Diminishing commodity prices and capital flight in a dutch disease and resource curse environment: The case of Bolivia

Baja Daza, Gover and Fernández Tellería, Bernardo X. and Zavaleta Castellón, David (2014): Diminishing commodity prices and capital flight in a dutch disease and resource curse environment: The case of Bolivia.

Abstract

Diminishing commodity prices and increasing world interest rates are the two main expected outcomes from slowdown of emerging economies and growth recovery of advanced economies in the post financial crisis. A CGE model is used to analyze commodity shocks in a natural resource country framework with two export oriented resource sectors (gas & oil and minerals) and mainly two emerging tradable sectors (food and manufacturing) with dominant import substitution orientation. Positive shocks of unusual magnitude in the pre-crisis generate strong Dutch disease (DD) effects but also unusual levels of government income, savings and investment, giving rise to a growth opportunity. A negative shock to the mineral sector in the post-crisis does not reverse the growth opportunity as long as the gas & oil sector remains strong. However, policy would be required to help absorb the labor released and in the long-run structural reforms are needed to significantly diminish built-in DD effects in this sector. If in addition a significant negative shock hits the gas & oil sector, the economy can experience negative growth. Having a stabilization fund would help in this scenario, but to avoid it altogether sector policy is more important. Additionally, a DSGE model with tradable/non-tradable sectors and skilled/unskilled savers/not savers workers is calibrated to analyze the conditions under which capital flight might occur under increasing world interest rates in the post-crisis. These conditions require a significant degree of macroeconomic deterioration which is not being observed, but point to some key variables to follow, such as the level of net external assets held by the country.

• Item Type: MPRA Paper
• Language: English
• Keywords: Natural resources, External shocks, Real exchange rate, Dutch disease, Commodity prices, Capital flight, Resource curse, Bolivia, CGE, DSGE
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C68 - Computable General Equilibrium Models; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F40 - General; F - International Economics > F6 - Economic Impacts of Globalization > F60 - General; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q3 - Nonrenewable Resources and Conservation > Q30 - General

References

Adler, G., and N.E. Magud. 2013. “Four Decades of Terms-of-Trade Booms: Saving-Investment Patterns and the New Metric of Income Windfall.” IMF Working Paper WP/13/103. Washington DC, United States: International Monetary Fund.

Aghion, P., and P. Howitt. 2009. The Economics of Growth. Cambridge, United States: MIT Press.

Andersen, L.E., and R. Faris. 2001. “Reducing Volatility due to Natural Gas Exports: Is the Answer a Stabilization Fund?” IISEC Working Paper 11/01. La Paz, Bolivia: Instituto de Investigaciones Socio Económicas.

Andrade, S., and J. Morales. 2008. “The Role of the Natural Resource Curse in Preventing Development in Politically Unstable Countries: Cases of Angola and Bolivia.” INESAD Working Paper 11/2007. La Paz, Bolivia: Instituto de Estudios Avanzados en Desarrollo.

Angelopoulos, K., W. Jiang and J. Malley. 2013. “The Distributional Consequences of Tax Reforms under Market Distortions.” Forthcoming in European Economic Review.

Banco Central de Bolivia (BCB). 2012. Memoria 2012. La Paz, Bolivia: Banco Central de Bolivia.

Barja, G., J. Monterrey and S. Villarroel. 2006. “Bolivia: Impact of Shocks and Poverty Policy on Household Welfare.” Latin American Journal of Economic Development 6: 137-211.

Barja, G., S. Villarroel and D. Zavaleta. 2013. “Institutional Design and Implicit Incentives in Bolivia’s Decentralization Model.” Latin American Journal of Economic Development 19: 63-123.

Bénabou, R. 1996. “Heterogeneity, Stratification and Growth: Macroeconomic Implications of Community Structure and School Finance.” American Economic Review 86: 584-609.

Benigno, P. 2009. “Price Stability with Imperfect Financial Integration.” Journal of Money, Credit and Banking 41: 121-149.

Central Bank of Bolivia. 2010. Memoria Institucional 2010. La Paz: Central Bank of Bolivia.

