Bolivia - Current economic position and prospects

RESTRICTED Report No. WH- 199 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF BOLIVIA May 19, 1970 South America Department  CURRENCY EQUIVALENTS US$1 = 11.88 Bolivian pesos 1 Bolivian peso - US$0.084 1 million Bolivian pesos = US$84,175.00  TABTE OF COTTEYTS Page ITo. !,',A P BASIC DATA SUI.1APY AT'JD COTTCLUSIO1FS I. THE ECONONY AND ITS G-ROIWT SIQTCE 1952 Introduction ** ... . *** . * .... ....... ***** 1 Structural Change and Groth. 2 II. SECTORAT. PPOBKENS A1YD POLICY RMUIRPFNTTS Agriculture ****** ...........**.*.* .......... -.. .... 8 Obstacles to Development .....o............. 10 The IYeed for Agricultural Exports . 11 TIining .. ... .. *.*. fo.***..* .............. 13 PNinerals Development, Prospects and Strategy ... 16 The Fydrocarbons Industry ........... . .. .... 17 I4anufacturing ...... . ..... .. ... ..... .... * *... .... * 22 Education ..oooo ..............o.o ......... 25 Transport .... .... ... ....... .. . . ..... ... 27 III. DEV OPPT761\T STRATEGY ANTD PUBLIC I\TVEST"EN.T Development Strategy and Priorities ....... 00-00.. 33 Credit to Assist Private Investment ............... 35 Public Investment, 1970-74 ..oo .... .................... 36 Financing of Public Investment, 1970-74 .00- ..... 39 The Short-term Situation in Early 1970 * ........ 0. 143 Balance of Payments Outlook and Creditworthiness 44.. 44 A NOTE oT- DEVELOPNTE.NT PTANVING AND PUBLIC DTVESTFEaT PROGRAM1IG STATISTICAI APPENTDIX This report is based on a visit to Bolivia by a Bank NTission in August/ September 1969. The mission included the following individuals: Philip Glaessner, Chief; Harold Pilvin, Chief Economist; Thomas Burke, General Economist; Joseph Edwards, Livestock Advisor; Giulio Fossi, Planning Advisor, Raul Paraud, Highway Engineering Advisor; Carl-Heinz Tretner, Fiscal Advisor, IMF (Consultant); Andrew Freyman, Mining Advisor (Consultant); Alirio Parra, Petroleum Advisor (Consultant); 'Raymond Crotty, Chief Agricultural Advisor (Consultant); Ru_sell Bradley, Agronomist, FAO (Consultant); 'Roberto Lima-ITetto, Advisor, Credit Insti- tutions.  . .........~ ~ ~~~~~~~~~~~0 NE A~ I A. -~~~~~~~~ . ....  BASIC DATA Area 419,470 square miles Population (1968) 4.7 million Average annual rate of growth, 1963-68 2.6 percent Gross National Product at Market Prices (1968) $b9,389 million Average annual growth in real, GNP, 1961.-68 5.1 percent Per Capita GNP (1968) US$169 GDP at Market Prices by Industrial Origin (percent) 1963 1968 Agriculture 26 19 Mining 10 15 Manufacturing 14 16 Construction 4 6 Electric Power 1 1 Transport 8 7 General Government 7 8 Commerce and Other Services 30 28 Total 100 100 Average Average Saving and Investment as Percent of GNP 1963-64 1967-68 Gross Domestic Investment 15.2 16.4 Gross National Saving 8.7 10.7 External Saving 6.5 5.7 Central Government Finances 1968 1969 ($b millions) Capital Expenditures 127.5 128.2 Investment and capital transfers 100.8 79.9 External debt amortization 26.7 h8.3 Financing 127.5 128.2 Surplus/deficit on current account - 32.6 - 40.6 Domestic borrowing 106.7 121.0 External borrowing 53.4 h7.8  Balance of Payments 1967 1968 (US$ millionT_ Current Account _ 37.8 -53.1 Exports 155.2 157.1 Imports -151.8 -161.5 Other - 41.2 - 8.7 Amortization of Long-Term Debt - 15.5 - 10.4 Gross Capital Inflows 53.3 63.5 Private capital (long-term) 2.9 6.5 Official capital 46.4 64.7 Short-term capital, changes in reserves, errors and omissions 4.0 - 7.7 Commodity Composition of Exports (FOB) 1964 1968 (percent of total exports) Metals 94.7 78.9 Tin 69.6 51.6 Lead 4.2 2.9 Silver 5.3 6.3 Tungsten 1.1 5.4 Other 14.5 12.7 Agricultural Products 4.7 4.3 Petroleum 0.6 16.8 Total 100.0 100.0 Foreign Exchange Position Dec. 1967 Dec. 1968 July 1968 July 1969 (US$ million) Gross Reserves 38.2 46.7 46.3 54.8 Gross Liabilities 5.6 14.3 16.7 20.5 Net Reserves 32.6 32.4 29.6 34.3 IMF Position Dec. 1967 Dec. 1968 July 1968 July 1969 (US$ million) Quota 29.0 29.0 29.0 29.0 Drawings outstanding - 12.0 12.0 15.0 Outstanding Public Medium and Long-Term (including un- disbursed) External Debt Estimated September 30,1969 US$420.8 million  - iii - Debt Service Ratio: estimated 1969: 11 percent Exchange Rate US$1.00 = 1bll.88 Bank/IDA. Loans or Credits Fiscal Year Purpose US$ million IBRD 1970 Gas pipeline 23.3 IDA 1964 Power 5.0 IDA. 1964 Power 10.0 IDA 1967 Livestock 2.0 IDA 1969 Power 7.4 IDA. 1970 Livestock 1.h TOTAL 49.1  SUNvARY AND CONCLUSIONS 1. Bolivia's economic development has not been favored by its history, its politics or by its geography. The population has known oppression from the time of the Incas through the Spanish