Report No. 32233-BO Bolivia CountryEconomicMemorandum Policies to Improve Growth and Employment October 31, 2005 Poverty Reduction and Economic Management Unit Bolivia-Ecuador-Peru-Venezuela Country Management Unit LatinAmerica and the Caribbean Region Document of the World Bank BOLIVIA:COUNTRY ECONOMICMEMORANDUM POLICIES TOIMPROVE AND EMPLOYMENT GROWTH TABLE OF CONTENTS Acknowledgements Executive Summary ....................................................................................................................................... i Economic and Political Background......................................................................................................... i Growth and its Determinants ................................................................................................................... .. Trade, Trade Policies, and Institutions .................................................................................................... v Investment, Productivity, and Competitiveness...................................................................................... . . ii iv Policies for Growth, Employment, and PovertyReduction.................................................................... vi Chapter 1 Introduction............................................................................................................................. 1 1.1 Refoms and Results.................................................................................................................... 1 1.1.1 Economic Reforms in the 1990s.......................................................................................... 2 1.1.2 Shocks. Economic Management. and Employment............................................................. 1.2 LookingForward-Next Steps for Increasing Investment, Productivity, and Growth.............11 5 Chapter 2 Growth and its Determinants................................................................................................. 13 2.1 GrowthRegressions................................................................................................................... 14 2.2 Constraints to Growth................................................................................................................ 15 2.2.1 The Binding Constraint-Politicalocial Instability ....................................................... 16 2.2.2 Other Constraints.............................................................................................................. 17 2.2.3 2.3 Recommendations ..................................................................................................................... Parameters........................................................................................................................ 17 18 Chapter 3 Investment, Productivity, and Competitiveness .................................................................... 19 3.1 Productivity, Investment, and Growth....................................................................................... 19 3.1.1 Sectorial Differences in Productivity................................................................................ 22 3.1.2 Productivity. Firm Size, and Informality .......................................................................... 23 3.2 Investment Climate.................................................................................................................... 24 3.2.1 Macroeconomic Policy Environment................................................................................ 24 3.2.2 Property Rights. the Rule of Law. and the Enforcement of Contracts.............................. 25 3.2.3 TheRegulatory Environment ............................................................................................ 26 3.2.4 Economic Infrastructure ................................................................................................... 28 3.2.5 Taxes and TaxAdministration .......................................................................................... 30 3.2.6 Labor Legislation and Rules............................................................................................. 31 3.2.7 Credit Availability and Pricing......................................................................................... 3.3 Competitiveness......................................................................................................................... 33 .. 32 3.3.1 General Considerations .................................................................................................... 33 3.3.2 International Comparisons ............................................................................................... 34 3.3.3 Cadenas Productivas: Clustersfor Improving Competitiveness...................................... 36 3.4 Recommendations .................................................................................................................... -39 Chapter 4 Trade, Trade Policy, and Institutions .................................................................................... 43 4.1 Introduction ............................................................................................................................... 43 4.2 Trade patterns ............................................................................................................................ 43 4.2.1 Exports .............................................................................................................................. 44 4.2.2 Imports .............................................................................................................................. 49 4.3 Trade Policy and Reforms ........................................................................................................ -50 4.3.1 Tarifls and Customs Revenue............................................................................................ 50 4.3.2 Non-tarifSMeasures.......................................................................................................... 51 4.3.3 Export Policies.................................................................................................................. 52 4.3.4 Preferential Agreements ................................................................................................... 54 4.4 Projectingthe Impacts of Current Trade Negotiations .............................................................. 55 4.4.1 The Doha Round ............................................................................................................... 55 4.4.2 Andean-Mercosur Agreement ........................................................................................... 56 4.4.3 56 4.5 Trade Institutions....................................................................................................................... 58 US-Andean Free TradeArea ............................................................................................ 4.5.1 Export Promotion since 1985........................................................................................... 58 4.5.2 Current TradeInstitutions ................................................................................................ 59 4.5.3 TheNew CustomsAdministration (ANB).......................................................................... 60 4.5.4 Technical Regulations and Voluntary Quality Standards................................................. 62 4.6 Conclusions and Recommendations.......................................................................................... 62 4.6.1 Recommendations............................................................................................................. Trade Diagnostic: Vision. Priorities and Reality ............................................................. 62 . 4.6.2 63 References................................................................................................................................................... 65 Annexes....................................................................................................................................................... 71 Annex 1.1: SelectedEconomic Indicators, 1990-2004 ......................................................................... 73 Annex 1.2: Consolidated Public Sector Accounts ................................................................................. 74 Annex 1.3: Government Reforms, 1994-97-Follow-up on the 1994 CEM ........................................ 75 Annex 1.4: Principal Internal and External Shocks 1998-2003 ............................................................ 79 Annex 1.5: Debt Sustainability Analysis ................................................................................................ 81 Annex 2.1: Growth Diagnosticsand the BindingConstraints to Growth.............................................. 86 Annex 3.1: Background Material on Productivity and Investment ..................................................... 105 Annex 3.2: Status of Investment Climate Assessment Recommendations.......................................... 112 Annex 4.1 Mejorandola Calidad y 10s Estandaresde 10s Productos de Exportacih ......................... 119 Map ..................................................................................................................................... inside back cover FIGURES Figure 1.1: Public Expenditures.................................................................................................................... 7 Figure 1.2: Average RealLabor Income" ..................................................................................................... 7 Figure 1.3: RealExchange Rate Index.,........................................................................................................ 7 Figure 1.4: Employment by Sectors............................................................................................................ 10 Figure .1.5. Unemployment and Self-employment Rates* ......................................................................... 11 11 Figure 2.1: Real Growth Rate of GDP per Capita and its Permanent Component ..................................... Figure .1.6: Formal Privateand Public Employment Indices" ................................................................... 14 Figure 3.1: Informality................................................................................................................................ 24 Figure 4.1: Share of trade inGDP, 1980-2004 ........................................................................................... 44 Figure4.2: Share of Non-Traditional Exports ............................................................................................ 45 Figure 4.3: Export Concentration, 1962-2003 ............................................................................................ 45 46 Figure 4.5: RelativeExport Performance of Bolivia's Export Bundle, 1999-2003 ................................... Figure4.4: Composition of Non-traditionalExport Bundle, 2003 ............................................................. 47 Figure 4.6: Labor Content of ManufacturingExportsBy Region, 2003 .................................................... 48 Figure4.7: Size Distribution of Export Shipments, 2004........................................................................... 48 Figure 4.8: Import Concentration, 1962-2003 ............................................................................................ 49 Figure4.9: Average Ad-valorem eEuivalent of NTM, 2002...................................................................... 52 Figure 4.10: Inefficient Shipment Sizes Related to Export Incentives ....................................................... 53 TABLES Table ES.l: If HadKeptPace With Latin American Growth. 1950-2000 ..................................... Bolivia Table ES.2: How Sustained GrowthOf 4.5-5 Percent Can Raise Incomes and Reduce Poverty ...............iii ... ii Table 1.1Projectedand Actual Growth, 1994-97 ........................................................................................ 5 Table 1.2Debt Sustainability-Results under Three Scenarios................................................................... 9 Table 2.1: Growth inReal GDPper Capita for SelectedCountries. 1950-2000 ........................................ 13 Table 2.2: Explaining Changes inGrowth BetweenDecades.................................................................... 14 Table 2.3: GrowthAccounting 1971-2000 ................................................................................................. 15 Table 3.1: Capital and Labor Productivity, 1990-97 .................................................................................. 20 Table 3.2: Investment, By Decades, 1970-2002......................................................................................... 20 Table 3.3: Annual Investment, 1994-2004 ................................................................................................. 21 Table 3.4: Productivity, Investment, and Growth....................................................................................... 21 Table 3.5: Labor Productivity, By Sector, 1999-2003 ............................................................................... 22 Table 3.6: Contribution of Companies to GDP and Employment, By Size, 1999...................................... 23 . Table 3.7: Public Institutions Index Rankings, Selected Countries, 2004 .................................................. 25 Table 3.8: Starting A Business, SelectedCountries, 2004.......................................................................... 28 Table 3.9: Tax System Comparisons .......................................................................................................... 31 Table 3.10: Elements of Competitiveness................................................................................................... 33 Table 3.11: Global Competitiveness Index, 2004....................................................................................... 35 BOXES Box 1.1:Where I s BoliviaHeadingPolitically and Socially?...................................................................... 1 Box 1.2: Capitalization ................................................................................................................................. 3 4 Box 1.4: Pension Reform.............................................................................................................................. Box 1.3: The 1994 CEM: Bank Recommendations and Government Actions............................................. 6 Box 1.5:The Hydrocarbons Law................................................................................................................... 8 Box 1.6: Aguas Del Illimani......................................................................................................................... 8 Box 2.1: Growth Diagnostics-Finding 16 Box 3.1: Interviews With Entrepreneurs..................................................................................................... the Causes of Low Growth......................................................... 24 27 Box 3.3: Regulation of Private Infrastructure............................................................................................. Box 3.2: Simplifying Business Regulations for The Municipality of L a Paz............................................. Box 3.4: Macaws, S. R. L.,Cochabamba ................................................................................................... 28 29 Box 3.6: ProgressinImproving the Investment Climate............................................................................ 40 Box 3.5: The Grapes, Wine, and Singani" Cluster ..................................................................................... 38 ACKNOWLEDGEMENTS This report was prepared by a core team composed of Bruce Fitzgerald (LCCBA, co-task man- ager), Carlos Mollinedo (LCSPE, co-task manager, macroeconomics and growth diagnostics), Sara Calvo (LCSPE-macroeconomics and growth diagnostics), Bruno Giussani (The Netherlands Embassy- customs and trade), Christopher Humphrey (LCCGA--editorial organization), Marcelo Olarreaga (DECRG-trade), Juan Carlos Requena (consultant-productivity, competitiveness and investment cli- mate), William Tyler (consultant-productivity, competitiveness and investment climate) and Julio Velasco (LCSPE-macroeconomics and growth diagnostics). The team was supported by Enrique Fanta (consultant-customs), Eduardo Gamarra (consultant-political issues), Christian Goethner (consultant- quality and standards) and Georgia Pelaez (consultant-productivity, competitiveness and investment climate). General coordination and logistical support were provided by Carmen Romero (LCSPS) and RosaliaRushton (LCC6A). Special thanks to Michael Geller who streamlined the contents and messages of the final report. Overall supervision and guidance were provided by Vicente Fretes-Cibils (Lead Economist and Sector Leader, LCCBA) and Mauricio Carrizosa (Sector Manager, LCSPE). The peer reviewers were Philippe Auffret (SASPR), Luke Haggarty (CLALA), and Norman Loayza (DECRG). We extend special thanks to the donor community for support-financial and intellectual-and feedback during the study: Canada; Germany through PTB; DFID; the Netherlands; and USAID through Bolivian Trade and Business Competitiveness (BTBC). The work for the report received financial and intellectual support from: Liliana Ayalde (USAID), Gustavo Bracamonte (Canada), Sam Bickersteth (DFID), Margaret Enis (USAID), Peter de Haan (The Netherlands), Jules Lampbell (BTBC), Johannes Lehne (Germany), Marianela Montes de Oca (DFID), Diego Muiioz (DFID), Walter Nuiiez (BTBC), Roberto Petri (The Netherlands), Stephanie Reichertz (PTB) and William Young (Canada). Additional support was provided by Edgardo Mosqueira (LCSPS), Oscar Antezana (LCCBO) and Marco Scuriatti (LCC6). Important contributions were made by institutions and officials of the Bolivian Government and the Central Bank: Waldo Gutierrez (Minister of Finance) Carlos Diaz, (Minister of Economic Develop- ment), Luis Carlos Jemio (former Minister of Finance), Juan Antonio Morales (President of the Central Bank), Horst Grebe (former Minister of Economic Development), Walter Kreidler (former Minister of Economic Development), Marcelo Barr6n (Unidad de Productividad y Competitividad), Jorge Brito (Unidad de Programaci6n Fiscal), Oscar Claros (Unidad de Programaci6n Fiscal), Kory Eguino (IB- NORCA), Hernan Lino (IBMETRO), Oscar Lora (INE), Gabriel Loza (Former Director Unidad de Anidisis Politico y Econ6mico-UDAPE), Beatriz Muriel (Red de Analisis Fiscal) and Monica Parada (Unidad de Programaci6n Fiscal). Helpful comments were provided by Omar Arias (LCSPP), Simon Cueva (IMF), George Gray (UNDP, Bolivia) Ricardo Haussman (Harvard University-growth diagnostics), Reidar Kvam (SDV), Leonid Koryukin (LCSFR, regulatory system), Roberto Laserna (consultant-political issues), Connie Luff (Bolivia Country Manager), Yira Mascaro (LCSFF-banking and microfinance), Rainer Quitzow (SDV), Dani Rodrik, (Harvard University-growth diagnostics) and AndrCs Velasco (Harvard Univer- sity-growth diagnostics) and Roberto Zagha (PRMVP). BOLIVIA: COUNTRYECONOMICMEMORANDUM POLICIESTO IMPROVE GROWTH AND EMPLOYMENT EXECUTIVE SUMMARY ES.1 Bolivia i s today at a crossroads. Several years of growth were achieved in the early and mid 1990sresulting from structural reforms which encouraged an upswing in private investment and produc- tivity gains. However, more recently a series of economic shocks have hit Bolivia. These shocks not only had a negative impact in and of themselves, but they also ledto growing political and social instabil- ity and public disenchantment with the reform program, which has lost momentum in the past five years. This, inturn, reinforced an economic downturn, to the point where the gains inpoverty reduction and em- ployment creation of the 1990shave been lost. ES.2 Investment levels of 18-22 percent of GDP (compared to only 13.5 percent in recent years) and productivity increasesare neededto achieve annual growth rates of 4 to 5 percent that would be sufficient for meaningful job creation and poverty reduction. This will require a significant increase inprivate in- vestment, given that the public sector faces severe fiscal constraints. The key obstacle to achieving this goal i s political and social instability, a topic beyond the scope of this Country Economic Memorandum (CEM)'. Once a degree of political consensus and social stability i s achieved, Bolivia should retake the reform agenda to promote private investment and productivity gains, tackling micro-level obstacles such as contract security, legal enforcement, legal and regulatory burden, and trade policy, among others. ES.3 Thisreport outlines policies that would allow Boliviato achieve faster growth. Developmentand poverty have many dimensions, and growth i s necessary-but not sufficient-for development and pov- erty reduction. This report i s focused narrowly on growth. Drawing on long term trends, it diagnoses current problems inlight of the country's growth objectives that are being supported by the Banks overall programas articulated inthe Country Assistance Strategy. ECONOMIC POLITICAL BACKGROUND AND ES.4 Bolivia's economy i s ina long-term slump. Duringthe secondhalf of the twentieth century, there were intermittent growth spurts-driven by commodity booms and capital inflow surges-followed by collapses and crises. On average, real incomesfell slightly, and in 2000 Bolivians earned one percent less than their grandparents earned in 1950. By comparison, over this period real incomes rose by 75 percent inArgentina, 200 percent inChile, and 350percent inBrazil. ES.5 During the late 1980s and early 1990s, Bolivian governments broke with the failed economic models of the past and undertook the most sweeping economic reforms in Latin America. The reforms were sustainedand deep, and they bore fruit, initially with rapid economic stabilization and, subsequently, with growth that averaged 4.5 percent during 1994-98. The Government's reform track record encour- aged foreign investors to increase investment from 3 percent of GDP in 1995 to a peak of 12 percent in 1998. Foreign investment was concentrated in capital-intensive sectors included in the Government's privatization program and in a natural gas pipeline. Domestic private investment-about 5 percent of GDP in 1998-was concentrated inthe service sectors. ES.6 The overall economic upturnled to growing employment and falling poverty. The official unem- ployment rate in capital cities fell from over 10 percent in 1989 to 4 percent in 1997, while the self- 1. The World Bank is preparing a Country Social Analysis for Bolivia, which will complement the CEM and other documents and analytical work. The Country Social Analysis will address issues related to social, economic and political dimensions of the current crisis and conflict inmore detail. BOLIVIA:POLICIESTOIMPROVEGROWH EMPLOYMENT AND ii employment rate dropped from nearly 40 percent to about 35 percent in the same period. Urban poverty rates declined from 52 percent to 46 percent between 1993 and 1999, and although national and rural numbers arenotavailable, evidence suggests they improved as ES.7 After 1998, a series of shocks slowed the economy. Some were external (the Russian crisis which raised international interest rates and reversed capital flows, and devaluations in Brazil and Argen- tina) and some were internal (coca eradication, and the unexpected high cost of pension reform). Some shocks were favorable (new natural gas reserves, booming exports of gas and soy, and HIPC debt relief), but these were not sufficient to offset an economic slowdown. Although the economic reforms them- selves did not cause the negative shocks, and in fact likely softened their impact, public opinion turned against the reforms and against foreign investors as the population had perceived few benefits from the process. There have been five governments since 1997, and the country i s preparing for elections by the end of 2005. Policy formation and execution have been erratic as governments have been forced to re- spond to events, rather than controlling them. Fiscal deficit without pensions has increased in2001-2003, some privatizations have been reversed and most other reforms were stopped short of their goals. As a result, Bolivia does not have the legal, regulatory, or institutional frameworks necessary to compete and prosper inthe twenty-first century. Private investment has declined sharply and recent economic growth, averaging 2.2 percent since 1999, has not been based on investment or sustainable productivity gains, but on favorable world prices for soy and natural gas exports. ES.8 A productive, growing economy expands resources and opportunities for all, but this i s not hap- pening in Bolivia today. Inaddition to persistent poverty and inequality, the overriding economic issues are rising unemployment, growing informality, declining productivity, and narrowly-based, sluggish growth. In 2002, the poverty rate was 65 percent, the unemployment rate was 8.7 percent, and both have risen since then. The business environment has worsened, and private investment fell from 18.3 percent of GDP in 1998 to 6.4 percent in 2003. Investors-foreign and domestic, alike-are deterred by policy reversals of recent years, including the new Hydrocarbons Law and demands for nationalizationof the oil industry, the renunciation of the contract with Aguas del Zllimani, and ongoing social disruptions. Bo- livia's trade prospects are indoubt: its Andean partners are negotiating a Free Trade Agreement with the United States, but Bolivia is only an "observer." The current administrationhas no mandate to implement any meaningful policy changes and political and social disturbances have it in a straitjacket. Unable to resist social demands, spending has climbed (during the second half of 1990s). Despite the substantial effort reduction of the fiscal deficit in recent years, the actual level, 5.5 percent of GDP, i s high for a country with an already highpublic debt burden. GROWTH ITSDETERMINANTS AND TableES.l If Bolivia had kept pace with Latin American ES.9 Over a long period of time, growth, 1950-2000.. . even moderate growth can make a IfBolivia had grown at: Bolivia's Average Bolivia's Poverty great difference in peoples' lives. Income, 2003 Rate Table ES.l shows what might have -0.02 percent per year been if Bolivia had grown over the (Actual growth rate) US$900 65% last 50 years at the median rate of 11 +1.5 percent per year other Latin American countries: aver- (Latin American median) US$1888 29-44% age income would be more than dou- ble the level it i s today, the poverty rate would be 21to 36 percentagepoints lower, and the Bolivianpopulation would be considerably better off. 2. See Bolivia Poverty Assessment (2005). EXECULVESUMMARY ii ES.10 Bolivia achieved a brief spurt in the 1990s when the reforms raised growth by an average of 3.5 percent above the 1980s growth rate. Econometric analysis estimatesthat the structural reforms increased growth by 1.3 percentage points and stabilization reforms increased growth by 1.7 percentage points. Productivity gains accounted for a large part of growth during the 1990s, but over a longer period, 1971- 2000, most of Bolivia's growth can be explained not by additional capital or rising productivity but by increased labor. Bolivia's growth would have been much higher if productivity had been raised and more capital investment had been attracted. With the current trends, Bolivia's annual per capita growth rate over 2000-10 i s likely to be only 1.6 percent. This i s better than Bolivia has done inthe past, but it i s be- low the average for Latin America and i s not sufficient to keep up with social discontent or contribute substantially to poverty reduction. The picture would be different if Bolivia had followed through on its earlier stabilization and structural reforms. ES.11 With the implementation of suitable economic policies, Bolivia Table ES.2 How sustainedgrowth of 4.5-5percent can raise should be able to return to 4.5 per- incomes andreducepoverty cent growth, but this will require Average Real Income Poverty Rate greater investment and higher pro- Bolivia todav US$900 65% ductivity gains than Bolivia has ...in 10Years US$1134-1188 55-60% achieved in recent years. This ...in20 Years US$l395-1539 3 5 4 0 % growth would raise incomes and re- duce poverty. Over twenty years, the poverty rate could be cut nearly inhalf (ES.2). ES.12 A recently articulated approach-growth diagnostics-examines the constraints to growth in search of a causal link, seeking to identity the smaller set of constraints which, at any time, are binding.3 Directing public policy first toward eliminating the few most binding constraints would have the greatest impact on g r ~ w t h .It~ i s also the case that others constraints are not subject to policy interventions, but are parameters. For example, Bolivia i s a vast, sparsely populated country. Its geography and ethnic identities are fixed by history, and as such, policy must recognize and accommodate them. The BindingConstraintfor Growth: Znstability ES.13 The binding constraints on growth today relate to investors' uncertainty as to whether they can realize returns on their investment. This uncertainty stems principally from the general instability in the country, and was reinforced by the dispute of the Hydrocarbons Law and the Government's unilateral de- cision to terminate the contract with Aguas del Zllimani. The investment climate was already deteriorating inthe face of violent protests, policy reversals, andbusinessdisruptions, butthese actions have ledinves- tors to delay new investments, expansions, and modernizations until they feel confident that their rights will be honored. ES.14 Macroeconomic mismanagement i s currently not a binding constraint, but it could easily become one if this or future administrations lose control of the fiscal accounts. In recent years private investors have enjoyed an extended period of stable prices and real exchange rates, but large, unsustainable deficits discourage investors since they can presage inflation and/or devaluations. 3. See Hausmann, Rodrik, and Velasco (2005). 4. Not all constraints need to be considered immediate priority in a growth strategy. For example, low educational levels can restrict Bolivia's potential, but in2005 this i s not impeding investment and productivity gains, as Bo- livians of all educational levels are leaving the country for better opportunities abroad. While over the longer term, education is essential to development and raising living standards, and the Government should continue its emphasis onprograms and policies to improve social indicators, this report is more narrowly focused on primary constraints, and hence, policies to improve growth. BOLIVIA:POLICIESTOIMPROVE GROWHANDEMPLOYMENT iv ES.15 Creating a climate of stability and maintaining macroeconomic stability should be the top priority for policy makers. The political and social situation is not the topic of this report, but it must be resolved ina manner consistent with Bolivia's complex political, social, and historicalbackground. Nor are mac- roeconomic policies discussedin detail here, although they are analyzed extensively inthe Bank`s Public Expenditure Review for Bolivia (2004). Additional Constraintsfor Growth ES.16 Once the political and social crisis has eased and the conflicts over hydrocarbons and Aguas de Zlimani are resolved satisfactorily to Bolivians and foreign investors alike, relaxing the two key con- straints listedbelow would leadto substantial improvements conducive to increasedgrowth. 0 Investment climate. Bolivia's investment climate is one of the most cumbersome inthe world. While reforms have improved some public institutions, they have not been sufficient to attract new foreign or domestic investors and, overall, the investment climate i s deteriorating as some institutions have worsened or have stopped functioning completely. Significant weaknesses act as major roadblocks to private sector activity, including excessive red tape, an antiquated legal code, and insufficient contract enforcement andproperty rights. 0 Trade policies. The trade regime today i s generally open and induces few distortions. However, uncertainty over future trade relations with the United States deters formal-sector investors and encourages the informal sector. As Bolivia draws closer to losing its trade preferences with the United States (at the end of 2006), this factor could reduce the gains that the private sector has made innon-traditional exports. Also, uncontrolled contraband-spurred by weak Customs administration and hightaxes-further acts as a disincentive to formal sector investment. ES.17 Constraints related to the investment climate and trade policy constitute the first level of reforms to be addressedonce political and social stability i s achieved, and these are the focus of this report. How- ever, to ensure long-term, sustainable growth will require focus on other important secondary constraints, including: 0 Education. Education indicators have improved, but they are still low by regional standards, particularly related to the quality of education. As mentioned, although the low level of education is not currently a major constraint, it will limit the country's long-term growth once the economy begins to generate jobs requiring higher skill levels and opportunities demanding innovation and entrepreneurship. 0 Infrastructure. The physical infrastructurei s extremely limited and i s compounded by the geographic obstacles Bolivia faces. According to the Global Competitiveness Index, Bolivia ranks looh out of 104countries interms of infrastructure, and i s by far the worst inSouth America interms of road and rail density. This infrastructure gap will become a major limitation on competitiveness once the economy starts growing. INVESTMENT, PRODUCTIVITY, AND COMPETITIVENESS ES.18 Growth of 4.5 percent per year-needed to reduce the highpoverty levels and create new jobs for young people joining the labor market-would require annual investment rates of 18-22 percent of GDP and productivity gains of 1.5 to 2.0 percent. As indicated, the investment rate i s extremely low. While on average Latin American and other developing countries maintained or increased investment rates, the in- vestment rate in Bolivia was lower inthe 1990sthan inthe 1970s, averaging 16.6 percent of GDP (com- pared to 20.6 percent inL A C and 21.7 percent inother developingcountries). Similarly, while productiv- ity gains inthe 1990s averaged 1.5 percent per year (significantly higher than the decline in productivity of about 0.4 per year over the long term-1950-2000), these gains should be maintained or increase for sustaining higher economic growth. EXKUTIVESUMMARY V ES.19 Under the present policies, Bolivia i s not likely to realize either the investment targets necessary for 4.5 percent growth. Public investment has averaged 5.5 percent of GDP (over 2001-04), and given fiscal constraints, the prospects for increases are limited. To reach an investment target of 22 percent of GDP will require private investment to increasefrom 8.2 percent of GDP (the average for 2001-04) to 17 percent. This will be difficult inthe current environment. ES.20 Over the longer term, productivity inBolivia has also been low. For the economy as whole, there was noticeable growth in total factor productivity (1.5 percent per year) only during the 1990s. At the sectoral level, there are wide disparities inproductivity across sectors, but little growth since 1999. There are even greater disparities interms of fidestablishment size. The labor productivity of large firms i s 25 times greater than that of microenterprises. Large firms produce 65 percent of GDP, but use less than 9 percent of total employment. In the face of social unrest and disruptions to businesses, it is likely that already low productivity levels are declining further. ES.21 The prevalence of informal enterprises accounts for much of the disparity in productivity. Infor- mality i s the highest inLatin America and among the highest inthe world, with an estimated two-thirds of the economy operating outside the formal sector. Because of weaknesses in the business environment (see below), many small businessmen see informality as necessary for their f m s to survive. ES.22 The 2001 Bank report, Bolivia: Microeconomic Constraints and Opportunities for Higher Growth, analyzed the investment climate in Bolivia. Inthe intervening four years, the Government has taken action on several of the recommendations, and there have been improvements in some areas, in- cluding customs and tax administration, business registration, and infrastructure (roads). Despite these improvements, Bolivia i s still a difficult place for business, and its overall investment climate has become even less attractive to investors. Major difficulties exist with respect to property rights, the rule of law and the enforcement of contracts, which have also been identified as the bindingconstraints to growth. ES.23 As evidence of its risky investment climate, Bolivia i s the lowest ranking Latin American country inthe Banks analysis of businessenvironments (Doing Business, 2005). Inthe WorldEconomic Forum's recent Global Competitiveness Index, Bolivia ranked95" of 104 countries. Within the overall index, the weakest components are institutions (Le., property rights and rule of law), labor market efficiency (re- flecting the antiquated Labor Code dating from 1939), and physical infrastructure. Despite progress, there remains a large, unfinished agenda of legal reforms, regulatory modernization, and institutional im- provements. These are necessary to build a business environment for the twenty-first century to make Bolivia competitive, attract investment and increaseproductivity. TRADE, TRADE POLICIES, AND INSTITUTIONS ES.24 Ineconomies with small domestic markets, exports are generally the main engine behind growth. This has not been the case inBolivia. While recent export performance has been better than regional per- formance, this export growth has not translated to economic expansion. Even the growing non-traditional exports are concentrated in sectors-primarily insoy and soy derivatives-that will not substantially con- tribute to increasesinproductivity or growth. ES.25 Bolivia's trade system was complex and restrictive until the mid-1980s when comprehensive re- forms opened the trade regime. The tariff structure i s simple, rates are low, and there are virtually no non-tariff restrictions. However, the liberalizationcontributed only modestly to expanding and diversify- ingexports. The recent strong export performance largely reflects favorable external factors-high prices and strong demand for products exported by Bolivia. When prices drop, export earnings will falter. ES.26 Bolivia's main export markets are Mercosur and the Andean Community. The United States market i s relatively small, but i s important for non-traditional and manufacturing exports. There i s room to expand exports in all markets, but Bolivian exporters ship their products in relatively small lots and BOLIVIA:POLICIESTOIMPROVE G R OANDEMPLOYMENT ~ vi have insufficient production capacity to strongly compete in world markets. Inpart, this constraint can be overcome by greater private investment, but it also requires improvements in productivity, and hence competitiveness. ES.27 Bolivian exporters do not fully use the preferences they enjoy under trade agreements. This re- flects Bolivia's limited export bundle and weak negotiation and implementation of trade agreements. Non-tariff barriers inBolivia's preferential trade markets keep Boliviannon-traditionalexports from gain- ing access. Trade negotiators should focus on non-tariff barriers within the LatinAmerican regionand on joining the Free Trade Agreement (FTA) negotiations with the United States. Bolivia cannot afford to stay out of the FTA negotiations and risk losing the American market that has the potential to be its most important market for non-traditional, labor-intensive, and manufactured products. ES.28 Inaddition, Government policies and institutions have not afforded strong support or incentives for exporters. Specifically, the following have been identified as particularly hinderingthe further devel- opment of exports. e Continuous reorganizations of the export promotion agency, CEPROBOL, have undermined its effectiveness. The tax refund system for exporters i s costly, creates distortions, and i s undermined by delays of four months or longer. It i s widely believed that the delays are related to the government's large fiscal deficit and its needsfor liquidity. e Technical regulations and export quality issues are a threat to Bolivian exports, but these have not been apriority for government or exporters. ES.29 Nevertheless, import and export controls have improved and trade facilitation enhanced though institutionalreforms inthe Customs Administration. Although tariffs are low, customs duties are a major source of government revenues, as imports are also subject to the value-added tax. As such, the total duty on imports can be prohibitive, so smuggling i s very profitable and anti-smuggling police have not been very effective. Smuggling also reduces government revenues--estimated at about one-third of Bolivian imports-narrows the tax base, and also gives the informal sector a significant cost advantage against the more productive formal sector. To effectively fight smuggling, it i s necessary to attack the incentives that drive the activity with commitment to a comprehensive, credible national policy backed by more convic- tions and stricter penalties. POLICIES FOR GROWTH, EMPLOYMENT, POVERTYREDUCTION AND ES.30 Given the fiscal constraints on the public sector, the private sector holds the key to future growth. Without a growing and vibrant private sector, growth will remain stagnant. The first priority for policy makers i s to establish the necessary conditions for private sector growth in Bolivia, which has two com- ponents: Reducing uncertainty. 7he constant political instability, social disturbances and climate of uncer- tainty are the most significant bindingconstraints to investment and growth faced by the country. Al- though beyond the scope of this report, addressing these problems will require strong political leader- ship capable of achieving a degree of consensus among the polarized population. It is also crucial to initiate bindingprocesses to resolve investment disputes related to the Hydrocarbons Law and Aguas del Zllimani on terms that would be widely perceived as fair both by Bolivians and international in- vestors. Maintaining macroeconomic stability. Keeping prices, the exchange rate, and interest rates relatively stable i s essentialto growth, and this inturn, requires sound fiscal management. The Public Expendi- ture Review offers specific immediate and longer-term recommendations to reduce public expendi- tures, to increase public revenues, and thus, achieve fiscal balance. Some of these measures are al- E~ECV~VE SUMMARY VI7 ready inplace, but further actions are needed to put public accounts onto a long-term sustainable path and keep debt levels at a manageablelevel. ES.31 However, these necessary conditions are by themselves not sufficient to generate the levels of investment and productivity-and in turn economic growth, job creation, and poverty reduction-that Bolivia seeks. To accomplish this, the country needs to retake the reform agenda it began, but did not continue with, in the 1980s and 1990s. Based on the analyses in this and other recent Bank economic re- ports, policy makers should implement reforms to (i) improve the investment climate to increase produc- tivity and investment; and (ii) strengthentrade policies and further integrate into world markets. Improve the Investment Climate to Increase Productivity and Competitiveness ES.32 The Government has made progress in some areas but, overall, the investment climate i s deterio- rating. The report Bolivia: Microeconomic Constraints and Opportunities for Higher Growth (2001) con- tains a comprehensive set of recommendations to better the investment climate. Previous administrations have moved forward in a number of areas, but further progress i s needed.5 Several recommendations can be tackled inthe short-term, while others will require a government with broader public backing and more stablepolitical and social conditions to implement. ES.33 Improve regulatory environment. The regulatory burden faced by companies operating inBolivia i s very high. Some improvements have been made in recent years, including the decentralization of the business registry (formerly all companies had to go to L a Paz) and a 10percent reduction inthe time re- quiredto register a business. But at 59 days on average, it still takes far too long to set up a business in Bolivia. As well, closing a firm i s extremely difficult and costly. Regulatory independence i s a problem also, with high turnover and political interference. The Government should take measures to reverse these trends, appointing permanent regulators and assuring that they are independent of political control and have competent, professional staff. Easing these obstacles i s a task the Government can tackle in the near term. ES.34 Introduce the legal foundations for a modem business environment. Inthe present environment of fractured and confrontational politics, this is not the time for a comprehensive legislative agenda. However, Bolivia cannot compete effectively untilit buildsa legalframework conducive to private sector activity. Key issues that need to be addressedinclude: 0 Labor Law-The existing Labor Law imposes large, non-wage costs on employers and discourages formal enterprises from increasing employment, making Bolivia uncompetitive with other countries. Although difficult to tackle in the current setting, the law needs to be modernized along the lines of international good practice to encourage employment creation, while at the same time protecting workers' legitimate interests. 0 Bankruptcy Law-The Bankruptcy law should allow for faster exit of unsuccessful f m s , and permit creditors to efficiently take possessionof pledgedassets. 0 Intellectual Property Rights-As a basis for negotiating a Free Trade Agreement with the United States, Bolivia should have a law which accords with international good practice in terms of enforcing patents and copyrights. ES.35 Strengthen property rights, the rule of law, and institutions. Weak enforcement of property rights, along with an unpredictable system concerning the rule of law, is a major binding constraint for growth. Greater respect for the law on the part of the government requires political will and a supportive political environment. Yet, some confidence-building measures by the Government might be possible. Keepingthe roads passablefor commerce and preventing illegal land seizures would be visible and sym- bolic early steps. 5. See Annex 3.1 for an overview of Bolivia's progress in implementing the report's recommendations. BOLIVIA: POLICIES TOIMPROVEGROW AND EMPLOYMENT viii ES.36 Monitor investment climate indicators. The Government's economic team should monitor, rela- tive to other countries, key indicators associated with the investment climate.6 After compiling a list of indicators, the Government should assign specific responsibilities and targets for improvements within the Cabinet. These efforts, as well as the measures being taken to improve the indicators, should be made publicly available. Strengthen TradePolicies and Further Integrate Into WorldMarkets ES.37 With Bolivia's small domestic market, economic growth will depend for success in fully expand- ing exports and integrating into the global economy. The country has great export potential through its natural resources, agricultural sector, and abundant labor. ES.38 Develop a comprehensive strategy for opening export marketsfor Bolivian products. Following the successful creation of a liberal trade region, the focus of policy now should be to gain and maintain access to key markets for Bolivian products. Several policies can help achieve this goal: 0 Enter into negotiations with the United States and other Andean countries for a Free Trade Agree- ment, to ensure continued market access even after existingATPDEA trade preferencesexpire. 