October 01, 2014

The Bolivian Economic Model


It has been eight years in the making, but Bolivia has developed an economic model which the Morales government calls: The new economic, social, communal and productive model of development. It has taken this long because the government has basically been rewriting all the laws in Bolivia, and I am not exaggerating too much when I say this. If you want to get an idea of what I mean, take a look at this post of mine. Morales and his supporters call this effort the "re-foundation or re-establishment of Bolivia". To achieve that they needed to pass new legislation. Now, it is highly debatable whether the country has indeed been re-founded (if you ask me the government has been largely re-inventing the wheel), another thing is to say that the government has consequently been redrawing the State's structures and its basic foundations. So much, that the model has began to show shape in recent years. Part of that effort has been the implementation of an economic model of development, which has increasingly become a reality for most Bolivians. For that reason, this post aims at explaining what kind of a model it is.

To begin to understand what the government is trying to do, the fundamental question is what does social, communal and productive model of economic development means?

To start of, this model rests on two principles:
  1. a) reduction of poverty and 
  2. b) reduction of social inequality.

To follow up, those principles rest on several goals:
  1. the recovery of the natural resources ownership
  2. the recovery and the subsequent generation of income for the State
  3. the re-distribution of the State's income through distribution mechanisms
  4. the re-distribution of the State's income into other income and employment generating economic activity

Source: The Ministry of Economic and Public Finances

The Morales government has set itself a particular purpose to achieve, also with economic development. The Buen Vivir, which is translated as Living Well in English, has the aim of producing economic development by rejecting materialism and capitalism in favor of a dignified, healthy, well satisfied life in harmony with the community and the environment. At this point, I will leave this definition as it is, because it can be the material for another post or a book.

To reach its goal, the Morales government's economic model places the State at the center of economic activity. In fact, it would be fair to characterize it as "the" most important economic actor in such an economy. One, because it is the entity that "recovers" the natural resources from private hands and, in doing that, it also "recovers" State income, which otherwise would have been going to other places. This last statement means that large corporations or private companies which have been in charge of the exploitation and commercialization of Bolivian natural resources transfer the income generated by this activity to their central offices, wherever those may be. Second, the State oversees and plans the production and generation of income to then re-distribute it within the population to achieve a social goal.

In that vein, the State has a simple plan. As the most important economic actor in the economy, the State administers the income-generating nationalized companies so they can continue generating income, this time however, in favor of the state, and of course, as the dogma goes, in favor of the people. These companies, which the State calls strategic, have the necessary and only task of generating income. In Bolivia's case these are mainly the companies dealing with natural gas, oil and minerals.

With the income stemming from the strategic companies, the State has two main tasks. On the one side, as administrator of that income, the State designs mechanisms of distribution such as the mentioned subsidies of prices (gasoline prices, for example) and other things such as housing, social transfers (bonuses and rents), wage increases, and public investment. On the other side, and related to the last distribution mechanism mentioned, the State promotes the industrialization of the economy through the investment of financial funds on the creation of state-owned or state-sponsored industry (tourism, manufacturing of textiles, handicrafts, etc.).

However, the state is considered the only player in what the government calls a plural economy (that would be too communist, wouldn't it?). This means that, in addition to the state, there are other economic actors which may play a role in the economy. The most important of these is the private sector. However, while the private sector is welcomed to make joint investments with the State or even allowed to engage in enterprise by itself in some areas, the end results have to align with the State's political agenda and goals. This is however not to say the system is authoritarian in a sense that private enterprise cannot exist. The influence of the State is subtle and many times subversive. For example, if the government does not like what a large firm is doing in the country (e.g. the cement factory), it might just create its own firm and try to drive the private firm out of the market. Finally, other players might be communities, which may produce agricultural or handicraft goods and social cooperatives, which in Bolivia's case I take it to mean the production of agricultural goods.

The next question would be if that model can be observed in reality.

Source: The Ministry of Economic and Public Finances

Well, Bolivia receives income from the following sources:
  1. Public Enterprises (Strategic: to generate resources, transport, telecommunications, energy, hydrocarbons, mining; Social: to create employment, providing services, meeting non-satisfied demand, to intervene in the market to prevent distortions)
  2. Central Administration (national taxes SIN, international trade levies/tariffs AN)
  3. Decentralized Entities (institution that generate other types of income such as fees)
  4. Departmental Governments
  5. Municipal Governments
  6. Public Universities
  7. Social Security Institutions (selling goods and services)
  8. Financial Institutions (selling goods and services)

From those, 50 per cent and 35 per cent of the State's income is generated by the public enterprises (i.e. the selling of natural gas and, in less capacity, minerals) and the collection of taxes and tariffs by the central government.

