Paul Mosley1 This draft: 27 January 2007



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The ‘political poverty trap’: Bolivia 1999-2007
Paul Mosley1
This draft: 27 January 2007


Abstract. We analyse the recent wave of political instability in Bolivia in the context of a ‘poverty trap’ model which suggests that elements in a country’s political system, as well as its economic structure, may be instrumental in perpetuating a state of poverty. In Bolivia the costs of adjustment in the recent phase have been very severe, with well over a hundred killed between 1999 and 2007 as a direct consequence of demonstrations against aspects of the globalisation and adjustment process, and an appearance of a return to a state of chronic political instability; other countries affected by the global crisis have suffered less severely. Is this because they used the available instruments of adjustment more effectively, or for other reasons? In particular, how does poverty impact fit into the story: would a ‘more effective’ pattern of adjustment have been more pro-poor?
There is no doubt that some aspects of the Bolivian political economy do have to be taken as parametric and have, over many years, played a major part in increasing the vulnerability of the political system and in predisposing it, in recent years, towards instability. These include: the collapse of conventional party politics as an instrument for representing the interests of the poor; the decay of a number of key institutions including the courts, financial institutions and standards of fiscal governance; and the unique combination, within the satellite city of El Alto, of strategic location, unemployment rising much faster than conventional poverty indicators, and very high levels of politicisation and strategic communication between neighbourhood groups. All of these factors applied a process of hysteresis, or a vicious circle of downward pressure, to levels of trust in government (not only amongst the Quechua/Aymara majority, but also among the urban middle class) by the centre-right coalitions of the 1990s, and the persistence of this dynamic seriously limited the government’s room for economic policy manoeuvre as it tried to extract itself from recession in 1999-2004.
However, we also argue, there is clear evidence, in the Bolivian case, of some incorrect decisions (from the point of view of minimising social cost and political instability) having been taken, not because they were politically inescapable but simply because the necessary strategic vision was lacking. Our major examples, from the climactic year of 2003, relate to fiscal policy and policy towards the privatisation and pricing of oil and gas exports; but several other areas where the breadth of government vision during the crisis was not sufficiently wide include pensions policy, agricultural policy and international policy options, including capital controls and exchange rate management. A component of these errors, especially in the case of fiscal and privatisation policy, consists in not seeing how politically damaging a policy which overtly threatened to increase unemployment and inequality was likely to be. We argue that the aid donors were complicit in allowing those mistakes to happen: in not helping the Bolivian government to broaden its strategic field of vision.
In international perspective, it appears that Bolivia was hampered in its efforts to escape the political poverty trap by its low levels of institutional capacity, its high and deteriorating levels of inequality and unemployment, and the apparent indifference of government to measures which might have relieved these ills (such as increases in the social efficiency wage, and protection against instability on the external capital account). There seems little doubt that the overall regressive stance of policy, coupled with communication and institutional failures, played a part in locking Bolivia into a worse crisis than other afflicted countries; but policy was not uniformly regressive, and part of the problem appears to be that the Bolivian government was watching the wrong indicators of what might make it politically vulnerable.

  1. Introduction: political violence and varieties of stabilisation experience

On 12 and 13 October, 2003, over sixty people2 were killed in a confrontation between civilian protesters and the armed forces in the city of El Alto, Bolivia. The incident marked the climax of a series of disturbances which have continued through to the present year, and which mark Bolivia as one of the gravest sufferers, in human terms, from the wave of capital-account crises which have buffeted the developing world since their onset in East Asia in 1997. The variety of experiences of adjustment-related conflict across the developing world since 1997 is illustrated in Table 1.
Table 1. Countries affected by global crisis(1997-2005): political responses and their consequences


Country

Year of entering crisis

Duration of crisis (years of negative growth in per capita GDP following onset of crisis)

Estimated deaths in political violence directly associated with economic crisis

Thailand

1997

1

0

South Korea

1997

2

2

Indonesia*

1997

2

30

Malaysia*

1998

1

0

Russia*

1998

3

25

Turkey

1998

2

20

Brazil

1999

1

no data

Argentina*

2000

3

12

Bolivia*

2000

6

140


Sources and definitions. Onset of crisis is defined as first year of negative per capita GDP growth, and duration of crisis is defined as number of years of negative per capita GDP growth after onset;source is World Bank, World Development Indicators CD-ROM. Estimated deaths from political violence associated with crisis (street demonstrations, riots, roadblocks, and crisis-related industrial violence) are provisional estimates derived from contemporary newspaper accounts under ESRC project RES-156-25-00016, The political economy of pro-poor adjustment. For more detail of computation see Mosley(2006), appendix 2.
It is clear from the table that the interaction between the social costs of crisis and the political consequences was in some cases (eg South Korea, Malaysia and Thailand) short-term and self-correcting, but in other cases (eg Indonesia, Turkey and Bolivia) much more long-term and self-reinforcing. In this paper we seek to understand why these differences in response-pattern occur, with particular reference to the case of Bolivia, where the recent crisis has restored an ancestral pattern of instability (Figure 1) following an apparently successful escape from the vicious circle during the