0 With private sector involvement, negotiate lower non-tariff barriers (elimination of reference prices and non-automatic licensing, for example) with preferential trading partners in the Andean region, with Mercosur, and with Chile and Mexico. 0 Join export promotion activities with Mercosur members, who already have a joint mechanism for this purpose. 0 Overhaul CEPROBOL, and consider outsourcing CEPROBOL to the private sector with clear ac- countability for targets and results. ES.39 Strengthen trade institutions and instruments. Inthe near term the government should take sev- eral measures to encourageexporters: 0 Promote the temporary import regime (RITEX) among exporters by streamlining costly, burdensome procedures. 0 Simplify the systemto refund tariffs and internal taxes (VAT and ICE) to exporters. 0 Reduce delays-as requiredby law-for issuingtax refundinstruments (CEDEIMs). 0 Strengthenbasic infrastructure and institutions for standardsand quality control: o The umbrella organization (The National System for Normalization, Metrology, Certification, Accreditation and the Management of Quality, SNMAC) has not receivedthe priority it requires. Quality practices in international trade make it necessary for the SNMAC to be regulated by law and not merely a Supreme Decree, as it i s now. o Re-activate the National Council for Quality Control (CONACAL), chaired by the Minister of Economic Development. Technical barriers to trade carry a significant threat to Bolivianexports, particularly non-traditional exports. The CONACAL could be an important forum for issues related to quality management for export products. ES.40 Combat smuggling. Define and execute a clear, national anti-smuggling policy, with the partici- pation of all relevant public and private sector institutions. Elements could include: 0 Continue the program underway to strengthen the Customs Operations (COA), by providing more personnel, appropriate training and state of the art communicationand tracking technology. 0 Strengthen reform processes in the new Bolivian Customs Administration (ANB) and the Internal Revenue Service (SIN) to rationalize trade facilitation and smuggling control, and study the feasibility of mergingthe institutions. 6. Relevant indicators include the size of the informal sector and the time it takes to start a business, hire/fire a worker, register property, get credit and enforce contracts. EYECLILWESUMMARY IX 0 Eliminate the legalrestriction prohibiting the ANJ3 from prosecuting retailers of smuggled goods. 0 Promote cooperation with customs administrations in neighboring countries, initially to exchange official information of imports and exports, and later to establishjoint border infrastructure. BOLIVIA: POLICIESTOIMPROVEGROWTH EMPLOYMENT AND X CHAPTER1 INTRODUCTION 1.1 Bolivia covers a large, sparsely inhabited territory. Its area i s as big as Austria, Belgium, France, Germany, and Switzerland combined, but its population of nine million people i s less than the population of metropolitan Paris. Bolivia's economy i s small-US$8 billion-about as large as that of Akron, Ohio, a city of 200,000, the 80* largest inthe United States. Bolivia's average income of US$900 i s 149* inthe world, and its poverty and inequality are the most severe inLatin America. 1.2 The economy has been stagnant even though Bolivia's natural resources-silver, tin, gas, lum- ber-offered economic advantages. Over the second half of the Twentieth Century, 1950-2000, there were intermittent growth spurts-driven by booms in commodity prices and capital inflows-followed by collapses and crises. On average, real incomesfell slightly, and in 2000 Bolivians earned one percent less than their grandparents earned in 1950. By comparison, real incomes in Argentina rose 75 percent; in Chile, 200 percent; and inBrazil, 350 percent. (See Table 2.1 for comparisons with other countries). 1.3 Despitethe weak economy, social indicators for health, and education have been improved: infant morality dropped from 166 deaths per thousand births in 1970 to 61 in 2000; life expectancy of males rose from 38 years in 1950 to 60 years in2000 and for females from 42 to 63; illiteracy dropped from 31 percent in 1980to 14 percent in2000. 1.4 Bolivia has been handicapped by a history of ethnic conflicts, unstable governments, and recur- ring episodes of military or dictatorial rule (Box 1.1). Many of the problems that confront the economy today have deep historicalroots: 0 Property rights. The government twice expropriated assets of foreign oil companies, Standard Oil in 1937 and-32 years later-Gulf Oil in 1969. 0 Informality. A large, unproductive informal sector which, since the mid-l930s, has accounted for more than half of employment. 0 Foreign aid. Sizable foreign aid inflows began inthe mid-l950s, but they have not ledto sustainable growth. 1.1 REFORMSANDRESULTS 1.5 Duringthe 1960sand 1970s,growth was relatively highfor Boliviaand was associatedwith min- eral export booms, notably tin, and with capital inflows. Public debt increased significantly and around 1980, Bolivia entered a critical downturn, exacerbated by a collapse of the tin market and an international debt crisis which, in 1983-85, culminated with unprecedented hyperinflation and a five percent drop in real per capita GDP. 1.6 The present democratic era began in 1982, and this period marks a break from the earlier eco- nomic policies which retarded growth, development, and social progress. In 1985 the Government of Vic- tor Paz Estenssoro introduced far-reaching reforms, and they worked. The reforms stabilized prices, and the economy enjoyed moderate real growth on the order of four percent annually. Still, the economy was vulnerable because of high government expenditures (the fiscal deficit in 1993 was 6.4 percent of GDP) and a weak formal sector with low private investment. BOLIVIA: POLICIESTOIMPROVEGROW AND EMPLOYMENT 2 Box 1.1 Where is BoliviaHeading Politically and Socially? Bolivia i s facing the most serious political and social crisis since the transition to democracy in the early 1980s. The outcome of the crisis will not be known for several years as the intensity of social mobilization, the depth of the institutional crisis, and the absence of clear options to overcome conflict conspire to prolong the politi- cal and social impasse. Bolivia's recurring crises are driven by the presence of a profound structural divide. Briefly, there are four structural factors have been a permanent fixture in the country and bear a great part of the responsibility for the re- curring pattern of conflict. First, Bolivian state and its institutions are weak. The weaknesses manifest in (i)lack of political consensus among parties and leaders for modernizing institutions, including the political process; (ii) the inability o f main- taining law and order, and providing effective and efficient public services; and (iii)incapacity of sustaining coherent public policy over the medium- and long-term. Second, Bolivia suffers from the effects of a development pattern that exacerbated wealth concentration, includ- ing land tenure, in the hands of small elite. A pattern of social exclusion reinforced inequality and extreme pov- erty, especially among the indigenous people, who form about half of the population. The increasing wealth gap can be attributed to the elite's control over political, legal, and economic institutions, and the inability of the poor majority, including both rural peasants and informal market participants inurban areas, to access these in- stitutions and use them to improve their material conditions. Third, the country is deeply divided on how to manage and distribute natural resources. Bolivia's social move- ments are increasingly demanding that the national resources benefit the country as a whole rather than just the rich and foreign investors that are perceived as the primary beneficiaries. This conflict has a long history inBo- livia dating back to the early colonial era, and it i s exacerbated by a strong anti-globalization movement. Finally, Bolivia has yet to complete the transition from a state centeredled development strategy towards a modern, market-oriented one, and the current crises make it more difficult to push ahead with the reforms neededto ensurethe country's economic viability. These issues must be placed against the backdrop o f daily intense political battles that confront political parties, social movements, regions, and individuals against each other. President Rodriguez's ascent to the presi- dency came on the heels o f the resignation of President Mesa, and the subsequentresignation o f the Presidents o f the Senate and the Chamber o f Deputies. The nature of his ascent limits Mr.Rodriguez's power and responsibility-his mandate is limited to call national elections, and the outcome of such elections i s unpredictable. The political and social agenda for the immediate future is complex and would challenge even a presidenl with great popular support. It includes: constitutional reform to allow for national elections to take place inthe nexi six months; hosting a referendum on regional autonomy; the convocation of a Constituent Assembly to reform the constitution; and the election of departmental prefects. While extremist demands, such as full nationalization of en. ergy industry, secession o f the wealthy lowland provinces, and armed conflict are not likely, neither can they be totally ruled out. The most probably near term scenario is for the current administration to continue until genera elections are held, with most major hot-button issuespostponed untila new government takes power in early 2006. 1.1.1 EconomicReformsinthe 1990s 1.7 In 1993, a new Government came into power with record political support (33.8 percent); this enabled it to initiate ambitious structural reforms, laid out in its Plan de Todos.The aim was to increase investment substantially, generate employment, preserve macroeconomic stability, increase resources for education and health, and decentralize public spending through popular participation. Its capitalization plan (Box 1.2) sought to attract foreign investors to modernize state owned companies, offering a control- ling interest in exchange for new investments in the electricity, telecommunications, hydrocarbons, water, and transportation sectors. CHAPTERINTRODU~ON 1: 3 Box 1.2 Capitalization Zapitalization began in 1994 as a form of privatization designed to attract new foreign investment and managerial :xpertise. It covered enterprises in the electricity, telecommunications, hydrocarbons, water, and transportation ndustries. Private investors acquired a 50 percent ownership stake and management control inreturn for commit- nents to make capital expenditures equal, at least, to the enterprise's original net worth. Investments were required Nithin an agreed period (typically six to eight years), to meet expansion and quality goals, and to operate under .egulation with a long-term (typically 40 years) contract. The other 50 percent of the shares belong, for a small share, to workers, and the rest are managed by a hnd, which uses the dividends to partially finance an annual payment (the Bonosol) to all Bolivians who were dder than 21 in 1997, once they reach 65. This approach was adopted to make capitalization politically viable. Zapitalization was complemented with sectoral reforms and a new regulatory system (See Box 3.3 on the regula- :ionof private infrastructure). Capitalization met its investment objectives, and employment losses were relatively small. Services im- )roved and the percentage of the population with access to electricity and telephone connections increased signifi- :antly. Despite these improvements, capitalization i s publicly perceived as benefiting foreign investors at Bolivi- ins' expense. It is a politically charged issue, the focal point of protest and discord. (See Boxes on the Hydrocar- 3ons Law andAguas del Illimani). Investments in Capitalized Companies through 2001 (US$,Million) Investment Actual Percentage of Contracted Investment Target Electricity 140 160 114 Hydrocarbons 835 1,293 155 Transport 87 104 120 Telecommunications 592 522 88 Total 1,653 2,078 126 Source: Oficina del DelegadoPresidencialparalaCapitalizaci6n(2003). 1.8 The World Banks last Country Economic Memorandum-Structural Reforms, Fiscal Impacts, andEconomic Growth-was in 1994. It built on and complemented Plande Todos and argued that capital accumulation and technological change should be the principal growth driver^.^ It advocated a strategy of private investment in hydrocarbons, telecommunications, electric generation, air and rail transport, and mining.The CEM was concerned by the fragility of the fiscal situation and recommended that structural reforms be carried out in a fiscally sustainable sequence. It recommended that over 1994-97 the Govern- ment should undertake ten specific reforms (Box 1.3, and Annex 1.3). 1.9 Ingeneral, Government reforms were consistent with some of the Bank's recommendations ar- ticulated inthe 1994 CEM. Boliviatransferred to the private sector most of its larger, most important pub- lic enterprises. Foreign direct investment grew substantially-from 2 percent of GDP in 1994 to 12 per- cent in 1998-though it was concentrated in hydrocarbons (which attracted 45 percent of FDI).This was a period of relatively low international interest rates and ready access to capital markets, and Bolivian banks borrowed abroad to lend domestically. Investment reached record levels in 1997 and 1998-19.6 percent and 23.6 percent of GDP. The strategy to generate a "shock" of investments into the economy succeeded. 7. The CEM used an empirical study o f the determinants of growth (1950-1990) concluding that (a) the greatest source of growth was capital accumulation which explained around 65 percent o f total growth, (b) nearly 18 percent could be explained by the technological change and (c) the returns of capital explained around 25 per- cent. "Sources of Economic Growth inBolivia: An Econometric Assessment". Sergio Navajas Orellana. BOLIVIA: POLICIES TOIMPROVEGROW,AND EMPLOYMENT 4 Bank Recommendations Government Actions 1. Accelerate reforms inthe mining, electricity, Most public enterprises were capitalized during 1994-97; telecommunications and hydrocarbons sec- tors; In 1995the Government: 2. Introduce a corporate income tax; Introduced a corporate income tax; 3. Increase transactions taxes from 2% to 3%; Increased the transaction tax from 2% to 3%; 4. Establish excise taxes on gasoline and diesel Introduced excise taxes on gasoline and diesel. 2 in 1995; 5. Permanently improve collection efficiency; Tax revenues (excluding royalties and hydrocarbon taxes) were increased from 9.3 percent of GDP in 1993 to a peak of 14.1percent in 1998, before stabilizing around 13.5 per- cent in 2004. reflecting enhanced tax efficiencv. 6. Noreal increase inthe General Government General Government real wages (except for health and edu- wage bill - excluding limited increasesin cation) increased less than 1percent between 1995 and education and civil service- in the short term; 2003. However the government was unable to contain sig- nificant salary increasesinhealth and education. 7. Reduce public capital expenditures to 6.7 Capital expenditures of the non-financial public sector were percent o f GDP by 1997 and allocate 80% of reduced from 9.0 percent of GDP in 1994to 7.2 percent in capital expenditures to infrastructure and so- 1997 while targeting 73 percent o f public investment to so- cial sector projects; cial sectors and infrastructure. 8. Transfer transactions costs, a portion of sen- Most indemnities and debt obligations were transferred to iority/severance obligations and at least 75% the capitalized companies. of debt service obligations associated with capitalization to the shareholders, both do- mestic and foreign; 9. The proceeds of real and financial assets in restructured sectors, such as real estate hold- ings of COMIBOL and ENFE,and ENDE's shares inELFEC, to finance one-time reform costs: and 10. Set up o f a well-designed regulatory frame- The System of Sectoral Regulation Law (SIRESE) was work for specific sectors and overall. passedin 1994; Five sectoral regulators were created and four sectoral laws completed this framework: Electricity (1994), Telecommu- nications (1995). Hvdrocarbons (1996). and Water (2000). 1.10 Growth was robust by Bolivian standards, averaging 4.7 percent through 1997 and peaking at 5.0 percent in 1998. Between 1993 and 1999 poverty fell (by six percentage points in urban areas-from 52 percent to 46 percent). Growth was in line with the World Banks projections (Table 1.1), though it fell short of the Government's expectations of an average of 8.1 percent over 1994-97. Investments were capital intensive and they did not generate the expected employment. While the privatizations were attrac- tive to foreign investors, they were prominent, large one-off deals with support at the highest levels of government giving these investors confidence that they could avoid many of the problems that confront other entrepreneurs.For other investors, outside these deals, the investment climate was unattractive, and the government didnot undertake the reforms which would have improved it. CHAPTERINTRODUCTON 1: 5 Table1.1 ProjectedandActual Growth,1994-1997 Base Scenario L~~Growth Plande Todos Actual Rates Scenario I I I 1994-1997 1994-1997 I 1993-1997 1990-1993 1994-1997 GrowthRates (%) 4.5 3.5 8.1 4.0 4.7 Investment (% of GDP)' 16.4 16.1 25.3 15.3 16.4 Private' 8.8 8.4 18.5 8.0 9.0 Public 7.7 7.7 6.8 7.4 7.4 1.1.2 Shocks, Economic Management, and Employment 1.11 After capitalization, there was a series of economic shocks. The shocks, their impacts, and the government responses are summarized in Annex 1.4. Some shocks were favorable for Bolivia and some imposed severe costs. Some shocks were causedby events on the other side of the world, over which Bo- livia had no influence, and some resulted from government policy. Negativeshocks: The Russian and Asian crises (1998)-These events led to higher interest rates and a cut-off of foreign financing. Domestic banks prepaid international debts while their non-performing loans rose from 5 percent in 1998to 18 percent in2003. El Niiio (1998)-Agriculture accounted for 15 percent of GDP and it employed 43 percent of the labor force in 1997, and a much larger proportion of the poor. El Niiio reduced production by an estimated 4.4 percent. Fiscal cost of social security reform (1998-present)-Costs of the reformhave been nearly double what they were estimated (see Box 1.4) and they account for 70 percent of the fiscal deficit. Brazilian and Argentine downturns and devaluations (1998-2001)-The downturns depressed demand for Bolivian goods in Brazil and Argentina, and the devaluations made Bolivian goods less competitive and reducedthe dollar value of remittances from Bolivians living in Argentina. They not only led to lower exports but they reversed the direction of trade flows for some products. Compensating depreciations of the Boliviano increased non performing loans and public debt service innationalcurrency. Coca eradication (1997-2000)-Eradication was sharply increased in 1997. Most coca production i s illegal, so we cannot know the extent of the harvest or its contribution to GDP. The U. S. State Department estimates that the crop was reduced from 48,000 ha. in 1996 to 14,600 ha. in 2000. IMF (2005, p. 43) estimates that, from a peak of 5.6 percent of GDP in 1988 coca fell to about 0.7 percent in2003. Coca eradicationsignificantly decreasedcorruption, organized crime, and drug use; however its negative impact falls heavily on poor farmers. Positive shocks: HIPC debt relief (1999, 2001)-Bolivia benefitedfrom the Highly-Indebted Poor Countries (HIPC) initiative and from the enhanced HIPC. Total debt service relief amounts to about US$2 billion. The savings in debt service effectively provides additional resources of about US$120 million per year until2011.The financial relief of the enhanced HIPC must be re-directedto municipalities, based on their population and poverty in line with Bolivia's Poverty Reduction Strategy. This is integral to the BOLIVIA:POLICIESTOIMPROVE GROWH AND EMPLOYMENT 6 government's program o f fiscal decentralization which has contributed to lower efficiency and transparency infiscal policy and higher government expenditures. 0 Booming exports of natural gas and soy-Bolivia has enjoyed windfall gains in hydrocarbons and soy exports. Hydrocarbons exports rose from US$64 million in 1999 to an estimated US$790 million in 2004, owing to favorable world prices and the new gas pipelines. Exports of soy and its products were estimated to be US$420 million in 2004. Both sources of exports are tenuous, depending on highworld prices and, inthe case of soy, to preferential accessto the Andean market which could be lost under a US-Andean Free Trade Agreement. Box 1.4 PensionReform Bolivia's pay-as-you-go pension system was inefficient, costly, and unsustainable.Pensions were gener- ous; the retirement age was low; administrative costs were high; and fraud was widespread. The implicit debt of the system was 40 percent of GDP, threatening the government's solvency. It was replaced in 1996 by a defined contribution system financed with employees' contributions to "funds of individual capitalization" which were managed by private administrators.These funds, in turn, were obligated to buy up to US$180 million in long term treasury bonds (about 2.5 percent of GDP) to help financethe transition to the new system. The reform transferred most of members of the old system to the new one. People who retired before 1996, and some active workers, remainedunder the old system. The workers who contributed for severalyears to the old systembut had not fulfilled all the conditions for retirement ("thesandwich generation") were transferredto the new systemand would receiveeither a lump-sumcompensation,or a monthly compensationfor their contribu- tions to the old systemonce they reachthe retirement conditions under the new system. The new system has improved services, but the transition costs have been nearly double what they were estimatedin 1996and they accountfor about 70 percent of the budgetdeficit. They havebeenhigher than expected because: (1) optimistic projections of GDP growth and exchange rates; (2) a series of government decisions in the face of social pressure to increase pension benefits (with the current minimum pension doubling the minimum wage) and relax conditions to benefit from the old system; (3) an increase in public sector wages to pay additional costs; and (4) bad implementation and fraud, resulting in 30 percentmore pensionersthan projected. Bolivia'spen- sion payments are huge and growing (4.5 percent of GDP in 2004, up from 2.5 percent in 1997) and only 120,000 beneficiariesreceive them. A related issue i s the Bonosol benefit, created in 1997, which gives annual payments to every Bolivian over 65, irrespective of their financial condition. It i s financed by revenues from privatization through a trust fund. but valuation and liquidity problems, as well as the high level of benefits, threaten its sustainability. Under currenl trends, the system may not be able to make these payments and the Bonosol could become another drain on the Government'sresources. 1.12 The net result was that the economy stagnated and reforms were derailed. Growth dropped to 0.4 percent in 1999 and averaged 2.0 percent over 1999-2003. Unemployment gradually increased from 4.4 percent in 1997to 9.2 percent in 2003, and poverty increased to the levels o f the early 1990s. Economic Management 1.13 Under these pressures, public spending rose sharply. After 1997 expenditures (including pen- sions) rose from 27.3 percent o f GDP to 33.3 percent in2002 (Figure 1.1and Annex 1.3) because: (i) the payroll rose with the growth o f health and education, and government salary increases were higher than inflation; (ii) other primary current expenditures grew as a percentage of GDP; (iii) 2001, as part of since the Government's program and with the help o f HIPC resources, capital expenditures increased by 2.0 percent o f GDP; (iv) after growing rapidly between 1997 and 1999, the pensionreform cost kept growing to a maximumof 4.5 percent o f GDP in 2002; and (v) finally, despite HIPC relief, interest payments grew from 2 percent o f GDP in 1999 to 2.9 percent in 2004 because of increasing internal and external debt and depreciation of the exchange rate relative to the dollar. The Government tried to control spending through measures like the reduction o f per diem, acquisition o f goods and services, and reduction o f public offi- cials' wages; as a result total expenditures (including pensions) declined to 32.3% o f GDP in 2004. These CHAPTERINTRODUCTON 1: 7 are highly visible and enjoy popular support, but they could not significantly reduce expenditures and, in some cases, negatively affected management and ledto a loss of some well-qualified, higher-level public officials. Figure 1.1 Public Expenditures Figure 1.2 Average Real Labor Income" (constant Bs. of 1990) 3500, 700, - 600 f 5.33 E =4w 8 Eg3M) 0 200 100 0 -Wages and salarws U andSeNICes +Interest fromdomsto debt.---...Goods Interestfromexternal del -mnsons -Capltalexpendlture -6-Othercurrentexpendltur a Realamrage laborimme Source: UPF, IMF and World Bank staff estimates. Note: *Corresponds to information on capital cities and El Alto. Source: INE (1989-1995 Encuesta Integrada de Hogares; 1996-1997 Encuesta Nacional de Empleo; and 1999-2002 Programa Medici6nde Condiciones de Vida ). 1.14 In 2003 there were violent protests against budget and tax proposals and against natural gas ex- ports through Chile. These led to 70 deaths, runs on bank deposits, and to President Sanchez de Lozada's resignation. President Mesa promised greater social Figure 1.3 Real Exchange Rate Index dialogue including a referendum on hydrocarbons (1996=100) policies and exports (See Box 1.5) and a constituent fl assembly, scheduled for 2005. Congress must ap- prove legislation to define the scope of the constitu- 140 - ent assembly, but in the current atmosphere of ethnic and regional tensions, fractured politics, weak gov- ernment, and violent protests, there i s great uncer- tainty and the risk to alter fundamentally the eco- nomic and political and social landscape. 1.15 The real exchange rate, particularly since the mid-1990s has been stable (Figure 1.3). The combi- nation of a credible monetary and exchange rate pol- icy, appreciation of the currency in trading partners, .. 40 I and stable net capital flows-made up of highofficial inflows, private capital outflows, and apparently g g W a I D a C g O g # $ lower external transfers from coca eradication-has -PEER- RER(Other regions)--.-.Rw(LACregion) kept the real exchange rate (ER) stable. Discrete Note: An increasedenotes redexchange depreciation. changes in RER in 1999 and 2001 were driven by devaluations in Brazil, Chile and Argentina. Aside from these step changes, the RER has been quite stable, particularly when contrasted to earlier periods. BOLIVIA:POLICIES TOIMPROVEGROWTH EMPLOYMENT AND 8 Box 1.5 TheHydrocarbons Law Exploration for hydrocarbons in Bolivia began in 1919, and the sector has veered between government monopoly and private participation, including two nationalizations of foreign-owned assets: Standard Oil (1937), and Gulf Oil (1969). In 1996, a new Hydrocarbon Law, part of the structural reforms, transferred oil and gas development from the national company, YPFB, to private companies. It stated that the exploration, exploitation, and marketing would be carried out by the private sector through contracts of shared risk with YPFB. To encourage exploration and de- velopment the law distinguished between existing (before April 1996) and new (after April 1996) hydrocarbon fields. Existing fields paid 50 percent royalties on wellhead while new hydrocarbons fields paid 18 percent. The law subjected the hydrocarbon sector to the General Tax Regime but imposed an additional surtax once large field pro- duction would be achieved. Bolivia collected US$440 million intaxes on hydrocarbons in2004,5 percent of GDP. The reform significantly increased investments in upstream activities and foreign investors built a gas pipeline to Brazil. Gas reserves increased from 7 to 49 trillion cubic feet. Investors proposed a new pipeline to ex- port liquid natural gas to California but it was dropped due to opposition to exporting gas through Chile. Popular opposition to capitalization grew in the belief that the gas contracts Bolivia had signed were unfair because the companies could transfer abroad their income to avoid taxes. IMF (2005, pp. 24-25) found that "the revenue per- formance of the hydrocarbons sector has been disappointing..." but that this i s "...mostly attributable to factors that are either temporary or can be addressedthrough improvements inregulations and tax administration." The Mesa Government held a national referendum on the Hydrocarbons Law in July 2004, resulting in a mandate to change the Law. InAugust 2004 the Government presented a Bill to Congress, which met strong oppo- sition and was eventually withdrawn. InApril 2005 the Congress approved legislation, which the President refused to sign, creating an impasse with the Congress. In May 2005, Congress passed the new Hydrocarbons Law. The Government, foreign oil companies, and the international community have expressed concerns with four provi- sions: (i)amandatorymigrationfromexistingtonewcontracts; (ii)theroleofthestrengthenedYPFB,particularlyregardingcommercializationrights,whichcouldhamperpri- vate competition, or an excessive state intervention inthe sector; (iii) rightsforindigenouspeopleontheexploitationofhydrocarbonsoncommunitarianland; veto (iv) the new tax regime: an 18 percent royalty, combined with a 32 percent nondeductible tax based on production rather than on revenue. which does not distinguishbetween field sizes. II Box 1.6 Aguas del Illimani As part of the privatization program, the government granted concessions for the Cochabamba and L a Paz/El Alto water and sewage systems in order to improve their service and reduce Government costs. In Cocha- bamba, Aguas del Tunari (an affiliate of Bechtel) took over in 1999 and, with authorization from the regulator, raised tariffs but before it had improved service. Following opposition and rioting, the government cancelled the contract in early 2000, and modified the regulation law. The regulator resigned and the company was returned to government control. Things went better, initially, in L a PazEl Alto. Aguas del Illimani (an affiliate of French Suez-Lyonnaise des Eaux) began operations in 1997. It expanded coverage, especially among the poor, and new connections rose by two-thirds in the first years o f the contract. Inview of the rioting in Cochabamba, the regulator rejected a request to raise tariffs - which were lower than those charged by public water companies-but permitted increases in connec- tion charges for new users to a prohibitive level of US$450 per household. El Alto's population grew rapidly and an estimated 80,000 families lived outside the area covered by the concession agreement. Discontent grew and the gov- ernment asked the company to renegotiate the contract. The social organizations of El Alto called for the rescission of the contract. Demonstrations and blockades were mounted and in January, 2005, the government notifiedAguas del Illimani that its concession would be unilaterally terminated. The Government is seeking a solution, perhaps some sort of public-private partnership, that will minimize the cash compensation it will be required to pay to Aguas del Illimani. CHAPTERINTRODUCT~ON 1: 9 1.16 Aside from exchange rate policy, economic management has been weak. As social protests rose, the government increased public wages, cancelled planned increases in gasoline prices, and in 2004, re- versed an important privatization reform, reneging on its contract with Aguas del Zllimani (Box 1.6). As indicated above, public spending grew much faster than revenues, and the fiscal deficit rose from 2 per- cent to 9 percent of GDP between 1996 and 2002. The deficits were financed by dollar-denominated do- mestic borrowing and by foreign donors, and total public debt rose to 70 percent of GDP, about 14 points higher than before debt-relief was granted under HIPC. 1.17 The fiscal situation should be monitored closely; it would be sustainable if gas exports are main- tained.. Annex 1.5 contains the results of an analysis of the sustainability of the debt under three scenar- ios. The two major parameters are related to receipts from gas exports and from soy exports and trade preferences with the United States, and both present risks. First,gas export receipts are at risk either due to internal political and social factors or to declining world prices; and second, soy exports are at riskdue to the current trade negotiations between the United States, Colombia, Ecuador, and Peru related to a Free Trade Agreement (FTA). Bolivia's soy exports are based on trade preferences within the Andean Com- munity which could be eliminated under an FTAbetweenthe U.S. and the other Andean nations. Further, the U. S. has unilaterally extended trade preferences to Bolivia and other Andean nations under the An- dean Trade Promotion and DrugEradication Act (ATPDEA) which are due to expire at the end of 2006. The preferences apply to most of Bolivia's non-traditional manufactured exports. If Bolivia were to join the FTA negotiations, then it could extend or expand these preferences. Table 1.2 summarizes the three scenarios: 0 Baseline scenari-This assumes a moderate increase in gas export receipts from Argentina and Bra- zil and soy exports are either maintained at present levels or replaced by receipts from gas or other exports. Real GDP growth i s assumedto average 3.6 percent and the fiscal deficit i s assumed to fall to 2 percent of GDP. 0 Reduced soy export receipts and U.S. trade preferences (Scenario 2)-Export receipts (soy and non- traditional exports to the U.S.) decline by US$300 million between 2005 and 2007, recovering after- wards. Real GDP growth declines to 1.5 percent in 2006-07 and recovers gradually thereafter. Do- mestic debt service and fiscal financing requirements increase but the fiscal impact i s limited by the fact that these export sectors do not significantly contribute to fiscal revenues; the negative fiscal ef- fect of reduced soy export i s transmitted to the economy through a reduction in aggregatedemand re- sultingfrom a reduction inincome. However, other effects like employment reductions could aggra- vate social unrest makingthis scenario unviable. 0 Gas crisis (Scenario 3)-This scenario assumes that because of difficulties with the approval of the Hydrocarbon Law, the gas sector enters a crisis, investment i s suspended, and gas exports decline by US$400 million a year between 2005 and 2009. Inthis scenario, fiscal revenues are directly affected and the public sector will not be able to service its debt. Table 1.2 Debt Sustainabilitv-Results Under Three Scenarios Maintain or replace (Baseline Scenario) (Scenario 3) soy exports Sustainable, if public domes- tic debt i s contained Not sustainable Reduced soy exports (Scenario 2) and tradepreferences 1 Marginally sustainable Employment 1.18 Bolivian employment i s concentrated in low-productivity activities inthe informal sector. About 83 percent i s generated by micro-enterprises with low labor productivity and producingonly 25 percent of BOLIVIA:POLICIESTOIMPROVEGROW ANDEMPLOYMENT 10 GDP. The bulk of rural employment is in traditional agriculture41 percent of the total employment or 85 percent of the rural employment, is in agriculture (Figure 1.4). Services provide 76 percent of urban employment, where commerce alone represents25 percent of urban employment. Manufacturing gener- ates 16 percent of the urban employment-while extractive industries generate merely 1percent. Only 35 percent of urban employment is inthe formal sector, of which 12percent is inthe public sector. Figure 1.4 Employment by Sectors 1.19 Better economic performance during (percentage of total employment, average 1999-2002) 1990s had a positive impact on employment, but the downturn increased unemployment and un- 100% der-employment. From 1990 to 1997 unem- 90% ployment and self-employment rates fell8(Figure 80% 1.5). This trend reversed in 1999 and urban un- employment rose from 4.4 percent in 1997 to 9.4 70% c percent in 2001 and to 8.8 percent in 2002. The 60% preliminary estimate of unemployment i s 9.2 2% 50% $ percent. Self-employment rose from 30 percent 5 40% inthe mid-1990sto 38 percent in2002. 8 30% 1.20 Despite market and public sector re- 20% forms, employment in the formal private sector stagnated and public employment increased. Be- 10% tween 1995 and 2003 formal private sector em- 0% National Urban Rural ployment has been stagnant (Figure 1.6), and employment in some non-tradable sectors con- w Manufacture Agricutture 0 Mningand hydrocarbons C o m r c e Other services tracted (construction, trade, hotels, bars and res- taurants, and communications). Even though em- ployment in public enterprises contracted as a result of capitalization, public sector employment increased by 14 percent. Decentralization resulted in higher employment at the sub-national levels (prefectures) and inthe Central Government. 1.21 Labor incomes have fallen, especially in the informal sector. Between 1997 and 2001 the real la- bor income declined by 16.8 percent (Figure 1.5). The reduction is explained mainly by the reduction in average incomes engenderedby the growth of informality and the stagnation of employment inthe formal sector. 8. Self-employment is a proxy o f under-employment. The analysis made in this section is based on urban em- ployment data. Only this information enables to obtain a series of compatible data since beginning of the 90s. To that, urban employment urban i s more sensitive to macroeconomic fluctuations. CHAPTERI,ODUCTION 1: 11 45% 120 ___ 40% 115 - 35% -gjm" f p 105 30% -EP s u - 3 -=llo::100- ...... ....... .... ............................ 25% 95 - g g ~ y q 8 5 $ 6 $ 8 ~ 2Ph g 1.2 LOOKING FORWARD-NEXT FORINCREASINGINVESTMENT,PRODUCTIVITY,AND STEPS GROWTH 1.22 Bolivia i s at a crossroads. After several years of growth inthe1990s, resulting from structural re- forms which encouraged an upswing in private investment and productivity gains, a series of economic shocks hit Bolivia. These shocks not only had a negative economic impact, but they also led to public dis- enchantment with the reform program, which lost momentuminthe past five years, and growing political instability and social unrest. This, inturn, reinforced the economic downturn, to the point where the gains in poverty and employment of the 1990s have been lost. Bolivia needs to retake the reform agenda to achieve annual growth rates of 4 to 5 percent, sufficient for meaningful job creation and poverty reduc- tion. To sustain such level of economic growth, investment levels of 18-22 percent of GDP each year- compared to only 13.5 percent in recent years-and productivity gains of 1.5-2.0 percent per year are required. 1.23 This Country Economic Memorandum presentsa diagnosis of current problems inlight of longer- term trends and objectives, and some policy options that could lead to increased investment and produc- tivity that are necessary for sustainable growth. It i s grounded in the findings and recommendations in three recent World Bank reports: Investment Climate Assessment-Bolivia: Microeconomic Constraints and Opportunities for Higher Growth (World Bank 2001) Public Expenditure Review-Bolivia: Public Expenditure Management for Fiscal Sustainability and Equitable and Eficient Public Services, (World Bank 2004b), and Poverty Assessment-Bolivia Poverty Assessment: Establishing the Basis for Pro-Poor Growth, (World Bank 2005d). BOLIVIA: POLICIES TOIMPROVE GROWH ANDEMPLOYMENT 12 0 Country Social and Political Assessment-As a companion piece, the World Bank i s preparing a Country Social Analysis. This study will provide policy recommendations to help Bolivia achieve greater politicaland social stability (forthcoming). 1.24 The report consists of three subsequent chapters which each individually include specific recom- mendations. 1.25 Chapter 2: Growth and Its Determinants. This chapter analyzes Bolivia's growth performance from two perspectives. The first uses econometric analysis, comparing Bolivia with other countries to study the determinants of growth. The second perspective seeks to determine from the list of all con- straints, which constraints are binding on growth today. 1.26 Chapter 3: Investment, Productivity, and Competitiveness. This chapter analyses the factors that limit productivity and investment as well as the determinants of Bolivia's competitiveness, relative to other nations, inattracting investment. 1.27 Chapter 4: Trade, Trade Policy, and Institutions. Given Bolivian small domestic market, the ex- port sector i s crucial for economic growth. This chapter assesses Bolivia's trade policies and institutions and their effectiveness in trade, aiming at identifying barriers that prevent Bolvia's trade sector from be- coming an important source of growth. CHAPTER2 GROWTHAND ITS DETERMINANTS 2.1 Over the long term, Bolivia has not grown, and real average incomes were slightly lower in 2000 than they were in 1950. Table 2.1 shows average rates and cumulative growth for selectedcountries over the second half of the Twentieth Century. Bolivia i s the only one of the 30 countries where real incomes did not grow. Evenmoderate growth, over a longperiod, makes great differences inpeoples' lives. IfBo- livia had grown at the median rate of the other llLatin American countries-Ecuador's rate of 1.5 per- cent per year, 111 percent over the 50 years-the per capita income today would not be US$900, but US$1,888. The higher income would also lead to lower poverty. We estimate that the poverty rate would be inthe range of 29 percent to 44 percent instead of 65 percent (in2002).9 Table 2.1 Growthin Real GDP Per Capitafor Selected Countries, 1950-2000 (average and Cumulative) Developing Countries Industrialized Countries Average Cumulative Average Cumulative Annual Growth, Annual Growth. Growth 1950-2000 Growth 1950-2000 Argentina 1.1% 73% Australia 2.1% 183% I Bolivia -0.02% -1% Austria 3.5% 458% Brazil 3.0% 338% Belgium 2.8% 298% Chile 2.2% 197% Canada 2.2% 197% Colombia 1.8% 144% Denmark 2.3% 212% Costa Rica 1.7% 132% France 2.9% 318% Ecuador 1.5% 111% Ireland 3.7% 515% Mexico 2.2% 197% Italy 3.4% 432% Paraguay 1.4% 100% Japan 4.9% 993% Peru 1.2% 82% Portugal 4.0% 611% Uruguay 1.2% 82% Norway 2.9% 318% Venezuela 0.2% 11% Spain 3.8% 545% South Korea 5.4% 1287% Sweden 2.3% 212% Taiwan 6.3% 2022% United Kingdom 2.2% 197% Thailand 3.9% 577% United States 2.3% 212% Source:Calculatedfromdatafromthe PennWorld Tables. 2.2 Figure 2.1 shows Bolivia's real, per capita GDP growth over 1950-2004. There were two favor- able periods of growth, the early 1960s to the late 1970sand duringthe 1990s.These were offset by peri- ods of deeper lossesand the net effect was no real growth over the period. 2.3 The growth in the 1990s was consistent with World Bank projections inthe 1994CEM (See Ta- ble l,l) but it seemed disappointing to some in light of Bolivia's reforms. The reforms might have had more profound impacts but were limited by, at least, four factors (i) most reforms were not fully imple- mented (e.g., fiscal consolidation); (ii) the reforms did not extend to the investment climate for private sector activities; (iii) institutional reforms (e.g., enforcement of contracts, customs) began late, have not been vigorously pursued, and take longer to complete; and (iv) some reforms led to new distortions (e.g., pension). 9. The World Bank's Poverty Assessment estimated that the poverty/growth elasticity for Bolivia is inthe range of 0.3 to 0.5. This is low compared to the average of 1for other Latin American countries. (World Bank 2005d). BOLIVIA: POLICIES TOIMPROVEGROWHAND EMPLOYMENT 14 Figure 2.1 Real Growth Rate o f P e r m a n e n t Component 10.0% 5.0% 0.0% -5.0% -10.0% -Growth Rate of GDP per Capita -Permanent component -15.0% -? gEz :l - r n ?~~~~~~~~~~~~~~~~~~~~~~~ Note: The permanentcomponentfilters out short-termfluctuations,usingaBaxter-Kingfilter. Sources: INEandBCB. 2.4 This chapter considers Bolivian growth from two perspectives. The first relies on econometric investigations comparing Bolivia against other Latin American countries to find the factors which empiri- cally are important in determining growth. The second perspective looks at the constraints to growth and seeks to identify the constraint which i s binding. 2.1 GROWTH REGRESSIONS 2.5 Loayza, Fajnzylber and Calderon (2002) used cross country growth regressions for a sample of L A C countries to evaluate the determinants of recent growth. Table 2.2 shows their results for Bolivian growth, comparing the 1990s to the 1980s. The actual increase in growth was 3.5 percent, and they esti- mate that the structural reforms increased growth by 1.3 percentage points and stabilization reforms in- creased growth by 1.7 percentage points. Unfavorable external conditions decreased growth by 0.6 per- centage points. Their results account for a 2.5 percent increase-out of 3.5 percent total increase, leaving a relatively large residual not accounted for within their model. Table2.2 Explaining Changes in GrowthBetween Decades (change in the average growth rate of real GDPper capita) 1990s compared to 1980s 3.5 % ~ Actual change betweendecades Change explained by the regression 2.5% Transitional Convergence 0.1% Cyclical Reversion 0.0% Structural Reforms 1.3% Stabilization Policies 1.7% External Conditions -0.6% Change not explained by the regression 1.O% Note: Structural reforms include secondary enrollment, primary domestic creditIGDP, structure-adjusted trade volume/GDP, government consumption, and main telephones lines per capita; external conditions include growthrate of terms of trade andperiod shifts; and stabilization policies include inflation, standard deviationof outputgap, index of exchange rate overvaluationand frequency of years underbankingcrisis. Source: Loayza, FajnzylberandCalderon, 2002 CHAPTERGROW ANDmDETRMINANTS 2: 15 2.6 The improved growth inthe 1990s is associated with an increase inthe contributions of total fac- tor productivity (TFP) and human capital. The regression analyses split GDP growth into increased in inputs of labor and capital and into growth of total factor productivity. This technique attributes growth either to more labor, more physical capital or to TFF' (i.e. the unexplained residual after deducting the contributionof capital and labor). Growth of TFP i s usually attributedto shifting labor or capital to activi- ties with higher productivity or to adopting new technologies or more productive labor or capital. Bo- livia's TFP improved during the 1990s, indicating improvements in productivity levels-in part resulting from economic reforms; the human capital contribution continued its upward trend. In contrast, the con- tribution of physical capital to growth remained below 1970s levels (Table 2.3). However, over the longer period, 1971-2000, most of Bolivia's growth i s explained by adding more labor. Contributions to growth of capital and of productivity gains are notably small. Table2.3 GrowthAccounting 1971-2000 GDP Labor Education Cavital TFP 1971-2000 2.7 % 1.6% 0.2% 0.7% 0.2% 1991-2000 3.8% 1.7% 0.4% 0.5% 1.2% 1981-1990 0.1% 1.6% 0.2% -0.3% -1.5% 1971-1980 4.2% 1.6% -0.1% 1.9% 0.7% Source: Loayza, Fajnzylber andCalderon, 2002 2.7 Bolivia i s not projected to attain sustained high growth during the present decade, unless deep reforms are undertaken. In a recent updatingof their growth studies, Loayza et al. (2004, Table 111.3) pro- ject growth per capita in Bolivia for 200G10 could be 1.6 percent-below the projected average of 2.0 percent for Latin American. However, Bolivia could raise this growth by an additional four percentage points by further reforms in a "sharp progress" scenario that would place Bolivia within the top 25 per- cent of LAC countries. Bolivia could achieve: two percentage point gain from stabilization reforms di- rected at avoiding systemic banking crises and two percentage points from structural reforms aimed at government burden, education and public infrastructure. 