NS 4540 Winter Term 2017 Bolivian Economy

Bolivia: WEF I 2

Bolivia: WEF II 3

Bolivia WEF III 4

Bolivia: Governance 5

Bolivia EF I 6

Bolivia EF II 7

Bolivia/Paraguay Economic Freedom 8

Bolivia/Paraguay Investment Freedom 9

Bolivia/Paraguay Corruption 10

Bolivia Background I • Evo Morales elected president in 2005 • Imposed a new constitution in 2009 to expand his powers and increase state participation in the economy • Despite a constitutional two-term limit, he won a third five-year term in October 2014 – referendum for a fourth term has just been defeated • His stated goal is “communitarian socialism. ” • Bolivia has strong alliances with Cuba, Venezuela, and Iran • Its economic growth rate has been one of Latin America’s highest thanks to revenues from gas exports. • However project growth has declined in line with commodity prices • Bolivia’s private investment rate is among the world’s lowest • Foreign investment is concentrated in natural resources 11

Bolivia Background II • Four out of 10 Bolivians live below the poverty line • Nearly 60% of working arrangements are informal • Bolivia is one of the world’s largest producers of coca leaf, and a major transit zone for Peruvian cocaine. • Still, the Ministry of Economy and Public Finance and the central bank have pursued relatively orthodox monetary, fiscal and exchange rate policies • Because of good commodity prices in recent years, • The economy has grown quickly by historical standards • Poverty rates have declined • Levels of indebtedness have decreased • International reserves have risen, and • The country’s international credit rating has improved as a consequence 12

Bolivia: Morales’ Policies I • Robert Looney, “Morales Walks the Populist High Wire” Foreign Policy, February 26, 2013 • Bolivia different than most Latin American countries • 30 plus indigenous groups account for 2/3 of the population • It has the highest percentage of native American peoples (almost all of whom are poor) of any South American country • Since 2006 the administration of Evo Morales has been intent on significantly altering the established political and economic order • Displacing the non-indigenous ruling elite and • Challenging the influence of both the U. S. , and the free market system • A high risk experiment that’s largely isolated Bolivia in an era of global integration 13

Bolivia: Morales’ Policies II • Soon after the 2005 election Morales • Rammed through constitutional changes that reordered political power in favor of the indigenous minority and • Started the piecemeal nationalization in hydrocarbons • Since governed with an eclectic strategy that blends • determination to address poverty of indigenous peoples • with a surprising degree of pragmatism • Morales first economic priority was to undue the economic reforms of President Gonmzalo Sachez de Lozada a follower of Jeffrey Sachs 14

Bolivia: Morales’ Policies III • Sanchez’s brand of “shock therapy” included the partial privatization of key industries • Electric power • Railways and • Telecoms • An invitation to foreign investors to buy control of former state companies on the condition that they invested heavily in the economy • Most of these industries have been re-nationalized with foreign investors the key target 15

Bolivia: Morales’ Policies IV • In 2012 Morale decreed the nationalization of shares held by the Spanish firm Iberdrola in two electricity distribution companies • It was the 15 th takeover of foreign assets since Morales assumed power • May have ushered in a new chapter in assertion of state control over the economy – Iberdorla’s holdings had never been state enterprises • Next the government nationalized the Spanish company that operated Bolivia’s three international airports • Charged company was reaping “an exorbitant profit with little capital input. ” 16

Bolivia: Morales’ Policies V • Not surprisingly foreign investment has fallen off • Lack of foreign investment has been partly offset by strong increases in public investment • With greatly increased involvement of key state corporations in oil and gas and mining • However Bolivia’s state enterprises lack the technological proficiency and financial reach of multinationals • A reality that is slowing down resource development • Situation is especially critical in the natural gas sector where exportable surpluses and foreign exchange earnings will begin to decline unless new reserves are accessed and accessed 17

Bolivia: Morales’ Policies VI • Another stumbling block has been barriers to trade with the U. S. • Morales has refused to cooperate with the suppression of coca production • Remains a major cash crop for indigenous framers in the highlands • Obama Administration pulled the benefits Bolivia was due under the Andean Trade Preferences’ Act • law specifically designed as an incentive for South American countries to show more enthusiasm toward war on drugs. 18

