Bolvia

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Integrated Infrastructure Development Plan Proposal
Finance Ministry of Bolivia - Request for a concessionary loan from The
World Bank
Matt Dobjeleski, Alex Tripp, Zach Smith, Ben De Witte
ECON 355: Economic Growth and Development
December 11, 2014

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I. Current Economic Position
Bolivia is no stranger to economic hardship and development barriers. Since
declaring independence from Spain in 1809, the country has faced extreme poverty,
periods of rampant hyperinflation, numerous military coups, and a long-term sect
between indigenous peoples and the nonindigenous. But with these tribulations, Bolivia
has improved its economic situation time and time again, currently seeing growth rates
higher than the past three decades. Currency reform and a balanced budget pulled them
out of 23,500% worth of inflation in the 1980’s.1 Responsible policy application also
made it possible for Bolivia to not only avoid the 2008 recession but also see the highest
growth rates in the Western Hemisphere during that time. High international reserves and
avoidance of contractionary monetary policies to check creeping inflation proved
extremely productive during 2007-2011. The inflation proved to be temporary and short-
term, validating their opposition to contractionary policy. With all of this improvement,
obstacles still persist, restraining Bolivia to a lower middle-income economy. 2
In the wake of the 2008 financial crisis, recovery came about quickly for Latin
American countries, as stock markets and exchange rates rebounded back to pre-crisis
levels within the year.3 The abundance of commodities such as soy and iron, along with a
surge in Chinese demand for raw material, cushioned Latin America from the worst of
the crisis. Bolivia’s growth rate only shrunk from 6.1% to 3.4%.4 Six years later, Latin
America growth rates have hampered to 1.1%, due largely to slowed growth in main
trading partners, China included.5 This slump was felt throughout emerging economies in
the Western hemisphere, but bypassed several South American countries, Bolivia among

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them. In 2013, GDP grew a robust 6.8%, from 187 billion BOB (Bolivian Bolivianos) to
204 billion BOB, and is projected for 5.5% growth in 2014. 6
Figure 1: Bolivia’s annual GDP growth from 2008 to present, showing a steady increase after the 2008 financial crisis.
Source: Trading Economic, Economic Indicators
Even with this sustained flourishing growth, Bolivia is still considered one of
South America’s poorest and least developed countries. The data during the recession and
in the years following is encouraging, but still as of 2011, 45% of the country’s
population of 10.8 million lives below the poverty line.7 This is largely due to the
substantial size of Bolivia’s agricultural sector. It occupies the largest share of GDP, at
12.3% using the most recent data as of 2009. Since only 3.5% of Bolivia’s land area is
arable and usable for farming, the entire sector is extremely inefficient. With so many
people competing on such scarce land, the productivity of the land plummets, crops
dwindle and citizens are forced to participate in subsistence farming. As of 1996, 40% of
Bolivian agriculture was subsistence based, which dampens economic productivity, as
there is no diversification or investment in capital. 8
This GDP, high relative to neighboring economies, is encouraging but holds much
less weight when human development is considered. With a Human Development Index
rank of 108/187, which would be lower yet when adjusted for distribution inequalities.

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Bolivia may be experiencing “growth without development”, a situation where social
welfare is detached from economic growth. Contributors to this issue include class
stratification present between indigenous and nonindigenous peoples, child labor, and
poor infrastructure. These factors may explain why Bolivia lags behind the more
developed countries of the region, Brazil, Mexico and Chile. Foreign investment and
policy adjustment are two methods of improving Bolivia’s internal problems, as well as
their stance in regional and global markets. 9
Ethnicity in the country is described as 65% indigenous predominantly Quechua
and Aymara, 15% European descent mostly from Spain and Germany, and 25% mixed
white and Aymara.10 With over 30 different indigenous groups, all with different cultures
and languages, economic development is challenging and not very straightforward. These
groups live primarily in the Andes region of Bolivia, located in the Southwest, and
poverty is more common there. These groups are very traditional and religious, with
strong ties to the land they reside on, considering it sacred. This is notable because this
Southwest region of the country is home to an expansive area of salt flats, called Salar de
Uyuni. In fact, this salt flat is the largest is the world, over 4,000 square miles, and cover
a massive lithium reserve, over 34% of the world’s lithium reserves.11 As of 2009, no
mining or production of lithium had occurred on the salt flats. This was due to resistance
from the Aymara and Quechua peoples, lack of control over production by foreign firms,
and the environmental concerns associated with mining such a corrosive substance. Small
pilot plants have recently sprung up, with caps on how much lithium they can produce.
With such a large demand for lithium in today’s market, large-scale production could
help elevate Bolivia into a developing middle-income economy.12 Bolivia’s neighbor

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Chile provides 38% of the world’s lithium supply, dwarfing Bolivia’s share, and can be
used as a template for Bolivian lithium expansion. Their goal is to ultimately produce
30,000 tons/year, over a fifth of the market’s value of $9.8 billion, but solutions to these
production problems need to created, and will be considered further in the policy
evaluation portion of this essay. 13
Bolivia’s child labor has been increasing over the past few decades. President
Morales passed legislation in October of this year that will lower the legal working age to
10, the youngest in the world. The International Labor Organization specifies developing
economies not allow children under 14 to work, which conflicts with the new law.
Morales defends his position with anticipated economic expansion and poverty reduction.
This legislation will also increase regulation for the 10-13 year olds that are now
protected, improving compensation and conditions. Despite this, experts are rejecting
those justifications and submit this move as regressive. The country’s youth already form
58% of the labor force, which is disadvantageous to education and contributes to poverty
cycles. An immediate ban on all child labor would not be ideal, as food and other
immediate needs would be jeopardized with the lack of income, but there should be
steady phasing out of the issue.14 Bolivia has taken a great step backward in this regard.
Primary school attendance currently has a rate of 94%, as it is mandated by
government although enforcement is difficult in rural areas. To combat challenges in
attendance enforcement, government spending was directed to investment in education,
specifically a program named Bono Juancito Pinto (BJP), in 2006.15 BJP provided
conditional cash transfers to students up to grade six, and is reliant on enrollment. BJP,
and its accompanying public investment programs will be further examined in the fiscal

