Macroeconomic Policy Choices for Growth and Poverty Macroeconomic Policy Choices for Growth and Poverty Reduction: The Bolivian CaseReduction: The Bolivian Case

North – South Institute CanadaNorth – South Institute Canada

Macroeconomic Policies to Increase Social Macroeconomic Policies to Increase Social Mobility and Growth in BoliviaMobility and Growth in Bolivia

Alejandro F. MercadoAlejandro F. MercadoSocio Economic Research InstituteSocio Economic Research Institute

Catholic University of BoliviaCatholic University of Bolivia

Annual Bank Conference on Annual Bank Conference on Development Economics Development Economics ABCDE Tokyo, Japan, ABCDE Tokyo, Japan,

Poverty in Bolivia has become an endemic phenomenon. We were poor yesterday, we are poor today and, most likely, we will be poor tomorrow. Bolivia has experimented with almost all conceivable economic policies. We have nationalized,privatized, capitalized and nationalized again, while we remain trapped into the vicious cycle of poverty.

Introduction

A fifty percent poverty rate can mean two completely different things. First, one interpretation of this might be that the probability of becoming a poor person is 50 per cent. From another point of view, the whole population is poor half of the time.Second, one might conclude that 50 percent of the population is always poor, while the remainder is unlikely to become poor.

The problem arises from treating poverty as a static problem, while in reality its a highly dynamic problem.

A large amount of attention has been paid to poverty and inequality, while very little attention has centered on the dynamicsof poverty which we will call social mobility

Poor People

Rich people

Big gap

The fundamental problem:

The link between effort

and result ismissing

People makeLess effort

The countryDoesn’t grow

Restore the Link betweeen

Effort andresult

People makeMore effort

The countryGrow fast

Social Mobility

Discrimi-nation

Lack accessto credit

Corruption

El Salvador

Honduras

Dom.R.

Paraguay

PeruUruguay*

Venezuela

Panama Mexico Argentina*

Guatemala

Brazil

Bolivia

Ecuador

Costa Rica

Nicaragua

Colombia

Chile

45.0

50.0

55.0

60.0

65.0

0.7000 0.8000 0.9000 1.0000

SMI based on teenagers (13-19 years)

Adj

uste

d G

INI

Bolivia: Macroeconomic situation

• Market oriented approach • Foreign Direct Investment

1950 - 2000

¿What happen from 1990 to 2000?

¿Why?

GDP

GDP

2.5%

4.0%

MACRO-SOCIAL SITUATION:Social Expenses (% del GDP), 1980-2002

0

2

4

6

8

10

12

14

16

1819

80

1982

1984

1986

1989

1992

1994

1996

1998

2000

2002

HealthHousingSocial SecurityEducation

0

2

4

6

8

10

12

14

16

1819

80

1982

1984

1986

1989

1992

1994

1996

1998

2000

2002

HealthHousingSocial SecurityEducation

Monetary Poverty Incidence

0

10

20

30

40

50

60

70

80

90

1999 2000 2001 2002

Nacional Urban Rural

0

10

20

30

40

50

60

70

80

90

1999 2000 2001 2002

Nacional Urban Rural

In the last years Bolivia lived dramatic moments. The resignation of President Sanchez de Lozada and the later resign of President Carlos Mesa, they were because of a popular movement that put in risk the democratic system.Stabilizing the political situation, the elections carried out in December of the last year named as winner Evo Morales with 54 percent of the vote. Morales is the leader of the Movement to the Socialism (Movimiento al Socialismo - MAS).

Beyond the legitimate demands of the excluded ethnic groups, the government of Evo Morales is the return to the vision of the nationalist left. The proposal of the government of Evo´s political party is the development of an Andean Capitalism as the first step to the construction of socialism. For the realization of this objective they said that it is necessary to consolidate a strong government that allows the development of the historical tasks of the bourgeoisie. This means the direct intervention of the government in the economy and the subordination of the market and international trade to the government's plan.