Bolivia: Morales’ Policies VII • Loss of right to export duty free to U. S. matters little with natural resources where the markets are truly global or (in the case of natural gas) the only logical customers are Brazil and Argentina. • However it does limit Bolivia’s ability to reduce economy’s dependence on hydrocarbons, tin and zinc and in particular efforts to diversify into labor-intensive textile manufacturing • May also hinder plans to produce batteries from Bolivia’s vast deposits of lithium 19

Bolivia: Morales’ Policies VIII • The empowerment of the powerless has not always worked in Morales favor • Policies are being tested by very indigenous groups these were designed to benefit • Since late 2010 a number of native groups have been protesting the failure of his government to consult sufficiently on infrastructure projects • For a while demonstrations halted construction of a highway the government claimed was critical for he development of the eastern lowlands • Indigenous groups have staged numerous protests to • block gas development despite the fact that most social programs are financed out of gas export revenues. • Prevent production of lithium deposits 20

Bolivia: Morales’ Policies IX • One study estimated protects, strikes and other social conflicts reduced Bolivian GDP growth by average of 1% annually between 1970 and 2004 • Likely to have risen in light of increase in high-profile protests • Despite • Low levels of foreign investment • Reduced foreign aid • Limited access to U. S. market and • Destructive impact of protests • Economic performance has been surprisingly good • About 62% of population lived in poverty in 2002 • By 2010 that level had been reduced to 42% • Drop in income inequality 21

Bolivia: Recent Trends 22

Prospects I • Economy will continue to be negatively affected by low global oil prices since these guide the price of gas exports to China and Brazil • Morales administration seems determined to avoid the inflationary policies of the past • However in the longer term economy remains dependent on a few commodes which have had favorable prices in recent years but have declined since 2013 • Government’s failure to attract scale of investment characteristic of other countries in region raises questions about country’s ability to sustain its growth trajectory 23

Prospects II • Large scale investment is particularly urgent in the gas sector to prevent a decline in production after 2016 • Investors are concerned that demand for Bolivian gas in Brazil and Argentina may decrease if these two countries are able to develop their own abundant resources • In spite of policies designed to foster an industrial capacity in some sectors Bolivia will remain an exporter of unprocessed materials • Since its export industries are largely capital intensive • This pattern of growth will do little to absorb a rapidly growing domestic supply of labor, much of which is currently employed in the informal sector. 24

Natural Gas I • Stratfor, Bolivia Braces for Economic Change, October 17, 2015 • Natural Gas the Driver of Bolivia’s Economy • Since 2006 Bolivia has managed to sell its natural gas to its primary consumers, Brazil and Argentina for increasingly high pries • Morales reinvested some of those energy revenues in social packages that benefitted his political constituents • Now however the gas boom has begun to slow • Global decline in commodity prices has put pressure on Brazilian and Argentine economies to cut back on their demand for Bolivian natural gas. • In January to June 2015 Bolivian gas exports down more than $1 billion compared to same period in 2014 25

Natural Gas II 26

Natural Gas III • Despite ongoing recession Brazil has been able to increase its own natural gas production through previous investment in energy sector • Between 2004 and 2014 Brazil’s natural gas output rose from 8. 5 billion cubic meters to nearly 34 billion cubic meters • With 471 billion cubic meters of proven natural gas reserves figure likely to grow considerably • Bad for Bolivia, since 50% of its natural gas goes to Brazil • Argentina – natural gas production declined by 20% since mid-2000 s • New government wants to expand production • Country has world’s second largest shale gas reserves 27

Assessment I • Bolivia will have to adjust its populist policies in response to the country’s changing gas prospects • With fewer energy-related revenues to rely on will have to diversify economy • Hard because about 80% of Bolivian employment is informal meaning it cannot be easily taxed • Private sector invests funds totaling less than 10% of GDP • However, sectors other than gas will need to play a bigger role in the future 28

Assessment II • However diversification will be difficult • Country landlocked with limited transport routes to foreign markets • Has a relatively unskilled labor force and a small domestic market • Progress in attracting investment into non-extractive industries will probably be slow for the foreseeable future. • Before term Ends Morales will work to bolster his popularity while trying to groom a successor • No matter who wins the office in 2019 • constraints on Bolivia’s economy placed by falling hydrocarbon revenue • will limit ability to implement same populist policies that propelled Morales to his current status. 29