1. The Bolivian Growth Experience in the Post- Washington Consensus Era Sarah Haradon Dave Rogers Allison Schwartz Public Policy 556: Macroeconomics April 11, 2007

2. Overview I.The Bolivian Context II.Macroeconomic Trends III.Bolivia’s Growth Experience IV.Policy Recommendations

3. The Bolivian Context Population: –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)

4. Macroeconomic Trends: Gross Domestic Product

5. 1980 - 1986 1987 - 19911993 - 1998 1992 1999 2000 2001 2002 - 2005 Macroeconomic Trends: Gross Domestic Product

6. Macroeconomic Trends: Inflation Inflation peaked at 11,670% in 1985 YIKES!

7. Macroeconomic Trends: Current Account and Trade Balances

8. Data unavailable Macroeconomic Trends: Revenues, Expenditures, and Deficits

9. Solow Growth ModelEndogenous Growth Model Source: Professor Kathryn Dominguez Growth Models

10. What should have occurred according 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: Bolivia’s Growth Experience

11. 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

12. 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 Bolivia’s Growth Experience: Lack of FDI

13. 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

14. 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.

15. 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.

16. 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.

17. Thank you! Several images courtesy of Google images.