Development Profile of Bolivia

Table 3: Gross Domestic Product (GDP) 1980 - 2003

Source: Dresdner Bank Lateinamerika, 2005        

3. Economic structure and economic performance

The Bolivian GDP is composed of about 25 % of the primary sector (agriculture, mining and hydrocarbons), 20% of the secondary sector (manufacturing and construction) and 55% of the service sector.

Within the last 40 years the agricultural share of GDP has more than halved. In 2003 it has only been 15,65%. The hydrocarbon sector has become the most dynamic sector in the economy. It has been pushed by the start up of the gas exports of the Rio Grande-Campinas (Bolivia-Brazil) pipeline. Large amounts of foreign direct investments have been attracted by hydrocarbons in the last 5 years. In 2003 oil and gas (inclusive metal and mining activities)

generated over one-half of export earnings, but made up only 7.6% of GDP. This reflects that international prices are relatively high.

The manufacturing sector accounted for 18% of GDP and generated 38% of the total exports in 2003.

In spite of the growing improving importance of the financial services during the 1990s in Bolivia, rising debt and poor economic performance lowered to contribution of the financial services down to 11,5% of total GDP in 2003.

Chart 1: Gross Domestic Product by Sectors, 2003

Source: Country Profile Bolivia, Economist Intelligence Unit, page 41

A considerable progress in GDP growth took place during the 1990s. The President Sanches de Lozada (1993-97) pushed for a market – oriented economy, becoming a member of Mercosur, signing a free trade agreement with Mexico and privatizing state owned companies. With the capitalization of numerous public enterprises of the Bolivian market exports and investments became the main engine of growth during the 1990s.

From 1990 to 1998 GDP grew from 4.9% to 8.5% (see table 3). From then on growth slowed, falling back to 8.4% (2,3% real GDP growth) in 2000, rising to 8,5% (1,5% real GDP growth) in 2001 and falling back to 8,4% (2,8% real GDP growth) in 2002. This turndown was caused by the fall in demand and prices for Bolivian exports and by the Asian crisis, which followed after. The upturn in 2002 was impeded by civil unrest. Real GDP growth was 2.4% in 2003, but was almost offset by population growth, which was 2,28%.

B) International Trade/ Foreign Direct Investment and development

1. The New Economic Policy (NEP)

In 1985 Bolivia implemented a New Economic Policy, based on the neo-liberal ideas of privatization, free-trade and liberalization of capital flows. The first NEP stabilization package was so effective, that hyperinflation of 25,000% per year could be stopped. After liberalizing the prices, exchange in interest rates and structural reforms were introduced and trade controls eliminated. 

In 1996 the capitalization program was introduced. Capitalization in Bolivien terms means that investors acquired a 50% share of a public enterprise by investing directly over several years in the enterprise rather than paying cash to the government.

The aim of the program was to increase the levels on investments, to fight growing deficits in state-owned companies and to decrease uneven distribution of income by creating new jobs. The goal was to increase the

investment rate to over 20% of GDP, which was only possible by raising foreign direct investments.

2. Trade

2.1. Memberships of organisations

Trade has grown with neighbouring countries, due to increased access to import markets.

Bolivia is member of the free trade area Comunidad Andina (CAN, Andean Community). Its member countries are Colombia, Ecuador, Peru and Venezuela. Trade has been fostering successfully between its members. From 1991 to 2003 the value of trade between the member countries increased from US$ 3.6 billion to US$ 10.3 billion.

Bolivia is also an associate member of the Southern Cone Common Market (Mercosur) since 1997. The membership in Mercosur opened up trade and investment opportunities for Bolivia. The main Mercosur trading partners of Bolivia are Brazil and Argentina. 

The U.S. Andean Trade Preference and Drug Enforcement Act (ATPDEA) enables Bolivia to export products (including cotton textiles, llama and alpaca products) to the United States free of duty on a unilateral basis.

2.2. Trade Balance

The shift to the more open economy caused increasing imports, mainly because of the capitalization program. Chart 2 shows that after the shift exports tended to move around 20% of GDP while imports increased and even reached 32% of GDP in 1998. 

Since the colonial time Bolivia mainly has concentrated it´s exports on mineral resources. Until the middle of the century ore generated 90% of foreign currency. Since the 70th the contribution of mining to the export sector has decreased and was overhauled by natural gas exports in the mid 80th . Like all developing countries, that produce natural resources, Bolivia suffers from the aggravation of the “terms of trade”.

The value of resources compared to the value of imported manufactured goods is declining steadily. The prices of imported good from industrialized countries are getting more and more expensive for developed countries. 

  Chart 2: Bolivian Exports and Imports after and before the liberalization

  Source: World Development Indicators, The Word Bank

Consequently, the poor export performance is linked to falling export prices. Chart 3 illustrates the price changes of natural gas, the main export good between 1980 and 2002.

Obviously the prices of natural gas started to decline in 1985.

