BELGICA

MAJOR COMPONENTS OF THE ECONOMY

The Belgian economy continues to be affected by eurozone woes

Belgium is a founding member of the European Union (EU), which formed in 1957 and was originally known as the European Economic Community (EEC), and has been a part of the euro area since its inception in January 1999. Its economy is a developed one and despite being one of the smallest countries by land area in the eurozone, Belgium had the sixth largest economy in the bloc in 2012 with a total GDP of €376 billion (US$483 billion), which equated to 4.0% of total eurozone GDP in that year.

Its economic progress has been hampered by the global financial crisis of 2008-2009 and the subsequent eurozone debt crisis of 2011 but it has performed better than the eurozone average on the whole. In 2009, real GDP contracted by 2.8% versus a real decline of 4.4% for the eurozone average. However, it recovered fairly well in 2010 recording a real GDP growth rate of 2.4% but still below the real GDP growth rate of 2.9% in 2007. Belgium’s economy went into recession in 2012 with real GDP contracting by 0.3% but outperforming the eurozone average real contraction of 0.6%. Its economic stagnation was in large part due to external factors, particularly broader eurozone woes, however, high unemployment and weak domestic demand also added to the malaise. This situation is likely to continue and external influences could continue to be a drag on the economy with real GDP expected to decline once again in 2013 by 0.3% before returning to a moderate real growth of 0.5% in 2014.

The most important sector in the Belgian economy was Financial Intermediation, Real Estate, Renting and Business Activities, which accounted for 29.8% of total Gross Value Added (GVA) in 2012. A sector that has increased its weight within the overall economy is Education, Health, Social Work and Other Community, which accounted for 17.9% of total GVA in 2012 versus 15.9% in 2007, indicative of government intervention to bolster economic activity.

The sector that has grown the most in the 2007-2012 period was Electricity, Gas and Water Supply, which increased by 21.0% in real terms, demonstrating the importance of Belgium’s infrastructure in the European energy supply chain. The next fastest growing sector was Education, Health, Social Work and Other Community, increasing by 14.9% in real terms in the same period and is illustrative of the continuing crucial role of government expenditure to prop up a flagging economy. This sector accounted for 38.6% of the employed population in 2012, whilst accounting for 36.4% in 2007, which shows the growing significance of the government as a key employer. Any reduction in government spending is likely to have a detrimental effect on the growth of this sector going forward, which would also place pressure on its employment prospects.

Despite the tide turning against financial services in developed economies, Belgium’s Financial Intermediation, Real Estate, Renting and Business Activities sector recorded a growth of 3.7% in real terms in the 2007-2012 period, although its growth trajectory reversed in 2012 with a year-on-year decline of 1.1% in real terms. Whilst Finance, Insurance, Real Estate and Business Services accounted for 13.2% of the employed population in 2007, this figure reduced to 11.9% in 2012, demonstrating the reduction in the role of the private sector in the employment sphere.

In the World Bank’s Ease of Doing Business 2013 report, Belgium ranked 33rd out of 185 countries. This was some way behind Finland (11th), the top-performing eurozone country, but its performance was better than some of its eurozone peers, namely France (34th) and Spain (44th). Excessive red tape discourages Belgian entrepreneurship. GDP per capita equated to €34,075 (US$43,782) in 2012, which compared favourably to that of France at €32,025 (US$41,148) in the same year. However, its GDP per capita contracted by 1.1% year-on-year in real terms in 2012.

Manufacturing’s share of total GDP in Belgium has been declining in the 2007-2012 period, starting at 16.3% of total GDP in 2007 and ending the period at 13.8%. The decline in the overall importance of manufacturing to the economy can be seen in its GVA performance over the same period, which contracted by 14.0% in real terms. Conversely, the services sector has increased its weight in the economy over the review period, accounting for 77.4% of total GDP in 2012 versus 75.2% in 2007, partly highlighting the significance of the financial services sector in the general economic mix.