1990s. Our concern is both to explain the particularities of why recovery has proved so elusive in Bolivia, and also in more general terms to illustrate what the lessons may be for institutions and governments which may have responsibility for dealing with crises of this type in the future.



One approach to crisis recovery strategies, often attributed to the International Monetary Fund, explains the effectiveness of reform strategies in terms of technical criteria, e.g. the speed with which particular economic policy instruments (expenditure cuts, tax increases, devaluation, and so on) are able to stabilise the currency. It can be argued, however, that what is in principle technically effective may not be in practice politically feasible or sustainable, that the political violence and policy instability portrayed in Table 1 are in part the consequence of this, and that as a result what is optimal in a technical sense may not be optimal if the likely political consequences of economic policy are taken into consideration. In particular, it may be necessary to orient adjustment policies more towards poor people than is necessary according to criteria of technical effectiveness, in order to obviate the risks of rebellion by poor people who are damaged by adjustment.

This idea has been explored, and rejected, by the very comprehensive OECD studies of social and political consequences of adjustment (Bourguignon et al. 1992; Haggard et al. 1995).Their conclusion, reached on the basis of empirical data from the 1980s and early 1990s, is that, although criteria of political feasibility are important in determining the right adjustment policy, ‘a focus on social equity is not necessarily relevant to understanding the politics of adjustment, because the politically most active groups are not usually the poorest’3 (Haggard et al. 1995:120). Their implication is that a more pro-poor policy might not necessarily have rescued Bolivia, or any of the other countries listed in Table 1, from the political consequences of fiscal austerity.

In this paper we explore, focusing on the Bolivian case, whether this is still true; and, more generally whether the adoption of more ‘politically rational’ reform strategies might be capable of achieving more sustainable processes of adjustment at lower social cost. Our analytical approach is to visualise developing countries as being vulnerable to being caught in a ‘poverty trap’ – an interactive process between poverty and its causes -, which if a crisis is wrongly handled may enmesh them in a long-term process of decline. ‘Poverty trap’ models have recently re-emerged in the development literature as explanations of the persistence of poverty in individuals and countries, but they typically do not contain political variables. What is attempted here is in general terms to explain the persistence of crisis in terms of the working of political institutions as well as economic factors, and in specific terms to ask whether and how more pro-poor patterns of policy might in specific cases such as Bolivia’s be an effective instrument for escaping from such a crisis.


The original ‘poverty trap’ or vicious circle of poverty’ literature, starting with Nurkse (1953), uses a causal mechanism in which, in its simplest form, low income causes low investment which perpetuates low income(left-hand part of Figure 2). More recent versions of the vicious circle, including Carter and May (1999), World Bank(2000) and Barrett and Carter(2006) have added additional mechanisms to this vicious circle, of an essentially economic nature4. Our own argument develops this approach by suggesting that what Bolivia has been caught in, since it became enmeshed in the global crisis, is a political poverty trap. As in a conventional poverty trap model, poverty remained high on account of low and unstable investment rates; but what kept investment rates low was in part, a collapse of trust in the political process to achieve democratic decision making and an erosion of the institutional structure, which in turn was aggravated by economic crisis. Policy choices (at both the macro and the micro level) provide a potential escape from this trap, and it will be a major objective to investigate the extent to which events in Bolivia were the consequence of a failure to take advantage of these opportunities.


Poverty



Poverty

Productivity


Inequality





Level of investment (especially foreign investment)



Low investment


Confidence in legislative institutions



Policy choice:

(1)macroeconomic

(2)allocative

Institutional capacity










Low productivity



Political stability



(a) basic economic (as per Nurkse 1953) (b) politico-economic
Figure 2. Varieties of poverty trap

The ‘political poverty trap’ approach specified in (b) forms the core of our general explanatory story. In the Bolivian case, two additional country-specific factors - relationships with aid donors, and the geographical concentration of wealth, poverty and political militancy – play an important part both in setting the initial conditions and in determining the course of the drama. These initial conditions are examined in the following section 2. In section 3, we test the poverty trap model pictured in Figure 2 against the available data for Bolivia. Section 4 takes a comparative perspective and asks whether the variables in the poverty trap model help to explain why Bolivia experienced a particularly severe political and economic crisis between 2000 and 2005 in comparison to other countries afflicted by the ‘East Asian’ crisis, and in particular whether other countries avoided the crisis by taking up options which were available to but neglected by Bolivia. Section 5 concludes.




