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Institutions and economic growth in Bolivia

Briefing/policy papers

Written by Steve Wiggins

Why is Bolivia’s record of economic growth so wretched? Some of the answer may lie in the failure to develop the economic institutions necessary to progress from a factor-driven to an efficiency-driven economy. Property rights are uncertain, transactions costs are high, and the ability to co-operate economically is stunted.
Why is this? Partly this comes from history: Bolivia developed as an economy centred on exploiting high-value minerals using cheap labour. The mines as large-scale, integrated operations had little need for market institutions other than property rights.
The other part is the governance of Bolivia. The state is weak, but capable of conferring favours when handing out the rights to mine, drill or farm, or when granting monopoly privileges, import protection and tax exemptions. By being particular in its favours, the state becomes a valuable ally for large-scale vested economic interests. Crony capitalism is thus encouraged.
But since the state is so particular, it lacks legitimacy and sooner or later ⎯ usually sooner in Bolivia ⎯ crises and protests bring down the administration. Even those within the circuits of cronies then have to reinvest in cultivating ties to the new administration. For everyone else, change creates more uncertainty.
The result is a state poor in delivering public services and unable to create a level playing field, while frequent changes of government make for unstable economic policy. Overall this produces a rotten business environment, one that deters investment by business of all scales, but one that is especially bad for small enterprises.

Steve Wiggins, Alexander Schejtman, George Gray & Carlos Toranzo