On 20 April, Luis Arce Catacora, Bolivia’s economy minister, spoke at the University of Chicago, about “The Model That Changed Bolivia's Economy,” which, he said, explains how Bolivia has been able to sustain a five percent annual economic growth rate over the last decade.
Arce said that the Bolivian economic model is based on state control of strategic sectors—oil and gas, mining and electricity—that allows it to capture and use surpluses to reduce poverty and inequality and to promote other sectors that generate employment and income (i.e., agriculture, industry, tourism).
The first part of the model appears to have worked well. The country has increased its revenues from gas exports exponentially. In 2001, the government received US$217 million in revenues. By 2014, natural gas generated more than US$5.5 billion—equivalent to 43 percent of all government revenues.
This success has partly resulted from contracts to export natural gas to Brazil (beginning effectively in 1999) and Argentina (2007), but also from the 2005 introduction of the direct hydrocarbon tax, which is a 32 percent tax on gas companies’ gross sales. This came on top of the pre-existing 18 percent royalty on gross sales and the standard corporate income tax of 25 percent.
Capturing greater income from resource extraction has helped fund public spending on infrastructure, health and education, in addition to cash transfer programs, which have generated one of the most successful advances in social progress in Latin America. The proportion of Bolivians living on less than two dollars a day has fallen from 38 to 19 percent in ten years. Inequality has also fallen: Bolivia’s Gini coefficient, a measure of income inequality, fell from 0.63 in 2000 to 0.47 in 2013.
At the same time macroeconomic indicators have soared. In addition to the sustained growth mentioned above, GDP has tripled over the last ten years to $30 billion. External debt is at its lowest level in decades at 16.6 percent of GDP, while international reserves have increased from US$1.7 billion to US$15 billion since 2006.
Yet Bolivia’s success relies fundamentally on its extractive resource exports. The mining and gas industries contribute 14 percent of GDP and 80 percent of exports, making it one of the most resource-dependent countries in Latin America.
Source: Observatory of Economic Complexity
This dependence has left Bolivia exposed to commodity price shocks. The price at which Bolivia is selling its gas has fallen in lockstep with collapsing oil prices. Export prices of gas to Brazil and Argentina are determined by a formula that takes into account the semi-annual average of a basket of fuel oils, and prices are furhter adjusted at the end of the cycle depending on the price of oil. This means that the price of gas sold to Brazil, for example, has fallen from an average in 2014 of $10.10 to $6.35 per MMBtu in the second quarter of 2015, a 37 percent drop.
The fall in prices is likely to slow economic growth, which the IMF predicts will fall 3.5 to 4 percent this year if oil prices remain at US$50 to US$60 a barrel. However, it is unlikely that Bolivia’s social programs will suffer in the short term. Unlike Venezuela, Bolivia has stuck to a prudent management of public finances, accumulating fiscal surpluses and foreign reserves, with the latest IMF report (2014) showing confidence in the country’s ability to manage a transitory budget shortfall. These sound finances have provided a base for the government to adopt a countercyclical fiscal policy, increasing public spending by 30 percent, including capital expenditures to $6.2 billion, and increasing the minimum wage by 15 percent.
Such macro financial policies are timely, but are only a short-term solution to volatile commodity prices. Long-term mitigation of this risk is best addressed through diversification of the economy beyond the extractives sector. On this front too, Bolivia is in a better situation than Venezuela, as it has not ruined other productive sectors—such as agriculture and related industries—with expropriation or stifling price controls. But “better than Venezuela” is not good enough. While the Morales government has achieved success in poverty alleviation and other social metrics, it has largely failed to truly promote a more diverse economy.
As Arce has stated, over the last nine years, the current government has invested $8.5 billion of public money to industrialize natural resources—the cornerstone of the economic model. Bolivia’s industrialization has been therefore predominantly focused on the gas sector: $5.4 billion was spent to build petrochemical plants including plants for separating liquids from natural gas. But the other drivers of the economy have not received enough support. The downstream mining sector has received public investments of $549 million (6.5 percent of $8.5 billion) and agriculture only $240 million (2.8 percent).
Investing in industrial upgrades that allows Bolivia to add value to extracted gas can of course create positive linkages, but upgraded products are subject to the same price fluctuations as their raw material inputs and in the case of gas are typically not produced in labor-intensive ways. Focusing on industrialization of the resource sector has actually made the country more dependent on its gas production, and less diversified.
True diversification must be achieved relatively quickly. In 2013, it was said that the proven gas reserves in the country would last ten years if export levels were maintained, but it is likely that domestic demand and petrochemical production require production at a higher rate than was then foreseen. New additions to reserves are somewhat in question, with some saying that the previous fiscal reforms were detrimental to exploration, while YPFB, the national oil company, is increasingly seeking new sites in environmentally sensitive areas. Nor are market prospects that great: as Brazil and Argentina develop large deposits of their own, their demand for Bolivian gas may stagnate.
The fall in estimated reserves and the fall in the value of these reserves under current prices have effectively meant a significant drop in Bolivia’s natural wealth, meaning there is now a lot less fuel to propel Bolivia’s economy forward. This means Bolivia’s government must invest its fiscal surpluses strategically in order to industrialize beyond the commodity sectors. Such prudent policies can kick-start a virtuous cycle of growth that moves the country away from a reliance on its subsoil resources.
Fernando Patzy is the Latin America Senior Officer at the Natural Resource Governance Institute (NRGI).
