Economy

Bolivia is one of the poorest countries in South America after the Guyanas. This has been attributed to high levels of corruption and the imperialist role of foreign powers in the country since the colonisation. The country is rich in natural resources, and has been called a 'donkey sitting on a gold mine' because of this. Apart from famous mines, which were known by the Incas and later exploited by the Spaniards, Bolivia owns the second largest natural gas field of South America after Venezuela. Furthermore, El Mutún in the Santa Cruz department represents 70% of the world's iron and magnesium.

Economic Background

Bolivia's current lacklustre economic situation can be linked to several factors from the past two decades. The first major blow to the Bolivian economy came with a dramatic fall in silver prices during the early 1980s which impacted one of Bolivia's main sources of income and one of its major mining industries. The second major economic blow came from the end of the Cold War in the late 1980s and early 1990s as economic aid was withdrawn by western countries who had previously tried to keep a market liberal regime in power through financial support. The third economic blow came from the US sponsored eradication of the Bolivian coca crop which was used in 80% of the worlds' cocaine production at its peak. Along with the reduction in the coca crop came a huge loss of income to the Bolivian economy, particularly the peasant classes.

Since 1985, the Government of Bolivia has implemented a far-reaching program of macroeconomic stabilization and structural reform aimed at maintaining price stability, creating conditions for sustained growth and alleviating scarcity. A major reform of the customs service in recent years has significantly improved transparency in this area. The most important structural changes in the Bolivian economy have involved the capitalization of numerous public-sector enterprises. (Capitalization in the Bolivian context is a form of privatisation where investors acquire a 50% share and management control of public enterprises by agreeing to invest directly into the enterprise over several years rather than paying cash to the government).

Parallel legislative reforms have locked into place market liberal policies, especially in the hydrocarbon and telecommunication sectors, that have encouraged private investment. Foreign investors are accorded national treatment, and foreign ownership of companies enjoys virtually no restrictions in Bolivia. While the capitalization program was successful in vastly boosting foreign direct investment (FDI) in Bolivia ($1.7 billion in stock during 1996-2002), FDI flows have subsided in recent years as investors complete their capitalization contract obligations.

In 1996, three units of the Bolivian state oil corporation (YPFB) involved in hydrocarbon exploration, production and transportation were capitalised, facilitating the construction of a gas pipeline to Brazil. The government has a long-term sales agreement to sell natural gas to Brazil through 2019. The Brazil pipeline carried about 12 million cubic metres (424 million cu ft) per day in 2002. Bolivia has the second-largest natural gas reserves in South America and its current domestic use and exports to Brazil account for just a small portion of its potential production. Widespread opposition to exporting gas through Chile touched off protests that led to the resignation of President Sánchez de Lozada in October 2003.

In April 2000, Bechtel signed a contract with Hugo Banzer, the former president of Bolivia, to privatise the water supply in Bolivia's 3rd-largest city, Cochabamba. The contract was officially awarded to a Bechtel subsidiary named Aguas del Tunari, which had been formed specifically for that purpose. Shortly thereafter, the company tripled the water rates in that city, an action which resulted in protests and rioting among those who could no longer afford clean water. Martial law was declared, and Bolivian police killed at least six people and injured over 170 protesters. Amidst Bolivia's nationwide economic collapse and growing national unrest over the state of the economy, the Bolivian government was forced to withdraw the water contract. In 2001, Bechtel filed suit the Bolivian government for $25 million in lost profits. The continuing legal battle has attracted attention from anti-neoliberal globalisation and anti-capitalist groups.

Bolivian exports were $1.3 billion in 2002, from a low of $652 million in 1991. Imports were $1.7 billion in 2002. Bolivian tariffs are a uniformly low 10%, with capital equipment charged only 5%. Bolivia's trade deficit was $460 million in 2002.

Bolivia's trade with neighbouring countries is growing, in part because of several regional preferential trade agreements it has negotiated. Bolivia is a member of the Andean Community and enjoys nominally free trade with other member countries (Peru, Ecuador, Colombia and Venezuela.) Bolivia began to implement an association agreement with Mercosur (Southern Cone Common Market) in March 1997. The agreement provides for the gradual creation of a free trade area covering at least 80% of the trade between the parties over a 10-year period, though economic crises in the region have derailed progress at integration. The US Andean Trade Preference and Drug Enforcement Act (ATPDEA) allows numerous Bolivian products to enter the United States free of duty on a unilateral basis, including alpaca and llama products and, subject to a quota, cotton textiles.

Sectors

Agriculture, Forestry and Fishing

Agriculture, forestry, and fishing accounted for 14 percent of Bolivia's gross domestic product (GDP) in 2003, down from 28 percent in 1986. Combined, these activities employ nearly 44 percent of Bolivia's workers. Most agricultural workers are engaged in subsistence farming - the dominant economic activity of the highlands region. Agricultural production in Bolivia is complicated by both the country's topography and climate. High elevations make farming difficult, as do the El Niño weather patterns and seasonal flooding. Bolivia's agricultural GDP continues to rise but has attained only a rather modest average growth rate of 2.8 percent annually since 1991.