  Chart 3: Prices of Bolivian Natural Gas, 1972-2003

   Source: YPFB

While the prices of silver and tin have been relatively low since 1985, prices other important export goods like zinc and gold have been relatively high and also the prices of soya have been relatively stable.

Consequently export prices could only party affect the Bolivian export performance between 1985 and 2003. 

The main reason for raising imports has been the surge of foreign direct investment since 1996, stimulated by the privatization program. Import increased so sharply, that a trade deficit was caused, meaning that the value of imports was higher then the value of exports. Trade deficit peaked at US$888 m in 1998. In 2003 the trade balance ran small US$22m surplus. Reasons for this change were steadily increasing natural gas exports, enhancing prices for minerals and agricultural exports and weak import demand.

2.3. Traded goods and trading partners

Bolivia mainly exports natural resources and imports intermediate goods.

Main export earnings are generated by the hydrocarbons (80% natural gas and 20% petroleum). Among the non-traditional exports, soya is the main export earner (50% of non-traditional earnings), while minerals generate 23,33% of total export earnings.  Most spendings for imports are used for intermediate goods, mainly industrial goods. The second largest import sector is capital goods. Consumer goods are just 21,37% of all imports.

  Chart 4: Major Bolivian exports, 2003                    Chart 5: Major Bolivian Imports, 2003

  Source: Banco Central de Bolivia

Until 2001 the US was the main trading partner for Bolivian exports and until 2000 for Bolivian imported goods. In 2002, Brazil was the main trading partner for Bolivian exports and Argentina for Bolivian imports. In 2002 most earnings were generated by exports to Brazil (24%), followed by Colombia (15.3%), Switzerland (13.5%) and the US (11.2).

Most imports came from Argentina (17.7%), followed by Brazil (17%), US (11.9%) and Chile (8.6). 

However, as the US is one of the largest trading partners and an important foreign direct investor of Bolivia, foreign policy is dominated by Bolivia´s relationship with the United States. Central bilateral issues are the eradiction of surplus coca crop, that is cultivated illegally, meaning not for cultivated for traditional use. 

60% of the agricultural labour force lives by a subsistence economy. As coca has a high market price, a large part of the population cultivates coca leaves illegally. During the 1970s and 1980s coca plantations for illicit trade grew rapidly. The government eradiction began in the late 1980s, but significant efforts were made only by the Banzer administration (1997-2000).

3. Foreign direct investments

3.1. Evolution of FDI

Between 1955 and the early 1990s, Foreign Direct Investments (FDI) in Bolivia were minimal in comparison to other Latin American countries. During this period Bolivia suffered from political and economical instability. Only as deep structural and economic reforms and the capitalization program were introduced in the 1990s, FDI started to increase significantly. 

  Table 5: Primary Recipients of FDI in Latin America, 1990-1998 (in % of GDP)

Table 5 and Chart 6 illustrate the evolution of FDI in Bolivia. Both demonstrate the increase of FDI from 1990 to 1998. The main part of FDI was stimulated by the capitalization program, which started in 1996. FDI started to increase sharply between 1996 (9.2% of GDP) and 1998 (10.2% of GDP). In the period of 1995 to 2000 40% of all inflows were due to capitalized enterprises. In 1997 and 1998 Bolivia received the main part of FDI (measured in percentage of GDP). In this period no other Latin American country has achieved similar rates of FDI in % of GDP. 

  Chart 7: FDI inflows in Bolivia (in % of GDP)

  CE= capitalized enterprises

 

  Source: Central Bank and Minstry of Foreign Trade and Investment of Bolivia

3.2. Investment sources

FDI have mainly come from the United States, Latin America and Europe. The Unites States made up 62.7% of 1990s FDI and still in 1998 the US was the main investor in the hydrocarbon, mining, industry and electricity sector and represented 34.7% of all FDI. Between 1990 and 1998 US investments in Bolivia increased more than 7 times. Latin America represented 31.2% of total annual FDI flows since 1990. The principal investors among Latin American countries have been Argentina, Brazil and Chile. 

Between 1985 and 2000, 39% of FDI came from the US, 28% form Europe and 27% from Latin America. Argentina contributed with 11%, Brazil with 7% and Chile with 5%.

  Table 7: FDI in Bolivia by country of origin, 1990-98 ( in millions of US$)

Between 1998 and 2003 foreign direct investments averaged US$717m annually, which is equivalent to 9.8% of GDP. Due to capital inflows and the increasing earnings from export the capital account registers surpluses in 2003, despite the costs of debt servicing.

3.3. FDI by sector

The main part of investment was concentrated on the hydrocarbon sector (around 40% of FDI). 26% of the investments are focused on the service sector, 17% on utilities and communication, 9% on manufacturing and 7% on mining. It is obvious, that investments have been directed to capital and skill-intensive sectors.

