Economy of Bolivia

The economy of Bolivia has had a historic pattern of a single-commodity focus. From silver to tin to coca, Bolivia has enjoyed only occasional periods of economic diversification. Political instability and difficult topography have constrained efforts to modernize the agricultural sector. Similarly, relatively low population growth coupled with low life expectancy has kept the labor supply in flux and prevented industries from flourishing. Rampant inflation and corruption also have thwarted development. The mining industry, especially the extraction of natural gas and zinc, currently dominates Bolivia’s export economy."Country Profile: Bolivia." Library of Congress Federal Research Division. January 2006. http://lcweb2.loc.gov/frd/cs/profiles/Bolivia.pdf]

Background

Bolivia's 2002 gross domestic product (GDP) totaled $7.9 billion. Economic growth is about 2.5% a year and inflation expected to be between 3% and 4% in 2002 (it was under 1% in 2001).

Since 1985, the Government of Bolivia has implemented a far-reaching program of macroeconomic stabilization and structural reform aimed at maintaining price stability, creating conditions for sustained growth, and alleviating poverty. A major reform of the customs service in recent years has significantly improved transparency in this area. The most important structural changes in the Bolivian economy have involved the capitalization of numerous public sector enterprises. (Capitalization in the Bolivian context is a form of privatization where investors acquire a 50% share and management control of public enterprises by agreeing to invest directly into the enterprise over several years rather than paying cash to the government).

Parallel legislative reforms have locked into place market-oriented policies, especially in the hydrocarbon and telecommunication sectors, that have encouraged private investment. Foreign investors are accorded national treatment, and foreign ownership of companies enjoys virtually no restrictions in Bolivia. While the capitalization program was successful in vastly boosting foreign direct investment (FDI) in Bolivia ($1.7 billion in stock during 1996-2002), FDI flows have subsided in recent years as investors complete their capitalization contract obligations.

In 1996, three units of the Bolivian state oil corporation (YPFB) involved in hydrocarbon exploration, production, and transportation were capitalized, facilitating the construction of a gas pipeline to Brazil. The government has a long-term sales agreement to sell 30 million cubic metres a day (MMcmd) of natural gas to Brazil through 2019. The Brazil pipeline carried about 21 MMcmd in 2004. Bolivia has the second-largest natural gas reserves in South America, and its current domestic use and exports to Brazil account for just a small portion of its potential production. Natural gas exports to Argentina resumed in 2004 at 4 MM cmd.

The government held a binding referendum in 2004 on plans to export natural gas and on hydrocarbons law reform. Protest and wide-spread opposition to exporting gas through Chile led to the resignation of President Sanchez de Lozada in October 2003. By May 2005, the hydrocarbons law draft was being considered by the Senate.

In April 2000, violent protests over plans to privatize the water utility in the city of Cochabamba led to nationwide disturbances. The government eventually cancelled the contract without compensation to the investors, returning the utility to public control. The foreign investors in this project continue to pursue an investment dispute case against Bolivia for its actions. A similar situation occurred in 2005 in the cities of El Alto and La Paz.

Bolivian exports were $1.3 billion in 2002, from a low of $652 million in 1991. Imports were $1.7 billion in 2002. Bolivian tariffs are a uniformly low 10%, with capital equipment charged only 5%. Bolivia's trade deficit was $460 million in 2002.

Bolivia's trade with neighboring countries is growing, in part because of several regional preferential trade agreements it has negotiated. Bolivia is a member of the Andean Community and enjoys nominally free trade with other member countries (Peru, Ecuador, Colombia, and Venezuela). Bolivia began to implement an association agreement with MERCOSUR (Southern Cone Common Market) in March 1997. The agreement provides for the gradual creation of a free trade area covering at least 80% of the trade between the parties over a 10-year period, though economic crises in the region have derailed progress at integration. The U.S. Andean Trade Preference and Drug Enforcement Act (ATPDEA) allows numerous Bolivian products to enter the United States free of duty on a unilateral basis, including alpaca and llama products and, subject to a quota, cotton textiles.

