Bolivian president Evo Morales began his second year in office on a high note, successfully renegotiating another hydrocarbon contract – this one with Brazil – and basking in some of the best macroeconomic numbers that the country has seen in decades. A mid-February poll in the country’s largest cities put his support at a healthy 65%, up a full 15 points from four months ago. Compared to past figures, the Bolivian economy is booming. Gross domestic product (GDP) grew by nearly 5%, inflation is negligible, export earnings jumped, and the government recorded a fiscal surplus for the first time in 36 years.
Overall tax collection was up 40% in 2006 compared to the previous year. “The principal achievement last year was the fiscal surplus, which was 5.2% of GDP. It is the first surplus since 1970 and the largest in more than 50 years. This is historic and cannot be overlooked,” finance minister Luis Arce tells Emerging Markets in an exclusive interview. Nationalization of the hydrocarbon sector on May 1, 2006 has not scared off foreign investors as first believed, with Bolivia recording a net transfer of approximately $170 million in foreign direct investment. The Morales government defied critics by successfully negotiating a 48% increase in the price of gas it sells to Argentina to $5 per million BTUs, last June. A similar agreement was negotiated with Brazil in mid-February.
The Brazilian deal will generate for Bolivia an additional $50 million to $150 million annually, depending on whether the statistics come from the Brazilians or the Bolivians, respectively. There are also indications that foreign companies, particularly from Brazil, might be willing to pump more than $1 billion into a new petrochemical industry. “The significance of the government’s energy reform cannot be over-emphasized,” says Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington. “Increased revenue will allow the government to pursue plans to accelerate economic growth.” Morales’ new promise to “nationalize” the mining industry – he uses the term nationalize when referring to a plan to increase taxes – has not provoked a huge outcry from large-scale mining companies.
Big companies recognize that the $45 million the sector paid in taxes in 2006 on more than $1 billion in exports is artificially low and can be negotiated up. The mining ministry reported that it would like to see a new taxing system that generates at least $300 million annually for the state. “We are learning to live with rumours about negative impact, but the opposite has occurred. We have consolidated our macroeconomic numbers, which provides stability and is the strongest signal to foreign investors,” says Arce. In addition to internal management and the windfall from record-setting prices for raw materials, such as natural gas, Bolivia has already benefited from debt cancellations from the World Bank and International Monetary Fund, and most recently from the Inter-American Development Bank (IDB), which is forgiving more than $1 billion in debt.
Public debt has dropped from 71% of GDP to 7%, freeing up money to use for social programmes. While these elements have helped Morales get off to a good start in year two of his five-year term, he faces a series of political and economic challenges that could make 2007 a difficult year.
Social unrest
Bolivia’s political and social conditions remain extremely precarious, and Morales has had to deal with a growing number of social conflicts. There have been serious confrontations with peasants growing coca, the raw material used to make cocaine, small-scale miners and unions. Several of these conflicts ended up with multiple deaths and the government rushing in to find solutions. Henry Oporto, a political scientist and former deputy planning minister, says Morales is having to deal with many of the same forces that brought down his predecessors, Gonzalo Sanchez de Lozada, in 2003, and Carlos Mesa, in 2005.
In this last case, the social forces agitating against the government formed the base that led to Morales’ big victory in late 2005. “I believe that we are going to see intense conflicts that will create more instability. There will be a jump in social conflicts originating in the grassroots sectors that are the government’s normal support system,” says Oporto. As an example, he cited the recent march on La Paz, the administrative capital, by small-scale miners protesting the government’s plans to increase taxes on mining companies. The 20,000-strong demonstration forced the government to change its position, announcing that taxes on mining would increase, but only for medium-sized and large-scale operations.
The small-scale contract miners, known as cooperativistas, represent about 18% of mining production. The government recognizes that it needs to begin meeting social demands – one of the reasons for the 2006 fiscal surplus was a tight grip on spending – and Arce says government spending will nearly double this year, topping $1 billion. “We are going to increase public investment to attend to needs that have long gone unmet. Spending will be directed at infrastructure, education, healthcare and production.
This means that we will have a fiscal deficit this year of around 2.5%,” says Arce. He says that increased public spending will be one of the arms the government will use to lower unemployment. The other is the Productive Development Bank (Banco de Desarrollo Productivo), which was formally created by decree on January 1, 2007. This second-tier bank will channel long-term, low-interest funds to the productive sector, primarily micro-enterprises and small businesses.
Fighting poverty
The government also has plans for an aggressive programme to begin attacking the poverty that affects 65% of the country’s eight million people. The government has created a new Social Protection Unit, which will coordinate all the programmes that directly fight poverty, and it is launching a project called Communities in Action. This project will identify capacities in poor communities and then inject capital and technology to capitalize on them. It includes sending technocrats to live in the communities to guarantee that technology and know-how are adequately transferred. “It is like an incubator. We are going to tap into the existing potential of communities, improve conditions and then watch them take off,” says Arce.
Increased spending may keep grassroots groups at bay, but it is not going to resolve the other major political problem, which is the simmering division between eastern and western Bolivia, as well as Morales’ open confrontation with the prefects in the western departments: Beni, Pando, Santa Cruz and Tarija, collectively known as the “half moon” region. These departments have been pressing for greater autonomy since before Morales took office. The most serious challenge so far has not come from the half moon departments, but from Cochabamba, which is Morales’ home base and located at the crossroads between the lowland and wealthier east and the highland and poorer west. Cochabamba prefect Manfred Reyes announced in December that he would call a referendum on autonomy, sparking a crisis with pro-government forces that led to weeks of violent protests.
There were serious concerns for a brief period of time that the situation could spread and possibly lead to civil war. Tensions have subsided, but the problem has not gone away. Minister Arce says dealing with the autonomy issue, particularly how income is divided between the central, departmental and local governments, is one of the administration’s most pressing matters. “We have a pending task in Bolivia, which is reassigning resources between the national government and sub-national levels. We need to find adequate means for distribution and defining responsibilities,” he says. The problem is more complicated than simply redistributing resources.
The increasing income from hydrocarbons, and the potential of more money from mining, is increasing demands for the spoils. President Morales’ claim that his gas and oil policies will generate $4 billion annually – overall exports in 2006 were $3.6 billion – for the state by 2010 has different sectors already planning what they will do with the windfall. “Everyone in Bolivia has disproportionate ideas on how they are going to benefit from the sale of gas, as if it were a panacea for all the country’s ills,” says Oporto. “Everyone wants a bigger slice of the pie without understanding what the pie is.”
ATPDEA
One concern shared by the government and its opponents is the economic impact on Bolivia if the United States were to eliminate the preferential tariffs the country enjoys under the Andean Trade Promotion and Drug Eradication Act (ATPDEA), which allows Bolivia, Colombia, Ecuador and Peru to send more than 6,000 products to the United States tariff free. ATPDEA was set to expire on December 31, 2006, but was prolonged at the last minute by the US Congress for six months, with another six-month extension possible.
Deputy trade minister Pablo Rabczuk predicts that Bolivia will lose 40,000 jobs and $222 million in export earnings if ATPDEA is not extended. A team of Bolivian authorities, including Minister Arce, travelled to Washington in late February to discuss trade preference with US lawmakers. Arce says Bolivia’s idea is not to lobby for extension of ATPDEA per se, but to propose a plan for trade “that respects the differences between the productive forces of the two countries. We cannot have a traditional free-trade agreement with the United States, because the enormous asymmetries between our economies would be suicidal for us.”