  1. The current crisis in its long-term setting

Bolivia’s democratic state, established in 1825, has a notorious record of political instability, fragility and reversion to a totalitarian model. During the hundred and sixty years from independence to the hyperinflation of 1985 there were around 150 changes of government (Mesa, Gisbert and Mesa 2003), and a number of episodes of military dictatorship. Between 1951 and 1985 a whole succession of governments sought to break the constraints to the country’s persistently poor economic development performance by means of structuralist measures, including a thoroughgoing land reform in 1952, nationalisation of the mines in the same year and of the country’s natural gas reserves in 1965, and widespread controls on the exchange rate and other ‘key prices’. At the onset of the global structural adjustment process, in the early 1980s, the government initially resisted pressures for expenditure cuts and price decontrol, and the failure of these attempts led eventually to one of the great hyperinflations of modern times, reaching its peak at an annual rate of 24,000 per cent in August 1985.

As might have been expected, the scale of deflation and liberalisation required to achieve economic stabilisation was exceptionally painful, and in particular involved massive production and employment cuts in the country’s former main export staples – the tin and silver mines5. But gradually, through this process, a measure of both political and economic stabilisation was achieved: inflation was brought under control, growth in the real economy was positive from 1987 until the onset of the global crisis in 2000, and most of the elected governments of this period, contrary to all Bolivian precedent, ran their full four-year term. Of these administrations, the most radical in its liberalising measures was that of Gonzalo Sanchez de Losada, a mining millionaire6, between 1993 and 1997, which initiated (under the so-called ‘Law 21060’) the privatisation of the main public utilities (oil and gas, telephones, electricity and water) under a regime known as ‘capitalisation’. and drastically reduced controls on trade and capital movements. It was during this period that the Managing Director of the IMF expressed his hope that Bolivia would sustain its economic growth, and convert itself into an ‘Andean jaguar’ , by analogy with the East Asian ‘tiger economies’7 .

The higher levels of economic growth and political stability produced by this liberalisation were however inherently vulnerable, on account of underlying structural factors. Firstly the shift, under structural adjustment, from a growth pattern based on exports of minerals to a pattern based on hydrocarbon (oil and natural gas) exports posed major problems for employment creation and poverty reduction, since mining is labour-intensive whereas the oil and natural gas sector is capital-intensive (Table 2); moreover, within both food and cash-crop agriculture, which is also labour-intensive, structural adjustment stimulated very little growth8, making the problem worse. Secondly, the gains from structural adjustment, essentially in the tradable oil and natural gas sectors, accrued mainly to individuals, mainly not of indigenous Aymara and Quechua ethnicity, in the richer east and south-east of the country, where the oil and gas deposits are located; and the losses from structural adjustment accrued mainly to workers, mainly of indigenous ethnicity, in the poorer west of the country. As a consequence, inequality (and especially inter-ethnic and inter-regional inequality) grew through the period of stability from 1986 to 2000, and in a way that was openly increased by the government’s acts of privatisation. Poverty has been measured in Bolivia over a much less lengthy period than inequality; but of the available measures of poverty, headcount poverty and poverty measured by access to health and education services appear to have diminished over the period prior to 1999, so that growth over this period can be characterised as (rather weakly) pro-poor (Klasen et al 2001; Landa and Jimenez 2005).
Table 2. Bolivia 1986-2004: growth of output and employment

Annual average growth rates





Whole economy

Agriculture

Mining

Petroleum and gas




Average

growth of output




Average growth of employment

(private sector only)