The United States remains Bolivia's largest trading partner. In 2002, the United States exported $283 million of merchandise to Bolivia and imported $162 million. Bolivia's major exports to the United States are tin, gold, jewelry, and wood products. Its major imports from the United States are computers, vehicles, wheat, and machinery. A Bilateral Investment Treaty between the United States and Bolivia came into effect in 2001. Agriculture accounts for roughly 15% of Bolivia's GDP. The amount of land cultivated by modern farming techniques is increasing rapidly in the Santa Cruz area, where weather allows for two crops a year. Soybeans are the major cash crop, sold into the Andean Community market. The extraction of minerals and hydrocarbons accounts for another 10% of GDP and manufacturing less than 17%.

The Government of Bolivia remains heavily dependent on foreign assistance to finance development projects. At the end of 2002, the government owed $4.5 billion to its foreign creditors, with $1.6 billion of this amount owed to other governments and most of the balance owed to multilateral development banks. Most payments to other governments have been rescheduled on several occasions since 1987 through the Paris Club mechanism. External creditors have been willing to do this because the Bolivian Government has generally achieved the monetary and faget targets set by IMF programs since 1987, though economic crises in recent years have undercut Bolivia's normally good track record. Rescheduling agreements granted by the Paris Club have allowed the individual creditor countries to apply very soft terms to the rescheduled debt. As a result, some countries have forgiven substantial amounts of Bolivia's bilateral debt. The U.S. Government reached an agreement at the Paris Club meeting in December 1995 that reduced by 67% Bolivia's existing debt stock. The Bolivian Government continues to pay its debts to the multilateral development banks on time Bolivia is a beneficiary of the Heavily Indebted Poor Countries (HIPC) and Enhanced HIPC debt relief programs, which by agreement restricts Bolivia's access to new soft loans. Bolivia was one of three countries in the Western Hemisphere selected for eligibility for the Millennium Challenge Account and is participating as an observer in FTA negotiations.

Macroeconomy

Bolivia had an estimated GDP of US$22.3 billion in 2004, with a growth rate from the previous year of 3.7 percent. Bolivia experienced a budget deficit of about US$500 million in 2004. Expenditures were nearly US$2.8 billion while revenues amounted to only about US$2.3 billion. Inflation has plagued, and at times crippled, the Bolivian economy since the 1970s. At one time in 1985, Bolivia experienced an inflation rate of more than 20,000 percent. Fiscal and monetary reform reduced the inflation rate to single digits by the 1990s, and in 2004 Bolivia experienced a manageable 4.9 percent rate of inflation.

Primary sectors

Agriculture, Forestry, and Fishing: Agriculture, forestry, and fishing accounted for 14 percent of Bolivia’s gross domestic product (GDP) in 2003, down from 28 percent in 1986. Combined, these activities employ nearly 44 percent of Bolivia’s workers. Most agricultural workers are engaged in subsistence farming--the dominant economic activity of the highlands region. Agricultural production in Bolivia is complicated by both the country’s topography and climate. High elevations make farming difficult, as do the El Niño weather patterns and seasonal flooding. Bolivia’s agricultural GDP continues to rise but has attained only a rather modest average growth rate of 2.8 percent annually since 1991. Bolivia’s most lucrative agricultural product continues to be coca, of which Bolivia is currently the world’s third largest cultivator. The Bolivian government, in response to international pressure, has worked to restrict coca cultivation for the use of producing cocaine. However, eradication efforts have been hampered by the lack of a suitable replacement crop for rural communities that have cultivated coca for generations. Since 2001, Bolivia’s leading legal agricultural export has been soybeans. Additionally, cotton, coffee, and sugarcane have been viable exports for Bolivia. For domestic consumption, corn, wheat, and potatoes are the crops of choice of Bolivian farmers. Despite its vast forests, Bolivia has only a minor timber industry. In 2003 timber accounted for only 3.5 percent of export earnings. The Forestry Law of 1996 imposed a tax on sawn timber and consequently cut Bolivian timber exports significantly. The tax was used to establish the Forestry Stewardship Council, which has been only minimally successful in forest restoration efforts and eliminating illegal logging. With increased efficiency, Bolivia could likely expand the profitability of its forest resources, while still protecting them from overexploitation. Bolivia has a small fishing industry that taps the country’s freshwater lakes and streams. The annual catch averages about 6,000 tons.

