Bolivia’s informal economy is not a problem—It is a solution to institutional failure
By Elias Sanchez
This week, Bolivia inaugurated a new president, Rodrigo Paz, whose rhetoric blends nationalism with a market-friendly appeal under the slogan of “love for the patria” and “capitalism for everyone.” The ceremony, held in the Congress of La Paz beneath an Indigenous banner symbolically restored after two decades of hyper-interventionist politics inspired by the Socialism of the 21st Century, marks a rhetorical break but not necessarily a structural one.
Labelling Paz as “centre-right” is less an ideological definition than a chameleon strategy emblematic of Bolivian—and increasingly global—populism, where socialist interventionism adapts to the language of pragmatism and inclusivity. Nevertheless, his rise carries a modest symbolic weight: a tentative sign of renewal in a state weakened by decades of extractive statism and institutional decay.
In economic terms, Paz faces a formidable legacy. Two decades of institutional engineering have entrenched state control over high-order goods—strategic sectors such as hydrocarbons and minerals—while distorting incentives in lower-order markets, where informality now dominates. This vertical chain of intervention has generated a dual economy: one bureaucratically centralised, the other informally resilient. Within such a framework, the new president’s room for manoeuvre is limited; he inherits not a blank slate, but a political economy structurally conditioned by path dependency and interventionist inertia.
Quantic political economy: A Lens Beyond the Pulpit of Power
During the summer, I travelled to Bolivia to explore a concept often cited but rarely understood by development economists: informality. In Cochabamba, a city in Bolivia, I wasn’t seeking policy gaps or macro trends—I was searching for the human logic behind economic life: the everyday acts of ingenuity and exchange that emerge when formal systems fall short—what Ludwig von Mises called human action.
As both an economist and a political observer, I approached the trip as a form of anthropological economics: an attempt to understand how people navigate markets when institutions fail. What I found wasn’t mere dysfunction but remarkable adaptation—a vibrant, if precarious, economy operating on the margins of a state that is both overbearing and unreliable.
To call Bolivia a flawed hub of informal activity—as the World Bank once did, labelling it the country with the largest informal market in Latin America, with roughly 84–86% of its workforce outside formal employment—barely captures the scale. The streets teem with vendors selling mangoes, SIM cards, and car parts side by side. Beyond macroeconomic and micro-economic visibility, these are swift, trust-based exchanges: no receipts, no taxes, no regulation. Viewed through an economic–anthropological lens, this is not chaos but coordination—improvised, adaptive, and resilient. What seems disordered from above reveals, on the ground, a dense web of norms, obligations, and necessity—an informal system that functions precisely because the formal one fails.
It was here that I began to see the outlines of what might be called a quantum political economy: a system where uncertainty, expectation, and interaction replace the deterministic assumptions of conventional models. Each market exchange in Bolivia’s informal sector collapses a web of possibilities—between legality and survival, trust and risk—into a single act of decision. Institutions, when they exist, serve less as fixed rules than as probabilistic frameworks that stabilise behaviour just enough to prevent collapse. Informality, in this light, is not a deviation from order but a spontaneous response to indeterminacy—an emergent dynamic coordination that operates within the uncertainty of political and economic life.
The Quantum Logic of Informality: Order in the Shadow of the State
Economists trained in the halls of development ministries often approach markets through a mechanistic and deterministic lens, treating them as “problems to be solved” by extending tax regimes, licensing systems, or microcredit schemes. The underlying ambition is to formalise—to make informal actors legible to the determinisms of the state’s political agenda. In theory, such reforms promise higher productivity, greater tax revenue, and wider access to social security. Yet this diagnosis remains superficial. In Bolivia, these interventions rarely address why informality persists in the first place.
A quantum perspective allows a deeper understanding: Bolivia is not a country without a state, but one where the state is omnipresent—just not where, or how, it should be. Enforcement of property rights is inconsistent, contracts are seldom upheld, and the legal system functions less as a neutral arbiter than as an instrument of rent-seeking and political patronage. As Mural Arsel et al. (2014) note, the process of nationalisation after 2005 reasserted state control over strategic sectors in the name of sovereignty and redistribution. In the mining industry, this shift altered who determines resource use, who benefits, and what development model prevails. The expansion of state power reflects not mere ownership but an attempt to redefine national identity and the very meaning of development.
This move edges toward a quantum view of the political economy—one that recognises the interplay of uncertainty, feedback, and institutional entanglement—but it remains incomplete. As Ludwig von Mises warned, the logic of interventionism ensures that state interference seldom ends with a single decree. From a Mengerian perspective, production is an interdependent process of higher- and lower-order goods; when high-order goods such as minerals are nationalised, interventions cascade downward, distorting relative prices and intertemporal preferences. The result, over time, is not coordination but coercion: successive layers of control that erode liberty, suppress entrepreneurship, and blunt the signals required for market adjustment.
What emerges is a hybrid order—a politicised economy suspended between bureaucracy and clientelism—that the new government must now confront. Yet despite these distortions, informality continues to thrive within this constrained environment. It dynamically supplies markets, as entrepreneurs consciously reject formalisation because state involvement often worsens their prospects. The informal economy, far from being a deviation, represents a rational and spontaneous adaptation to a system in which formal institutions—trapped in a spiral of interventionism—fail to guarantee justice, property, and freedom of action.
Informality as a Quantic Institutional Workaround
To call Bolivia’s informal economy a pathology is to misread the evidence. It is better understood as an institutional workaround—a rational, individual response to a system that disrespects property, mistrusts markets, and rewards proximity to power. This is the structural reality President Paz must confront: a state sustained by subsidies, interventionism, and political favouritism.