Average

growth of output



Average growth of employment9

Average

growth of output



Average growth of employment

Average

growth of output



Average growth of employment

1995-98

4.7

-1.7

2.1

nd

0.0

-1.1

5.6

-0.6

1999-2004

2.1

1.0

2.9

2.7

-1.6

0.1

9.5

-0.3

Source: Instituto Nacional de Estadistica, Anuario Estadistico 2005, tables 4.02.01.01 and 3.04.05.01.
The reformist governments of this period were by no means unaware of these long-term threats to economic and political stability, and attempted by various means to palliate them: the throughgoing decentralisation of political power and fiscal responsibility to the regions in 1994 (van Cott 2002); the fairly rapid growth of public sector employment (Table 2) supported by the pioneering Fondo de Inversion Social (Social Investment Fund), which channelled aid funds into the development of social infrastructure for low income groups; and the also fairly rapid growth of small private-sector and medium enterprises, supported by a number of innovative ventures in microfinance (Mosley 2001; Mosley and Marconi 2006), in which Bolivia has a reasonable claim to be a global market leader. (The last two of these are effectively joint ventures with the aid donors, on whom Bolivia is much more dependent than any other Latin American country10) These tendencies helped to improve the appearance of the social indicators, and even allowed some international financial agencies, as we saw, to feel a measure of euphoria about the transformations occurring in Bolivia. But the persisting inequality previously referred to, aggravated by persisting corruption in the public service, continued to undermine the political dividend delivered to the ‘Andean jaguar’ by economic growth . When the global recession hit, these areas of long-term weakness were to aggravate the short-term mechanisms of the political poverty trap, in a manner which we now examine.

3. The crisis of 2000-06, and alternative explanations of its ‘persistence’



The ‘East Asian crisis’, having arrived in Latin America via Brazil at the beginning of 1999, hit Bolivia later still, in the second half of the year. The next five years were all years of falling per capita GDP , there have been five new presidents in the last five years, and lethal political violence has occurred in every year except 2000, with a climax in 2003 (Table 3). For the moment at least, political stability has gone.

Table 3. Bolivia: evolution of the economy in relation to elections and political violence, 1997-2006







1998

1999

2000

2001

2002

2003

2004

2005

estimate

Real economy


























Growth

GNP per capita (in current US $)


1070

1023

1016

949

883

870

874

890


Real GDP growth (%): absolute

Per capita


5.2

0.4

-4.6



2.4

-0.7

0.0

-6.6



2.5

-7

2.6

-1.5



3.5

0.4

3.6

0.2


Investment

Investment/GNP(%)



23.8

18.4

17.3

17.0

15.0

12.5







Foreign investment/GNP(%)

11.9

12.9

10.7

8.7

8.3

4.5







Savings/GNP(%)

16.0

12.5

11.8

12.7

13.4

9.5







Public finance

Budget deficit/GNP(%)


















8.5




3.0

Poverty indicators

Urban unemployment rate (INE)(%)

Urban unemployment rate

(CEDLA)%


5.3


6.1


6.8


7.3


7.4


8.0





8.2


Headcount poverty (INE)(%)




62.3

65.5

64.3

64.6

64.1

63.6

63.1

Gini coefficient of inequality(%)


62.7

62.2

64.4

61.5

63.2

62.4

61.4

60.1

Political changes and incidence of violence


























Changes of government










Vice-President

Quiroga succeeds on death of Banzer





June: election won by Sanchez de Losada
October: Sanchez de Losada resigns and flees from country after El Alto riots. His Vice-President, Carlos Mesa, takes over.




June:

Carlos


Mesa

resigns


following

further


riots in

El Alto.


Provisional govt

appointed under

Eduardo

Rodrigues



(chief

justice)
December

general

election:



won by

MAS


under Evo Morales


Incidence of political violence:

Deaths in policy-related violence









Feb- April: 4

(Cochabamba ‘water war’ and other rural blockades)


18 Sept-4Oct: 7

21-30 June: 2

January:12

February: 30 (La Paz)

October: 59 (La Paz and mainly El Alto)






June: 1(Sucre)