However, as I mentioned before, the Morales government is working hard in implementing its model of economic development. Here is how:

Here is a list of public enterprises divided into strategic and non-strategic categories:

  • Empresa Siderurgica Mutun (mining)
  • Empresa Minera Huanuni (mining)
  • YPFB (petrol or oil)
  • COMIBOL (mining)
  • Empresa Metalurgica VINTO (mining)
  • ENTEL (telecommunications)
  • Transporte Aereo Militar (transport, mainly cargo)
  • Empresa Boliviana de Industrializacion de Hidrocarburos (natural gras)
  • EPSAS (water and sanitation)
  • Empresa de Apoyo a la Produccion de Alimentos (sells commestibles)

  • Empresa Naviera de Bolivia (transport)
  • Boliviana de Aviacion (transport)
  • Corporacion de las Fuerzas Armadas para el Desarrollo Nacional (infrastructure)
  • Cartonbol (carton)
  • Empresa Boliviana de Almendras y Derivados (almonds and related goods)
  • Complejo Agroindustrial Buena Vista (agriculture)
  • Lacteosbol (milk)
  • Papelbol (paper)
  • Empresa de Comercializacion de materia prima, insumos, equipos de trabajo (commercialization of raw material and capital goods)
  • Empresa Nacional de Electricidad (electricity)
  • Empresa de Cemento Boliviano (concrete)
  • Depositos Aduaneros Bolivianos (customs)
  • Azucarbol (sugar)
  • Empresa de Correos de Bolivia (mail)
  • Agencia Boliviana Espacial (space, such as satellites)
  • Servicio de Aeropuertos Bolivianos (airports)
  • Bolivia TV (television)

Now, before you get impressed with the number of industries and industry-promoting agencies listed here, you have to know that this is a comprehensive list of all the government has been and still wants to do. Many of those mentioned companies or entities exist only in paper and many already exist but are not operating yet and still, others are already operating, but either at a loss or are in the early stages and others are already bringing benefits (at least to the government, as in the case of Bolivia TV).

In light of what has been happening and the real possibility that Morales will be re-elected this October 12, the possibility that this model will be fully implemented is very high. However, there are several things that come to my mind when I think about this.

The first though in my mind seriously questions the reliance of economic growth on a few nationalized companies. While I agree the money has to come from somewhere, it might as well come from those nationalized companies, which at the same time forces me to seriously think about the role nationalizations can play in such contexts, however to rely on basically the production and sell of one product seems to me crazy. Not just me, but many others have been expressing their anticipation of how will things turn out for Bolivia when the prices of natural gas take a turn down on international markets. This skepticism is specially relevant when we consider that 50 per cent of Bolivia's income is generated by the sell of natural gas to Brazil and Argentina. An alternative would be, for me, to classify a few other capital-intensive sectors as strategic and invest in them with special attention so as to diversify the risk. I would consider perhaps the industrialization of lithium, the production or assemblage of electronic goods or even the manufacturing of textiles (El Alto had a very lively textile sector until recently).

The second thought, and countering the pessimism of the first one, I cannot help of thinking the government is perhaps just doing that, namely industrializing. I think this when I look at the list of efforts enumerated above. Many of these efforts are in the manufacture sector and many in the industry sector. The only fear is, and with this coming back to the critical side of my argument, if whether the decisions to create factories, assembly lines, refineries, transport companies, etc., are all of many of them based on political consideration rather than economic ones. By that I mean, for example, if the decision to construct and launch a communications satellite has not been based on the intentions to improve Bolivia's profile in the world and not on the necessity of a satellite because the internal market was needing such an investment. Similarly, if the construction of a refinery or a separation of liquids plant in such and such part of the country has not been decided because of the local constituencies and the fact that such plants were far away from any distribution net were neglected in the decision process. In fact, these things have been happening in the implementation of the Bolivian economic model.

Finally, I also have to think about the deficiencies the model might have. For example, the central role of the government seems to me on the wrong side of the development path. In my opinion, such a centrality of the government's role is bound to hamper growth rather than stimulate it, in the end. This not only in light of the crowding out effects economists like to cite but simple mechanisms of the markets. If the government, due to political decisions, either subsidizes to a large extent prices, this distorts the functioning of the markets. Demand does not meet supply anymore and the mechanism does not function. But, leaving aside, economic arguments, which I am convinced are very important, I can convincingly say that if the government seeks to undermine a rival through the creation of a competing firm to take it out of the market, I suggest this will not be in the interest of the country. Once again, the heavy reliance on one sector seems to me not to be sustainable. I think I don't need to hammer this nail any more that what I have done. To end on a positive note, I have to think on the social transfers the model prescribes. I think they are necessary, so long they are kept under control. The social transfers the Morales government has implemented has directly reached many people who otherwise had not had the chance to bust their income like that. These transfers have to some degree contributed to reduced indigent poverty in Bolivia.

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