July 2008 · Number 130 46978 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region. BOLIVIA Strengthening Competitiveness for Export Diversification and Inclusive Growth Seynabou Sakhoa and Oscar Calvo-Gonzalezb What role should foreign trade play in Bolivia's develop- ratios and export entrepreneurship index in the Latin ment strategy given the country's natural resources en- American and Caribbean region and has achieved great dowment and landlockness? What are the constraints to success in making soya the major export crop in less higher competitiveness in Bolivia? What is the impact of than 10 years. At the same time, however, the country's preferential trade agreements on Bolivia's trade volumes, share in world trade has stagnated and exports are in- growth, employment, and poverty? creasingly dominated by gas and minerals. Bolivia's policy makers as well as its National Develop- Reinvigorating the non-traditional export sector is im- ment Plan call for inclusive growth based inter alia on portant for the government of Bolivia as it implements its greater diversification of non-traditional exports (tra- National Development Plan. The plan's goal is to shift to ditional exports being hydrocarbons and minerals). greater value-added exports, coupled with more balanced trade relations and diversified export markets and prod- In this context, a recent World Bank report1 investigates ucts. In addition, the government currently faces several how Bolivia can achieve greater diversification in the non- policy challenges regarding the renewal of preferential ac- traditional sectors through higher cess to the U.S. market through the competiveness. The report identifies Andean Trade Promotion and Drug the main constraints with an empha- Eradication Act (ATPDEA), changes sis on transport and logistics, para- in its tariff policy toward the com- mount for a landlocked country. The mon external tariff of the Andean report analyses how Bolivia's open- Community (CAN), possible free ing to foreign trade since the mid trade agreements (FTAs) between 1980s has affected economic growth, the United States and important re- employment and poverty. The analy- gional partners (Peru and Colombia), sis further assesses the role of Bolivia's current prefer- and worsening global economic conditions. ential trade agreements (with the US, the Andean Com- munity, and Mercosur) on those key economic indicators. As a resource rich country, the Bolivian government's emphasis on export diversification is well-placed Bolivia's trade liberalization effort, launched in the but the optimal non-traditional export strategy mid-1980s, has resulted in a relatively open trade re- should build on successes in the traditional sector. gime. However, the results have been mixed. On the one Diversification matters because a heavy reliance on a hand, Bolivia now has one of the highest export-to-GDP few products implies excessive vulnerability to price downturns. Bolivia's non-traditional sector is already 1. BOLIVIA: Strengthening Competitiveness for Export Diversification and In- exporting a wide range of diversified products but clusive Growth, World Bank, Report No. 43240-BO, June 30 2008 The work described in this note was supported by the UK Government's Department of International Development (DFID) through the Markets and Governance for Poverty Reduction Fund (MGPR) Trust Fund. The views expressed in this document are not necessarily those of the UK Department for International Development' the limited productive capacity implies short (rather ness to fully exploit preferential agreements. We find than sustained) export episodes and a high attrition that Bolivian exporting firms are no more productive rate for new exporters. The current boom in natural than their non-exporting counterparts, which contrasts resources can help to leverage the growth of non- with evidence from most countries. This finding, togeth- traditional exports by providing resources to invest in er with the fact that preferential access alone has a limit- human capital and knowledge technology, as well as ed impact, suggests that increasing exporting firms' pro- infrastructure and transport that will have spill-over ductivity is key to improving their performance. Long- effects across different sectors of the economy. standing investment and business environment factors-- such as contract enforcement, regulatory uncertainty, and Main Findings political instability--have undermined productivity and export performance. As a result, the manufacturing sec- Preferential access to world markets is necessary but tor has only attracted limited FDI. In addition, exporting not sufficient for success in non-traditional exports; firms' productivity is further affected by competitiveness rather, success depends largely on increasing the issues related to the neutrality of the incentives regime competitiveness of exporting firms. Preferential for exporters, the efficiency of backbone services such as agreements alone cannot provide the levels of transport and logistics, and the effectiveness of institu- growth and trade that facilitate long-term economic tions for cross-border trade. development. The simulations undertaken in this study suggest that the non-renewal of ATPDEA preferences a neutral incentive regime is essential to the growth of non- is potentially the most costly. The report finds that traditional exports non-renewal of the ATPDEA with the United States would reduce growth the most, by 0.6 percent. The Payment delays under the duty-drawback system are a ratification of the U.S.-Peru and U.S.-Colombia free problem for exporters. Duty drawbacks (called CEDE- trade agreements (FTAs) would reduce growth by 0.4 IMs) allow exporters to claim back duties paid on inputs percent. Deeper integration with MERCOSUR would for exported products, thus partly offsetting the cost of tar- dampen growth by 0.09 and re-alignment of Bolivia's iffs for exporting firms. Reimbursement requests under the tariff scheme to the Andean Community (CAN) CEDEIMs are accumulating, as the budgeted allocation common external tariff would lower it by 0.01. for CEDEIMs is not keeping pace with exports levels. In addition, the program that automatically suspends taxes on imported inputs for exporters (called RITEX) has a very Preferential agreements remain critical because they low take-up rate. In the absence of a smoothly operating can help spur new areas of export growth, thus helping duty relief mechanism, export manufacturers have to pro- towards the goal of diversification. The small estimated duce at a higher cost than if they had full and easy access impact of preferential agreements does not reflect these to production inputs at world prices. This obviously handi- agreements' full effect as second-round effects are not caps their export performance. captured in the modeling. The scenarios analyzed are based on products