All sectors that have benefited form the investment wave, could experience modernization processes, new technologies and labour training. In case of the hydrocarbon sector, where

most investments have taken place, only few linkages were created to the local economy, so that spillover effects have been much lower compared to many East Asian countries, where spillover effects has mainly occurred in the manufacturing sector. In Bolivia the potential for spillovers was limited because the manufacturing sector received only 8% of total FDI.  

Table 8 shows, that the highest wages are generated by the hydrocarbon and mining sector, followed by electricity and water, transportation and communication and construction. The lowest wages are generated in the agriculture sector. Between 1996 and 2000 the real wage in the agriculture sector declined by almost 12%, while in the hydrocarbon sector the real wage grew annually with an average of 28.9%.  Thus, wages for workers from capital intensive sectors have increased, while non-capital intensive sectors had a negative growth and have much lower wages than capital-intensive sectors

The data also illustrates the problems which arise with the structure of employment. The agriculture sector employs 38.9% of the labour force but generates only a monthly real wage of 160 Bolivianos, whereas the hydrocarbon sector employs just 1.4% of the labour force but generates a monthly real wage of 2494. The result of the development of real wage and employment share is changes in inequality.

Table 8: Employment, real income und educated worker in Bolivia, 2000

4. NEP and poverty reduction

4.1. Poverty rates and inequality

Until today the high poverty rates, especially in rural areas, could not be reduced by economic growth. Economic growth has been very inconsistent and very volatile. Between 1966 and 2000 the average growth rate was zero. However, since the introduction of the NEP, volatility of growth has fallen and GDP averaged 0.7% positive growth between 1986 and 2002. However, there has been only little progress in poverty reduction in rural areas. Between 1976 and 2000 the percentage of people suffering from unsatisfied basic needs could be reduced from 85.5% to 58.6%. But most of the progress took place in regions, where people were initially less poor. Regional inequality is widening. For example Potosi, which is know as the poorest region of Bolivia, has shown almost no progress since 1992. The percentage of people suffering from unsatisfied basic needs could be only reduced by 1% (from 80.7% to 79.7%). While Santa Cruz, which is the region with the lowest level of unsatisfied basic needs, was able to reduce the percentage by 41.2 from 1976 to 2001. Thus, in spite of an overall reduction of poverty of the total population from 70% to 64% from 1999 to 2002, poverty in rural areas could not be reduced. In 2002, still 80.1% of the rural population lived in poverty.   Income inequality is a serious concern in Bolivia. An evolution of inequality between 1989 and 2002 indicated in chart 9 shows that the Gini Coefficent is still

 around 55.

Chart 9:  Inequality in Bolivia, 1989-2002

4.2. Per capita income growth and inequality

A study of the Kiel Insitute of World Economics pointed out that sustained growth of GDP per capita does not always lead to declining poverty. As already shown inequality in Bolivia has almost not changed. But at the same time per capita income has increased steadily, with exeption to 1992 and 1999. Thus, there is no significant relationship between growth and inequality in Bolivia. This findings can also be adapted to many other Latin American countries.

 Chart 10: Growth of GDP and GDP per capita, 1985 - 1999

Section C

Conclusion

The New Economic Plan (NEP) was introduced in order to foster trade and increase foreign direct investments. It was hoped, that growth would increase and that poverty would be reduced. 

Trade and foreign direct investment had a positive effect on GDP. Considerable growth rates could be achieved in the 90s. GDP growth maintained until 1999, but then began to decrease due to declining demand and declining export prices and decreasing FDI.

The analysis shows that development could only partly achieved by growth. Development requires“ sustained and sustainable growth in per capita income, accompanied by diversification of production, reduction of absolute poverty, and expanding economic opportunities for all citizens”. 

Growth per capita income was almost sustainable but has not lead to a reduction of absolute poverty. Absolute poverty is required to decline to the extent that also the poorest of the

population benefit from growth. But poverty has fallen in regions where people were already less poor, while extreme poverty has almost not changed.

The hydrocarbon sector has received the major part of investments and also wages have increased significantly. One problem is, that no spillover effects have been realized by the hydrocarbon sector and the other problem is that the hydrocarbon sector only employs a very  low percentage of the population. Consequently, only few people could benefit from FDI.

While total poverty has been reduced, inequality still remains one of the biggest problems of Bolivia.

But, there has been some progress in recent years: Trade deficit could be eliminated, because of  increased gas export earnings and weaker domestic demand. This was important to reach a gradual decline of the current-account deficit. More over main social indicators have improved and further health and education reforms are planned.

However, Bolivia´s economic performance mainly depends on exports and foreign direct investments. Finally we have to keep in mind that Bolivia is still one of the poorest countries and depends on foreign aid and debt relief. 

Bibliography

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            Structural Adjustment in Bolivia”, 2001, available on:

           

• Pampuch, Thomas and Echalar Agustín:“Bolivien”; 1998 by Beck´sche Reihe Länder, München/Germany

• Real Insituto Eclano, José Antonio Alonso:” Poverty, sustainable development and the environment, available on:

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