Oct 12, 2014 | 13:03 GMT

5 mins read

Bolivia's Thriving Economy Risks Falling Behind


Barring an unexpected twist, incumbent Bolivian President Evo Morales will be re-elected Oct. 12 for a third term. Since Morales came to power in 2006, Bolivia's economic growth and foreign reserves are up while poverty and government debt are down. Geographic and demographic issues that had long threatened to divide the country have been put aside, at least temporarily.

But Chinese commodity demand will not be high much longer, and Bolivia is having economic and political troubles with its neighbors. Morales will need to reconsider certain policies and emphasize infrastructure development in his next term to keep Bolivia from becoming more and more isolated.

Because of its geography, Bolivia has been prone to division since the Spanish conquests. The country is landlocked, having lost its coastline to Chile in 1879 as a result of the War of the Pacific. High altitude, extreme heat and aridity define the western parts of the country and hamper agricultural development. In contrast, the southeastern regions are tropical lowlands that have some of the most fertile soils in the world. As a result, more than 50 percent of the country's gross domestic product is concentrated in the southeast, while there is a high concentration of poverty in the west and north. Demographics too, have played a role in Bolivia's history since colonial times, dividing the country between the indigenous Quechua and Aymara population concentrated in the west and farmers of European origin living in the east.

The Rise of Morales

Morales, a coca farmer representing the Movement Toward Socialism party, won the country's presidential election in 2005. Wealth redistribution through heavy state intervention in the economy was a dominant feature in his agenda. Having lost power for the first time since independence, and fearing that their lands would be confiscated and their assets expropriated, wealthy landowners in the east threatened secession. The ensuing unrest brought the country to the brink of civil war in 2007-2008.

Morales did nationalize several foreign-owned mines, energy fields and electricity companies. He also passed constitutional reform in 2009 that gave the state ownership of all natural resources and required that the state hold at least 51 percent of the shares of any mining endeavor. But his economic policies were very successful. Since his inauguration, Bolivia's GDP has grown from $9.4 billion to $30.2 billion, poverty has fallen by 30 percent, government debt has dropped from 80 percent to 33 percent of GDP and foreign reserves have climbed from $2.6 billion to $17.5 billion.

The country's growing economic wealth has effectively defanged the secessionist movement. With the government's position bolstered by oil and natural gas revenue, the government's political opponents have been relegated to a fractured coalition of small opposition parties. The latest polls show Morales ahead of his next closest opponent by more than 45 percentage points. The implication is clear: Even the most reluctant lowlanders are swinging in favor of the incumbent.

Risks To Growth

However, Bolivia will not be able to keep up this level of economic success over the long term, primarily because Morales' development model is aimed at redistributing wealth. His state-driven economy is heavily dependent on revenues from high commodity prices, a product of the high demand from China and the effects of commodity prices on Bolivia's neighbors. The conditions are optimal right now, but they will not last forever, and the country's deficient transportation infrastructure will hamper its competiveness if commodity prices start to fall.

Part of Bolivia's problems stem from its relationship with its neighbors. For a long time, Bolivia's neighbors have helped transport its natural gas, the one commodity it has relatively little difficulty transporting out of the country, to consumers. Now, however, Venezuela is weakening, Chile is increasingly hostile to Bolivia and Argentina is unstable. Bolivian natural gas is still a strategic need for Brazil (which is in the midst of an energy crisis), Argentina and Chile — all countries that operate on an energy deficit — but future drops in natural gas prices would be particularly damaging to Bolivia's non-diversified economy.

To make matters worse, Chinese energy demand is decelerating. As one of the driving forces of Bolivia's recent economic growth, any negative trend in Chinese demand will reduce Bolivia's positive trade balance and thus affect Morales' state-driven wealth redistribution model.

Another problem for Bolivia when it comes to exploiting its natural resources is its lack of sea access and poor transport infrastructure. Lack of sea access will likely remain a long-term issue because of Bolivia's loss of coastline to Chile. It will also maintain political hostility between the two countries. Limited paved roads and old railway systems hinder economic development as well, but can be improved with investment in new infrastructure projects. Without such investment, Bolivia's competitiveness will decline, harming future economic growth.

Potential Solutions

Bolivia does however have some potential solutions to its impending economic decline, including one buried in its highlands: deposits of silver, zinc, gold and especially lithium. Bolivia has 23 percent of the globe's total lithium reserves. The country's lithium is not as pure as that found in Argentina or Chile, countries that have been producing their lithium reserves for years. Still, many foreign companies have shown interest in investing.

The government's need to control the business of natural resource extraction so that it can fund social programs has complicated matters, however. Already, Bolivia has rejected several offers from Chinese, Korean and Japanese firms interested in investing in lithium mining. Until Morales changes his government's stance on foreign investment, this money will continue to be funneled toward other lithium producers such as Chile and Peru. Moreover, even if Bolivia were to get investment to develop its lithium reserves, more investment in transport infrastructure would still be needed just to get the resources out of the country.

Bolivia also has significant and largely unexploited natural gas reserves. What natural gas it does produce has become indispensible for nearby energy consumers. However, Bolivia has not tapped into new markets. Chile, for example, is in need of energy, but a clause in Bolivia's Constitution resulting from the War of the Pacific bans direct energy exports to the country, forcing natural gas to be piped into Argentina first. Such policies only limit competitiveness and the use of resources that could otherwise be exploited.

Morales' economic management strategy is adequate for now, but it will become increasingly cumbersome as changes take place in the region and in China's consumption patterns. The country will have to change its stance on foreign investment as well as develop its transportation infrastructure to continue to grow. But an easy victory in the presidential election for Morales will grant him total discretion, making him unlikely to amend existing policies.

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