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policy portion of our formal proposal. Secondary education is not compulsory, and is as
low as 25% attendance rate.16 This illustrates propensity to work higher than propensity
to attend school in children ages 13-17 and contributes to Bolivia’s 45% poverty ratio.
Policy discouraging child labor will increase lagging secondary schooling enrollment and
attendance.
Shipping any good in Bolivia is very expensive currently, at 20 times the cost of
transportation in Brazil.17 Flooding is an ongoing concern in the country, and weakens
transportation infrastructure that’s in place. Routes such as the Yungas Road in La Paz
provide extremely dangerous travel conditions and speak to the severity of Bolivia’s
infrastructure problem.
In the past decade, Bolivia has reported a trade surplus with a positive current
account of $362.1 million (3.3% of GDP), only briefly dipping below zero in 2012.18
This is another break in the clouds for poverty stricken Bolivia. Improvements to
Figure 2: Real Export prices in Bolivia, 2002 – 2009. All variables increase over this time period. Source: Weisbrot, Ray,
and Johnson, The Economy During the Morales Administration

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efficiencies in hydrocarbon production are partially responsible, and natural gas accounts
for 43% of total exports.19 Rising commodity export prices relative to import prices also
put upward pressure on the current account, with terms of trade being 150.85 at the end
of 2013. 20
Currently a member of the Andean Community of Nations, Bolivia enjoys a free
trade agreement with Peru, Colombia and Ecuador. The Mercosur bloc of countries
comprised of larger economies such as Brazil, Argentina, and Venezuela also recently
associated themselves with the Andean Community, increasing the free trade area to 5
more Latin American countries.21 With tariffs eliminated and trade preferences on goods,
Bolivia’s international trade position is relatively favorable. This is trade surplus is
illustrated further by a strong balance of trade, being reported as $299 million in
December of this year. Two Mercosur members, Brazil and Argentina, are Bolivia’s
biggest trade partners, 33% and 12% of export respectively. 22
Figure 3: Exchange rate of the U.S. dollar to the Bolivian Boliviano for the past 12 years.
Source: Finance, Yahoo, USD/BOB

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The capital account has been fairly volatile, plummeting in 2006 from a $1.8
billion surplus to $9.7 million in 2008. Government debt forgiveness in 2006 and capital
flight around the same time were the two main drivers of this fall. A total of $1.75 billion
was cancelled between World Bank and IMF debt, and net foreign investment fell from
8.3% to -4.6% of GDP during this time as well. Capital account has remained low since
then, at a $5.7 million surplus. 23
Many developing countries in today’s global economy see wide balance of
payments deficit, with inadequate exports leading to a negative current account, and
foreign loans and investment inflating their capital account. Fortunately for Bolivia, this
problem is more prevalent in countries without oil reserves, and is another reminder as to
how important their hydrocarbon industry has become. Exports as a percent of GDP rose
from 12.6% in 1999 to 41.7% in 2008, and remaining a net exporter will help push them
from a frontier market to an emerging market. 24
Bolivian currency has a history littered with devaluation, hyperinflation, and
replacement. Presently, the exchange rate against the USD is equal to 6.91 Bolivian
Bolivianos (BOB), which is under a managed float.25 It is not fully dollarized but does
lean partially on the strength of the USD, as most Latin American currencies do. The
BOB was introduced after rampant inflation in 1987, and replaced the Bolivian Peso.26
After the dust settled and the BOB could stabilize, rates have been fairly stable in the past
twelve years, not exceeding 8.07 nor falling below 6.73. Part of this stability is due to the
44% dollarization (as of 2009). Complete dollarization would create a more stable
currency, but decreasing dollarization (BOB was 88% dollarized in 2000) demonstrates
increasing confidence in the BOB. Slight depreciation in the past three years may be due

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to higher inflation rates in Bolivia as opposed to the United States, as the three-year
averages are about 5.5% vs. 1.6%.27 The inflation bump that was seen during the
recession (spiking at 14% in 2008) put considerable depreciationary pressure on the
exchange rate but legislation did not pursue contractionary policy, which would have
hindered real economic growth. The surge in inflation proved to be temporary, validating
lawmaker’s stance, and by the beginning of 2009, the exchange rate had fallen 12.8%
down to 6.8 USD/BOB. 28

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II. Obstacles to Development
As mentioned in the previous section, Bolivia has many key factors that severely
limit their development. Subsistence farming, which has been a major problem
throughout the nation has been preventing growth of any kind due to the minifundios the
farmers work on and due to the density of citizens. The rift between the indigenous
peoples and nonindigenous peoples has been a very controversial and growing conflict
for many years. As many people want to use the untapped resources of Bolivia, the
indigenous people will not allow it. Child labor has also contributed as major obstacle for
Bolivia, with the recent bill that was passed this October, even more children are being
seen in the workplace. Bolivian infrastructure also needs to see improvement; if any
production or growth wants to be seen, the infrastructure needs vast upgrades. Lastly, the
Bolivian informal market is a major issue. 80% of the urban market sector is informal,
which results in high urban unemployment.29
Throughout Latin America, the inequality of distribution of land has always been
a major issue. In Bolivia, this is no different. The problem lies within the “latifundios”
and “minifundios. Latifundios are very large landholdings that can provide employment
at least 12 workers. Typically, these large farms are worked on by thousands of people.
The minifundios on the other hand are the opposite of the former. Minifundios are very
small landholdings that are not suitable for even a small family to work on.30 And, as
previously mentioned, only 3.5% of Bolivia’s land is suitable for farming. This means,
where farming is available, it is very dense with workers. Another issue seen with these
latifundios, are the wealthy land owners have not been using them properly. Many of
these landholders use the latifundios for power and prestige, rather than economic

