On the Determinants of Bolivia’s Economic Growth: Productivity and Institutional Puzzles Executive Summary
Carlos A. Mendez Guerra∗ Nagoya University
Contents 1 2 3 4 5 6
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Background and Motivation . . . . . . . . . . . . . . . . . . . . . . Research Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . Conceptual Framework . . . . . . . . . . . . . . . . . . . . . . . . . Methodology and Data Sources . . . . . . . . . . . . . . . . . . . . Overview of the Findings . . . . . . . . . . . . . . . . . . . . . . . Seven Puzzles of the Bolivian Economy and their Policy Implications
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1 2 3 4 4 6
Background and Motivation
Bolivia gained its independence in 1825 from Spain and much of its subsequent history has consisted of a series of nearly 200 coups, counter coups and social conflict. As a result, it is possible to argue that democracy was established “in practice” in 1982. In spite of this progress, democratic leaders continuously have faced the problems of poverty, inequality, social unrest and low growth. In 2009, the Bolivian people reelected the socialist leader Evo Morales as president after he ran on a promise to change the country’s traditional political class and empower the nation’s poor and indigenous majority. After promoting a series of social policies, his development strategies still have exacerbated racial and economic tensions between the indigenous population and the non-indigenous communities The economic story of Bolivia raises innumerable sets of questions. From a geographical comparative perspective. Figure 1 highlights the enormous differences in the Bolivian development ∗ The
findings, interpretations, and conclusions expressed in this paper are entirely those of the au- thor. They do not necessarily represent the views of Nagoya University. The author happily receives comments at: https://sites.google.com/site/carlosmendez777/contact-me-1
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2 Research Questions
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Fig. 1: The Power of Geometric Growth is Absent in Bolivia yt = y0 egt ⇒ ln(yt ) = ln(y0 ) + gt + ε ln(BOLIVIA’s GDP per worker) ln(JAPAN’s GDP per worker) 8.8 8.9 9 9.1 9.5 10 10.5 11
JAPAN: g=2.6%*** R2=0.86;
1960
1970
BOLIVIA: g=−0.07% R2=0.01
1980
1990
2000
2010
Year 95% CI
Fitted values
ln( GDP per worker)
Source: Author’s calculations using data from Penn World Tables V. 7.0
path and other economies. From a historical comparative perspective the Bolivian economic performance also seems to contradict the traditional assumptions of many growth models. For example, Figure 2 shows that capital deepening is another absent feature in Bolivia.
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Research Questions
The research questions are systematically organized in four analytical chapters: Chapter2: Stochastic trends and production function • Do the main production aggregates of the Bolivian economy show a random walk behavior? If so, is it possible to identify stable long-term relationships among them? • Considering the noticeable difference between the conventional wisdom and the “naive” shortcut to compute the capital share, what other estimates of factor shares can be considered to understand the distribution of income between capital and labor in Bolivia? • How can the Bolivian economy be characterized in terms of returns to scale and the degree of substitution between capital and labor? Chapter3: Factor accumulation and productivity growth • What is the relative contribution of capital stock, labor and productivity to GDP growth in Bolivia? • How is the behavior of Factor Accumulation (FA) and Total Factor Productivity (TFP) in each of the development paradigms and historical periods of Bolivia?
3 Conceptual Framework
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6000
7000
8000
9000
10000
Fig. 2: Capital Deepening in reverse?: Capital Swallowing
1963
1973
1983
1993
2003
. Capital Labor Ratio trend, HP corrected Capital−Labor Ratio
Source: Author’s calculations using data from Extended Penn World Tables V. 4.0 (Marquetti, 2011)
• What is the contribution of human capital improvements in the process of economic growth in Bolivia? Chapter4: Investment constraints and productivity determinants • Why does investment not seem to increase the capital-labor growth rate? • What factors can be identified in order to explain the behavior of the TFP in Bolivia? Chapter5: Institutional outcomes and domains • What type of institutional arrangement (equilibrium) can be used to represent the Bolivian economy? • What mechanism and interactive domains can be identified to explain Bolivia’s current institutional arrangement?
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Conceptual Framework
Figure 3 presents the main theoretical elements and relationships of a conceptual framework that has been designed to implement research regarding economic growth1 , productivity and institutions. 1 To understand the mechanics of economic growth, first it is necessary to estimate some production parameters. which are discussed in Chapter 2.