SOCIO-POLITICAL RISK

Regional divisions have caused political instability and could continue to do so in the future

Belgium’s government is a federal parliamentary democracy under a constitutional monarchy. The head of state is King Albert II and the head of government is Mr Elio Di Rupo, a Socialist French speaker, who became prime minister in December 2011 leading a coalition of six parties. This followed a period of political instability (the longest in Belgian history) when there was no official government following the general election of June 2010, with the parties trying to form a coalition unable to find common ground.

Considerable cultural differences exist between the Flemish and French-speaking factions of the population creating political and social instability in the country, with some even believing that it could lead to a break-up of Belgium. The New Flemish Alliance (NVA) is a separatist centre-right party that did extremely well in the last general election, gaining the majority of votes at federal level, but also succeeded at the local elections held in October 2012, and its presence on the Belgian political stage will continue to put pressure on the coalition government for greater rights for Flanders (Belgium’s Flemish speaking northern area). The next general election is due to take place in May 2014. With Belgium positioned almost at the centre of Western Europe geographically, the city of Brussels, Belgium’s capital, is home to the EU and the North Atlantic Treaty Organization (NATO). Therefore, much attention is given to this otherwise small European country, given that it is at the vanguard of European political and Western geo-political life. In terms of corruption, Belgium scored relatively well ranking 16th out of 176 countries with a score of 75 out of 100 in 2012 (the closer the score is to 100 the cleaner the country), according to Transparency International’s Corruption Perception Index. Belgium’s 2012 ranking improved three positions from its 2011 ranking of 19th out of 183 countries and corruption is not an issue that would deter investment flows into the country.

Within the review period of 2007-2012, unemployment hit a high of 8.3% of the economically active population in 2010 but has since come down to 7.6% in 2012. This is somewhat below the level for the eurozone average that was 11.3% in 2012. However, as in many neighbouring European countries, Belgium’s youth unemployment is particularly high and reached 20.1% of the economically active population aged 15-24 years in 2012, increasing substantially from 18.8% in 2011. The country suffers from excessive bureaucratic burdens that limit businesses from creating new jobs, but the global financial crisis of 2008-2009 and the eurozone debt crisis of 2011 have also had a significant hand in maintaining the high unemployment rate. According to Eurostat, Belgium’s unemployment rate rose to 8.6% in May 2013.

Despite its relatively high unemployment rate, Belgium suffers from skills shortages in the areas of healthcare, science, technology and engineering, which could have a detrimental effect on its competitiveness in the medium to long term. Belgium does not appear to suffer from brain drain, as indicated by the World Economic Forum’s Global Competitiveness Report 2012-2013, where it ranked 20th out of 144 countries in the Brain Drain category, although its position slipped by three versus a ranking of 17th out of 142 countries in the previous year’s report.

ENERGY & ENVIRONMENT

Although a high polluter, CO2 emissions have decreased significantly

Given the country’s lack of natural resources, Belgium imports most of its energy needs. Its coal industry is no longer viable, owing to high production costs and competition from cheaper developing economies, but because of its geographical location at the centre of Europe, it plays a major part in the European oil and gas supply chain. Imports of mineral fuels equalled US$72.3 billion or 15.0% of total GDP in 2012. These imports grew by 52.9% in US$ terms between 2007 and 2012 versus total imports growth of 5.5% in US$ terms in the same period.

Together with natural gas, crude oil accounted for 78.8% of Belgium’s total primary energy consumption in 2012. Nuclear energy accounted for 18.1% of primary energy consumption in 2012. With its high dependence on imported energy, particularly hydrocarbon fuels for consumption, Belgium is at the mercy of global energy prices and their volatility. Belgium has been set a target of acquiring 13.0% of its gross final energy consumption from renewable sources by the EU by 2020. As of 2011 (latest data available), Belgium had fulfilled only 4.1% of its gross final energy consumption from renewable energy, according to Eurostat. This is one of the lowest figures in the EU-27.

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.