Bolivia and the IMF
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Reinvigorating Growth in Bolivia
1. It is indeed a pleasure to be here in Santa Cruz de la Sierra—the thriving economic center of Bolivia. This is my first time in Bolivia, and I am grateful to have the opportunity to meet so many influential opinion-makers and exchange views on Bolivia's stabilization and reform efforts aimed at reinvigorating growth.
2. It is also a great pleasure to be meeting under the auspices of Camara de Industria, Comercio y Servicios de Santa Cruz (CAINCO). Through these conferences, and in many other ways, CAINCO is playing a vital role in promoting the national dialogue on economic policies in Bolivia, and today's theme of productive growth and poverty reduction is clearly central to the concerns of all of us interested in promoting Bolivia's long-term development.
3. The IMF is deeply committed to working with Bolivia and helping it achieve its clear potential and reduce its persistently high poverty and inequalities. Exactly ten days ago, the IMF's Board completed the first review of Bolivia's stand-by arrangement, recognizing the good progress that has been made in recent months to stabilize Bolivia's macroeconomic situation after the turbulence of earlier this year. We are also continuing to work hard with other members of the international community to help the Bolivian government put together a longer-term economic program, which could be supported by our Poverty Reduction and Growth Facility.
4. In my presentation today, I would first like to begin with a short retrospective, to remind ourselves of the achievements made in Bolivia's early reform efforts centered around ending hyper inflation in the mid-1980s, and the subsequent course of the economy. I will then discuss the reasons why economic performance has lagged in the most recent period. Finally I will draw some lessons for what I believe are the key tasks that now lie ahead to reduce vulnerabilities and put Bolivia firmly back on a high growth track.
Bolivia's Early Macroeconomic Stabilization
5. Bolivia's historic macroeconomic stabilization starting in 1985 was aimed at abruptly ending its hyper inflation, and was supported by a stand-by arrangement with the Fund. The process of macroeconomic stabilization generally continued over the next decade in a successful way. Consider the important changes in the macroeconomic situation during the period:
· The rate of inflation was brought down from its peak of over 23,000 in September 1985 to 18 percent in 1990 and has been maintained in single digits since 1995.
· Growth averaged well over 4 percent a year from 1990 to 1997, after contracting by a cumulative 10 percent in the first half of the 1980s.
· External debt was lowered from its peak of about 100 percent of GDP to under 50 percent.
· Current account deficits remained quite sizable, but were financed largely by foreign direct investment in export earning projects and infrastructure, allowing gross reserves to be quickly rebuilt from the very low levels reached in 1985.
6. These major achievements were based on strong macroeconomic policies and a bold set of structural reforms, in the context of much greater political stability.
7. The ending of hyper-inflation in 1985 was dramatic, indeed one of the early and most enduring examples of the shock approach to inflation control.1 Unlike other countries that generally relied on an exchange rate anchor or quantitative monetary targets, the lynch-pin of Bolivia's achievement was fiscal correction—aimed at eliminating inflationary financing of the budget from the central bank. Accordingly, through strict control of the wage bill and other measures, the public sector deficit was reduced from almost 30 percent of GDP in 1984 to around 4 percent in 1986, and for the next decade was maintained at levels that could be financed by concessional external financing. The unification of exchange rates was another key plank of the stabilization package and also helped improve the competitive position of Bolivia.
8. Supporting the tightening of macroeconomic policies were important structural reforms to reduce the extensive state intervention in the economy that had built up between 1952 and 1985 and strengthen social support:
· The passage of mining, hydrocarbons and investment laws permitted joint ventures in these sectors and encouraged heavy foreign direct investment. Particularly notable has been foreign involvement in hydrocarbons, responsible for the Brazil gas pipeline that is now Bolivia's largest export earner, and the source of a substantial part of Bolivia's growth in recent years.
· Bolivia has been in the lead of efforts in Latin America to transform the role of the public sector by moving six of the largest public enterprises to private ownership and control, thus stemming the drain on the public finances, raising funds to support the poor, and creating opportunities for private investment and growth.
· Private enterprise has also been encouraged by lifting price controls, and by systematic trade liberalization that has given Bolivia one of the most open trade regimes in Latin America.
· Institutional reforms included establishing an independent central bank and privatizing state-owned banks.
9. As a result, social indicators saw major advances over this period, especially in halving child mortality, improving the quality and reach of primary education, and strengthening old-age security for Bolivians through pension reform.
10. It is important to highlight that these economic and social advances were underpinned by greater political stability, providing another key lesson of the importance of political stability for growth. Between 1964 and 1985, Bolivia had 20 governments and even more economic teams. Since 1985, however, Bolivia has achieved a return to democracy, with regular and peaceful changes in government, which has made for generally greater continuity in policy implementation. Moreover, the successful campaign to control coca production has helped to control a major source of corruption that threatened to undermine governance and the open political system.
