Monday Morning Development Newsletter

from the

Institute for Advanced Development Studies

- removing critical obstacles to sustainable development

Is Bolivia's fiscal policy pro-cyclical?

By Lykke E. Andersen*, La Paz, 4 August 2008 . Last week, Fundacin Milenio (FM) presented its Economic Report for the first semester of 2008. The numbers look great, with high economic growth (6.1% for the first trimester), booming exports (58.3% more than same period last year), a rapidly growing trade surplus (117.4% more than same period last year), increasing tax revenues (26.5% higher than last year), falling external debt (31.1% lower than 12 months ago), increasing foreign reserves (55.5% higher than 12 months ago), and an enviable public sector surplus (2.5% of GDP). Still, FM managed to be deeply worried about the Bolivian economy, and criticized fiscal policy for being pro-cyclical. Ignoring the fact that the government is running a substantial budget surplus for the third year in a row (clearly a counter-cyclical fiscal policy during these bonanza years), they worried about the rapid growth of public expenditures (29.0% more than same period last year). When an attentive member of the audience pointed out that the newly created state enterprises might have a significant role to play in this increase, FM replied that due to the deterioration of public sector statistical reporting, it is no longer possible to separate out the effect of state enterprises. This is plainly not true. The source of FMs data is the Unidad de Planificacin Fiscal (www.upf.gob.bo) and right next to the numbers for the Non-Financial Public Sector (which FM presents), are the numbers for state enterprises, and for the General Government (Non-Financial Public Sector excluding state enterprises). The two main items in current government spending are Goods and Services (34%) and Salary Payments (24%). Apart from these there is capital spending, amounting to about the same as salaries. Lets compare the numbers for the first quarter of 2008 with the first quarter of 2007 to see how expansionary government spending is at the moment.

Table 1: Changes in public spending between first quarter of 2007 and first quarter of 2008 Growth rate including state enterprises (%) 58.4 13.7 19.4 Growth rate excluding state enterprises (%) 3.0 10.8 17.8

Goods and Services Salary Payments Capital Spending

Source: www.upf.gob.bo.

Without including the newly created/nationalized state enterprises, nominal public spending on goods and services increased by only 3%, far less than the rate of inflation during the same period (about 14%), which thus implies a real contraction. The same holds for salary payments, which increased by 10.8% in nominal terms, but decreased in real terms. Capital spending increased by 17.8% which is a bit more than the

inflation rate, so there was a real expansion, albeit small. Transfers is also an important post, but only pension payments are clearly identified. The latter increased by 7.7% in nominal terms, again less than the inflation rate, thus indicating another contractionary component of public spending. You may or may not agree with the governments participation in the productive sector, but either way, a decent analysis of fiscal policy ought to separate out state enterprises. And outside state enterprises, public spending is not currently expansionary. As a percentage of GDP it has actually fallen between the first quarter of 2007 and the first quarter of 2008. Related articles: Inflacin y Polticas Macroeconmicas Poltica Fiscal Anticclica para Prevenir Crisis

(*) Director, Institute for Advanced Development Studies, La Paz, Bolivia. The author happily receives comments at the following e-mail: landersen@inesad.edu.bo. (c) Institute for Advanced Development Studies 2008. Feel free to circulate in its original form. Past issues can be found at www.inesad.edu.bo/mmblog.htm . The opinions expressed in this newsletters are those of the author and do not necessarily coincide with those of the Institute or of the sponsors.

To subscribe or cancel your subscription to this newsletter, please send an e-mail to: newsletter@inesad.edu.bo

| | | |

Institute for Advanced Development Studies Calle 21 #8350, Edif. Monrroy Velez, Piso 7, Calacoto, La Paz, Bolivia Tel/Fax: 591-2-2146069 - www.inesad.edu.bo