Tag Archives: bolivia

The Importance of Trade Liberalization for Developing Countries

trademap

Sergio Daga was part of the CIPE-Atlas Corps Think Tank LINKS  Fellowship, and served at the Heritage Foundation.

Countries trade with each other because trading typically makes a country better off. In international trade competition occurs at the firm level, while citizens of every country can benefit from free trade. Citizens enjoy a greater variety of goods and services, and generally at a lower cost.

Imagine a country that decides to isolate itself economically from the rest of the world. In order to survive, the citizens of this country would need to grow their own food, make their own clothes and build their own houses. However, if this country decided to open its border to trade, its citizens would specialize in the activities they do best. Specialization leads to higher productivity, higher income, and better living standards.

Can every country benefit from free trade? A fundamental principle of economics – comparative advantage – holds that when a country produces more of one product, it will create less of some other product. This trade-off occurs because resources are scarce and societies want to get the maximum benefit from them.

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The State of Entrepreneurship in Bolivia

Most of Bolivia's entrepreneurs are self-employed in non-technology-intensive fields.

Most of Bolivia’s entrepreneurs are self-employed in non-technology-intensive fields.

Sergio Daga is a CIPE-Atlas Corps Think Tank LINKS  Fellow serving at the Heritage Foundation. 

The latest Global Entrepreneurship Monitor Report for Bolivia, published in 2010 and led by Marco Antonio Fernandez C. from the Catholic University of Bolivia, shows interesting findings that shed light on the state of entrepreneurship in Bolivia today. In a survey of individuals between 18 and 64 years old in the three biggest cities of the country, nearly 76 percent said they believe they have the skills required to be an entrepreneur, over 53 percent foresee opportunities to start a business, and only 28 percent are afraid of failure.

The Global Entrepreneurship Monitor (GEM), an initiative founded and sponsored by Babson College (US), Universidad del Desarrollo (Chile), and Universiti Tun Abdul Razak (Malaysia), has completed 13 annual surveys of the entrepreneurial attitudes, activities, and aspirations of individuals around the world. Its latest edition covered 69 countries that represent 74 percent of the world’s population and 87 percent of the world’s GDP. One of  GEM’s unique characteristics is that they conduct specific in-depth country studies about entrepreneurs in mainly developing countries.

A striking indicator for Bolivia is the Total Early-Stage Entrepreneurship Activity (TEA) rate, which shows the rate of individuals in the working-age population who are actively involved in business start-ups, either in the phase preceding the birth of the firm (nascent entrepreneurs), or the phase spanning three and a half years after the birth of the firm (owners or managers of new firms). The TEA rate for Bolivia was almost 39 percent and this rate is the second highest among the 59 countries who participated in the TEA research in 2010.

According to the same report, the motivations for starting a business stem mostly from opportunity (measured as the desire to increase revenues), and not necessarily to gain independence (measured as the desire to become their own bosses). Additionally, aspirations for growth (which translates to creating jobs) among Bolivian entrepreneurs are significantly low. Only 65 percent of the early-stage entrepreneurs planned to create one job, and only 4 percent of them aspired to create more than 20 jobs in the next five years. When the already established entrepreneurs were asked about their growth outlook, it was even worse – not even half of a percent of the respondents said that they aspire to create more than 20 jobs in the next five years.

Lack of innovation and creativity is another problem.  Out of the early-state entrepreneurs, less than 1 percent answered they incorporated new technologies or innovative ideas into their ventures. Furthermore, a vast majority of the early-stage entrepreneurs indicated they are in the service sector, offered no new products, and faced high competition due to the homogeneity of their offerings.

Finally, the report also painted a picture of an average Bolivian entrepreneur:  a male between the age from 25 to 34 with only a primary education, and a monthly family income between $145 to $290 USD. They call themselves independent, but actually belong to the informal economy (paying no taxes and receiving no social benefits) and their main motivation is to generate more revenue, not profit.

Although “attitudes and perceptions to become an entrepreneur are quite favorable within Bolivians” (GEM Report Bolivia, 2010), the truth is that the vast majority of Bolivian entrepreneurs have low aspiration to increase production and to create jobs. Entrepreneurs are not innovating nor advancing the use of technology into their products and services. As a result they face higher competition and lower prices for their products.

In another study, conducted by the International Finance Corporation (IFC), already established firms in Bolivia (independently of their size) were asked what real obstacles they think undermine the potential of entrepreneurship in their country.  The top answers on the list were unfair competition formal entrepreneurs face because of the informal market, political instability in terms of predictability of public policies, and the unprepared and unskilled labor force.

