Global Economic Crisis Effect on Bolivia, Essay Example

Introduction

Third-world countries are facing hard economic times because of the current global economic crisis. The effects of the current Global Financial Crisis have surpassed the entire economic crisis to have hit the global for many years (Lykke, Muriel, and Valencia 45). The crisis triggered recently and affected both the developing and the already developed countries across the globe. The world has had the worst experience in terms of economic crisis since the early thirties, and this is continuing to worsen because it affects broad sectors and the strongholds of respective economies. Bolivia is one country, which has also faced the difficult times especially being in the third-world countries with a rather slow developing economy (Jorge and Alvaro 18 – 39). However, it is worth noting that despite the crisis experienced, Bolivia as a developing country has not been hit severely, and the country has not suffered massive macroeconomic disequilibria. Growth in the country’s economy is happening slowly but in a sure manner. A slowdown is evident within the country’s economy with the flow of remittances hitting about 9% from year 2009, a considerable increase compared with year 2008 fiscal year (Carlos and Nina 82 – 87). However, the country’s economy is surviving under harsh circumstances presented by the global crisis. This essay discusses the global economic crisis with specialization on how it has affected the Bolivian economy.

Visible Effects of the Global Crisis on Bolivian Economy

Global financial crisis have hit the Bolivian economy through a number of transmission mechanisms. In the country’s export sector, Bolivia has experienced reduced commodities and their prices with a significant reduction that has affected the economy negatively (Jorge and Alvaro 18 – 39). The effect has led to a drop in export revenues, which add to the growth of the economy substantially. It was reported during year 2009 fiscal year report that the price index for export products in Bolivian economy dropped by an average of 24.5% (Lykke, Muriel and Valencia 45). It was also clear that prices within the mining sector particularly the exports reduced by an average of 33.9%. Hydrocarbons, which are one of the major exports in the country, went down by 11.4% and the agro-industry facing a 17.7% drop (Cecchetti, Kohler and Upper 116-123). It was also evident that the first semester of the fiscal year 2008 faced a drop of 3.8% in the exported quantities because of the sharp contraction of the major exports (Felton and Reinhart 89). With the sharp reduction, in the demanded exports particularly from Brazil, one of the major importers of hydrocarbons, the effects of the crisis continued to hit the country. Other countries which were also importers of hydrocarbons from Bolivia also faced the consequences of the crisis, which resulted in reduced imports (Jorge and Alvaro 18 – 39).

However, there was a positive attribute of the crisis in the Bolivian economy. The mining sector was one significant area which experienced an increase of about 13.5% in exports (Jorge and Alvaro 18 – 39). This was because leading countries across the globe were forecasting harder economic times in the future and thus were prospecting on increasing their assets in terms of metals to help with the recovery of their economies. There was, therefore, an increase demand for metals worldwide during this period which evidently benefited Bolivia’s mining sector (Felton and Reinhart 89).

However, the remittances in the country’s economy reduced by 9% in year 2009 because of the reduced employment opportunities (Cecchetti, Kohler and Upper 116-123). The population was increasing within the country and this called for more people seeking job opportunities, yet they were few and unemployment levels went high (Carlos and Nina 82 – 87). With remittances going down it was pressure on the country’s economy to stabilize the situation and manage the country’s financial sector to prevent any collapse and this was a monumental challenge. On the same light, net capital flows started the year on a negative scale and the situation continued to year 2009 (Lykke, Muriel and Valencia 45). The country’s economy also faced a reduction of the foreign direct investment as well as lesser portfolio investment flows because of the presumed political uncertainties (Jorge and Alvaro 18 – 39). The uncertainties threatened the investment field which was a stronghold of the economy and thus posed as a big challenge with the global crisis hitting harder on the economy. The uncertainties were deliberated as having severe negative effects on the country’s climate and thus caused fear among investors (Felton and Reinhart 89).

