Bolivia’s Two Futures

By Alvino-Mario Fantini *

When Bolivia’s new president is sworn into office early next year—marking that country’s sixth change of government since 1997—he will face a monumental choice. The new president can choose to strengthen the partnerships forged in the 1990s with international firms to develop the country’s basic industries and services. Or, he can succumb to pressure from activists and re-write the contracts made with foreign investors—originally made at the invitation of the government itself—and virtually confiscate their investments.

What remains unclear, however, is the stake that Bolivians themselves have in this choice. For them—some of the poorest people in South America—the choice is really between two starkly different futures.

Recent Reforms

To understand these two possible futures, one must first understand Bolivia’s past. While real income from 1950 to 2000 rose by 75 percent in Argentina, 200 percent in Chile, and 350 percent in Brazil, people in Bolivia in 2000 earned 1 percent less than their grandparents did. But this record of stagnation began to change in 1990s, primarily through the government’s strategy of partnering with foreign firms. According to a recent World Bank report, “[t]he reforms were sustained and deep and they bore fruit initially with rapid economic stabilization and, subsequently, with growth that averaged 4.5 percent during 1994-98.”

The Bank says the government’s track record encouraged foreign investors to increase investment levels to a peak of 12 percent of GDP in 1998 from only 3 percent in 1995. The resulting economic growth reduced the official unemployment rate in the country’s principal cities to 4 percent in 1997 from over 10 percent in 1989, and contributed to a reduction of urban poverty to 46 percent in 1999 from 52 percent in 1993.

In addition, according to another World Bank document, social expenditures increased to 18.7 percent of GDP in 2001 from 2.5 percent in 1986. The share of the population with unmet basic needs also decreased—to 59 percent in 2001 from 86 percent in 1976.

Progress Thwarted

Unfortunately, the World Bank has also found that as a result of social unrest and political uncertainty, “Bolivia does not have the legal, regulatory, or institutional frameworks necessary to compete and prosper in the twenty-first century.”

Bolivia’s predicament is further heightened by the constraints of its history. The 19th century War of the Pacific left the country with no access to the sea and its people with a deep-seated grudge against Chile. Thus, failure to move forward recently with a Pacific LNG pipeline and natural gas liquification plant in Chile—one might call this a 21st century casualty of a 19th century conflict—has left Bolivia cut off from world gas markets and stuck with long-term negotiated prices (currently at a fraction of recent world prices) for gas deliveries to Brazil.

Not only has Bolivia prevented itself from capturing the “upside gains” of high world energy prices, but its haggling with Argentina last year during that country’s energy crisis has effectively consigned Bolivia to the role of short-term supplier of last resort—forfeiting the possibility of acting as the Southern Cone’s energy lynch-pin.

Foreign investors have certainly taken notice of these developments. Since 1999, the country’s private investment has declined sharply and GDP growth rate has averaged 2.2 percent. And as social unrest and political chaos have deepened over the last few years, poverty has risen once more above 65 percent and unemployment has increased to the double-digits.

Two Futures

What does the World Bank foresee if Bolivia continues to neglect its investment climate, renege on contracts and attack foreign capital? It concludes that Bolivia’s annual per capita growth rate during 2000-10 will likely plunge to a paltry 1.6 percent. Given the country’s 1.9 percent annual population growth rate, this is entirely insufficient to lower unemployment levels or make any real progress in poverty-reduction efforts.

In addition, Bolivia’s “outsider” status as the U.S. negotiates a Free Trade Agreement with Colombia, Ecuador and Peru may result in another lost opportunity. The World Bank calculates that Bolivia could stand to lose as much as $51 million in potential exports.

On the other hand, what would Bolivia stand to gain if it returned to a policy of attracting foreign capital and protecting foreign investments? The World Bank suggests that it would sustain a growth rate of 4.5-5 percent, which “could make a substantial dent in its poverty problems. Over 10 years, average real incomes would rise by 26 to 32 percent and, over 20 years, by 55 to 71 percent.” Thus, in ten years, the poverty rate could drop to nearly half of the country from roughly two-thirds of the country. In twenty years, it could drop to as little as one-third of the country.

Can such a modest miracle take place in a country with such a difficult history? The World Bank believes it can—but only if the Bolivian government reduces “the constant political instability, social disturbances and climate of uncertainty.” This means establishing the rule of law, honoring contracts and resolving disputes over foreign investment in a way “that would be widely perceived as fair both by Bolivians and international investors.”

Such a return to openness, reciprocity, stability and transparency would allow Bolivia to take advantage of its massive natural gas reserves, realize its regional energy ambitions and perhaps enjoy the fruits of a U.S.-Andean free trade agreement.

In short, the next Bolivian president faces two starkly different paths to the future. One would lead to something far better than anything the country has ever known. The other could produce consequences far worse than anything Bolivians have seen at any time during the 20th century.

* Alvino-Mario Fantini, a Bolivian-American journalist, worked in Bolivia for five years as a foreign correspondent and external affairs officer for an international development organization. A graduate of Dartmouth College, he has received Phillips Foundation and European Union journalism fellowships.

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