conquest to a more recent era when its miners eked out a meager and hazardous livelihood in mines owned by a handful of extremely wealthy men, or on the land in virtual serfdom to a few very large land owners. Over two-thirds of Bolivia's 4.7 million people live in rural areas. The incomes of most of the large agricultural population are well below the national average of around $150 per capita. The nation's miners comprise a second, far smaller segment of the population whose needs demand early attention. Some 56,000 men work in the mines on a full or part-time basis. The main problem facing the miners is not one of income levels; while low by inter- national standards, they are among the highest paid Bolivian workers. The overriding problem is one of health, safety and living conditions. 2. The 1952 revolution ended the serf-like status of the peasant and miner and abolished the extreme concentration of economic control in the hands of a small number of land and mine owners. Economic growth, the agrarian reform, the increase in communications, education and literacy, and the development of an extensive road network have all contributed to the increased participation of the rural poor in the market economy and in urban life. The revolution, however, also resulted in severe economic dislocation. By 1961 the country had largely emerged from this prolonged economic disruption. Subsequently, Bolivia enjoyed a period of consider- able growth until 1969, when political instability combined with increasing economic strains to slow the pace of development. 3. The economy's growth since the early 1960's, which amounted to an increase of about 5.7 percent annually in gross product, helped to alleviate a serious problem of unemployment and underemployment. The structure of the economy changed during this period of growth, as petro- leum, manufacturing and construction expanded sharply, while the economy's traditional basic industries, mining and especially agriculture, grew rather slowly. Considerable headway was made in the creation of a substan- tial infrastructure, including a road network, air transport and power and communication facilities. 4. The main factors contributing to this period of steady growth are rising private and public investments and a dynamic export sector. The confidence in the currency which prevailed for most of the period following the 1956 stabilization made possible also a prolonged period of exchange rate stability, even though domestic prices in Bolivia rose faster than in its main trading partner countries. Large inflows of foreign capital - mostly official and on concessional terms - helped to make possible the development of the economic infrastructure and the expansion of the country's productive capacity; this increase in capacity in turn placed Bolivia in a position to increase exports. Traditional exports - metallic minerals - as well as new ones, in particular petroleum, contributed to the growth in export earnings that helped to stimulate the economy, while providing strength to the currency.  - ii - 5. The vigor of the growith experienced during the past decade tended to obscure a number of serious problems, including a grossly inade- quate level of public saving and an increasingly distorted price structuie. An overriding problem has been the extent to which the finance of public investment has depended on external resources. The saving of the public sector in 1968, for example, financed only one-third of its capital forma- tion. Even with very large foreign borrowing, central bank credit has been extensively used in recent years to finance the deficits of the public sector. The financial and fiscal performance of the public enterprises and central Government have been seriously deficient. Al- though the increasing profitability of the national petroleum and mining enterprises enabled the public sector as a whole in 1968 to generate considerable savings, there is little doubt that the public enterprises and general government have a long way to go before they have exploited fully their potential for producing savings. Most of the public enterDrises and decentralized institutions would benefit from improved management; current pricing and production policies result in inadeauate contributions to fiscal revenues, or drains on the treasury. The central Government, for its part, has long delayed a much needed major tax reform which would help bring an end to its continuing deficits and, in time, produce some savings. 