Why Doesn’t Bolivia Catch Up With Chile?

February 21, 2011 Development 1 Comment 2,900 Views

By Paola Barrientos.

Neoclassical growth theory predicts convergence among countries with similar structural characteristics (i.e. preferences, technologies, and rates of population growth). In the case of Bolivia and Chile, despite of their differences, they have many common characteristics that could make us think that there should be some sort of converge: both are mining countries, have shared similar history (ex-spanish colonies and went under militar dictatorships and socialist regimes in similar periods), are catholic, speak the same language, and are located next to each other. However they do not converge (see Figure 1). Why is this? Is it a matter of time? (is it going to happen in the future?)

Figure 1: Divergence between Chile and Bolivia, 1960-2008

New Growth Theory advocates against convergence to a unique globally stable steady-state but rather to several multiple locally stable steady-states. This means that there is a tendency towards a natural club-convergence formation. However, theory does not guide us on how these clubs are formed. One approach is to use historical facts to determine clubs. The argument is that historical events, such as external shocks and ideological trends, shape the way institutions are formed, and institutions determine the way the scarce resources are used. In other words, technology is endogenous to the institutions that make adoption of better techniques of production likely (1).

Thorp (2) captures in depth the comparative reality within Latin America, and places in a proper historical context, the development efforts, strategies, choices, successes and failures of the different Latin American countries. She emphasizes the “political economy” part of the Latin American history, a term which is shorthand for the interface between political forces, institutional inheritance and economic outcomes.

Based on Thorp, Barrientos (3) identifies three important phases and two to three clubs within each phase. Below I present a summay of each phase and club and I identify in which club Chile and Bolivia were.

The first phase ranges from 1900 until 1930 – when the Great Depression hit the Latin American economies – and it is characterized by the Latin American countries intensively exporting primary products. Two clubs are identified: the mineral (Chile and Bolivia are here) and agricultural products exporters.

During the second phase, an inward-looking model was the response to the Great Depression. This model is known as Import Substitution Industrialization and goes from 1931 to 1974 when the oil crisis occurred. Two clubs are identified: those that were able to industrialize, despite all the distortions that the model brought (Chile is here), and the non-industrializers which failed to industrialize for different reasons (Bolivia is here). Chile had political and social structure problems but still promoted the production (and export) of forestry, fishing, mining and engineering sectors. In 1960 Chile tried to produce automobiles but failed due to its small market size. Bolivia was characterized by having a strong primary export sector that dominated attempts to industrialize. Bolivia’s strong and powerful tin sector took advantage of a weak State to concentrate resources (A lot of the debt was directed to pay expensive railroads for the sector). After the revolution in 1952 the tin sector was nationalized and the government had immense difficulties managing it and lastly in the 60s some investment went to mining and petroleum sectors.

The third phase ranges from 1975 to 2007. This phase is characterized by several features. First, Latin America experienced the debt crises in the early 80s, to which it responded with several “structural reforms”. Then, from these reforms and from an accumulation of several factors during history, the need for a change in development to one with a more social outlook in a globalization context arose. Three clubs are identified: the good institutions club (Chile is here), where countries developed institutions that could deal with growth and/or welfare, the painful club, where countries were traumatized by the debt crises adjustment (Bolivia is here), and the vulnerable club, composed by the Caribbean countries who are different from the rest and are characterized by being vulnerable to external factors.

Despite that the degree of inequalities and poverty are still high in Chile, they have managed to build strong institutions, and good relations among the public and private sector. The State promoted exports and investments. Even though they have applied radical orthodox policies and hosted radical violent military regimes, they have built a political consensus. They truly committed to the rules of the free market game, gaining investors confidence. Moreover Chile has developed a process of consultation to identify poorly designed policies. In general Chile had historically stronger institutions than elsewhere in Latin America.

Bolivia, on the other hand, is characterized by having weak institutions that lead to bad results either in terms of growth, welfare or both. Bolivia’s structural problems exposed it dramatically to the perils of globalization and they applied orthodox policies. Bolivia took a lot of time to recover from the battle against hyperinflation, which was impossible without severe repression.

In conclusion, the answers to our questions are based on the history of the region. The only time when Bolivia and Chile were in the same club was from 1900-1930 (see table below), when both countries strongly depended on the exports of minerals. Later on, Chile diversified its production and development while Bolivia remained a primary exporter. This fact helped Chile to be better prepared to confront the debt crises than Bolivia. Finally, the hyperinflation that Bolivia suffered was a key factor to stay behind in the fight against poverty. Nowadays Chile’s GDP per capita is 5 times higher than Bolivia’s. This shows that Bolivia is far from converging to Chile, and it is not a matter of time. Bolivia and Chile are in different clubs.