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Latin American Economy & Business - October 2014 (ISSN 1741-7430)

Bolivia: The presidential inbox (1)

On 12 October President Evo Morales won a resounding election victory, taking 61% of the vote to secure a third term in office, starting in January 2015 and running to January 2020. Most analysts agree that the country’s exceptionally strong economic performance was a key factor underpinning the popularity of this left-wing but pragmatic leader, a representative of the traditionally impoverished Aymara indigenous community (which makes up about two-thirds of Bolivia’s 10m-strong population). The Morales government now has to beware of complacency and start planning for the day the country’s natural gas boom may come to an end.

While Morales is a close political ally of his fellow left-wing leaders in Argentina and Venezuela, the small Bolivian economy seems to be functioning in an entirely different league. Both Argentina and Venezuela will experience recession in 2014, along with rampant inflation (over 60% in the case of Venezuela, according to the IMF). By contrast, Bolivia will see real annual GDP growth of 5.2% and inflation of not more than 6% this year (also on IMF forecasts). The country’s recent performance doesn’t look like a flash in the pan, either. Morales and his economy minister, Luis Arce, have achieved 5%-plus economic growth every year since they came to office in January 2006, delivering the longest, most consistent period of economic expansion experienced by Bolivia in the last three and a half decades. Arce, a Marxist, is sometimes described as a ‘closet liberal’. Certainly he has balanced the budget more years than not and Jeffrey Webber, a Canadian analyst of the Bolivian economy, was recently moved to comment that “inflation rates have been clamped at levels that would keep Milton Friedman resting peacefully in his grave”.

At many different levels Bolivia’s performance has been impressive. Foreign currency reserves stood at US$15.4bn in October, equivalent to just over 48% of GDP (comparatively speaking, one of the highest levels in the world). Per capita GDP has doubled, according to IMF data. The proportion of the population living in conditions of extreme poverty has been reduced from 38% to 18%, a result the World Bank this year described as “extraordinary”. In July, UNESCO said Bolivia had freed itself of illiteracy (the proportion of Bolivians who cannot read or write has been brought down to under 5% of the population). Income inequality has been sharply reduced. This was achieved in part by major increases in the real purchasing power of the minimum wage – up 87.7% in 2005-2014. Social spending (on health, education and pensions among other things) has also grown significantly, although it has lagged behind overall economic growth – as a result it has fallen as a proportion of GDP, from 12.4% in 2005 to 11.5% in 2012. Public sector investment has also grown, with funds going into the construction of roads, schools and hospitals. And despite the government’s leftist credentials, Foreign Direct Investment (FDI) has kept on coming. At 5.9% of GDP in 2013, it was ahead of Peru’s 4.9% and Brazil’s 3.0% in the same year.

One of the keys to the government’s success was the 2006 nationalisation of the hydrocarbons industry, in particular the natural gas sector. While presented to domestic and international opinion as a body blow delivered against exploitative international companies, the move was carefully balanced. Operating companies such as Petrobras, Total and Repsol lost ownership of the gas deposits but were kept on as service providers, keeping their expertise in the country and delivering their output to the state-owned hydrocarbons company, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB). While revenue shares were adjusted in Bolivia’s favour, at a later stage these companies were offered new tax and other incentives to boost output. The move coincided with rising gas demand from Bolivia’s energy-hungry neighbours Brazil and Argentina. As a result, Bolivia’s gas export earnings have rocketed from around US$1bn in 2005 to US$6.1bn in 2013. Bernardo Fernández, of the Universidad Católica Boliviana, notes: “When Evo Morales came to power, no-one was expecting this bonanza. These have been a very prosperous eight years, and there’ll be a couple more before the fiscal situation starts to deteriorate”.

This then, is the key issue for the third Morales term in office: how to prepare the country for a potential ‘post gas-boom’ economy. On current calculations, Bolivia’s main gas fields, which account for 57% of exports and 45% of government revenue, are likely to begin to decline in 2017. The government is stepping up exploration: YPFB is to spend US$300m searching for new gas fields, and Russia’s Rosneft is expected to join Gazprom to operate in the country. But critics on both the Right and the Left say not enough is being done to diversify the economy beyond the extractivist economic model. César Arias of Fitch Ratings says the next four years may not be as good to Bolivia as the last. Eric Farnsworth, of the Washington-based Council of the Americas (usually highly critical of nationalist governments), notes, “there is a huge competitiveness issue that’s going to take years for the Bolivians to get their arms around.” Writing for Los Andes, Peruvian journalist Eder Pérez Fuentes also had the competitiveness issue in mind when he listed two big challenges for the government: first to make good a deficit in education spending and quality of delivery; and second to develop an industrialisation policy, particularly focusing on the potential of adding value in the iron ore and lithium sectors.

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