2.2 CONSTRAINTSTO GROWTH 2.8 Economists, researchers, and government officials and policy-makers have pointed to 14 interre- lated factors that have-at various times-inhibited Bolivia's growth (1) macroeconomic mismanage- ment; (2) trade policies; (3) taxation; (4) political instability; (5) weak institutions; (6) infrastructure; (7) financial sector weaknesses; (8) investment climate; (9) deficient entrepreneurship/labor/skills; (10) edu- cation; (11) geography; (12) ethnic conflicts; (13) non-diversified economic structure, and (14) external factors. (D. Kaufmann, et al. 2003 reviews the literature on Bolivian growth studies.) These encompass the factors that Loayza et al. (2004) identified in their analyses as well as the IMF's ex post evaluation. IMF(2005, p. 13)concludedthat: "As has been recognized for some time, the root causes of low trend growth in Bolivia are poor infrastructure, poor institutions and government services, and fear of instability. The main insight of the more recent studies is that the political and social roots of these problems are deeper than recognized in the previous literature. At the industry level, these problems manifest themselves in the dichotomy between the formal sector, which benefits mainly pow- erful or well-connected firms, and a vast informal sector. At the state level, they lead to poli- ticized agencies which-with important exceptions-function as providers of services and rents to their `clients,' at the expense of society as a whole." BOLIVIA: POLICIES TOIMPROVEGROWH AND EMPLOYMENT 16 2.9 Taking this list of 14 constraints as the startingpoint, the goal for policy i s to identify which con- straints are bindingon growth today and to make them the priorities for public policy (Box 2.1). Eliminat- ingbindingconstraints would make the greatest impact on increasing growth. Box 2.1 GrowthDiagnostics-Finding the Causes of Low Growth Growth diagnostics is an approach to development studies that was recently articulated by Hausmann, Rodrik, and Velasco (2005) who used it to analyze policies in Brazil, the Dominican Republic, and El Salvador. The approach examines the correlates of low growth in seeking to find the cause. It considers three possible realms: (1) Low or uncertain returns to investment; (2) Inadequate private appropriability of returns; and (3) Inade- quate access to finance. Whereas econometric investigations identify the correlates of growth, growth diagnostics tries to establish a causal relationship. It i s analogous to a medical doctor who is presented a list of symptoms but who can only cure the malady after pinpointingthe cause. Finding.the binding constraint faces several challenges: There are many constraints to growth, but not all are binding. B y their nature, causal elements will be corre- lated with low growth, but not everything that is correlated is a cause. Binding constraints change. (1) Economic reform removes binding constraints and the economy will grow until a new binding constraint limits it. (2) Even when no binding constraint is removed, political, social or economic events or shocks can introduce new binding constraints. Some factors that limit growth are not constraints but parameters. They are imposed by nature, and can only be changed by providence, not by public policy. It is impossible to prove that a constraint is binding. The searchfor the bindingconstraint involves testing each constraint against the implications that would be observed if it were the binding constraint. Each hypothesis can be rejected, but none can be "proven." Broad-based, sustained growth is necessary-but not sufficient-to reduce poverty. Growth will raise in- comes, but there are other, non-monetary aspects to poverty and development. Bolivia has managed, over the past fifty years, to improve these indicators even though per capita real income was un-changed. Life expec- tancy, literacy, and health measures have all improved, and the World Bank's poverty assessmentfound that "indicators of non-income poverty show more improvement than income poverty." While growth would pro- vide more resources to improve the non-monetary poverty indicators, growth is only one element of develop- ment and the government should continue to pursue social sector reforms that ensure the added resources will be most effectively applied. See Annex 2.1, Growth Diagnostics and the Binding Constraints to Growth ~~ 2.2.1 TheBindingConstraint-PoliticaVSocial Instability 2.10 Despite substantial advances in fiscal and financial reforms including: improvements inbank su- pervision and Central Bank reforms, during the 1990s and through 1998, the binding constraints related to financial sector weaknesses and some macroeconomic mismanagement (Annex 2.1 contains an exten- sive evaluation of the binding constraints to growth). These acted to hold growth below the levels that some expected in the face of Bolivia's strong and extended economic reforms (Annex 2.1 contains an ex- tensive evaluation of the bindingconstraints to growth). 2.11 Following the economic shocks and the government's reactions to them, the bindingconstraints changed. Today,the bindingconstraints on growth relate to investors' uncertainty as to whether they can realize the returns on their investment. This uncertainty stems from political and social instability which led to the referendum on hydrocarbons and was reinforced by the Government's unilateral decision to terminate its contract with Aguas del Zllimani. The result has been to undermine property rights and the rule of law. The investment climate had already been deteriorating in the face of violent protests, policy reversals, business disruptions, and escalating fiscal deficits, but these actions have led investors to delay new investments, expansions, and modernizations of facilities until they can have greater assurance that their rightswill be honored. CHAPTERGROWTH mDEFRMINANE 2: AND 17 2.2.2 Other Constraints 2.12 Other constraints are operable in Bolivia, and when the political and social crises are resolved, thenthe new bindingconstraints are likely to be one or more of the following constraints: Investment climate-By nearly every metric, Bolivia's investment climate i s one of the worst in the world. Some reforms have been made, but they are not sufficient to attract new foreign or domestic investors and, overall, the investment climate i s deteriorating. Weak institutions-Refoms have improved some public institutions but others have gotten worse or have stopped functioning completely-significant deficiencies intrade institutions and in institutions dealing with private investors are discussedinthe next two chapters of this report. Trade policies-The trade regime, today, i s generally open and induces few distortions. However, uncontrolled contraband and uncertainty over future trade relations with the United States deter for- mal-sector investors and encourage those inthe informal sector. As Bolivia draws closer to losing its trade preferences with the United States (at the end of 2006), this factor could reduce the gains that the private sector has made innon-traditional exports. Macroeconomic mismanagement-Large, unsustainable deficits discourage investors since they can presage inflation andor devaluations. However, private investors have enjoyed an extended period of stable prices and real exchangerates. This constraint could re-emerge under a government which was unable to control spending inlight of the fragile fiscal situation. 2.13 Inaddition, there some factors that reduce efficiency, limit competitiveness, or affect the nature and composition of investment. They mainly include 0 Education-Education indicators have been improved, but they are low by regional standards. The factors that account for low wages and rising unemployment are more relatedto labor-demand than to the educational levels of the labor force. 0 Infrastructure-If infrastructure were a binding constraint then there would be large numbers of un- funded projects with highrates of return. Most agree that infrastructure i s weak and it limits Bolivia's competitiveness, but the size of the economy and Bolivia's geography are such that, until the econ- omy grows, there are likely to be better investments outside infrastructure. 2.2.3 Parameters 2.14 Bolivia's economic prospects are shaped by factors within its control and by others over which it has no influence. Those factors within its control are constraints, but those outside its control are parame- ters. Parameters help to determine Bolivia's comparative advantage and its potential within the world economy, and the proper role for public policy i s to relax constraints - or to convert them into assets-in order to maximize economic growth within these parameters: 0 Extemalfactors-Bolivia's i s a small economy that will be affected by developments in the larger world economy. Its economy i s closely tied to the economic fortunes of its larger neighbors- Argentina, Brazil, and Chile. Sealing the borders and retreating into autarky i s not an option. Bolivia can position itself better against external factors by adopting policies that facilitate adjustment, but external factors-by their nature-will always be outside the control of public policy. 0 Geography-Bolivia's geography was given by nature and by history. It i s a land-locked nations with difficult terrain. Public policy cannot level the Andes nor redraw its borders. 0 Ethnic conflicts-Bolivia's history has been one of ethnic conflicts, and the history cannot be changed. The future history can be one of how the ethnic conflicts were overcome. Public policy, to- day, can lay the foundations for a future society which has put this in its past and has overcome its ethnic conflicts. BOLIVIA: POLICIESTOIMPROVE GROW ANDEMPLOYMENT 18 0 Non-diversified economic structure-Bolivia has a small population and a small economy dominated by natural resources. Given these parameters, the economic scope for diversification is limited. The appropriate goal for public policy i s to allow economic forces to operate, encouraging investment and trade, and they will reveal the efficient level of structural diversification. 2.3 RECOMMENDATIONS 2.15 The binding constraint to growth i s the political and social instability which has added risk and uncertainty for investors. It ledto the referendum on hydrocarbons, to terminating the contract withAguas del Zllimani, to rising public expenditures and deficits and to underminingproperty rights and the rule of law. 2.16 There are no easy solutions, short-cuts, or "work-arounds" to these problems. Sustained growth will be elusive until they are resolved. The overarching political and social problems are not economic and they can only be solved politically and cooperatively by Bolivians. Today, when Bolivia is most in need of new investment, the politics are not cooperative but are conflictive, divisive, and confrontational. They are driving investment away from Bolivia, instead of attracting it, and they will lead to deeper pov- erty. 2.17 Investors complain that Bolivia does not have "clear and stable rules of the game," and it cannot have them untilit has restored a stable and predictable social, political and economic environment. This i s inherently subjective but, as a goal, it should include at least two elements: 1. Restorationof public order. Moderationof political instability and social disturbances, elimi- nation of unpredictable blockages of public roadways and infrastructure, and ability to oper- ate businesseswithout disruption. 2. Enforcement of property rights and respectfor the rule of law. This can be accomplished by finding solutions to the crises surrounding the Hydrocarbons Law andAguas del Zllimanithat are widely perceived, bothby Bolivians and internationalinvestors, as fair; 2.18 Clear and stable rules are essential for investors. However, for the country to maximize the bene- fits of new investment, the rules of the game have to the right rules that encourage efficient, labor- intensive investment in line with Bolivia's comparative advantages. Today, the rules of the game, and the institutions which implement and enforce them, are not the right ones. The next chapter-Investment, Productivity, and Competitiveness-look at the distortions inherent in the present system and discuss policies to reduce them. CHAPTER 3 INVESTMENT, PRODUCTIVITY,AND COMPETITIVENESS 3.1 To prevent poverty from rising further, Bolivia needs private investors to create jobs in the formal sector that offer wages high enough so that families can purchase the basic bundle of goods and services. If Bolivia could sustain a growth rate in the range of 4.5 to 5.0 percent for 10 to 20 years, it 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. The World Banks Poverty Assessment (World Bank, 2005d) estimates that the elasticity of poverty to growth i s low-in the range of 0.3 to 0.5-so with this sustained growth poverty would drop from 65 percent (2002) to 55-60 percent in 10 years and to 35-54 percent in 20. To achieve these results will require greater investment and better productivity gains than Bolivia achieved, even duringthe 1990s. 3.2 The concepts of productivity, competitiveness and the investment climate are closely related. Productivity i s defined as the quantity of output for a unit of input-labor or capital-while competi- tiveness reflects many components of an economy and its ability to compete domestically or interna- tionally. The investment climate affects an economy's ability to attract investment and to employ it effi- ciently and productively. But, since investment i s demand responsive, it may be influenced by an econ- omy's competitiveness, with more competitive economies generally having an edge. Breaking out of this possible low-level trap-by measures to raise productivity-is the path to economic growth and development. William Lewis (2004, p. 12), based on industry-level studies of seven developed and de- veloping countries conducted by the McKinsey Global Institute found that "The solution does not start with more capital. The solution, rather, i s in the country's productivity or the way it organizes and de- ploys both its labor and its capital. Ifpoor countries improved productivity and balanced their budgets, they would have plenty of capitalfor growth from domestic savers and foreign investors." 3.3 This chapter discusses trends inproductivity, investment and growth; reviews Bolivia's invest- ment climate and competitiveness, and offers some recommendations for policy reforms. 3.1 PRODUCTIVITY,INVESTMENT, AND GROWTH 3.4 Productivity increases are the driving force in economic growth. The essence of development lies in improving productivity: getting more output from the resources employed in production. The McKinsey Global Institute found, based on international fm-and sector-level analyses over a wide range of countries that "Productivity varies enormously around the world, and the differences in pro- ductivity explain virtually all the differences inGDP per capita."" 3.5 Generally speaking, an economy's productivity i s determined by the way economic agents em- ploy labor, capital and natural resources. A country's GDP per capita i s equal to the average labor pro- ductivity (output per worker) multiplied by the percentage of the population that i s working. The sim- plest measure of productivity-output per worker-shows that developing countries including Bolivia have much lower productivity than the more advanced industrial countries. 3.6 The limitation of this measure of labor productivity i s it does not reflect the contribution of non-labor factors of production and therefore overstates the contribution of labor alone. More complete and recent measures have included non-labor factors, especially capital, and focused on the TFP (see 10. William W. Lewis, The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability (Chi- cago: University of Chicago Press, 2004), p. 9. See also Hall and Jones (1999) for an econometric analysis with similar conclusions. BOLIVIA: POLICIES TOIMPROVEGROWTH EMPLOYMENT AND 20 Section 2.1). Several recent studies compare TFP growth for Bolivia to that of other countries. (Annex 3.1, Table A3.1-1) Loayza et al. (2004) estimates annualized TFP growth for Bolivia over 1970-2000 as 0.2 percent. Another study covering 1950-2000 estimates it as -0.4 percent. Both studies place Bo- livia among the world's poorest performers (Table 2.3; Annex 3.1, Table A3.1-1; and Gomes, Pessoa and Veloso 2004). 3.7 Table 3.1 focuses on productivity for the non-agricultural sectors and the occupied urban labor force for 1990-97. Capital productivity-as measuredby the ratio of non-agricultural GDP to the esti- mated capital stock-increased only slightly. Labor productivity for non-agricultural output was essen- tially stagnant, while the capital-to-urban labor ratio declined. This i s explained by the high rural to ur- ban migration duringthe 1990s, but it does not reflect well on Bolivia's growth dynamics. Ina vigorous growing economy, one would expect increasing labor productivity and capital deepening. Table3.I Capital and Labor Productivity, 1990-97 1 Year Non-Agric. ~ Year ICOR GDP'K GDP/UrbanL" UUrban La 1990 1.o 25.0 14.2 67.2 1991 1.3 25.8 13.8 63.7 1992 5.O 25.7 13.8 63.3 1993 1.9 26.2 13.4 60.2 1994 1.4 27.0 12.8 55.9 1995 1.7 27.7 12.8 54.3 1996 2.3 28.1 12.4 51.7 1997 2.5 28.4 13.0 53.8 Note: (a) expressedinmillions of 1990Bs. Source: Annex 3.1 Table A3.1-3, as calculated andreproducedfromJemio (1999). 3.8 Investment, the other main driver of economic growth, is-and has been-low. During the 1990s investment averaged 16.6 percent af GDP-low compared to Latin American countries, or to all developing countries (Table 3.2). L A C and other developing countries, on average, maintained or in- creasedinvestment rates, but Bolivia's investment rate was lower inthe 1990sthan inthe 1970s. Table3.2 Investment,by decades, 1970-2002 (asa percentage of GDP) 1970-2002 1970s 1980s 1990s 1990-2002 Bolivia 16.2 17.8 14.0 16.8 16.6 LAC 1/ 20.0 20.2 19.2 20.6 20.4 Developingcountries 1/ 21.2 20.8 21.0 22.1 21.7 Note: Investmentdata doesn't include "changes in stocks"; it correspondsto gross fixed capital for- mation. 1/unweightedaverages. Source:The World Bank and INE. 3.9 Table 3.3 shows investment trends over the last ten years: 0 Public investment generally declined relative to the base year, and it was falling even as total public expenditures were rising from 29 percent of GDP in 1994-95 to 33 percent in 2002-04 (Annex 1.1). Also, official loans and grants to the public sector have risen while public investment has fallen. 0 Private investment rose sharply to a peak of 18.3percent of GDP in 1998, and gradually fell back to 6.4 percent in 2004. Most of the additional investment i s linked to foreign direct investment under the capitalization program and to build the gas pipeline to Brazil. However, since the onset of the economic crises, FDI dropped off sharply and fell to its lowest level-1.3 percent of GDP-in 2004. CHAPTER INVESMEN,~ AND COMPEZTVENESS 3: P R O D U V ~ , 21 - Table3.3 Annual Investment, 1994-2004 (as a percentage of GDP) - 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 c Gross capitalformation 14.4 15.2 16.2 19.6 23.6 18.8 18.1 14.3 16.6 13.4 12.4 Public 8.5 8.0 7.3 5.9 5.3 5.7 5.1 5.4 5.5 5.2 6.0 Privateandchangesin stock 5.9 7.3 9.0 13.8 18.3 13.1 13.1 8.9 11.1 8.2 6.4 FDI 1.5 2.6 5.8 11.1 12.1 12.2 8.8 8.7 8.5 2.4 1.3 Sources: INE, and BCB. 3.10 Table 3.4 uses the growth accounting results from Section 2.1 to project future growth rates, depending on the levels of investment and changes in productivity. Inthe 1990s, investment averaged 16.8 percent of GDP (Table 3.1) and TFP growth averaged 1.2 percent-its highest level in any of the last three decades (Table 2.3). If Bolivia achieved these rates over the next ten years, the rate of growth would be about 3.7 percent per year. However, investment has fallen, averaging only 13.4 percent of GDP since 2000, and with the low investment and economic disruptions, productivity gains are likely to be negative or, at best, zero. Thus, recent trends imply much lower growth, only on the order of 2 per- cent, which, with Bolivia's populationgrowth rate of 2.4 percent would leadto falling incomes and still- higher levels of poverty. Table 3.4 Productivity, Investment, and Growth What investment and productivity are necessary to grow at 4.5 5.0%? - (average real GDP growth 2005-2015) TFPcontribution to growth (%) lnvestment (% of GDP) 12 14 16 18 20 22 24 , 0.0 ._____2.1:_. - -- -- - ---- - -, I 1.9_ - _ _ _ 2.3 2.5 2.7 2.9 3.1 0.5 2.5 2.7 2.9 3.1 3.3 3.5 3.7 1.o 3.0 3.6 3.4 3.d 3.8 4.0 4.2 1.5 2.0 2.5 3.0 5.2 5.4 5.7 5.9 6.1 6.3 6.5 3.5 5.7 6.0 6.2 6.5 6.7 6.9 7.1 4.0 6.3 6.5 6.8 7.0 7.2 7.5 7.7 Note: GDP growth estimates are based on a growth accountingframework using selected parameters for Bolivia from Loayza, Fajnzylberand Calderon(2004). An increasedenotesreal exchange depreciation. a Boliviainthe 1990s:investment- 16.8%andTFP growth- 1.2 I Boliviatoday: investment 13% andTFP growth 0% - Source: World Bank staffestimates 3.11 Table 3.3 answers the question, "What combinations of investment and productivity gains would lead to growth in the range of 4.5-5.0 percent?" These combinations are marked with shading. These levels are unattainable without resuming and deepening the policy reforms that were dropped after the economic shocks. Inthe peak years of the capital inflows, 1997-99, total investment averaged 20 percent of GDP. This was made up of public investment equal to 6.4 percent of GDP and private investment of 13.6 percent, principally foreign direct investment (11.5 percent of GDP). Even ifBo- livia reaches those levels of investment, there would still have to be gains in total factor productivity BOLIVIA: POLICIESTOIMPROVEGROW ANDEMPLOYMENT 22 from the 1.2 percent average of the 1990sto about 1.6 percent or higher to raise growth above 4.5 per- cent per year. 3.12 Bolivia is not likely to realize either the investment or productivity targets under present poli- cies. Public investment has averaged 5.3 percent of GDP (over 2001-04), and-given fiscal con- straints-the prospects for increases are limited. To reach an investment of 20 percent of GDP will re- quire private investment to increase from 8.2 percent of GDP (the average for 2001-04) to around 15 percent. This will be difficult becauseBolivia i s not attractive to investorsiither domestic or foreign. The World Bank (Doing Business, 2005) and the World Economic Forum(Global Competitiveness Re- port) both rank Bolivia at the bottom in terms of the competitiveness of their business environments. The balance of this chapter analyzes options for improving productivity and competitiveness to attract more investment. 3.1.1 Sectorial Differences inProductivity 3.13 Bolivian incomes are low because most Bolivians are employed in low-productivity work. Ag- riculture-particularly subsistence agriculture-is characterized by low productivity. The services sec- tor also offers many low productivity, low wage.activities. Moving labor out of these activities into higher productivity sectors i s essential for development and poverty reduction, but public policy pres- ently discourages that transition. Table 3.5 Labor Productivity, by Sector, 1999-2003 (in US$) Sector 1999 2000 2001 2002 2003a Agriculture, Forestry, etc. 667 704 602 641 687 Social, Personal& Domestic Services 750 687 721 744 755 Commerce 973 1,014 1,046 1,125 952 Construction 1,216 1,002 1,181 1,255 711 RestaurantsandHotels 1531 1,545 1,450 1,3 14 1,046 ManufacturingIndustry 2,764 3,177 3,326 2,841 2,820 Transportationand Communications 4,061 4,8 18 4,266 4,598 4,507 Public AdministrationServices 7,540 7,315 9,276 8,545 9,019 Financial Services 10,949 8,523 7,905 10,247 9,839 Oil and mining 12,073 13,293 13,540 18,229 n.a. Electricity, Gas andWater 17512 8,05 1 12,954 18,602 n.a. GDP-Average 1,891 1,935 1,839 1,919 1,840 Note: (a) preliminarydata. 3.14 Table 3.5 shows sectoral estimates of labor productivity over 1999-2003 which reveal the fol- lowinghighlights: 0 This was a slow growth period, with little, or no, gains for agriculture, manufacturing, commerce, and transportatiodcommunications or the economy as a whole. 0 The average productivity of workers in manufacturing i s four times greater than the average of ag- ricultural workers. Modern financial services are relatively capital intensive and possess high labor productivity, as do utilities (electricity, natural gas, and water) and oil and mining. There were strong productivity gains in oil and mining, where there was considerable investment following the privatizatiodcapitalization program. CHAPTR INVELZME~,~COMPELTVENESS 3: P R O D U ~ AND , V 23 3.1.2 Productivity, FirmSize, and Informality 3.15 Just as productivity differs across sectors, it varies substantially across firm size, with larger firms being more productive. Table 3.6 shows estimated output and employment by enterprise size. Microenterprises account for 83 percent of employment, but they produce only 26 percent of GDP. This implies that large firms have labor productivity levels 25 times greater than microenterprises and that for every one percent of the labor force that could be shifted-through new investment-from microen- terprises into large enterprises, there i s a potential 7 percent gain inoutput. (The net gain inGDP would be smaller because of the cost of the additional investment.) Table 3.6 Contribution of Companies to GDP and Employment, by Size, 1999 Size of Finn output Employment Employment Productivity (number ofemployees) (% of GDP) (Thousands) (% of total) (in 000s of Bs.) Micro (1-9) 25.5 2,984 83.1 4 Small (10-19) 2.7 170 4.7 8 Medium(2049) 3.3 123 3.4 13 Large (>50) 65.3 312 8.7 101 Adjustment 3.2 Total 100 3,589 100 13 Note: Productivity i s measuredby GDPper employee. 1999 GDP was Bs 48,156 million. Source: World Bank (2004), p. 23, basedon data from the Vice Ministry of Microenterprises.See also CONAPE 3.16 Comparisons such as these are difficult because of the high degree of informal activity. By its nature, it i s impossible to know how much of the economy i s informal, but the most widely cited esti- mates put it at 67 percent, placing Bolivia among the economies with the greatest informality." Figure 3.1 compares Bolivia to other Latin American countries. InLatin America the average i s 41 percent. The lowest rate is inChile (20 percent). Among Bolivian manufacturing fm,90 percent of the estab- lishments, employing 72 percent of manufacturing labor force, are informal (World Bank 2001, p. 125). 3.17 Large f m s (50 or more employees-about 1000 f m s ) produced 65 percent of GDP but ac- counted for only 9 percent of employment. Table 3.6 includes informal f m s but it may under- represent their output, especially for small and micro enterprises. In any case, the productivity of smaller fm i s generally much lower than that of larger firms; they have less fixed assets; older tech- nology, and they are less efficient. In2002, the formal sector employedonly 31 percent (a large propor- tion of whom were government employees) of the occupied urban labor force; the remainder were in the informal sector, including domestic service (Monterrey 2004, p. 9). 11. See, for example, World Bank, Doing Business 2005 and Friedrich Schneider, "Size and Measurement of the Informal Economy in 110 Countries around the World," Department of Economics, Johannes Kepler University, July 17, 2002. The high percentage o f informality has not changed much over the years. Klein (2003, p. 177) cites estimates for 1940 indicating that 67 percent of the Bolivian economy was outside the formal market economy. BOLIVIA: POLICIES TOIMPROVE GROWTH EMPLOYMENT AND 24 3.18 Informal enterprises are less productive inpart because they operate outside the law. They can- not get favorable credit terms nor take advantage of institutions that facilitate enterprise growth and al- low firms to achieve economies of scale. Informal enterprises operate principally (but not entirely) in non-tradable sectors+ommerce, transportation, and Figure 3.1 Informality construction. The informal sector i s competitive do- mestically because it i s able to avoid taxes, but it Chile cannot compete internationally. CostaRka ME4m 3.19 Smuggling is widespread-and, by its na- VvX ture, informal-and there i s some smuggling of ex- ports to neighboring countries, mostly to avoid those countries' import taxes or other restrictions. Recent :z -r BDidl AYWAOE research (Loayza 1996, Schneider 2002) has found Mz Nka- that growth of the informal sector i s correlated with lower growth; factors which tend to increase the in- wemala formal sector are hightaxes and social security con- PWU tributions, labor market restrictions, burdensome P- 0olkia regulations, and weak government institutions. In- 0 10 20 30 40 50 80 70 80 formal enterprises can avoid these costs and obsta- % of the economy cles and this may be a route to their economic sur- Source: Bank, Doing Business, 2004 vival. 3.2 INVESTMENT CLIMATE 3.20 Most factors that affect a country's investment climate can be influencedor controlledby public policy, e.g., labor law, contract enforcement, regulatory norms. This section focuses on those factors, based on Bolivian data and analyses, assorted information and international surveys, and interviews with entrepreneursinvolved in a wide range of economic activities. (Box 3.1) The focus of these inter- views was on impediments to output expansion, investment, exports and employment: What are the constraints to investment, and how have firms dealt with them? This chapter incorporates insights from interviews with entrepreneurs from 15 firms. The firms were mostly manufacturing establishments,from the apparel textile, food, wood, metalworking, auto parts, leather, for- estry, and jewelry industries. In addition, two financial institutions were separately interviewed. The firms were generally medium size or large scale enterprises, ranging from 20 to over 400 employees. Most interviews were conducted with the chief executive officers. With the exception of one firm (See Box 3.4), the firms were prom- ised confidentiality. Quantitative information was sought on production, employment, salaries and salary struc- ture, profitability, exports, imports, input usage, investments, machinery, taxes, and costs. The problems of the firm were discussedfrom managerial and economic perspectives. The results of these interviews are reflectedin the text. Complementingthese interviews were meetings with a numberof small and informalenterprises 3.2.1 Macroeconomic Policy Environment 3.21 Entrepreneurs believe that since the stabilization in the mid-1980s Bolivian macroeconomic policy, though heavily dependent on external aid, has been consistent, effective, and supportive. Infla- tion has been in single-digit levels over the past decade; the Central Banks exchange rate management kept the currency competitive and offered reasonable monetary stability. Dollarization presents special problems for monetary and financial policy, but it has been effectively handled. (Morales 2003 analyzes CHAPTER3: INVEmEm, PRODUCTlVm, AND cOMPERl7VENESS 25 dollarization and monetary policy.) The chief macro risk i s fiscal and there i s uncertainty concerning future policies and managementof the Central Bank.12 3.2.2 PropertyRights,the Ruleof Law, andthe Enforcementof Contracts 3.22 Property rights,the rule of law, and the institutions to guarantee their enforcement are the foun- dations of a market economy. Potential investors-domestic or foreign-evaluate how well property rights are defined and protected by law, how well the judicial system would protect their rights, and whether the judicial system i s immune to pressures from the government, citizens, or f m s . Does the government abide by the rules it has set and honor its contracts? Property rights can also be compro- mised by organizedcrime or by corruption. Table3.7 Public Institutions Index Rankings, Selected Countries, 2004 WEF WEF TI Corruution Country Contracts & Law Corruption Perceptions Index a Index a Index Argentina 100 55 108 Bolivia 94 74 122 Botswana 35 47 31 Brazil 53 45 59 Chile 27 15 20 Hong Kong (China) 13 4 16 South Korea 43 50 47 Mauritius 50 82 54 Malaysia 33 44 39 Norway 3 12 8 Paraguay 101 90 140 Peru 86 39 67 Singapore 10 7 5 Slovenia 47 23 31 Taiwan (China) 31 24 35 Venezuela 104 69 114 Notes: a'Components of the WEF Growth Competitiveness Index ranking 104 countries. Transparency International'sCorruptionPerceptionsIndexranked145countries. Sources: World Economic Forum, The Global Competitiveness Report, 2004-2005; Transpar- ency International,Corruption Perceptions Index 2004. 3.23 There are serious problems inBolivia. Most international surveys of public institutions and the rule of law rank Bolivia near the bottom. Table 3.7 show country rankings for selectedLatin American and other countries for three indexes: 0 The World Economic Forum's (WEF)contracts and law index, which reflects four factors: (i) Judicialindependence; (ii)Protectionofpropertyrights; (iii)Governmentneutralityinawardinggovernmentcontracts;and (iv) The prevalence of organized crime. 12. Apart from the enduring fiscal and debt imbalance, an additional source of uncertainty relates to monetary and exchange rate policies. The Central Bank has the legal mandate, policy instruments, and institutional in- dependenceto ensure price stability. There i s no formal inflation target, but the Central Bank inrecent years has acted as if one existed. It has also actively managed exchange rate policy to maintain currency parity in real terms (as opposed to a free float, as usually pursued with an inflation targeting regime). BOLIVIA: POLICIESTOIMPROVEGROW AND EMPLOYMENT 26 The WEF corruption index focusing on the prevalence of extortion by government officials intrade transactions, public utility services and tax administration. Transparency International's (TI) Corruptions Perceptions Index. 3.24 The polling method for the contracts and law index, i s sensitive to recent events, and the low rankings for Argentina (100 of 104 countries) and Venezuela (104) reflect recent government abroga- tions of contractual obligations. Bolivia also ranks near the bottom (94). Ina subjective survey focusing solely on property rights issues, the WEF ranked Bolivia 103'd out of 104 countries (World Economic Forum 2004, p. 524) in terms of judicial independence, the efficiency of the legal framework, and pro- tection of intellectual pr~perty.'~ 3.25 Bolivia also ranks poorly on corruption, although entrepreneurshave commented on recent im- provements, most notably with respect to the customs service and tax administration. Enforcing con- tracts i s another dimension of the effective exercise of property rights. Bolivia also fares poorly on both the time and the number of procedures necessaryto enforce a contract (Annex 3.1, Table A3.1-4). 3.26 Local entrepreneurs think that the most prevalent and bindingconstraint i s the uncertainty sur- rounding property rights and the rule of law, resulting from political uncertainty and social tension. The uncertainty surrounding the Hydrocarbons Law and the government's abrogation of the water contracts visibly and dramatically defines the private investment climate, but there are other examples. Illegal occupations of private and concessioned lands constrain investment in agriculture and forestry. Road blockades and other disruptive or violent protests-illegal in practically all countries-have lowered production and reduced labor incomes. 14 3.27 Entrepreneurs interviewed cited these problems as the major reason they are not making new investments. Market demand-especially for exporting firms - was not often mentionedas a constraint. Most firms are adopting a "wait and see" stance with respect to new investment. Representative quotes from entrepreneurs, as expressedinthe interviews, include: "The Government keeps changing the rules." "The Government should obey the law and respect its own contracts." "Judicial insecurity impedes my business, and I will not invest new resources until the situation is improved or, at least, clarijied." "Idon't wanttogrow my business underpresent circumstances." "Iwanttomaintainalowprojle. If myj r m grows, Iwill attractmoreattentionfrom the Govern- ment and more efforts by Government ofJicials to extort moneyfrom my operations." 3.2.3 The Regulatory Environment 3.28 Today there are few price controls, and the trade regime i s open, but the regulatory environ- ment i s still burdensome and costly. And, while there have been some recent improvements, there is substantial scope for more. 3.29 In a country which needs new, formal sector investment, starting and registering a business is unreasonably costly and time consuming. It requires some 15 procedures, including an attorney's prepa- ration of deed and application, publication of the deed, presentation of the opening statement of ac- counts, tax registration, municipal level approval, and registration with public or semi-public institu- tions, including the FUNDEMPRESA,the Chamber of Commerce, the national health system, the pen- sion system and the Ministry of Labor. 13. See Annex 3.1, Figure A3.1-3. No effective intellectual property protection exists in Bolivia and the 2004 WEF survey rankedBolivia in 103rdplace with only Angola rankedlower. (bid., p. 525). 14. Some foreign-owned firms in L a Paz and El Alto report up to 30 days of lost work per year. See U.S. De- partment of State (2004). CHAPTERINVESTMEM; COMPETITTVENESS 3: PRODUCTIV~~ AND 27 3.30 The average time to open a business in 2004 (59 days) i s better than in 2000, when it took 18 steps (each entailing several procedures) and an average of 66 days. (World Bank 2001, p. 12.) Proce- dures have been simplified on several fronts. The municipal government of La Paz has made improve- ments that lowered the average cost from US$3,400 to US$1,460. (Box 3.2) Nevertheless, US$1,460 is 65 percent more than the average annual income and i s still inordinately high. Bolivia i s not among the worst Latin American countries (Table 3.8), but it is far behind the best (Chile) and it lags other, more developed countries. There are no reasons a priori that Bolivia can not emulate leaders such as Austra- lia, Hong Kong and Singap~re.'~For example, Table 3.8 shows that many countries view minimum capital requirements as unnecessaryand for establishing a new business. Box 3.2 Simplifying Business Regulationsfor the Municipality of La Paz In2002 the government, with support from IFC, decided to simplify business regulation, including initial business registration. The Municipality o f La Paz was chosen as a pilot, and the Ministry o f Eco-nomic Development's Unit for Productivity and Competitiveness (LJPC) designed the project to use the pilot results for a National Plan o f Administrative Simplification. Simplification was expanded for registra-tion and oper- ating licenses to over 30 processes affected by municipal regulations. Training o f civil ser-vants and the in- troduction of advanced information and technology systems have added transparency and accountability within the Municipality, thereby improving service, along with the Municipality's public image. Results have included: The number o f steps o f business regulation in L a Paz was reduced by an average of 70 percent and the time was reduced by 90 percent. The average number of visits by entrepreneurs to the Municipality was reduced from six to two. The Municipality introduced software which allows entrepreneurs to follow the processing o f their appli- cations on line. Inspections have been streamlined to allow faster processing o f operating licenses. New procedural guidelines have helped entrepreneurs prepare their applications on-line. The number of business applying for operating licenses has increased by 25 percent since the pilot began. Based on the success o f the L a Paz pilot, the Government - with the IFC's collaboration - plans to extend the simplification techniques to at least 60 other municipalities. 3.31 The obstacles to establishing a business encourage f m s to remain in the informal sector, but they are not the only-or even main-reasons. The problemfor informal enterprises is not opening and registering a business but operating it. Aside from the loss of competitiveness (stemmingfrom tax pay- ments and labor law requirements), there are ongoing licenses and permissions required. Dealing with government procedures and regulations i s time consuming and costly; it i s a customary complaint of formal f m s . In terms of regulatory burden, Bolivia ranks poorly but, except for "bureaucratic red tape," it i s not at the very bottom of either the world or Latin America. (Annex 3.1, Figure A3.1-4). 15. Inthe case of Singapore, the time required to open a new firm can be cut short by buying a shell company, already set up and shelved by others for that purpose. The name of the newly registered firm can be easily changed, and the firm can be operational within one day. BOLIVIA:POLICIESTOIMPROVEGROWTH EMPLOYMENT AND 28 Table 3.8 Starting a Business,Selected Countries, 2004 Country/Region Number Of Cost (% GNI Min. Capital (% Steps Time(days) per capita) GNIper capita) Argentina 15 32 16 8 Australia 2 2 2 Bolivia 15 59 173 Botswana 11 108 11 Brazil 17 152 12 Chile 9 27 10 Colombia 14 43 27 Ecuador 14 92 47 Hong Kong (China) 5 11 3 South Korea 12 22 17 Malaysia 9 30 25 Mexico 8 58 17 Nicaragua 9 45 170 Paraguay 17 74 158 Peru 10 98 36 Singapore 7 8 1 Taiwan (China) 8 48 6 Venezuela 13 116 15 L A C Countries 11 70 60 OECD Countries 6 25 8 44 Source: Doing Businessin2005 (WorldBank, 2005). 3.32 There are also difficulties to close a firm. Closing a business was not legally conceivable until recent years. Shutting a firm i s still difficult and costly. There i s no effective bankruptcy law, compli- cating the extension of credit by the financial system. 3.2.4 Economic Infrastructure 3.33 The capitalization program resultedin improvements in many public services. Firms report no major difficulty-at least in L a Paz, Santa Cruz or Cochabamba-in electricity or telephone services, consistent with international comparisons of Bolivia to other countries with respect to electricity and telephone communications services (Annex 3.1, Figure A3.1-5). Despite improvements, the institutions which regulate the privatized public services face an uncertain future (Box 3.3). Box 3.3 Regulation of Private Infrastructure The sectoral regulatory system (SIRESE) was established in the mid-1990s in conjunction with the capi- talization program in five infrastructure sectors: water and sanitation, transport, telecommunications, hydrocar- bons, and electricity. SIRESE consists of a General Superintendency which oversees five sectoral Superintenden- cies. SIRESE was established as an independent regulatory system, financed by fees paid by the regulatedfirms. With support from international donors, SIRESE's institutional capacity grew quickly and it per-formed reasonably well, especially in its first years of operation. Since the change in the Government in 1997, tensions have grown between the Government, the legislature and SIRESE, fueled by negative public attitudes towards privatization, growing political and social instability, and the recent budgetary crisis. De-spite governmental com- mitment to strengthen SIRESE and a second round of World Bank support to SIRESE in 1998-2005, the regula- tory system is not sufficiently stable nor independent. Growing political instability has been, perhaps, the strongest factor in undermining the stability and the independence of SIRESE. All the six Superintendents are interim and five of them have been in-terim for several y ~ n o m i n a t e candidates for presidential approval. The interim Superintendents lack d CHAPTER3: INVESTMENT, PRODUClWm, AND cOMPE7ll7VENESS 29 autonomy because they can be replaced by the Government at any time. Recently, Water and Sanitation had four Superintendents in less than six months. In addition, the Fiscal Austerity Law o f 2004 significantly reduced the salaries of SIRESE employees, which led to an outflow of highly trained (some with Bank assistance) specialists. In2002-3, the (cross-sectoral) Superindendency of Companies (SE) emerged -a step towards restructur- ing the corporate sector. I t is working on a variety o f issues - from company registration and ra-tionalization of administrative procedures to corporate governance and finance - that, at times, overlap with activities of other agencies. The creation of SE notwithstanding, a good infrastructure regulatory system i s central to a business en- vironment that attracts private investment. Incontrast to the real sector, the financial regulation has developed without serious impediments. There are Superintendencies for (1) Banks and Financial Institutions, and (2) Pensions, Capital Markets, and Insurance. The financial sector performed well during the 2001-2003 crisis. B y and large this was due to improved prudential regulation - in particular, the introduction o f the Base1principles of asset valuation, the adoption o f the Central Bank Law and related regulations, and legislation for bank liquidation and re-structuring. With substantial interna- tional support, the Superintendency for Pensions, Capital Markets, and Insurance has built capacity to regulate and oversee the system o f pension funds, the insurance markets and the stock exchange. There are no apparent con- flicts between the two Superintendencies and the Govern-ment or the Congress. 3.34 An educated labor force is part of an economy's economic infrastructure. While the educational system has improved and could be strengthened further, investment i s not constrained by a shortage of skilled labor. The returns to education-both secondary and tertiary-are low by international, and Latin American, standards (Annex 3.1, Figure A3.1-6). In one case, a producer of specialized leather products, the firm i s expanding as quickly as it can train employees in-house (Box 3.4). This i s consis- tent with the findings of the McKinsey Global Institute studies of productivity that "The importance of the education of the workforce has been taken way too far. Education i s not the way out of the poverty trap. A high education level i s no guarantee of high productivity. Regardless of institutional education level, workers around the world can be adequately trained on the job for high productivity." (Lewis 2004, p. 11). Box 3.4 Macaws, S. R. L.,Cochabamba In the mid-1990s the Palm Pilot was the first widely-adapted Personal Data Assistant (PDA)-an electronic device with software to store notes, a calendar, a calculator, and an address book. In a decade PDAs have evolved into handheld computers, communication devices, and global positioning systems with prices from US$l50 to over US$lOOO. The market inthe United States, alone, is about 10million units annu- ally. Peter Weiss started exporting leather fabrications for designers in 1994 after working in a family- owned tannery for over 12 years. With his experience, industry knowledge, and insights from trade shows, he saw a market and he formed Macaws in 1999 to export leather products, particularly cases for PDAs or smart phones, or to protect other electronic equipment. A Bolivian bank provided financing and, with in-vestments of about US$3 million, Macaws today exports 150,000 units a month: large lots for manufactur-ers or single, customized items, mostly ordered over the internet. Macaws attributes its success to the qual-ity o f its prod- ucts and their design and functionality. Its quality systems are registered under I S 0 9001:2000 and its health and safety procedures and policies are registered under OHSAS 18001:1999 in-ternational standards. Macaws shows how a dynamic entrepreneur can compete internationally, bringing world-class qual- ity and labor standards to solve pressing social problems: Labor-intensive employment. Labor represents about 60 percent of the firm's costs. Macaws has grown from 25 employees to 300 with enough orders to hire another 150 during first half of 2005. About 75 percent o f the employees work in clusters in shops or in their homes, the rest in Macaws' factory. All of Macaws inputs are Bolivian, and Macaws' suppliers have created about 50 more jobs. To attract and re- tain good employees, Macaws has sought to be socially responsible in all its policies and dealings. BOLIVIA: POLICIESTOIMPROVE GROW ANDEMPLOYMENT 30 involvement of the firm's executives who place special emphasis on the importance o f high quality. The pace of training is the binding constraint on Macaws' growth. Poverty reduction. All employees are formal hires, and they receive health benefits. They are paid on a piece rate with a bonus for quality. They earn an average of US$650 per month - well above the mini- mum wage (US$60 a month) or the average wage (US$120 a month) - though the earnings may be shared with other members o f the cluster. Employees who live in rented rooms can, after a few years, own their home and car, get better medical care, and sendtheir children to better schools. Competing in world markets. Macaws i s exclusively an export business. There is virtually no market in Bolivia for its principal products, and it has no local showroom or sales representatives. I t has a primary distributor inNew Jersey, and can manufacture and deliver an order anywhere inthe United States within two weeks of receiving it over the internet. It plans to open distributors in other countries, including China. 