Is Bolivia’s catch-up growth here to stay?

Daniel Lemaitre on the practicality of Evo Morales’ economic vision

So, what percent growth will Bolivia average the next few years?

Recently reelected Bolivian President Evo Morales and his economic team are the first to boast about Bolivia’s economic strategy, and for good reason.

Bolivia’s economic ascent and stabilization during the Morales administration is difficult to ignore. The economy has expanded threefold—from US$10 billion to US$30 billion dollars—since 2006. From 2006 to 2013, Bolivia posted annual growth rates of 5.6 percent, one of the highest in the region.

The economy has also demonstrated resilience under Morales, growing over 3 percent in 2009, a year in which neighboring economies stagnated following the global financial crisis. 2014 is also shaping up to be a good one based on the 9.95 percent growth posted in the second quarter (while neighboring commodity producers have faced declining growth).

Following Morales’s win on October 12, Vice-President Álvaro García Linera announced that Bolivia’s GDP would match Chile’s by 2025. The Morales team argues that Bolivia’s recent catch up growth will become a permanent, “progressive growth” strategy that emphasizes redistributive policies while simultaneously managing inflation and instituting an orthodox macroeconomic policy regime. He predicted 5 percent annual growth moving forward.

The Vice-President’s bold remarks echo the Economic Minister’s pre-election declaration that Bolivia’s performance over the past eight years is based on bottom-up redistributive policies.

So is Bolivia’s growth here to stay?

Despite the incumbent’s optimism, uninterrupted expansion remains improbable because Bolivia’s economy is not structurally protected against negative externalities, such as falling commodity prices. Bolivia’s recent success can be best described as a bonanza, which implies a sense of temporariness.

Three important structural factors may eventually undermine Bolivia’s growth in the long run: 1) unsustainable government expenditure and increased borrowing in the medium term; 2) dependence on primary sector revenues; and 3) a fall in international investment triggered by a tense business environment.

Bolivia’s development trajectory depends largely on fiscal policy.

The central government spends much of its tax revenue from multinational corporations on redistributive social programs and subsidies in urban areas. Nevertheless, in 2013, Bolivia achieved a small budget surplus despite the high spending. Considering hefty revenues from the natural gas sector alone, it should be no surprise that the Bolivian government is earning a lot and spending correspondingly.

Yet the long term sustainability of such spending trends is questionable. Primary sector revenues have already decreased and are expected to continue decreasing in 2015 and 2016. With lower revenues, the Bolivian government will probably have to finance deficits in the coming years. With slowing revenue growth, financing increased spending with debt would create insurmountable fiscal strains.

GDP annual percentage growth in Bolivia (2006 – 2013) compared to other Andean countries

Bolivia currently exports commodities that are losing value in the international market.

Soybean prices have fallen by 10 percent since June 2014. Natural gas exports might also decrease in 2015. Bolivia exports much of its gas to Argentina, a country that has significant reserves itself and is desperately trying to lessen its dependence on imported gas and oil.

Finding natural gas buyers will not be easy for Bolivia because it is a landlocked country and it has fractured commercial and diplomatic relations with Chile, its neighbor to the west and gatekeeper to the Pacific Ocean. Moreover, gas is becoming an overabundant commodity globally as the US increases its own gas production.

Foreign investment has dropped in the past years due mainly to high taxes and unwelcoming governance. The Heritage Foundation ranks Bolivia 158^th out of 165 in its Index of Economic Freedom. Bolivia scores low in freedom from corruption, investment freedom, and property rights, three components fundamental to attracting foreign investment.

The Morales administration ignored these issues because high commodity prices offered him a degree of leeway. If Bolivia must now borrow from international lenders to finance spending, it might be a fitting time to focus on governance indicators to improve the country’s credibility.

Morales must address these three key issues if he wants his country to continue growing and achieve parity with the rest of the Andean region. It is clear that at the start of Morales’ first term, alienating international competition from extractive industries seemed like a logical solution, given the tense political conditions that brought him to power.

Morales has established a clenched grip on power at an opportune time. As commodity prices decrease, Bolivia will need a strong and trusted leader to liberalize and diversify key industries to decrease dependence on natural gas and primary sector exports. The Morales administration must also realize that fiscal policy alone is unable to generate the appropriate rates of growth to eliminate poverty.

With that said, curbing government spending should be seen as a prudent remedy to compensate for the decreased revenues from cheaper exports in dominant national industries.