6. The problem of the deficient financial and fiscal efforts of the public sector came into increasingly sharp focus in 1969, a year which saw two changes in the presidency and in the Government's top administration, and the nationalization of Bolivian Gulf Oil Company. An economic austerity program was introduced to prevent prices from rising and to restrict capital flight. As concern over the viability of the exchange rate mounted, private investment activity declined. By late 1969, moreover, there was mounting concern over the growing dif- ficulties in mobilizing the public savings required to utilize external aid. Thus a climate of crisis was beginning to affect the country's growth momentum, hampering investment, the generation of private and public saving and even export prospects, as both petroleum and natural gas sales--the latter expected to commence in mid-1970--were interrupted as a consequence of the Gulf Oil nationalization. The Government fiscal problems and the lack of confidence had led to restrictions on credit to the private sector. In the face of the above difficulties there is little doubt that the economic slowdown of 1969 would have been even more serious had it not been for the continued strength in world metal markets. 7. In early 1970, it appeared doubtful that the Bolivian Govern- ment was in a Position to institute the major fiscal and financial reforms required to finance a public investment program on the scale outlined above and to permit the pricing system to perform its function in efficiently allocating resources. Notwithstanding this inability of the Government to undertake major reforms, some measures were taken and an improvement in the fiscal and balance of payments situation occurred in the first half of 1970. As a result of favorable prices, an increase in the value of exports--perhaps by US$ho million--appeared to be pos- sible, while a significant reduction in the overall deficit of the central Government and the achievement of a modest s'-:plus on current  - iii - account appeared to be attainable in 1970. Against this background of improved fiscal and balance of payments performance, Bolivia's short-run growth prospects around mid-1970 turned to a considerable extent on the question of settlement of the dispute surrounding the nationalization of the Bolivian Gulf Oil properties and resumption of the interrupted work on the natural gas pipeline project. The econormic importance of this issue resulted not only from its direct effect on capital inflows incomes and foreign exchange earnings, but also from the indirect effect which a settlement would have on business and foreign investor confi- dence. Given a continuation of strong metals markets and the Govern- ment's ability substantially to hold the line on wage increases, a settlement of the Gulf Oil question would provide the opportunity to move from a policy of credit restraint to one of providing a moderate stimulus to the economy. Such a short-term program aimed at promoting economic activity would--assuming that the overall fiscal deficit was kept to a reasonable level--allow for some expansion of credit to the private sector in real terms in 1970. These improvements in the short- run do not, howqever, in any way lessen the urgency for the Govemment to adopt the fundamental reforms which are a prerequisite to an optimum development effort. 8. Bolivia's long-term growth potential is substantial, but its realization requires a concerted attack on a number of pervasive prob- lems, including not only those of financial management, but also more deeply-rooted ones pertaining to productive skills, health and educa- tional standards and to the full incorporation of the rural Indian population into the national life. These are of necessity long-term problems, but only a full recognition of their complexity and importance will enable the Government and foreign lenders to make lasting contri- butions to Bolivia's development. Among the elements of a medium-term (say, five years) development strategy consistent with such a longer term vision are the following: a. A continued effort to raise rural living standards and bring more of the rural population into the market economy; this objec- tive should be pursued, in part through direct and selective efforts at raising productivity, in part through providing increased health and education services and in part indirectly as a consequence of a program to develop and increase agricultural exports from the lowlands. In view of the dependence of Bolivia's growth on the availability of imports, it is essential to expand export earnings and to maintain a substantial level of capital formation. The necessary increase in exports can only be achieved by substantial investments in the development of deposits of metallic minerals and