3.2.5 Taxes and Tax Administration 3.35 The tax system was modernized under the economic reforms beginning in the mid-1980s, but there i s still no personal income tax, and the system relies on import and value added taxes and a busi- ness income tax for most revenues. Compared to other countries, Bolivia's tax rates and burden do not appear excessive (Annex 3.1 Table A3.1-5). The business income tax, at 25 percent, i s modest in rela- tion to other countries and the value added tax, with an effective rate of 14.9 percent, i s nominally a broad based tax with few exempted products. However, with these instruments, the base i s relatively narrow. High levels of contraband reduce collections of the value added tax and import taxes, and in- formality reduces business tax collections. Formal, private firms and agents complain that their taxes are excessively high (in relation to those who do not pay taxes and in relation to the services they re- ceive) and that they are less competitive because they pay taxes. Further, in a country where the head- count poverty rate was 65 percent in 2002, reliance on regressive consumption taxes aggravates the problem. 3.36 Table 3.9 reflects some of the characteristics of the Bolivian tax system. The index for the effi- ciency of the tax systemdemonstrates respondents' perceptions of the tax system's simplicity and trans- parency. Bolivia's relatively highranking (58' of 104 countries) reflects the earlier reforms, and by this measure Bolivia outperforms many more developed countries, including Australia, the U.S. and Ger- many. On the question of the extent and effects of the tax system, which measures the degree to which the tax system limits incentives to work or invest, Bolivia does worse; it i s ranked 8@ - but still better than Argentina, Brazil, Peru and Ecuador. Corruption issues are significant impediments to investment and growth, and "irregular payments to tax collectors" have been identified as problematic for Bolivia by the internationalcomparator surveys. These results were corroborated in the interviews with Boliv- ian firms, although severalrespondents noted recent improvements. The Bolivian tax system i s not seen as a deterrent to investment and growth, despite some complaints about corrupt tax officials and inspec- tors. CHAPTERINVESTMENT;~COMPEZTVENESS 3: P R O D U C ~AND , ~ V 31 Table3.9 TaxSystem Comparisons Selected Country Rankings, 2004 Country/Region Extent and Ef- EfSiciency of the Irregular Payments fect of Taxation Tax System in Tax Collection Argentina 90 100 60 Australia 66 91 10 Bolivia 80 58 88 Botswana 15 6 45 Brazil 103 102 55 Chile 28 21 19 Colombia 70 76 46 El Salvador 12 11 43 HongKong (China) 1 1 4 SouthKorea 48 69 63 Malaysia 11 10 39 Mexico 71 99 53 Nicaragua 93 59 67 Paraguay 32 36 90 Peru 86 77 42 Singapore 4 4 11 Taiwan(China) 9 16 25 UnitedStates 17 89 20 Venezuela 42 64 82 Source: WEF, 2004. Indexeswere constructedfrom survey datafrom 104countries. 3.2.6 Labor Legislationand Rules 3.37 Bolivia has a minimum wage (about US$SO/month) but it does not appear to distort the labor market. Most manufacturing firms pay well over the minimumwage, and some pay several times the minimum. 3.38 The Labor Law, on the other hand, does introduce economic distortions. The prevailing legisla- tion, dating from 1939, i s similar to laws in other Latin American countries (e.g., Argentina and Brazil) which were modeled on Italian labor legislation of the 1930s. It sets up elaborate and inflexible rules, prohibits part time or non-permanent employment, mandates specific benefits, and reduces free choice for employers and employees. Its effects have been to increase labor costs for employers and reduced flexibility inthe labor market. Ironically, those individuals who were meant to benefit from the legisla- tion's protections end up being disadvantaged and discriminated against. It prohibits low-skilled, less- experienced, and less-qualified workers from accepting any employment that offers less than the arbi- trarily mandated benefits, forcing them to seek employment in the informal sector where they enjoy no protection under the labor law. World Bank (2001) estimates that nonwage costs for employees covered by the labor code (a minority of the country's workers) amount to 54 percent above the wages paid to the employees. 3.39 One effect of the Labor Law i s that many firms which hire low-skilled labor remain informal to avoid paying the mandated benefits. A recent survey of urban workers for 2002 by Znstituto Nacional de Estadistica (NE)estimated that only 31percent of occupied urbanworkers were inthe formal sector and covered by the Labor Code or similar regulations; 10 percent were employed by the public sector and 21 percent by the private sector (Monterrey 2004, p. 11). Of these, only one in eight was an un- skilled laborer: barely 2.3 percent of the occupied urban labor force covered unskilled workers in the private sector, showing that coverage of the Labor Law i s very narrow, especially for unskilledlabor. BOLIVIA: POLICIESTOIMPROVE GROWTH EMPLOYMENT AND 32 3.40 Annex 3.1 (Table A3.1-6) presents survey data on labor market flexibility. While Bolivia is less flexible than more developed countries, the indicators are not significantly out of line. Even the firing costs for labor-in terms of weeks of salary-are modest in relation to those of some countries (e.g., Brazil and Colombia) but higher than average in Latin America. The most recent WEF survey reports relative flexibility in wage determination for Bolivia (27' of 104 countries) and in the ease of hiring foreign workers (32& of 104). These relatively highratings suggest that the Labor Law may effectively be circumventedby businesses. Inaddition, labor relations at the fmlevel are generally reported to be good. 3.41 Many firms are quick to complain about the Labor Law. It reduces their flexibility and produc- tivity, but the relevant question here is how much it impedes private investment and forces f m s into the informal sector, and that has not been estimated. Some firms circumvent the labor code by contract- ingwork out to the informal sector. This presents other problems: maintainingquality, training the out- source workers, and work force discipline. 3.2.7 CreditAvailabilityand Pricing 3.42 An efficient and healthy financial system i s essential for growth. This was illustrated inBolivia during the growth in the 1990s. (Annex 3.1, Table A3.1-2) The current state of the Bolivian financial sector raisesquestions about its future inpromoting growth and facilitating investment. 3.43 The slowing growth, beginning in 1999, was accompanied (some say provoked) by a turndown in lendingby the commercial banks. Deposits strongly contracted over 1999-2004.The percentage of non-performing loans increased markedly, reaching a high of some 20 percent in early 2003. Capital adequacy requirements were tightened and commercial banks were requiredto make greater provisions for bad loans, resulting inmore cautious lending. There i s presently highliquidity inthe banking system which may be a reflection of more prudent behavior, although the private sector complains about crowding out, as the banks have heavily invested in short-term treasury bonds to finance the deficit. 3.44 Most bank lending is denominated in U S dollars, which implies a substantial exchange risk for non-exporting firms and a credit risk to the banks. Despite efforts to increase lendinginlocal currency, most loans are dollar-denominated. Recent average annualized lendingrates, in dollars, for prime bor- rowers range from 7.4 to 11.6 percent.16 These rates are higher than current internationalrates, but they not inordinately higher. Access to credit through the banking system i s limited; real property- commonly used as collateral-is put at apremium. Annex 3.1, Table A3.1-7 presents some information oncredit access. 3.45 Credit to the private sector through the banking system has fallen since 1999, but this i s not the case with credit from microfinance institutions (MFIs). Total loans from the M F I s grew from about US$l50 million in 1999 to nearly US$300 million in 2002, making it the fastest growing part of the financial sector (World Bank and IMF 2003 and Baldivia 2004). While interest rates (averaging about 23 percent annually in US$ inearly 2004) and operating costs are considerably higher than those of the commercial banks, the percentages of non-performing loans i s much lower, 4.6 percent in December 2003.17 Such lending is important for microenterprises-typically not registered-and for generating employment. 16. Nueva Economia, Aiio 11, No 565 (February 13, 2005), p. 17. Both average deposit and lending rates are listed by bank. Spreads commonly fall in a range o f 4-6 percent. 17. Baldivia (2004), pp. 88-94. I t should be noted that these data are for the MFIs regulated by the SBEF (Su- perintendencia de Bancos y Instituciones Financieras). For unregulated MFIs the lending interest rates are presumably somewhat higher. It should also be noted that the average lending rates for the regulated MFIs have fallen substantially (from 30 percent in December 1998 to 23% in December 2003). This reflects both the increasing role and competitiveness of the MFIs inrelation to the commercial banks. CHAPTER 3: INVESTMEM; PRODUCTIVm, AND COMPE?7lWENESS 33 3.46 The Bolivian securities market (Bolsa Boliviana de Valores) has potential for financing future investment. Presently it is quite limited, with most listed firms being family-held enterprises with un- clear minority ownership rights, governance, and accounting, but the nascent corporate bond market shows some promise if it can improve accounting standards. 3.3 COMPETITIVENESS 3.3.1 GeneralConsiderations 3.47 A country's ability to attract investment and increaseproductivity-in other words, its competi- tiveness-is related to institutions, policies, and factor endowment, particularly as they compare to those of other countries. Inturn, those institutions, policies and factor endowments and the way they are combined determine productivity. Through greater productivity, more competitive economies can bring about higher levels of per capita income and welfare. 3.48 Competitiveness i s an emerging and somewhat subjective concept, and there are many ways to classify and measure it. One scheme, developed by Michael Porter and his associates for the World Economic Forum's annual Business Competitiveness Index," stresses business conditions and the mi- croeconomic elements of competitiveness. Another approach-pursued here-also includes macroeco- nomic or aggregate determinants of productivity. Sala-i-Martin and Artadi (2004) describe this taxon- omy and its measurement. This taxonomy selects 12 major components, or building blocks, of com- petitiveness. However, just as there i s no formula for economic development, there i s no precise weighting or ranking of the components. Some may be necessary to achieve competitiveness (not to mention, development), but they may not be sufficient. Weakness in one element can offset strength in others. Table 3.10 lists the 12 elements, along with some indicators and comments regarding Bolivian circumstances. Table 3.10 Elements of Comi !titiveness Measurement/Indicators Relevancein Bolivia Reliability of police services,judicial inde- Government failure to deal effectively with pendence,judicial security, extent of corrup- road blockades and land seizures. Questions tion, government efficiency, bankruptcy laws, o f government contract enforcement for hy- accounting standards, transparency inthe pub- drocarbons sector firms and privatized public lic and private sectors. service providers and concessionaires (e.g., Aguas Illimani). Uncertainty concerning future private sector and F D Icontracts. Some recent improvements inthe Supreme court. Road network and quality, port access and Low population density and long distances Physical quality, telephone coverage, electricity quality, impede the development o f transportation, Infrastructure railroad services, air transport infrastructure communications and electricity. quality. Macroeconomic Public sector deficit, inflation, government Relative stability since the late 1980s. Un- Stability debt/GDP, current account deficit, savings rate, certainty associated with fiscal imbalance interest rate spread. and populist political pressures. 18. See Porter (1990) and subsequent issues o f the WEF, The Global Competitiveness Report. The Porter Busi- ness Competitiveness Index (BCI) produces very similar results and rankings to that used here - the Global Competitiveness Index (GCI), which was estimated for the first time in 2004. This similarity i s not surpris- ing since the underlying database and some of the indicators are the same. The overall B C I ranking for Bo- livia in 2004 ranked the country at the very bottom - in 93rd place out of a sample o f 93 countries, while the GCIranked Bolivia in98th place out o f 104 countries. BOLIVIA:POLICIES TOIMPROVEGROWH EMPLOYMENT AND 34 Healthindicators, including life expectancy, While health and educational indicators have Human infant mortality, etc. Extent and quality of edu- improved over the past 20 years, they con- Capital cation and training. tinue to lag behind those of other L A C coun- tries. Goods Tax burden and complexity of tax system, ag- High degree of informality reflects regula- Markets ricultural and other government induced policy tory andor tax burden. Efficiency distortions, domestic competition, foreign com- petition. Labor Market Payroll taxes, hiring and firing practices, wage Restrictive labor legislation and rules pro- Efficiency determination flexibility, labor relations at the motes informality. firmandnational levels, brain drain. Access to credit, financial market sophistica- Open capital account. Low loandemand Financial Mar- tion, bankruptcy procedures, collateral prac- growth intraditional banking sector, coupled ket tices, banking system health, venture capital with a vigorous recent growth of microfi- Efficiency availability, presence of FDI, existence of ex- nance institutions. change controls or other capital account restric- tions. Firmleveltechnology absorption, laws and Openness to technology i s most prevalent in Readiness regulations on technology transfer, internet the extractive and modern financial sectors. usage, cellular telephone coverage. Domestic market size, as measuredby GDP Size of domestic market is quite small. Openness and minustrade balance; export level andcomposi- Opennessof economy -measured by ratio o f Market Size tion. exports to GDP-is low, despite trade policy liberalization in late 1980s. State o f cluster development, includingdomes- Limited spontaneouscluster development. Business tic supplier quantity and quality; production Little FDIinmanufacturing. Sophistication process sophistication; firm marketing strate- . gies, presence o f FDI. Company spending on R&D, quality of scien- Low levels of R&D infirms. Innovation tific research institutions, availability of scien- I tists and engineers, issuanceof patents, intel- lectual property protection. Source: The taxonomy and classificationclosely follow Sala-i-Martin and Artadi (2004). P 3.49 For these 12 elements relative importance will shift as countries de~elop.'~For less advanced countries the basic elements would likely include those at the top of the list, including institutions, physical infrastructure, macroeconomic stability, security and basic human capital. For the most ad- vanced countries, competitiveness and growth are more likely to be driven by business sophistication and innovation. 3.3.2 InternationalComparisons 3.50 The measurement of competitiveness is important to make comparisons over time or across countries. Many of the elements contributing to competitiveness are subjective and not measurable. For 19. Sala-i-Martin and Artadi (2004) articulate a series of stages of development based upon the importance of these elements of competitiveness at different levels of per capita income. They posit three distinct stages for growth driven by: (i) factors and factor accumulation; (ii) quest for efficiency; and (iii) the innovation. CHAPTER3: INVESTMEM; PRODUCTIVm, AND COMP~VENESS 35 them, opinion polls are conducted, generally polling business leaders throughout the world.'' For other attributes there are data. Given the range of questions and issues, aggregation presents difficulties, and elaborate weighting systems are developed. 3.5 1 Table 3.11 presents selected international rankings from the 2004-5 Global Competitiveness Report. As can be seen for the overall Global Competitiveness Index, roughly following the description above, Bolivia ranks very poorly internationally-95" out of the 104 countries in the survey. Among Latin American countries Bolivia i s at the bottom of the list. Haiti was omitted from the 2004 survey, Table 3.11 Global CompetitivenessIndex, 2004 (rankings among I04 countries) Elementsof Competitiveness Bolivia Argentina Brazil Chile Colombia Mexico Peru Botswana Overall Index 95 75 49 29 69 60 76 58 Institutions 101 83 55 29 67 69 81 38 Physical Infrastructure 100 59 58 34 73 62 81 51 Macroeconomic Stability 93 39 96 15 67 36 55 13 Security 72 79 75 39 103 83 84 40 Basic Human Capital 76 38 61 28 52 45 69 90 Advanced HumanCapital 85 49 48 41 70 66 72 71 GoodsMarketEfficiency 99 88 48 29 73 76 85 47 Labor MarketEfficiency 103 97 52 26 73 69 79 22 Financial MarketEfficiency 95 89 33 19 55 65 48 46 Technological Readiness 97 59 42 32 71 52 75 65 OpennessandMarket Size 97 80 28 59 55 27 77 71 Business Sophistication 98 65 27 32 53 51 73 80 Innovation 101 85 32 49 62 59 94 57 Source: Xavier Sala-i-Martin andElsa Artadi, "The Global CompetitivenessIndex," in WEF,2004. 3.52 Table 3.11 also shows rankings for the elements of country competitiveness. Bolivia's low scores for the institutions category illustrate the difficulties investors face in the exercise of property rights and the rule of law. The low ranking in labor market efficiency reflects the existing Labor Law, despite some offsetting flexibility in wage determination. The low score for physical infrastructure re- flects the problems with the roadtransportation andport network - a feature of the country's geography. 3.53 For Chile-the Latin American leader in both competitiveness and recent sustained growth- strengths have included the institutions framework, macroeconomic policies, financial market develop- ment and efficiency. These features have overcome the drags on competitiveness stemming from the small domestic market size, which inturn i s offset by Chile's outward orientation that allows it to take advantage of internationalmarkets. 3.54 Botswana i s a natural resource based economy like Bolivia, but, unlike Bolivia, it has grown rapidly over recent years. By 2003 it had a per capita income slightly higher than Uruguay's or Brazil's. It has developed competitiveness in a number of important areas and has grown ingreat part because of institutional adaptation, a stable macroeconomic policy environment, and market efficiency. These fac- tors helped overcome disadvantagesstemmingfrom human capital inadequacies, small market size, and unsophisticated businesses. 3.55 The WEF Global Development Index in Table 3.11 is similar to two other WEF indexes, the Growth Competitiveness Index and the Business Competitiveness Index (BCI). The Growth Competi- tiveness Index focuses on growth and macroeconomic conditions, while the BCIconcentrates on micro- 20. The World Economic Forum's Executive Opinion Survey for 2004 was conducted by a great many affiliated research institutions throughout the world. The qualitative opinion survey included 8,729 respondents for 2004. BOLIVIA: POLICIES TOIMPROVEGROWHANDEMPLOYMENT 36 economic and business considerations. The BCI ranks Bolivia somewhat lower that the Global Com- petitiveness Index-in last place out of 93 countries.21 3.56 The three WEF competitiveness indexes are positively correlated with levels of per capita in- come and with each other. The expected strong association with per capita income i s supported with analysis from the dataset.22These correlations do not indicate the direction of causality, if any: Has Chile grown over the past 30 years because of strong competitiveness, or has Chile's competitiveness been strong because of its economic growth? Ingeneral terms, competitive economies are likely to en- joy high incomes and living standards, suggesting that improving competitiveness should bring bene- fits. 3.3.3 Cadenas Productivas: Clusters for Improving Competitiveness 3.57 One of the important buildingblocks of competitiveness i s business sophistication, which in- volves the development of clusters, or productive chains. Inrecent years the Bolivian Government has taken an important step in promoting clusters, or productive chains (cadenasproductivas). This ap- proach can use public-private dialog to identify and address binding constraints to investment and growth at the sectoral level. With more efficient markets, clusters would develop naturally, but the work pursued by the Government provides additional, catalytic support with the potential to improve market efficiency and accelerate emergence of productive clusters. 3.58 Attracted by the experience in other countries, the Government has articulated plans to support productive chains (Kreidler 2005, CONAPE 2005, UPC 2005, and Loza 2004). Working through the Bolivian System of Productivity and Competitiveness (Sistema Boliviano de Productividud y Com- petividud - SBPC),the Government has sought to promote strategic alliances of public and private sec- tors, jointly with the academic community, to formulate and implement policies to increaseproductivity and competitiveness. 3.59 Organizational Structure and Criteria for Selection. The identification of the priority sectors has involved various government agencies in an Inter-ministerial Commission, coordinated by the Min- istry of Economic Development's Productivity and Competitiveness Unit (Unidad de Productividud y Competitividad- UPC). The general criteria to select the priority sectors include: (a) employment gen- eration; (b) foreign exchange earnings; (c) contribution to GDP; (d) degree of manufacturing and level of value added; and (e) participation of the poor. Supplementary and secondary criteria are: (f)political will and facility; (g) willingness of actors and economic agents to improve the cluster; (h) the existence of a reasonably competitiveness structural base; and (i) regional equity. These criteria are largely quali- tative and there i s no basis to weight them or to make trade-offs (UPC 2004). 3.60 Within the Government, objectives, instruments and cluster definitions, as well as the criteria for selection, had to be agreed upon. All of this has taken time, with the programdating back to 1996. A positive feature of the preparations has been a dialog between the public and private sectors, leading to better understandings of the sectors, their problems and potentials, the need to base competitiveness on 21. WEF (2004), p. 29. Indeed, in the accompanying analysis Bolivian was considered an "overachiever" in the sense that its per capita income was higher than that which would be predicted by its business competitive- ness elements, as measured by its BCI. The underlying implication, posited by Porter (2004), is that Bo- livia's economic future i s bleak unless it can improve its business environment. 22. Annex 3.1, Table A3.1-8 presents some bivariate statistical analysis. While using the different components of the competitiveness indices to explain variance inper capita income levels may have an intuitive appear, multicollinearity undermines the validity of such analysis. Nevertheless, the Global Competitiveness Index accounts for 68 percent of the variance inper capita income levels across the country sample. Also, in such analysis, the Porter (2004) conclusion from the B C I analysis-namely that Bolivia i s an "overachiever" also appears. cHAP?ER 3: INVESTMENT, PRODUC7TVm, AND cOMPEm7VENESS 37 matters beyond price, the dependence of an enterprise's competitiveness on its own actions, and what can be reasonably expected from government. Much of this work, including studies and technical assis- tance, has been supported by donor funding,especially the CorporacidnAndina de Foment0 (CAF). 3.61 A number of diagnostic studies have been produced under the UPC and some 15 studies are available. They have generally been carried out by consultants and consulting firms. The size of the studies varies widely-from 54 pages (quinoa) to 823 pages (exotic fruits). Many comprise around 200 pages. Likewise, there i s wide variance in quality. Three of the strongest studies (soy, quinoa and grapedwine) are the shortest and were financed by the PACKAF. 3.62 After deliberation by the Commission, supported by the diagnostic studies, some 20 productive chains have been selected. The first group included soyhegetable oils, wood products, leather products, textile and apparel products and quinoa. Subsequent clusters have been codpoultry, nuts, alpaca and vicuiia products, grapedwine, bananas, wheat, hearts of palm, beef products, and various other food products. Tourism for Sucre, Potosi and Ayuni has been selected. Inretrospect, most of the country's productive economic activities (excluding nontradables) have been designated for the clusters program. 3.63 Agreementsfor Policy Action. With clusters selectedfor the program, the next step has been to articulate and enter into cluster-specific agreements involving the public and private sectors. These agreements (AcuerdosBolivianos de Competividad,or ABCs) record generalized obligations and recognition of sectoral problems. Formally the ABCs are signed by government repre- sentatives, private associations, and participating firms. They have no legal force, but they express common understandings and commitments to work together. They are monitored and designed for an- nual renewal. Most importantly, the ABCs establish an institutional vehicle for dialog, communication and follow-up, with the idea that Government and private firms can work together to improve produc- tivity. The underlying idea i s not to provide credit or subsides, but to have the public and private sectors jointly identify andresolve problemslbottlenecks for the different individual clusters. 3.64 During 2004 six more ABCs were agreed and signed, covering clusters for wood products, leather products, hearts of palm, grapesjwine (See Box 3.5), codpoultry, and wheat. Two other ABCs-for the quinoa and soy/vegetable oils clusters-were renewed. Private firms' participation in these agreements has varied. For the quinoa and soyhegetable oils chains, the ABCs were signed in 2002 with more than twenty private signatories for each. For ABCs signed in 2004, there were seldom more than six signatories. The decline may reflect: (a) the relative importance of the quinoa and soy sectors; (b) Presidential involvement (and signature) for the 2002 ABCs (versus Ministerial or Vice Ministerial signature in 2004); or (c) a reduction inprivate perception of the benefits and effectiveness of the clusters program. 3.65 The format and structure of the ABCs are similar for all the sectors. They contain statements of objectives, a vision for the cluster, an elaboration of the problems and priorities derived from workshop discussions, and agendas for action. The most frequently cited problems have been judicial insecurity, inadequate infrastructure (especially transport), informality/smuggling, and insufficient financing. In the cases of quinoa and soyhegetable oils an examination of progress under the action agendas is pos- sible. hboth cases advances have been registered intransportation improvements, but progress in im- provingjudicial security (for land title and protection from invasions and arbitrary seizure) has not been evident. 3.66 Progrnm Evaluation: Strengths and Weaknesses. The major strength of the cluster promoting program i s its potential for identifying and addressing bindingconstraints both at the sectoral level and across sectors. The program emphasizes public-private partnership and working together to resolve problems, rather than a top-down approach or one involving fiscally expensive and distortionary subsi- dies. Related to the question of distortions i s the fact that the list of the productive chains does not ap- pear to be fixed. The criteria for selection and inclusion in the program, as listed above, are general BOLIVIA: POLICIES TOIMPROVEGROW ANDEMPLOYMENT 38 enough to include most productive economic activities. Clusters can be added to the list so that their problems can be identified and addressed. The program seems to be well administered and competently managed. Box 3.5 The Grapes, Wine,and Singani" Cluster Bolivian wine production is concentratedin the south, with the valley of Tarija accounting for two- thirds of total output. While many of the topographical and climatic conditions are similar to the premium wine producing regions of Chile and Argentina, the high altitudes provide a unique flavor, quality, and iden- tity to Bolivian grapes, wines and singanis. A "wine culture" is beginning to emerge in Bolivia, with con- sumption levels expected to increase rapidly beyond the present 1.5 litres per capita annually. In addition, although exports are presently very low (less than US$100,000/year), wide agreement exists as to the poten- tial for the cluster/sectorto expandoutput and exports. Inthe last decade, the investmentinthe wine sector was aboutUS$70 million, and the cluster's over- all production in2002 accounted for about 0.2 percent of GDP - still small but growing. Grape and wine pro- duction is carried out in 33 communities, with direct employment being estimated at approximately 5,000 individuals. In May 2004 the Government of Bolivia through the Unit of Productivity and Competitiveness (UPC) signed an agreement (Acuerdo Boliviano de Competividad, or ABC) with membersof the grape, wine and singani production chain. Inthe action program agreed inthe ABC, a number of steps and measures have been pursued, including: A programhas been developedto reducethe negativeeffects of hail. Research, development, and certification in the sector were strengthened. The infrastructure was im- provedto meet accreditation standards and upgrade services for the sector. Training and technical assis- tance have also beenprogrammedand are presentlybeing executed. A marketing promotionplan was initiated for the domestic and foreign markets. Financing has beenpledgedfrom a variety of international sources, including the IDB and CAF. * Singani, a Bolivian liquor, i s a spirit obtained by distilling grape wine or grape marc. For the cluster diag- nostic study, see Paniagua(2002). 3.67 Weaknesses in the cluster program center on the intense government role. While there are un- deniable merits in a governmental initiative along such lines, the government apparatus seems a bit too elaborate and process-intensive. The program has assumed an overly-legalistic form, with emphasis and attention on drafting, approving and renewing the cluster agreements (the ABCs), as opposed to moni- toring their implementation (which frequently requires government action). Indeed, firms, when asked about the program, complain about its "bureaucratic nature", its presumed costs, and a perceived lack of action by the public sector. One firm in a selected cluster activity referred to the program as an "exer- cise inpublic sector hot air and governmental self-absorption." Another manager indicated that his firm had never been visited by government officials except for the evident purpose o f extracting bribes (and these visits were not in connection with the cadenas productivas activities). More generally, the failure or inability o f the government to deal with overall investment climate problems (e.g., property rights, rule o f law, corruption, etc.) also applies to cluster specific development. Ifthe Government i s unable to resolve these problems at a general level (presumably involving the political leadership at the highest national level), prospects for their resolution on a piecemeal, or cluster level, basis may also be limited. This i s a useful supplement to a broader programof improvingthe investment climate, but it should not be seen as a substitute. CHAPTER INVE~TMEW, COMPE~WENESS 3: PRODUC~V~, AND 39 3.4 RECOMMENDATIONS 3.68 General Considerations. Three basic propositions would constitute the foundations for a strat- egy for renewed growth. First, given the fiscal constraints on the public sector, the private sector neces- sarily holds the key to future growth; private sector investment and growth will have to be counted on to propel the economy. Without a growing and vibrant private sector, overall growth will also stagnate. Second, with the small size of the Bolivian domestic market, economic growth will dictated by the country's success in expanding exports and integrating into the global economy. Finally, the informal sector and microenterprises cannot be expected to lead the country's growth. They have a role to play, but they cannot be seen as the leaders. Their productivity is too low, and their profitability is often based on illegal activities or on distortions in laws or policies. Productivity and competitiveness dictate modem business organization and methods, and a transition to those practices will be necessary for the economy to grow in a sustainable fashion. The transition will imply-and facilitate-a progressive re- duction inthe informal sector. 3.69 Improving the investment climate-recommendations from the Investment Climate Assessment. The World Banks Investment Climate Assessment (ICA, World Bank 2001) had an extensive analysis of the problems that lead to low productivity and to low private investment. Annex 3.1 lists the World Banks recommendations, the progress which has been made to date to solve these problems, and the outstanding issues. Box 3.6 summarizes the results. 3.70 Under the broad topic of measures to reduce f m s ' high operational costs there has been pro- gress on improving customs procedures and infrastructure services. For the customs service, important improvements have been made through simplifying procedures and expediting customs clearance. Re- taining a customs agent is still required, and firms complain that the Customs service i s not doing enough to combat smuggling, although this i s not solely a function of the customs service. For infra- structure, mostly focusing on roads, some 40 percent of public investment over the past four years has been road construction, centering on export corridors. No actions have been taken regarding the Labor Law, and it remains an issue. 3.71 The ICA also covered regulatory and public institutional questions. Tax administration has im- proved since 2001, but issues remain. An area of tangible progress has been in relation to permits and registrationfor firms. The average time to start a business has fallen 10percent from 66 to 59 days, but this is still too high. Muchcan still be done, includingthe elimination of unnecessaryregistrations, con- solidation of procedures, use of "one stop shops," and elimination of minimum capital requirements. Little progress has been made with respect to the judicial system, and the business perceptions are still that the system is costly, slow and prone to corruption. More development of a reliable public registry of property would be important. BOLIVIA: POLICIES TOIMPROVE GROW ANDEMPLOYMENT 40 Box 3.6 Progress in Improving the Investment Climate In2001, the World Bank's Investment Climate Assessment (ICA) developed recommendations to foster growth, employment creation, and private sector development. Annex 3.2 lists the problems which were diag- nosed in the ICA, the Bank's recommendations, and actions the government has taken. Four years have passed and progress has been made on some of the recommendations, but others have not been seen as priorities. Some actions which the government took have not had the desired results. Because o f the political disruptions of busi- nesses, abrogation o f contracts, and uncertainty of future trade relations with the United States, the overall in- vestment climate i s worse today, and there are areas of backsliding - where progress would be neededjust to return to the conditions which prevailed at the time of the ICA: Someprogress: Customs reform - Many procedures have been improved and private entrepreneurs have noted progress. (See Annex 3.2). Roads - Government has given priority to improving the roads. There remain problems of maintenance, and there are new problems of blockages by protestors. Tax administration - Administrative improvements, but a small tax base, contraband, and widespread eva- sion place heavy burdens on a small tax base. Business registration - The national registry has been decentralized and average time has been reduced by 10percent from 66 to 59 days, but this is still too long and costly. Export promotion - The export promotion agency was reorganized in 2004 which will try to create a net- work using Bolivia's 34 embassiesand 100consulates. Exportfacilitation - The RITEX has been improved, but CEDEIMs delays are still significant problem for exporters. Changes which have not achieved the desired results: Explore options to reduce foreign exchange risk and increase credit in domestic currency. The government created a scheme, UFV, but it has not had the desired effect. Extend trade benefits to SMEs. The maquicentro program has not worked. No progress: Eliminate requirement topay customs agents tofacilitate imports and exports. ' Revise the Labor Law to introduceflexibility and lower non-wage costs. Modernize and improvejudicial procedures. Trainingprograms - Limited efforts have not yielded programs which businessmen consider useful in deliv- ering trained employees. Back-sliding: Aggressively promoteforeign investment. Negotiate duty-free statusfor Bolivian cotton garment exports to the United States. 3.72 This Country Economic Memorandum recommends a number of policy changes to attract the necessary investment (18-22 percent of GDP) and to improve productivity (TFP growth of 1.5 percent to 2.0 percent per year) to generate growth and employment sufficient to reduce poverty. Some of these recommendations are activities which can be undertaken in the near term, and others can only be real- ized over the longer term. Near-tern Improvements 3.73 Improving the Indicators of Competitiveness. The ICA was a solid diagnostic with recommen- dations to improve the investment climate and increase Bolivia's competitiveness. Buildingon the ICA, this chapter-including the annexes-has extensive comparisons of Bolivia with other countries, noting Bolivia's relatively weak standing in most indicators of competitiveness. These indicators are widely available to investors, world wide, and (along with newspaper headlines that give glimpses of an appar- ent hostility toward private investment) help to form their views of Bolivia. Most are described in the CHAPTER 3: INVESTMENT,PRODUmVm, AND COMPETmVENESS 41 World Banks annual publication, Doing Business. They are not the only way to analyze competitive- ness but they are a reasonable startingpoint. 3.74 Improve Regulatory Environment. The regulatory burden faced by companies operating in Bo- livia i s very high. Some improvements have been made in recent years, including the decentralization of the business registry (formerly all companies had to go to La Paz) and a 10percent reduction in the time required to register a business.But at 59 days on average, it still takes far too long to set up a busi- ness inBolivia. As well, closing a firm is extremely difficult and costly. Regulatory independence i s a problem also, with high turnover and political interference. The Government should take measures to reverse these trends, appointingpermanent regulators and assuring that they are independent of political control and have competent, professional staff. Easing these obstacles is a task the Government can tackle inthe near term. 3.75 Monitor Investment Climate Indicators. The Government's economic team should monitor, relative to other countries, key indicators associated with the investment climate, including size of the informal economy, starting a business, hiring and firing workers, registering property, getting credit, protecting investors and enforcing contracts. After compiling a list of indicators, the Government should assign specific responsibilities and targets for improvements within the Cabinet. These efforts, as well as the measures beingtaken to improve the indicators, shouldbe madepublicly available. 3.76 Cadenas Prodwtivas. The clusters development programi s off to a good - if slow - start, and i s an important support for the Government's efforts to attract new investment. It offers potential to de- velop public-private sector partnerships to identify sectoral and broad-based changes that will increase output, investment, productivity and competitiveness. Keeping the selection of clusters flexible and open should be continued. The emphasis on dialog and communication should be sustained, with the objective of identifying and overcoming government-imposed constraints and problems encountered by the productive sector. The government should put greater emphasis on accomplishing measurable re- sults that increase the competitiveness of private investment. Longer-term Improvements 3.77 Strengthening Property Rights, the Rule of Law and Institutions. Weak pursuit and enforce- ment of property rights, along with an unpredictable system concerningthe rule of law, i s a major bind- ing constraint for growth. Greater respect for the law on the part of the government presumes political will and a supportive political environment. Yet, some confidence-building measures by the Govern- ment might be possible. Keeping the roads passable for commerce and reclaiming lands that have been seized by ambitious groups would be visible and symbolic first steps. One area where some progress has been noted i s in the fight on corruption. Expanding this struggle along new fronts, particularly con- traband, would also bringbenefits. 3.78 Labor Law Reform. Bolivia's obsolete Labor Law imposes costs for firms, does not adequately protect workers, and i s a major contributor to the high degree of informality and, possibly, to emigra- tion of skilled Bolivians attracted by better opportunities outside the country. It impedes the moderniza- tion and growth of the economy. InBolivia, as in most countries, reformof the Labor Law i s extremely difficult specifically because it protects not the most vulnerable but the powerful, well-connected, and the relatively affluent. This may rule out early reforms of the Labor Law, but an alternative approach might involve changing the regulations and procedures governing the Zonas Francas Industriales. Since the zonusfrancas are not working as originally intended, some rethinking may be appropriate. Many countries have used these arrangementsnot only to expand exports of manufactures and generate employment, but also to attract FDIand overcome start-up difficulties. For the Bolivian arrangements, some changes in tax administration-the stickingpoint inthe past - would appear to be desirable. More importantly, the zonas could be exempted from some of the more burdensome provisions of the Labor BOLIVIA: POLICIES TOIMPROVEGROW AND EMPLOYMENT 42 Code. This would be a way to introduce reform, with the new arrangements providing a test which could illustrate the benefits of future reforms. 3.79 The Legal Foundations for A Modern Business Environment. In the present environment of fractured and confrontational politics, this i s not the time for a legislative agenda, but Bolivia cannot compete effectively until it buildsthe legal framework that other nations have. In addition to the Labor Law, there are important laws that either do not exist or are obsolete. These are laws that govern - for example - international trade, intellectual property, bankruptcy. The government's competitiveness ini- tiatives, including cadenasproductivas, can be used to compile a complete list of defective or missing legislation inpreparation for a time which is more propitious for economic modernization. CHAPTER 4 TRADE, TRADEPOLICY, AND INSTITUTIONS 4.1 INTRODUCTION 4.1 Incountries with smalldomestic markets,the export sector is crucialfor growth.Exports'annual contribution to Bolivian growth rose from an average of -0.2 percentage points duringthe 1980s to +0.6 percentage points duringthe 1990s and to +2.9 percentagepoints in 200044. Last year, a 33 percent in- crease inexports ledto the first trade surplus in 14years and the contributionto growth was greater than 7 percentagepoints. 4.2 Bolivia's GDP growth has traditionally been high when export growth was low, and vice-versa. This is partly because exports are a small share of GDP (around 21 percent), but also because there are few links between the export sector and the rest of the economy. The high GDP growth rates of the mid 1990s were not export-led: GDP grew about 4 percent annually during the 1990~,'~ exports were less but than a fifthof GDP, and they grew at an average rate of 3.4 percent. 4.3 Bolivian export performance over the past 20 years i s weaker than other countries in the region. Exports per capita in Peru, Colombia, Brazil and Ecuador grew at least twice the rate as Bolivia's: Argen- tina 4.5 times and Venezuela and Chile 7 times more rapidly. 4.4 Recent export increases seemto be due to exogenous factors, rather than active domestic reforms or government policies. High prices and world demand for soy, natural gas and other mineral exports have led export growth. Non traditional manufacturing exports have been lagging behind the recent ex- port growth. In2004 manufacturing exports grew 20 percent, whereas the agriculture sector grew 40 per- cent, the hydrocarbon sector 64 percent and the mineral sector 29 percent. Commodity prices are volatile and the recent export growth could be short lived. Sustained, poverty-reducing growth would require a broader export base with links to the non-tradable sector. 4.5 This chapter assesses Bolivia's trade policies and institutions and their effectiveness in trade. It aims to identify policy and institutional barriers that prevent Bolivia's trade sector from becoming an im- portant source of growth. The chapter only considers trade ingoods. Section 2 focuses on Bolivia's import and export patterns. Section 3 analyzes Bolivia's trade policy and that of its main trading partners. Section 4 assesses the economic impact of current trade negotiations at the World Trade Organization, the re- gional agreement of Andean countries with Mercosur and the ongoing negotiations for a free trade area between Andean countries and the United States (based on simulation models described in Francois and Hall, 2003). Section 5 focuses on the institutional aspects of trade. Section 6 provides some concluding remarks and recommendations. 