CAF Survey. 2012. Access to Financial Services. Caracas, Venezuela: Development Bank for Latin America.

Canavire, G., and M. Mariscal. 2010. Políticas Macroeconómicas, Choques Externos y Protección Social en Bolivia. La Paz, Bolivia: Unidad de Análisis de Políticas Económicas.

Cerezo, S. 2010. “Consideraciones sobre el Nivel Óptimo de Reservas Internacionales para Bolivia: 2003-2009.” Latin American Journal of Economic Development 14: 41-70.

Cerezo, S. 2014. “Testing the Hypothesis of Dutch Disease in the Bolivian Economy.” Latin American Journal of Economic Development 21: 93-116.

Cerruti, E., and M. Mansilla. 2008. “Bolivia: The Hydrocarbons Boom and the Risk of Dutch Disease.” IMF Working Paper WP/08/154. Washington, DC, United States: International Monetary Fund.

Chakraborty, S., and E. Dabla-Norris. 2009. “The Quality of Public Investment.” IMF Working Paper WP/09/154. Washington DC, United States: International Monetary Fund.

Chen, D., and J. Mintz. 2011. “New Estimates of Effective Corporate Tax Rates on Business Investment.” Tax and Budget Bulletin 64. Washington, DC, United States: Cato Institute.

Clemente, L., R. Faris and A. Puente. 2002. “Natural Resource Dependence, Volatility and Economic Performance in Venezuela: The Role of a Stabilization Fund.” Andean Competitiveness Project. Cambridge, United States: Center for International Development.

Coady, D. et al. 2006. “The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali and Sri Lanka. IMF Working Paper WP/06/247. Washington, DC, United States: International Monetary Fund.

Cole, H. et al. 2005. “Latin America in the Rear View Mirror.” Journal of Monetary Economics 52: 69-107.

Collier, P. et al. 2010. “Managing Resource Revenues in Developing Countries.” IMF Staff Papers 57: 84-118.

Crivelli, E., and S. Gupta. 2014. “Resource Blessing, Resource Curse? Domestic Revenue Efforts in Resource-Rich Countries.” European Journal of Political Economy 35: 88-101.

Davis, J., R. Ossowki and A. Fedelino. 2003. Fiscal Policy Formulation and Implementation in Oil-Producing Countries. Washington, DC, United States: International Monetary Fund.

Davis, J. et al. 2003. “Stabilization and Savings Funds for Nonrenewable Resources: Experience and Fiscal Policy Implications.” In: J. Davis, R. Ossowki and A. Fedelino, editors. Fiscal Policy Formulation and Implementation in Oil-Producing Countries. Washington, DC, United States: International Monetary Fund.

Del Granado, H. et al. 2010. Generación, Distribución y Uso del Excedente de Hidrocarburos en Bolivia. La Paz, Bolivia: Fundación PIEB.

Escobar, F., S. Martínez and J. Mendizábal. 2013. El Impacto de la Renta Dignidad: Política de Redistribución del Ingreso, Consumo y Reducción de Pobreza en Hogares con Personas Adultas Mayores. La Paz, Bolivia: Unidad de Análisis de Políticas Económicas.

Espinoza, J. 2012. “Cooperativas Mineras: El Actor Social Emergente.” In: H. Oporto, D. Garzón, J. Espinoza and P. Portugal, editores. Los Dilemas de la Minería. La Paz, Bolivia: Fundación Vicente Pazos Kanki.

Estado Plurinacional de Bolivia. 2010. Ley Marco de Autonomías y Descentralización, No. 031. La Paz, Bolivia: Estado Plurinacional de Bolivia.

Evans, P. 2000. “US Stylized Facts and Their Implications for Growth Theory.” Columbus, United States: Ohio State University. Mimeographed document.

Feu, A. 2004. “Evaluation of Capital Productivity in Brazil in the XX Century.” Economy & Energy 8: 43.

Feu, C. et al. 2007. “Capital Stock in Brazil and Capital Productivity after the National Accounts Revision made by IBGE.” Economy & Energy 9: 65.