Source: Instituto Nacional de Estadistica (www.ine.gov.bo); Banco Santa Cruz/Muller y Asociados, Estadisticas socio-economicas 2001, 2003, 2005. Estimates of headcount poverty from UDAPE . ‘Deaths in policy-related violence’ and ‘Days lost through strikes and demonstrations’ are our own measure, which is elaborated in Mosley(2006b), Appendix 2.
A brief chronology of these episodes of violence can help to explain the interaction between short-term and long-term factors in causing the poverty trap to snap shut. In April 2000, blockades in protest at the government’s economic policies were organised by the CSUTCB (Confederacion Sindical Unica de Trabajadores Campesinos de Bolivia – the small peasant farmers’ union) in various parts of western and central Bolivia, in protest against the increases (of up to 275%) in prices imposed by the water authority in Cochabamba, privatised under Law 21060. In the process of suppressing these blockades, four people were killed11 . In February 2003, a proposal was made to extend the income tax net downwards to include various categories of salaried employees not previously covered, in preparation for the arrival of an IMF mission which was expected to provide a $3.9 PRGF (Poverty Reduction and Growth Facility) credit in return for credible reductions in Bolivia’s fiscal deficit of 8.5 per cent of GDP12 . Before the proposal could be implemented, it was leaked to the press and, when a riot was started by students in the Plaza Murillo, the La Paz square where the presidential palace stands, the police, who were amongst the low-paid workers at risk of being brought into the income tax net under the new proposals, did not defend the palace, and stood aside. The army were then sent in to discipline the police, among whom about two-thirds of the 30 fatalities in the subsequent rioting took place13.
The climactic confrontation between the security forces and civil society took place in October 2003. It followed the announcement of a general strike in El Alto and La Paz by the COB (Central Obrera Boliviana – Bolivian Confederation of Trade Unions) in protest against a government plan to export Bolivian natural gas in an unprocessed state through Chile. The army, under government orders, broke a blockade of the Senkata petroleum depot, on the south side of El Alto, by force on 13 October, and this action escalated into a more general insurrection across the whole of El Alto in which, on 13 and 14 October, at least 59 people were killed14. On 14 October, the vice-president, Carlos Mesa, detached himself from the government in the light of the killings, and when, on 17 October, President Sanchez de Losada fled the country to escape what had become a lynch mob, Mesa was sworn in as interim president. His 21-month administration ended also with a general strike initiated in El Alto, in June 2005. The election of the country’s first Aymara-Indian president, Evo Morales, has not ended the climate of instability: in sectarian rioting between groups of miners in Oruro in October 2006, a further fourteen persons were killed, and two more died in demonstrations in Cochabamba in January 200715 .
Why did these incidents of political violence occur? At the level of proximate causes, one account given in the wake of the February 2003 violence by the Governor of the Central Bank, Juan Antonio Morales, stressed the long-term factor of inequality (especially ‘horizontal’ inter-ethnic inequality), and the failure of the government’s short-term measures to relieve it:
[The increases in] Bolivia’s external debt and the external aid aimed at reducing poverty benefited mainly the middle class. Even if improvements were achieved in the Human Development Index and poverty fell, the distribution of income deteriorated, as it did across the whole of Latin America. The deterioration of income distribution in a poor and supremely politicised country is perhaps among the main causes of the tragedy of [last] February16.
However, several countries also suffering from high levels of inequality, including some in Latin America, did not suffer from the same high levels of overt social conflict (see further Table 8 below): so one thing that has to be explained is why a given plausible cause led to particularly grave effects in Bolivia. Secondly, it is useful to embed the Governor’s explanation in a broader picture of cause and effect which takes into account not only the causes of violence, but its consequences in terms of lowered investment rates, and thence lower productive potential and incomes.
These are captured by the ‘ political vicious circle’ model originally presented in Figure 1, which suggests that a circular causation between low incomes, political instability, investment collapse and low incomes will persist if the connections from economic decline to institutional debility and bypassing of formal political institutions (links 2 and 3 on Figure 1) are strong enough. In what follows we shall seek to argue that these linkages were particularly strong in Bolivia, and caused the political poverty trap to close, because of four factors:

    1. deinstitutionalisation’ or ‘political decapitalisation’: because of the decay of a range of institutions designed to promote justice and in particular to protect the interests of the weak, the deterioration of income distribution came to seem particularly hurtful to the excluded.

    2. The metamorphosis of party politics: especially over the years of recession (2000-2005) the political parties acknowledged by the politically weak as protecting their interests moved away from parliamentary towards other channels of influence.

    3. The geographical focussing of discontent: much of the anger felt by the poor was experienced in a location (El Alto) where it could be organised and deployed with reasonable probability that violent extra-parliamentary action could achieve long-term political change.

    4. Wasted opportunities for executing ‘pro-poor’ modes of policy reform: even in face of the extreme vulnerability factors represented by (1) to (3), economic policy options for healing the underlying social conflict existed, had been successfully been tried out in other contexts, and might have been helpfully tried out in Bolivia. They were not used, and for this lack of vision the international financial institutions, on which Bolivia more than most crisis-afflicted countries was heavily dependent, bear some responsibility.

Political instability then drove away foreign capital, and the loss of investment perpetuated low income, completing the vicious circle. Having provided a rationale to support these hypotheses, we then, in Part 4, offer a test of them.



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