4.2 TRADEPATTERNS 4.6 The importance of the trade sector has been growing. Trade was less than 30 percent of GDP at when the economic reforms were launched in 1985. It reached 38 percent by the mid 1990s and it has been above 40 percent for the last two years. There was a rapid acceleration of the import to GDP ratio during the 1990s while the ratio of exports to GDP varied little. Over the last four years exports rose sharply and imports as a share of GDP declined from their peak inthe late 1990s (see Figure 4.1). 23. To be comparable to the export growth rates, the GDP growth needs to be calculated on GDP measured incur- rent dollars; in which case the GDP growth rates of the 1990swas around 5.5 percent per year. BOLIVIA: POLICIES TOIMPROVE G R O ~EMPLOYMENT AND 44 4.7 The lagging of export growth relative to imports after important trade reforms i s not unusual in the region. It is generally explained by a combination of more intense competitive pressureonthe import- competing sector due to the reforms, and a simultaneous deterioration of the terms of trade due to external factors (minerals and fuels in the case of Bolivia). Export promotion was not an important element of the economic reforms started in 1985, and the export recovery waited until Bolivia enjoyed more favorable - terms of trade. *rude inGDP, 1980-2004 -Import/GD-Expor P t/G DP 0.35 1 I 0.3 0.25 0.2 0.15 0.1 I 4.8 Trade i s a greater percentage of Bolivia's GDP than of Colombia's (31 percent) or Peru's (27 per- cent) and i s close to the 41 percent average for Latin American and Caribbean countries. It i s much lower than the 52 percent average for low and middle income countries, which as Bolivia tend to have small domestic markets. The next two sections describe the evolution and patterns of exports and imports. 4.2.1 Exports 4.9 Bolivia's export bundle has been concentrated in a few primary products (mining and hydrocar- bons), but non-traditional exports increased in the 1990s. The reforms started in 1985 encouraged export diversification. Non traditional exports today are around 50 percent of total exports, whereas they were between 5 and 16percent in 1980-1985. In 2003, the exports were composed of: 0 Traditional exports-Hydrocarbons accountedfor 57 percent of the traditional exports and miner- als-principally zinc, tin, gold and silver-represented 43 percent. 0 Non traditional exports-Soy products were 50 percent of non traditional exports. Adding gold and silverjewelry, wood products, apparel, Brazilnuts, leather and sugar, accounts for more than 80 per- cent. 4.10 Exports of soy and its derivatives exports have been growing consistently, but otherwise the in- creased share of non traditional exports has more to do with a decline of traditional exports than strong growth of non traditional exports. Conversely, the recent decline in the share of non-traditional exports (Figure 4.2) reflects natural gas exports to Brazil and Argentina, as well as favorable international prices for commodity exports. 4.11 Bolivia's export bundle remains very concentrated compared to most other countries in the re- gion. Figure 4.3 shows the evolution of Herfindhal concentration indices for Bolivia, Chile, Colombia, CHAPER 4: T ~ D ET, ~ DPOLICY, AND INXTU770NS E 45 Ecuador and Peru.24This index encompasses product and market concentration (as well as their correla- tion within each country). For Bolivia, it shows a move towards concentration around 1985, followed by diversification. However, by 2003, only Peru's export bundle i s more concentrated than Bolivia's. The Herfindhal indexes of Chile's, Colombia's and Ecuador's exports are one-third to one-half the size of Bo- livia's. Bolivia's higher values are mainly due to a higher product concentration rather than the market concentration. Figure 4.2 Share of Non-Traditional Exports - 0.60 0.50 1 0.40 0.30 0.20 0.10 0.00 Fiaure 4.3 Exvort Concentration.1962-2003 -Ecuador -Colombia +Bolivia Chile -Peru ~ 0.35 0.3 8 s1 0.25 e 0.2 88 0.15 o : " " " " " " " ' ~ " " ~ ' ~ " ~ " ~ ~ ' ' ~ ~ ' ~ ~ ' ' ~ ~ 62 63 64 65 66 67 68 69 70 71 71 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99W 01 02 03 Source: United Nation's Comtrade, New York. The Herfindhal concentrationindex i s calculatedusing product/markets as ob- servations, andthereforereflectsboth productandmarket concentrationas well as their correlation. H =cs,? 24. Herfindhal concentration indices are: CSi=1 ,where i s the share of observation iin the export bundle (i.e., ).Hincreases with concentration. BOLIVIA: POLICIES TOIMPROVEGROWTH EMPLOYMENT AND 46 4.12 Recent export growth has been mainly due to strong world prices for Bolivia's export bundle. Figure 4.4 shows that only 16 percent of Bolivia's exports bundle had declining world markets (in terms of value) during 1999-2003. (In volume terms only 7 percent of the export bundle declined inworld mar- kets.) The rest benefited from growing world markets. This i s the case for natural gas which (almost a quarter of exports) with an average growth of almost 20 percent 1999-2003. Soy products, crude petro- leum, leather goods, gold and silver jewellery and apparel also benefited from above-average growth. The price volatility of these products suggests that the export boomcould easily be reversed. Rest Soya 52% 3% 4.13 Relative to other countries, Bolivia's export performance has been above average. Figure 4.5-a graphical display of Bolivia's export performance-shows that almost two thirds of the export bundlehas gained share inworld markets. 0 Declining sectors-The lower left quadrant i s products where the world market i s shrinking and Bolivia's share i s falling, e.g., zinc ores and wood products. 0 Underachievers-The upper left quadrant i s products where world market has been above average, but Boliviais losingmarket share. It includes soy, precious metals andjewelry. 0 Achievers in adversity-The lower right quadrant i s products with falling world markets, but where Bolivia has been increasing its market share, principally Brazil nuts and tin ore. 0 Champions-In the upper right-hand quadrant, world markets have grown and Bolivia has increased its share. These products includenatural gases, soy products, apparel and leather products. 4.14 The main export markets are Mercosur and the Andean community, which together account for 60 percent of Bolivia's exports in 2004. Exports to Mercosur, 38 percent of total exports in 2004, are mainly traditional exports: natural gas to Brazil and Argentina, and crude oil to Argentina. Exports to the Andean Community are dominated by soy and soy derivatives. All exports of soy are to Colombia and Peru. More than 80 percent of soybean oil and soybean oil cake exports went to Andean countries, mainly Venezuela, in2003. 4.15 The United States, at 12 percent of exports, is a relatively small and under-exploitedmarket, but it is important for non-traditional and manufacturingexports. The United States receivedmore than three quarters of Bolivia's apparel, gold and silver jewelry and wood exports in 2003. The InternationalTrade Centre, using their Tradesim model, estimates that exports to the United States are 44 percent below their CHAPTER 4: T M D TRADE ~ POLICV, AND ~NmTunolvS 47 potential levels.25Manufactured exports to the UnitedStates tend to be more labor-intensive than exports to other regions. Overall, manufacturing exports account for 41 percent of manufacturingjobs inBolivia. As shown in Figure 4.6, manufacturing exports to the United States have the largest labor content - almost 16 percent of manufacturing jobs. Manufacturing exports to the Andean countries account for an additional 11percent. 25. Tradesim is an econometric gravity type model. Predictions for Bolivia are out of sample as Bolivia was not included inthe original regression. BOLWIA:POLICIES TOIMPROVEGROWHANDEMPLOYMENT 48 Figure 4.6 Labor Content of Manufacturing Exports By Region, 2003 (percentage of manufacturing jobs) i 0.18 7 I 0.16 0.14 0.12 0.1 1 0.08 0.06 0.04 0.02 0 Andean Chile Mercosur USA ROW 4.16 There i s room to expand Bolivia's share in its partners' markets. Its main competitors tend to be other Andean countries, other Mercosur countries, the United States, the European Union or, in the case of apparel, China, India andPakistan. 4.17 Bolivian exports are shipped in small quantities. There were around 700 f m s exporting in 2003, and only a few are able to export large amounts. Figure 4.7 shows the distribution of the value of the av- erage shipment by six digit category in 2004.26It peaks around US$20,000, which i s a very small ship- mentby most standardsalthough there is arguably alarge variance. The largest average shipment by tariff line was around US$25 million (and the smallest close to zero). Recently shipment values have been de- clining declined from an average of US$29,000 in 2001 (measured in current dollars) to US$20,000 in 2004 -a fall of over 30 percent inrealterms. 0 20000 40000 ratio 60000 80000 100000 26. I t i s computed by taking the ratio of the total exports by HS 6 digit category and the number of cases per tariff line "casos por partidas" according to data provided by ANB. The figure shows kernel density estimates of this ratio. CHAPTERTRaDE, T ~ DPOLICV,ANDINSllTlJ77ONS 4: E 49 4.2.2 Imports 4.18 Imports are more diversified than exports, but are concentrated ina few products. The Herfindha1 ratio of Bolivia's imports tends to be above its neighbors' (Figure 4.8). Concentration increased during the first ten years of the reforms, but it has since fallen to levels closer to the regional average. -Ecuador -Colombia Bolivia -Chile -Peru 0.018 0.016 ;8 0.014 51 0.012 .C * d 0.01 gg ___ u 0.008 4 0.006 fm 0.004 0.002 - I I I I Source: UnitedNations' Comtrade. 4.19 An open trade regime and efficient customs are likely to be important determinants of the per- formance of Bolivia's manufacturing sector. Imports impose a competitive discipline on the manufactur- ing sector. More than 50 percent of imports are manufactured products, and a large share of the sector's inputsis imported. The largest iteminthe import bundle is intermediate inputsfor industrial use, which accounted for US$712 million in 2004. Capital goods for the industrial sector added US$365 million, mostly for the manufacturing sector. Consumption goods imports have fallen to less than 20 percent of imports in 2004. Around 12 percent of imports entered under temporary admission, inputsto the export sector. 4.20 Mercosur accounted for 43 percent of imports in 2004. Brazil i s the biggest exporter to Bolivia and accounted for 26 percent imports. The Andean community accounted for 12 percent of Bolivian im- ports and Peru, with 7 percent, i s the main Andean exporter to Bolivia. The rest of LAM added 7 per- cent. Imports from the United States accounted for 14 percent and the European Union for 9 percent. China representeda small but growing 6 percent. 4.21 Smuggled goods are estimated to be a third of total official imports, and probably double official imports of consumption goods. Recent estimates by Kreidler and Rocha (2004) suggest that smuggling could have been as highas US$665 million in 2003 (39 percent of total imports). Between 50 and 80 per- cent of total smuggling are consumption goods. A typical smuggling pattern i s a L a Paz informal mer- chant who hires a trucker and crosses the Chilean border, bringingmerchandise to warehouses in L a Paz or Cochabamba. These warehouses are protected from customs inspections as part of the "secondary zone," that encompasses small tax payers under the "Simplified Regime." From these warehouses, smug- gled goods are distributed through well-known informal outlets by family networks and associates. Some BOLIVIA:POLICIESTOIMPROVEGROW ANDEMPLOYMENT 50 merchants, selling appliances, computers, bicycles, and other household goods, give receipts and warran- ties. Trucks are not registered, drivers usually come from Oruro Department, and may use a network of dirt roads that cross the Chilean border without customs inspection. Another technique i s to import mer- chandise legally into Chile, receiving an International Cargo Manifest, but then, after leaving the free zone of Iquique, either disappear over the Bolivian border or are passed through customs with false documents or without inspection (see Lanyi, Guevara and Bell, 2000). 4.3 TRADE POLICY AND REFORMS 4.22 Before the 1985 reforms Bolivia had a very restrictive trade regime. Cigarettes and apparel faced tariffs of 70 percent; cars, 62 percent; and jewelry, wine and furniture, 50 percent. A customs tax of 8 percent was imposed on all products. Non tariff barriers and discretionary licensing were important trade barriers. A multiple and fixed exchangerate made some transactions very costly and subsidized others. 4.23 Trade reforms quickly led to an open trade regime. Tariffs on capital goods were reduced to ei- ther 0 or 5 percent by 1988; and tariffs on other goods were gradually reduced to 10 percent. The goods subject to 0 or 5 percent tariff gradually increased to include intermediate goods, initially for sectors that benefited from trade preferences in the United States under the Andean Trade Preferences and Drug Eradication Act (ATPDEAhsuch as leather,jewelry, wood and apparel, but later extended to all sectors. 4.24 The unweighted average tariff in the late 1990s was between 9 and 10 percent, but duties col- lected were only 3.5 percent of imports. This was due partly to the large proportion of intermediate and capital goods and partly to tariff preferences and exemptions. Discretionary import licenses were gradu- ally lifted and the last one (for sugar) was eliminated inthe early 1990s. B y the late 1990s only five per- cent of tariff lines were subject to non-tariff barriers, and these were exclusively for health or sanitary reasons. Exchange rates were unified and Bolivia moved from a (multiple) fixed regime to a (managed) float. Trade liberalization was complemented by several regional and bilateral trade agreements through the 1990s.Trade increasedfrom 15 percent of GDP in 1985 to almost 30 percent by the late 1990s. 4.3.1 Tariffsand Customs Revenue 4.25 Within the region, only Chile's tariff regimeis simpler than Bolivia's. Bolivia's tariff structure in 2005 consists of 7741 ten-digit tariff lines. Most (72 percent) are set at 10percent. Around 23 percent of tariff lines-mainly capital goods-face 5 percent tariffs. Five percent of tariff lines are zero (mainly books, magazines, vehicle parts and scientific material). The resulting average tariff i s 9.3 percent. 4.26 All tariff lines were bound duringthe Uruguay Round, but there is significant "water" inthe tariff schedules. All bound tariffs were set at 40 percent during the Uruguay Round except for sixteen six-digit H S lines which are set at 30 percent (for vehicle parts). Thus, any likely outcome of the Doha Round would not impose any significant reduction on Bolivia's applied tariffs. 4.27 Despite low tariffs, incentives for smuggling are high due to domestic taxes and other import charges. Payments to the SENASAG and the ministry of health for inspections can be higher than tariffs (Rodriguez Alvarez, 2004). There i s a 1-2 percent fee for the customs broker. Reportedly, many brokers charge extra fees to expedite services. Domestic taxes include a 13 percent value-added tax that i s charged on the tariff-inclusive c i f . import value, which translates into a 14.94 percent rate. A specific consumption tax (ICE) i s charged on 64 tariff lines. It ranges from 0.21 percent on mineral water to 50 percent on cigarettes and tobacco. Motor vehicles have a specific consumption tax between 10 and 18 percent. The specific consumption tax i s charged on the c.i.f. and tax inclusive value of shipments. 4.28 The combined tax burden can be prohibitive. A US$20bottle of whiskey with a US$2 insurance and freight cost would pay a tariff of US$2.20 (10 percent on the c.i.f. value), a customs warehouse tax of US$0.12, a value-added tax of US$3.64 and a specific consumption tax of US$1.94 (corresponding to CHAPTER4: TRADE,TRADE POUCV,AND rNSLTlJ77ONS 51 6.95 percent of the value-added inclusive price). Total taxes amount to almost US$8 or 40 percent of the free on board (f.0.b.) import value. Inthe case of cigarettes the tax burden i s 91 percent of the f.0.b. im- port value; for vehicles it's 54 percent. Such large margins create incentives to smuggle, and official im- ports of whisky were below US$1million in2004. 4.29 Customs i s a major source of government revenues. In 2004 import duties were US$70 million and total revenues including VAT (value-added tax), ICE (specific consumption taxes) and Zmpuesto Es- pecljCico sobre Zos Hidrocarburos y Derivados (hydrocarbons tax) were US$319 million-27 percent of tax revenue, 4.7 percent of GDP. VAT collections are the main source, accounting for about 73 percent of customs revenues. In 2004 more than 60 percent of the VAT and 45 percent of the specific consump- tion taxes were collected by customs. Given that imports represented only 23 percent of (the official) GDP in 2004, this implies that the collection rate at customs is 2 to 3 times larger than inthe rest of the economy. The share of import duties has fallen due in part to the trade agreements and more tariff lines that qualify for lower duties. Other elements that reduce customs revenues are tax exemptions for diplo- matic missions, international organizations and, especially NGOs; temporary admissions for exporters; the deferral of VAT payments for up to three years. 4.30 Curbing smuggling could significantly increase tax collections. If smuggling was estimated US$665 million in 2003 (Kreidler and Rocha, 2004), the lost taxes would be about US$lOO to US$l50 million. Reducing some of the high specific consumption taxes (andor the VAT) would lower the re- wards to smuggling, shift transactions to the more efficient formal sector, and could increase tax reve- nues. 4.3 1 Curbing smugglingwill require better enforcement. Control Operativo Aduanero (COA) is re- sponsible for reducing smuggling but it has not been fully successful. COA could be strengthened with more personnel, training, and better technology for communications, crowd control, vehicle tracking and x-rays. The fight against smuggling would also be helped by more convictions and harsher penalties. The judiciary has been lenient in sentencing smugglers. The procedures for the destruction or public auction- ingof smuggled goods couldbe improved. 4.32 Reducing smuggling would make the formal sector more competitive. B y avoiding taxes, the informal sector enjoys significant cost advantages. According to a survey following up on the Investment Climate Assessment, the number one problem of small and medium size enterprises i s smuggling(31 per- cent of f m s interviewed and 38 percent of public officials interviewed suggested smuggling as a prob- lem for small and medium size firms). If this competitive pressure falls, it could provide incentives for formal firms to expand and add employees, as well as encouraging informal sector firms to join the for- mal sector. 4.3.2 Non-tariffMeasures 4.33 There are virtually no non-tariff measures (NTM). There are no import quotas, no import surveil- lance mechanisms, and no import monopolies or cartels. Bolivia has not imposed restrictions for balance of payments reasons(i.e., it has never invoked GATT Article XVII1:B). Few safeguards and antidumping measures have been applied. 4.34 Import prohibitions and licenses apply to a few tariffs lines for public health or environmental reasons. Licensing requirements are also imposed for technical regulation of insecticides, radioactive ma- terial and several chemical substances. Labeling requirements are limited to retail packages showing weight or other content measures in an international system unit. Phytosanitary regulations apply to live animals (certificate of origin and health) and sanitary certification for live plants or seed (certified by a Bolivian consulate). Food imports require a sanitary certificate from a laboratory recognized by the Bo- livian authorities. The legal framework for standards, testing and certification is implemented by SNMAC. The objectives of the SNMAC are to foster the competitiveness and quality of Bolivian goods and services abroad(see section 4.5.5 and Annex 4.1 on technical regulations and standards). BOLIVIA: POLICIESTOIMPROVEGROW ANDEMPLOYMENT 52 4.35 Bolivia has the lowest ad-valorem equivalent (AVE) of non tariff measures in the region. Over- all, around 19 percent of tariff lines are subject to some type of NTM and they affect 29 percent of im- ports (Kee et al., 2005). The NTMs are quite restrictive with an average AVE of 32 percent." On aver- age they add 6.1 percent to protection. Officially, this reflects technical regulations for health and envi- ronmentalreasons without protectionist intent, but many believe that technical regulations are sometimes used for protectionistpurposes. Moreover, as shown inFigure 4.9, Bolivia's average AVE of NTMi s the lowest inSouth America; only 38 percent the level of Brazil's. F i g u r e 4.9 nt of NTM, 2002 14 12 in i _ _ 8 6 4 2 0 Bohvia Ecuador Chile PCN Argatim Venezuela Paraguay Colodia U ~ g u a y Brazil Source: Kee, Nicita and Olarreaga,2005. 4.3.3 Export Policies 4.36 The export regime is very liberal with almost no government intervention. There are no volun- tary export restraints, export charges or minimumexport prices. There are no export cartels nor export quotas, apart from those negotiated within bilateral trade agreements. 4.37 The main pillar of export policies i s tax neutrality for exports. Free trade zones have a negligible contribution to exports, but Bolivia has two instruments of tax and tariff concessions: a tax refund system and the temporary import regime for export promotion (RITEX). 4.38 The tax refund system covers tariffs and domestic taxes (VAT and ICE) for traditional and non- traditional exports. To get the refunds importersneedto present tax payment records up to a maximumof 13 percent of the value of exports. This i s reimbursed through a tax certificate (CEDEIM), a transferable security negotiable on the Bolivian stock exchange which can be used to pay any tax liability to the cus- toms or internal tax authorities 4.39 Tariff refunds can be automatic or discretionary. Bothuse a CEDEIM. 0 The automatic mechanism applies to exports, ina ten-digit classification, which were below US$3 million the previous year-about 97 percent of exports in 2004. The reimbursement i s 2 percent of 27. The ad-valorem equivalents are estimated in two steps. First, import quantity impact of NTBs are estimated and these are then transformed into price equivalents (or ad-valorem equivalents) using import demand elastic- ities estimated by country at the product level. For more detailed information, see Kee, Nicita and Olarreaga (2005). CHAPTER 4: TRADE, TWDEPOUCV,AND INnrruT7ONS 53 the value of exports if the shipment i s above US$lOO thousand and 4 percent if the shipment i s smaller. 0 The non automatic mechanism applies to exports above US$3 million. The government determines the reimbursement every year, basedon the industry's costs. Exporters can request a fm-specific calculation if the refund does not reflect its costs. 4.40 The reimbursements are designedto be incentives for new export products and firms, but they are costly to implement and may create distortions. It i s costly for customs to verify an export's ten-digit category. Pre-shipment inspection companies charge one to two percent of the value of a shipment for this. If is the cost to customs it is not worth it; especially considering that 97 percent of six-digit har- this monized system tariff lines had exports below US$1 million in 2004 and would have received the auto- matic 4 percent reimbursement. Regarding the higher refund rate for new and small exporters, this en- courages f m s to multiply export shipments under different (andor new) company names to receive the extra two percent refund. Figure 4.10 shows the distribution of the shipments in 2004 around US$lOO thousand. It peaks before and after US$lOO thousand suggesting that exporters may be incurring addi- tional costs to split shipments. To avoid the economic inefficiencies and discourage corruption it would be preferable to grant a uniform, automatic 4 percent rate regardless of the size of the export shipment.28 Figure 4.I O InefJicient Shipment Sizes Related to Export Incentives Peaks before and after lJS$lOO thousand suggest exporters split shipments Note : This shows the Kernel density of the average shipment around US$lOO thousandusingexports data for 2004 4.41 Delays in reimbursement or emission of the CEDEIM undermine the incentives to export. The Supreme Decree established that it shouldn't take more than 35 days (20 working days for emission and 15 days for accepting the request), unless there i s no bank guarantee for the amounts of the tax refund, in which case it could take three to four months. In practice, the delays are close to six months, which can be quite costly and especially burdensome for small- and medium-sized firms with costly access to credit. There are currently some highly publicized cases of complaints by exporters in the illegality of the tax refunddelays inthejudiciary system. 28. Note that the subsidy agreement of the WTO limits the reimbursement to 3 percent of the export value, but Bolivia is exempted given its status in the WTO as a low income country BOLIVIA: POUCIESTOIMPROVE GROWTH EMPLOYMENT AND 54 4.42 The temporary import regime (RITEX) suspends import tariffs as well as internal taxes (VAT and ICE). RITEXdoes not cover capital goods, and it does not includetax suspensionson fuel, hydrocarbons or electric energy. It i s not clear why these inputs are excluded. 4.43 RITEX's use has been quite limited, but it offers advantagesover the tax refund system. We es- timate that less than 10percent of exports benefited from RITEX. In2003 only US$82 million of imports entered under RITEX, representing around US$25 million of suspended taxes. While the amounts seem small, the benefit for the users i s estimated at US$2.5 million?' and users of RITEX think the system works effi~iently.~' 4.44 RITEXis usedby a few industries, partly reflectingthe concentration of Bolivia's exports. More than half the imports entering under RITEX (US$48 million) were soy which are inputs for soy oil and oilcake exports. Cotton imports and cotton textiles used primarily by apparel exporters (to the United States) accounted for another six percent. 4.3.4 Preferential Agreements 4.45 The greatest complexity in Bolivia's tariff regime i s due to preferential agreements with the An- dean Community, Mercosur, Mexico, Chile and Cuba. All products originating in the Andean Commu- nity receive duty free treatment, and preferencesto Mercosur and Mexico are also quite extensive. On the other hand preferences granted to Chile and Cuba are modest. The average preference margins to Chile and Cuba are negligible: close to 3 percent. The average preference margin for Mercosur members i s above 81 percent and for Mexico around 96 percent. By 2006 for Mercosur members and by 2009 for Mexico all tariffs will be set to zero, as with the Andean Community. There are a few exceptions in the case of Mercosur for a few sensitive products (vegetable oil and sugar) for which there will be non zero tariff rates until2014. 4.46 The preferential agreements improve market access for Bolivian exporters. All exports to the Andean Community and most to Mercosur members and Mexico benefit, inprinciple, from tariff prefer- ences. Inthe case of Mercosur tariffs have yet fallen to 0, and average preferential tariff in Mercosur members was around 2 percent in 2004. In the case of Mexico the average preferential tariff is still around 10percent, suggesting that the free trade agreement with Mexico can bring important market ac- cess gains. 4.47 The major obstacle to Bolivian exports in these markets is non-tariff barriers that are generally outside the trade agreements. These include reference prices for apparel in Argentina; discretionary li- censing and sanitary inspections for coffee, dairy products and wood chairs inBrazil; quotas for sugar and food preparations inColombia; and, inMexico, reference prices on t-shirts, cotton sweaters, beer and cot- ton, and discretionary licensing for crude petroleum. They are not transparent, so they introduce uncer- tainty and erode the tariff preferences. 4.48 This partly explains why a large share of Bolivia's tariff preferencesi s underutilized, and why the main market for Bolivia's non-traditional exports i s the United States. Non-tariff barriers, which were outside the negotiations, are used by the larger trading partners to block Bolivian non-traditional exports. The government could seek mechanisms at the regional level to address these non-tariff barriers. 4.49 In the Cuba and Chile agreements there is scope for deeper tariff preferences, and removal of non-tariff barriers. The average Chilean tariff on Bolivian exports in 2004 was around 3.8 percent; Cuba, 4.1 percent. Both countries impose non-tariff measures going from simple sanitary measures in Chile, to discretionary licensingfor all products inCuba. 29. This assumes that tax refund occurs a year after the import date and that interest rates are around 10percent. 30. Rodriguez Alvarez (2004) and people interviewed for this report suggested that part of the reason these pro- grams have had limited use is the instability of long run policies and legislation in this area. CHAPTER4.' TRADE. TRADE POUCV,AND ~ N 9 7 T ~ O N . S 55 4.50 Bolivian firms are not integrated in production chains of regional partners. Regional exports are concentrated inminerals and soy products. Within Mercosur, the Competitiveness Forumaims to improve the competitiveness and increase the regional value-added of Mercosur's exports, and its work could lead to better integratingBolivianproducts. 4.51 The United States provides significant preferences under its ATPDEA (Andean Trade Pact and DrugEradication Act) and its Generalized System of Preferences(GSP). Around 40 to 50 percent of Bo- livia's exports to the United States have been entering preferentially, either under the ATPDEA or the GSP. Most of the other exports entered at zero MFNtariff. Only about 10percent of exports in2004 were subject to tariffs and those paid an average tariff of 2.1 percent. Overall the preferential scheme offered by the UnitedStates i s very generous. However, it was extended unilaterally by United States and, unless it is renewed or replaced, it will expire inDecember 2006. 4.52 Bolivia receives GSP benefits inthe European Union, but they are not as generous as those under the ATPDEA. Since 1990, the EUhas granted special preferential access conditions (exemption or reduc- tion of tariffs) for all industrial products and numerous agricultural products for Andean countries com- mittedto tackling drug production and trafficking - the GSP "drugs" regime. The GSP regime has been extended to the end of 2005 with a provision which, in practice, excludes the Andean countries' exports from possible graduation (the 1percent clause"). The European Union's preferential tariffs are not neces- " sarily 0, and preference margins tend to be very small when tariffs matter, i.e., for tariffs above 15 per- cent). Nevertheless, most non-traditional exports enter the European Union duty free. 4.4 PROJECTING THE IMPACTSOF CURRENT TRADE NEGOTIATIONS 4.53 Three ongoing trade negotiations will shape the future of Bolivian exports: Negotiations in the WTO (the Doha Round); last year's Andean Community-Mercosur agreement i s likely to erode Bolivia's preferential access in these markets; the United States i s negotiating a Free Trade Agreement with Co- lombia, Ecuador and Peru to replace ATPDEA before it expires in December 2006. The economic im- pacts of each of the agreements are estimated inturn.3' 4.4.1 The DohaRound 4.54 It is not clear where the Doha negotiations are going or what reforms will be negotiated. How- ever, any reductions in bound tariffs are unlikely to affect Bolivia's tariffs. We consider two scenarios (See Hoekman, Nicita and Olarreaga, 2005): 0 Business-as-usual40 percent cut in bound tariffs by all WTO members; a reduction of all tariff peaks to a maximum of 50 percent; a 40 percent reduction in agricultural subsidies; elimination of export subsidies; and improvement intrade facilitation that will increase world trade by 2 percent. o Bolivia's exports would increase by US$48 million-about 3 percent of 2003 exports. The largest increases would be injewelry, natural gas, soybean oilcake and oil, and t-shirts. o The welfare losses, about US$7 million, would be in sectors where subsidies are eliminated, and world prices rise-iron and steel pipes and tubes, wheat, wheat flour, and malt. 31. The estimates in this section are only indicative due to modeling limitations. Trade agreements, particularly the US-Andean FTA, often involve only liberalization so the reforms are difficult to model. For example, all of our estimates exclude welfare estimates associated with services liberalization that, in some cases, could be significant or the dynamic gains associated with higher productivity due to stronger disciplines and rules in other areas such as investment, intellectual property etc. Estimating the economic impact of many of these agreements that go beyond merchandise trade is problematic and the evidence is so far ambiguous (see World Bank, 2004). So all numbers, probably, underestimate the actual impacts. BOLIVIA:POLICIESTOIMPROVEGROWHAND EMPLOYMENT 56 0 Ambitious scenario-elimination of all applied tariffs; a 50 percent cut in the restrictiveness of non- tariff barriers, elimination of agricultural support and subsidies; and improvement in trade facilitation that will increase world trade by 2 percent. o Bolivian exports would rise by US$82 million (5 percent). The same products as under the business-as-usualscenario are at the top of the list, plus sugar. o Welfare losses are associated with imports with higher world prices (iron and steel pipes and tubes, insecticides); or exports with lower world prices (ethyl alcohol, kidney beans). 4.55 The world welfare changes under the scenarios are striking. Business-as-usual would increase world welfare by an estimated US$59 billion, but under the ambitious scenario the effects are 4 to 5 times larger (See Hoekman, Nicita and Olarreaga 2005) For Bolivia, business-as-usualwould lead to a welfare loss, but the ambitious scenario would lead to a welfare gain of around 0.5 percent of GDP. This i s smaller than the average gain among low- or middle-income countries (2 percent of GDP) and even smaller than the average gain for OECD countries. The impacts would be small because Bolivia's trade policy i s already relatively open and most of Bolivia's major exports (minerals, natural gas) face low pro- tection abroad. 4.4.2 Andean-Mercosur Agreement 4.56 The Andean Community and Mercosur Agreements reduce Bolivian exports by an estimated US$18 million-1 percent of 2003 exports. The agreement allows more regional exporters to receive the favorable terms Bolivians receive, and thereby erodes Bolivia's advantages. We estimate32that Bolivia's welfare losses will be US$3.5 million, 0.4 percent of 2003 GDP. Losses are small and are concentrated in a few products and markets-principally in Colombia and Venezuela (soybean oil and oilcake). Other products with significant market share losses are soy to Venezuela and Colombia and sugar to Colombia. As the Andean Community-Mercosur agreement takes effect, Bolivia can offset these losses by export diversification. This could be include deepening the US-Andeanpreferences. 4.4.3 US-AndeanFree Trade Area 4.57 The United States i s negotiating a Free Trade Agreement with Colombia, Ecuador, and Peru. Negotiations were begun in May 2004 in Cartagena, Colombia with the goal of replacing the ATPDEA before it expires in December, 2006. The agreement would be modeled on the Central American Free Trade Agreement. 4.58 Bolivia i s only an "observer" in the negotiations because of internal opposition and because the Government has not resolved outstanding concerns about investors' rights. Internal oppositioni s based on a wide range of concerns from the fear that signing an FTA would be costly for Bolivianfarmers through the subsidized competition of American farmers (especially soy), including the fact that the use of some of the agricultural inputs (e.g., seeds) would be subject to stronger intellectual property protection within the FTA. Some fear that intellectual property right protection will lead to higher costs for medicines, that indigenous communities would lose their biogenetic heritage to American pharmaceutical and agro- industrial multinationals, and finally that the Bolivian government would lose be forced to change its pro- curement practices. The external factor i s the unwillingness of the UnitedStates to negotiate an FTA with Bolivia before there i s a clear and satisfactory resolution of the HydrocarbonsLaw (Box 1-4). 4.59 An FTA would improve Bolivianexporters' access to the UnitedStates while providing duty free access for U. S. exporters to the Andean region. Using the GSIM model (Francois and Hall 2003) as in the previous subsection, we estimated the welfare impact under two scenarios. In the first, Bolivia i s ex- 32. The model, GSIM, was originally developed by Francois and Hall (2003). The parameters and data to run the model were provided by WITS. CHA~ERTRADE,TRADE 4: Poucv,ANDINS~UT~ONS 57 cluded from the FTA and suffers market erosion in the United States and in other Andean countries. In the second, Bolivia is a party to the FTA and benefits from better accessto the U.S. market. 4.60 Under both scenarios, the welfare impacts are modest but Bolivia would be better off if it were a party to the FTA than if it stayed outside the FTA. If Bolivia participates in the FTA, exports would in- crease by as much as US$51million (almost 30 percent of Bolivia's exports to the UnitedStates), whereas ifBoliviaisnotapartyitsexportrevenueswoulddropbyUS$5million. Thelabor-contentofBolivian exports to the UnitedStates i s twice as highas inexports to the rest of the world (see Figure4.6), so these exports are likely to generate significant manufacturing employment. We estimate that annual welfare gains associatedwith the FTA are around US$6 million. Ifthe FTA goes ahead without Bolivia, welfare losses would be around US$700 thousand, whereas if Bolivia participates welfare would increase by US$5.7 million. 4.61 The principal exports expanding under an FTA are likely to bejewelry, builders carpentry, wood, tin, men's and boys' shirts, sweaters and t-shirts. Exports of these products to the United States would increase by more than 10percent. These are also the products that would suffer from preference erosion iftheFTAisconcludedwithoutBolivia. 4.62 Bolivia does not import agricultural products that are heavily exported by the United States, so the increase inagricultural imports would be negligible. On the export side, soy products would compete against the United States inthe Andean markets-just as Mercosur members took market share from Bo- livia inthese markets. This loss will occur regardless of whether Bolivia participates inthe FTA. How- ever, the lost revenues in soy products are around US$1.2 million smaller than the loss from the Andean- Mercosur FTA. Cotton and dairy products would also suffer small preference erosion. Some agricultural products would have significant gains: brazil nuts, sugar, and coffee. 4.63 The impact of an Andean-US FTA on the agricultural sector i s likely to be small and it could be positive in some sectors. The current debates are similar to earlier debates of the impact of NAFTA on Mexican farmers that predicted a drastic impact on Mexican farmers. Inreality, bothMexicanproduction and exports of agricultural products have increased significantly since NAFTA took effect (Lederman, Maloney and Serven, 2004). 4.64 The Free Trade Agreement would not lead to significant tariff revenue losses. First, revenues from U.S. imports are small becausetariffs are low, and most products from the United States are capital goods that attract a 0 percent tariff. Second, imports from the U.S. are not expected to increase dramati- cally, so there would be little trade diversion or tariff losses. We estimate a negligible increase inrevenue due to collectionof VAT on a higher volume of imports. 4.65 The FTA goes well beyondmarket access. The agreement will regulate the trade and investment relationships among the Andean countries and the UnitedStates ina comprehensive manner, with the aim of increasing trade and investment flows and accelerating economic and social development. It affects trade in goods and services, investment, and government procurement, and it will impose modem, world- class disciplines inintellectual property, customs administration, competition, labor, environment invest- ment, services, sanitary and phytosanitary measures, technical barriers to trade, trade remedies and dis- pute settlement procedures. Full implementation would, gradually over time, lead to a sweeping mod- ernizationof Bolivian laws, regulations, and institutions. 4.66 Inrecent FTAslabor and environmentalprovisions havenot gone beyondrequiring signatories to enforce their own laws. These laws govern right of association, prohibitions on forced labor, child labor, and working conditions. The FTAs are premised on the assumption that each member's laws are satisfac- tory and that any distortions that may occur are caused by not enforcing the laws. In the case of labor agreements, the novelty i s in how dispute settlement i s regulated. If there i s a dispute, instead of using trade remedies (as would be the case in the WTO for example), the U.S. FTAs authorize a dispute settle- ment panel to impose a monetary fine for violating labor laws. CAFTA and the U. S.-Chile agreement BOLIVIA: POLICIES TOIMPROVEGROW ANDEMPLOYMENT 58 did not have a strong environmental component and, therefore, one would not expect one for the U. S.- Andean agreement. 4.67 Recent U.S. FTAs have required strong commitments inthe areas of trade related investment and intellectual property pr~tection.~~They include investment and intellectual property provisions that go beyondthe WTO agreements on trade relatedinvestment measures (TRIMS)and trade related intellectual property protection (TRIPS),with investor-state arbitrationmechanismsin case of disputes. 4.68 In the area of standards, mutual recognition can deliver significant gains. Technical assistance would be neededto improve laboratory and certification mechanisms (Annex 4.1). Mutual recognition of professional standards could allow Bolivian professionals to gain access to jobs in the U.S. if temporary movement or cross border trade in services i s liberalized. 4.5 TRADEINSTITUTIONS 4.5.1 Export Promotionsince 1985 4.69 In 1985, with the highest levels of hyperinflationever recorded inBolivia, Victor PazEstenssoro, proclaimed that Bolivia was in its death throes and that the only way it could survive was to increaseex- ports. The phrase "export or die" was coined and has been with Bolivian exporters ever since and "non- traditional exports" beganto emerge. 4.70 Most of the export promotion infrastructure began in 1989, under the government of Jaime Paz Zamora. A Ministry of Exports and Economic Competitiveness (MECE) was created and pushed for leg- islation and institutions to promote exports with the goal of providing Bolivianexporters with instruments and mechanisms that neighboring countries used. The government created free trade zones (zonas fran- cas); the export promotion agency (INPEX); the one-stop shop for export procedures (SIVEX) and the temporary import regime for export promotion (RITEX). Congress also approved Law 1182, which es- tablished the framework for foreign direct investment. Between 1989 and 1993 there was the highest in- crease inthe value of Boliviannon-traditional exports-in part due to government support, but also to the Andean Trade Preference Act (ATPA), enacted by the U. S. Congress in 1991, granting duty-free access to the U.S. market to some 6000 Bolivianproducts. 4.71 The biggest contribution from MECE was the 1993 law, Development and Tax Treatment of the Export Sector Act. This introduced the concept of tax neutrality and established a refund system for ex- porters. Although it has never happened in practice, in theory the law establishes that national taxes should be refundedto the exporter within 25 days. 33. For example, U.S. investment agreements within FTAs generally include pre-establishment rights to invest in business and activities in all sectors (including services), except where prohibited by negative lists (instead of positive lists in WTO services agreements). The rationale is that it provides certainty on the rules of the game, which are necessary for increased investment inflows. Post-NAFTA agreements include not only FDI in the definition of foreign investment, but also portfolio flows, private and sovereign debt. The inclusion of short- term debt, together with the pre-establishment rights, led the U. s. Treasury inthe case of the U.s.-Chile FTA to require that Chile modify its controls on capital flows that were designed to curtail destabilizing hot money. All these go far beyond the multilateral commitments at the WTO, and those in bilateral investment treaties. There are TRIMS+ conditions in the area o f trade-related investment measures that ban performance require- ments, domestic sourcing, trade balancing and technology transfers. The TRIPS+ provision include extension of patent terms for delays caused by regulatory approval process, extension o f copyright protection to the life of author plus 70 years (instead of 50 years in TRIPS), a requirement to provide patent protection for plants and animals and a limitation on the use of compulsory licenses for national emergencies. For more details, see Chapter 5 of World Bank (2004). CHAPTER 4: TRADE, TRADEPOUCV,ANDINS77TU770N.5 59 4.72 The Shchez de Lozada Government restructuredministries and eliminated MECE. Export pro- motion and related activities were transferred to the Ministry of Foreign Affairs, although SIVEX and RITEX were in the newly-created Ministry for Economic Development. Export promotion was not an Administration priority, and he Ministry of Foreign Affairs had little interest in consolidating or expand- ing it. It was interested innegotiating to open markets for Bolivian exports: a free trade agreement with Mexico, an associate membership in MERCOSUR and an agreement with Chile for some tariff conces- sions. Non traditional exports continued to grow, but did not as robustly. 4.73 The Banzer Government (1997-2002) reorganized support for the export sector. It established the Ministryof ExternalTrade andInvestment to assumemost of the responsibilities previously transferred to the Ministry of Foreign Affairs. The notable exception was responsibility for trade negotiations, a deci- sion which led to conflict between the two Ministries for the next five years. The trade promotion agency was revamped and named CEPROBOL and legislation was introduced to make the tax refund system more efficient. On average, exporters were waiting for eight months to receive the money they were owed. Congress passeda law declaring exports a national priority, but it was never implemented. 4.5.2 CurrentTrade Institutions 4.74 Since 2003, trade promotion institutions are again part of the Ministry of Foreign Affairs under the Viceministry for InternationalEconomic Relations. Some instruments have been retained ina smaller Ministryfor Economic Development, under the Viceministry for Commerce, Industry and Exports. The Ministry for Foreign Affairs has re-launched CEPROBOL, to include all Bolivian diplomatic missions around the world to promote Bolivian exports. The role of CEPROBOL i s to study the problems of the export sector and to advise and recommend policy measures to the government. It aims to provide techni- cal assistance and finance capacity building in the export sector (e.g., market studies, export information, quality certification and information, transport logistics, etc.). The RITEX, SIVEX and the free trade zones are administered by the Ministry of Economic Development, and the tax refund system remains part of the Ministry of Finance, through the control of the Inland Revenue Service (SIN). 