Frank, J. 2010. “Towards a Fiscal Pact: The Political Economy of Decentralization in Bolivia.” Working Paper Series on Public Sector Management. Washington, DC, United States: World Bank.

Frankel J. 2010. “The Natural Resource Curse: A Survey.” Faculty Research Working Paper Series RWP10-005. Cambridge, United States: Harvard Kennedy School.

Frankel, J., C. Végh and G. Vuletin. 2011. “On Graduation from Fiscal Procyclicality.” NBER Working Paper 17619. Cambridge, United States: National Bureau of Economic Research.

García, C, and J. Restrepo. 2007. “The Case for a Countercyclical Rule-Based Fiscal Regime.” ILADES-Georgetown University Working Papers 01/2007. Washington, DC, United States: ILADESs-Georgetown University, School of Economics and Business.

García, C., J. Restrepo and E. Tanner. 2011. “Fiscal Rules in a Volatile World: A Welfare-Based Approach.” IMF Working Paper WP/11/56. Washington, DC, United States.” International Monetary Fund.

Gelos, G. and A. Isgut. 2001. “Fixed Capital Adjustment: Is Latin America Different?” Review of Economics and Statistics 83: 717-726.

Gollin, D. 2002. “Getting Income Shares Right.” Journal of Political Economy 110: 458-474.

Guzmán, J.C. et al. 2010. Uso Productivo del Excedente Hidrocarburífero: Propuesta de Creación del Fondo Soberano de las Regiones. La Paz, Bolivia: Fundación PIEB.

He, H. 2012. “What Drives the Skill Premium: Technological Change or Demographic Variation?” European Economic Review 56: 1546-1572.

Hornstein, A., P. Krusell and Violante, G. 2005. “The Effects of Technical Change on Labor Market Inequalities.” In: P. Aghion and S. Durlauf, editors. Handbook of Economic Growth. Amsterdam: Elsevier.

Humphreys, M., J.D. Sachs and J.E Stiglitz. 2007. Escaping the Resource Curse. New York, United States: Columbia University Press.

International Monetary Fund. 2012a. “Macroeconomic Policy Framework for Resource-Rich Developing Countries.” IMF Board Paper. Washington, DC. United States: International Monetary Fund.

International Monetary Fund. 2012b. “Bolivia Article IV Consultation.” IMF Country Report 12/149. Washington, DC, United States: International Monetary Fund.

Jordán, R. et al. 2010. Excedente y Renta en la Minería Boliviana: Determinantes del Crecimiento Minero 2000-2009. La Paz, Bolivia: Fundación PIEB.

King, R. and S. Rebelo. 2000. “Resuscitating Real Business Cycles.” Rochester Center for Economic Research Working Paper 467. New York, United States: Rochester University.

Klein, P. 2000. “Using the generalized Schur form to solve a multivariate linear rational expectations model.” Journal of Economic Dynamics and Control 24: 1405-1423.

Krusell, P. et al. 2000. “Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis.” Econometrica 68: 1029-1053.

Laserna, R., J. Gordillo and J. Komadina. 2011. La Trampa del Rentismo y Cómo Salir de Ella. Tercera Edición. La Paz, Bolivia: Fundación Milenio.

Latin American Shadow Financial Regulatory Committee. 2013 and 2014. Statements 28, 30 and 31. Washington, DC, United States: Centre for Global Development.

Lederman, D. and W.F. Maloney. 2007. Natural Resources: Neither Curse nor Destiny. Washington, DC, United States: The World Bank.

Lofgren, H., R.L. Harris and S. Robinson. 2002. A Standard Computable General Equilibrium (CGE) Model in GAMS. Washington, DC, United States: International Food Policy Research Institute.

Magud N. and S. Sosa. 2010. “When and Why Worry about the Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth.” IMF Working Paper WP/10/271. Washington, DC, United States: International Monetary Fund.

Martín-Moreno, J.M., R. Pérez and J. Ruiz. 2014. “A Real Business Cycle Model with Tradable and Non-Tradable Goods for the Spanish Economy.” Journal of Economic Modeling 36: 204-212.

