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

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.