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production. As a result, acres upon acres have been left idle and therefore unproductive.
In fact, this has led to widespread poverty. Specifically throughout the rural sector, 95%
of the population is poor.31 These people typically consist of agricultural peasants or
wage-earners who have limited landholdings and who lack access to credit and basic
infrastructure. Evo Morales however, has made many changes to help alleviate this issue.
The Land redistribution from the wealthy “latifundios” and agribusiness elites to
poor farmers and indigenous communities, has been seen as a landmark under the
Morales regime. According to data gathered by the National Agrarian Reform Institute
(INRA) the Morales administration has accomplished a great amount, but they are far
from being finished. The INRA has reported up to 157 million acres of land has been
surveyed and titled since 1996 under Bolivia’s land regularization laws. Benefiting more
than 1 million people. Some 134 million acres, or 85% have been titled during the last
seven years under Morales, compared to just 23 million between 1996 and 2005 during
the previous neoliberal governments. Fortunately, one-third of all regularized land is held
collectively by indigenous and peasant organizations in the form of self-governing Native
Community Lands. This is positive considering the owners of Latifunios have long
drown out the indigenous in terms of land. Another 22% is owned by individual or family
plots by small farmers. Together, peasants and indigenous communities hold an
approximate 88 million acres of titled land, more than double the amount they controlled
in 1992, as reported by the INRA(1). Although this can be seen as a great and historic
achievement for Bolivia, much work is still to be done. 32
In past years, the pace of land titling has fallen short of legal requirements and
popular expectation. For example, during April of 2013, only 60% of the land titles of the

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total 262 million acres in Bolivia were registered and titled(1) INRA officials have stated
they will require another five years for the complete process to be finished. Also, the
redistribution has slowed considerably. Data between June 2011 and October 2012, only
11 million acres were titled. This is halved by the average annual rate achieved in the first
few years of the Morales regime. Bolivia has been subject to pressure for land
redistribution and conflicts between social sectors over land have brought major
challenges to the government. The people of the Western Highlands represent around
70% of Bolivia’s rural population. These citizens have been increasingly land poor, as
their minifundios have been compromised by subdivision over successive generations as
well as climate change. 33
This has resulted in the migration to the eastern lowlands where the indigenous
people reside. It has also led to many conflicts because of the demand for land.
Interestingly, these peasant and settler organizations deem the indigenous people the new
latifundios landholders given the new distribution of land. As with no surprise, the little
education and technology known by the indigenous people have left these large lands as
unproductive as the previous landowners. According to the NGO “Fundacion Tierra,”
much of the 11.6 million acres of land that could be made available to redistribution is
compromised and not suitable for production34. As much as the Morales administration
would like to take credit for the grand redistribution of land, a major amount of fertile
agricultural land in the eastern lowlands continues to be held by agribusiness and
ranching elites. This land was awarded to these people as part of the military coups
during the 1970s, where they would award the elite with land so they were able to
promote agricultural exports. Again, it is stressed much of this land being underutilized

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and misused leading to little or no actual economic value. This suggests Bolivia lacks the
technology and infrastructure in order to maintain a productive agrarian system.35
Throughout the history of Bolivia, there has been a rift between the indigenous
peoples and nonindigenous peoples. This can be highlighted by the ongoing Parque
Nacional y Terrtorio Indigena y Parque Nacional Isiboro Secure (TIPNIS) conflict. At the
heart of this conflict is the construction of a specific highway that would run through the
center of Isiboro Secure National Park and Indigenous territory, an isolated area where
the traditional Amazonian native groups can be found. On December 4, 2011, the
Morales administration signed an agreement with indigenous leaders that clarified a ban
on the further construction of this highway.36 In regards to this law; there has been much
controversy. The law come into question as to whether the land and natural resources
remain “untouchable” for both the Andean and Amazonian indigenous people who reside
here. It was decided the area was protected only from large-scale enterprises but not
small scale operations that support indigenous tradition. The controversy has even led to
marches and protests by the indigenous people. For example, in December 2011,
indigenous activists engaged in a 65-day march of over 300 miles to protest the proposed
highway.37 Although big business is a main concern for the Amazonian indigenous
people, a new conflict arose when the Indigenous Council of the South (CONISUR),
which consist groups of cocoa grower are actually demanding the government to go
through with the high way.38 The members of CONISUR even went far enough to make
plans on marching to La Paz. It is apparent that Bolivia is split by this conflict of interest.
If the highway was to be built, it would improve Bolivian infrastructure and further
develop the nation. However, this decision clearly goes against the traditions and customs

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of the Amazonian indigenous people. As of April 2013, Morales announced the road
would be on hold until extreme poverty in the TIPNIS was eliminated.39
Child Labor has been an ongoing issue for Bolivia. This issue can be illustrated
through the lens of Basu. We must assume two assumptions. First is a household with a
high enough income where the family needs not send their children to work. The second
assumption is child and adults are substitutes of labor. Also, according to Basu’s Child
Labor equilibrium, the adult labor supply is perfectly inelastic.40 This highly inelastic
supply is very sensitive to decreases in wage and shows why many families send their
children to work. As wages decrease, the family requires higher income in order to
survive. This increases the supply of labor to both Adults and children. As the supply
increases, the demand for labor decreases and therefore we see an even further dip in
wages. . Production and wages in countries that enable child labor are always lower than
those who do not, and position themselves at a lower equilibrium. This problem is an
epidemic throughout Bolivia and severely hinders the education and health of children as
well as growth of the entire nation.
According to the United States Labor department in 2013, Bolivian children have
been engaged in child labor in agriculture and in the worst forms of child labor in mining.
Unsurprisingly, many of these children are working in the informal sector which lead to
even lower wages and more hours. In a study done by the department of labor, they were
able to find some striking statistics. 20.2% of all children of the ages 7 to 14 are
participating in child labor. The majority of the labor is seen in the agricultural sector
with 70.9% of children working. Only 7.9% of children are working in the industrial
sector and 21.2% of children are working in the services sector. 41

