The Bolivian Economy

Bolivia is one of the Western Hemisphere's poorest countries, despite an abundance of mineral resources. Its economy has always been dependent on mineral exports, principally of tin, but these have gradually declined since World War II. Little of the nation's great agricultural and forest potential has been developed; agriculture remains little above the subsistence level, and Bolivia must import large quantities of food. Moreover, evidence is that the coca crop eradication program, without effective crop substitution, has led to a substantial contraction in the informal market. The opening in 1999 of the $2-billion, 3,150-km (1,969-mi) Bolivia-Brazil pipeline holds the promise of the development of new export markets—in Brazil and, eventually, in the United States, via extensions into Mexico—for Bolivia's previously untapped natural gas reserves, but the project has been fraught with controversy and delays. Originally agreed to in 1974, construction did not begin until 1994, and then it was under a contract that gave Enron Corporation a 40% share, allegedly without a proper bidding process. Protests against Enron's involvement began immediately, but after Enron's bankruptcy in 2001, many new complaints surfaced concerning its failure to meet the terms of the contract, including its failure to donate a promised $10 million for rural electrification; its failure to supply land deeds for indigenous people whose land was being transversed by the pipeline; its failure to secure financing for the project (a task eventually taken over by Brazil), and, its failure, apparently, to make any investments in the project beyond an undocumented $22 million in the planning stage.

In 2003, President Sánchez de Lozada, who in a previous term had sponsored the "capitalization" program that brought in private foreign investors like Enron as partners in public sector enterprises and who had won a second term in June 2002, faced violent protests that threatened to unseat the government. In February 2003, there were violent clashes with coca farmers, and in March, the police joined protests against an IMF-sponsored tax hike, which the government subsequently rescinded. Sánchez de Lozada appealed to foreign governments, particularly the United States, for $100 million in immediate aid to help his government survive, and as of June 2003, the Bush administration had sent $10 million. The United States gives Bolivia $150 million a year in aid conditional on the government's satisfactory progress in the coca crop eradication and crop substitution program.

Bolivian economic production grew at a fairly steady rate of about 5% during the 1960s and 1970s; but in the 1980s, after the second oil shock, growth turned negative. Inflation, which had averaged 3.5% in the 1960s, averaged 22% in the 1970s, and then got out of control in the early 1980s, after the second oil shock. Attempts to implement IMF austerity programs to contain inflation back-fired in the face of violent protests and government efforts to their limit human costs. When world tin prices plummeted to a fraction of production costs in 1985 after the collapse of the International Tin Agreement (ITA), a consumer-producer international commodity agreement (ICA) for tin, inflation reached as high as 24,000%. After 1985, a strong anti-inflation consensus allowed the government to apply strong austerity measures that brought annual inflation down to 10.87% by 1987. In August 1985, President Paz implemented a drastic anti-inflationary program: he floated the peso, froze public-sector wages, cut public spending, eliminated controls on bank interest rates, authorized banks to make foreign-currency loans and offer foreign-currency accounts, initiated a comprehensive tax reform, eliminated price controls, established a uniform 20% tariff, removed tariff exemptions, eliminated virtually all import and export restrictions, and modified labor laws to permit greater flexibility in hiring and firing. The immediate result was a jump in capital repatriation and retention as a result of the rise in interest rates. The government also restructured several public-sector institutions, including the Central Bank and COMIBOL, the national mining corporation. The Central Bank closed several branches and reduced staff by 70%, and COMIBOL closed numerous mines and dismissed nearly 20,000 workers. Inflation was held to double digits until 1993, after which averages have been held to single digits.

In 1994, the first Sánchez de Lozada government introduced the innovative "capitalization" plan for privatizing six major state enterprises (the national airlines, the railways, electricity, telecommunications, the ironworks, and, most controversially, the oil and gas corporation). The plan provided for a private company to take over 50% ownership plus the operation of the enterprise, with the other shares distributed to the adult population to be deposited in private pension funds. Bolivia's high foreign debt obliged it to seek private partners in order to raise capital. The average GDP growth between 1977 and 1987 was -1.8%, but this improved during the 1990s with an average rate of 4.2%. By 1999, Bolivia was in its second decade of democratic rule and its thirteenth consecutive year of economic expansion. Market reforms were firmly in place, investment was growing steadily and inflation under control, at 4.4% in 1998. Privatization of state-owned industries had improved the investment environment of Bolivia. Growth was led by energy (particularly investments in the gas pipeline to Brazil and in hydrocarbons exploration), mining, and agriculture (particularly in soy products as a substitute for coca).

In 1999, however, real GDP growth slowed to 0.4% due mainly to the Brazilian financial crisis, which caused revenues from the newly opened Bolivia-Brazil gas pipeline to fall well below expectations. Another factor thought to be dampening growth was the success of the coca crop eradication program coupled with a lack of success in crop substitution. An estimated 50,000 to 60,000 hectares of coca had been eliminated by 2002, leaving between 5,000 and 10,000 hectares (although in 2003 there were reports of substantial increases). An improvement to 2.4% growth in GDP in 2000 was cut short by the world-wide economic slowdown in 2001, during which growth fell to 1.2%. Inflation also increased in 2000, to 4.8%, up from 2.4% in 1999, but then declined to 1.6% in 2001. Real GDP growth in 2002 was estimated at 2.5%, and average inflation at a new low of 0.9%.

On 2 April 2002, the IMF agreed to a one-year standby arrangement with the government with credit totaling about $120 million, less than Bolivia's IMF quota. For 2003, the government has laid out a program it hopes to see supported by a three-year arrangement under the IMF's Poverty Reduction and Growth Facility (PRGF), established in 1999 and normally permitting borrowing up to 140% of a country's quota. The program aims at containing public sector borrowing while increasing social expenditures, containing inflation, increasing international reserves, and adopting policies to strengthen the banking sector.

As of 2004, Bolivia's GDP per capita remained lower than many other countries in the region (including Mexico, Chile, Venezuela, Argentina, Uruguay, Brazil, Peru, Ecuador, Colombia, and Paraguay). Its GDP growth rate was also less than all of the same countries, with the exception of Bolivia. With an inflation rate less than 5%, however, Bolivia's consumer prices were near average for the region.

Income

The US Central Intelligence Agency (CIA) reports that in 2005 Bolivia's gross domestic product (GDP) was estimated at $23.6 billion. The CIA defines GDP as the value of all final goods and services produced within a nation in a given year and computed on the basis of purchasing power parity (PPP) rather than value as measured on the basis of the rate of exchange based on current dollars. The per capita GDP was estimated at $2,700. The annual growth rate of GDP was estimated at 3%. The average inflation rate in 2005 was 5.4%. It was estimated that agriculture accounted for 12.6% of GDP, industry 35%, and services 52.4%.

According to the World Bank, in 2003 remittances from citizens working abroad totaled $126 million or about $14 per capita and accounted for approximately 1.6% of GDP. Foreign aid receipts amounted to $930 million or about $105 per capita and accounted for approximately 12.3% of the gross national income (GNI).

The World Bank reports that in 2003 household consumption in Bolivia totaled $5.8 billion or about $658 per capita based on a GDP of $8.1 billion, measured in current dollars rather than PPP. Household consumption includes expenditures of individuals, households, and nongovernmental organizations on goods and services, excluding purchases of dwellings. It was estimated that for the period 1990 to 2003 household consumption grew at an average annual rate of 3.3%. In 2001 it was estimated that approximately 37% of household consumption was spent on food, 11% on fuel, 9% on health care, and 14% on education. It was estimated that in 2004 about 64% of the population had incomes below the poverty line.