Chapter 1

Introduction to the Country of Bolivia

country in the world of today, where it lies geographically, politically and economically and

how did it arrive at that situation. Such background would be very useful in the paper when

trying to test for evidence of the three hypothesis of trade in underdeveloped countries and

analyzing the results of those tests to understand why or why not such hypothesis are either

confirmed or rejected by the data.

1.1. Geography:

Bolivia lies in Central South America,

in the southern hemisphere. Its area totals

to 1,098,581 square kilometers, ranking as

the 28th largest country in the world. Out

of such area, 1,083,301 square kilometers

are land while only 15,280 square

kilometers are water.

Bolivia has been one of the two

landlocked countries in South America,

along with Paraguay, since 1879, after

losing its coastal territories to Chile in the

War of the Pacific. It is bordered by Brazil

from the north and the east, by Peru and Chile from the west and by Argentina and Paraguay

from the south.

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 The western highlands of Bolivia are part

of the Andes Mountains while the eastern

lowlands are part of the Amazonian

rainforests. This is why the climate is

diverse depending on the altitude and the

season ranging. In the high altitude areas,

the weather is generally dry and cold and it

becomes snowy in the winter especially in

the southwest. In the low altitudes

rainforests, the weather is warm, humid and rainy.

Bolivia’s natural resources are mainly mineral and hydrocarbon wealth. It is rich in tin,

zinc tungsten, antimony, silver, iron, lead and gold in addition to petroleum, natural gas and

timber from rainforests. With regard to agriculture, 2.78% of the land is arable and 0.19%

represents permanent crops living the majority of 97.03% to other activities.

Bolivia shares with Peru the control over the largest lake in South America and the highest

navigable lake in the world, namely, Logo Titicaca. The lake acts as a moderator to the

climate of the surrounding area making cultivation of some crops like wheat and maize

possible.

1.2. History:

Inhabitants of the now called Bolivia date back to around 20,000 years in the Andean

region. By the 2nd century B.C. a civilization had formed at the south of the Lake of Titicaca

namely, the Tiwanakan civilization named after the city of Tiwanaku. By 1200 A.D., the

Tiwankan culture has weakened or even disappeared due to a drought. Other similar cultures

have appeared after that up till the 13th C.

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 By 1450, the Bolivian territories had become a part of the Incan empire until the Spanish

colonization took place in 1525. The Spanish empire robbed the Bolivian silver as well as

other treasures to accumulate its Mercantilistic bullion. As was the case with all colonies,

opposition to colonial rule grew and demands for independence were met in 1809.

However, 16 years of struggle and wars separate the independence of Bolivia from the

establishment of the republic of Bolivia in 1825. The next period witnessed intense wars with

neighboring nations, namely, Peru, Chile, Argentina and Brazil that witnessed some Bolivian

victories at the beginning in the War of the Confederation, but ending in Bolivian defeats

especially in the War of the Pacific. In those wars, Bolivia lost its sea access to Chile in the

War of the Pacific as well as many other natural resources rich lands to other neighbors.

Near the end of the 19th century, economic and political stability could be maintained due

to the rise in the prices of their minerals, especially gold and silver at the beginning and then

replaced by tin in the first third of the 20th century. Such economic stability was accompanied

by the rule of the elites who advocated laissez-faire policies.

However, such stability was not sustained due to the mistreatment of the indigenous

people and the era came to an end by the Chaco War (1932-1935) when Paraguay defeated

Bolivia. Following the war, disturbance ruled over Bolivian politics until the revolution took

place in 1952 led by Nationalist Revolutionary Movement (MNR) which introduced some

political, economic and land reforms. The reforms bared some fruit and a period of economic

and political rest for 12 years.

The military took over next through a coup and ruled the country in a dictatorship form in

the 70s. During that time, the economy grew but at the cost of severe violations to human

rights. Hence, when the Latin American debt crisis hit Bolivia by the end of the 70s, political

stability could not be maintained and coups became common again.