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Breaking down these sectors, we are able to see the kinds of activities these
children participate in. Children working in the agricultural sector have been planting and
harvesting crops such as corn, cotton, sugarcane, and peanuts. Observing the industrial
sector, we see the worst forms of child labor. These children are participating in forced
labor to work in the mines to find gold, silver, tin, and zinc.42 They are also forced into
the production of bricks. It is widely known the environment is not safe for these children
and typically fall ill or contract diseases. Lastly, in the services sector we see children
involved in street work, which entails vending, shoe shining, and working as
transportation assistants. While Child labor is a major internal issue, we now look onto a
key external factor, which is the clear lack of infrastructure.
Since Bolivia is a landlocked developing country, they do not have the luxury of a
coastal nation to work on exports. With this being the case, transportation infrastructure
plays a crucial role for Bolivia. Unfortunately for Bolivia, they ranked as having the
second worst transportation infrastructure in all of Latin America. Only having 3.9% of
GDP was spent on transportation in 2013, and as a result, only 7.1% of roadways in
Bolivia are paved.43
Contributing to this low level of infrastructure are the many natural disasters
Bolivia faces. According to the Germanwatch, Bolivia was ranked number six of
countries affected by natural disasters in 2007. For example, earlier in 2014, Bolivia was
struck hard by heavy rain, which resulted in 59 deaths and US $38 million in damage to
road infrastructure.44 The Bolivian government has undergone substantial criticism from
indigenous societies who feel the creation of new roads have been largely invasive and
pose a threat to their ecosystem. This is no different than the ongoing TIPNIS conflict

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mentioned above. The lack of infrastructure poses a large threat to the education of all
citizens. This is especially seen in the rural areas. With the 95% poverty rate in rural
areas, one could assume this is due to lack of infrastructure. Only 7.1% of roads are
paved along with the constant natural disasters that further prevent roads from being
built.45 This leaves the people in the rural sector with no formal way of travel and makes
it more difficult for the children to receive an education. If there are no ways to get to
schools, the children will be given no formal education. The last major obstacle we have
found is the large informal sector in Bolivia.
According to the World Bank, nearly 80% of urban and rural employment in
Bolivia is informal. The nation leads the world in value-added generated through the
informal sector as a share of gross domestic product, estimated to be 68%. The high level
of informality has many negative implications for Bolivia regarding economic growth,
financing of public goods, as well as the integrity of public and private institutions. A
main reason for the vast amount of informal firms comes from the burden of regulation.
To register for formal business in Bolivia is very expensive- up to 140% of the average
annual income.46
Another reason is the low quality of public institutions. These weak institutions
make it more difficult for the law to be enforced and the risk of penalties from informal
firms are lowered. This complicated regulation also leads to the wide perception that the
benefits of becoming formal are largely offset by the costs associated. The informal firms
tend to have low productivity due to very limited access to financial, physical, and human
capital to produce more efficiently and grow. There are many negative fiscal implications
from the informal market. While these firms are required to pay certain unavoidable

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taxes, they do not pay income or other taxes from government services. As a result, they
are free riders on public services and only give back a fraction of what they’re supposed
to.47

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III: Resources and Potential
Despite a volatile history and a lower development status relative to neighboring
countries, Bolivia is still a strong candidate for development aid. With development aid
there are a few areas to consider when deciding where to allocate the money and to
whom. There is economic potential, a history of successful development initiatives, and
the quality of institutions. Bolivia holds advantages in all of these areas relative to many
other aid seeking developing nations.
In terms of economic potential, Bolivia is a classic case of a diamond in the
rough. Within Bolivia exists the world’s largest iron ore deposit in Mutún, which holds
up to 20 billion tons of ore.48 Bolivia is also a large natural gas and petroleum exporter,
and is part of OPEC. Until recently, Bolivia’s hydrocarbon production was unproductive,
but a capital improvement in the form of the 1400km long GASPOL pipeline increased
Figure 4: The GASBOL pipeline and its integration role between the Pipeline Systems of the South,
Southeast and west-center regions of Brazil and the other countries of the Southern Cone.

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exports substantially.49 The pipeline runs from Bolivia to Brazil, and allows for mass
exporting of hydrocarbon based commodities. Additionally, Bolivia holds the world’s
largest lithium salt flat in Uyani de Salar.50 Lithium is a crucial modern primary good
because of it’s numerous industrial uses including batteries, glass, ceramics and grease
which make it an irreplaceable commodity with no good substitutes. And while Bolivia’s
lithium potential is the greatest in the world, 98% of the world’s lithium is currently
being produced by Chile and Argentina.51 This ignores the huge potential comparative
advantage that Bolivia has in lithium mining.
There are a couple potential reasons why Bolivia is lagging behind in lithium
production, and in primary resource production in general. First, the lack of
infrastructure makes it impossible to transport large quantities of harvested primary
goods across the border. Because of the lack of transportation infrastructure, most
notably railroads, firms have no incentive to produce more primary goods because
marginal goods will just accrue as inventories. Secondly, the primary goods industries
cannot take advantage of economies of scale due to a lack of capital endowments and
limited access to credit markets, which limits expansion and capital inflows from
abroad. Lastly, the expected wage incentive for farmers to move from the unproductive
farms to commodity harvesting is too low. Thus many Bolivians, particularly indigenous
peoples, continue to produce agricultural products at near zero marginal productivity
while the gas fields and lithium flats remain understaffed. It is important to note however
that foreign direct investment in Bolivia and the opening of credit markets domestically
can alleviate the first two issues completely, while driving up the expected wage and
improving the third issue as well.