4 Methodology and Data Sources
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Fig. 3: General Conceptual Framework Production Side Macroeconomic Variables
Capital Stock and Investment
Production (GDP)
Labor
Random Walk Behavior Long Term Relationships Distribution of income between Capital and Labor
Production Function Approach (Cobb-Douglas and CES)
Substitutability between Capital and Labor
Growth Performance
Factor Accumulation Growth
Productivity Growth
Capital Swallowing Low Returns Adjustment Costs
Short-run Fluctuations Institutions&Policies Initial Conditions
Inclusive Institutions
Extractive Institutions
Domains of Strategic Interactions: Economic, Political, Social and Organizational Source: Author’s design based on research questions and literature review
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Methodology and Data Sources
Empirical analysis and secondary data lead the discussion of the theoretical elements described in the conceptual framework. Table 1 summarizes the research methodology and data sources for each chapter.
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Overview of the Findings
Chapter 2 presents statistical evidence regarding the existence of the random walk phenomena in the main production aggregates of the Bolivian economy. Production-side variables are characterized by frequent shifts and kinks in their long-run tendencies. As a result, per capita variables show
5 Overview of the Findings
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Tab. 1: Methodology and Data Sources Topic / Chapter Stochastic trends and production function Factor accumulation and productivity growth Investment constraints and productivity determinants
Methodology and Type of Data Econometric analysis (Time Series) Growth-accounting analysis (Time Series) Econometric analysis (Time Series)
Institutional outcomes and domains
Descriptive analysis (Cross Section)
Data Sources Bernanke and Gurkaynak (2001) Marquetti (2011) Barro and Lee (2010) World Bank (2011) Heston and Aten (2011) The Freedom House(2011) Teorell et al. (2011) Schwab (2011)
zero or native growth rates. Using cointegration methods and a CRS2 -constrained regression, the capital share in national income is estimated. Its low value supports the traditional view that the capital share is around 1/3. Moreover, constant returns to scale and low elasticity of substitution are recognized as technological features of the Bolivian economy. Chapter 3 shows that strong fluctuations in GDP, factor accumulation and productivity in the three development paradigms of Bolivia. Growth accounting decomposition shows that in the period 1963-2008, the average growth rate of GDP was 2.69 from which productivity explained only 16 percent. The inclusion of human capital suggests large returns to educational achievement, but questions are raised regarding the existence of better measures of educational output. Chapter 4 argues that Bolivia has exhibited sharp-trends variation in investment and productivity growth during the last half century. Theoretical and empirical evidence suggest that the negative growth of the capital-labor ratio is sharpened by high volatility in investment, high relative price of capital, low marginal product of capital and high adjustment costs. Additionally, econometric evidence on the behavior of Bolivia’s TFP during 1980-2008 highlights the importance of short-run fluctuations in international prices, structural policy variables, institutions and initial conditions. Chapter 5 documents, from a game-theoretic perspective, that Bolivia can be represented by an unstable institutional equilibrium between extractive economic institutions 3 and more inclusive political institutions 4 . Cross section data suggests that insecure property rights, limited enforcement of contracts, high entry barriers, corruption and bureaucratic inefficiencies are generating a non-leveled playing field for the economic actors. Furthermore, negative interactions with factors from the social domain (high fractionalization and high cultural diversity) and the organizational 2
Constant Returns to Scale Following the definition of Acemoglu and Robinson (2012), inclusive economic institutions: are characterized by secure property rights, law and order, and a systematic coordinated effort between markets and the state. Furthermore, the productive system is open to relatively free entry of new businesses, contracts are enforced and there is access to education and opportunity for the great majority of citizens. 4 Following the definition of Acemoglu and Robinson (2012), inclusive political institutions are norms which allow broad civil participation and political pluralism. They also place constraints and checks on politicians. The rule of law is a noticeable feature. 3
6 Seven Puzzles of the Bolivian Economy and their Policy Implications
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domain (low innovation and low cluster development) tend to prevent the proper functioning of the markets in spite of noticeable improvements in political pluralism and participation.
