Economic Growth in Bolivia

An overview of the Latin American countries reveals that practically the entire region is faced with numerous development challenges including serious poverty, inequality, and rising unemployment levels. In this context, there have been various attempts at addressing these vital issues of this region including programs introduced by the World Bank and the International Monetary Fund. In this context, particular focus has been given on supporting national and regional economic reform efforts, the restructuring of the financial sectors, and human development programs through partnerships, lending and non-lending instruments. Though there were significant improvements to this respect including Mexico and Argentina's growth showing a steady rise at 5.1 percent and 4.4 percent respectively; Uruguay at 4.9 percent; Chile at a strong 7.1 percent, and Brazil showing a slow growth rate. The following paper will however limit its discussion to the economic growth of Bolivia, located within the same Latin American continent. (Library of Congress, 1989; World Bank Annual Report, 1997).

Bolivia - In Brief

With the official name of the Republic of Bolivia, or Bolivia in short, it has her capital at La Paz, which is also the seat of the federal government. The city of Sucre, however serves as the legal capital as well as the seat of the nation's judiciary.

A brief on the economic indicators of Bolivia reveals that as of 1987 statistics, Bolivia's Gross Domestic Product was 4.35 billion US dollars or approximately USD 640 per capita. Though the nation witnessed its growth rise to 5.5 percent per annum in the decade of the 1970s, the growth rate witnessed a negative spiraling trend up to the end of 1987, with unemployment reaching a huge 20 percent from the 6 percent in 1970s. This was perhaps triggered by a continuous spate of recessions and hyperinflation levels in practically all the formal sectors of the economy. (Library of Congress, 1989; World Bank Annual Report, 1997).

Agriculture Sector

With the status of the second most agricultural nation on the entire South American continent, Bolivia has rich and fertile highlands employing 60 percent of the farmers while another 20 percent are employed in the equally rich fertile valleys across Bolivia. The fact that some 23 of the GDP accounts from the agriculture, employing some 46 percent of the entire nation's work force speaks well of the tremendous value and contribution of agriculture to the nation's economy. However, the relatively low exports from agriculture amounting to as little as 15 percent also shows that the nation is suffering from primitive farming technology, and little support from the government to raise the share of agriculture in the nation's export potential. Though significant, one must note Bolivia also has an underground economy employing some two thirds of the entire workforce, dealing in contraband drugs, coca and other trading commodities.

Industry

An insight on the various industries in Bolivia show that mining accounted for a significant share in the economy, with silver and tin as the principal mined products. The mining sector accounted for 4 percent of the GDP, 36 percent of the exports, providing for a 2.5 percent of total government revenues, and employing 2 percent of the labor force. Though playing a minor role, the manufacturing sector brought in 10 percent of the GDP as of 1987 statistics. The total number of employees engaged in all the industries accounted for 20 percent of the entire labor force.

Energy Sector

The energy sector has also played a key role, as hydrocarbon particularly natural gas accounts for a leading export potential as of 1980s statistics. Bolivia has a relatively low domestic energy consumption, with a 46 percent share used for residential/commercial purpose, transportation using another 31 percent, industry utilizing 20 percent and mining at a low 3 percent only.

Services Sector

The services sector employs some 34 percent of the nation's workforce including banking, financial services, transportation, communications, and tourism. Though the nation suffers from a strong and stable financial status, the private banking sector has thrived over the years with assets of more than 357 million USD, as of 1988 statistics.

Imports/Exports

The official statistics as of 1987 show that the country imported goods worth more than 777 million USD, while the unofficial import figures crossed the 1 billion-dollar mark primarily due to the import of contraband material. As for the export statistics as of 1987, these totaled some 569 million US dollars, perhaps the lowest in the entire decade of 1980s. The government then abolished all export taxes and introduced the floating exchange rate, with the result that unofficial coca-related exports nearly equaled the official figures of 1980s, with revenues ranging from 600 to a billion US dollars per annum. As of 1985 however the leading commodities to be exported included hydrocarbons accounting for 11 percent of the nation's GDP, and covering for more than 50 percent of government revenues. Natural gas was the leading exported commodity duly replacing tin and silver witnessing a healthy growth from 21 to more than 44 percent during 1980 to 1987. (Library of Congress, 1989; World Bank Annual Report, 1997).

