To Infinity…

Written by Curtis M. Goodman – November 2008

The paper will examine Bolivia’s current position within World Trade Organization Doha negotiations in relation to agriculture, development, and services. Through this examination, readers will gain a comprehensive understanding of the major strengths, weaknesses, opportunities, and threats facing Bolivia’s insertion in the global political economy and how the country performs as a global actor in trade.

*This is PART II of BOLIVIA IN THE GLOBAL POLITICAL ECONOMY: Historical Development 1825-2008.

Agriculture

Agriculture has always played an important role in Bolivia’s economy. In a recent trade policy review by the WTO “agriculture is a key sector in terms of employment and exports, but because of its low productivity, its contributions to GDP is relatively modest.”(2005) According to 2005 and 2006 statistics, agriculture accounted for 17.2% of total exports. (CIA – World Factbook — Bolivia, 2008) This represents a substantial amount of total trade for Bolivia and highlights the nation’s opportunity to establish equitable trade guidelines and improve market access. In the current Doha round of WTO negotiations, Bolivia supports the Cairns Group proposals on agriculture.

The Cairns Group, formed in 1996, accounts for approximately one-quarter of global world agriculture. The nineteen member nations are: Argentina, Australia, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Indonesia, Malaysia, New Zealand, Pakistan, Paruguay, Peru, Philippines, South Africa, Thailand, and Uruguay. This diverse coalition represents a strong desire for reform to the current approach to multi-lateral trade. Since the Uruguay Round of negotiations these nations have actively attempted to have agriculture recognized as an essential component of trade liberalization. The main tenets of the Cairns Group are based on three reforms: deep cuts to all tariffs, elimination of all trade-distorting domestic subsidies with the elimination of export subsidies, and clear rules to prevent circumventing such commitments. (Cairns Group) It is without doubt the implementation of such reforms would benefit Bolivia:

…achieving a substantial increase in market access for agricultural and non-agricultural products is a challenge owing to the country’s vulnerability and to its economic development situation as a land-locked developing country, which has meant that in spite of the liberalization measures it has adopted, it has not succeeded in achieving greater participation in international trade. (Trade Policy Review Body, 2005)

Although Bolivia has not achieved greater international trade the domestic conditions are especially promising for agriculture proficiency. Throughout history, dating back to the Incan era, the area has been blessed with a stable climate, nutrient rich soil, and abundant access to water. (Desarrollo Economico de Bolivia, 1958) In a recent WTO Trade Policy Review report the target areas for high growth potential include: forestry, agriculture, livestock breeding and fisheries, food and agro-industry. (2005)

However there are a number of issues that still stunt the growth of these sectors. These include: the high cost of improving a weak transportation system; non-tariff barriers developing countries implement to block such imports through sanitary and phytosanitary restrictions (SPS); the inability to compete with subsidized exports from developed nations and more generally the ineffectiveness of the Bolivian negotiating committees.

In an attempt to overcome the aforementioned sanitary restrictions exports imposed by developed countries, Bolivia has established the National Agricultural Health and Food Safety Service (SENASAG). This government agency was coordinated by the framework outlined in the Agriculture Agreement and Agreement on the Application of Sanitary and Phyto-Sanitary Measures by the WTO. Since the inception of SENASAG Bolivia has increased their efficiency in developing rules for producers and implementing systems for quality control. (Trade Policy Review: Bolivia, 2005)

It is especially challenging for developing nations such as Bolivia to compete in global markets when many developed nations have agriculture subsidies supporting an uncompetitive industry. Research of WTO documents related to agriculture reveals that Bolivia has a firm commitment to free trade. Since 1995 no subsidies for agriculture export have been implemented. Bolivia has made their goal of sustainable development very clear and holds “that it is not fair that developed countries want to impose environmental trade barriers while they have a highly polluting agriculture that is being subsidized.”(Bojanic, 2001) The elimination of such subsidies that “distort production, impair trade, and prevent significant improvement of developing country access to world markets” would benefit Bolivia’s trade portfolio. (Barbara J Frazier, 2004)

Given the relatively small size of Bolivia, it faces seemingly insurmountable barriers through the negotiation processes of the WTO. Limited resources are available meaning that small delegations are sent to negotiations. It is arguable whether the technical capacity exists for the Bolivian delegation to compete or even operate on the same scale with the larger, more experienced delegations from developed countries. As Bojanic describes, “delegations are rarely composed of experienced and skilled negotiators” pointing to low public sector compensation and high turnover rates. (2001) Due to these inadequacies Bolivia resorts to the negotiating capacity of regional groups such as MERCOSUR and Cairns.

Since joining the WTO, Bolivia has demonstrated an ongoing commitment to achieving reform of agriculture trade. Five specific provisions emphasized by the Cairns group were outlined in an Overseas Devlopment Institute paper by A.H. Bojanic:

- A clear commitment to end discrimination against agriculture and fully integrate it into WTO rules

- A clear commitment to achieve fundamental reform of agriculture trade through elimination of all forms of export subsidies; substantial improvement in market access; and reduction of domestic support including the elimination of trade and production – seen as distorting forms of support

- A reaffirmation that the main focus of work should be on these three areas and that non-trade concerns relevant to the Agreement on Agriculture will be dealt with in non-trade distorting ways, precluding and preventing other new types of barriers

- A confirmation that enhanced, concrete, and clearly defined differential treatment provisions for developing countries be an integral part of the outcome of the negotiations

- A clear understanding of the timetable and benchmarks for concluding the agriculture negotiations and a structure that will enable work to advance. (Bojanic, 2001)

Development

Bolivia remains positive despite the many setbacks faced through the past decades. With a firm commitment to liberal free trade as outlined under the WTO, Bolivia has been a poster-child of compliance with international institutions. However these commitments have not equated to serious economic gains. Examining measurable results we find that GDP has grown at an average rate just covering inflation, which has stabilized dramatically since the 1980s.