Mevius, F., and I. Albarracín. 2008. “Bolivia and the Dutch Disease: What are the Risks and How to Avoid Them.” IISEC Working Paper No. 09/08. La Paz, Bolivia: Instituto de Investigaciones Socio Económicas.

Ministerio de Economía y Finanzas Públicas (MEFP). 2012. Memoria de la Economía Boliviana 2012. La Paz, Bolivia: Ministerio de Economía y Finanzas Públicas.

Oporto, H. et al. 2012. Los Dilemas de la Minería. La Paz, Bolivia: Fundación Pazos Kanki.

Oporto, H. et al. 2013. ¿De Vuelta al Estado Minero? La Paz, Bolivia: Fundación Pazos Kanki.

Paz, V. et al. 2013. “Explaining Low Redistributive Impact in Bolivia.” Commitment to Equity Working Paper CEQ 6. New Orleans, United States: Tulane University.

Persson, T. and G. Tabellini. 1992. “The Politics of 1992: Fiscal Policy and European Integration.” Review of Economic Studies 59: 689-701.

Pindyck, R. 2004. “Volatility in Natural Gas and Oil Markets.” The Journal of Energy and Development 30: 1-19.

PNUD/Bolivia. 2005. La Economía Más Allá del Gas: Informe Temático sobre Desarrollo Humano. La Paz, Bolivia: Programa de Naciones Unidas para el Desarrollo.

Reinhart, C., and K. Rogoff. 2009. This Time is Different: Eight Centuries of Financial Folly. Princeton, United States: Princeton University Press.

Rocabado, C. 2006. “Simulación de Reforma al Impuesto a la Renta de las Personas en Bolivia.” Estudios Económicos de Desarrollo Internacional 6(2): 71-90.

Sachs, J.D. 2007. “How to Handle the Macroeconomics of Oil Wealth.” In: M. Humphreys, J.D. Sachs and J.E. Siglitz, editors. Escaping the Resource Curse. New York, United States: Columbia University Press.

Schmitt-Grohé, S., and M. Uribe. 2003. “Closing Small Open Economy Models.” Journal of International Economics 61: 163-185.

Sinnot E., J. Nash and A. De la Torre. 2010. Natural Resources in Latin America and the Caribbean: Beyond Boom and Busts? World Bank Latin American and Caribbean Studies. Washington, DC, United States: The World Bank.

Torres, G. et al. 2012. Perspectivas de la Matriz Energética Boliviana. IISEC-UCB and Fundación Hanns Seidel. La Paz, Bolivia: Instituto de Investigaciones Socio Económicas.

Unidad de Análisis de Políticas Económicas (UDAPE). 2013. Dossier de Estadísticas Sociales y Económicas No. 23. La Paz, Bolivia: Unidad de Análisis de Políticas Económicas.

Universidad Privada Boliviana. 2005. “Estudio del Mercado Laboral de Bolivia.” La Paz, Bolivia: Universidad Privada Boliviana (UPB) and FUNDA-PRO.

Uribe, A., and W. Hernani-Limarino. 2013. “Pobreza Monetaria, Crecimiento y Redistribución.” Latin American Journal of Economic Development 20: 149-230.

Valencia, F. 2010. “Precautionary Reserves: An Application to Bolivia.” IMF Working Paper WP/10/54. Washington, DC, United States: International Monetary Fund.

Van der Ploeg, F., and A. Venables. 2013. “Absorbing a Windfall of Foreign Exchange: Dutch Disease Dynamics.” Oxcarre Research Paper 52. Oxford, United Kingdom: University of Oxford.

Warner, A. 2014. “Public Investment as an Engine of Economic Growth.” IMF Working Paper WP/14/148. Washington DC, United States: International Monetary Fund.

Zavaleta, D. 2003. “Modeling the Economic Effects of a Natural Resource Boom in General Equilibrium: The Bolivian Case.” Geneva, Switzerland: University of Geneva.

Zavaleta, D. 2010. “Modeling the Impact of Economic Policies on Poverty and Inequality: The Case of Bolivia.” Doctoral Thesis. Geneva, Switzerland: University of Geneva.