As CIPE has pointed out building entrepreneurial economies requires many steps, including:

 “building market institutions; removing barriers to starting, operating, and growing a business; reforming educational systems; and creating a broader awareness and understanding of what entrepreneurship means as well as appreciation for its contribution to the development of democratic societies. As simple as the recipe for entrepreneurship-driven development may be, the implementation of necessary reforms is a much more complex matter. Only when the right institutional climate is in place can small business success stories become more commonplace. Entrepreneurial economies sustain growth through the rule of law and a functioning democracy. Institutional change takes time, effort, determination, and, above all, dedicated reformers.”

Will there ever be such reformers in Bolivia? My organization, Políticas Públicas para la Libertad, is working to make this happen.

CIPE Atlas Corps Think Tank LINKS Fellowship brings talented young professionals with strong research backgrounds to shadow researchers and experts at leading U.S. think tanks for six month. Sergio Daga is part of the inaugural class, serving at the Heritage Foundation as Visiting Senior Policy Analyst for the Index of Economic Freedom in Latin America. 

Driving Economic Growth in Bolivia: Insitutions and Productivity

Lack of technology -- or weak institutions?

Lack of technology — or weak institutions? (Photo: Wikimedia commons)

Sergio Daga is a CIPE-Atlas Corps Think Tank LINKS  Fellow serving at the Heritage Foundation.

According to empirical studies, high rates of economic growth over the long-term (in per capita terms) result in better living standards for people in every country. The main force for high, long-term economic growth rate is productivity gains – finding better ways to efficiently use production factors such as natural resources, labor, physical and human capital.

Lora and Pagés explain that, compared to other regions in the world, the relatively lower growth of productivity is the main determinant of the poor economic growth rates in Latin American countries.  They also argue that it has also prevented the region from closing income gaps and economic development levels with developed economies. Therefore, the achievement of higher productivity should be the epicenter of the current economic debate in Latin American countries.

How can we foster productivity? Productivity gains are usually associated with increases in technological progress of a country, but some argue that this is a complex problem that goes beyond that. In fact, depending on the country’s level of development, technological readiness could be a necessary condition but not a sufficient one.

For low-middle income countries, such as the majority of Latin American countries, productivity gains could be achieved by making progress towards what the World Economic Forum’s Global Competitiveness Report calls “the fundamental pillars for development.” One of the most important pillars is having a sound and fair institutional environment.

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What’s Going On in Bolivia?

I’ve seen plenty of ‘propaganda’ movies about the destructive nature of democratic market economies.  But here is an alternative - an interesting movie about the destructive nature of democratic and market reversals based on what’s been taking place in Bolivia over the past couple of years.  If you have 10 minutes to spare, check it out.

Is Bolivia Becoming a Failed State?

The last few days in La Paz have been replete with demonstrations. Members of the Bolivian Workers Central (COB) have been blasting dynamite and taking over government ministries to force the government to pass a new pensions law that favors them. More demonstrations are scheduled in the coming days and the COB is threatening a “punishment vote” against President Morales in the upcoming revocatory referendum scheduled for August 10. These demonstrations are being repeated in cities around the country. Other groups are also demonstrating. For example, a union of handicapped citizens has blocked entry to an oil refinery causing gasoline shortages. They are also seeking government pension payments.

Meanwhile, the revocatory referendum is causing increasing political division between different ethnic, economic class and regional groups. If Morales is able to secure a substantial confidence vote and replace some of the regional prefects in opposition to him with his own candidates, then he will no doubt move to adopt his new constitution. Among other divisive measures, his new constitution would allow for some 35 ethnic-based autonomous “regions” to be established. However, a strong showing of support for the Morales government in the referendum is far from assured. If he loses the vote, which seems unlikely, it is far from clear who would succeed Morales as head of the government. The most likely outcome will be a modest win for Morales but also for some of the key opposition prefects and continuation of the status quo.

Most people I have spoken with here do not see an easy road ahead for Bolivia. Most of the major initiatives on the table, including the referendum and the autonomy movements in various regions, are all illegal under the current constitution. However, the constitutional court, which has only one member now, is not overseeing the legality of these processes. As a result, the government-controlled Electoral Commission is giving the green light for the referendum to take place and the regional autonomy movements are gathering strength.

The coming weeks will be crucial for discerning how far the country may sink into chaos. The newest economic report by Fundación Milenio paints a bleak picture of government spending outstripping income, inflation out of control rising from 17% per year, greater reliance on traditional exports mainly hydrocarbons but also decreasing production of those exports because of low levels of domestic and especially foreign investment. The government seems to be exercising little control over this steady decline of the economy and it seems that it will only be a matter of time before there are more uprisings against its policies. Neither is it reaching out to build bridges with the opposition. What happens if the Morales government is thrown out is anyone’s guess but a failed state seems easily one of the possibilities.