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 After experiencing the devastating effects of political instability, the military resorted to

the Congress to establish democracy. Yet, even after democratic ruling took place, the

economic load of the debt crisis was very heavy on the Bolivian economy. The government,

the military and all the parties exerted collective efforts to make it through the crisis with the

minimum losses.

By the beginning of the 90s, the worst of the crisis was over; and in 1993 the elections

brought to presidency Sanchez de Lozada whose policies are very much pro capitalism. His

policies represented to a big extent, the IMF’s recommendations after the crisis regarding

liberalizing the economy, privatization and free trade. Such policies were met by discontent

from many sectors.

The following president resumed the same policies of the former coupled with attacks on

the “illegal” coca industry in Bolivia which contributed to a significant source of income to

many peasants. Sanchez de Lozada came back to office with more free market policies in

2002. However, this time a recession and elevated discontent of the Bolivian trade policies,

especially with regard to exporting natural gas, resulted in demonstrations and political

unrest.

The unrest continued until the “Movement Toward Socialism” (MAS) party headed by

Juan Eva Morales assumed office in 2005. Morales seeked more control over Bolivia’s

natural resources through nationalization and renegotiating agreements with hydrocarbon

companies. His radical policies resulted in more revenue to the government but at the costs of

complicated foreign relations especially with the United States.

1.3. Government Organization:

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 Government type: Republic

Independence: August 6, 1825

Constitution: February 7, 2009

Suffrage: Universal adult (age 18), compulsory

Regional governance:

The country is divided into nine

departments, namely:

* Beni (Trinidad)
* Chuquisaca (Sucre)
* Cochabamba (Cochabamba)
* La Paz (La Paz)
* Oruro (Oruro)
* Pando (Cobija)
* Potosí (Potosí)
* Santa Cruz (Santa Cruz de la Sierra)
* Tarija (Tarija)

Those departments are further divided into provinces which are further divided into

municipalities and cantons.

Governmental branches:

• Executive branch (president and cabinet)

The president is both the chief of state and head of government. Both the president and his

vice are elected together. The Cabinet is appointed by the president.

• Legislative (bicameral)

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 The bicameral Plurinational Legislative Assembly has two chambers. The Chamber of

Deputies has 130 members elected to five year terms, seventy from single-member districts

and sixty by proportional representation. The Chamber of Senators has twenty-seven

members (three per department), elected to five year terms.

• Judicial (five levels of jurisdiction)

The judiciary consists of a Supreme Court, an independent Constitutional Tribunal, and

departmental and lower courts.

Major political parties:

Movement Toward Socialism (MAS), Social Democratic Power (PODEMOS), Nationalist

Revolutionary Movement (MNR), National Unity (UN), Social Alliance (AS)

1.1. Demographics: (According to 2009 estimates)

The population of Bolivia is around 9,775,246 ranking the 84th on the World. The

population is growing at 1.722 % per year. The ratio of males to females in the population in

0.98:1

With regard to the age structure in Bolivia, around 35.5% of the population are less than

14 years old, 60% are between 15 and 64 years old and the remaining 4.5 are above 65%.

The total median age in Bolivia is 21.9 years. The median age for males is slightly less at

21.3 years, while the median age for females slightly exceeds the median at 22.6. The life

expectancy of the total population is 66.89 years ranking 156th. The males’ life expectancy is

64.2 years while the females’ is 69.72 years.

The urban population represents 66% of the total population in 2008 while the rate of

urbanization is estimated to be 2.5% from 2005-2010.

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 There are four main ethnic groups in Bolivia, namely, the Quechua (30% of the

population), mestizo (30% of the population), Aymara (25% of the population) and white

(15% of the population.

The majority of the Bolivians are Roman Catholics (95% of the population) while the

minority are Protestant (5% of the population).

There 3 official languages, Spanish (60.7%), Quechua (21.2%) and Aymara (14.6%), in

addition to, foreign languages (2.4%) and others (1.2%).

Literacy rate, defined as being over 15 and can read and write, represents 86.7 % of the

total population. The literacy rate is higher for men at 93.1% and lower for women at 80.7%

according to 2001 census.