The natural gas reserves in Bolivia reach to 49 trillion of cubic feet and are the second most important reserve of South America. Among the companies that have important presence in Bolivia they are Repsol YPF, Petrobras Energy, Petrobras Bolivia, Total Bolivia, British Gas, Don Won Corporation, Pan American Energy, Mobil Petroleum, Vintage, Maxus and others. These companies come from Brazil, Spain, Argentina, United States, United Kingdom and Holland among the most important.

In May 2006 the government of Evo Morales decided to nationalize the production of petroleum and natural gas.

Nationalization of the oil and natural gas

Outstanding aspects of the Nationalization set of laws

• The Bolivian State recuperates the property, possession and the total and absolute control of the resources of petroleum and natural gas. • The companies are obliged to give all their production to the Bolivian Oil Company (YPFB) • The companies should change their contracts in a term of 180 days • The fields with a production average superior to 100 million cubic feet are obliged to give a government take of 82 percent. Smaller fields will have a government take of 50 percent. • In the capitalized companies, it transferred in a free way the shares of the Bolivians in favor of YPFB • A necessary amount of stocks of the companies are nationalized so that YPFB has control of 51 percent of the capital. • The refineries are nationalized

Social Mobility and Economic Growth

El Salv.

HondurasRep. Dom

Paraguay

Peru

Uruguay*

Venezuela

Panama

Mexico

Argentina*

Guatemala

Brazil

Bolivia

Ecuador

Costa Rica

Nicaragua

Colombia

Chile

0,0

1000,0

2000,0

3000,0

4000,0

5000,0

6000,0

7000,0

0,7000 0,8000 0,9000 1,0000

Social Mobility Index

GD

P pe

r cap

ita ($

us 1

990)

How to increase Social Mobility and long run Economic GrowthConcerning Social Mobility, Education is the most important factor.However, there are many other factors or barriers to Social Mobility :

Differences in quality and coverage of education between rich and poor people.

Discrimination in the labor market that reduces the returns of education

Barriers inside the credit marketBarriers inside the marriage market.

Education

The education system is fundamental for achieving higher social mobility, and the improvement of the public education system has been high on the agenda in Bolivia for a decade at least.

How to increase social Mobility in Bolivia?

Regarding the public sector, the permanent increase in public spending causes a very transitory increase in the rate of GDP growth, but it comes accompanied by a permanent cost in terms of a bigger public deficit and tends to favour the rich people.Many studies conclude that in all cases reductions in the participation of government expenditures are positively related to increases in the productivity of the economy. We consider that the market structure is not failing. Moreover, we think that there is a failure in the model to read the reality. We are interpreting the reality based on a static model while the reality is dynamic; we live the present and forget the future. Decade after decade, generation after generation, we bet for short run solutions based on the intervention of the public sector in the economy and we continue sinking into poverty. The present paper is, therefore, a call to change our point of view, to lift the head and look the future, to work for our children instead to make them work for us.

Concluding RemarksThis paper has shown that despite decades of concerted international efforts to reduce poverty, Bolivia still has the highest poverty rates in Latin America, with virtually no improvement in the very poor rural areas.

• We argue that the failure of previous development policies is due to a lack of social mobility. Without social mobility, there is little incentive for people to invest in human and physical capital, and without investment there cannot be productivity growth. In addition, the lack of social mobility implies an inefficient use of human capital, and it hinders the construction of efficient social mechanisms of redistribution and consumption smoothing over the life-cycle.

• Efforts to improve social mobility in Bolivia should concentrate on public education systems and the elimination of corruption and misgovernance. That means reducing government intervention in the economy . Social mobility may also be increased through improvements in the functioning of credit markets.

The bases for poverty reduction

MARKET ORIENTED ECONOMY DEMOCRACY

SOCIAL MOBILITY

THANK YOU VERY MUCH