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Bolivia also has a successful history of development initiatives which prove that
reforms and development can take hold in Bolivia. Most notably, the intervention of
Jeffrey Sachs in the 1980’s to curb the rampant inflationary bubble shows how drastic
successful reforms can potentially be. In the 1980’s, inflation rose as high as twenty-
thousand percent.52 Within two years inflation dropped down to the low double-
digits. The stabilization of the economy came about as a result of Jeffrey Sachs’ “Shock
Therapy” program which cut government spending, liberalized national industries, and
eliminated price controls. Shock Therapy resulted in better access to international credit
markets, improved terms of trade, and a break from the traditionally unsound spending
habits of a former colonial regime. Additionally, this policy had never been attempted by
a democracy before, and the conventional wisdom at the time was that only a strong-
armed dictator could institute the necessary reforms.53 Bolivia could then be called a
“test case for development”. In nearly every metric, Bolivia passed the test with flying
colors.
The biggest obstacle to Bolivia’s successful implementation was the colonial
legacy which was common among most Latin American countries. Bolivia used to be the
center of Spanish colonization in Latin America, and the riches of the Spanish
Conquistadors built up the cities of La Paz and Sucre, the capital. However when the
Spanish left, these grand cities and all of the trade necessary to maintain them fell into
disrepair. The indigenous majority who were subjugated in the colonial era continued to
lack the educational and economic opportunities that the Spanish had.54 However, in
recent years great strides have been made through development initiatives to help these
people. In 2010, a new constitution was enacted which gave full rights to indigenous

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people, and a Special Activity Development Fund Program was set up to help
disseminate the new regulations to the citizens and to empower the often uneducated and
politically marginalized indigenous people.55 Even the current president is of indigenous
origin. Bolivia thereby recognized the issue of marginalization and low morale acting as
poverty traps, and took steps to overcome them for the sake of development.
Institutionally, Bolivia is newly becoming a successfully governed liberal
democracy. Despite a strong history of coups and political unrest, the current regime led
by elected president Evo Morales has been extremely successful in terms of stability,
social integration, and economic reform. His tenure began when he rose to power as an
activist in the coca grower’s union. From there, he worked hard for the Bolivian people
by taking money from primary resource extraction and putting it toward public works
programs and anti-poverty initiatives aimed at the indigenous people. During his tenure,
poverty dropped 25% and extreme poverty dropped by 43%. He also expelled the DEA
and US ambassadors from Bolivia due to the political unrest and destabilization that they
were causing.56 He also is a believer in dependency theory, citing the US as an
“imperialist” power. While that may not be the best stance to take on an international
level, it creates a sense of national pride and self-worth in Bolivia, which is good for
promoting solidarity and political cohesiveness in any developing country. His eight
years in office also constitute the longest continuous democratic rule of any ruler in
Bolivia. This newfound institutional stability is good for Bolivia because it assures
international aid donors that the proper plans are implemented to spend the money
serving the public good.

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`The Morales regime spearheaded new growth in the primary goods market,
which had a cascade effect on the economy as a whole due to efficient money
allocation. The new revenue streams were spent on internal infrastructure improvements
like sewer systems and public transportation for the poorest areas. Morales also invested
in three separate educational and health funds, the Bono Juancito Pinto, the Renta
Dignidad, and the Bono Juana Azurduy.57 These programs will help improve the
standard of living for the indigenous and hopefully will reduce stigma against them in the
future. This will serve to diminish social unrest and will solidify the quality of
institutions in Bolivia further. Thus, a cycle of development begins and hopefully a
higher equilibrium state characterized by high living standards and high productivity will
take hold.
President Morales has also stabilized the economy along with his political
position. He has managed to create a trade surplus despite growing consumer tastes in
Bolivia, as well as decreasing the country’s international debt. In the last 4 years, Bolivia
has experienced the best period of economic growth in the last 30 years.58 Even prior to
the 30 years, the economy was propped up by OPEC oil exports and the growth was not
sustainable. This new growth is both sustainable and being attained at a healthy
level. The new institutions in Bolivia make Bolivia unique among South American
developing countries, and they represent a welcome new change in social attitudes and
political development that are the crucial first steps in growing towards development.

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IV. Formal Proposal
The plan to be proposed in this report is an investment in infrastructure. The main
problem that has been addressed is Bolivia’s “growth without development”. That is, that
it has been experiencing positive economic growth over past years but this growth has not
improved the wellbeing of its citizens. This is common among developing countries since
there is much work that needs to be done to improve human development goals such as
improved education and health, . Our plan is to improve rural transportation
infrastructure, migrate unproductive workers out of the agricultural sector, make changes
to foreign and domestic policies, and fund higher education. This plan will fix the most
important issues facing Bolivia and will be discussed in detail in this section.
Project Goals
The main goals of the development plan are to focus on the two Millennium
Development Goals (MDG) that can make the largest improvement in Bolivia’s human
development.
The first MDG that will be targeted will be to eradicate extreme poverty and
social exclusion. This is the most pressing issue facing Bolivians, since in 2011 61.3% of
the population lived at less than $2.00 per day (PPP) and 7% lived below $1.25 per day.59
Subsistence farming perpetuates this problem by creating a very unproductive rural
sector. By improving the wages of millions of people and providing the incentive to
move out of unproductive rural areas, we can raise the quality of life and per capita
income of many of the poorest individuals in the country. Among these individuals are a
majority of the indigenous population. This group has historically faced much higher