1.2. Economy:

Overview:

Bolivia is one of the countries in the world that is heavily endowed with natural resources

in terms of hydrocarbons and minerals. Some have even described it as the “Saudi Arabia” of

Latin America. It has the second largest natural gas reserves in Latin America. In addition,

Bolivia is very rich in minerals like Tin, Zinc, Lithium (it is estimated to contain 50%-70% of

the world reserves) and other minerals.

Although, such resources have brought about economic prosperity through international

trade at the beginning of the 20th century, currently, Bolivia is one of the poorest and least

developed countries in Latin America. Several factors have contributed to Bolivia’s current

tough economic situation. The drop in the world prices of tin, in the early 80s, coupled with

the withdrawal of foreign aid by western countries, after the Cold War, have significantly

reduced the country’s income. The effect was augmented by the Latin American debt crisis in

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the 80s that have increased Bolivia’s debt significantly and left it in a deplorable state.

Bolivia continued to be one of the heavily indebted poor countries (HIPC) until today. Public

debt amounted to 44% in 2009 down from 45.2% in 2008.

However, with recommendations from the World Bank and the International Monetary

Fund, economic restructuring and reform along with free trade policies were implemented

targeting macroeconomic stability and keeping inflation down. Although such policies had

negative effects on income inequality and unemployment, they resulted in economic growth

in the 90s.

The new millennium for Bolivia witnessed political and social unrest along with the

adverse economic effects of the 2001 recession in the U.S. until Morals’ administration has

come to place. Since then, economic policies are more socialist and less open to free trade.

Still, the fruits of Morales’s policies are to be discovered.

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 Nominal and Real GDP and their growth rates (in national currency):

Both nominal and real GDP grew between 1990 and 2008. Although nominal GDP grew

very rapidly, real GDP rose modestly in that period indicating inflationary pressures on the

economy.

The growth rates of both nominal and real GDP fluctuated a lot during that period.

However, the growth of real GDP shows smoother behavior than the growth of nominal

GDP. The years of 1992/1993, 1999, 2001 and 2007 witness slowing down of both nominal

and real growth rates.

GDP composition by sector in 2008:

Contrary to the claim that developing countries’ economy is usually based on agriculture,

it actually contributes the least among economic sectors to GDP by 11.3% only. Of course,

Bolivia’s geography does not encourage expansion of agriculture which explains such

phenomena. Industry follows agriculture with 36.9% contribution to GDP. Mining and

hydrocarbons extraction belong to the industry sector and represent a major component of it

along with some basic industries like textiles. Finally, the largest contributor to GDP is the

services sector with 51.8%.

Poverty:

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 The GDP per capita in Bolivia is relatively low at $4600 (PPP) in 2009 ranking the 144th

on the world.

Moreover, inequality is severe in Bolivia with 60% of the population under poverty line

according to 2006 estimates. To make the point clearer, the poorest 10% of the population

contribute shared by 0.5% in income or consumption while the richest 10% shared by 44.1%

in 2005.

Labor:

The labor force in Bolivia totals to 4.536 million according to 2009 estimates by the CIA

World Factbook. Unemployment rate in 2009 is 8.5% compared to 7.5% in 2008. The

composition of labor force by sector is as shown below.

Inflation:

Between 1990 and 2008, prices continually increased indicated by the consumer price

index (CPI) and the GDP deflator.

Both the CPI and the GDP deflator grow in synchrony during the 1990, yet they start to

diverge a little in the 2000s with the GDP deflator growing faster than the CPI. They also

move counter cyclically with GDP growth.

Exchange rate:

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 The Boliviano was continually depreciating from 1990 and up to 2005 against the USD

until it slowed down, stopped and reversed direction by appreciating from 2006 onwards.

Trade Balance:

Bolivia used to have an unfavorable trade balance during the 1990s and the early 2000s.

However, starting 2003, Bolivia trade balance started becoming more and more favorable.

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