Bolivia's most lucrative agricultural product continues to be coca, of which Bolivia is currently the world's third largest cultivator. The Bolivian government, in response to international pressure, has worked to restrict coca cultivation for the use of producing cocaine. However, eradication efforts have been hampered by the lack of a suitable replacement crop for rural communities that have cultivated coca for generations.

Since 2001, Bolivia's leading legal agricultural export has been soybeans. Additionally, cotton, coffee and sugarcane have been viable exports for Bolivia. For domestic consumption, corn, wheat and potatoes are the crops of choice of Bolivian farmers.

Despite its vast forests, Bolivia has only a minor timber industry. In 2003 timber accounted for only 3.5 percent of export earnings. The Forestry Law of 1996 imposed a tax on sawn timber and consequently cut Bolivian timber exports significantly. The tax was used to establish the Forestry Stewardship Council, which has been only minimally successful in forest restoration efforts and eliminating illegal logging. With increased efficiency, Bolivia could likely expand the profitability of its forest resources, while still protecting them from overexploitation. Bolivia has a small fishing industry that taps the country's freshwater lakes and streams. The annual catch averages about 6,000 tons.

Mining

Mining continues to be vital to Bolivia's economy. The collapse of the world tin market in the 1980s led to a restructuring of the industry. The state dramatically reduced its control and presently operates only a small portion of mining activities. Small-scale operations, often with low productivity, employ many former state miners. Natural gas has supplanted tin and silver as the country's most valuable natural commodity. A discovery in 1997 confirmed a tenfold gain in Bolivia's known natural gas reserves. Finding markets to utilise this resource, both domestically and internationally, has been slowed by a lack of infrastructure and conflicts over the state's role in controlling natural resources. Although the world tin market has re-emerged, Bolivia now faces stiff competition from Southeast Asian countries producing lower-cost alluvial tin.

Gold and silver production has increased dramatically over the past decade. Annually, as of 2002 Bolivia extracted and exported more than 11,000 kilograms of gold and 461 tons of silver. Additionally, Bolivia has increased zinc production, extracting more than 100,000 tons each year. Other metals excavated include antimony, iron and tungsten.

Energy

Bolivia is energy self-sufficient. The country's energy needs are relatively small but growing consistently. Bolivia uses oil for the majority of its power needs, followed by natural gas. The country has large reserves of both. Bolivia's energy sector changed significantly when the government allowed privatisation in the mid-1990s. International companies quickly invested in Bolivian energy sources, particularly in natural gas, and made Bolivia into a player in the world energy market.

The exportation of Bolivian energy resources, while potentially lucrative economically, has been politically hazardous. President Gonzalo Sánchez de Lozada ultimately resigned over his plan to export natural gas to the United States and Mexico in 2003. Subsequent politicians have been hesitant to act decisively even though Bolivia's economy could readily use an export boost.

On June 6, 2005, President Carlos Mesa offered his resignation to the Bolivian Congress after months of demonstrations by Bolivia's Indian population calling for renationalizing the natural gas and oil sectors. Mesa had increased taxation on foreign companies while still encouraging their investment in Bolivian energy development. Bolivia has estimated oil reserves of 441 million barrels, the fifth largest in South America. The country's natural gas reserves total 27.6 trillion cubic feet according to Bolivian government figures, ranking Bolivia behind only Venezuela in terms of proven natural gas reserves in South America. Additionally, Bolivia produces more electricity with its nine power companies than it can consume. In 2002 Bolivia generated 4.1 billion kilowatt-hours of electricity but consumed only 3.8 billion kilowatt-hours.

Industry and Manufacturing

Manufacturing has accounted for approximately 18 percent of Bolivia's gross domestic product since 1995. Most industry is small-scale, aimed at regional markets rather than national operations. Inadequate credit options and competition from the black market have kept Bolivia's manufacturing sector from developing fully. Leading manufactured goods in Bolivia include textiles, clothing, non-durable consumer goods, processed soya, refined metals and refined petroleum.

Services

The services industry in Bolivia remains undeveloped. Inhabiting one of the poorest countries in South America, Bolivians have weak purchasing power. The retail sector suffers from weak demand and competition with a large black market of contraband goods. US companies such as McDonald's and Domino's have pulled out of Bolivia in recent years.

Banking and Finance

Banking in Bolivia has long suffered from corruption and weak regulation. However, a series of reforms initiated by the 1993 Banking Law and subsequent acts are gradually improving Bolivia's banking sector. Bolivia has a central bank and nine private banks. Consolidation occurred following reforms, lowering the number of private banks in Bolivia from 14 in 1995 to nine in 2003. Foreign participation and investment in Bolivian banks are allowed. About 90 percent of Bolivian bank deposits are held in US dollars. The Bolivian government is trying to change this situation by taxing dollarized accounts while exempting boliviano accounts from the tax.