hydrocarbons and by pursuing intensively the ex- pansion already underway of such promising agriculture export lines as the livestock industry. b. An expanded investment program; success in this objective will require substantial participation by both private and public sectors. It is clear that private investment in several areas, including agriculture, hydrocarbons, metallic minerals and manufacturing, will need to carry the main burden of development if these sectors are to  - iv - achieve their potential. For private funds, domestic and foreign, to come forth in the necessary volume, a satisfactory investment climate will have to be created. Moreover, the channeling of foreign capital and public loans funds into private agricultural, mining and industrial investment should be intensified. Government econamic policies, in- cluding those relating to prices will have to be reevaluated to insure that they do not act as disincentives to private investment. c. Public investment at a relatively high level; this should, in the next five years, be channeled increasingly into directly pro- ductive investment--especially investments to develop exports--and selected social and economic infrastructure, and less into road trans- port development than in the last few years. To define in detail the content of an adequate investment program, update it continually and ensure its execution, a considerable strengthening of the Government's planning and investment budgeting procedures is needed. 9. To reduce its dependence on foreign capital in the long run, while at the same time providing its population hopes for breaking out of its traditional poverty, Bolivia has no alternative to at least main- taining present investment ratios and gradually raising the share financed by domestic savings. Growing fiscal deficits are fundamentally inconsistent with the exploitation of Bolivia's growth potential. The investment and financing programs mapped out in this report would seem to provide a basis for an effective development program, but they are predicated on the assumption of a substantial fiscal effort. 10. If Bolivia adopts suitable economic policies, her economic performance should improve, provided that a climate of political sta- bility is maintained. The adoption of the required policy measures should place Bolivia in a position to adopt an investment program over the 1970-7h period that would, if implemented effectively, enable the economy to grow at a rate of about five percent annually. Such a program would, over the five years, include public investments of some $b5.8 billion (in 1969 prices), which would, together with private in- vestment, amount to around 16 percent of gross product. The financing of the proposed public investments would include $b3.2 billion (US$269 million) to be secured through external borrowing. In addition, the mission has proposed $b566 million (US$48 million) of foreign loans to finance private investment over the 1970-74 period. 11. The introduction of appropriate policies would make Bolivia's export prospects moderately favorable. However, the risks of shortfalls are substantial and as now seen, Bolivia's capacity to service foreign debt will, in all likelihood, remain severely limited, making it neces- sary to restrict most foreign borrowing to those sources that can pro- vide financing on concessional terms. It would, moreover, appear to be desirable for foreign lenders to continue to follow a policy of fi- nancing a portion of the local costs of public investment in cases where covering only foreign expenditures would not enable the foreign lenders to make a significant contribution to the project.  I. THE ECONOMY AND ITS GRCWITH SINCE 1952 Introduction 1. Bolivia's economic development has not been favored by its history, its politics or by its geography. The population has known oppression from the time of the Incas through the Spanish conquest to a more recent era when its miners eked out a meager and hazardous livelihood in mines owned by a handful of extremely wealthy men, or on the land in virtual serfdom to a few very large land owners. The isolation from trading partners imposed by a mountainous terrain that inhibited transport and communications was exacerbated by the loss of access to the Pacific in the 1879 war with Chile. This history bred a national disposition to regard foreign participation in the economy with some trepidation. Nor has the development of the country's economy been made easier by the extreme politi- cal instability that has characterized Bolivia since it gained independence in 1825. Short-lived governments have meant short-lived public adminis- trations with predictably unhappy results for the continuity and professional skill Twith which economic policy has been formulated and applied. Finally, the country's very difficult geography has greatly complicated the develop- ment task through fragmentation of the population and its resources, and the resulting high costs of transport and other basic services. 