Recent Economic performance
11. Against this promising background, it is especially disappointing that economic performance over the past five years has been very weak, resulting also in reversals of social progress. We need to better understand the reasons for this deterioration.
· Per capita real income has fallen over this period, and Bolivia's real GDP per capita now stands at about US$900, one of the lowest in South America. It is not surprising, therefore, that open unemployment has risen in the last four years to 8½ percent by end-2002; and about half of the labor force is underemployed.
· Underlying the weaker economic performance have been sharp declines in domestic investment and savings, both of which have fallen by as much as a third since 1998. Public savings turned negative last year. The marked decline in private savings and investment had its counterpart in a significant weakening of the capital account of the balance of payments.
· Other external indicators also deteriorated over this period. Bolivia's export share has not risen commensurately with the openness of its trade regime, and there has been growing dependence on regional markets—especially Brazil—while Bolivia's market share in industrialized countries has fallen.
· As a result of reduced growth and renewed financial pressures, the progress made in reducing poverty during the early part of the 1990s (especially in the larger cities) has come under serious strain. Two-thirds of Bolivia's population are now estimated to be below the poverty line, with more than a third in extreme poverty—especially affecting the indigenous people and rural women.
12. In part, this weak performance has reflected the impact of a less favorable external environment and domestic and external shocks. Bolivia's terms of trade have been volatile, and agricultural exports have been affected by weak international prices. Moreover, global growth has been weak since 2000, and many countries in Latin America have been affected by higher risk spreads as well as slower growth in export markets for much of this period.
13. However, there have been rising homegrown weaknesses that have probably played the major part in explaining the weak performance of Bolivia's economy since 1998. In a number of important areas, macroeconomic vulnerabilities were allowed to linger and reemerge, and the reform agenda was left incomplete—leaving the economy ill-prepared to deal with domestic and external shocks.
14. Among the rising macroeconomic vulnerabilities have been the following:
· The public finances deteriorated seriously again. Efforts to establish a modern tax system and control spending weakened, making it more difficult to preserve sound public finances in the face of a slowing economy. The fiscal deficit was allowed to rise, reaching 9 percent of GDP in 2002, partly reflecting rising pension costs. As a result, nonfinancial public sector debt has increased to over 60 percent of GDP, despite the enhanced HIPC debt relief, reflecting large recourse by the public sector to domestic financing on market terms and a substantial increase in nonconcessional foreign borrowing.
· Too great a reliance was placed on a crawling peg exchange rate regime as a nominal anchor for the system, reducing Bolivia's room for maneuver in the face of external shocks—especially the realignment of key regional currencies.
· Several years of financial disintermediation and economic stagnation have added to vulnerabilities in a highly dollarized financial system and deteriorating corporate and household balance sheets. Nonperforming loans have risen to at least 20 percent. Banks' loan portfolios have been declining for several years, the deposit base has shown greater instability over the past year, and banks' balance sheets are concentrated on a small base of clients.
15. Key structural and institutional reforms were not carried forward forcefully:
· Bolivia has continued to have one of the most inflexible labor market regimes in Latin America, discouraging employment in the formal sector.
· Not enough was done to establish alternative sources of income for the farmers affected by coca eradication schemes.
· Fiscal decentralization was advanced, placing more resources in the hands of municipal governments, but was not uniformly accompanied by a strengthening of local institutional capacity.
· The efficiency of health care and education spending has declined, with evidence of some reversals in key primary school enrollment indicators. Effectively addressing this issue will require strengthening institutional capacity at the local government level.
· Governance and competitiveness issues have also detracted from the private investment that is needed to sustain growth. Thus, Bolivia ranks amongst the lowest of countries in the 2002 Global Competitiveness Report, and in the rankings put forward by Transparency International. In addition, recent studies have pointed out that the costs and complexities of new business start-ups in Bolivia are among the highest in the region.
16. Perhaps most worrying of all, Bolivia's poor economic performance in recent years has contributed to social and political fragmentation. A growing disenchantment with the traditional parties and reform fatigue—reflected in several episodes of social unrest—have weakened the ability to implement fiscal adjustment policies and economic reforms.
Meeting The Challenges Ahead
17. Against this background, the Bolivian government is developing a new strategy to reinvigorate growth with improved equity. A substantial body of research confirms that the key to rapid poverty reduction is high and sustained economic growth. Thus, at a minimum, Bolivia should aim at raising growth back to 4 percent per year but, given the high rate of population increase, an even more ambitious objective would be needed to rapidly reduce the number of the poor. This may sound like a tall order but many countries have shown that, by consistently pursuing the right mix of economic and social policies, it is possible to grow at even higher rates. Bolivia has the natural and human resources to achieve such a goal, based on an ambitious policy framework and continuing support from the international community. The challenge is to identify the right mix and sequencing of policies so that a virtuous circle can be created which generates popular support for further reforms.