24
poverty rates than the non-indigenous population. The injustices that this group has faced
are symptomatic of the fact that they live mostly in poor, rural communities with large
families to support.60 This social exclusion will be addressed by our infrastructure
improvement plan.
The second Millennium Development Goal to be targeted is to ensure
environmental sustainability. This goal will be achieved by the growth of a high tech
industry in Bolivia. This high tech industry includes renewable energy and battery
technology innovation, which are important barriers currently in the way of widespread
adoption of clean energy infrastructure in the world. This growth will be made possible
by the growth of the mineral market and funding in research facilities in higher
education.
The ultimate goals of this infrastructure improvement plan are to directly improve
the livelihood of the poorest Bolivians, push development to a higher stable equilibrium,
and contribute to the world’s high tech industry. This is possible with a “Big Push”
approach that specifically aims at improvements to infrastructure, diversifying
commodity exports, growth of the industrial sector, rural-industrial migration, and
university research investment. This plan can affect many areas of the Bolivian economy
at once propel the country’s development.
Plan details
The Infrastructure Plan will be carried out in several parts. In this section, a
detailed overview of each part and how it will be implemented will be discussed. The
plan consists of: Improvement of rural transportation system, foreign trade policy

25
changes, domestic market policy changes, the expansion of the industrial sector, and
funding to university research centers.
The first improvement, investment in the rural transportation system, will consist
of a large scale renovation of an existing railway from Puerto Suarez in western Bolivia
to the Port of Ilo, Peru. Bolivia owns a plot of land within Peru in which it has built a
sovereign port to the Pacific Ocean. The deal between Peru and Bolivia marks the end of
126 years without a sea port owned by Bolivia.61 This port has given Bolivia much
greater access to the global market by opening the Pacific Ocean for exports. With a large
investment in a rail system that cuts through all of Bolivia to this port, it would create a
major increase in demand for goods in the country’s domestic industrial sector. Many
railroads in Bolivia are currently in a state of disrepair or underutilized. Investments are
Figure 5: Planned route of a Bolivian railroad connecting the country to the Pacific Ocean.
Source: www.hoybolivia.com

26
necessary to revitalize the industrial sector of Bolivia by improving this transportation
method.
This project will begin within the next five years, once feasibility studies and
project planning is complete. It has already been considered by the Bolivian government
and planning is still in the early stages.62
The next part of the project will include changes in foreign trade policies.
Bolivia’s dependence on natural gas exports follows a trend in Bolivian history of being a
single commodity exporter. Being a single commodity exporter is a risky foreign trade
policy, so in order to balance this risk there will need to be changes to the existing policy.
Bolivia will diversity its exports by scaling natural gas production back and growing
production in new export heavy markets such as lithium, zinc, and other metals. New
projects will be accepted to extract lithium especially to take advantage of Bolivia’s vast
wealth of lithium that can be injected into the world economy. These policy changes
mainly work to optimize Bolivia’s domestic markets and to reduce risk and increase
production of key exports.
Domestic policies will be focus on changing the requirements for the
formalization of businesses to increase the size of the formal sector. Since the informal
sector currently makes up a significant portion of the labor force due to prohibitive
regulations and paper work, there must be a change to this process. The amount of
applications and legal documents required will be reduced and more resources for
handling these documents will be allocated. This will increase tax revenue and offer more
companies access to lines of credit.

27
Lastly, funds will be used for investments in university research facilities. As the
growth of a high tech industry grows, it will become more important to have skilled
workers and new innovations to match the changing marketplace. Particularly research in
chemical and engineering labs will be funded and new equipment will be made available
to encourage growth in these fields of study within Bolivia.
Justification of the plan (how)
To justify this plan, popular and peer-reviewed models of development economics
will be used to validate its expected success. The major goals to be addressed are
improvements to infrastructure, diversifying commodity exports, growth of the industrial
sector, rural-industrial migration, and university research investment.
The first part of the plan called for an investment in a cross-Bolivian railroad
improvement. By improving access to rural areas and remote mining operations, it would
become much more cost effective and efficient to transport materials from these facilities.
Currently, railroad access in rural areas of Bolivia is minimal and many potential mining
operations are running lower than capacity or were not profitable to pursue. Access to
new areas to increase the country’s output and more efficient transport of goods would
cause a change in the incremental capital-output ratio (ICOR). The implications this has
on the economy is defined by the Harrod-Domar model of growth.63 With a higher ICOR,
Figure 6: Harrod-Domar equation for economic growth. The change in Y (output) in a set
period of time divided by total output is equal to the country’s savings rate (investments)
divided by its capital-output efficiencyratio.

28
Bolivia would require a lower rate of investment to achieve its target growth rate. The
intuition of this model is that the more efficiently a country uses its units of production,
the easier it will be to save and therefore require less foreign aid to finance growth. A
higher return on investment for all future projects can also be sustained with the
improvement to efficiency, making future development projects more successful.
The goal of diversifying Bolivia’s commodity exports will also improve output
and security. It is more efficient to increase the country’s portfolio of exports rather than
relying on natural gas as 45% of national exports.64 The tin market collapse of the 1980s
taught the country a valuable lesson on the consequences of non-diversification.65 Bolivia
was exporting primarily tin at this time but a sharp decline in prices sent a shock through
the economy. Diversification will reduce the risk associated with global market
fluctuations and will increase total productivity.
The productivity increases of the economy will be experienced mostly in the
lithium, mineral mining, and high-tech industries. These industries require aid from
government investment to begin larger scale production and with the improvements to
transportation and more favorable trade policies, this will allow them to begin larger scale
production. Due to increased total production and Bolivia’s vast endowment of natural
resources, the costs will decline in these industries and Bolivia will improve its
competitive advantage against the global market as an exporter of these goods. This
competitive advantage will attract firms to create factories in Bolivia to take advantage of
this growth and increase competition among these firms to incentivize innovation. The
innovation due to large amounts of new raw material such as lithium will boost activity in
high tech markets such as battery production and renewable energy technology.

