Bolivia: Bolivia Finance Profile 2011

Market-based competition  The fundamentals of market-based competition were better secured in early 2005 than in 2009. This is because state intervention in and state control of strategic sectors has expanded. The hydrocarbons law passed in May 2005 not only raised the duties on gas and oil companies from 18% to 50%, but restored the traditional state-owned petrol company YPFB as a major player in the sector. The expansion of state control has accelerated and intensified since the Morales government’s ascension to power in 2006. There is substantial state intervention in and control of strategic sectors. Market-based competition was also limited by the Agrarian Reform Law of 2007, which allows for the expropriation of land “not fulfilling its economic and social function,” and lays the groundwork for a more comprehensive and redistributive agrarian reform (see 9.1 and 9.2). The informal sector plays a major economic role. There are strong discrepancies between the relatively developed eastern Half Moon region and more traditional regions such as the Altiplano; that is, between the eastern region’s export-oriented, modern sector, dominated by international companies, and a weak national industry. The internal market in rural areas is still underdeveloped.

Anti-monopoly policy In principle, Bolivia’s laws call for resisting the formation of monopolies and oligopolies, but the regulations have for many years been implemented rather inconsistently. Between 1985 and 2005, many new monopolies or oligopolies have been formed at the regional or sectoral level, such as in the media sector or by the processes of privatization (e.g., mining, social security). In addition, the return to stronger state interventionism since 2006 has manifestly favored state and parastatal monopolistic tendencies.

Liberalization of foreign trade Foreign trade, which was deregulated after 1985 and liberalized and diversified throughout the 1990s, has since 2005 been affected by the renationalization of gas and oil production, and by the broader return to state interventionist policies. Trade has remained liberalized in principle, but significant exceptions can be found, including differentiated tariffs and special rules for individual companies or sectors. The new policies have included a rise in royalties and taxes (for some companies up to a temporary high of 82%); expropriation of substantial parts of companies’ shares (to be handed over to the YPFB) with contested compensation procedures; unilateral decisions; and conflicts over plans for pipeline construction, export quotas, gas prices and capital returns. These policies helped slow FDI flows between 2006 and 2007 (from 17.2% to 9.8% of gross fixed capital formation) and reduced FDI stocks (as a percentage of GDP) from 61.8% in 2000 to 44.7% in 2006 and 40.5% in 2007. However, many foreign companies and states, particularly the neighboring Brazil, Argentina and Chile, as well as the United States, have come to terms with the Bolivian government and the YPFB on the basis of a compromise stating that nationalization would be accepted in principle, but that payments and prices would be agreed upon. Brazil even agreed to a significant rise in the gas price, and the YPFB bought a number of refineries back from Petrobras in an orderly procedure. There are also numerous differentiated tariffs and special rules or exemptions for individual sectors, countries or companies. Imports and exports are usually taxed, often heavily, even if the government has not always succeeded in putting its plans for exorbitant tax increases into practice (as in the case of the mining cooperatives in 2007).

Bolivia is a member of the Andean Community (CAN) and an associate member of Mercosur, and it tries to use the market opportunities and openings associated with these two organizations, as well as those of the European Union and the United States, without investing too much. As Bolivia was excluded from negotiations over a free trade agreement between the CAN and the United States after the passage of the 2005 hydrocarbons law, the government opposed the subsequent treaty, instead joining forces with Venezuela and Cuba in 2006 (in the “Peoples’ Trade Treaty”), and even sabotaged, until June 2007, the beginning of negotiations between the CAN and the European Union. Despite the conflicts over legalizing production of coca (an essential issue to the Morales government), Bolivia was initially a participant in the economic programs associated with the U.S.-Andean Trade Promotion and Drug Eradication Act (ATPDEA) which, among other things, gave Bolivian producers duty-free access to the U.S. market. This changed at the end of 2008, however. After Morales announced an extension of the area in which coca cultivation was legally allowed, and expelled U.S. Ambassador Philip Goldberg and all Drug Enforcement Agency agents (alleging that they were cooperating with protest movements) in September and October 2008, the U.S. declared Bolivia as “non-compliant” in the war on drugs, revoked a number of trade preferences and stopped several USAID programs for the country.

Bolivia’s banking system and capital market are differentiated, open and internationally oriented, but still subject to fluctuations due to a lack of supervision and high dependency on foreign markets. Most domestic banks have some degree of foreign participation. As Bolivia’s integration with the international capital market is very limited and capital inflows have been negligible for many years except for foreign direct investment in hydrocarbons and mining, the worldwide financial crisis has not at the time of this writing significantly affected the country’s banking system. However, the expected declines in commodity prices and remittances will affect the country’s economic outlook in general.