Mining continues to be vital to Bolivia’s economy. The collapse of the world tin market in the 1980s led to a restructuring of the industry. The state dramatically reduced its control and presently operates only a small portion of mining activities. Small-scale operations, often with low productivity, employ many former state miners. Natural gas has supplanted tin and silver as the country’s most valuable natural commodity. A discovery in 1997 confirmed a tenfold gain in Bolivia’s known natural gas reserves. Finding markets to utilize this resource, both domestically and internationally, has been slowed by a lack of infrastructure and conflicts over the state’s role in controlling natural resources. Although the world tin market has reemerged, Bolivia now faces stiff competition from Southeast Asian countries producing lower-cost alluvial tin. Gold and silver production has increased dramatically over the past decade. Annually, as of 2002 Bolivia extracted and exported more than 11,000 kilograms of gold and 461 tons of silver. Additionally, Bolivia has increased zinc production, extracting more than 100,000 tons each year. Other metals excavated include antimony, iron, and tungsten.

Energy

Bolivia is energy self-sufficient. The country’s energy needs are relatively small but growing consistently. Bolivia uses oil for the majority of its power needs, followed by natural gas. The country has large reserves of both. Bolivia’s energy sector changed significantly when the government allowed privatization in the mid-1990s. International companies quickly invested in Bolivian energy sources, particularly in natural gas, and made Bolivia into a player in the world energy market. The exportation of Bolivian energy resources, while potentially lucrative economically, has been politically hazardous. President Gonzalo Sánchez de Lozada ultimately resigned over his plan to export natural gas to the United States and Mexico in 2003. Subsequent politicians have been hesitant to act decisively even though Bolivia’s economy could readily use an export boost. On June 6, 2005, President Carlos Mesa offered his resignation to the Bolivian Congress after months of demonstrations by Bolivia’s Indian population calling for renationalizing the natural gas and oil sectors. Mesa had increased taxation on foreign companies while still encouraging their investment in Bolivian energy development. Bolivia has estimated oil reserves of convert|441|Moilbbl|m3, the fifth largest in South America. The country’s natural gas reserves total convert|27.6|Tcuft|km3 according to Bolivian government figures, ranking Bolivia behind only Venezuela in terms of proven natural gas reserves in South America. Additionally, Bolivia produces more electricity with its nine power companies than it can consume. In 2002 Bolivia generated 4.1 billion kilowatt-hours of electricity but consumed only 3.8 billion kilowatt-hours.

Industry and Manufacturing

Annually, manufacturing has accounted for approximately 18 percent of Bolivia’s gross domestic product since 1995. Most industry is small-scale, aimed at regional markets rather than national operations. Inadequate credit options and competition from the black market have kept Bolivia’s manufacturing sector from developing fully. Leading manufactured goods in Bolivia include textiles, clothing, non-durable consumer goods, processed soya, refined metals, and refined petroleum.

ervices

The services industry in Bolivia remains undeveloped. Inhabiting one of the poorest countries in South America, Bolivians have weak purchasing power. The retail sector suffers from weak demand and competition with a large black market of contraband goods. U.S. companies such as McDonald’s and Domino’s have pulled out of Bolivia in recent years.

Banking and finance

Banking in Bolivia has long suffered from corruption and weak regulation. However, a series of reforms initiated by the 1993 Banking Law and subsequent acts are gradually improving Bolivia’s banking sector. Bolivia has a central bank and nine private banks. Consolidation occurred following reforms, lowering the number of private banks in Bolivia from 14 in 1995 to nine in 2003. Foreign participation and investment in Bolivian banks are allowed. About 90 percent of Bolivian bank deposits are held in U.S. dollars. The Bolivian government is trying to change this situation by taxing dollarized accounts while exempting boliviano accounts from the tax. As recently as 2002, 27 percent of all loans were non-performing, leading most foreign investors to focus their resources in the somewhat-safer venue of corporate lending. Most bank lending in 2003 went to manufacturing (24 percent), followed by property services (18 percent) and trade and retail (16 percent). Bad debt remains at a historically high level. Further reforms are necessary, including the pending act to introduce a deposit guarantee system. Bolivia’s stock market expanded in 1998 to include corporate bonds, along with the money market and government bond options that had existed previously. The privatization of Bolivia’s social security program has bolstered the stock market.

