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The Effectiveness of Foreign Aid in Bolivia

Author

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  • Andersen, Lykke Eg

    (IISEC, Universidad Católica Boliviana)

  • Evia V, José Luis

    (IISEC, Universidad Católica Boliviana)

Abstract

During the last five years, Bolivia received more than $US 3,000 million in foreign aid and more than $US 3,500 million in Foreign Direct Investment (FDI). The country also received debt relief with a net present value of $US 1,300 million and implemented a National Poverty Reduction Strategy. During the same period, however, the GDP growth rate fell from an average level of 4.7% between 1993 and 1998 to an average level of 1.7% between 1999 and 2002, relative and absolute poverty increased, and the fiscal deficit increased to 8.7% of GDP in 2002. These numbers suggest that neither foreign aid, nor debt relief, nor FDI has the capacity to increase growth rates and reduce poverty in Bolivia. This, however, is not necessarily true. It could be the case that without these positive shocks, the situation would have been even worse due to other negative shocks. The only way to separate the effects of different shocks is to use a Computable General Equilibrium (CGE) model, where the effects of changes in one variable can be analyzed while holding all other exogenous variables constant. The model used for this project contains a variety of sectors and household types which permits the analysis of aggregate effects on the GDP growth rate, the balance of payments, the fiscal deficit, etc, as well as distributional effects indicating who benefits and who is hurt by different policies. The distributional analysis is of particular importance when poverty is a main concern since aggregate GDP growth does not necessarily reduce poverty. Estimations by UDAPE indicate that the elasticities of poverty with respect to changes in GDP are extremely low in Bolivia: Only 0.3% in rural areas and 0.6% in urban areas. This means that during the last decade, growth in Bolivia has clearly not been pro-poor, despite the stated emphasis on poverty reduction. During the period 1998-2002, Bolivia received on average $614 million in foreign aid per year. For the period 2003-2006, there are commitments implying that this amount will increase to $872 million per year, which means an increase in the level of annual foreign aid of $258 million. This report used the CGE model to simulate the effect of additional foreign donations of $258 million per year for four years, after which the level of aid returns to its “normal” level. Such a simulation allows us to see the effects of the initial expansion, the effect of the subsequent contraction, as well as the long run effects after the temporary increase in foreign aid. The effects of this extra aid will obviously depend on how the money is used. Applying the combination of public spending and public investment that we consider most likely, the simulations show an increase in the GDP growth rate of approximately 1 percentage point per year during the four years of extra aid, but when the extra aid disappears, the growth rates return to their normal levels. It is important to stress that public investment in the model is assumed to produce public goods, which increase the productivity of everybody.

Suggested Citation

  • Andersen, Lykke Eg & Evia V, José Luis, 2003. "The Effectiveness of Foreign Aid in Bolivia," Documentos de trabajo 10/2003, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.
  • Handle: RePEc:ris:iisecd:2003_010
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    References listed on IDEAS

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    1. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
    2. Antelo Callisperis, Eduardo, 2000. "Políticas de estabilización y de reformas estructurales en Bolivia a partir de 1985," Series Históricas 7607, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    3. Andersen, Lykke Eg & Faris, Robert, 2002. "Natural Gas and Income Distribution in Bolivia," Documentos de trabajo 1/2002, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.
    4. Gemio, Luis Carlos & Wiebelt, Manfred, 2003. "¿Existe espacio para políticas anti-shock en Bolivia?," Revista Latinoamericana de Desarrollo Economico, Carrera de Economía de la Universidad Católica Boliviana (UCB) "San Pablo", issue 1, pages 37-68, Septiembr.
    5. Howard White, 1992. "What do we know about aid's macroeconomic impact? An overview of the aid effectiveness debate," Journal of International Development, John Wiley & Sons, Ltd., vol. 4(2), pages 121-137, March.
    6. Jemio, Luis Carlos & Wiebelt, Manfred, 2003. "¿Existe Espacio para Políticas Anti-Shocks en Bolivia? Lecciones de un Análisis basado en un Modelo de Equilibrio General Computable," Documentos de trabajo 1/2003, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.
    7. Andersen, Lykke Eg & Wiebelt, Manfred, 2003. "La Mala Calidad de la Educación en Bolivia y sus Consecuencias para el Desarrollo," Documentos de trabajo 2/2003, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.
    8. Willem te Velde, Dirk, 2003. "Foreign Direct Investment and Income Inequality in Latin America," Documentos de trabajo 4/2003, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.
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    Cited by:

    1. Lykke E. Andersen & Alice Brooks & Alejandro F. Mercado, 2004. "Macroeconomic Policies to Increase Social Mobility and Growth in Bolivia," Development Research Working Paper Series 02/2004, Institute for Advanced Development Studies.
    2. Heylen, Fanny Heylen, 2010. "Analyzing the Poverty Impact of the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative in Bolivia," Revista Latinoamericana de Desarrollo Economico, Carrera de Economía de la Universidad Católica Boliviana (UCB) "San Pablo", issue 14, pages 71-106.
    3. Heylen, Fanny, 2010. "Analyzing the poverty impact of the enhanced Heavily Indebted Poor Countries (HIPC) initiative in Bolivia," Documentos de trabajo 1/2010, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.
    4. Stephan Klasen & Melanie Grosse & Rainer Thiele & Jann Lay & Julius Spatz & Manfred Wiebelt, 2004. "Operationalizing Pro-Poor Growth - Country Case Study: Bolivia," Ibero America Institute for Econ. Research (IAI) Discussion Papers 101, Ibero-America Institute for Economic Research.
    5. Lykke E. Andersen & Osvaldo Nina, 2007. "Geographical Constraints to Growth in Bolivia," Development Research Working Paper Series 05/2007, Institute for Advanced Development Studies.
    6. Lykke E. Andersen & Osvaldo Nina & Dirk Willem te Velde, 2004. "Trade, FDI, Growth and Poverty in Bolivia," Development Research Working Paper Series 03/2004, Institute for Advanced Development Studies.
    7. Lykke E. Andersen & Bent Jesper Christensen, 2006. "Labor Mobility in Bolivia: On-the-job Search Behavior of Private and Public Sector Employees," Development Research Working Paper Series 01/2006, Institute for Advanced Development Studies.

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    More about this item

    Keywords

    Foreing aid; Bolivia; economy;
    All these keywords.

    JEL classification:

    • Z00 - Other Special Topics - - General - - - General

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