2. Nearly 70 percent of the population of 4.7 million -- more than half of which is Indian and does not speak Spanish -- inhabits the western high plateau, the Altiplano. The heaviest rural concentration is in the immediate vicinity of Lake Titicaca, which is characterized by a somewhat easier climate and growing conditions than the rest of the Altiplano. The past decade has seen a steady movement of the rural population to the towns and cities, with the result that while the total population has been increasing recently at about 2.6 percent annually, the urban and rural population have grown at annual rates of 3.5 and 2.2 percent, respectively. Nevertheless, over two-thirds of the country's population still live outside the cities, towns and mining centers and are dependent on agriculture. Their incomes, which are well below the national average of around $150 per capita, are far less than those of the miners, and among the lowest of any farm group of comparable size in Latin America. Traditionally and by necessity inward-oriented in small farm communities, the campesino's way of life and outlook has begun to change markedly. This has been due in large measure to the agrarian reform which followed the 1952 revolution and swept away a social organization that had reduced the peasant to a serf- like status in which economic opportunity was virtually unknown. The breaking of social barriers consequent on the reform and the development of an extensive road network have led to a rapid increase in the campe- sino's participation in the market economy and, perhaps more slowly, in Bolivia's urban culture. The peasant's agricultural surplus, previously the landlord's rent, is today marketed for his own benefit; he has migrated in large numbers to the more fertile valleys and lowlands, as well as to the cities; and he and his children are becoming literate  and educated both through marked increases in the nation's formal educational effort and through the influence of modern means of communi- cation, the press, the radio, and, beginning in 1969, television. Yet rural education is wholly inadequate and the campesino's level of living remains, with few exceptions, extremely depressed. One of the chief tasks facing present-day Bolivia is to improve its response to the challenge of aiding the peasant's own efforts to improve his lot, while facilitating his increased participation in the country's economic and cultural life. 3. The nation's miners comprise a second, far smaller segment of the population whose needs demand early attention. Some 56,000 men work in the mines on a full or part-time basis. The main difficulty facing the miners is not one of income levels; while low by international standards, they are among the highest paid Bolivian workers. The overriding problem is one of health, safety and living conditions. Safety precautions and control of dust are seriously deficient, resulting in high accident and fatality rates; silicosis, which is widespread, frequently leads to tuberculosis and often to the miner's death. Nearly half of the underground labor force suffers from respiratory diseases. Most peasants and miners, and the urban poor as well, suffer from primitive housing and health conditions and many from nutritional deficienty. There is a large and increasing hou2f 'ing dsficit; consumption of calories is estimated to be about three-fourtho of the nutri- tional requirement; health care is inadequate and the practice of abortion and infanticide are widespread. W;hile the econo,>ic gruJxth of recent years has pr-babiy prevented unemployment from growing rapidly, the h mndi'eds of thous-nds of unemp:loyed and under-employed, in both rural and urban areas, represent a continuing -- and perhaps growing -- source of social and political unrest. Structural Change and Growth 4. The main focus of this report is on the prospects for the future development of the Bolivian economy and on possible solutions to its key problems. Yet, it is important not to lose sight of tne fact noted above, that since the disruption and stagnation that followed the 1952 revolution -- and with it the aararian reform and nationalization of the large mines -- Bolivia has been engaged in a process of profound and continuing social change and economic tra;.sformation. In oril