Tourism

Bolivia’s spectacular vistas and natural attractions have not been enough to transform the country into a major tourist destination because of its political instability and lack of first-class accommodations. Still, Bolivia’s tourist industry has grown gradually over the past 15 years. In 2000 Bolivia attracted 306,000 tourists, compared with 254,000 in 1990. Tourist revenue peaked at US$179 million in 1999. Tourism in Bolivia declined following the September 11 ,2001 attack on the United States, as was the case across North and South America.

Labor

The economic downturn of the late 1990s, coupled with privatization and austerity efforts led by President Mesa, resulted in significant unemployment. Although the Bolivian government does not keep unemployment statistics, outside experts estimate unemployment to be between 8 and 10 percent of the population. Underemployment of Bolivia’s workforce of nearly 4 million is also widespread. As a result of the lack of formal employment opportunities, nearly 65 percent of the urban workforce was self-employed in 2002. Labor unions have a strong history in Bolivia. Many workers in the formal sector belong to unions. The larger unions, such as the Bolivian Labor Federation and the Trade Union Federation of Bolivian Mine Workers, have been successful in rallying workers to countless strikes and work stoppages. Nevertheless, working conditions for most Bolivian workers are difficult.

Foreign Economic Relations

Bolivia was a founding member of the Andean Group, a South American organization designed to promote trade among Bolivia, Colombia, Ecuador, Peru, and Venezuela. Subsequently renamed the Andean Community (Comunidad Andina—CAN), the organization has succeeded in increasing intra-South American trade. Trade among member countries rose from US$3.6 billion in 1991 to US$10.3 billion in 2003. Bolivia also belongs to the Common Market of the South (Mercado Común del Sur—Mercosur). Bolivia became an associate member in 1997 in order to open investment opportunities with the founding Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay), as well as other Mercosur associate members (Chile, Colombia, Ecuador, Peru, and Venezuela). Bolivia conducted more than US$1 billion in trade with Mercosur countries in 2003. As a result of negotiations initiated in 1999 on a possible South American Free Trade Area (SAFTA), the two groups announced in December 2004 that they would merge, creating a South American Community of Nations patterned after the European Union.

Imports

Bolivian imports of goods and services were valued at about US$2.1 billion in 2004. The import of consumer goods increased for the first time since 2002. By sector, Bolivia imported mostly intermediate goods, followed by industrial, capital, and consumer goods. Leading sources of Bolivian imports include Brazil, Argentina, the United States, and Chile.

Exports

Bolivian exports of goods and services in 2004 stood at more than US$2.1 billion compared with US$1.9 billion in 2003. Increased production of hydrocarbons, especially natural gas, led Bolivia’s trade upturn in 2004. A 20-year supply contract with Brazil for natural gas, ending in 2019, the necessary capital to increase production. In 2004 export revenues for natural gas topped US$619 million. Bolivia also exported significant quantities of petroleum. Beyond hydrocarbons, other significant exports included zinc, soya, iron ore, and tin. In 2001 Brazil overtook the United States as Bolivia’s primary export outlet. Switzerland, Venezuela, and Colombia are also important export partners. Bolivia has actively sought to foster economic connections in South America after long relying on the United States as its primary trade partner.

Balance of trade and currency

Bolivia had an estimated trade surplus of more than US$340 million in 2004. This figure represents a marked change in Bolivia’s economic balance sheet. Bolivia reached a peak trade deficit of US$888 million in 1998 before increased hydrocarbon exports radically altered the situation.

Bolivia had a large negative balance of payments for 2002⎯US$317 million. However, this situation has been remedied by the vast increase in export revenue. Estimates for the balance of payments for 2004 show a record surplus of US$126 million. Bolivia’s external debt totaled an estimated US$5.7 billion in 2004. The International Monetary Fund has assisted Bolivia in paying down this debt. In 1995 the United States, among other countries, reduced Bolivia’s debt by two-thirds.

Bolivia’s currency is the boliviano (BOB). The exchange rate in January 2006 was about 8 bolivianos per US$1.