4.75 CEPROBOL has had very limited success. This i s the opinion of its current director, firms inthe capacity building- has been filled by private institutions such as IBCE. CEPROBOL has had a small export sector and academic studies (Rodriguez Alvarez 2004). Part of its role - technical assistance and budget which has not allowed it to spend much on export promotion. Its budget for 2002 was slightly above US$300 thousand, and 74 percent went to staff salaries. Also, the Continuous institutional rear- rangementshave undermined its effectiveness. 4.76 There are no facilities for export financing. There i s no pre or post-shipment export financing in Bolivia that offers exporters access to credit at preferential terms or rates as in other countries in the re- gion (e.g., Bancomext in Mexico or Bancoldex in Colombia). Moreover there i s no export credit insur- ance. Export activities often involve taking more risks than transaction within national borders. Pooling of this risk is sometimes undertaken by governments which protect exporters against the non-payment by foreign buyers (e.g., Brazil or Argentina for political or extraordinary risks). These are two areas where many governments see a role, although these are highly specialized fields that require strong institutions. Without them, the instruments may lead to new distortions and unwarranted subsidies without achieving their desired results. 4.77 Trade policy i s set in the National Committee for Exports (CONEX), chaired by the Minister of Economic Development, and composed of the Minister of Foreign Affairs, the Minister of Agriculture and representativesfrom the regional chambers of exporters. CONEX should sit once a month, but it does not meet regularly and usually only when there are urgent matters. CONEX can define trade policy, but to convert any of its decisions into legislation, it has to present its proposals to the National Council for Economic and Social Policy (CONAPES), which i s composed of all economic and social ministers. BOLIVIA:POLICIESTOIMPROVEGROW ANDEMPLOYMENT 60 4.78 The Customs Administration (ANB) i s an important trade institution. It has the responsibility of overseeing import and export flows and levying duties and other taxes on imports. Exports are not taxed. Over the past five years, ANB has been engaged in a comprehensive institutional reform (Section 4.5.4) to become more user-friendly: simplified regulations and procedures; up-to-date information systems; merit-based hiring; training; and improved facilities and equipment have facilitated trade. However, there i s still plenty of work to be done to reduce smugglingfrom neighboring countries. 4.79 Other trade institutions are the national service for the control of agricultural products and food- stuffs (SENASAG), which controls quality and safety of imports as well as domestic production for na- tional consumption. The Ministry of Health issues import licenses for drugs and medicines, the Ministry of Defense for fire-arms and explosives, the Home Ministry-though the Anti-narcotics Police-for chemical products and petrol derivatives. Other Ministries, particularly the Ministry for Sustainable De- velopment, are responsible for trade of endangeredanimals or plants and for the import of ozone degrad- ingproducts. The Ministry of Economic Development, through the Viceministry of Culture, is incharge of preventingartifacts from the cultural heritage from leavingthe borders. 4.80 There i s an array of projects and programs financed by international cooperation agencies (bilat- eral and multilateral) and NGOs, aimed at improving the productive conditions and capacities of farmers and micro, small and medium firms, and opening new markets for their products. The limited Bolivian productive capacity i s an obstacle to export growth and economic development, and government created the national system for productivity and competitiveness (SBPC) in 2001 to coordinate improvements of the productive sector. The SBPC i s coordinated by a specialist unit (UPC) dependent from the Ministry of Economic Development. 4.81 Finally, the private sector, organized in the Chamber of Commerce (CNC), Chamber of Industry (CNI) and the Chamber of Exporters (CANEB), with their regional offshoots, also provides technical as- sistance, information and export promotion services to exporters. Most notably the Bolivian Institute for External Trade (IBCE), basedin Santa Cruz, which aids CEPROBOL with trade promotion activities and the Ministry of ForeignAffairs with trade negotiations. 4.5.3 The New CustomsAdministration 4.82 After unsuccessful reforms spanning over two decades, the government undertook a institutional reform of the Bolivian Customs Administration (ANB)in 1999. A new customs law in July 1999 (Ley General de Aduanas, or LGA) began a US$38 million reform project financed largely by donors. The LGA updates and organizes previously dispersed and outdated customs regulations, dating back to 1929, and creates a new institution, independent financially and administratively from central government and out of the reach of traditional political parties. This was achieved with the appointment of an independent Board of Directors, selected by the President from a list of candidates approved by the Chamber of Depu- ties. 4.83 The US$38 million project, the Bolivian Customs Administration Modernization and Reform Program (PROMA), was the backbone of the institutional reform. The main objectives of PROMA were to: (i) facilitate trade, (ii) increase the collection of custom taxes and (iii) corruption. (PROMA was fight not specifically designed to aid the ANB with the fight against smuggling.) The means to these objectives were: 0 Competitive hiringof technically competent personnel 0 New customs regulations that incorporated modem concepts and are oriented towards trade facilita- tion; 0 State of the art IT systems to control operations and new equipment and communication services; 0 New control and inspection infrastructure and procedures, including WTO-approved valuation proce- dures; and 0 Institutional mechanismsto detect and control of corruption. CHAPER 4: TRADE, TRADE POLICY, AND INWUl7ON.S 61 4.84 Recent evaluations (Fanta 2005, Silva 2004) found that most of the activities undertaken under PROMA have been completed and have successfully implemented. The reform has had a positive effect on trade facilitation and curbing corruption within the institution. Fanta (2005) found that exit times for imports and exports have been reducedto acceptable international levels in that past five years and that the number of customs declarations processed per employee i s one of the highest amongst customs or- ganizations inneighboring countries, with the exception of Chile. Importers and exporters interviewed for this reporthavecommented favorably on improvements inthe customs administration. 4.85 The institutional reform requires further actions. Foremost i s the need to renew the Board of Di- rectors, which has been weakened through resignations and loss of mandate. Selection of candidates by Congress has been delayed for more than two years, undermining decision-making and planning. Second, i s to continue to strengthen human resources, particularly creating incentives to keep good professionals and to attract new ones. Salary structures have been frozen due to the government's austerity programand are not competitive with the private sector. Promotion opportunities need to be regulated and training op- portunities enhanced. 4.86 Improvements in some technical areas could further boost trade facilitation. Fanta (2005) found three areas to improve operations: physical inspection, customs procedures and registration. First, the LGA requires that upto 20 percent of merchandise arriving at customs be physically inspected. However, fraud detected thorough physical inspection amounts to less that 1percent of total tax collection. This means that it i s necessary to improve the mechanisms for risk assessment and evaluation in order not to burden unnecessarily bonafide importers. Second, the endeavor undertaken to establish fair, clear and enduring customs procedures has been important in the reform process and has given importers and ex- porters security when dealing with customs officials. However, at present, these procedures are heavy with paper-work, which appears in some cases to be redundant. An effort at simplification of customs procedures seems to be in order. Finally, the ANB requires trade operators to register with the institution, but so do many other Bolivian institutions. Registration in one of these institutions, with the records shared by all others, should be sufficient to undertake trade operations. 4.87 The success of the institutional reforms has been tainted by the inability to effectively fight smuggling. The general public has associatedcustoms reformwith the fight against smuggling.The LGA places the responsibility for smugglinginthe hands of the ANB, but effectively dealing with this problem requires both a comprehensive policy against smugglingand the involvement and active participation of several other institutions. The creation of the anti-smuggling police unit (COA) has been an important first step, but they are under manned and under equipped are not an effective deterrent for seasoned smugglers. However, to increase the number of COAs and provide them with more sophisticated equip- ment i s not sufficient. Other actions need also to be taken. 4.88 Effective anti-smugglingrequires the reductionof all incentivesthat drive the activity. A coherent anti-smuggling policy should start by eliminating article four of the LGA, and related legislation, which prohibit COA and the ANB from carrying out control operation against retailers of smuggled goods. The requirements for phytosanitary and sanitary certificates and other import licenses need to be stripped of burdensome procedures and high costs. All commercial import operations need to be camed out under a tax registration code or NIT. Effective coordination with the Inland Revenue Service (SIN) for combined control operations needsto be enhanced, too. 4.89 Finally, curbing of smuggling requires cooperation with customs administration in neighboring countries. The official exchange of information about imports and exports i s a first step to cross border cooperation. A second important element i s the harmonizationof import and export procedures, as well as basic paper-work and documentation, and this could be followed by coordinated border infrastructure and border control. BOLIVIA:POLICIES TOIMPROVEGROWHANDEMPLOYMENT 62 4.5.4 Technical Regulations and Voluntary Quality Standards 4.90 Bolivia i s developing a basic infrastructure for quality control. This i s organized around the na- tional system for normalization, metrology, certification, accreditation and the management of quality (SNMAC) in February 1997. The system is based on three pivotal institutions: the National Institute for Normalization of Quality Standards (IBNORCA), the Bolivian Organism for Accreditation (OBA) and the Metrology Institute (IBMETRO). The main objective of the SNMAC is to provide technical support to improve the reliability of quality planning and control inBolivian production for internal and external markets. 4.9 1 SNMAC has not received priority attention from government. There has been significant progress in developing noms for quality control, calibration services, and an increasing number of private f m s and public institutions require accreditation to pre-established quality standards. However, quality prac- tices ininternational trade make it necessary for the SNMAC to be regulated by law and not merely a Su- preme Decree, as it is now. The importance of a law becomes apparent when the plethora of other institu- tions (outside SNMAC) involved in quality control comes into consideration. The relationship, roles, and responsibilities between these institutions and SNMAC need to be legally defined. Also, it i s necessary for the government to quickly activate the National Council for Quality Control (CONACAL) - which has not met since 2001 - with public and private participation. It i s also essential that CONACAL be chaired by the Minister of Economic Development, as it has been established, so that decisions can quickly be put into legislation or taken action upon. 4.92 SNMAC needs additional funding to support increased activities and international commitments. The number of sectors which need to be regulated i s growing and globalization of trade is increasing the capacity required to safeguard against risks to health, domestic production, the environment and con- sumer rights. In this context, OBA and IBMETROrequire greater budgets, so to hire and train more per- sonnel and to fund other resources, such as laboratories, to meet their responsibilities. IBNORCA is a publidprivate partnership which fares better, although it still requires more funding to fulfill its obliga- tions. 4.93 Finally, the increased use of technical barriers to trade in international commerce carries a sig- nificant threat to Bolivian exports, particularly non-traditional exports, of which exporters may not be fully informed. It may be desirable to establish appropriate national mechanisms to inform exporters about non-tariff barriers. The CONACAL appears to be initially an important forum to discuss and dis- seminate information about quality management for export products, and CONACAL can evaluate whether additional measures would be economical. 4.6 CONCLUSIONSAND RECOMMENDATIONS 4.6.1 Trade Diagnostic: Vision, Priorities and Reality 4.94 Bolivia has not realized its trade potential. Investors have been unwilling to make the investments necessary to expand production to sell in world markets, and domestically-oriented firms have faced ille- gal and unfair competition for contraband. They have a comprehensive diagnosis of the trade-related problems they confront that includes these points: Bolivian governments have not pursued a comprehensive development vision. They have relied on exports of minerals and hydrocarbons and neglected the potential in other sectors, e.g., forestry, agri- culture, tourism and manufacturing. Governments have not consistently or effectively supported the growth or diversification of non- traditional exports. There have been many strategies, but Cabinet changes, repeated re-organizations, and low budget levels have undermined effectiveness. CHAPTER4: TRADE, TMDEPOUCV,AND ~NSLTU770NS 63 Production capacity-not markets-is the main export problem. Bolivia can readily increase market share inmost of its export markets. Illegal imports are the enemies of Bolivian production. Most exporters agree with Kreidler and Rocha (2004) that contraband and other illegal imports (sometimes second-hand, adulterated, or products with expired sell-by dates) have become tough competitors for Bolivian industry.Permissive legisla- tion, usually approved under pressure from the informal sector, and lack of enforcement of anti- smuggling laws discourage investment and leadto low capacity utilization. Legislation i s missing, unstable, or ignored. Bolivia lacks trade legislation, most notably an external trade law. It does not have legislation that regulates issues such as dumping, technical barriers to trade, e-commerce, trade in services, certification, market access, trade negotiations, etc. Legislation by itself i s not the answer because existing legislation for export promotion and control of imports i s not enforced or complied with by the authorities. This i s the particular situation faced by exporters in relation to the implementationof tax neutrality and tax refund legislation, which i s seldom abided by government officials. Bolivia's low competitiveness discourages productive investments. To most firms in the Bolivian pri- vate sector, engaged in commerce, industry and exports, the competitiveness position of the country inrelation to its most immediate competitors increases costs and reduces possibilities of insertion in the global economy. Export promotion infrastructure i s weak. The institutions responsible for export promotion are under- funded and under-manned, and have lost credibility with exporters. Exporters do not consider these institutions useful or relevant, and established exporters do not ingeneral use them. Ineffective trade agreements. There i s a perception among exporters that the integration agreements signed during the 1990swere politically motivated and poorly related to economic or commercial in- terests. This perception i s borne out by deteriorations of trade balances after signing the trade agree- ments. The agreements appear to have made little difference to non traditional exporters because con- cessions granted by trade partners are not totally relevant to Bolivia's export bundle or do not reduce non-tariff restrictions. Exporters believe there are not effective consultations with the private sector on trade agreements. 4.6.2 Recommendations 4.95 The problems for trade policy are long-standing, and there are no quick or simple solutions. While reforms, beginning in the 1980s have given Bolivia an open trade regime, its trade laws, policies, regulations, and institutions have been unstable, and they are not consistent with what is required to com- pete inthe Twenty-First century. They discourage investors and limit job creation. The problems are not isolated but are reflections of the policy and institutional problems throughout government, discussed in other Chapters of this report. There are several steps the government could undertake to improve the trade system for importers and exporters. Near-term Improvements: 0 Promote RITEX among exporters, by improving costly, burdensome procedures. 0 Simplify the systemfor tax-refunds to exporters for the refund of both tariffs and internal taxes (VAT and ICE). 0 Comply with the law regardingtimely emission of CEDEIMs. 0 Re-activate the National Council for Quality Control (CONACAL), chaired by the Minister of Eco- nomic Development. 0 Support and strengthen SNMAC. The benefits of SNMAC's work should be widely disseminated among exporters. BOLIVIA: POLICIES TOIMPROVEGROW ANDEMPLOYMENT 64 Longer-term Improvements 0 Define a clear, coherent and comprehensive country strategy for export promotion, growth and pov- erty reduction. The strategy should include: o The role, structure, andfundingof CEPROBOL and other export promotioninfrastructure, in- cluding the possibility of outsourcing CEPROBOL to the private sector with clear accountability for targets and results. o Joining export promotionactivities with Mercosur members, who already have ajoint mechanism for this purpose. 0 Define and execute a clear, national anti-smuggling policy, with the participation of all relevant pub- lic and private sector institutions. Elements could include: o Strengthen COA to fight smuggling, by providingit morepersonnel, appropriate training and state of the art communication and tracking technology. o Strengthenreformprocessesinthe ANB and SINto rationalizetrade facilitation and smuggling control. o Createmechanismsfor closer cooperation between ANB and SINto fight smugglingand tax eva- sion, including studyingthe feasibility of merging the institutions. o Eliminatethe legalrestriction for the ANB to control retailers of smuggled goods. o Promote cooperation with Customs Administrations inneighboringcountries, initially to ex- change official information of imports and exports, and second, to establishjoint border infra- structure. 0 Diplomatic initiatives: o Withprivate sector involvement, seek to negotiate lower non-tariff barriers (elimination of refer- ence prices, non-automatic licensing) with preferential trading partners (Andean, MERCOSUR, MCxico and Chile). o Enternegotiations for aFree Trade Agreement with the United States and other Andean nations. 0 Legislative initiatives: o Approve a law to regulate issuesof quality managementfor export productionanddisseminate information on technical barriers to trade inexport markets. o Clarify Bolivian legislation with relationto imports of second-hand, adulterated or unsafe prod- ucts, particularly inthe area of customs valuation for second-handproducts. 0 Withinthe context of overall tax reform, recognize the trade distortions existing inpresent policy. Possible reforms for consideration include: o The elimination of ICEon imports. ICEcouldbe confined to goods producedinthe internal mar- ket. o Charging the VAT on c.i.f. value, but not the tariff-inclusive value. o Make theVAT deferral systems easier to access for small and mediumsize importers. o Eliminatethe "simplified regime" for importers. All commercial importers could be registered underthe "general regime" and carry a tax registration number. REFERENCES ALADI (2004), "Informe sobre el comportamiento registrado en las condiciones de acceso de 10s produc- tos de Bolivia a1mercado interregional", LAIA Secretariat, Montevideo. Baldivia Urdininea, Jose (2004) Las Microfnanzas: Un Mundo de Pequenos que se Agrandan, La Paz: FundacionMilenio. Baldivia Urdininea, Jose, (2004), Incentivos y Desincentivos que tiene el Sector Empresarial Boliviano para Concretar Alianzas y Negocios con 10s PequenosProductores Rurales, mimeo. World Bank. De- cember. 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BOLIVIA:POLICIES TOIMPROVEGROWHAND EMPLOYMENT 70 ANNEXES 9 m m - f . 9 9 w m o r ' o * w m m - m - N N - tNNQI t v ! m t q 9 p m m m m m m m 09T-t tpYm9m0m 9 , 1.B @ W 0 . I . ANNEX 1.5 DEBTSUSTAINABILITYANALYSIS34 1Baseline Scenario The baseline scenario considers conservative assumptions. It assumes that real GDP reaches4 in 2005 and then converges towards 3.6 (this being the average growth rate for 1990-2004). Real GDP growth i s high in the short run because gas exports to the region increase, in particular to Brazil and to Argentina -assuming that the contract to export gas to Argentina, which i s due to expire at end-2005, i s extended. It i s assumed that Bolivia succeeds in preserving soy export preferences by reaching an FTA with the US together with the rest of the Andean countries. On the fiscal front, a progressive fiscal ad- justment takes place over the 2005-08 period. Inthe mediumterm, the Government employs additional fiscal revenues from export sectors to moderately expand public investment; the overall fiscal deficit con- verges towards 2 of GDP. The baseline scenario rules out a major financial crisis and widespread severe social conflicts. Total DebtIndimton .- - ExternalDebt Indicators DomsticDebt Indicators 70 90 90 BO m 80 70 70 50 m m w -: 50 e0 50 1 5 . : 6: P 30 " 3 a i L 6: 30 10 - 30* 20 20 20 I O .......................................... 10 10 0 0 0 YUr Inthe baseline scenario (Scenario 1)fiscal sustainability is achieved. As showninFigureA1.5A, the NPV of debt to GDP ratio deteriorates until2006 reachinga level of 67 ,then recovers and reaches 59 by 2017 (the stock of debt to GDP ratio shows a similar pattern). Convergence between the NPV debt and the nominal terms debt curves reveal the impact of the graduation. External debt flow indicators do not 34. This annex was prepared by Carlos Mollinedo and Julio Velasco in consultation with Bolivian government officials. The exercise is based on loan-by-loan data provided by the authorities and creditors. The external debt outstanding is as of end-2004, and includes the debt relief provided under the HIPC, enhanced HIPC Ini- tiatives, and beyond HIPC. Data on the public sector's domestic debt employed is as of December 3lst, 2004, and has been provided by the Treasury. Information on new external disbursements has been provided by the Central Bank. Once all identified external financial flows are taken into account, it is assumed that the private sector obtains additional financing from the external private sector (at commercial terms) to close the external accounts. To close the fiscal gap, the Government is assumed to sell US$-denominated 2-year bonds and 15- year treasury bills (to Administradoras de Fondo de Pensiones [AFPs]). It is assumed that this Government pa- per is held by the private sector andor by the monetary sector. 82 BOLIVIACOUNTRYECONOMIC MEMORANDUM: POLICIESTOIMPROVE GROWTH AND EMPLOYMENT show a womsome pattern but they remain constant-in the long-run these indicators do not improve. Domestic debt flow indicators flag debt sustainability fragility in the mediudlong term. This behavior reflects the uneven composition of the domestic debt (concentrated in very short term and long term in- struments). In the short term, debt instruments are amortized; by 2010 long-term debt instruments (AFP bonds) start to be amortized, thus increasing debt service payments. 2 Alternative Scenarios Two alternative scenarios have been considered; Scenario 2 assuming a discontinuation of US and Andean trade preferences shows a fragile fiscal sustainability. Scenario 3 contemplating a crisis inthe gas sector i s fiscally unsustainable. Scenario 2 assumes that Bolivia fails to preserve its trade preferences with the US, currently ensured through an ATPDEA, and fails to sign an FTA with the US. As a result Colombia's and Venezuela's soy markets are negatively affected. Compared with the baseline projec- tions: soy and other non-traditional exports (jewelry, textiles and wood) declined by US$300 million be- tween 2005 and 2007, recovering afterwards; real GDP growth declines to 1.5 in 2006 and 2007, gradu- ally recovering afterwards and converging to 3.6. Scenario 3 assumes that becauseof difficulties with the approval of the Hydrocarbon Law, the gas sector enters in a crisis and investment in the sector i s tempo- rarily suspended. As a result gas exports are negatively affected. Compared with baseline projections, gas exports declined by US$400 million between 2005 and 2009. Figure A1.5B summarizes the results of two alternative scenarios. Tables A1SA, A1.5B and A1SC present the macroeconomic framework and key debt indicators for all scenarios. Findings show that in Scenario 2 fiscal sustainability i s marginally achieved; the impact in fiscal accounts i s limited by the fact that export sectors do not significantly con- tribute to fiscal revenues. However, other effects (beyond the scope of this analysis) like employment re- ductions might trigger social unrest making this scenario unviable. Scenario 3 i s fiscal unsustainable, fis- cal revenues are directly affected. Inthis case, Boliviawill notbe able to service the debt. Figure A1.5B Alternative EconomicPegormaneeand Degree of Fiscal AdjustmentIndicators of Fiscal Sustainability t 7 N W ofDebtto GDP 50 DebtS C N ~ Cto~ PUMicRevenucs 45 ...... IZO 40 35 30 E l ! rs 20 i5 I O 5 Note: The public sector correspondsto the consolidatedcombinedpublic sector operations. - 82 'O0*9N1 O N ? ? Y E A R P P ? ? % W 3 Z w?n O b N 3Q 2t3 z?zz C O N N " " ~ - - m m c 9 1 O * N $I e.0- 4 6 4 6 fU 0 aE & 14'90: l?? O d N a n s a a I P 2 2 q s a N N N O 5; .E'5 e -W?OOWFN?W N O 1 ? 4 ? S W - y N W N O ',?HZ W C N N -???-? 9s::: ANNEX 2.1 GROWTH DIAGNOSTICS THEBINDING CONSTRAINTSTO GROWTH35 AND Economists, researchers, and government officials and policy-makers have pointed to 13 interre- lated factors that have inhibited Bolivia's growth: (1) Macroeconomic mismanagement; (2) trade policies; (3) taxation; (4) political instability; (5) weak institutions; (6) infrastructure; (7) financial sector weak- nesses; (8) investment climate; (9) deficient entrepreneurship/labor/skills;(10) education; (11) geography; (12) ethnic conflicts; (13) non-diversified economic structure, and (14) external factors. (D.Kaufmann, et al. 2003 reviews the literature on Bolivian growth studies). These factors are all correlated with Bolivia's low growth but,many are only symptoms. The goal of this annex is to identify from the above list of factors, which ones are the most bind- ing constraints to growth. The Growthdiagnostic is an approach that assumes that physical investment is the key determinant of growth and asks what affects investment low? (Hausmann et. al. 2005). It uses a simple economic model to examine the determinants of investors' expected private returns and compare them to the cost of finance. More specifically, the model allows to focusing o n (1) returns to investment; (2) private appropriability of returns; and (3) access to finance, in the sequencing illustrated in Figure A2.1.36Inconsidering the growth diagnostic approach, a few points should be kept in mind. These are described inBox A2.1.A. Box A2.1.A On Growth Diagnostic Inconsidering this approach to analyzing the factors that have inhibited Bolivia's growth, a few points should be kept inmind: There are many constraints to growth, but not all are binding. The common approach to growth studies has used correlations to search for constraints. Growth diagnostics seeks to identify a causal relationship between public policy and growth. It is analogous to a medical doctor treating a patient with multiple symptoms - headache, fever, congestion, coughing. One of the symptoms may be causing the others, or all may be caused by something else which i s not, itself, a symptom. Treating the symptoms will not cure the illness. B y their nature, causal elements will be correlated with low growth, but not everything that is correlated i s a cause. Binding constraints change. They change for two reasons: (1) In the normal course of successful economic reform, binding constraints are removed and the economy will grow until a new binding constraint limits it. Bolivia's relatively high growth in the mid-1990s followed structural reforms that removed binding con- straints. Today, growth is being impeded by other binding constraints; and (2) Even when no binding con- straint is removed, political or economic events or shocks can be such that new binding constraints will super- sede earlier binding constraints. Somefactors that limit growth should be seen asparameters, not constraints. Some constraints are imposed by man and can be eliminated by public policy but others are imposed by nature, or by history, and public policy can ameliorate their impact only. It is diflcult to prove that a constraint is binding. Given a list of constraints, the search for the binding con- straint involves qualitative investigation to test each against the implications that would be observed if it were the binding constraint. Investigations o f this sort are, like all scientific inquiry, such that each hypothesis can be rejected, but none can be "proven." Instead, when a hypothesis is tested against multiple implications, and i s- not rejected under any of them, then we g a i m e n c e that we have identified the binding con- = 35. This annex was prepared by Sara Calvo with assistancefrom Carlos Mollinedo and Julio Velasco. The author thanks Barry Eichengreen, Ricardo Hausmann, Dani Rodrik, Andres Velasco, Roberto Zagha and the Bank staff who participated in the Bank's Growth Diagnostic project for guidance and useful comments. 36. Under this approach, growth will take place if the private returns to asset accumulation, net of the cost o f fi- nancing it, are high. This is expressed as Growth = 6 { [(1-o)x 8 3 - r], where [( 1-0) x 8 ] i s the private return to accumulation adjusted by the risk of appropriation, o, and social returns, 8;and r is the cost o f fi- nancing. ANNEX2.1: GROW DIAGNO~CSTHEBINDINGcONSTi3UNTSTO GROWTH AND 87 Finally, broad-base, sustained growth is necessary - but not sufficient - to reduce poverty. Growth will raise incomes, but there are other, non-monetary aspects to poverty and development. Bo- livia has managed, over the past fifty years, to improve these indicators even though per capita real in- come was unchanged. Life expectancy, literacy, and health measures have all improved, and the World Banks poverty assessment found that "indicators of non-income poverty show more improvement than income poverty. While growth would provide more resources to improve the non-monetary poverty indi- cators, the government should continue with social sector reforms that ensure the added resources will be most effectively applied. - L u r e A2.1. Growth Diagnostics - Low levels of private investment andentrepreneurship d \ Low returnto economic High cost of finance activity Low social retums Low Bad appropnability internauonal Bad local finance finance Poor )ad 7""1 geography infrastructure Government Market failures human Low capital Information Coordination externalities externalities "self -discovery " AAP~J~~ ro en n%s Microns s Macro risks: saving -- m oinstayihty financial %X;S n e fiscal 1Sources of low levels of private investment Why has Bolivia not been able to achieve sustained annual GDP growth rates higher than 4-5 percent given reforms since the mid-l980s? The analysis inthis Annex suggests that we cannot reject the hypothesis that stubborn uncertainty about future private returns (or private appropriability risks) deriving from the interplay between social, political and economic factors has been the most important obstacle. The economic factors behind this uncertainty appear to be external and internal factors leading to macro- financial instability and poor enforcement of contracts and property rights. Bolivia's economic reforms made it, by late 1990's, as one of key reformer in Latin America. With an improved external environment, Bolivia's growth averaged annual 4.5 percent duringmid-1990s. Inlate 1998 growth suddenly decelerated as a consequence of internal and external shocks. Discoveries of new gas reserves and a new pipeline in 2000 sustained growth - in contrast to other Latin American countries -although at rates around 2 percent during 1999-2000. Bolivia's investment performance has been poor. The gap between the economy share and the Latin America share interms of GDP has widened since the 1970s (Table A2.1.1). During the mid-1990s and untilthe early 2000's, foreign direct investment (FDI,including privatization funds) increased signifi- 87 88 BOLIVIA: POLICIESTOIMPROVEGROWH EMPLOYMENT AND cantly, but plunged in 2003 (Figure A2.1.2). Domestic private investment was steady until the mid- 1990s. Since 1996it has been quite volatile, not conducive to highlong-termgrowth. TableA2.1.1. Investment to GDP Figure A2.1.2 Bolivia. Investment, of GDP (averages) - Bolivia -LatinAmer- 25% ica 20% 1970s 18 20 1980s 14 19 15% 1990s 17 21 - u E Source: Morales (1990), WDI. 8 10% ae 5% 0% - .- O m 2 2 2m 2m -m N W Pe$$zrm~~ooo m mmQmC mm mm mO o- oN om oP o N N N Capitalization Other foreign direct investment Private domestic investment 0 Public investment Note: Total investment corresponds to gross capital formation, from national account figures, FDIseries come from balance o f payments,, public investment series come from fiscal account figures, and private domestic investment series i s estimated as a residual. Source: INE,VIPFE, and BCB Inwhat follows, we discusspotential sources of low levels of privateinvestment, namely low re- turnto economic activity and/or of highcost finance. Rates of return on private activities are only avail- able from 1998 on, i.e., for periods during which the economy faced several external shocks, hence they are a reflection on how the economy behave under those conditions-as opposed on the structural status of economy. 1.1High risks of appropriability of returns? Highrisks of appropriation of returns, as illustratedinFigure 1,could be the result of government failures such as uncertainty about macroeconomic stability and economic and regulatory policy, as well as of market failures reflected in absence of information or coordination externalities that typically lead to productive sectors far behind in terms of innovation and implementation of new techn~logies.~~These sources are discussedbelow. 1.1.1Macro risksfrom governmentfailures. Has uncertainty about macro-financial stability been high? Uncertainty about macroeconomic stability and economic and regulatory policy continue to pre- vail in Bolivia. Bolivian entrepreneurs identified these as the leading constraints to business expansion. Stubborn dollarization (around 90 percent of bank deposits and loans in 2004), virtually stagnant invest- ment in sectors other than gas or soy sectors, and capital outflows-measured by errors and omissions of the balance of payments-- at around 4-5 percent of GDP annually suggest that there is concern about the fragility of the economy. A financial crisis turned into a solvency crisis would lead to changes in the ex- change rate (like inMexico in 1994 and inArgentina in 2001). The economy is highly liability-dollarized (e.g., 90 percent of bank loans are dollar denominated), hence for dollar-indebtedfirms and individuals, in 37. Hausmann and Rodrik(2002) and World Bank (2002). ANNH2.1: GROWH DIAGNO~CSTHEBINDINGCON9RAINT.S TOGROWH AND 89 particular those with domestic currency denominated income, e+, firms in the non-tradable sector, changes in the exchange rate will reduce profitability. It will also reduce the capacity to consume, given reduced wealth in dollar terms (World Bank 2004a and 2005). Inrecent years, higher service payments on dollar debt due to high interest rates and exchange rate depreciation led to a 50 percent drop in firm profitability (World Bank 2004a). Fiscal and financial sector vulnerabilities have persisted even though stabilization programs since the mid-1980s have kept inflation low; the Central Bank monetary and exchange rate policy remains credible; and the financial sector is one of the best supervised financial systems in the region. Bolivia's overall fiscal deficit and the public debt have been high since the late 1980s (Table A2.1.2). The economy reduced the primary deficit significantly twice, duringthe late 1980sin the context of a stabilization pro- gram to attack hyperinflation, and inthe mid-1990s as a result of privatization that reduced the number of public employees and hence reduced the public wage bill (The privatization proceeds were distributed among Bolivians and are kept in special accounts). During 1997-2004 the overall budget deficit (after grants) amounted to an average of 5.6 per cent annually, reaching around 9 percent during 2001-2002. Sustained grants and official credit since the stabilization effort of the mid-1980s (reaching around 6 per- cent of GDP on average inrecent years) have helped finance the reforms that contributed to highbudget deficits, and have prevented major disruptions in the provision of social services, including social protec- tion programs that became critical inthe face of the slow-down of the economy since 1998. Despite im- provements since 2003, the fiscal situation remains fragile. TableA2.1.2. Stubbornfiscal andfinancial sector vulnerabilities, 1990-2004 1990-1994 1997-2004 (privatization years) 1995-1996 - Overallbudget deficit -- after grants 4.5 1.8 5.6 beforegrants 6.5 4.1 7.8 Totalpublic debt, of 91 (1994) 72 78 (2001-03) GDP All concessional All concessional 30 at market-interest rates Financial sector 1987-91. Closingof 8 Annualbank runs. runs/closing Of banks banks. Bankruns Closingof banks.Non- (See Annex) 1994.Bankruns.Clos- ing of 2 banks performingloans at 19 Bankingsector lend- inginterest rates (dol- 16 (1997-2000) - 19 17.5 I? mnni ?nnq\ I& \L.VVl-L.WJJ lar loans), In the financial sector, despite deep reforms, financial troubles have been a constant since the 1980s (Table A2.1.2 and Annex 1).Inrecent years, bank non-performing loans increased to 19 percent of total loans in 2001 and remain high although improving (15 percent in 2004). Deposits and loans have been decreasing since 1998, which has lowered bank profitability. Only recently have interest rates come down, reportedly due to lack of creditworthy borrowers (Table A2.1.2), as discussed below. Social conflicts have deepened economic vulnerabilities. In the fiscal front, in recent years, teacher strikes led to fast increases in wages that reversed the reduction of the public wage bill achieved throughprivatization of public enterprises. Also, recent increasesinpensionbenefits for the military con- tributed to today's highcost of pension. On the revenue side, tax revenue i s high(compared to other Latin American economies) at around 22 percent of GDP (2004), but 85 per cent comes from the hydrocarbon sector. The economy has the potential to generate more revenues from this sector-and thus comfortably finance its reforms - but social pressure has not allowed the Government to remove the freeze on fuel prices implemented to buffer the impact of shocks. Also, non-hydrocarbons tax collections are poor. Bo- 89 90 BOLIVIA: POLICIES TOIMPROVEGROWHAND EMPLOYMENT livia ranks poorly in effectiveness of tax collections (Figure A2.1.3). Several attempts to implement a tax reformto increase fiscal revenue were aborted inresponseto social pressure (IMF, 2005). Inthe financial sector, the banking system sufferedfrequent sudden withdrawals of deposits, i.e., bank runs. These were driven by political and social developments, e.g., the elections of 2002 that revealed the highpopularity of coca producer groups, that triggered memories of cycles of expansionary fiscal policy, monetary financ- ing of budget deficits and exchange rate devaluations and highinflation. These bank runs were incipient but with long-lasting effects due to spikes of overnight interest ratesinan attempt to preservethe stability of the exchangerate (Figure A2.1.4). -Figure A.2.1.3 Effectivenessof Tax Collections - Figure A2.1.4 Social and Political Volatility and Overnight Interest Rates Jamaica 12 Chile 3 Braal Paraguay Nicaragua Venemela Peru Ecuador 0 Guatemala 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: IDB (2002) - Source: Banco Central de Bolivia. t On the other hand, the real exchange rate, particularly since the mid-1990s has been stable. The combination of a credible monetary and exchange rate policy, appreciation of the currency in trading partners, and stable net capital flows-- made of high official inflows, private capital outflows, and appar- ently lower external transfers from coca eradication -have kept the real exchange rate (RER) stable. The RER embodies both the weighted RER with respect all trading partners and that with respect to Latin America's. Bolivia's exports to the L A C region account for more than half percent of total exports. Coca transfers before the eradication program have been estimated at around 4-5 percent of GDP. Discrete changes in RER in 1999 and 2001 have been driven by devaluations in Brazil and Chile and Argentina, respectively. Aside from these step changes, the RER has been quite stable. Several empirical studies show that the stability (as opposed to the level) i s what matters to promote exports. 1.1.1.1Explaining the higher growth rates of the early and mid-1990s Bolivia succeeded in increasing private investment - domestic and foreign-during the early and mid-l990s, despite macro-financial fragility (although much reduced compared with environ- ment of the mid-and late-1980s). Increase in investment during that period has been associated with re- forms, inparticular privatization of utility companies, and with the positive external environment of most of the 1990s-a period of relative political and social stability but macro-financial stability uncertainty when low international interest rates led to a surge in capital inflows to Latin America that translated in higher availability of credit and faster growth for the whole region (Table A2.1.3, Figures A2.1.5 and A2.1.6). The boom in Bolivia's main trading partners, Mercosur and Andean economies, increased the demand for Bolivian exports. Bank growth correlation studies confirm this. Incontrast to other Andean Community economies, Bolivia has a high dependency on regional exports (as opposed to non-regional exports, Table 4). This highlights the economy's vulnerability to systemic shocks like the international ANNEX2.1: GROWTH DIAGNO~CSAND THEBINDINGcONsTR4INTS TO GROWH 91 financial crises of the late 1990s. Depressedterms of trade since the mid-1980s were compensated by a booming coca sector. TableA2.1.3 Termsof trade changes, international interest rate and GDP Growth 1980-84 1985-89 1990-95 1996-1998 1999-2003 Terms of trade changes -21.2 -40.8 -42.3 0.4 -6.6 (99-01) International interest rates (Libor) 13.05 8.28 5.74 5.80 3.99 GDP Growth () Brazil 1.43 4.54 1.92 2.03 1.64 Argentina -0.08 -1.37 5.19 5.83 -2.13 Colombia 2.45 4.36 4.46 2.02 1.18 Ecuador 1.71 2.84 2.69 2.85 1.54 Peru 0.61 0.08 3.79 2.89 2.51 Venezuela -1.83 1.51 4.02 2.11 -3.66 Bolivia -1.85 0.98 4.20 4.78 1.88 The economy's sectors that expanded the most during the 1990's were hydrocarbon and services (Table A2.15). Based on 2001 data-the only data available-these were sectors offering the highest re- turns on equity.38Inthe developingworld, growth inservices duringbooms is typical ineconomies where there i s uncertainty about the appropriability of returns. Businesses that reach maturity quickly develop (e.g., construction, McDonald's, Taco Bell, etc), driven by readily available credit and favorable relative prices. (World Bank 2000a, IDB 1995, World Bank 1997 and 2001a) InBolivia, repatriated capital (less than 1percent of GDP annually during 1991-1992) and external bank borrowing (around 2 percent of GDP annually during 1993-1998) led to increased credit availability (Figures A2.1.4 and A2.1.5). Repa- triated capital could be an indication of restored credibility but also of lack of credibility. Disinflation pro- grams of the 1980s inLatin America ledto highreal interest rates as inflation came down but vulnerabili- ties persisted, leading to expectations of devaluations-the so-called peso problem. Morales and Sachs (1990) identified this problem in Bolivia right after the stabilization of mid-1980s. Credit became scarce after the shocks of 1998, in particular for the booming sector, e.g., the real estate sector, hence they col- lapsed first (more on this inSection 2.) (World Bank 2004a). 38. WB estimates basedon data from Superintendency 91 92 BOLIVIA:POLICIESTOIMPROVEGROW ANDEMPLOYMENT Figure A2.15 External Financing and Bank Loans -- Figure A2.1.6 Capital Flows -- 3500, 1000 14% moo 900 12?h 800 1Ooh 2500 7M) 0% 6% PC : 600 5 2000 --8 4% 69 500 m 2% 3 1500 cn 4w = 8 0% 1000 300 -2% 200 -4% . 500 100 -0% - 0 0 g N m P Externalfinancing to bankingsector -Loans to tradable sectors -Loans to non-tradablesectols oEnorsandhissions mNon-FDIpnmteflows-FDI Source: SBEF. Source: BCB. TableA2.1.4 Bolivia. Trading Partners. 2003 Regional European Rest of Regional Exports, per region Country exports us Union the Total Andean Mercosur Chile Central World Community America Bolivia 48 22 27 3 100 23 18 5 0.1 Colombia 31 41 19 9 100 20 2 2 5 Ecuador 26 38 19 17 100 12 2 4 5 Peru 20 28 24 28 100 7 5 2 2 Venezuela 27 54 6 13 100 9 4 1 8 Andean Source: Rojas (2005). Sumdifferencesare due to approximationof figures. - 27 45 13 15 -100 12 4 2 6 A Insum, we cannot rejectthe hypothesis that concerns about the fragility of the fiscal situationand the financial sector inBolivia have not disappeared, despite reforms since the mid-1990s. Inrecent years social and political conflicts, today's bindingconstraint, have deepenedthese vulnerabilities, and several attempts to contain public expenditures and implement tax reforms have been aborted. Deterioration of the macro-financialenvironment may lead to exchange rate movements. The Bolivian economy has high dollar debts, hence changes in the exchange rate may lead to economic troubles for both the public and the private sector, in particular the financial sector. These concerns are evident in highinterest rates, high inventories, and significant capital flight since the mid-1990s. Credibility issues related to government fiscal policy were already identified in World Bank (1994) and Antelo (1994) and more recently in Re- quena, et al (2000) and Kaufmann, et al (2003). 