Impact of the Crisis on Growth, Development and Poverty

As noted earlier Bolivia as a developing country has not been hit severely and the country has not suffered massive macroeconomic disequilibria (Carlos and Nina 82 – 87). At the beginning of year 2009, the country exhibited a surplus of 1.2% and 1.5% in the exhumed gross domestic product of the external and fiscal surpluses (Gustavo and Cristobal 65 – 71). The fiscal balance experienced a surplus even with the economy having experienced a drop in fiscal revenues as well as a noted expenditure expansion. The country’s administration created several bonuses and transferred them to the population as an effort to maintain the levels of consumption within the economy (Jorge and Alvaro 18 – 39). The country made a considerable effort as this would maintain the aggregate demand which was quite prominent in maintaining the stability of the country’s economy (Carlos and Nina 82 – 87).

A stop was experienced in the increment levels of foreign exchange revenues and reserves compared to the levels in previous periods. The country’s reserves held at an averaged $8 billion which was equivalent to 70% of the country’s GDP (Lykke, Muriel and Valencia 45). In the first eight months of 2008, the financial system deposits experienced an increase of about 11.9% (Felton and Reinhart 89). It was also noted that there was an increase in lending from the financial system, but the rate was marginally above 3.6% (Cecchetti, Kohler and Upper 116-123). The consequences of the reduction were evident in the accumulation of large liquidity reserves. Public external debt in the country’s standings, which had significantly been reduced by earlier established debt relief initiatives, remained at a low level in a stable manner (Felton and Reinhart 89). There was some stability established within the economy because of the large amount of revenues coming from the public sector in the form of substantial export earners particularly the hydrocarbon royalties. Therefore, the government found it unnecessary to resort to foreign lending, which would lead to more debt (Carlos and Nina 82 – 87). At least with these initiatives the inflation rate in the Bolivian economy was brought down, and it stood at 1.4% in year 2009 (Carlos and Nina 82 – 87). Nevertheless this also worked to the disadvantage of the country’s economy because low-inflation rates resulted to a weaker demand from the country’s lower consumption levels and thus exacerbated the negative effects of global financial crisis (Jorge and Alvaro 18 – 39).

Despite the identified positive trends in the economic indicators of the country, Bolivia’s economy still faces a monumental threat from other pressures. Other structural factors have threatened a weaker economy in the future especially supported by the aftermath of the economic, global crisis (Cecchetti, Kohler and Upper 116-123). A good example of the structural factors is the real exchange appreciation which was significantly noted within the economy. By mid 2008, the rate of real exchange appreciation was averaged at 6.3% (Felton and Reinhart 89). The Central Bank, which monitored the country’s economy, has pegged the exchange rate but other partners in the commercial industry devalued exchange rates making the situation worse and harsh for a growing economy (Jorge and Alvaro 18 – 39).

Within a period of a year, there was also a slower growth in the country’s GDP because of the resultant global financial crisis and the reduced investment levels (Felton and Reinhart 89). The key activity sectors including hydrocarbons and manufacturing industries faced a possible collapse which drew many investors out of business and as a result, pinning down economic growth. The country also had reformed over time and there were sweeping changes in trade and investment regulations, which the investors were not comfortable with, and thus threatened the gradual expansion of the growth in the country’s economy (Cecchetti, Kohler and Upper 116-123). The expansion of the country’s oil reserves and exports were also condoned by the government in prospect of safeguarding the resources of the country that would help in regaining stability after the global crisis (Lykke, Muriel and Valencia 45).

This resulted in lower production capacity which in turn lowered the revenues generated from the hydrocarbon sector that undermined the long-term sustainability of economic growth in the country and an unstable macroeconomic equilibrium. Another resultant feature which affected the country’s economy a fantastic deal was the low-investment rates and pull outs which resulted in loss of jobs and unemployment (Felton and Reinhart 89). This led to severe state of economic growth trends because the consumption rates were also reduced due to lower purchasing power. Most of the country’s populace continued to grow poorly with poverty rates prospected to increase by 5% compared to previous years (Gustavo and Cristobal 65 – 71). With such rates of poverty, consumption was prospected to dwindle at the same rate, and this was unhealthy for a growing economy which needed high-purchasing power for its ultimate survival.

