social problems such as a 60% poverty rate. Bolivia privatized its government-owned industries to increase productivity and capital investment. It reformed its social security system, rescuing it from bankruptcy and expanding it to cover most of the population. It also decentralized functions to local government and greatly enhanced citizen political participation.


The capitalization program (1993) had three objectives- privatization, social security reform, and creating more stakeholders in the program. The program was designed to attract foreign investment in Bolivia without giving up ownership.

Bolivia did not have the money to invest in its own industries and foreign investment was the solution, increasing economic growth by 6-8% per year. When the government privatized its businesses, it required the foreign investors to buy half of the shares of the company by investing that amount of money in Bolivia instead of paying the government for the shares.

The government invested the other half of the shares in the new social security program. The old social security program was almost bankrupt and only covered 11% of the workforce. The new system covers more employees and allows workers to retire upon accumulating a pension based on 70% of their average salary. Upon retirement, a person buys an annuity to pay out his benefits and there is no guaranteed minimum benefit. The new pension system increased national savings from 2% of GDP to 5% of GDP.

The public could purchase government-issued shares in privatization at book value with only 5% down. Many people who could not ordinarily afford to purchase shares were able to because the shares were sold at book value (cheaper than the market price) and only a small downpayment was required. These shareholders were directly involved in privatization, creating widespread public support for the program. The poorest people could not afford shares, which increased inequality.

The dividends from the shares, called bonosols, were invested to pay $200 per year to all Bolivians 65 and older. This measure helped poor Bolivians and increased equality among the elderly.

Popular Participation

The Popular Participation program (1994) decentralized the government and devolved responsibility and resources to the local level. The changes resulted in the creation of 250 new municipalities and recognition of 19,000 community and grassroots organizations, compared to 100 before the program, that could oversee and help direct local resource use.

The local governments received a larger proportion of tax revenues for their new responsibilities and community groups had a voice in what investments they would like the government to make. These groups helped to create a municipal development plan (PDM) to coordinate local interests with investments. Then, the mayor, municipal council, and vigilance committee look at the PDM and formulate an annual operating plan. The plan is then examined by the vigilance committees and the Finance Ministry for approval.

Vigilance committees (VCs) were formed to supervise the spending of funds and ensure accountability. They could get Congress to freeze local funds if they were misused. This program created a huge change in the way the country was run. Instead of top-down dictation of projects, communities could design their own projects and only had to get the central government to approve the financing, which was just a technicality.

The program also reformed education, allowing more local control in financing schools, evaluating teachers, textbooks, and curriculum. More control needs to be devolved in the school system, such as hiring and firing control.


Bolivia is an interesting case because it was successful. The reforms resulted in increased investment, productivity improvements, and citizen participation despite the extreme poverty of the country. The reforms could have gone further by giving the citizens a voice that carries more weight and by devolving more power to the local government over the school system. VC members are not paid and they do not have significant resources. Some mayors have tried to influence VC members through bribes or threats, and some VCs are not truly representative because the mayor ordered their formation. Despite shortcomings in the reforms, other countries used Bolivia as a role model in implementing their own reforms.