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Seven Puzzles of the Bolivian Economy and their Policy Implications
Puzzle1: Random walk behavior with high volatility and zero per-worker growth in half a century The results of the stochastic-trend analysis suggests that there is enough space for policy action. Fist, fiscal policy, should be contra-cyclical in an attempt to reverse any negative shock, especially in investment. Second, investment in infrastructure projects, can be useful not only to keep a stable capital deepening, but also create externalities that incentivize private investment and generate a “crowding-in� effect. Third, government action should be strategic in the booms and busts of the economy. In order to effectively accumulate capacity for intervention, the Bolivian administration should impose upon itself saving rules such as the structural surplus rule. Puzzle2: Labor intensive economy at the national level but capital intensive in the corporate sector Given the fact that the corporate sector tends to be capital intensive, labor can increase production only if it embodies additional technical knowledge. Capital intensive industries, such as hydrocarbons and mining require high skilled workers and further efforts in Research and Development (R&D). On the other hand, in the non corporate sector capital is still scarce, suggesting higher returns if there is a minimum endowment of complementary factors such as human capital. After reaching the minimum endowment level, additional credit, training and less bureaucratic procedures may increase local production and wages. Puzzle3: Factor accumulation explains the long-run and cyclical aggregate efficiency explains the short-run Aggregate efficiency is very sensitive to booms and busts. Reducing social conflict and rent seeking behavior is not an easy task. In Bolivia the root of these two problems seem to be affected by the lack of employment opportunities in the formal sector. The rents generated in the oil and mining sector should be used for the generation of alternative productive sources and formal employment opportunities. New legislation should be clear in defining what percentage of the oil and mining rents should be allocated to social protection and what percentage should go to productive investment in new industries. Puzzle4: Are there large returns in schooling but low returns in education? A clear distinction should be made between simple (input) schooling and educational outcomes. Educational policies, should be outcome-oriented. It is a priority to define specific output measures in terms of learning contents and minimum skills at each level of education. Standardized national tests at different levels might give a better picture of an initial benchmark for planning and control. Incentives for vocational and technical training are also other means to increase the productive capacity while correcting the mismatch between supply and demand of university graduates in social sciences.
6 Seven Puzzles of the Bolivian Economy and their Policy Implications
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Puzzle5: Capital Swallowing sources: Investment volatility, low return of capital and high adjustment costs Following Lucas’ argument, it is necessary to increase the stock of complementary factors in order to increase the return of capital. Better and an outcome oriented training, and a stable social environment are necessary inputs for raising the marginal product of capital. More investment is needed increase the share of reproducible capital. This implies the design of investment funds in new productive sectors; nevertheless, in order to effectively do it, institutional reforms are needed in terms of facilitating procedures for accelerating the implementation of projects, minimizing adjustment costs and reducing uncertainty. Puzzle6: Under what circumstances are improvements in terms of trade improvements associated with low productivity? In Bolivia, improvements in terms of trade not only generate volatile rents, but also generate pervasive incentives for rent seeking behavior. When the already numerous social organizations use economic resources and organize social manifestations such as blockades and demonstrations, the aggregate efficiency of the economy tends to decline. As mentioned in the policy analysis of Puzzle 1 predictability and fiscal rules for cyclical flow of income reduce uncertainty. Puzzle7: Unstable equilibria: extractive economic institutions and inclusive political institutions. At some level, the current social revolution can be qualified as positive in terms of creating more inclusive political institutions 5 . Nevertheless, unless there are similar reforms in economic institutions Bolivia might return to its previous equilibrium where economic rents and power are captured by small elites. There are not clear incentives for diversification of the economic system and adoption of more efficient technologies. The debate is centralized in the redistribution of wealth rather than the creation of wealth. The central government is spending too much time in harmonizing social demands rather than designing a more productive economic agenda for economic change based on more inclusive economic institutions 6 .
References Acemoglu, D. and Robinson, J. (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown, Cambridge. Barro, R. and Lee, J.-W. (2010). A new data set of educational attainment in the world from1950 to 2010. 5
Following the definition of Acemoglu and Robinson (2012), inclusive political institutions are norms which allow broad civil participation and political pluralism. They also place constraints and checks on politicians. The rule of law is a noticeable feature. 6 Following the definition of Acemoglu and Robinson (2012), inclusive economic institutions: are characterized by secure property rights, law and order, and a systematic coordinated effort between markets and the state. Furthermore, the productive system is open to relatively free entry of new businesses, contracts are enforced and there is access to education and opportunity for the great majority of citizens.
6 Seven Puzzles of the Bolivian Economy and their Policy Implications
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Bernanke, B. and Gurkaynak, R. (2001). Is growth exogenous? taking mankiw, romer and weil seriously. NBER Working Papers 8365, National Bureau of Economic Research, Inc. Heston, Alan, R. S. and Aten, B. (2011). Penn world tables v.7.0. Marquetti, A. (2011). Extended penn world tables v. 4.0. Schwab, K. (2011). The global competititveness report. Technical report, World Economic Forum, Geneva. Teorell, J., Charron, N., Samanni, M., Holmberg, S., and Rothstein, B. (2011). The quality of government dataset v. 6.0. TheFreedomHouse (2011). Governance indicators. WorldBank (2011). World development indicators.