BOLIVIA

MAJOR COMPONENTS OF THE ECONOMY

Government spending is the engine of economic growth

The Bolivian economy grew at an average annual rate of 4.7% in real terms between 2007 and 2012, compared to the regional average of 3.7%. Increasing intervention of the state in the economy has led to a deterioration of Bolivia’s business climate during the period of 2007-2012, which together with factors like policy instability, weak rule of law and excessive levels of red tape result in a challenging environment for businesses. This is reflected in the World Bank’s Ease of Doing Business Index 2013, where Bolivia ranked 155th out of 185 economies at a global level in, occupying the 30th position out of 33 countries within the Latin American & Caribbean region.

The largest sector in the Bolivian economy is Mining and Quarrying, accounting for 19.1% of total Gross Value Added (GVA) in 2012, owing to production of both energy (mainly natural gas) and non-energy commodities (including tin, silver and zinc). Public Administration and Defence; Compulsory Social Security is the country’s second largest sector, representing 14.5% of total GVA in 2012, up from 13.6% in 2007. This was due to strong expansion of the public sector during the period of 2006-2012 through substantial increases in public employment, nationalisation of private companies and the set-up of new state-owned companies.

The Bolivian economy avoided economic contraction during the 2008-2009 global economic crisis backed by significant levels of government spending, and posted robust real GDP growth of 4.1% in 2010 and 5.2% in 2011, owing to recovering exports and investment. Bolivia’s real economic growth decelerated slightly to 4.6% in 2012 and is expected to ease further to 4.3% in 2013, due to the effects of the global economic slowdown and continued uncertainty in the global economy. This will likely ease growth of the country’s GDP per capita which rose by 2.9% year-on-year (y-o-y) in real terms to reach a historical high of BOB17,732 (US$2,566) in 2012.

During the period of 2007-2012, the Mining and Quarrying sector registered the highest annual average growth rate across all sectors of the Bolivian economy at 9.3% in real terms on the back of rising prices of the commodities the country produces and exports. As a consequence, the contribution of the Mining and Quarrying industry to the country’s total GVA has increased from 15.2% in 2007 to 19.1% in 2012. The Construction sector has been the second fastest growing in Bolivia during the same period, expanding by 6.7% per year in real terms during the same period, although its share of total GVA is relatively small reaching just 3.3% in 2012.

The Manufacturing sector expanded at an average annual rate of 2.1% in real terms during the period of 2007-2012, below the real growth of 4.4% for the overall economy, reflecting the long-term decline in importance of the Bolivian manufacturing industry in favour of the mining and quarrying sector. Between 2007 and 2012, the service sectors showed a mixed performance with some segments like wholesale and retail trade and financial intermediation benefiting from the country’s robust economic growth during most of this period, while other segments like transport and telecommunications showed sluggish growth, as a result of government intervention in the economy in the form of price controls in these sectors. During the medium term, growth of the Bolivian economy will remain highly sensitive to global prices of commodities that can keep generating revenues to sustain financing the country’s significant levels of government expenditure.

SOCIO-POLITICAL RISK

Large levels of poverty and income inequality raise risk of social unrest

Bolivia continues to suffer from high levels of poverty and income inequality, despite the country’s robust economic growth between 2004 and 2012 and the implementation of government social programmes since the mid 2000s. Bolivia’s Gini index – a measure of income inequality ranging between zero (perfectly equal) and 100 (perfectly unequal) – continues to rank amongst the highest in the world at 49.3 in 2012 (although down from 56.3 in 2007). According to the United Nations (UN) Economic Commission for Latin America and the Caribbean (ECLAC), Bolivia’s poverty rates – defined as the percentage of the population whose income is not sufficient to cover basic alimentary and non-alimentary needs – reached 42.4% in 2010 (latest data available). Importantly, the country’s extreme poverty rates – defined as those whose income is not enough to cover even basic alimentary needs – stood at 22.4% in the same year.

Due to its high rates of extreme poverty and income inequality, Bolivia is prone to social unrest including violence, demonstrations and blockades of the country’s main trade routes, which often result in fatalities. This is reflected on the World Bank’s ‘Political stability and absence of violence index’, where Bolivia ranked 142nd out of 203 economies in 2012. Additionally, the increasing intervention of the government in the economy during the period of 2007-2012 (through nationalisations, unilateral rewriting of contracts and greater influence in the justice system) has had a detrimental effect on other aspects of governance and weakened the rule of law. In the World Bank’s ‘Rule of law index’, the country ranked 167th at a global level out of 202 countries in 2011 compared to the 157th position out of 201 economies it occupied in 2007. The ‘Rule of law index’ reflects the perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police and the courts.

Corruption is perceived as widespread in Bolivia, with frequent corruption cases coming out to light involving political parties, the judiciary, government officials and the police. According to Transparency International’s Corruption Perceptions Index 2012, Bolivia ranked joint 105th (together with seven other economies) out of 176 countries, behind countries like Chile (joint 20th) and Colombia (joint 94th) but ahead of Dominican Republic (joint 118th) and Venezuela (joint 165th).

ENERGY AND ENVIRONMENT

Natural gas is the backbone of the country’s energy policy

Following the discovery of important natural gas reserves in the southern region Tarija in the early 2000s, natural gas has become the centre of Bolivia’s energy policy. According to data from the Ministry of Hydrocarbons and Energy of Bolivia, natural gas accounted for 46.9% of the country’s primary energy supply in 2010 (latest data available), up from 38.5% in 2007, while crude oil and biomass (mainly firewood) accounted for 35.3% and 14.7% respectively. The Bolivian government has heavily promoted the domestic use of natural gas in residential, transportation and industrial settings, as well as bolstered natural gas exports, of which Brazil and Argentina are the main recipients. Although Bolivia is also a crude oil producer, stagnant oil output means that the country has to rely on energy imports (mostly of petroleum and related products) that amounted to US$1.2 billion (equivalent to 4.4% of total GDP) in 2012.

Due to its economic importance, the Bolivian energy sector has been one of the most affected by increasing interventionism of the state in the economy. Widespread nationalisations (the latest of them to the Spanish company Iberdrola in December 2012), rewritten contracts and price controls have affected the sector, while the new 2009 constitution mandates all exploration, exploitation, industrialisation, transport and marketing of natural resources to be assumed by the state. The decline of private investment resulting from this stance has led to a deceleration in exploration and output of crude oil and natural gas. Additionally, there are questions regarding the reliability of Bolivia’s data on proven natural gas reserves, which have been revised downwards from 0.8 trillion cubic metres in 2004 to 0.3 trillion cubic metres in 2012. While Bolivia’s short-term energy needs are covered, policy uncertainty risks the development of the energy sector in the long term, and may prevent the country from reaching its goal of potentially becoming a regional energy hub.