Bolivia: Economic Consequences of the New Constitution

Juan Antonio Morales* and Thomas J. Trebat

In a January referendum followed around the world, a significant majority of Bolivians (62%) voted in favor of a new constitution.  On the surface, the passage of the constitution is a victory for Bolivia’s indigenous majorities and provides reason to celebrate.  The new charter promises more equitable access to land and other natural resources, redefines Bolivia as a “plurinational state” in which multiple societies (e.g., 36 defined ethnic groups) and their legal structures co-exist, and guarantees social and economic rights.  As the embodiment of the ideals of Bolivia’s social movements, this constitution is a powerful document.

The economic consequences of the document are less clear, however, and these deserve careful scrutiny, especially in the case of Bolivia.  As we see it, what is written in the document (which few voters could have been expected to digest) raises so many concerns about economic and political institutions in Bolivia as to cast doubt on the ability to create the wealth needed to deliver the rights promised.  For all its symbolism, this constitution could make life even more difficult for all Bolivians, perhaps especially the poorest Bolivians, by dividing the country politically, creating permanent legal and economic uncertainty, and discouraging the private investment and knowledge transfer in natural resource sectors that Bolivia so desperately needs.

Consider first that a substantial minority of the population opposed the new charter, thus widening fissures in a society already dangerously divided along class and regional lines.  Voters in four of the nine provinces, the wealthier ones in the energy-rich lowlands of the East, voted to reject, despite assurances of regional autonomy.  The political gap between the East and the Andean highlands has not been bridged by the new constitution.    This issue remains to be addressed in the future.

Class divisions and urban-rural divisions in Bolivia were also clear in the vote. The constitution was rejected in most of Bolivia’s cities, with the notable exception of La Paz and El Alto, and even in La Paz, the middle-class and wealthier neighborhoods voted against.  One can choose to read in the vote results the clear voice of the vast majority of Bolivians who are poor, but it should be a concern for all that Bolivia’s middle classes and its educational and entrepreneurial elites viewed the document with such evident alarm.  The new legal charter has sown uncertainty among those who possess most of Bolivia’s human and financial capital, resources which Bolivia, poor and isolated and slipping behind the rest of the region, can scarcely afford to alienate or do without.

Why were the urban middle classes and the Eastern provinces so opposed to the constitution?  Some of the opposition was clearly on practical grounds.  Many believed that the now discarded Constitution of 1967 had served Bolivia well and there was no need to rewrite it from scratch.  Opponents were alarmed as well at its length (411 articles), the numerous contradictions and ambiguities, and the enormous fiscal burdens that could be placed on the State in order to provide all Bolivians with the social and economic rights spelled out.

The political independence of the judiciary in Bolivia is weakened, and possibly undermined, in the new constitution. Supreme Court judges are to be elected by popular vote for a fixed term of six years with no re-election.  Ethnicity will be taken into account in the selection of the judges, though exactly how is not clear.  The same selection procedures apply as well for judges of the Constitutional Court.  In the context of a country adjusting to a new constitution, this mode of judicial election is bound to add to significant legal uncertainty

On the economy itself and economic institutions, the key question is how private investment will react to the new constitution.  Our reading of the relevant economic chapters leaves us concerned on this score.  The chapter on Bolivia’s “economic constitution” is shot-through with the long-discredited ideas of state-led development and protectionist policies so characteristic of the Latin American economies in the 1950s and 1960s.  Four economic sectors are deemed to comprise the “plural economy” – state, communitarian, private, and social cooperative – yet exactly what these sectors consist of and the boundaries between them are not clear.    Private investors interested in the natural resource sector, for example, may reasonably conclude that primacy will be accorded to collective forms of ownership, such as communitarian property, sacred in the indigenous traditions.

The Bolivian state emerges with enhanced authority to allocate resources.  The constitution reserves for the state the development and exploitation of natural resources without sufficient regard for the technical and financial inability of state agencies to operate in this most critical sector of the Bolivian economy.   At most, private companies will be allowed to sign association and service contracts in the natural resource area under the condition that they reinvest all profits in Bolivia, which for some companies may be acceptable, but which is hardly a compelling argument for foreign investment.  Public utilities (in areas such as water, sewage and electricity) and pension funds are off-limits for private firms. The once level playing field for foreign and domestic firms has been tilted to favor the latter who will receive priority consideration in public policies.  All firms face the possibility of labor taxes and other charges to generate funds to meet social goals.

The implications for monetary and financial policies are also serious.  Bolivia’s central bank has operated under the basis of a 1995 law which granted it a high degree of autonomy; over the last thirteen years of political strife, the Central Bank of Bolivia has been an important guarantor of financial stability.  For reasons that are not completely clear, the new constitution will alter this role of the Bank and require changes in the Central Bank law.  For example, the objectives of monetary and exchange rate policy now will be set by the executive branch of government in coordination with the Central Bank, but the clear implication is that the Bank will be implementing policies decided upon in the presidential palace.