Balance of Payment

Bolivia's total external debt stood at 4.6 billion US dollars as of 1986. This was largely attributed to increasing public sector expenditures amounting to more than 30 percent of the GDP. A brief on the deficit showed that as of 1987, it was 500 million US dollars or 10.5 percent of the GDP, which witnessed a decline to 6 percent by 1988. As for the nation's gross reserves, they stood at approximately 405 million US dollars, net reserves at 181 million US dollars and gold reserves at some 300 million US dollars respectively.

Exchange Rate

As of January 1, 1987, the official currency Bolivian peso was replaced with Bolivian, and when it was floated with the US dollar, the currency witnessed became somewhat stable at B2.3 equivalent to 1 USD as of 1988 statistics. The difference between the official and black market rates however it did not exceed 1 percent. (Library of Congress, 1989)

The Growth and Stabilization of the Bolivian Economy

Having briefly mentioned the primary economic indicators of the economy of South American country of Bolivia, the following part of the paper will present some of the salient aspects of the growth and stabilization witnessed in the economy of Bolivia.

A brief on the macroeconomic stabilization reveals that it was in 1985 that the actual effects of stabilization of the Bolivian economy began to emerge. This was largely due to the policies of International Monetary Fund, in particular IMF's Stand-By-Arrangement facility that aimed at bringing an end to the hyperinflationary levels. Some of the major accomplishments were based on strong emphasis on the macroeconomic policies, combined with a set of structural reforms, and an emphasis on greater political stability. With considerable gains, the IMF sanctioned set of policies left a positive affect over the next decade, and the Bolivian economy witnessed a relative stabilization taking into account the following changes.

As of 1985, the inflation rate was 23 percent, which was significantly brought down to 18 percent by 1990, a figure which continued till the level reached single digit figures in 1995, and somewhat continues to date. Indeed one of the most effective areas, the ending of the hyperinflation levels was somewhat dramatic for the Bolivian economy as a whole. It may be observed that while other countries generally relied on an exchange rate anchor, the key to Bolivia's successful recovery was based on fiscal correction measures, including the measure aimed at practically eliminating inflationary financing of the nation's budget from the central bank. With the strict control measures on the wage bill the public sector deficit was also reduced from a huge 30 percent of GDP in 1984 to approximately 4 percent in 1986, a policy which continued for the entire next decade maintaining the deficit level through financing from concessional external sources. The unification and flotation of the exchange rate was yet another factor which provided a strong impetus for the stabilization of the Bolivian economy, as also bringing vital improvements in the competitive status of the nation. (Library of Congress, 1989; World Bank Annual Report, 1997).

The rate of growth of the economy has been averaging at more than 4 percent during the years 1990 to 1997, a figure which somewhat contracted from 10 percent in the first half of the 1980s decade. The external debt was brought down from a high of 100 percent of Gross Domestic Product to a 50 percent low. With gross revenues declining to their lowest in 1985, foreign direct investment in areas of exports and infrastructure boosted these revenues as also providing impetus for maintaining current account deficits.

The Introduction of Structural Reforms to Initiate Growth and Stabilization

Another set of policies included the structural reforms which not only initiated growth and stabilization for the entire Bolivian economy, they also served to reduced extensive state interference in the economy which had been on the rise during the period between 1952 and 1985. Strengthening social support was also another area that was given impetus by the introduction of the various structural reforms.

One of the changes to bring structural reforms was to invite foreign direct investment in areas of energy development such as hydrocarbons, mining sectors, and investment for which relevant laws were formulated. The passage of these laws thus precipitated large foreign direct investments in the said areas of the economy. A notable development to this respect was the Brazil gas pipeline, which has become Bolivia's largest export earner, as well as a source of nation's growth in the last few years.

Another area that has helped the nation attain significant levels of growth and stabilization is the move of transferring and transforming public sector enterprises into private entities. This move has helped lower the staggering public finances which was otherwise being spent on the operations and running of numerous public sector enterprises. It has also provided the government with needed funds to cater for a number of social welfare programs such as the helping the poor and providing basic health care facilities. Allowing private enterprises the facility to carry out businesses in the nation has also opened up opportunities for private investment and growth, in turn bringing prosperity across the breadth of the economy.

A structural reform that has provided for enhanced private sector involvement is the removal of price controls, as well as systematic trade liberalization, making Bolivia one of the most open trade regimes in the entire South American continent. The said reforms have also provided for an establishment of an independent central bank as well as allowing state-owned banks to be purchased by private sector.