Bolivia’s Response on Global Economic Crisis

The Bolivian economy has given its best in trying to increase its capacity of growth. The country has embarked on undertaking counter cyclical policies that are efficient for ameliorating the negative effects of the crisis and in an effort to salvage the rates of growth. The government’s effort to avail resources in recent years has been an excellent strategy in helping to stabilize economic growth through the creation of bonuses and a transfer of fiscal resources to the poorest segment of the country’s population (Cecchetti, Kohler and Upper 116-123). It is an altruistic effort of salvaging the purchasing power and holding it stable with the three types of unconditional transfer and thus production in the manufacturing industry holds stable and strong for the future. According to a government report, the transfer cost amounted to an average of $363.9 million (2.27% of GDP), with allocations to the elderly totaling $267.2 million (1.7% of GDP); pregnant women, $69 million (0.22% of GDP) and schoolchildren, $27.7 million (0.2% of GDP) (Gustavo and Cristobal 65 – 71). The effects have been positive because they have sorted out an enormous problem of high rates of poverty and it has immensely offset a contraction in consumption as well as the population’s aggregate demand. However, the strategy is not a long-term strategy and cannot be depended upon for a long time. Other policies aiming for a sustainable solution needs to be introduced within the economy (Felton and Reinhart 89).

The established policies should be aimed at creating jobs for the unemployed and sustaining a favorable investment climate that would promote private investment. On the same note, there is a need to establish policies which lead to a labor-intensive export market and open up foreign markets. The policymakers should promote such strategies is long-term solutions for the global economic crisis are to be established (Cecchetti, Kohler and Upper 116-123). The earlier bonus transfer policy also has considerable shortcomings because it does not support long-term financial sustainability. Paying benefits to the identified groups is dependent on hydrocarbon rent sustainability (Jorge and Alvaro 18 – 39). With a reduction in investment flows within the hydrocarbons sector, as well as a threat of reduced international prices for oil and other natural gases, the country might not have adequate resources in terms of government revenues to sustain the bonus strategy (Lykke, Muriel and Valencia 45).

The government is compensating for the negative effects of identified policies by undertaking measures to strengthen state-owned oil enterprises by obtaining a long-term credit from the Central Bank averages at $1 billion (Gustavo and Cristobal 65 – 71). This has resorted to its foreign exchange reserves increasing that finances the credit. The funds are beneficial since they facilitate the drilling of activities that boost the expansion of reserves and export capacity. However, the initiative risks considerable risks because it is quite expensive and has a higher likelihood of not succeeding (Carlos and Nina 82 – 87).

Conclusion

Bolivia, as a part of the global economy, has faced hard economic times because of the current global economic crisis. The effects of the current Global Financial Crisis have surpassed the entire economic crisis to have hit the global for many years. However, it has been observed that Bolivia has not been hit severely by the crisis and the country has not suffered massive macroeconomic disequilibria. Growth in the country’s economy is still happening in a slow trend. This is because of the government efforts geared towards increasing the purchasing power of the country’s population, creating jobs and managing an investment-friendly environment.

Works Cited

Carlos, L. and Nina, O. Global Financial Crisis: Effects on Bolivia. Development Research Working Paper No. 03/2009. INESAD, La Paz – Bolivia, 2009

Cecchetti, S., Kohler, M. and Upper, C. Financial Crises and Economic Activity. NBER Working Paper 15379. 2009

Felton, A. and Reinhart, C. The First Global Financial Crisis of the 21^st Century. CEPR-Voxeu.org, 2008

Gustavo, C. and Cristobal, B. Misallocation and Manufacturing TFP in the Market Liberalization Period of Bolivia. (Mimeo) Inter American Development Bank, 2009

Jorge, B. and Alvaro, C. Towards a new consensus: poverty reduction strategies for Bolivia, International Journal of Development Issues, 8(1), 2009, 18 – 39

Lykke, A., Muriel, B. and Valencia, H. Non-agricultural Labor from Rural Farmers in Bolivia: An Analysis of Determinants and Effects. Development Research Working Paper 01/2009. INESAD, La Paz – Bolivia, 2009