The new constitution also prohibits the Central Bank or the government from assuming any kind of private sector liabilities, including those of the banking system. In case of the closing of a bank, no public money could be used to rescue depositors. While this may sound fine as a matter of principle, the constitution can interfere with the Bank’s role in assuring financial stability in the event a failed bank ignites a run on the rest of the system.  What if there is the risk of financial collapse? Why give constitutional rank to a public policy that will have to change according to the circumstances?

Our concerns about the economic consequences of the new charter are amplified by our understanding that Bolivia has been lagging behind the rest of Latin America in per capita income (Chart 1) and is directly exposed to the ravages of the global financial crisis due to its heavy dependence on commodity export prices.

Low rates of investment and low productivity have characterized the Bolivian economy for many years. (Chart 2) This situation has not changed substantially since President Morales assumed office in 2005.  (Preliminary figures suggest that private investment may have increased in 2008; the increase may be due to a construction boom spawned by the rise in commodity exports.)  Private sector investment is well below the Latin American average; foreign direct investment is virtually nil; relations with the neighbors (including Brazil) are strained in part because of Bolivia’s resource nationalism; and funding sources such as the multilateral agencies and the United States have been marginalized.  Venezuela has not been an important source of financing to Bolivia either and with prevailing oil prices, President Chavez is unable to ride to Bolivia’s financial rescue.

For a good while, the remarkable boom in global commodity prices, especially for energy, masked these very basic challenges to economic growth in Bolivia.  Now the boom in energy and commodity prices is a thing of the past and new sources of economic growth are desperately needed.  The bottom line is that new constitution is not going to help to increase investment or productivity; in fact, it may actually undermine growth by discouraging private investment.

The economic picture today in Bolivia is not all disconcerting.  President Morales since 2005 has conducted a relatively prudent management of the economy, a performance that could be surprising to outsiders in view of his aggressive anti-market rhetoric.  Inflation has drifted upward, but remains under control.  Twin surpluses characterize the fiscal and external accounts.  International reserves are at record levels of close to $8 billion. (Chart 3)  At the same time, the long-term growth prospects for Bolivia are worrisome and the worst effects of the global financial crisis are yet to be absorbed.

Bolivia is facing poor growth prospects for a long period of time and is virtually on its own.  By exacerbating political divisions, planting the seeds for more regional unrest, and creating institutional uncertainty, the new constitution might have just made matters worse.


*Juan Antonio Morales was president of the Central Bank of Bolivia from 1995-2006.  He is now a Visiting Professor of International Affairs at Columbia University.


5 Responses to "Bolivia: Economic Consequences of the New Constitution"

  1. CSG-V   February 7, 2009 at 11:43 am

    Bolivia is trapped in the hand of a group of racially motivated politicians. This group wants to increase their wealth trough the creation and corruption of public companies. They also show a total disregard for the technical expertise required to run those companies.They understand that if they implement a meritocratic system in those new public companies, they will lose access to the wealth of the state. I feel that Bolivia is trapped by a bunch of greedy individuals, that thanks to the uses and abuse of the political and legal system, have gained total control of the wealth (Natural Resources) of the state.

  2. Guest07   February 10, 2009 at 8:38 pm

    Bolivia for many years have been dominated by a small groups of oligarchs who tend to live in the lowlands of the east. These oligarchs have rich themselves by manipulating the political system. Furthermore, they are by far the msot racist people in the world and view other bolivians as a group of serfs and whose only proper use is to exploit them.

    • Anonymous   February 11, 2009 at 8:08 am

      It is sad to see a country with such potential, be driven to one of the worst political and economic crisis. Individuals argue that a small group of Oligarchs are the reason for all the problems of the West, but have you even see a group of 1 million oligarchs? Can you have an opposition of more that 50% of the country and still consider them a group of oligarchs?

  3. traveller   February 13, 2009 at 4:22 am

    After many years living in Latam countries my impresion for a group of them (Mexico, Guatemala,Venezuela and Bolivia) is that they are not recognizing the main problem they have…they handle S.XIX social systems where racial origin (being white european, mestizo or indian) is still very important, you can find in this countries blond women from East Europe how are practical analfabets bieng elevated to spouses of important people just because they are blond…same story with jobs,education,etc.This countries have not implemented anti-racism responsible design policies, the bolivian one is a ” vendetta” of this problem but is not a solution.

  4. Anonymous   June 8, 2009 at 3:57 pm

    Enter discussions about the New Bolivian Constitution translated to English, click