1.1.2Micro risksfrom governmentfailures. Is uncertainty about economic and regulatory policy high? Bolivia has weak institutions. Corruption i s endemic, and enforcement of contracts and property rights is uncertain and costly. Bolivia performs poorly on indicators related to perceptions of the judicial system, the institutional quality of the national assembly, the honesty of politicians, and perceptions that state agencies and the legislative process have been captured by powerful corporations and individuals. Poor institutional quality i s reflected in high costs of business. Bolivia ranks poorly in this regard, region- ANNEX^.^: GROM DIAGNO~CS THEBINDINGCONSTRAINTS TOGROWH AND 93 ally and internationally (Figure A2.1.7). Bolivia's institutional quality has fallen in recent years (Figure A2.1.8 - higher numbers imply better performance, and zero i s the world average). Rent-seeking activi- ties are widespread and have crowded out investment inother activities (Morales 2004a). Figure A2.1.7 Government ImposedBusiness Costs Business cost of corruption I I m I Business cost of irregular payments I - I - I - I Irregularpayments in gowrnment policymaking 1 4 1 Irregular payments in judicial decition I I - 1 lnregular payments in public contracts I 1 I lnregular payment in tax collection I I - # I lnregular payment in exports and imports I - 1 I 1 I 0 20 40 60 80 100 -LAC -----World e Boliua Global Competitlvenese Rank +-- Source: Global CompetitivenessReport2004-2005. Figure A2.I.8 Governance and Institutional Quality Index (I996-2002) 1.o 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 - -1.0 ' I 1996 1998 2002 -VoiceandAccountablllty - - - - - - -2000 Polltical Stability -Government Effectiveness RegulatowQuality Rule of Law Control of Corruption Lack of enforcement of property rights has become more serious in recent years. The passage of the Hydrocarbons Law and the Government's abrogation of the Aguas del Illimani contract have made property rights and contract enforcement of paramount concern to foreign investors.39This business ob- stacle also affects Bolivia's rural sector, where land has been confiscated without due process by landless peasants, e g , "10s sin tierra." The view among peasant leaders i s "la tierra es de quien la trabaja." His- torically, land issues have played an important role in political debates. The Agrarian Reform- begun in 1953 - massively, and largely peacefully, distributed lands toward poor peasant farmers and, more broadly, it redefined the relationship between rural people and the State. By the mid-l990's, indiscrimi- nate land allocations, coupled with allegations of large-scale corruption among public land institutions, ledto a suspensionof the policy and started a reformprocess with the enactment of the INRA Law inOc- tober 1996. However, results have been poor. The process still lacks credibility, land regularization has ~~ 39. Infact, Bolivia's high dependence on foreign savings has it roots inthis cycle as foreign governments compen- satedfirms for non-compensated nationalizations. Klein (1982). 93 94 BOLIVIA: POLICIES TOIMPROVEEMPLOYMENT GROW AND been limited. Box A2.1.2 presents the current challenges. These challenges with regards to land issues are daunting and meeting themdemands increasedpolitical will. Where poor enforcement of contract and property rights prevail, investors seek safer opportuni- ties to invest their profits or savings abroad, as suggested in recent studies. This typically happens in economies-like Bolivia's--where the productive sector is highly concentrated, making difficult the entry o f new comers who could develop more businesses and increase competition. (See Johnson, et al. 2003, for experiences in transition economies). In view o f significant capital outflows since the mid-1990s in Bolivia, we cannot reject the hypothesis that lack of enforcement of property rights i s having an impact on firm development. The sudden drop of foreign direct investment in 2004 points to uncertainty regarding the Hydrocarbons L a w as the source of today's wait-and-see attitude of investors, in particular foreign investors. Box A2.1.2 Land Issues and Challenges The enactment o f the INRA Law in October 1996 marks a turning point on land policy inthe country. Bolivia cur- rently faces four major challenges on land issues: Restore credibility to the agrarian process. This will require credible institutional reform (particularly of INRA), simplification o f procedures for title regularization and conflict resolution, decentralization of functions, and possibly changes to the INRA law itself. A related challenge is the prevention and resolution o f land invasions (on indigenous lands, private properties, agricultural frontier, and protected areas) in various regions of the country. Similarly, the country needs to increase its efforts to revert to the State lands that were illegally ac- quired, or are currently not fulfilling the socio-economic function (including non-payment o f taxes, regulariza- tion fees). Finally, more rigorous enforcement of payment of landtaxes i s hended. Complete the land regularization (saneamiento) process. Only about 12% of country territory has been regular- ized, and the legal provision for saneamiento expires in October 2006. An extension o f this deadline seems in- evitable. A related challenge is the re-titling of Original Communal Lands (TCOs) inthe Andean region. Address long-term national imbalances in the distribution of land. There are great inter-regional inequalities (demand in the Western highlands vs supply in the Eastern lowlands), as well as intra-regional imbalances in the Department of Santa Cruz (poor farmers with little land and large tracts of underutilized lands). Government has only identified 45,000 ha of public lands, and these are mostly inremote regions, with little agricultural po- tential. Complementary mechanisms are needed to bridge the gap between unmet demand and underutilized supply of good quality land already within the agricultural frontier, particular inSanta Cruz. Increase the transparency of land markets. These are typically highly segmented, but particularly stifled in Bo- livia due to uncertainty surrounding the overall "agrarian" process (enforcement o f INRA law, future land taxa- tion, less than transparent institutions) and physical insecurity (unresolved conflicts, land invasions). Also, land markets are constrained by limited access to long-term capital by potentially entrepreneurial-but poor- farmers. At the same time, there is a significant number of large farmers with unpaid debts. Commercial banks' have a growing portfolio o f repossessedlands, which potentially can destabilize the financial system. 1.1.2.1High taxation and informality Taxation affects corporate activities primarily by increasing costs and promoting informality. Bolivia's corporate and value added tax rates (25 and 13 percent, respectively) are close to regional aver- age and international standards and the tax structure is fairly simple. But, reportedly, tax exemptions for small businesses discourage firms from expanding and lead to a large number o f firms under the same owner to avoid taxes that increase production costs. Tariffs are low by international standards - 0 to 10 percent - but bribes to facilitate smuggling and/or take goods from customs quickly add significant costs. Customs have been improved, but it had been estimated that bribes were as high as one percent of the value of imports. This is important, given the large component of imported inventories that f m s keep in ANNwZ.~:GROW DIAGNO~CSAND mEBINDING CONSRAINTS GROWTH TO 95 relation to other countries (World Bank 2001b). With unpredictable imports due to all uncertain barriers, in particular non-tariff barriers to Bolivian exports, exchange rate levels, interest rates, and domestic shipping delays, large (small) firms keep inventories of inputs and final goods for 50 (27) production days. This leads to additional financial costs of 16 (over 20) per cent of the cost of inputs or 9 (12) percent of the costs of sales for large (small) firms (World Bank 2001b). Unpredictable transport costs due to poor maintenance also contribute highproduction costs, as discussedbelow. Other high, government-imposed business costs include security and non-labor costs. In recent years, security has become an important additional business cost. Investors in some parts of the country, eg., in El Alto, face costs to protect against riots and looting. Road blockages and street violence have led some businessesto close. The costs can be so severe that inElAlto, for example, around 60 firms are trying to avoid closing by entering programs to restructure. Another 60 fmhave already closed (Super- intendencia de Empresas). Non-wage labor costs amount to around 50 percent of total labor costs. These non-wage costs are social benefits, pension, health insurance, bonuses, etc. Severance payments are much higher than Chile's and Colombia's (Figure A2.1.9). This "taxation," together with value added tax on imports of around 25 percent, help to explain Bolivia's high informality. Some labor costs are future income for employees, hence removing them may lead to heightened pressure for wage increases, no change in labor costs, and no impact on informality. However, high non-wage labor costs may be a deterrent of new formal busi- ness. This i s not measurable, hence we cannot conclude about labor costs as potential bindingconstraints for growth. Figure A2.1.9 Private Sector Severance Payment in Latin America (1996-2002) Puetio Rim Jamaica Nicaragua Haiti Unrguay Costa Rica Honduras Panama Colombia Chile Peru Dominican Republic Venezuela Mexim Argentina Bolivia Paraguay El Satvador Ecuador Brmil Guatemala 0 20 40 60 80 100 120 140 160 180 - - - Weeks Source: Doing Business, 2005. 1.1.2.2Marketfailures as a source of high risks of appropriability of returns. Adequateproductivity and innovation? As discussedinChapter 3, productivity is low across sectors inBolivia. Moving firms from low productivity firms to high productivity firms requires flexible labor markets, agile business regulations, and competitive financial sectors. The Bolivian economy lacks all (more on the financial sector below). Innovation or the ability to identify profitably products attractive for new investment does not seem to be lacking inBolivia. Duringthe 1990's, the number of innovations producedhas virtually been what could 95 96 BOLIVIA: POLICIESTOIMPROVEGROW ANDEMPLOYMENT be expected given the economy's GDP per capita (Klinger and Lederman (2004)). This result holds both considering 4 and 6 digits desegregation of export products (Figures A2.1.10). -Figure A2.I.I O Expected discoveriesper GDPper capita, 1992-2000 A Discovery Events, HS 4-Digit Discovery Events, HS 6-Digit of discoveriesduringthe periodof the study (1992-2000), andGDPper capita is adjustedusing PPP methodology. Furthermore, the recent export concentration does not seem to be associated with lack of innova- tion in exports. Table A2.1.6 shows that larger number of products has been exported over the last years, with the highest performance registered in 2004. Something similar has happened to the number of desti- nation countries. A positive net creation (Le., number of creation minus the number of destruction) of ex- porteditems reflects increasing dynamism inthe export sectors. - TableA2.1.6 Number of products exportedfrom Bolivia' - Numberof inter- - Number of prod- Numberof coun- Number of lasting Number of new UCtS tries exportedproducts export products3 ruptedexportprod- ucts4 1995 687 29 1996 715 29 454 261 233 1997 789 35 494 295 221 1998 816 37 554 262 235 1999 878 37 568 310 248 2000 897 38 631 266 247 2001 890 35 655 235 242 2002 884 38 591 293 299 2003 901 39 694 207 190 2004 1,329 45 760 569 141 Note: 1Basedon tariff categories (partidas arancelarias). Nandina 10-digitclassification.2 productsthat are again re-exported -(comparedto the previous year). 3 codes that are createdor reappear year after year. 4 codes that disappearyear after year. Source: UNDP- Bolivia "Mhs Alla del Gas", working paper leadby GeorgeGray (forthcoming). -- - Insum, stubborn dollarization, capital outflows and virtually stagnant investment innon-mineral and soy sectors suggest that there i s concern about appropriability of returns on investment. The sources of this concern are macroeconomic fragility as a result of political and social instability. Recent studies suggest that lack of enforcement of property rights could also be a source of outflows of profits. Lack of enforcement of contracts and property rights have worsened inrecent years, as well as political and social insecurity and associatedcrime that affects their business operations. These factors lead to excessive risks that deter new investment or lead to those of short maturity that may not be quality investment in terms ANNEXZ.1:GROW DIAGNO~CS THEBINDINGCONSlRAINTSTOGROWTH AND 97 of, for example, sustained employment generation. Preliminary results suggest that Bolivia does not face innovation constraints. Thus, we cannot reject the proposition that the high risk of appropriability of re- turns due to macro-financial instability magnifiedby recent increasedinlack of enforcement of contracts and property rights are Bolivia's binding constraints to growth. I.2Low social returns?Geography,education and infrastructure In this section we discuss unfavorable geography, inadequate education and insufficient infra- structure as sources of low social returns. Geography and ethno-linguistic fragmentation. Bolivia i s a landlockedcountry with mountainous terrain, a small economy, and low population density. Large segments of the population speak different languages including Spanish, Aymara, Guarani and Quechua. After Suriname, Bolivia i s the country with the highest linguistic fragmentation (Le., with a highprobability that two persons taken at random speak different languages) in Latin America. "Geographical divisions imply that different groups of a society may face different conditions that affect their economic possibilities and may have different economic interests, and social problems, all of which can influence the political game, ultimately, all aspects of de- velopment" (Gallup, Gaviria and Lora (2003)). Tropical highlands generate the lowest GDP per capita compared to other types of geography. InLatin America in terms of 1995 dollars tropical highlands gen- erate GDP per capita of around $4300, whereas temperate zones (southern cone) and highland and dry zones (southern cone) generate $7500and $9700. InBolivia, different regions have evolved differently interms of growth and poverty. Geography and ethno-linguistic fragmentation could have contributed to this, and perhaps to Bolivia's inability to grow at rates higher than those reached duringthe early and mid-1990s (4.5 percent on average annually) that were years of relative political and social stability. Further research i s needed in this regard. Never- theless, the Government i s trying to ameliorate unfavorable aspects of these characteristics including strengthening decentralization and ensuring quality public services for the whole population and across regions. Education. Bolivia has made significant improvements ineducation. Returns to education are low (Figures A2.1.1 l), which suggests more education will not lead to higher expected returns on investment. Bolivia ranks well with regards to school enrollment, particularly in primary and tertiary education. If education were a constraint to growth, then wages for educated people would be rising and educated peo- ple would be emigrating from other countries to Bolivia. Instead, there i s increasingbrain drain. Bolivia already ranks worst internationally with regards to brain drain - which i s another type of capital flight (TheLatin America Competitiveness Report, 2004-2005). The probability of being out of work is higher among more educated people - with the exception of the very few highly educated people (Table A2.1.7). All these point to bindingconstraints other than education and training to faster growth today inBolivia. TableA2.I.7. Urban Unemployment Rates by Educational Level Primary Primary Secon- Secondary Any Incomplete Corn- dary In- plete complete Complete Tertiary Bolivia 3.9 3.2 11.5 8.8 5.2 L A C Region Maximum 22.9 20.4 23.7 23.2 15.1 Median 5.1 5.5 7.9 8.6 5.2 Minimum 0.7 1.1 1.6 1.6 1.7 Note: Information correspondsto the most recent observationbetween 1998 and 2001. Sample: Males andFemalesages 15 to 64. Source: IDB (2003). 97 98 BOLIVIA: POLICIES TOINPROVEENPLOYMENT GROW AND Figures A2.1.11 Marginal Returns to Education, UrbanAreas P Marginal Returns to Secondary Education in Urban Area Marginal Returns to Tertiary Education in UrbanArea c M a tvbw PaJ VBEBsa Pmm C d m a MLW BsEhgdr &mJm WA- CoSlaAca Oetmla FaKlW @le Ncaaea @!e MI h l 6 0 8 0 10 0 120 14 0 16 0 9.0 14.0 19.0 24.0 29.0 Awrage returnto secondary educationfor urbanworkers Awrage returnto terciary educationfor urbanworkers Note: Information correspondsto the most recent observationbetween 1998 and2001. Sample: Males and Femalesages 15 to 64 Source: IDB (2003) D Infrastructure. The private sector does not find the supply of infrastructure a key obstacle, but they do find the poorly maintained roads make it difficult to predict costs (World Bank 2001b). Bolivia's topography and demography, together with its small economy, lead to low intensity-use - and high unit costs - for all transportation modes inrelation to other countries' use (Table A2.1.8 and A2.1.9).40 A pipe- line i s used for gas exports, and about half of non-gas exports are shipped via roads and railroad. About 70 percent of imports arrive via roads, while the rest use air transport. These call for good quality infra- structure, yet Bolivia ranks low internationally in the quality of infrastructure (Figure A2.1.12). Returns on roads rehabilitation are estimated to be inthe range of 40-50 percent (World Bank 2001c) and donors are fundingprojects inthis area. A plan that envisaged centralizing road management under a single body and offering concessionsto the private sector was highly politicized and made little progress. Bolivia TableA2.1.8 Road network in LAC countries TableA2.1.9 Air Travel in Bolivia and other LAC Countries Roaddensity Air passen- Air freight Air passen- (kmroads/ Motor vehi- gers carried (million ton- gers/Populati thousand Pavedroads () cles per kmof ('000) km) on 1.-q\ road KllU) Bolivia 1757 15 2.2 Bolivia 48.9 6.5 8 Ecuador 1181 15 0.9 Ecuador 152.1 18.9 14 Peru 2125 35 0.8 Peru 56.7 12.8 15 Paraguay 266 n.a. 0.5 Paraguay 72.5 9.5 n.a Guatemala 506 3 0.5 Brazil 201.8 5.5 17 Nicaragua 61 1 0.1 Chile 105.4 19.4 25 Source: World Bank: World Development Indicators, Guatemala 129.5 34.5 45 2002. Nicaragua 146.4 11.0 8 -- HondurasI 121.5 20.4 28 Source: World Bank: World Development Indicators, 2002. 40. For example, Bolivia has the lowest coverage of pavedroads and the highest operating cost among CAN coun- tries (Table 19.2 in Bello Mendoza, 2002). ANNEX2.1: GROWHDIAGNOSZSAND THEBINDINGC O N m I N E TOGROWH 99 ranks poorly in telecommunication network readiness (99 in 104 countries, the higher the number, the poorer the readiness) reducing the likelihood of use of internet or cell phones that have proven important for the development of remote areas in other developing countries (The Latin America Competitiveness Report, 2004-2005). Today, unpredictable road blockages and heightened uncertainty about enforcement of property rights, in particular those of foreign companies, are the dominant constraints to additional in- vestment ininfrastructureincludingelectricity and telecommunications. Figure A2.1.12 Summary of Infrastructure Indicators IOverall infraestwcture quallty I - 1 - Railroad infraestmcture development I I w 1 IAir transpon infraestmcture quality I I I IQuality of electricty supply 1 I 1 1Telephone infraestNcture quality r I 1 . - 0 20 40 60 80 100 -LAC -Wodd 0 Bolivia Global Competltlvenes Rank -L-- Source: GlobalCompetitivenessReport2004-2005 1.3High cost offinancing? I s the cost of financing a bindingconstraint to faster growth in Bolivia? Firms financed primarily through domestic banks and retained earnings (Table A2.1.10). The capital market i s incipient, and the summary of financial sector developments i s presented in Table A2.1.11. The current volatile social and political situation that has led firms not to borrow, and concerns about the viability of firms that were af- fected by the shocks of the late 1990'shas led to limited lending. As a consequencethere i s highliquidity inthe banking system (World Bank2004a) and deposit and lendingratesare low. This risk-averse behav- ior has been identified in most countries of the region fearing a financial crisis like Argentina's and Uru- guay's in2002. This particular situationdoes not help us to conclude unambiguously on today's con- TableA2.1.10 Sources of Financingfor Bolivian Companies Lower-middle-income 46.8 13.6 2.8 1.7 2.0 7.4 OECD 51.4 14.5 1.2 1.7 7.8 4.2 Bolivia 56.3 21.9 2.5 0.1 0.9 8.7 Service (without construction) 68.5 17.2 1.45 1.1 0.0 0.0 Construction 61.7 25.0 0.00 0.0 0.0 0.0 Manufacturing 50.2 28.3 2.30 0.0 1.2 2.0 Note: Because of the small number of observations, the numbers for Bolivia are averages and the numbers for country groups are medians. 99 100 BOLIVIA:POLICIESTOIMPROVE G R O ~ A EMPLOYMENT N D Year I Event Measures 1987-91 Mandatory closing of 8 banks (4 banks in 1987; 1 in 1988; 3 banks in 1991) 1994 Bank run. Mandatory closing of two banks (Banco Sur y Cochabamba) representing 11of total assets of commercial banks Other banks remain weak. 1995 Severe liquidity problems. 0 Policy to restructure banks. 0 Improvementsinprudential regulation 0 New CentralBank Law. 1996 Official cost of bank restructuring: 4 of GDP 1997 0 Runondeposits ofone restructured bankinFeb- Base1system ofriskweighting setting minimum ruary. Bank bought by foreign bank. capital-asset ration. 0 ClosingofbankBIDESA 1998 0 Runondeposits oflargest commercialbank in Law strengthening powers of the Superintendency February (Banco de Santa Cruz). Bank pur- of Banks chased by foreign bank (Banco Santader Central Hispano). 0 Multibanco andBancode laPaz mergedwith foreign banks (Citibank y Grupo Credicorp). 1999 Mandatory closing o f Banco Boliviano American0 0 New law modifies regulatory framework of representing 4 of assets of. Sold to Banco de financial system that buffers impact of bank Credito. closures. 0 Gradual tightening ofprovisioning require- ments 2000 0 Banco SantaCruz introuble. Lossesrepresents 0 Questionable measuresto encouragerepro- 84 o f lossesof all national private banks. gramming of loans. 0 Closing of branchof ABNAMRO BankNV 0 Restructuringof largest bank inthe system. 0 Change inloanclassification criteria to im- prove the quality o f bank loan portfolio. 0 Transparency ininterest rates 2001 Non-performing loans up at 16.0 from 6.6 in 1999. 0 Launching ofFEREthat provides credit to banks that reprogram loans to clients with the capacity to repay. 0 Launching ofPROFOP to provide one-time subordinated credits to capitalize banks. 2002 15 drop inbank deposits in the context of election 0 uncertainty during end-May -early July. 2003 0 January. Unprovisionednon-performing loans 0 Laws to strengthen bank resolution mecha- high. nisms and facilitate prompt corrective action 0 February. Drop indeposits inthe context of so- for banks with problems inCongress. cia1uprising. a Non-performing loans at 19 . ANNW2.1: GROWTH DIAGNOS~TCSMEBINDINGcONS7RAINTSTOGROWH AND 101 FigureA2.1.13 Summary of Access and Cost of Finance Indicators Financial market sophistication m 1 Access io credit m Ease access to loans * I lnteres rate spread I 1 1 Country Credit rating I 1 I I 0 20 40 60 60 100 --LAC -World e Boliua Global Competitiveness Rank +-- 4~ International and local finance. There is free movement of international capital in Bolivia. Dur- ing the 1990s available internationalloanable funds translated into abundant bank domestic credit (Figure A2.1.5), thus relaxing the credit constraints of firms. Domestic savings inBolivia have been low since the hyperinflation episode of the mid-1980~.~~Furthermore, highconcentration of the banking and corporate sector limits financing for business development (Cuevas 2002). The three largest banks (all domestic) account for half of the system's deposits. Likewise, loan exposure is concentrated, with loans above US$lOO,OOO accounting for about 70 percent of the banks' loan portfolio but for less than 4 percent of the loans. Limited availability of domestic savings appears to be one source of highinterest rates during the 1990s. Interest rates for small f m s are almost twice as highas for larger fm,and it i s higher in the non banking system (Figure A2.1.14). As in most developing countries this i s partly due to inability of small firms to buildup collateral and other financial qualifications. Informality adds to banks' concerns because informal companies generally present unreliable accounts. Only relatively large companies (with paid-up capital inexcess of US$SO,OOO) are required to present audited financial statements and there are no con- solidation requirements. FigureA2.1.14 Interest Rates 50 0 45 0 0 2001 40 0 m2004 Banking Sector Private Financial Fund 35 0 30 0 25 0 20 0 15 0 10 0 5 0 0 0 Source: SBEF. 41. Since the mid-l990s, a large proportion of domestic savings have been invested abroad (Figure 5). 101 102 BOLIVIA: POLICIES TOIMPROVE GROWWANDEMPLOYMENT Another source of high interest rates is high spreads-i.e., the difference between deposit and lending rates. InBolivia, as in the rest of Latin America (with the exception of Chile) bank spreads have not come down, despite improvements in efficiency, regulatory forbearance and financial liquidity. Re- quena et al (2000) identified macroeconomic risks as the source of high spreads in Bolivia. There seems to be no direct relation between non-performing loans (NPLs) and spreads. In recent years, NPLs in- creased rapidly while spreads remained high but did not increase. Interestingly, spreads have been low duringcrises or bank liquidations-reflecting expectations of government bail outs (Requena et al, 2000). This is consistent with the private sector reporting that they are not worried about the macro-financial situation. Thus, poor financial intermediation does not appear to be a binding constraint to growth in Bolivia. 1.3.1Bolivia's decelerationin the late 1990'sand credit availability High costs of financing and limited credit slowed the economy. Throughout LAC, Figure A2.1.15 Bolivia. GDP Growth episodes of fast credit growth and associated 6% 1 GDP growth have been attributed to large capital inflows and terms of trade improve- ments (IDB 2004). During 1993-97, Bolivia, like Chile, reached credit levels of around 55 percent of GDP (from around 25 percent in 1991), which i s quite high by regional stan- dards. Bolivia's private sector - largely banks -borrowed abroad, reaching around 2 percent of GDP during 1993-98. The shocks of the late 1990's led to a credit crunch and external borrowing turned negative throughout the region in 1999, resultingin full-fledged crisis in Argentina and Uruguay and in a regional slowdown. Bolivia was no exception in this regard: GDP growth dropped from an average of4.5 percencduring 1992-1998 to around 2percent in 1999 (Figure A2.1.15). Bolivia's sudden drop in the growth in 1999 had external causes. These included devaluations in trading partners (i.e., Argentina, Brazil and Chile) and the crises inthe international capital markets trig- gered by the Russian default. The last had indirect and direct impacts. The indirect impact was less export demand as a consequence of the slowdown of Bolivia's trading partners, given Bolivia's high content of "regional" exports like gas, Le., exports that will not find markets out of the region. The direct impact was the sudden end to external borrowingby domestic banks that had addedto loanable funds, particularly for the non-tradable sector. In the face of crises in neighboring countries, Bolivian banks advanced payment of external loans fearing a devaluation of the Bolivian currency. Internal developments including deepen- ing of coca eradication since 1998 that reduce liquidity inthe economy (IMF,2005) and political uncer- tainties associated with presidential elections in 2002 contributed to the slowdown of the economy. Both appear to have contributed to reduce loanable funds. The credit crunch was deepened as banks increased provisions to strengthen their soundness and by Banco Santa Cruz's reduction of its activities (Morales 2004b). Duringthe slowdown, as credit became costlier and scarcer, surviving firms used retained earnings to sustain working capital at the expense of investment, thus leading to a drop in investment (World Bank 2004a and 2001b). This was not unique to Bolivia. The whole Latin America region was affected by this systemic shock (Galindo and Schiantarelly 2003). The shocks hit hardest the service sectors (including construction and commerce) that were highly ANNEXZ.~:GROW^DIAGNOSTICSAND THEBINDINGCONSTRAINTSTO GROWTH 103 dollar-indebtedbut traded indomestic currency and make more use of retained earnings to finance activi- ties than other sectors (World Bank 2004a). The above discussion on the cost of financinginvestment suggests that (i) Bolivia was able to at- tract significant foreign savings (in addition to foreign direct investment) when they became available; and (ii) interest rates have been high due to poor competition practices and high spreads in turn due to macroeconomic policy risks (as opposed to bank inefficiency). The external shocks of the late 1990s in- creased the cost of credit and made credit scarcer, which highlights the vulnerability to credit shocks of firms that expanded their business during credit booms that lifted their credit constraint. This i s particu- larly important for f m s inthe service sector. It also highlights the vulnerability to systemic shocks of the export sector, given a large share of "regional" exports. Given highmacroeconomic policy risks, we can- not conclude unambiguously that the cost of finance i s Bolivia's bindingconstraint to growth. 2 Conclusions We cannot reject the proposition that the bindingconstraint to faster growth inBolivia since the early1990s has been high risk of appropriation of returns, as reflected in highinterest rates, high invento- ries, stubborn dollarization, capital outflows and brain drain. Sources of uncertainty are fiscal and finan- cial sector fragility as a result of political and social instability, as well as poor a poor investment climate, inparticular, enforcement of contracts andproperty rights. These vulnerabilities havebeenthe outcome of unpredictable policies and weak institutions and these in turn the result of ingrained political and social problems. These have worsened in recent years. Political uncertainty and street protests and road block- ages since 2003 have chilled the private sector, including foreign investors. High appropriability risk may have a direct negative effect on growth by creating the perception that Bolivia i s a public-sector driven economy, i.e., that the market i s not really open, thus deterring fm growth and newcomers. It may also have an impact by deterring innovation and export diversification. This is quite worrisome for Bolivia, which has a high concentration of regional exports, e&, gas that re- quires a gas pipeline to be transported (at least for now) and makes the economy vulnerable to systemic shocks like the internationalfinancial crisis of the late 1990s. A fragile fiscal situation and financial sector threatens the stability of the exchangerate and inter- est rates (given a highly liability-dollarization and low export activities that threatens the solvency of the economy), which creates uncertainty about firmproduction costs, in particular service payments of dollar debts of the non-tradable sector. While fiscal management has been difficult due to social pressures lead- ingto imbalances, monetary and exchange rate policy enjoy credibility. Furthermore, the financial system i s one of the best supervised systems in the region. The real exchange rate has been somewhat stable, al- though it suffered two step changes as a consequence of Brazil and Argentina's devaluation in 1999 and 2002, respectively. This highlightsthe adequate exchangerate and monetary policy of the Central Bank. We reject the hypothesis that lack of innovation i s a binding constraint-although further re- search i s needed on this. Bolivia has faced external shocks, positive and negative, and this does not allow us to study a specific period insearch for structural weaknesses. Also more data onprivaterates of returns i s needed. These are not readily available. We reject the hypothesis that non-wage labor costs are binding constraints today. While these costs are high, they are largely related to future income (i.e., pensions), hence reducing these costs may lead to pressure for higher wages, leaving salaries unchanged. However, we cannot reject the hypothesis that high non-wage costs, including severance payments, are a deterrent to new businessand to reduce informality. Deeper analysis i s needed on labor flexibility. The high cost of credit and difficult access to financing are associated with poor domestic compe- tition and high macroeconomic policy risks. Thus, high appropriability risks and not the cost of finance per se is the binding constraint. Duringthe early and mid-l990s, interest rates were highsuggesting scar- 103 104 BOLIVIA: POLICIESTOIMPROVEGROWTH EMPLOYMEAT AND city of domestic saving.42Availability of external financing has been associated with external factors. The relatively high growth rates of the early and mid-l990s, despite high macroeconomic and financial sector risks, were due to reforms but also to favorable external conditions reflected in availability of for- eign savings and, hence, reflected in increased local credit. As the credit constraint was lifted, firms ex- panded and new firms developed attracted by favorable relative prices also. But when external constraints tightened and credit became costlier and scarcer in the late 1990s, firms suffered production disruptions. Surviving firms used retained earnings for working capital as opposedto investment, hence this stagnated. We reject education and infrastructure as binding constraints today. Roads and aviation are Bo- livia's most important means of transportation, and they are underutilized. Roads maintenance however i s poor and efforts are underway to improve it. There are few potential unfunded investments in transport with highrates of return. With regard to education, given the emigration of workers seeking better oppor- tunities abroad, it i s more likely that educational improvements would accelerate the rate of emigration rather than the rate of growth. Brain drain has increased in recent years and together with private capital outflows i s adeterrent of business expansion, inparticular of managerial capacity and innovation. Reducing appropriability risk requires clear and consistent rules of the game across the public sector. It also requires that institutions protect the openness and fairness of markets to any new entrant, not the interests of the incumbent fm.Stronger institutions will contribute to macroeconomic stability, hence to build up credibility and make Bolivia attractive to investors. World Bank (2003 and 2005) rec- ommended that reforms are needed to promote faster growth and avoid crisis. These would include con- trolling public expenditures and improving tax administration to reduce the fiscal deficit and sustained strengthening of the financial sector while addressing institutional weaknesses to ensure credible institu- tions inthe longer term. Much remains to be done on these by all Bolivians. Finally, as the current binding constraints are relaxed, information and coordination problems could emerge, in particular in the rural sectors. InBolivia, rural infrastructure (e.g., telecommunications and electrification) remains poor, despite recent improvements. In other countries, the use of mobile phones and internet has contributed to promote business through better coordination. Thus, advancing in rural electrification and communication where there are adequate economic returns may become an addi- tional challenge. 42. The current reportedinterest rates are low because of banks' liquidity and weak demand for loans. ANNEX 3.1 BACKGROUND MATERIAL ONPRODUCTIVITYAND INVESTMENT FigureA3.1- 2: Net Foreign Direct Invest- Figure A3.I - 1:Investmentand Saving ment and External Capital Flows to Private and Public Sectors 25% 20% 15% a 010% '8 8. 5% -5% - -Externallnriestrnent A Saung[ExternalCurrent Account] -Net FDIcapital Rows to public sectoP primte sector' -FiscalSang[PUNICCurrentBalanceandGrants] ........ PnmteSang -Net ........, capitalflows to Net capital flows to primte sector includingE&O Source: INE,BCB and UPF. Source: BCB andWorld Bank staff estimates. Notes:* Includes portfolio investment, net external disbursement to private sector, net external flows to commercial banks and capital transfers. It does not include errors andomissions. ** Includes external disbursement to public sector of long, mediumand short term. Figure A3.1 -3: Property Rights and Judicial Pe~ormanceIndicators I rn I Efficiendy of legal framework I Propelty rigMs I Intellectual propetty protection I 4 0 20 40 60 80 100 -LAC -World a Bolivia Global Cornpetltlvenea Rank Source: World Economic Forum, Global Competitiveness Report 2003-2004 - +-- 106 BOLIVIA:POLICIESTOIMPROVEGROWANDEMPLOYMENT Figure A3.1 -4: Public Regulation Indicators Burden of central goemmet regulation I I iExtent of bureaucraticred tape I m 1 1 Effectiwness of bankmptcy law I I lj Flexibility or wage determination i I I I Hiring and firing practice I m I 0 20 40 60 80 100 -LAC -World 0 Bolivia Global CompetltivenessRank +-- i e p o r t 2003-2004 Figure A3.1 -5: Infrastructure Indicators Overallinfrastructure quality I 1 m I Railroadinfrastruchlre I dweiDpmen1 I Air trampert infraslruotuw quality I I / Qualityof eieotricity supply 1 I/ Telephone infrastructure quaiity I 0 20 Source: World Economic Forum, Global Competitiveness Report 2003-2004 - L L ANNEX3.1: ANALYSESOFINVESZVEW, PRODUO7Vm, AND COMPRmVENESS 107 Figure A3.1- 6: Marginal Returns to Education, UrbanAreas - Education inUrbanAreas P- - Marginal Returns to Tertiary Education in UrbanArea w-h .--_____ cp I mbrdr;s 6.0 6.0 10.0 12.0 14.0 16.0 9.0 140 19.0 24.0 29.0 Average returnto secondaryeducation for urban workers Average return to terciary education for urbanw h e n Note: Information corresponds to the most recent observation between 1998 and 2001. Sample: Males and Females ages 15 to 64 Figure A3.1- 7: Banking SystemDeposits, Loans and NPLs 4.5 4.0 20% 3.5 15% g, c m c Q) 10% 2.0 5yo 1.5 - 1.o 0% Deposits (LHS) 0Loans(LHS) +NPL /Total Loans (RHS) Source: SBEF. - 107 108 BOLIVIA: POLICIESTOIMPROVEGROWH EMPLOYMENT AND TableA3.I - I:Studies of International Total Factor Productivity GrowthAggregated at level of GDP Elias (1990) Latin America 1.2 Colombia 0.8 Argentina 0.5 Mexico 1.1 1940-90 Brazil 1.1 Peru -0.6 Chile 1.4 Gomes. Pessoa and Argentina -0.1 Taiwan 3.3 ~eloso'(2004)a Boiivia -0.4 Spain 1.9 Brazil 1.0 France 1.4 1950-2000 Chile 1.9 Italy 1.9 Peru -1.0 United Kingdom 1.7 Uruguay 1.1 Australia 1.6 Japan 3.1 Canada 1.1 Sduth Korea 2.1 United States 1.1 Loayza, Fajnzylber Argentina -0.46 Chile 0.48 andCalder6n(2002) a Bolivia 0.69 Mexico 0.15 1971-80 Brazil 3.31 Peru -1.33 Argentina -3.31 Chile 1.32 1981-90 Bolivia -1.45 Mexico -3.39 Brazil -2.15 Peru -3.52 Argentina 2.49 Chile 2.39 1991-2000 Bolivia 1.23 Mexico 0.06 Brazil -0.25 Peru 0.48 Notes:a. TFP estimateswere done with humancapitaladjustmentsincorporated. Sources: as indicated. TableA3.1- 2: Determinants of Bolivia's Growth Rate of GDPper capita, by Dec- ades Growth Determinants 1990s vs. 1990s vs. 1980s 1970s Initial State Variables 0.09 -0.45 InitialGDPpercapita(inlogs) 0.11 0.13 Initialoutputgap (log[actualGDPIpotentialGDP]) -0.02 -0.58 Structural Policies and Institutions 1.35 1.73 Secondary enrollment(inlogs) 0.11 0.47 Privatedomestic crediVGDP (in logs) 0.81 0.87 Structure adjustedtrade volume/GDP(in logs) 0.33 0.28 Governmentconsumption/GDP (inlogs) -0.26 -0.28 Maintelephonelinesper capita (inlogs) 0.36 0.39 Stabilizationand MacroeconomicPolicies 1.71 0.17 Inflationrate (inlog[l+inflation rate]) 0.88 0.04 Standarddeviationof output gap 0.08 -0.06 Indexof real exchange rate overvaluation(inlogs) 0.17 0.19 Frequencyof years underbankingcrisis 0.58 0.00 External Conditions -0.60 -1.68 Growthrate of terms of trade -0.12 0.04 Periodshifts -0.48 -1.72 ProjectedChange: 2.54 -0.23 Actual Change: 3.49 -0.14 Source: Loayza,FajnzylberandCalder6n(2002). ANNEX3.1: ANALYSESOFINVESTMEN7; pRODUC77Vm, AND cOMPE7iTVENESS 109 TableA3.1 -3: Bolivia: Estimates of Capital and Labor Productivity, 1990-97 Non- Fixed Capi- Year Occupied Non-Agric. Year GDPa Agric. tal Urban GDP/Urban K/Urban Lb GDP" Stock K" ICOR GDP/K Population Lb 1990 15443 13072 61880 1.0 25.0 921,338 14.2 67.2 1991 16256 13652 62952 1.3 25.8 987,949 13.8 63.7 1992 16524 14030 64280 5.0 25.7 1,O 15,703 13.8 63.3 1993 17230 14632 65651 1.9 26.2 1,090,950 13.4 60.2 1994 18034 15262 66781 1.4 27.0 1,195,363 12.8 55.9 1995 18877 16067 68225 1.7 27.7 1,256,576 12.8 54.3 1996 19651 16740 69984 2.3 28.1 1,354,542 12.4 51.7 1997 20474 17421 72073 2.5 28.4 1,339,873 13.0 53.8 Avg. Growth 4.1 Rate 1990-97 4.2 2.2 5.5 ' Notes: (a) millions of Bs of 1990. (b).thousands of Bs of 1990perurbanworker. TableA3.1 -4: Enforcing Contracts,Selected Countries,2004 Country/Region Procedures Number Of Time (days) Cost ( of debt) Argentina 33 520 15 Australia 11 157 14.4 Bolivia 47 591 10.6 Botswana 26 154 24.8 Brazil 25 566 15.5 Chile 28 305 10.4 Colombia 37 363 18.6 Ecuador 41 388 15.3 Hong Kong (China) 16 211 12.9 South Korea. 29 75 5.4 Malaysia 31 300 20.2 Mexico 37 421 20 Nicaragua 18 155 16.3 Paraguay 46 285 30.4 Peru 35 441 34.7 Singapore 23 69 9 Taiwan (China) 22 210 7.7 Venezuela 41 445 28.7 L A C Countries 35 462 23.3 OECD Countries 19 229 10.7 Source:WorldBank,DoingBusiness in 2005 (2005). 109 110 BOLIVIA: POLICIES TOIMPROVEGROW AND EMPLOYMENT Table A3.1 - 5: VAT and Corporate Income Taxes inSelected Countries VAT Corporate Income Country Tax Rate () Collection/ GDP () Tax Rate Argentina 21.0 6.2 35 Bolivia 14.9 5.7 25 Brazil 20.5 8.6 30 Chile 18.0 8.5 Colombia 15.0 4.9 35 Costa Rica 15.0 6.5 DominicanRep. 8.0 3.1 Ecuador 12.0 4.4 ElSalvador 13.0 5.3 Guatemala 10.0 3.7 Haiti 10.0 2.2 Honduras 12.0 3.8 Mexico 15.0 3.2 Nicaragua 15.0 10.0 Panama 5.0 2.0 Paraguay 10.0 4.5 Peru 18.0 6.3 30 Uruguay 23.0 8.4 UK 17.5 6.8 30 USA n.a. n.a. 35 Venezuela 15.0 3.2 34 Average (LAC) 14.3 5.3 Source: Keen,et al. (2001) andIMF. TableA3.1 -6: Hiring and Firing Workers,Selected Countries,2004 Dificulty Rigidity of Dificulty Rigidity O f Firing Costs Country/Region Of Hiring Hours Of Firing Employment Index Index Index Index (weeks) Argentina 44 80 30 51 94 Australia 0 40 10 17 17 Bolivia 61 60 0 40 98 Botswana 0 20 40 20 19 Brazil 67 80 70 72 165 Chile 17 20 20 19 51 Colombia 72 60 20 51 49 Ecuador 44 40 70 51 131 HongKong (China) 0 0 0 0 13 SouthKorea. 11 60 30 34 90 Malaysia 0 0 10 3 74 Mexico 67 60 90 72 83 Nicaragua 22 80 50 51 24 Paraguay 56 60 60 59 99 Peru 44 60 60 55 56 Singapore 0 0 0 0 4 Taiwan(China) 61 60 30 50 90 Venezuela 78 80 10 56 98 LAC Countries 44 53 34 44 70 OECD Countries 26 50 26 34 40 Source: World Bank, DoingBusinessin 2005 (2005). ANNEX3.1: ANALYSESOFINVEflNEW, PRODUCnVm, AND COMPETmVENESS 111 Table A3.1-7: Bolivia'sCredit Access RankingsandCompari- sons to LAC and OECD Averages Indicator OECD LAC A v o Bolivia A,,o Registering property (time indays) 34 92 56 Cost to create collateral ( o f GNI per capita) 5.2 51 19 Legal Rights Index (for obtaining credit) 6.3 3 3.8 Credit Information Index (for obtaining credit) 5.0 4 4.7 Public Credit Registry Coverage (per 1000adults) 76.2 96 85.7 Private Bureau Coverage (borrowers per 1000adults) 577 0 325 Source: World Bank,Doing Business 2005. TableA3.1- 8: Analysis of GDP Per Capita and Competitivenesslndices (numberof country observations n = 104) Estimated Regression Coeficients a Global Competi- Competitiveness Growth Adjusted Dependent Variable Equation # and Con- stant tiveness Index Index R2 - 4904 15878 0.63 (13.36) 2. GDP per Capita -34424 11181 0.68 (14.84) 3. Ln (GDP per Capita) 2.73 1.59 0.68 (14.66) 4. Ln (GDPper Capita) 4.15 1.14 0.75 (17.71) Notes: a. T-statistics are presented beneath the regression coefficients; all are significant at the 0.0 percent level. (b) GDP per capita for 2004, adjusted for PPP, is used. Source: Author's estimations from data contained inWEF, 2004. 