As recently as 2002, 27 percent of all loans were non-performing, leading most foreign investors to focus their resources in the somewhat-safer venue of corporate lending. Most bank lending in 2003 went to manufacturing (24 percent), followed by property services (18 percent) and trade and retail (16 percent). Bad debt remains at a historically high level. Further reforms are necessary, including the pending act to introduce a deposit guarantee system. Bolivia's stock market expanded in 1998 to include corporate bonds, along with the money market and government bond options that had existed previously. The privatisation of Bolivia's social security program has bolstered the stock market.

Tourism

Bolivia's spectacular vistas and natural attractions have not been enough to transform the country into a major tourist destination because of its political instability and lack of first-class accommodations. Still, Bolivia's tourist industry has grown gradually over the past 15 years. In 2000 Bolivia attracted 306,000 tourists, compared with 254,000 in 1990. Tourist revenue peaked at US$179 million in 1999. Tourism in Bolivia declined following the September 11 ,2001 attack on the United States, as was the case across North and South America.

Labour

The economic downturn of the late 1990s, coupled with privatisation and austerity efforts led by President Mesa, resulted in significant unemployment. Although the Bolivian government does not keep unemployment statistics, outside experts estimate unemployment to be between 8 and 10 percent of the population. Underemployment of Bolivia's workforce of nearly 4 million is also widespread. As a result of the lack of formal employment opportunities, nearly 65 percent of the urban workforce was self-employed in 2002.

Labour unions have a strong history in Bolivia. Many workers in the formal sector belong to unions. The larger unions, such as the Bolivian Labor Federation and the Trade Union Federation of Bolivian Mine Workers, have been successful in rallying workers to countless strikes and work stoppages. Nevertheless, working conditions for most Bolivian workers are difficult.

Imports

Bolivian imports of goods and services were valued at about US$2.1 billion in 2004. The import of consumer goods increased for the first time since 2002. By sector, Bolivia imported mostly intermediate goods, followed by industrial, capital and consumer goods. Leading sources of Bolivian imports include Brazil, Argentina, the United States and Chile.

Exports

Bolivian exports of goods and services in 2004 stood at more than US$2.1 billion compared with US$1.9 billion in 2003. Increased production of hydrocarbons, especially natural gas, led Bolivia's trade upturn in 2004. A 20-year supply contract with Brazil for natural gas, ending in 2019, the necessary capital to increase production. In 2004 export revenues for natural gas topped US$619 million. Bolivia also exported significant quantities of petroleum. Beyond hydrocarbons, other significant exports included zinc, soya, iron ore, and tin. In 2001 Brazil overtook the United States as Bolivia's primary export outlet. Switzerland, Venezuela and Colombia are also important export partners. Bolivia has actively sought to foster economic connections in South America after long relying on the United States as its primary trade partner.

Foreign Economic Relations

Bolivia was a founding member of the Andean Group, a South American organisation designed to promote trade among Bolivia, Colombia, Ecuador, Peru, and Venezuela. Subsequently renamed the Andean Community (Comunidad Andina-CAN), the organisation has succeeded in increasing intra-South American trade. Trade among member countries rose from US$3.6 billion in 1991 to US$10.3 billion in 2003. Bolivia also belongs to the Common Market of the South (Mercado Común del Sur-Mercosur). Bolivia became an associate member in 1997 in order to open investment opportunities with the founding Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay), as well as other Mercosur associate members (Chile, Colombia, Ecuador, Peru, and Venezuela). Bolivia conducted more than US$1 billion in trade with Mercosur countries in 2003. As a result of negotiations initiated in 1999 on a possible South American Free Trade Area (SAFTA), the two groups announced in December 2004 that they would merge, creating a South American Community of Nations patterned after the European Union.

Foreign Debt

The Government of Bolivia remains heavily dependent on foreign assistance to finance development projects. At the end of 2002, the government owed $4.5 billion to its foreign creditors, with $1.6 billion of this amount owed to other governments and most of the balance owed to multilateral development banks. Most payments to other governments have been rescheduled on several occasions since 1987 through the Paris Club mechanism. External creditors have been willing to do this because the Bolivian Government has generally achieved the monetary and fiscal targets set by IMF programs since 1987, though economic crises in recent years have undercut Bolivia's normally good record. Rescheduling agreements granted by the Paris Club has allowed the individual creditor countries to apply very soft terms to the rescheduled debt. As a result, some countries have forgiven substantial amounts of Bolivia's bilateral debt. The US Government reached an agreement at the Paris Club meeting in December 1995 that reduced by 67% Bolivia's existing debt stock. The Bolivian Government continues to pay its debts to the multilateral development banks on time. Bolivia is a beneficiary of the Heavily debted Poor Countries (HIPC) and Enhanced HIPC debt relief programs, which by agreement restricts Bolivia's access to new soft loans. Bolivia was one of three countries in the Western Hemisphere selected for eligibility for the Millennium Challenge Account and is participating as an observer in FTA negotiations.

Foreign Investment

Foreign investment in Bolivia was buoyed in 1995 by privatisation. Investment in mining and natural gas extraction increased, as did investment in the banking sector. However, the economic decline of the late 1990s, along with political unrest, caused foreign investors to pull out of Bolivia once again. In 2000 foreign investors contributed US$736 million to the Bolivian economy. In 2002 this total fell to US$676 million.