Economists often adopt a technocratic lens that treats informality as a flaw to be corrected from above. Yet this presumes the formal economy is functional—it is not. Informal actors are not lawless; they operate within self-regulating networks guided by norms, reputation, and trust. In the quantic political economy, coordination emerges from uncertainty: where social expectations, not decrees, stabilise transactions.
Informality, then, is not disorder but adaptation—a spontaneous order that fills the vacuum left by an overreaching yet ineffective state. What Bolivia lacks is not regulation, but legitimate, decentralised institutions capable of securing property rights and enabling voluntary exchange. Without such foundations, formalisation campaigns become new instruments of coercion—mechanisms to tax the poor and constrain the entrepreneurial.
When Property Depends on Power: The Institutional Breakdown of Market Coordination
The quantum failure of institutions in Bolivia runs deep. The country’s legal conception of property is less Roman than Rousseauian: property is granted from above rather than protected from below. Since the expropriation of tin mines in 1952 and the nationalisation of hydrocarbons in 2008, the state has positioned itself as the ultimate owner of strategic assets—entrenching a domino effect of intervention, where each act of control invites further interference. These were not isolated measures but part of a long tradition of redistributive nationalism, in which the state becomes both the gatekeeper of opportunity and the beneficiary of its own patronage networks.
The consequences are structural. By weakening the credibility of property rights, the state distorts the information signals upon which markets depend. Land, capital, and labour lose reliable pricing mechanisms; risk assessment gives way to political calculation. Entrepreneurs face uncertainty not from competition but from the threat of arbitrary expropriation. Investment horizons shorten, innovation slows, and productive capital migrates to the informal sector, where flexibility substitutes for legality—beyond the sight of technocratic policymakers.
The result is a dual economy. The formal sector, dominated by state-owned or politically favoured monopolies—YPFB in hydrocarbons, EMAPA in staple goods, and BOA in aviation—is shielded by regulation and sustained by subsidies. Meanwhile, within the quantum political economy, small enterprises and informal vendors navigate a maze of contradictions, creating order through adaptation. In this paradox, Bolivia’s economy endures not through institutional strength, but through the bottom-up resilience of those forced to work around it.
Decentralisation and the Quantum Logic of Institutional Coherence
The problem is not merely economic—it is institutionally quantum. Bolivia’s over-centralised state extracts rents from regions and municipalities while offering little in return. Local authorities operate with neither fiscal autonomy nor administrative capacity. In such a system, central regulation does more than fail—it erodes legitimacy itself, collapsing the fragile coherence between governance and accountability.
From a quantum political economy perspective, the state’s overreach disrupts local coordination. Each intervention distorts the informational “wave” that allows communities to coordinate spontaneously. The result is institutional decoherence: uncertainty spreads, incentives misalign, and collective action collapses into dependence.
The answer is not to bureaucratise informality but to rethink the architecture of the state. Decentralisation should align power with proximity, restoring the municipal sphere as the nucleus of governance. Herbert Spencer envisioned a social order grounded in voluntary cooperation and local autonomy—an idea uniquely compatible with Bolivia’s fragmented geography and plural traditions.
Justice, like commerce, need not emanate from the centre. When space is created for local experimentation, governance can emerge through bottom-up processes of trial and error—beginning with the entrepreneur, extending to municipal authorities, regional administrations, and finally, the central government. An effective reform would allow institutions to evolve organically, protecting property, enabling voluntary exchange, and empowering citizens rather than bureaucrats to shape their economic futures. For this reason, the depoliticisation of justice and the deregulation of markets constitute two of the most fundamental steps for President Paz if genuine institutional renewal is to occur.
A Final Reflection
One warm afternoon in Cochabamba, I sat on my grandmother’s terrace watching the city unwind after a long day of research. Children no older than ten wove through traffic selling gum, chocolates—whatever they could carry. They weren’t begging; they were trading—offering goods, smiles, and initiative.
In that moment, all the frameworks I had carried—models, equations, policy briefs—seemed to collapse into a single realisation: what I was witnessing was not economic failure, but quantum adaptation. Beneath the visible disorder lay an invisible order—a field of spontaneous exchanges, human signals, and local coordination continually forming and dissolving under constraint.
Mr. Paz must recognise that in Bolivia, informality is not the anomaly—it is the rule. Perhaps this is what he evokes with his slogan “Capitalism for Everyone”, though time will tell whether those words will rest on solid foundations or fade into rhetorical abstraction. Informality is not a deviation from the system; it is the system. The persistent drive to formalise, regulate or centralise misunderstands this quantum dynamic. People turn to informality not because they reject law, but because the formal order has decohered—its rules no longer resonate with lived reality.
What economists owe these actors is not another technocratic fix, but humility. Before prescribing, we must observe the quantum wave-patterns of human action—the decentralised interactions that keep markets alive when institutions fail. From the regional to the municipal, from the vendor’s stall to the neighbourhood network, order emerges not by decree but through spontaneous coherence.
The informal economy may appear chaotic on the surface, yet beneath it lies a deeply human logic: the impulse to act, to exchange, to persist. In that rhythm we find not pathology but resilience—the quiet, quantum heartbeat of an economy that endures despite the state, guided by the spontaneous order of the market.
Elias Moises Sánchez Flores is a political economist and Master’s student in Global Political Economy at the University of Leeds. His research centres on Austrian Economics, monetary institutions, and the structural roots of inflation and neo-extractivism in Latin America. He writes critically on state intervention, fiscal imbalances, and the limits of rentier-led development, drawing on the theoretical foundations of Mises, Hayek, and Huerta de Soto.