18. What then are the key elements of the growth strategy being developed by the government? The core components are restoring macroeconomic stability through fiscal consolidation; reducing macroeconomic vulnerabilities by strengthening the banking and corporate sectors; pressing ahead with market reforms in an improved institutional environment; increasing and making more efficient social spending; and effectively using Bolivia's natural resources. Let me make a few remarks in these areas and on the need to develop a strong domestic consensus for their success.
19. Fiscal consolidation consistent with putting the public finances back on a sustainable footing must be the bedrock of any medium-term growth strategy. Achieving this objective will foster a virtuous circle of growth by restoring a stable macroeconomic framework, providing the confidence needed for investment, and raising national savings to make available more resources for the private sector.
20. The 2003 budget has begun a phased reduction in the fiscal deficit consistent with these objectives. The program relies on a balanced package of measures, introduction of a new tax procedures code, collection of tax arrears, and control of low-priority public spending. Looking beyond 2003, the government will need to continue the consolidation effort, relying on an equitable and efficient tax reform to increase revenue buoyancy. The quality and composition of public spending will need to be improved through improved prioritization and better tracking, including at the local government level. Social spending will need to be protected and increased, especially on education and healthcare crucial for human capital development and poverty alleviation, and pension costs better controlled.
21. A well coordinated strategy to strengthen the corporate and banking sectors will help to ensure financial system stability and contribute to restoring economic growth by restarting domestic credit flows and strengthening corporate cash flows. The aim must be to squarely tackle corporate and financial balance sheet problems, while minimizing the risk of moral hazard and avoiding public bailouts that cannot be afforded. Building on experience in Asia and elsewhere, this can be achieved based on a modernized legal framework for bankruptcy and out-of-court workouts, while limiting government involvement and maintaining the highest standards of accountability and transparency.
22. The government has already taken a number of actions to put in place such a framework, including: the appointment of a high level management committee responsible for the overall strategy; developing legislation for voluntary, out-of-court corporate restructurings; and strengthening of the regulatory framework for the banking sector.
23. In parallel with these efforts, the government is also developing a strategy to deal with problems created by the high dollarization of the economy. A gradual and voluntary process aimed at promoting the use of the domestic currency would provide more scope for flexible exchange rate management and reduce balance sheet vulnerabilities. However, this process cannot occur overnight—it will depend on sustained prudent macroeconomic management to build confidence in the domestic currency, and on putting in place a regulatory framework that more directly recognizes the higher risks associated with dollar-based financial intermediation.
24. On the structural reform front, I would specially emphasize reforms that help ensure that the poor and less advantaged also benefit from growth. Enhanced rural development schemes are particularly important, especially to help absorb the social costs of the coca eradication program. Land access and property rights are also essential to attract investment and to improve conditions in rural areas. Similarly, attention will need to be paid to enable the poorer regions of the country accrue the benefits from international trade. Labor market reforms are crucial to encourage job creation.
25. While this is a daunting agenda, Bolivia also has a trump card, its abundant natural gas resources. The pipeline to Brazil has already played an important role in sustaining the economy in recent years, and it is now vital that a far-sighted approach is taken to developing the potential for exports of liquefied natural gas to the lucrative US export market. There is now a real window of opportunity to embark on a major project that could transform Bolivia's long-term economic prospects.
26. The government will soon be fully engaged in the National Dialogue effort to develop the medium-term structural reforms that could serve as the basis for a new poverty reduction strategy. The participatory approach is necessary to build broad popular support for the government's economic reforms and stabilization measures, and a special effort needs to be made to draw in the weaker sections of the community, specially women and the indigenous people. For this approach to be successful, it will be important to build consensus for an approach that is open and fair, creating opportunities for all Bolivians and paying particular attention to the needs of the majority of the country who are still desperately poor.
27. Ladies and Gentlemen, let me conclude by saying that I am optimistic about Bolivia's future. However, I should inject a note of caution. A lesson from the experience of other countries is the need for patience, as it typically takes several years after the start of a reform program before sustained growth sets in. In Bolivia, it augurs well that the government is committed to structural reforms to address the key constraints to growth and the efficient exploitation of Bolivia's vast reserves of gas and oil, which are the keys to realizing Bolivia's medium term prospects for growth and a viable balance of payments. The stabilization supported by the present stand-by arrangement with the Fund is a good start, and will need to be sustained and strengthened to make the economy more resilient, notably by placing the public finances on a solid footing. Finally, there is an urgent need to address issues of social equity and governance in order to underpin popular support for the reform process. Thank you.
1 A good account of how Bolivia succeeded in quickly halting hyperinflation is provided by Juan-Antonio Morales in "Inflation Stabilization in Bolivia," in Inflation Stabilization: The Experience of Israel, Argentina, Brazil, Bolivia, and Mexico, edited by Michael Bruno et al., Cambridge, Mass.: MIT Press, 1988.
IMF EXTERNAL RELATIONS DEPARTMENT