December 14, 2004

The Capitalization Process in Bolivia

MABB is a registered TM.

In the last few days, Bolvian politicians have been expressing their discontent with the Capitalization process in Bolivia. Some have even said the process was detrimental for the country. Some have pointed out, with relative reason, the capitalization has been devastating for the capitalized companies. However, how is capitalization going to help growth, if the citizens themselves have been, and still are, blocking its development into a possible growth engine?

The capitalization process started in 1994, under the presidency of Gonzalo Sanchez de Lozada (MNR) and his new economic policy. The basics for this policy was to "capitalize" government owned enterprises. The reasons being, the vast inefficiencies in the management of these enterprises. In basic terms, the public companies were not making any money and were not contributing to the creation of capital, which is the necessary ingredient for economic growth.

In 1995 the process started. ENTEL (National Telecommunications Enterprise), ENFE (National Trains Enterprise), LAB (Bolivian Airlines), ENDE (National Electricity Enterprise), YPFB (National Oil Company) y VINTO (Mining Company)were all capitalized.

The basic scheme was to sell 50% of the company's shares to strategic investors. These investors were to bring, in addition to capital, know-how, management and more investment. The state, who owned the other 50%, in the name of all Bolivians, was going to share in the profits.

Ten long years have passed and the capitalization process has nothing to show to justify its implementation. The reson d'etre, to reverse the economic crisis, was not achieved. The most conspicuous and easy to understand figure illustrating this is the official unemployment rate, which is around 8.5% currently. However, one has to look at underemployment, which is around 35%, and there is a gigantic informal sector, having all the ingredients of a shadow economy. There have been many scandals surrounding the capitalized enterprises and its efforts to become profitable companies. Bolivians are not richer; they are not employed; economic growth is weak at best; some of the former national enterprises are shut down now. The discontent among the population is palpable. The population just doesn't see the benefits of the capitalization.

A closer analysis of the economic progress, over time, might reveal something different. For example, foreign direct investment (FDI) in Bolivia, over the 1995-2001 period, discloses an average of 700 million dollars per year of FDI, with marked increases in 1998 and 1999 of over 1,000 million. GDP growth for the period 1990 to 2002 is an average of 2.7%, with some years reaching 4% annual growth. The National Statistics institute (INE) estimates for 2003 and 2004 are 2.9% and 3.2% GDP growth respectively. Bolivia exported at an annual rate of 6% from 1997 to 2002.

What these numbers highlight is some level of economic activity. If we compare these numbers to the 1980s period, they show a marked improvement. Of course, mainly because the 1980s was marred by hyperinflation and crisis after crisis. But, even if we compare them against other Latin American countries, the numbers have a respectable look. Additionally, part of the reason the country ended that vicious cycle of uncertainty and economic lassitude in the 1980s was the economic reforms instituted by the latter governments, including that of Sanchez de Lozada.

Although, I do not want to justify the capitalization process. God knows it would be a difficult task in light of its lackluster results. It is a fact that Bolivians are not better-off as a result of capitalization and some Bolivians are even worst-off (workers laid off, like miners). However, it is worth to emphasize the fact that the population had a very big role in hindering the possible benefits of those policies. Even though, it may have had some very good reasons for the disruptions.

If the government cannot fully implement its economic program and has to devote the bulk of the time in resolving social crises, then the policies do not have a chance to evolve. The endless, and very often unreasonable, demands, strikes, blockades, etc., from the different social sectors, greatly disrupts the government's ability to work. While Bolivia is in an endless state of crisis, no international investor wants or is even able (even if it wanted) to invest in the country. Uncertainty and a high level of government intervention in the private sector clogs the investment climate in a county.

I always have to think of the Bolivian Government as a confused man lying on the floor trying to get up. You just don't come to this man and start kicking and beating him in order to help him get to his feet. If you depend on this man, for once you might just wait until he is up and has regained his strength.