According to the Economist Intelligence Unit between 2003 and 2007 GDP grew at an average rate of 3.86%, reaching a record high of US$12.8 billion in 2007. This is welcoming as annual rates had experienced a downward trend through the 90s. Examining inflation rates we find 1991 rates of 21.4% dropped to 7.95% in 1996, and further dropped to 3.3% in 2003. Inflation in 2007 was reported at 8.8%.· Tariff quota creation – influences which products can be sensitive

· Tariff simplification – tariffs to change = percentage of price?

· ‘Green Box’ – provision for developing countries to provide domestic food aid

· ‘Sensitive products’ – partly shielded from full tariff reduction

· ‘Special safeguard mechanism’ (SSM) – allows developing countries to temporarily raise tariffs

· Cotton – cut domestic support deeper and faster than other products^[1]

The Bolivian government would benefit from focused attention on education programs. By supporting education programs which encourage an entrepreneurial spirit Bolivia would re-orientate the population to promote innovation, self-reliance, and creativity. (Barbara J Frazier, 2004) Improved education programs would also encourage increased technical aptitude towards international trade thereby enhancing local capabilities. In a WTO Trade Policy Review conducted in 2005 it was established that Bolivia has not taken advantage of technical assistance programs already in place.

Expanding export capacity would increase GDP and enhance Bolivia’s trade portfolio. The government has implemented programs to encourage the domestic potential of exporters including the Temporary Admission for Final Processing Regime (RITEX). The WTO praised this government program as it allows firms to import the necessary raw or intermediate materials for production while avoiding customs duties and taxes. Ultimately this program is intended to extend the scope and options of Bolivian firms in manufacturing. (Trade Policy Review Body, 2005) It has been argued that this has not increased domestic competency, instead RITEX promotes dependency on external raw materials and inputs, while not promoting traditional sectors. (Barbara J Frazier, 2004)

Bolivia has increased transparency measures for foreign investors in an effort to attract more development. “Bolivia provides foreign investment guarantees through bilateral investment treaties[2], free-trade agreements and GATS commitments. Foreign investors enjoy national treatment.” (Trade Policy Review: Bolivia, 2005) Foreign direct investment totaled US$1.4 billion between 2001 and 2005 – the USA accounted for one-third of net, followed by Brazil, Argentina, Italy and Spain. (Secretary for Economic, Energy and Agricultural Affairs )

The government has tried to implement Free Trade Zones (FTZ). The cities of El Alto, Cochabamba, Santa Cruz, Oruro, Puerto Aguirre, and Desaguadero are eight such zones designed to promote foreign investment and new opportunities for trade. However, only one of these eight FTZs operates satisfactorily. (Bojanic, 2001) The failure of the other FTZs is primarily due to the lack of roads and necessary infrastructure. (Secretary for Economic, Energy and Agricultural Affairs )

Transportation infrastructure would also benefit the further development of Bolivia. The high costs of transport and insurance considerably raises overhead costs thereby making Bolivia less competitive. The high cost of new projects and the government’s limited access to capital severely restricts future developments.

Services

Given the stage of Bolivia’s development, services are only beginning to play an important role in the economy. A large percentage of the population lives below the poverty line and as such, often do not require the market to provide services such as sophisticated professional services or highly technical services on a regular basis. Since 1995 Bolivia has undergone rapid privatization of important services – reforming legislation in financial, transport and telecommunication services[3]. According to a WTO Trade Policy Review this has played a key role in the modernization of Bolivia. (1999)

According to a WTO Trade Policy Review, Bolivia has based service policy on the General Agreement on Trade in Services (GATS). Currently no measures have been implemented which run contrary to the GATS commitments. However, Bolivia has not yet signed the protocol on financial services. (Trade Policy Review Body, 2005) Since the original negotiations on GATS Bolivia has since repealed on key areas concerning the financial sector. The specifically affect foreign banks establishing offices in Bolivia; exclusion of foreign exchange offices, credit information and clearing houses, and general deposit warehouses. This limits the ability of foreign banks to integrate in the marketplace, in turn strictly handicapping Bolivia’s potential financial growth. [4]. This represents improvements over past years. However, one cannot ignore the blatant failure to improve the infrastructure and reduce costs over the last fifty years, which has limited Bolivia’s insertion on the global stage.

Bolivia’s dependence on foreign loans and aid are not particularly positive for the development of strong governance. It has become common-place for the government to have deficit budgets which rely on international transfer funds to cover the balance. This dependence is especially damaging when international institutions tighten credit, refusing support unless specific conditions are met. In the article by Jim Shultz et al. Deadly Consequences great detail is given on the effects of IMF intervention in the Bolivian economy. Essentially government spending was 3.3% of GDP in 1997 and increased to 8.7% in 2002. The IMF demanded “a target of 5.5% for the following year – a cut totaling more than $250 million.”

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