The Bolivian Growth Experience in the Post-Washington Consensus EraSarah HaradonDave RogersAllison SchwartzPublic Policy 556: Macroeconomics April 11, 2007

Overview

I. The Bolivian ContextII. Macroeconomic Trends III.Bolivia’s Growth

ExperienceIV. Policy

Recommendations

The Bolivian ContextPopulation:

– 9.8 million (approx. 50% indigenous, 50% European/mixed)– 23% of Bolivians live on less than $1 per day– High literacy (86%) but also high infant mortality (54%)

Economy: – Severe hyperinflation in mid 1980s– Implementation of Washington Consensus Reforms– 1 of 2 SA nations classified as Heavily Indebted Poor Country

– Service sector (51%) Industry (36%) Agriculture (13%)

Politics:– Peacefully transition to democracy in the early 1980s– Five different presidents from 2000 to 2006– Evo Morales, the first indigenous president, elected in 2005

Sources: U.S. State Department, Background Note: Bolivia (2007) and EIU, Country Report: Bolivia (2006)

Macroeconomic Trends: Gross Domestic Product

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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

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Population Growth GDP Growth Per Capita GDP Growth

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4

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1980 - 1986

1987 - 1991 1993 - 1998

1992

1999

2000

2001

2002 - 2005

Macroeconomic Trends:

Gross Domestic Product

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10%

20%

30%

40%

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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

An

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eMacroeconomic Trends:

Inflation

Inflation peaked at 11,670% in 1985

YIKES!

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-$400,000,000

-$200,000,000

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$200,000,000

$400,000,000

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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Trade Balance Current Account Balance

Macroeconomic Trends: Current Account and Trade Balances

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$b 10,000

$b 20,000

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1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

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Deficit/Surplus Revenue Expenditure

Data unavailable

Macroeconomic Trends: Revenues, Expenditures, and Deficits

Solow Growth Model

Endogenous Growth Model

Source: Professor Kathryn Dominguez

Growth Models

What should have occurredaccording to the Solow

model:• Post WC reforms, capital stock per worker was below the steady state.

• Investment per worker should increase steadily and GDP growth should be approx. 8% annually

What actually occurred post WC reforms:

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1980 1984 1988 1992 1996 2000 2004

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DP

Gross capital Formation Per Worker GDP growth (annual %)

Bolivia’s Growth Experience

• Bolivia ranks 115 on UNDP’s HDI, more than 20 places behind its nearest South American neighbor.

• Limited enrollment in secondary (88%) and tertiary (41%) education.• “Brain drain” phenomenon, negative net effect on annual GDP growth.

Sources: EIU, Bolivia Country Profile 2006; UNDP, Human Development Report: 2006; World Bank, Bolivia Data Profile and Report =International Migration, Remittances, and the Brain Drain

Bolivia’s Growth Experience: Lack of Human Capital

• Lack of a port, and poor infrastructure serves as a barrier to both attracting foreign investment and improving domestic productivity.

• Political instability may threaten Bolivia’s ability to secure FDI.

• FDI levels lag behind comparison nations such as Peru and Botswana.

Sources: Ahlquist, John; Asiedu, Elizabeth; EIU, Bolivia Country Profile 2006, and World Bank, World Development Indicators

(10)

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0

5

10

15

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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004An

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Bolivia Botsw ana Peru

Bolivia, Botswana, and Peru: Comparison of Annual Percent Change in FDI from 1980 - 2005

Bolivia’s Growth Experience: Lack of FDI

• Coca sector is small, yet significant; 66% of the workforce is in the informal sector.

• Plan Dignity reduced the coca crop by 90% between 1997- 2001.

• $400 million has been eliminated from the Bolivian economy in recent years due to coca eradication efforts, likely reduced aggregate demand.

• Surging prices and ineffective alternative development programs; coca cultivation has rebounded; Bolivia is now the third-largest cultivator.

Sources: Daniel Kurtz-Phelan; EIU, Bolivia Country Profile 2006; US CIA, Bolivia The World Factbook; US Department of State Background Note: Bolivia

Bolivia’s Growth Experience: Illicit Coca Trade

Recommendations

•Provide more opportunities and incentives for young people to attain secondary and tertiary level educations –Supply-side investments–Demand-side investments

(1) Invest in a skilled population by increasing resources for education and creating incentives at the secondary and tertiary levels.

Recommendations

• Investor confidence: majority of Bolivia’s FDI comes from the US, but instability could threaten this

• Build capacity of its financial, regulatory, and legal institutions

(2) Encourage foreign direct investment to compensate for the lack of domestic capital.

Recommendations

• The coca issue must be addressed in order to promote political stability and boost investor confidence

• Include the international community on negotiating issues related to coca

• Promote more effective alternative development schemes

(3) Revisit coca eradication and alternative development projects.

Thank you!

Several images courtesy of Google images.