Foreign Investment

Foreign investment in Bolivia was buoyed in 1995 by privatization. Investment in mining and natural gas extraction increased, as did investment in the banking sector. However, the economic decline of the late 1990s, along with political unrest, caused foreign investors to pull out of Bolivia once again. In 2000 foreign investors contributed US$736 million to the Bolivian economy. In 2002 this total fell to US$676 million.

In 2007, India's third largest steel manufacturer, Jindal Steel and Power Limited, signed a contract with the Bolivian government to exploit the Mutun iron ore depoist, considered to be one of the largest in the world. According to the contract, Jindal would invest US$ 1.5 billion initially and an additional US$ 2.5 billion over the next eight years. This is the single largest investment by an Indian firm in Latin America. [ [http://www.theaustralian.news.com.au/story/0,25197,22858026-5005200,00.html India's Bolivian ore | The Australian ] ] The mining is expected to create 6,000 jobs directly and another 15,000 indirectly. The Indian company projects handling 25 million tonnes of minerals per day. [ [http://afp.google.com/article/ALeqM5gVpRQ9-JLWmbpxT08MJw-E5yxQBw AFP: Bolivia OKs Indian firm to mine vast iron deposit ] ] Through this deal, Bolivian government has shown its intent to decrease its economic reliance on Brazil and United States and develop closer ties with other emerging major economic powers, like China and India.

tatistics

*GDP: purchasing power parity - 25.82 billion (2005 est.)
*GDP - real growth rate: 4.1% (2005 est.)
*GDP - per capita: purchasing power parity - $2,900 (2005 est.)
*GDP - composition by sector:
**agriculture: 12.8%
**industry: 35.2%
**services: 52% (2005 est.)

Population below poverty line:38.2% (2007 est.)

Household income or consumption by percentage share:
"lowest 10%:"1.3%
"highest 10%:"32% (1999)

Inflation rate (consumer prices):5.4% (2005 est.)

Labor force:4.22 million

Labor force - by occupation:agriculture %, industry %, services %

Unemployment rate:8% in urban areas, with widespread underemployment (2005 est.)

Budget:
"revenues:"$2.848 billion
"expenditures:"$3.189 billion including capital expenditures of $741 million (2005)

Industries:mining, smelting, petroleum, food and beverages, tobacco, handicrafts, clothing

Industrial production growth rate:5.7% (2004 est.)

Electricity - production:4.25 billion kWh (2003)

Electricity - production by source:
"fossil fuel:"42.43%
"hydro:"55.75%
"nuclear:"0%
"other:"1.82% (1998)

Electricity - consumption:3.963 billion kWh (2003)

Electricity - exports:0 kWh (2003)

Electricity - imports:10 million kWh (2003)

Agriculture - products:
soybeans, coffee, coca, cotton, corn, sugar cane, rice, potatoes, timber

Exports:$2.371 billion (f.o.b., 2005 est.)

Exports - commodities:
natural gas, soybeans and soy products, crude petroleum, zinc ore, tin

Exports - partners:
Brazil 21.9%, Argentina 16.7%, US 13.8%, Chile 6.9%, Peru 6.5%, Japan 6.1%, China 5.8% (2005)

Imports:$1.845 billion (f.o.b., 2005 est.)

Imports - commodities:petroleum products, plastics, paper, aircraft and aircraft parts, prepared foods, automobiles, insecticides, soybeans

Imports - partners:
Brazil 21.9%, Argentina 16.7%, US 13.8%, Chile 6.9%, Peru 6.5%, Japan 6.1%, China 5.8% (2005)

Debt - external:$6.309 billion (2005 est.)

Economic aid - recipient:$221 million (2005 est.)

Currency:1 boliviano (BOB) = 100 centavos

Exchange rates:bolivianos (BOB) per US$1 - 8.0661 (2005), 7.9363 (2004), 7.6592 (2003), 7.17 (2002), 6.6069 (2001)

Fiscal year:calendar year

Notes

Unemployment rate-11.7%

References

*
*factbook
*StateDept

External links

* [http://www.dollarsandsense.org/archives/2006/1106luomagordon.html Turning Gas into Development in Bolivia] from Dollars & Sense magazine
* [http://cepr.net/documents/publications/bolivia_update_2007_08.pdf Bolivia’s Economy - An Update] from the Center for Economic and Policy Research