The area of social services was also enhanced from the structural reforms taken by the government. These included reducing child mortality by more than 50 percent, enhancing the quality of and access to primary education, and strengthening old-age security for Bolivians through the introduction of pension reforms.

The role and importance of political stability is also of equal importance in the gradual growth patterns and stabilization of the Bolivian economy. One may note that between the years of 1964 to 1985, there were some 30 governments, and a larger number of economic teams, which resulted in deteriorating economic conditions, instead of being of any assistance. However, with the return of democracy, and regular and peaceful changes in governance, the nation has followed a consistent path of growth and development in practically every sector of the economy. In addition, the reduction and control of coca production has also eliminated one of the major sources of corruption, a dangerous aspect which had become threatening for both the governance of the nation as well as open political system.

Economic Performance Update

The entire paper above discusses the various areas where the Bolivian economy has been given a boost and what have been the salient areas of economic development and growth. However, with such promising policies and the support of world organizations such as the International Monetary Fund with its equally supportive programs and agendas, the Bolivian economy has once again taken recourse and begun to move backwards. Following are some of the reasons for this reversal, which has been more than obvious in the periods after 1998.

Taking a brief view at the per capita income of Bolivia, one may observe that as of fiscal year ended 2002, the real GDP per-capita was approximately 900 US dollars. Though this figure is certainly higher as compared to the levels of 1987 when it was only 640 US dollars, it is still one of the lowest in entire South American continent. Equally surprising are the unemployment levels, which have risen to 8.5 percent during the last four years, including leaving more than half the entire labor force underemployed. (The figures taken are of fiscal year ended 2002).

The fall in the real GDP per capita and rise in unemployment levels is said to be attributed to the sharp fall in the domestic saving and investment areas of the economy, showing a fall of up to 33 percent. Such has been the weak performance of the economy that private savings were shown to take a negative turn taking along sharp declines in capital account of the balance of payments.

The weak performance of the Bolivian economy also spread to other areas of the economy including exports. The share of the nation's export has not matched with the lax set of policies and open trading regime that had opened doors for foreign direct investment and relaxed laws for private enterprises in various sectors of the economy including mining, hydrocarbons, and manufacturing. This has also been reiterated in the above paragraphs. Instead there is a growing reliance on regional markets such as that of neighboring Brazil, with the result that Bolivia's share in the markets of the industrialized countries has witnessed a gradual decline.

The impact from reduced growth and increasing financial pressures, has directly affected social sector programs, and practically eliminated all previous efforts for enhancing social sector spending. Thus, efforts taken in the early part of the 1990s have not only suffered from these negative growth and development patterns. It has been estimated that more than two third of the entire Bolivian population is now living below the poverty line, with more than 33 percent of them living in extreme poverty. Major brunt of these negative growth patterns in the economy has fallen on the indigenous people as well as majority of the women residing in rural areas of the country.

Perhaps serving as a major factor, an increase at the domestic weaker performance in particular since 1998 has played a key role in reversing of the economic growth in Bolivia. Further complicating were factors such as leaving the macroeconomic vulnerabilities to re-emerge, as well as the set backs suffered from an incomplete set of reform agenda. The result was not surprising, as the entire Bolivian economy was left to cope with the number of domestic as well as external shocks. Included in these vulnerabilities were factors such as deterioration of public financing system, failure to curb and control public spending, failure to restrict fiscal deficit which continued to rise, all of them combining to raise the non-financial public sector debt to more than 60 percent of GDP as of 2002. This was in spite of the introduction relief measures introduced by the International Monetary Fund, including its famous 'Highly Indebted and Poor Countries' debt relief program. Then there was a more than greater reliance on the 'crawling peg exchange rate regime' which served as a nominal anchor for the system. This move disallowed Bolivia from making any room for a possible maneuver, when faced with an external shock, particularly in times of regional currencies realigning their values.

Summarizing some of the measures that should be taken for the Bolivian government, if it sincerely intends to bring the nation back on the road to prosperity, growth and development one may note that key areas include the restoration of macroeconomic stability brought about through fiscal stabilization. Second, there must be a greater need for reducing macroeconomic vulnerability, which can be accomplished through strengthening the corporate and banking sectors of the economy. Third, the Bolivian government and private sector should join hands and pursue strategies for policy reforms in a truly 'institutional environment, accompanied with an increased spending on social sector reforms. The utilization of natural resources in an effective manner should also be taken into account, with sustainable growth and medium-term as well as long-term growth strategies as the primary objective of every government sitting in La Paz.