Bolivia and the Dutch Disease: What are the Risks and How to Avoid Them?

Since the beginning of the 19th century, the Bolivian economy has always been highly dependant on its natural resource production, and therefore has always been quite vulnerable to external shocks. During the 80’s and 90’s, Bolivia was a large exporter of different minerals (mainly gold and tin), and since 2003 it has become a large gas exporter. It is easy to understand how a negative price shock, for example, can have a negative impact on such an exporting economy. To illustrate this, we can see how Bolivia has suffered from negative price shocks on tin and gas during the 80’s: the main result was an approximate 10% cumulated GDP loss during the price shock . But a country can also suffer from a positive international price shock for a natural resource that it is exporting. One of the negative consequences of a positive shock (for example a sharp price and volume increase) in the resource based export sector on the other exporting sectors of the economy is called the Dutch Disease. Since 2003, gas production and prices in Bolivia have increased sharply, leading to a very positive trade balance, a high foreign currency inflow, a budgetary surplus and an increase in public and private aggregate demand. Those important currency inflows have put pressure on inflation, on the nominal exchange rate and finally on the real exchange rate. A real exchange rate appreciation would lead to a loss of competitiveness of non-resource exports (basically agriculture and manufacture goods), which would have a negative impact on the total export level and on the long-term growth rate. The aim of this work is to study the evolution of the booming tradable sector (the natural gas sector) in Bolivia, and its effect on the main macroeconomic indicators and on the non-booming tradable sector (the agriculture and manufacture sector). We will also study the effect of the increase in national revenue on the construction sector, and the importance of the Investment or Construction Boom in Bolivia. We will analyze those changes between 1996 and 2006, and highlight the different risks of experiencing a full blown Dutch Disease. Instituto de Investigaciones Socio - Económicas; IISEC