29
As these industries grow, new jobs will arise and wages will rise, beginning a
pattern of agricultural to industrial migration, which is best explained by the Lewis
migration model. For this model to apply to Bolivia, the country must meet certain
requirements, which are a surplus in agricultural labor with no marginal productivity, a
high productivity industrial sector, an industrial sector wage higher than agricultural
wage, and a system where all revenue is reinvested into capital. In Bolivia, 33.5% of the
population lives in rural areas, but only 3.5% of this land is actually arable.66,67 There is
very high unproductivity in the agricultural sector because of large families living on
farms at subsistence levels. Many of these families are indigenous people who stay on
farms for cultural or family reasons, but making a very low wage. There is also expected
to be very high growth in the industrial sector with the proposed plan and wages will rise
significantly due to the increased demand in the industrial labor market. Lastly, Bolivia
will meet the requirements of the Lewis model because it is expected that with the
increase of formality of the market, more people will have access to lines of credit,
making it easier for them to invest revenue in capital. According to the model,
Marginal Product (Industrial sector)
Marginal Product (Industrial sector)
Total Product (Industrial Sector)
Total Product (Industrial Sector)
Figure 7: Graphical description of changes in industrial sector due to Lewis model migration. Increases in the size of the labor market causes
shifts in demand, which grows total product of the sector.

30
unproductive workers in the agricultural sector to migrate to the modern industrial sector
in search of higher wages. The marginal productivity of the agricultural sector will begin
to rise as a result, as well as the growing industrial sector. The ultimate outcome of the
redistribution of labor will be a step towards reaching a higher stable economic
equilibrium. A better quality of life will be provided for all workers, but especially for
those who make the migration into higher wage industries. There are many cities in
Bolivia with large populations capable of absorbing the extra workers, avoiding
congestion as a result of this move.
The final goal of the plan, investment in university research, is an
important part of its strategy. As outlined in the O-Ring model, complementarities among
inputs is a critical component in a coordinated effort to raise the country to a higher
equilibrium. In the anticipation of a growing industry, the number of skilled workers
increases to fill positions in increasingly complicated careers. With the combined effects
of this plan, Bolivia can raise its citizens out of extreme poverty and create a high-tech,
industrial economy competitive with other countries to become a future central economic
hub in South America.
Similar Projects
A similar project that successfully employed the concept of the Lewis model of
migration was in Taiwan. In 1955, Taiwan had an unemployment rate of 6.3% and 100
TWD, which was significantly worse than the country’s target. As the country’s wage
stayed constant with in the increases in labor size in the manufacturing market,
unemployment fell drastically. This was the predicted outcome written by Lewis at the
time of the project and as decades passed, unemployment also continued to fall.68

31
Another successful project relating to the proposed plan for Bolivian development
is the transportation revolution in the United States during the nineteenth century. There
is strong evidence that the improvements to railroads rose the GDP per capita of workers
in the U.S.69 This is a similar project because the United States were in a similar
economic situation, with large amounts of natural resources available but poor
transportation systems to carry it to trade centers far away. As railroad improvements
were made in America, the real GDP of America grew significantly during the same time
period, indicating a strong correlation. 10
Funding
To finance this project, it will cost an estimated 13 billion USD. This cost
includes the construction of the railroad, policy changes, and the migration of workers,
although the single largest expense will be of the railroad construction. Financing options
from foreign countries is available to the estimated amount of 11 billion USD. China,
who has begun a feasibility study of the project, can potentially loan 10 billion USD to
fund the project as it is in their national interest to increase the productivity of Bolivia’s
extraction industry. Brazil and Peru are also potential sources for an additional 1 billion
USD. The remaining 2 billion USD is estimated to be paid for internally by Bolivia’s
national reserves. The country’s steadily growing GDP and boost in productivity from the
proposed changes in trade policies can provide 1.5 billion USD to fund this project.
Our request to the World Bank is to loan to the Bolivian National Bank the
amount of 500 million USD. Funds will be allocated to the successful completion of the
railroad improvement plan and satisfactory rating of all indicator milestones.

32
Conclusion
Bolivia is a growing nation that has overcome severe economic and political
hardships over the past two centuries. In the new millennium, Bolivia has proven itself as
a developing country with great potential. With a large endowment of natural resources
and a government regime that has brought the country together, we are able to grow into
a central economic hub of South America and give all of its citizens a high quality of life.
This proposal for an integrated infrastructure development plan calls for improvements to
infrastructure, diversifying commodity exports, growth of the industrial sector, rural-
industrial migration, and university research investment. The combined effect of these
actions will push the Bolivian economy into a higher economic equilibrium where
poverty is eliminated and a new, high tech industrial economy has risen.

33
Notes
1 Sachs, Jeffery, and Jaun Antonio Morales. 1989. "Bolivia's Economic Crisis." In Developing Country
Debt and the World Economy, by Jeffery Sachs, 57 - 80. Chicago: University of Chicago Press.
2 Weisbrot, Mark , Jake Johnston,and Rebecca Ray. 2009. Bolivia:The economy during the Morales
Administration. Washington D.C., December.
3 Ibid.
4 Trading Economics. 2014. Bolivia | Economic Indicators. December. Accessed 2014.
http://www.tradingeconomics.com/bolivia/indicators.
5 Kozak, Robert. 2010. Latin America, Caribbean 2014 Growth Likely Reached Only 1.1%. Accessed 2014.
www.wsj.com/articles/
6 Trading Economics, Bolivia | Economic Indicators
7 The World Bank. 2014. Bolivia.Accessed 2014. www.worldbank.org/en/country/bolivia.
8 Weisbrot, Ray and Johnson, Bolivia:The economy during the Morales Administration
9 Index Mundi. 2012. Bolivia Factbook. July.Accessed 2014. http://www.indexmundi.com/bolivia/.
10 Weisbrot,Ray and Johnson, Bolivia:The economy during the Morales Administration
11 Tegel, Simeon. 2013. The Bolivian dream: lithiumbatteries included. March. Accessed 2014.
www.globalpost.com.
13 Tegal, The Bolivian dream: lithium batteries included.
14 The World Bank, Bolivia.
16 Kozak, Latin America, Caribbean 2014 Growth Likely Reached Only 1.1%.
18 Kozak, Latin America, Caribbean 2014 Growth Likely Reached Only 1.1%.
24 Ibid.
25 Finance, Yahoo. 2014. USD/BOB. December. Accessed 2014.
http://finance.yahoo.com/q?s=USDBOB=X.
26 OANDA. n.d. Bolivian Boliviano. Accessed 2014. http://www.oanda.com/currency/iso-currency-
codes/BOB.
28 Finance, Yahoo, USD/BOB.