111 ANNEX 3.2 STATUSOFINVESTMENT RECOMMENDATIONS CLIMATEASSESSMENT PROBLEMAS RECOMENDACIONES ACCIONESREALIZADAS COMENTARIOS Aduanas Excesivos trhites e Hacer unseguimiento L a Aduana continda con supro- L o s comentarios del sector privado en ineficiencias en l a a 10s temas que retra- grama de institucionalizaci6n. las entrevistas han sido mis favorables Administraci6n de san el despacho de L o s procedimientos aduaneros que 10s expresados en el ICA y recono- Aduanas incremen- mercaden'aspara para el comercio de exportaciones cen que en cuanto a procedimientos de tan 10s costos opera- focalizar acciones en e importaciones fueron simplifica- exportacidn y de importaci6n se han tivos de las empre- la Administracidn dos. dado avances importantes. Envarios sas. Enpromedio Aduanera que facili- L a Aduana incorpor6 el Sistema casos seiialaron que retirar mercaden'as retirar las mercade- ten el comercio de de informacidn SIDUNEA (el cud de l a Aduana no toma rnis de 4 dias. n'as de Aduanas exportaciones e im- es unsistema computarizado para Aduana considera dificil disminuir a h toma mis de 10 portaciones. la administraci6n de aduanas que r n i s 10s trhites para facilitar el comer- dias. cubre la mayor parte de 10s proce- cio dado que hay factores que no contro- dimientos de comercio exterior) la como por ejemplo las normas vigentes para facilitar 10s trhites aduane- (inspecci6n previaen origen o destino a ros. cargo de verificadoras) y por l a existen- cia de otros actores distintos a la Aduana (transportistas, despachantes de aduana, verificadoras, o si la mercaden'a es espe- cial -explosives, quimicos, alimentos- intervienen instituciones pcblicas como el Ministerio de Defensa, Ministerio de Salud Servicio Nacional, INLASA, SE- NASAG). Las empresas deben Revisar la obligato- Enalgunos casos el sector privado con- contratar despachan- riedad del us0de sidera que 10s despachantes de aduanas tes de aduanas para despachantes de son necesarios y les facilitan 10s trhites acelerar el proceso Aduana. de exportaci6n e importacih, en otros de exportaci6n y de seiialan que no son necesariosy que s610 importacibn, lo c u d les incrementan sus costos. les incrementa sus Unex -presidente de laAduanaseiial6 costos de operaci6n. que no siempre es necesario el us0 de 10s despachantes de Aduana, est0 depende de si l a empresa cuenta o no con el per- sonal y conocimiento adecuado y por tanto no deberia ser obligatorio su con- trataci6n. Sin embargo autoridades y ex autorida- des gubemamentales seiialaron que cuando se ha intentado levantar la obli- gatoriedad del us0 de 10s servicios de 10s despachantes, el Gobiemo ha enfrentado una fkrrea oposici6n del gremio de des- pachantes. lnffaestructura L a pobre infraes- L a infraestructura En10s dltimos 4 af~osenprome- Elsector privado seiiala que no s610 tructura es una de debe ser ampliada y dio cerca de un40 de la inversi6n existe unproblema de falta de caminos las mis severas mejorada, particu- pdblica en infraestructura en Boli- sino de mantenci6n y de prevencidn (de restricciones que larmente aquella via ha sido destinada a infraestruc- desastresnaturales) de la infraestructura. enfrenta la industria dirigida a 10s merca- tura ,y a su vez casi la totalidad de Por ejemplo l a caida de unpuente en boliviana. El costo dos de exportaciones. la mismaha sido dirigida a la Cochabamba el aiio 2004 pus0en riesgo de transporte rnis construcci6n de caminos. parte importante de la exportaci6n de barato seiialado en Enla construcci6n de caminos, el soya por el pacific0 dado que e l gobierno la muestra del ICA gobierno hadado prioridad a 10s tard6 en reaccionar para solucionar el ANNEX3.2: STATUSOF(NVESIMENT CLIMAEASSESSMENT RECOMMENDA 7iONS 113 PROBLEMAS RECOMENDACIONES 1 ACCIONESREALIZADAS COMENTARIOS fue en el transporte corredores de integraci6n (0 de problema. de madera, el cual exportacibn). Enla actualidad el requerimiento anual era de US$O.OS por para el mantenimiento de caminos es de tonkilometro en el US$45 millones y el Servicio Nacional tramo Santa Cruz a de Caminos dispone de s610 US$30mi- Cbba. S e g h un llones. Ademh y teniendo en cuenta que reporte del Banco el gobiemo no hace el mantenimiento Mundialel prome- programado de caminos (dado que no dio del flete por ton- cuenta con 10s recursos suficientes), se kil6metro en B r a d ve obligado a realizar reparaciones de era en 1996 de emergencia, las cuales a su vez tienen US$0.035y en un unmayor costo y absorbenunapropor- rango de US$0.05 a ci6n creciente de 10s recursos para man- US$0.06en Austra- tenimiento (PER 2004). lia, CanadB y Esta- dos Unidos. Ley Laboral Aunque 10s salarios Revisar la Ley del Aunque hahabido varios intentos para enBoliviano son Trabajo incluyendo reformar la Ley del Trabajo, 10s gobier- elevados, el costo de las regulaciones rela- nos no tomaron la decisi6n politica de empleo para las cionadas con el costo reformar la Ley por temor a 10s conflic- empresas se incre- no salarial y el pro- tos sociales y politicos a 10s cuales ten- menta debido a las cedimiento para con- &a que enfrentar. disposiciones lega- tratar y despedir tra- Empresarios (pequefios, medianos y les vigentes (Ley bajadores. grandes) sefialan que l a inflexiblidad de General del Traba- la Ley del Trabajo impide que el merca- jo). Enpromedio 10s do del trabajo se ajuste a 10s requeri- costos no salariales mientos de demanda de las empresas, l a significan el 54 de cual a su vez responde a lafluctuacio- 10s costos salariales. nes de mercado. Empresarios consideran que unaLey del Trabajo mfis flexible y menos costosa permitirfa aumentar el empleo. RESTRICCIONESRELATIVASA ASPECTOS INSTITUCIONALES Y DE REGVLACldN L a Administracidn Reducir el costo de L ainstitucionalizacih del Servi- L a Administraci6n Tributaria absorbe Tributaria absorbe desacuerdos en cuan- cio de Impuestos Nacionales ha tiempo de las empresas que pagan im- tiempo de las em- to a pagos impositi- permitidoprofesionalizar el cobro puestos y atender sus frecuentes reque- presas que pagan vos, reducir las ins- de impuestos y disminuir l a co- rimientos les significa uncosto adicio- impuestos y atender pecciones a 10s gran- rmpci6n. nal.Las grandes empresas deben visitar sus frecuentes re- des contribuyentes, Elaiio 2003 se aprob6 el Nuevo en promedio unas 10veces al aiio las querimientos les las auditonas exigi- C6digo Tributario el cual estable- oficinas de la Administracibn Tributaria significa uncosto das, permitir las co- ce unnuevo regulaci6n del rkgi- para solucionar problemas relativos a adicional. Las gran- rrecciones volunta- menjuridic0 del sistema tributario pagos de impuestos. des empresas deben rias en cas0 de des- boliviano. visitar en promedio acuerdos, mayor Con este nuevo c6digo se fortalece unas 10veces al aiio control a traves de la capacidad de las instituciones las oficinas de l a mejores y mayor recaudadoras (Impuestos Naciona- Administraci6n cantidad de equipos les y Aduanas) para aplicar la Ley Tributaria para solu- de computaci6n. y se aclaran, acortan y simplifican cionar problemas 10s procedimientos parael cobro relativos a pagos de de impuestos. impuestos. Sistema de fiscalizaci6n que antes era arbitrario, ahora es realizado mediante sistemas de informaci6n a traves de la Unidad de Inteligen- cia Fiscal de Impuestos Intemos. S610 un 5 de 10s contribuyentes 114 BOLIVIA:POLICIES TOIMPROVE GROWTH EMPLOYMENT AND PROBLEMAS RECOMENDACIONES ACCIONESREALIZADAS COMENTARIOS son auditados. Hace 3 afios existian 6 milGran- des Contribuyentes (GRACOS) 10s cuales eran escogidos de mane- ra semidiscrecional. Ahora existen 15 Principales Contribuyentes (PRICOS) que aportan con un45 de las recaudaciones y 1500 GRACOS (que aportan con un25 de las recaudaciones). Elresto de las recaudaciones proviene del 401.443 contribuyentes, de 10s cuales 286.005 son contribuyentes del RCgimen General y 115.438 del RBgimen Especial (Simplifica- do, Integrado y Agropecuario Unificado) Enlaactualidad 10s GRACOS y PRICOS se determinan mediante unsistema automitico y parame- trizado (se cre6 una f6rmula que corre una vez al aiio en la cual toma en cuenta (i) impuestos pa- gados por las empresas, (ii) im- puesto determinado a pagar por las propias empresas y (iii) total de el ingresos de las empresas. Se permiten correcciones tributa- rias (rectificatorias) desde el afio 1992. L o s sistemas de informaci6n (y de provisidnde computadoras) en Impuestos Nacionales hanmejora- do notariamente. Impuestos Na- cionales adquiri6 nuevos equipos para sus oficinas en 10s distintos departamentos del pais. Ademis la velocidad de transmisidn de datos se increment6 en m8s de 400. Desde enero de 2005,los contri- buyentes p o d r h hacer sus pagos de impuestos via internet (usando la redbancaria). Licencias y Trrimites Empezar o mantener Reformular el siste- Gobiemo adjudicd mediante lici- Elpromedio de dias paraempezar una unnegocio enBoli- ma de registro y per- taci6n a una empresa privadael empresa se redujo de 66 a 59. via es costoso. Nue- miso de funciona- registro de empresas. L a institu- Empresarios reconocen que se ha mejo- vas firmas requieren miento de las empre- ci6n que se adjudic6 l a licitacibn rad0 el registro de empresas, especial- alrededor de 66 dias sas obteniendo una se denomina Fundempresa, orga- mente porque ahora no deben viajar la para registrarse. mayor coordinaci6n nismo que conformaron 10s em- ciudad de L a Paz para registrar empre- Las empresas recu- entre el nivel central presarios privados para este fin sas. Sin embargo consideran que el costo rrena facilitadotes y local (municipios). exclusivo (registrar empresas). para abrir una empresa continda siendo para preparar 10s Especial atenci6n al L a institucibnest&descentralizada elevado y que el procedimiento de revi- documentos reque- Registro Nacional de (una empresa puede registrarse en si6n de 10s documentos de constituci6n ridos a un costo Comercio (SENA- cualquier parte del pais) y cuenta sigue siendo lento y engorroso. promedio de REC) y la Licencia con 12 oficinas a nivel nacional. Respecto al punto anterior, tanto Fun- US$3.396. El costo de Funcionamiento. Se creb unComitC de Simplifica- dempresa como abogados especializados de establecer la Cada Agencia del ci6n de Trhites, en el cual parti- en el tema sefialan que no es unproble- empresa toma tam- Sector Phblico, debe- cipa la empresa privada y el Mi- ma de la institucibn (Fundempresa) sino ANNEX 3.2: STAN S OFINVESTMENT CLIMAEASSESSMENTRECOMMENDA TIONS 115 PROBLEMAS RECOMENDACIONES ACCIONESREALIZADAS COMENTARIOS bitntiempo (se ria determinar que nisterio de Desarrollo a travts de de cumplimiento de las normas sefiala- requieren 4 licencias procedimientos - diferentes instancias. das por Ley (C6digo de Comercio), por o permisos por aiio como ser la acepta- ElIFC apoya a10s municipios en tanto si se quiere avanzar m8s en temas que toman 40 dias ci6n y proceso de el tema de simplificaci6n de trhmi- de reducci6n de tiempos para registrar en obtenerse) y es informaci6npara el tes y ha logrado importantes resul- empresas, se debe reformar la Ley. costoso (1% empre- registro y otorgaci6n tados en el Municipio de L a Paz. Encuanto a 10s costos pararegistrar una sas que contratan un de licencias de fun- empresa, parte de l a explicaci6n se l a facilitador para ace- cionamiento- puede encuentra en el hecho de que antes el lerar el proceso les ser transferido a 10s sistema estaba subvencionado por el cuesta en promedio municipios e institu- Estado, dado que el registro de empresas US$1730). ciones locales. blica (Servicio Nacionalde Registro - estaba en manos de una instituci6n pd- Las agencias pdbli- cas para el registro y SENAREC). Fundempresa debe prestar obtenci6n de licen- el servicio de registro y cobrar por el cias de funciona- mismo. miento se concen- tran en L aPaz, est0 no obstante que hay otros dos centros econ6micos de im- portancia; Santa Cmz y Cochabam- ba. Este es tambitn otro aspect0 que fomenta la informalidad, puesto que para muchas empresas pequeiias que operan en otras centros econ6micos, es cos- toso y toma mucho tiempo para despla- zarse a L aPaz. Aspectos Judiciale3 L o s juicios en Boli- Incentivar el us0de Desde la Ley de Procedimiento L a Ley de procedimiento coactivo de via, especialmente procedimientos alter- Coactivo de 1997, no se handado 1997, permite acceder mhr8pido a la con el Estado, son nativos al sistema cambios en 10s procedimientos ejecuci6n de bienes hipotecados. Sin largos, costosos y judicial. judiciales. embargo se mantienen 10s problemas de sujetos a cormpci6n, L o s procedimientos tardanza en 10s procesos coactivos. las empresas prefie- judiciales deben ser Entre otros aspectos esto se debe al pro- ren resolver sus mejorados y moder- blema de falta de registro pdblicos de disputas fuera de las nizados para acelerar bienes inmuebles y muebles (mb ade- cortes. 10s procesos judicia- lante se trata este tema con mayor deta- les en cas0 de "de- lle) fault", particularmen- te en lo que se refiere al tema de acceder a 10s bienes hipoteca- dos. Revisar Administra- Se aprob6 el Nuevo C6digo Tribu- Empresarios privados consideran que blemas con el Esta- ci6n Tributaria y Ley tario (2003). adn teniendo todos 10s argumentos a su do e s t h relaciona- Laboral (incluyendo L a Ley del Trabajo del atio 1939 favor en unjuicio con trabajadores, la dos conjuicios por es este dltimo caso, el no ha sido modificada. Ley siempre tiende a favorecer al traba- impuestos y por la tema de 10s costos jador, por tanto evitan entrar enjuicios y Ley del Trabajo. En establecidos por Ley arreglar extrajudicialmente 10s pleitos. este dltimo cas0 y 10s procedimientos Este es un argument0 que pesa mucho al toma alrededor de establecidos para momento de ampliar las operaciones de contratar y despedir sus empresas y es tambitn uno de 10s 116 BOLIVIA: POLICIES TOIMPROVE GROWTH EMPLOYMENT AND PROBLEMAS RECOMENDACIONES ACCIONES REALIZADAS COMENTARZOS unjuicio y costo personal). principales argumentos por la cud varias promedio de empresas prefieren mantenerse informa- US$12.298 para la les. empresa. Escasez de mano de obra calificada Bolivia no cuenta Desarrollar pro- Gobiemo y sector privado conti- Empresarios hacen us0 del SAT, INFO- con suficientes insti- gramas de capaci- nuaron con el desarrollo de 10s C A L y PROCA1, per0 en general perci- tuciones tCcnicas taci6n. programas de Asistencia Ttcnica ben que no es una asistencia tCcnica para aumentar la provistos por el Gobierno y la dirigida a sus requerimientos especificos, mano de obra califi- EmpresaPrivada. Los principales la consideran demasiado global y en caday el apoyo son el Servicio de Asistencia TCc- algunos casos muy te6ricas. pfiblico institucional nica SAT y el Instituto de Capaci- Sexialanque la asistencia tCcnica en va- es limitado. taci6n Ttcnica y Laboral (INFO- nos casoshaestado a cargo de profesio- CAL). nales sin experiencia en el campo especi- Elaiio 2002 se cre6 elPrograma fico. de Capacitaci6n Laboral para J6- venes Trabajadores en Empresas (PROCAL). Financieras Las empresas se Explorar opciones Se cre6 la Unidadde Foment0 a la Elprincipalobjetivo del laUFV fue el endeudan en d61a- para reducir la expo- Vivienda (2001) UFV, el cual es de desdolarizar la econom'a creando un res, enfrentan eleva- sici6n por riesgo unfndice referencial que muestra indicador que sea utilizado como refe- das tasas de inter& y cambiario e incre- la evoluci6n diaria de 10s precios y rencia para llevar a cab0 operaciones, riesgo cambiario. mentar la disponibili- se calcula sobre labase del Indice contratos y todo tipo de actosjurfdicos dad de crtditos en de Precios al Consumidor (IPC). en moneda nacional con mantenimiento moneda nacional. de valor respecto a la evoluci6n de pre- cios. Pese a su denominacibn, lautiliza- ci6n de la UFV no esti limitada sola- mente al financiamiento de la vivienda. Con l a creaci6n de l a UFV las personas y empresas que reciben sus salarios o in- gresos en monedanacional, pueden ob- tener prestamos en UFV y por tanto cancelar sus deudas en monedanacional. De esta forma 10s prestamistas a travCs de las UFV's podrin realizar operacio- nes de cridito en monedanacional redu- ciendo asi el riesgo cambiario en raz6n a que las variaciones en el tip0 de cambio no afectarin la capacidad de pago de sus clientes Por tanto el desarrollo de operaciones en UFV reduciri elriesgo cambiario y asi- mismo preservari el valor adquisitivo con relaci6n a la evoluci6n de 10s precios internos, beneficiando tanto a ahomstas como prestamistas (informaci6n extrac- tada del Banco Central). L a medida sin embargo hatenido poco Cxito, el sistema financier0 privado no ha promovido convincentemente el us0 de l a UFV y 10s ahorros y crCditos contin& an estando altamente dolarizados. Los programas para Creaci6n de nuevos Gobiemo cre6 el aiio 2002 10s Los Maquicentros son espacios fisicos facilitar las exporta- programas de expor- Maquicentros (Centros de Miqui- cubiertos (galpones) en 10s que trabajan ANN& 3.2: STATUSOFINVEsrMNT CUMATEASSESSMENT RECOMMENDA n0NS 117 RECOMENDACIONES ACCIONESREALIZADAS COMENTARIOS ciones no disminu- taci6n fomentando nas) parafomentar laintegraci6n microy pequeiios empresariosrealizan- yeron significativa- 10s exportadores de pequeiiosproductoresen de- do trabajos de elaboracibn,producci6no mente10s costosde "secundarios"identi- termidascadenasde producci6ny confeccidnde productos. transacci6n del sec- ficando y fomentando abastecer aempresas mas grandes. Laideacentral es que uniendomaquinas tor formal exporta- unamayorrelaci6n de trabajo, 10s pequeiios empresarios de cadenas de pro- podrhsatisfacerdemandaspor sus pro- ducci6nentre expor- ductos que en forma individual no podri- tadores pequeiiosy anhacerlo. A1mismotiempo al estar medianoscon gran- ubicadosen un solo lugar fisico se pens6 des exportadores. que se facilitm'a el control de calidadde sus productos. No obstanteel fuerte impulso del go- biemo parallevar adelante 10sMaqui- centros, Cstosno dieronresultadoprinci- palmenteporquese enfrentaronproble- mas de carhcter organizacionaly de es- tandarizaci6nde laproducci6nentre 10s micro y pequeiios empresarios. Diseminarcon mayor Relanzamiento(atio2004) del CEPROBOLse cre6 el atio 1998,per0la tadoras bolivianas Cnfasislainforma- CentroPromoci6nBolivia (CE- percepci6nde laempresa privadaes que tiendenaresponder ci6n acercade 10s PROBOL), entidadestataldesti- estainstituci6n no funcion6 parapromo- lademandaen vez mercados de exporta- nadaaapoyary promocionarlas ver las exportacionesnilaimagende de buscarmercados. cionesentre 10s em- exportaciones. Bolivia. presariosbolivianos. CEPROBOLdependiadel Ministerio de Adicionalmentedi- DesarrolloEcon6micoy apartir de di- fundir entre 10s em- ciembre de 2004depende de laCancille- presariosmayor in- ria (Ministerio de RelacionesExterio- formacidnsobre po- res). Elnuevo CEPROBOL tiene como tenciales socios ex- objetivoprincipal el de crear unaredde tranjeros parasus promoci6ncomercial y de oportunidades empresas. de inversi6nen Bolivia mediantelas 34 embajadas y 100consuladosque posee el pais alrededor del mundo. Muchasempresasno Crear mecanismos Empresariosconcuerdanen que el RI- conocen10s progra- paradar aconocer y TEX esahoramhsconocidoy que opera mas de facilitaci6n mejorarel accesoa relativamentebien, sin embargorecla- de las exportaciones, programasdesarro- manel excesivo atraso conel que opera except0el Certifica- lladospor el gobier- el gobiemoparaefectivizar el CEDEIM. do de Devoluci6n no. Impositiva (CE- DEIM)y el RCgi- mende Intemaci6n Temporal(RITEX). Enpromedio, la Reducirlademoraen El Servicio Nacionalde Impuestos No obstante10s avances en el trhite, el demora enotorgar el retomar10s impues- ( S K ) implant6el atio 2003 un problemafiscal impide acelerar ladevo- CEDEIM es de 116 tos. Crearun grupo modern0 sistemainformhtico de luci6n de 10s CEDEIM en forma mhs dias especial ("Task For- devoluci6nimpositiva,el cual oportuna. ce") u oficina para otorga mayor eficiencia, agilidad, Adicionalmente autoridades de Hacien- monitorearel CE- transparenciay seguridaden 10s da, hanseiialado que se concedenbene- DEIMy disminuir el tramites y procesospara acceder al ficios aempresas que no corresponden excesivoatraso en la CEDEIM. (empresas que engatianal fisc0 solici- devoluci6nde im- Conel nuevo sistemade devolu- tando devoluci6nimpositiva por activi- puestosa10s expor- ci6n impositivase automatizaron dades que no hanrealizado). tadores. pasosy la emisi6nde titulos y Sector privado est5concientedel pro- valores (certificadosCEDEIM) blemaanterior (fraude), per0consideran bajoel criterio de "primero en que sonpocaslas empresas que comen- Ilegar primero en salir), evitando ten fraudes per0que el Estado al genera- asi la discrecionalidad. lizar esapercepci6nperjudicaala gran Asimismo se facilita el proceso mayorfade exportadoresy distorsionael mediante la atencibn de solicitudes principio de neutralidadimpositiva que 118 BOLIVIA: POLICIES TOIMPROVE GROWH EMPLOYMENT AND I ~~ ~~ PROBLEMAS RECOMENDACIONES ACCIONESREALIZADAS en linea, informando sobre errores y la aceptaci6n o rechazo del tr8- rior. mite al instante. L a admisib de las solicitudes de CEDEIM's es comunicado de forma abierta por Impuestos Nacionales mediante su pigina web (extractado de infor- mes del SIN). ANNEX 4.1 MEJORANDO LA CALIDAD Y LOS ESTANDARES DELOS PRODUCTOSDEEXPORTA- CION Preparado por Dr. Karl-Christian Goethner, Consultor, PTB, Kory Eguino, IBNORCA, Herlandth Lino Saldias,IBMETRO, Juan Carlos Castillo Villaroel, IBMETRO y Nicolds Molina, OBA. 1El Entorno Institucional en Materia de Calidad En la segunda mitad de 10s 1990, el Gobierno inici6 varias actividades para establecer una in- fraestructura de calidad en Bolivia. EnFebrero 1997 se crea el "Sistema Boliviano de Normalizaci6n, Me- trologia, Acreditacidn y Certificaci6n-Sistema NMAC" desde entonces se ha consolidado lentamente. El SNMAC esta conformado por el Instituto Boliviano de Normalizacidn y Calidad - IBNORCA, el Orga- nismo Boliviano de Acreditaci6n-OBA y el Instituto Boliviano de Metrologia - IBMETRO. SNMAC busca responder a la necesidad de contar con 10s elementos tCcnicos para la cuantificaci6n y la planifica- ci6n de la calidad de forma tal, que se constituya en pardmetro de confiabilidad para las transacciones comerciales de Bolivia hacia otros mercados. Asimismo, se estableci6 un Consejo Nacional de Competi- tividad y un Consejo Nacional de Calidad - CONACAL, conformado por instituciones clave del Gobier- no y sector privado. Estos consejos no se han consolidado, el CONACAL no se ha reunido desde 2001. Existen dos problemas que afectaron negativamente el desarrollo del Sistema: la falta de asignacidn de recursos presupuestarios y el cambio permanentedelpersonal. Unnfimero importantede asociacionesprivadas y cimaras empresarialestambiCnhan desarrolla- do servicios de apoyo para la mejora de la calidad. Las CBmaras de Industria m8s importantes del pais comenzaron a dedicar m6s atenci6n a1 tema de calidad, especialmente: la Cimara Nacional de Indus- trias-CNI en L a Paz, la CBmara de Industria, Comercio, Servicios y Turismo de Santa Cruz-CAINCO y la CBmara Departamental de Industria de Cochabamba-CDI. Con apoyo de proyectos internacionales financiados por USAID, OMS, el BID, la GTZ, el PTB y otros, se foment6 la mejora de 10s procesos de producci6n en el context0 de la producci6n mis limpia y se asesor6 las empresas en la preparaci6n para la certificaci6n segfin las normas I S 0 9.001 y e I S 0 14.001. A estas actividades tambiCn se sumaron otras cimaras como la CBmara Nacional de Exportadores de Bolivia-CANEB, la CBmara Nacionalde Comer- cio-CNC y el Instituto Boliviano de Comercio Exterior. Algunos proyectos del BID y de USAID tienen unroldestacado en apoyar a CANEBparadesarrollar algunos productos paranichosde mercados.ElCCI est6 trabajando desde 2001 con CADEX, IBCE y CEPROBOL para preparar empresas interesadasy aptas directa e integralmente a producir productos con potencial de exportaci6n conforme a las exigencias in- ternacionales. ElSistemaBolivianode Normalizacibn, Metrologia, Acreditaci6n y Certificacibn (SNMAC) Instituto Boliviano de Normalizacibn y Calidad -IBNORCA IBNORCA ha ganado mucho reconocimientoen el pais como punto de informaci6n de OTC y CODEX y como normalizador y certificadora (Sello IBNORCA). Sus funciones fundamentales consisten en la nor- malizacidn tCcnica y la certificaci6n de calidad asegurando la evaluaci6n de la conformidad de productos, procesos y servicios. Es miembro de ISO, IEC, COPANT, CAN, AMN y CODEX ALIMENTARIUS. Tiene seis objetivos: (i)proporcionar normas tCcnicas Bolivianas consensuadasque permitan obtener pro- ductos y servicios de calidad; (ii) certificar sistemas, productos y servicios de acuerdo a normas tCcnicas nacionales e internacionales; (iii) realizar procesos de inspecci6n confiables de acuerdo a Normas TCcni- cas, Reglamentos TCcnicos y/o especificaciones propias de clientes; (iv) capacitar a clientes internos y externos mejorando su competencia tCcnica en temas relacionados con normalizaci6n, calidad, seguridad industrial, medio ambiente e inocuidad alimentaria. (v) representar a1 pais en foros internacionales de normalizacibn. (vi) coordinar con 10s organismos empresariales, sectoriales y regionales para definir la politica nacional de la calidad ante instituciones gubernamentales. IBNORCA tiene presencia nacional y 120 BOLIVIA: POLICIESTOIMPROVEGROW ANDEMPLOYMENT se autofinancia por 10s servicios de evaluaci6n de la conformidad y de capacitaci6n que presta, no recibe ningtin aporte del Estado para la elaboraci6n de Normas TCcnicas. Conforme a1 C6digo de Buena Con- ducts de la OTC-OMC, IBNORCA, desde 1994, ha armonizado 205 normas internacionales y ha adapta- do 750 normas, es decir, se tomaron partes de normas internacionales o de otros paises de acuerdo a la necesidad del pais. Ante la carencia de referencia bibliogrifica intemacional, o en 10s casos en que se tra- ta de productos nativos del pais, la norma se desarrolla en base a 10s datos hist6ricos de 10s sectores invo- lucrados en el tema (200 normas bolivianas propias-NE3). EnIBNORCA existen 246 ComitCs TCcnicos para 18 sectores, de 10s cuales 40 son activos que funcionan tambiCn como ComitCs TCcnicos Virtuales. Existe uninter& creciente del sector empresarial por el trabajo de normalizaci6nen relaci6n a 10s cltimos diez aiios. El sector privado es el que mayor compromiso asume en la elaboraci6n y en el cumplimiento de las normas bolivianas. El mayor problema con 61que se tropieza en la elaboracibn, adaptaci6n y armo- nizaci6nde normas, es la discusi6n ticnica de 10s diferentes sectores representados(sector privado, sector estatal, universidades y consumidores), donde generalmente se amplian 10s plazos hasta llegar a un con- senso. Instituto Boliviano de Metr0logia-IBMETR0~~ Las competencias para la administraci6n de la metrologia en Bolivia, estin definidas en la Ley Nacional de Metrologia y en el marco legal del SNMAC. A travCs de esa normativa el INMde Bolivia es el IB- METRO, responsable de: (i) custodiar y mantener 10s patrones nacionales de medicidn en las magnitudes requeridas por la industria y su trazabilidad a1 Sistema Internacional de Unidades (SI) y diseminar la exactitudde esos patrones y el reconocimiento intemacional ante el BIPM; (ii) representar a1pais en foros y eventos de metrologia y participar en mediciones de comparacidn; (iii) apoyar el mejoramiento de las capacidades de medici6n de la industria, mediante servicios de calibracidn de la mis alta exactitud en el pais; (iv) apoyar las politicas gubernamentalespara el desarrollo cientifico y tecnol6gico;(v) defender a1 consumidor y el medio ambiente e incrementar la competitividad del sector productivo; (vi) normar las actividades metrol6gicas en 10s imbitos legal, industrial y cientifico, para establecer un sistema nacional de mediciones, acorde con 10s lineamientos internacionales. La sede del IBMETRO esti La Paz, donde se encuentran 10s laboratorios nacionales de referencia. Actualmente dispone de laboratoriosde masa, longi- tud, temperatura, presi6ny volumetria con las magnitudes mAsdemandadaspor la industria, elcomercio y la sociedaddel pais. Se estin construyendo laboratorios de flujo y de humedad. Existe cada aiio una mayor demanda por 10s servicios de calibracidn en el pais, a la luz de las exigencias de las normas internacionales de gestidn de la calidad, ambiental y, de seguridad y salud ocupacional, asi como por reglamentaciones especificas, como por ejemplo en la transferencia de custodia del sector de hidrocarburos, en menor grado por 10s requisitos de la acreditacidn tCcnica y por una naciente necesidad de desarrollar mediciones mis confiables, como una herramienta para tornar 10s productos nacionales mis competitivos, por costos de reproceso y pCrdidas menores. Los servicios de calibraci6n en el campo de la metrologia industrial del IBMETRO, que han crecido d s de 10veces entre 1998 y 2004, de 110a 1500. La pCrdida econ6mica debido a instrumentos nunca o mal calibrados es considerable. Por ejemplo las bisculas camioneras en Bolivia, que solamente en 10s cltimos aiios comenzaron a ser verificadas por IB- METRO. Cilculos similares se puederealizar tambiCn en el cas0 del gas natural. 43. Constituido como Servicio Metrol6gico Nacional (SERMETRO) en marzo de 1978. Fue establecida corn0 instituci6n publica desconcentrada con autonomia de gestibn, tkcnica, legal y administrativa dependiendo del Ministerio de Desarrollo Econ6rnico. ANNEX4.1: MEYORANDOaLIDAD YLOSESTANDARES DELO5 PRODUCT05DE EXPORTACION LA 121 Perdida econbmica considerable: errores en el us0 de bdsculas camioneras en Bolivia : Volumen de la comercializaci6n de soya (2003) 1.310.700.000 t Unerror promedio de comercializaci6n, por el us0 de las bhsculas camioneras, de 20 kg cada 40 t = 0,0005 655.350.000 kg o 655.350 t Per0 muchas bhsculas tienen una tolerancia de hasta 5 (!) 65.535.OOO t Fuente: IBMETRO Organism0 Boliviano de Acreditacidn-OBA ElOBA, es una instituci6npGblica desconcentraday tiene la competencia de dirigir las activida- des de acreditaci6n para el Sistema NMAC. Tiene 5 objetivos: (i) administrar 10s servicios de acreditaci6n en Bolivia para Laboratorios de Ensayo y Calibracibn, Organismos de Certificaci6n y Organismos de Ins- pecci6n y asegurar la competencia tCcnica de 10s organismos acreditados; (ii) Promover la aceptaci6n de la acreditacidn a nivel nacional como evidencia suficiente de competencia tCcnica en temas de evaluaci6n de la conformidad; (iii) alcanzar el reconocimiento intemacional de 10s certificados emitidos por orga- nismos de evaluaci6n de la conformidad acreditados por el OBA; (iv) representar a1pais en foros y even- tos de acreditaci6n; (v) coordinar el diseiio y gestionar servicios de reconocimiento de competencia tCcni- ca para instituciones del Estado Boliviano a fin de proteger 10s intereses del consumidor y el bienestar de la poblaci6n. Hasta la fecha se han acreditado a ocho organismos de evaluaci6n de la conformidad en Bo- livia, de los cuales seis mantienen vigente su acreditacibn: cuatro laboratorios de ensayo, unorganismo de inspecci6n y unorganismo de certificaci6n de sistemas de gestidn de la calidad. Laboratorios de Ensayo. L a situaci6n de 10s laboratorios de ensayo todavia es poco satisfactoria y representa uno de 10s cuellos de botella mis importantes en la infraestructura de calidad. AGn no existen laboratorios de referencia que puedan otorgar trazabilidad en magnitudes. A pesar de esta situacibn, 10s laboratorios de ensayo en Bolivia tienden a orientar sus operaciones hacia la implantaci6n de 10s requisi- tos de la norma ISO/IEC 17025. Certificaci6n de sistemas de la calidad. L a certificaci6n en Bolivia ha tenido un importante desa- rrollo durante 10s Gltimos aiios, principalmente debido a la accidn de varios organismos de certificaci6n extranjeros que han ampliado sus operaciones a1 territorio boliviano. Se observa entre las empresas una tendencia hacia la certificaci6n de sistemas integrados (calidad, medioambiente, salud y seguridad ocupa- cional). Otros tipos de certificaciones, por ejemplo en la producci6n orginica, se circunscriben a sectores muy especificos y en estos casos 10s clientes optan por certificadores extemos que cuenten con una acre- ditaci6n vilida en 10s mercados de destino para su producci6n. Se estima que en la actualidad: empresas certificadas I S 0 9 000, alrededor de 100 (21 certificadas por IBNORCA), con I S 0 14000 5 6 6 (1certifi- cada por IBNORCA), con OHSAS 18 000 5 6 6 (1 certificada por IBNORCA), con sistema integrado (IS0 9 000-14 000-18 000) 5 6 6 (1certificada por IBNORCA). Empresas en proceso de implantaci6n de algGn sistema de gesti6n entre 60 a 70 a nivel nacional. Unpaso importante en la implementacibnde sis- temas de gesti6n de calidad en la industria boliviana fue la creaci6n del "Sello IBNORCA". Es un sello que comprueba la conformidad de productos certificados con sus respectivas normas. Fue otorgado a 116 productos elaborados en 25 empresas. De 10s organismos de certificaci6n de sistemas de gestidn que ope- ran en Bolivia, s610 IBNORCA est6 acreditado por el OBA para certificar sistemas de gesti6n de la cali- dad. Otros organismos de certificaci6n estin acreditados en sus paises de origen (ICONTEC de Colombia, IRAM de Argentina, T W Rheinland de Alemania, Bureau Veritas Q I de Francia, Lloyds Registers de Gran Bretaiia, BSI de Gran Bretaiia, Fundaci6n Vanzolini de Brasil, etc.). N o existen disposiciones que regulen de forma alguna el funcionamiento ni la forma en la que se publicita el servicio de certificaci6n por organismos que operan en Bolivia. 122 BOLIVIA:POLICIES TOIMPROVEGROW ANDEMPLOYMENT El Sewicio Sanitario y Fitosanitario en Bolivia (SENASAG) El SENASAG es una instituci6n relativamente joven. Depende del Ministerio de Asuntos Cam- pesinos y Agropecuarios. La sede se encuentra en Trinidad (Departamento Beni) con presencia nacional. SENASAGtrabaja en 3 ireas: (i) servicio sanitario animal; (ii) sanitario vegetal y (iii) de servicio servicio inocuidad de alimentos. El SENASAG muestra debilidades institucionales que pueden ser superadas len- tamente. Por unlado, las direcciones departamentales tenian sus propios registros, mktodos de inspecci6n y certificaci6n. A1 otro lado, el SENASAG esti casi completamente financiado por proyectos internacio- nales (BID, OMS, FAO, etc.). Esto pone en duda su sostenibilidad. 2 Potencial Exportador y Conformidad con 10s Estcindares Intemacionales En 10s filtimos veinte aiios la estructura de las exportaciones ha cambiado dramhticamente. El estaiio -principal product0 de exportaci6n a principios de 10s 1980s-ha sido desplazadopor hidrocarbu- ros y productos elaborados y semi-elaborados. Entre 10s productos elaborados dominan productos de la agroindustria (soya y derivados, azdcar entre otros), de la industria de madera, curtiembre, textiles, joye- ria y metales. Otros productos de importancia creciente son cafk, cacao, castaiias, ganado vacuno y algo- d6n. Los esfuerzos en fomentar exportaciones alternativas de nicho impulsaron el desarrollo de nuevos productos como lana de alpaca, quinua y biocafk. Per0 a pesar de este progreso, la franja de productos bolivianos competitivos internacionalmente es a h reducida. Hay un consenso, en diferentes estudios recientes, que hidrocarburos, madera y productos de ma- dera, productos bio-orginicos (quinua, cafk, cacao, frutas, etc.), minerales, joyeria y algunos productos textiles, dispondrin de un potencial exportador. Enmuchos casos se trata de nichos de mercados que exi- gen una aka calidad conforme a las exigencias internacionales - la mayoria de estos productos son agro- industriales y por tanto estdn sujetos a las definiciones del Acuerdo OTC como del Acuerdo MSF de la OMC. Estos productos, ademis, estin consideradosdentro de las 19 cadenas productivasde mayor poten- cia1propuestaspor la Unidadde Productividady Competitividad (UPC)44 sobre las que se basanlas dife- rentes estrategiasde desarrollo presentadaspor el Gobierno. Una de las restricciones para el desarrollo de estas exportaciones no tradicionales se encuentra en problemas asociados con bajos volfimenes de producci6n, 10s tiempos de entrega, 10s altos fletes, 10s en- vases y embalajes internacionalmente normalizados y la calidad insuficiente de 10s productos, tal como se muestra en el Cuadro 1. Estas deficiencias han impedido cumplir las exigencias de calidad permanente y sostenible, volumen y tiempo impidieron del mercado europeo limitando, asi, el potencial de muchos ru- bros, siendo especialmente afectadas las exportaciones de nuevos productos alternativos y de nicho como ser quinua, vino y muebles. Potencialidadesy desafiosfuturos: (i) futuro desempeiio de las exportaciones de gas natural y El sus eventuales sub-productos depende de la Ley de Hidrocarburos y su reglamentacibn, (ii) principal El limitaci6n de las exportaciones de madera y productos de madera es la diversificaci6n de 10s productos generando mayor valor agregado, el cumplimiento de nonnas internacionales; (iii) L a carencia de un cer- tificacidn confiable de productos bio-orginicos impide que Bolivia pueda aprovechar la expansi6n de este mercado a nivel mundial; (iv) El grado de pureza y peso son decisivos para la las exportaciones de mine- rales; y (v) Junto con el diseiio, mejorar 10s el grado de pureza y peso, son indispensables para las expor- taciones enjoyeria. ~ 44. Estas cadenas productivas son: quinua, oleaginosas, uva-uinos y singanies, camklidos, bovino de carne, bobino de leche, cueros y sus manufacturas, madera y sus manufacturas, trigo, avicola-maiz, textiles y algodbn, casta- iia, banano, palmito, turismo (Sucre-Potosi-Uyuni), frutas de valle, frutas exoticas, Ajo, y haba. ANNEX4.1: MUORANDOLA QLIDAD YLO5ESTANDARESLO5PRODUCT05DE &YPORTACION DE 123 Cuac Product0 CalidadKonform idad Observaciones Manufacturas de madera Cuero y productos de cuero Textiles Hidrocarburos Came de bovino Luna de Camdido Carne de came'- lidos Vino Aves Castarias Quinua Biocafe' duos de pesticidas, fungicidas etc.) Biocacao 0 Maneio controlado I0 Contaminaciones 0 Certificacih corno producto orghnico (sin resi- 0 Control de plagas duos de pesticidas, fungicidas etc.) Frutas exdticas 0 Manejo controlado 0 Fuerte competencia de otros paises como Chile 0 Certificacih como producto orghnico (sin resi- y B r a d duos de pesticidas, fungicidas etc.) 3 Fortalezasy las Debilidades mds importantes Se ha desarrollado una infraestructura te'cnicabbsica de la calidad, pero lefalta apoyo estatal y algunos sectores de la economiay de la sociedad todavia son au'n ausentes. 124 BOLIVIA: POLICIESTOIMPROVE GROW ANDEMPLOYMENT Resumiendo el desarrollo de la infraestructura bisica de la calidad en Bolivia y su impacto poten- cia1en las exportaciones del pais, se puede constatar que hay progresosnotables. Hay un consenso bastante amplio que en 10s prdximos aiios, que hidrocarburos, madera y productos de madera, productos bio-orginicos (quinua, cafC, cacao, frutas, etc.), minerales, joyeria y algunos productos textiles, dispondrin de un potencial exportador. En muchos casos se trata de nichos de mercados que exigen una alta calidad conforme a las exigencias internacionales. Enestos rubros hub0 una serie de esfuerzos para mejorar la competitividad de 10s productos, muchas veces apoyado por fi- nanciamientos internacionales; Se logr6 establecer una infraestructura bisica de la calidad conforme a las experiencias y reglas inter- nacionales; Se logr6 capacitar a1personal para que pueda cumplir mejor sus tareas conforme a las exigencias in- ternacionales y tambiCnmantener este personal; Se logro cierta estabilidad institucional a pesarde las debilidades descritas mis abajo; Existen laboratorios de calibraci6n en el IBMETRO, con capacidad de cubrir la demanda de 10s clien- tes; Enunniimero reducidode empresas, el concepto de lacalidadforma parte integralde sugesti6n. MAS de 100empresasfueron certificadas seg6nI S 0 9.000 e I S 0 14.000; El"Sello IBNORCA" se hadesarrollado como una indicaci6nreconocidade calidad enBolivia; El SNMAC contribuyda concientizar y difundir mejor que antes las reglas y mCtodosinternacionales de verificar y mantener la calidad de productos y procesos. Por otro lado, el desarrollo fue bastantelento y muestra debilidades serias: Elniimero y volumen de 10s productos no tradicionales de exportaci6n sigue siendo insuficiente. Las razones son en muchos casos 10s bajos voliimenes de producci6n, 10s tiempos de entrega, 10s altos fle- tes y la calidad insuficiente de 10s productos. El proceso de ajuste a la conformidad de 10s productos exigida en 10s mercados intemacionales todavia est5 en el inicio. Muchas veces 10s productores, espe- cialmente de las PYMEs, no conocen las normas y reglamentos y no saben que pueden recibir la in- formacidn en el pais. Eso incluye procedimientos de exportaci6n, certificados y trazabilidad exigidos, asi como exigencias en envases y embalajes. La crisis econ6mica de Bolivia y el gran porcentaje de empresasinformales contribuyenpara que el mercado interno no exija calidad. No se logr6 sensibilizar de una manera m i s amplia a empresarios, funcionarios piiblicos, politicos y partes interesadas sobre el problem de la calidad. A pesar de 10s esfuerzos del IBMETRO y el IB- NORCA ("Sello IBNORCA") no fue posible diseminar satisfactoriamente el concepto de la calidad y su impacto en la econom'a y la vida de 10s ciudadanos bolivianos. La consecuencia es que productos bolivianos muchas veces no estin conformes a las exigencias internacionales. Hay sectores muy importantes para el desarrollo econ6mico y social que quedaron fuera del SNMAC o no participanactivamente: Hidrocarburos y Energia, Servicios Bisicos, Forestal, Salud, Agricultura y Educaci6n. Eso tiene repercusiones en la competitividad de 10s respectivos productos, pkrdidas en la exportaci6n de productos y servicios, una protecci6n casi ausente del consumidor y muchos otros graves problemas econ6micos y sociales. EL SNMAC debe su desarrollo y fortalecimiento en 10s iiltimos afios a la cooperaci6n intemacional. El sector estatal casi no ha apoyado a1SNMAC, lo que se hace evidente en la falta de unpresupuesto para las instituciones del SNMAC. Cuando finalice la cooperaci6n intemacional la sostenibilidad del IBMETRO y especialmente del OBA no est6 asegurada. El IBNORCA no cumple parcialmente sus obligaciones internacionales dentro del sistema intemacional de normalizaci6n y como punto focal del OTC. Hace falta una coordinaci6n de las entidades estatales reguladoras de 10s diferentes sectores con el SNMAC para la elaboraci6n de reglamentos tCcnicos. A veces estas entidades producen sus regla- ANNEX4.1: I%JORANDO LA GLIDAD YLO5ESTANDARES DELOSPRODUCT05DE.&PORTACION 125 mentos sin el conocimiento de nonnas y reglamentos existentes y del trabajo de las instituciones del SNMAC. 0 Dentro del Ministerio de DesarrolloEcon6mico falta una coordinacih mh estrechacon la Unidad de Productividady Competitividad, que es responsablepara el desarrollo de sus lineamientos. 0 La eficiencia de la administracibn del Acuerdo OTC/OMC y del CODEX esti perjudicada por la falta de coordinaci6n entre el Ministerio de Relaciones Exteriores y Culto y el IBNORCA, y el cambio fre- cuente del personal de ese Ministerio. 0 L a falta de coordinacih entre el Ministerio de Relaciones Exteriores y Culto y el SNMAC, en la formulacih y la negociaci6n de programas de cooperacih internacional, tambiCn est5 frenando un desarrollo m6s ripido y eficiente de la infraestructura de la calidad en el pais. 0 A pesar de algunos primeros contactos la falta de coordinaci6nentre el SNMAC y el SENASAG im- pide un desarrollo mbs eficiente del sistema de la calidad en favor de la proteccih de la salud en el pais, como de la competitividad de productos alimenticios bolivianos en 10s mercados internaciona- les. 0 L a vinculacih con organismos internacionales a6n es deficiente. Tiene que ver con el grado de desa- rrollo del Sistema, per0tambiCn con la falta de financiamiento estatal. 0 Hasta el momento, 10s institutos del SNMAC son todavia demasiado reactivos a las demandas de 10s clientes y no buscan suficientemente el contact0 direct0 con ellos. 4 Recomendacionespara mejorar el Ambiente de la Calidad en Bolivia Es indispensablefortalecer y coordinar 10s esfuerzospara lograr un ambientefavorable a la calidad si se quiere mejorar la competitividad de 10sproductos y serviciosbolivianos Confrontando la situaci6n actual de la infraestructura de la calidad con las exigencias que surgen del comercio intemacional, resultan las siguientes recomendaciones para el desarrollo del ambiente de la calidad en Bolivia: Enuna acci6n concertada entre el Gobiernoy las Cimaras empresariales, se debe fortalecer de mane- ra decisiva las actividades necesarias para mejorar el ambiente de la calidad en Bolivia. Eso no signi- fica solamente desarrollar una campaiia de difusih en medios de comunicacih, orientada a1 sector pGblico, privado y educativo, que disemine el concept0 de la calidad, apoye el fortalecimiento de una cultura de la calidad en el pais, y la mejora de la calidad de vida; sin0 tambiCn una profundizacib de 10s esfuerzos para fomentar la certificacih de sistemas de la calidad y productos para dar un salto importante en la mejora de la competitividad de productos bolivianos. Una reactivacih del CONA- CAL podria contribuir a desarrollar y establecer politicas nacionales de calidad. Como la presi6n de mejorar la calidad viene particularmente del mercado externo, esta politica precisa una estrecha coor- dinaci6n con 10s esfuerzos de desarrollar nuevos productos para nuevos mercados. Sensibilizar, interesar y buscar mecanismos de coordinacidn con 10s sectores que estin fuera del SNMAC o no participan activamente: Hidrocarburos y Energia, Servicios BBsicos, Forestal, Salud, Agricultura y Educaci6n. Crear unmecanismo que coordine la reglamentacihtCcnica en todos 10s niveles, de acuerdo a lo es- tablecido por el Acuerdo OTC/OMC. Eso podria ser una Unidad de Reglamentach TCcnica en el Ministerio de Desarrollo Econ6mic0, per0 tambiCn otras soluciones son posibles. Mejorar la coordinacih entre el MRREE y el IBNORCA en la administracih del Acuerdo OTC/OMC y mejorar la coordinacih entre el MRREEy el SNMAC en la formulaci6n y negociaci6n de programas de cooperaci6n internacional. TambiCn es aconsejable una coordinacih y cooperacibn mhs estrechaentre SNMAC y SENASAG. Asegurar la institucionalidad de 10s organismos del SNMAC y garantizar la estabilidad del personal tCcnico, especialmente en IBMETROy OBA. Eneste context0 es indispensable asegurar 10s recursos p6blicos suficientes para el funcionamiento de 10s institutos pfiblicos, conforme a las necesidades del pais. 226 BOLIVIA: POLICIES TOIMPROVEGROWTH EMPLOYMENT AND 0 Dotaci6n de una nueva infraestructura fisica para 10s organismos del SNMAC, acorde a las necesida- des del incremento de sus servicios. 0 Asegurar financiamiento para las membresias internacionales, acuerdos de reconocimiento interna- cional, trazabilidad de 10s patronesnacionales de medicibn, y representacibn de posiciones nacionales en niveles regionales e internacionales en temas relacionados con la calidad, metrologia y acredita- ci6n. Eso se refiere especialmentea asistir a las Asambleas Generales y reuniones de ComitCs TCcni- cos de interis nacional en: OIML, BIPM, SIM, ISO, IEC, ITU, COPANT, CODEX ALIMENTA- RIUS, IAAC, L A C e IAF. 0 El SNMAC debe convertirse efectivamente en uno de 10s instrumentos operativos del SBPC para asegurar la implementacidn de las cadenas productivas, trabajando con cada eslab6n. 0 Elaborar una planificacidn estratCgica para el SNMAC e implementarla con la intenci6n de trabajar proactivamente con 10s clientes existentesy potenciales. Anexo: Proyectos intemacionales defomento de calidad Enlo siguiente se encuentrauna compilaci6n de algunos proyectos importantes que han apoyado o estin apoyando el desarrollo de la infraestructura de la calidaden Bolivia: "Programa de Fortalecimiento de la Competitividad de las PYMES" con financiamiento BIDROMIN (Banco Interamericano de DesarrolloRondo Multilateral de Inversiones), el mismo que tie- ne por objeto formar recursos humanos capaces de implantar sistemas de gestidnde la calidad y de anili- sis de peligros y de puntos criticos de control (HACCP, por sus siglas en inglCs) a nivel nacional. Se cuenta hasta el momento con mis de 70 consultores independientes capacitados y en la gestidn 2004 se iniciaron las implantaciones de 10s sistemas I S 0 9000 y HACCP (actualmente 15 PYMEs) en coordina- ci6n con la Cimara Nacional de Industrias (CNI). Se espera como resultado final contar con 75 sistemas implantados (50 I S 0 9000 y 25 HACCP). "Programa de Cooperaci6n y Asistencia TCcnica UE-CAN en Materia de Calidad" financiado por la Unidn Europea, y viene desarrollando las actividades de 10s componentes de Normalizacidn; Regla- mentacidn y Notificaci6n; y Programa Calidad. Se espera que para fines del 2005 se concluyan las activi- dades de normalizaci6n, con revisi6n de documentos y concluyan la implantaci6n de sistemas I S 0 9000 en 5 empresas. Proyecto "Acceso a 10s Mercados y a la Integraci6n a traves de la Normalizacidn TCcnica CAN- FOMIN" (NOREXPORT), financiado por la Cooperaci6n TCcnica del Fondo Multilateral de Inversiones -FOMINdelBIDy quetiene como fin propulsar lacompetitividaddelasPYMES participantes enel proceso de normalizacih de Bolivia, Colombia, Venezuela, Ecuador y Peh, para facilitar la exportaci6n de bienes y servicios y el proceso de integracidn en uncontext0 regional, hemisfCrico y global. Se espera en 10s pr6ximos 4 aiios contar con 250 normas (50 NB y 25 normas andinas), 175 guias de evaluacidn de la conformidad (5 Guias Nacionales) y la certificacidn de productos para 10PYMEsnacionales. "Programa de Cooperaci6n Econdmica UE - Bolivia" consiste en mejorar el flujo de comercio exterior y las inversiones entre las empresas bolivianas y europeas como mecanismos sostenibles que fa- vorezcan el desarrollo econdmico del pais, el incremento del empleo, el crecimiento sostenido de la base empresarial boliviana, y contribuya la lucha contra la pobreza. Incluye un componente de calidad, en el cual el IBNORCA juega un papel importante. Enla presente gesti6n se elabord el plan anual de activida- des, las cuales se iniciarin a partir del mes de marzo de 2005. Proyecto bilateral Alemania - SNMAC. El proyecto de cooperaci6n tCcnica del Gobierno de Alemania a1 SNMAC se inici6 en el 1998 y tiene entre sus objetivos implementar el SNMAC a travCs de objetivos especificos para cada uno de 10s institutos que componen el SNMAC. El organism0 ejecutor de esa cooperaci6n tCcnica es el Physikalisch-Technische Bundesanstalt (PTB), uno de 10s mhs importantes institutos de metrologia del mundo. La cooperaci6n tCcnica que recibe el SNMAC se concentra en tres ireas: (i) Entrenamiento y capacitaci6n de 10s tCcnicos del SNMAC en importantes institutos de Amirica ANNEX4.1: MUORANDO LA QLIDAD YLOSE~ANDARESLOSPRODUCTOSDE&VPORTACION DE 127 y Europa; (ii) Asesoria tCcnica por expertos del PTB; (iii) Donacidn de 10s patrones nacionales de medi- ci6n y otros sistemas de medici6n. Proyecto WTO/Centro de Comercio Intemacional - Bolivia BOL/61/80, financiado por una do- naci6n del Ministerio de Econom'a de la Suiza SERCO en que las contrapartes son CEPROBOL y CA- DEX-IBCE. Los objetivos de este proyecto consisten en el desarrollo de productos y mercados, la crea- ci6n y/o reforzamiento de las capacidades nacional en gesti6n de comercio intemacional y el estableci- miento o fortalecimiento de 10s mecanismos para promoci6n y desarrollo del comercio exterior. El pro- yecto inici6 en 2001y probablemente va a ser prolongado. Uno de sus m6dulos se dirige directamente al mejoramiento de la calidadde 10s productos y la acreditaci6n intemacional. Enel marco del Programa de Cooperaci6n y Asistencia TCcnicade la Uni6n Europea en materia de Calidad que se viene ejecutando desde hace dos aiios, se desarroll6 el Sistema Alerta Exportador, lla- mado SlRT Sistema de Informaci6n de Reglamentacibn y Notificaci6nTCcnica de la ComunidadAndina, el mismo que se encuentra en period0 de prueba. El SIRT agrupa 10s cinco puntos focales de 10s paises andinos y permite la notificaci6nde proyectos de reglamento tCcnico y de reglamentos tCcnicos.