34
29 2013. IndigenousPeoples,Poverty and Human Development in Latin America: 1994-2004.Accessed
2014. http://web.worldbank.org/
30 Todaro, Michael, and Stephen Smith. "Agricultural Transformation and Rural Developments." In
Economic Development, 452-53. 12th ed. Pearson, 2015.
31
The World Bank. 1996. Bolivia:Poverty, Equity and Income - Selected Policies for Expanding Earning
Opportunities for the Poor. Accessed 2014.
32 Achtenberg,Emily. 2013. Bolivia:The Unfinished Business of Land Reform . April 1. Accessed 2014.
http://upsidedownworld.org
33 Ibid.
34 Ibid.
35 Ibid.
36 COHA. 2011. The TIPNIS Affair: Indigenous Conflicts and the Limits on “Pink Tide” States Under
Capitalist Realities. December. Accessed 2014.
37 Ibid.
38 Ibid.
39 Achtenberg,Emily. 2014. ElectionsRevive Bolivia’s Controversial TIPNIS Highway Plan. September.
Accessed 2014. https://nacla.org/blog
40 Todaro, Michael, and Stephen Smith. "Human Capital: Education and Health in Economic
Development." In Economic Development, 392-393. 12th ed. Pearson,2015.
41 U.S. Department of Labor. 2013. 2013 Findings on the Worst Forms of Child Labor. Accessed 2014.
http://www.dol.gov/ilab/reports/child-labor/bolivia.htm.
42 Ibid.
43 Singham, Nate. 2014. The Bolivian Transportation Sector,Regional Integration and the Environment .
March. Accessed 2014. http://www.cepr.net
44 Ibid.
45 Ibid.
46The World Bank. n.d. Bolivia:Policies for Increasing Firms’ Formality and Productivity. Accessed 2014.
web.worldbank.org.
47 Ibid.
48 Jamasmie, Cecilia. 2013. Bolivia to open bids for world’s biggest iron ore deposit. September 2.
Accessed 2014. http://www.mining.com/bolivia-to-open-bids-for-worlds-biggest-iron-ore-deposit-
63017/.
49 U.S. Energy Information Administration. 2012. Bolivia Background. August 23. Accessed December
2014. http://www.eia.gov/countries/cab.cfm?fips=bl.
50 U.S. Geological Survey. 2012. "Mineral Commodity Summaries." Government Report.
51 Ibid.

35
52 Menno, Pradhan, Luara Rawlings, and Geert Ridder. 1998. "An Analysis of Baseline Data for Impact
Evaluation." World Bank Economic Review.
53 Gonzalo Sanchez de Lozada, Jeffery Sachs, interview by PBS Organization. 2003. Up for Debate: Shock
Therapy: Bolivia,Poland, Russia. Same Policies-Different Results
54 Bolivia Bella. n.d. Colonial History of Bolivia: 1500-1800 A.D. Accessed 2014.
http://www.boliviabella.com/colonial.html.
55 ACDI VOCA. 2010. New Bolivian Constitution Guarantees More Rights to Indigenous People.
Accessed 2014. http://www.acdivoca.org/site/ID/Bolivia-success-story-New-Bolivian-
Constitution-Guarantees-More-Rights-to-Indigenous-People.
56 BBC News. 2014. Profile: Bolivia'sPresident Evo Morales. October. Accessed 2014.
http://www.bbc.com/news/world-latin-america-12166905.
57 Weisbrot,Rayand Johnson, Bolivia:The economy during theMoralesAdministration
58 Ibid.
59 The World Bank. 2014. Agricultural irrigated land (% of total agricultural land). Accessed December 1,
2014. http://data.worldbank.org/indicator/AG.LND.IRIG.AG.ZS/countries.
60The World Bank. 2013. IndigenousPeoples,Poverty and Human Development in Latin America: 1994-
2004.Accessed 2014.
http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/LACEXT/0,contentMDK:205058
35~pagePK:146736~piPK:146830~theSitePK:258554,00.html.
61 News, BBC. 2010. Peru deal giveslandlocked Bolivia coast for own port. October 21. Accessed 2014.
62 HoyBolivia. 2013. A fin de año se construirá vía férrea que unirá Puerto Suárez con Puerto Ilo, Perú.
June 17. Accessed December 2014. http://hoybolivia.com/Noticia.php?IdNoticia=83257.
63 See Figure 6: Harrod-Domar equation for economic growth
64 U.S. Energy Information Administration. 2012. Bolivia Background. (August 23)
65 ITRI. 2011. Long-term history of tin prices. Accessed 2014.
https://www.itri.co.uk/index.php?option=com_mtree&task=att_download&link_id=49605&cf_id=
24.
66 Portal, Rural Poverty. 2010. Bolivia Statistics. Accessed 2014.
http://www.ruralpovertyportal.org/country/statistics/tags/bolivia.
67 Trading Economics. 2011. Arable land (% of land area) in Bolivia. Accessed 2014.
http://www.tradingeconomics.com/bolivia/arable-land-percent-of-land-area-wb-data.html.
68 Fields, Gary S. 2004. "Dualism in the market: A perspective on the lewis model after half a century." The
ManchesterSchool 724-735.

36
69 James A. Schmitz, Jr. 2003. Nineteenth Century U.S. Economic Growth: How Important Was the
Transportation Revolution? Research Department Staff Report, Minneapolis: Federal Reserve
Bank of Minneapolis.
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37
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38
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Morales Administration. Washington D.C.,December.

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