currently traded and currents market The recent rise in import tariffs adds to the cost of im- conditions and do not consider products not yet traded. As ported inputs and worsens the anti-export bias. The in- a result, the scenarios downplay the impact of increased crease in import tariffs is expected to reduce exports more trade of new products that could take advantage of pref- than imports: exports by $35 million a year and imports erential market access. For example, the incipient trade in by $24 million a year. Output and welfare are also ex- the service sector may well yield significant gains through pected to fall. These results stem from the fact that higher preferential agreements, not only directly through the ser- import duties are also taxes for exports. First, they mean vices sector but also indirectly by lowering the cost of ser- higher costs of imported inputs, and higher costs of living vices inputs into goods production and exports. Therefore, may generate higher wage costs. Second, this strategy cre- there are risks related to a loss of preferential access to the ates an anti-export bias and reduces incentives to export. U.S. market and failing to pursue greater trade integration within the region. Bolivia could also be left out from the Rapidly rising inflation poses a threat to the competi- dynamics of trading blocks, which may reduce its poten- tiveness of Bolivian exporters. Inflation climbed to 12 tial to diversify its trade in new products and markets. percent at end-2007, up from 5 percent in 2006, increas- ing the price of Bolivian exports. The higher inflation The analysis suggests that policy should focus on in- is the result of such variables as the global rise in food creasing exporting firms' productivity and competitive- prices, a slow supply response attributable to low private 2 · July 2008 · Number 130 investment, increased aggregate demand fueled by remit- tances and commodities revenues, and the destructive ef- tends to under-export relative to other countries. Ac- fect of the La Niņa weather pattern. In response to the rise in counting for its status as a landlocked country, Bolivia im- inflation, the government issued export restrictions on staple ports more than econometric models predict (by 3 percent) food prices, shifting incentives to producing for the domes- and exports less than predicted (by 11 percent). Not ac- tic, rather than the international market. The government counting for its being landlocked, Bolivia exports 43 per- also increased its open market operations and brought about cent less than predicted. But export entrepreneurship--as a modest appreciation of the boliviano in real terms. Boliv- measured by the number of new products exported--is ia's currency, however, appreciated less than its neighbors; higher than one would expect given Bolivia's level of nominal and real appreciation will likely continue, further income. Bolivia has been able to export a diverse range eroding competitiveness in the non-traditional sector. of products, although only intermittently, in small quanti- ties, and by only a few firms. These results suggest an Efficient backbone services are vital for reducing exporters' costs unrealized potential for diversification through increasing For a landlocked country like Bolivia, efficient trade ser- volumes of some products that are already being exported vices are critical for export competitiveness. Telecom infra- - although in small amounts - rather than increasing the structure is not well-developed, undermining the country's overall number of products that Bolivia currently exports. connectivity to international markets and the ability to take advantage of opportunities in dynamic services export sec- Increasing the effectiveness of trade-related institutions tors, such as call centers and outsourcing. The phyto-sani- would enhance export competitiveness. The performance tary standards agency SENASAG does not function prop- of the institutional framework for trade is mixed. While erly owing to a lack of capacity and resources; exports are Bolivia implemented a successful customs reform, key delayed for months in some parts of the country because of export agencies remain plagued by institutional weakness slow certification procedures. The use of air freight remains and lack of resources. As a result, the export promotion limited because of a lack of air transport capacity. This hurts agency (CEPROBOL) cannot fulfill its mandate. In some the capacity to develop exports using airfreight in some cases, the private sector has stepped in to provide export parts of the country, such as Cochabamba. promotion services. The large number of products that are exported for only a short duration suggests that sus- Trucking costs appear to be competitive by international tained government support through effective trade pro- standards but the predictability of trip time remains a motion institutions could reap substantial benefits. challenge. The quality of transport logistics in Bolivia is slightly below the level to be expected for its income level. Policy iMPlicaTions Transport costs of 5­8 U.S. cents per km are competitive, The productivity and competitiveness of Bolivian firms but the great distances to ports makes the overall costs should be the paramount focus for boosting export high and places Bolivia at a competitive disadvantage. In growth and increasing the impact of the export sector addition, the predictability of truck trip time is important as on job creation and poverty reduction. New trade devel- most container ships operate out of Arica in Chile (Boliv- opments have the potential to affect the preferential ac- ia's main international port) once a week, hence seasonal cess of Bolivian exports to several markets. But preferen- damage or road blocks can be costly for exporters. tial agreements and regional integration alone have limit- ed implications for employment, poverty, and growth. In Institutional reforms implemented in Bolivia's Customs Ad- addition, preferential access can only be exploited once ministration (ANB) have improved trade control and trade the goods are produced and ready to be exported. facilitation, but smuggling and delays at border crossings persist. Import and export controls have improved and trade (a) Trade policy and preferential access to markets facilitation enhanced throughcomprehensive institutional re- In the short term, the Government may seek to reverse forms in the ANB. But control of smuggling remains weak the increase in Bolivian import duties; or, as a second and possibly affects a third of total imports, undermining the best option, it may consider limiting the economic dis- income of formal sector importers and producers. Similarly, tortions implied by the tariff increase. Indeed, the tariff econometric estimates suggest that Bolivian exporter are hurt increase toward the common external tariff of the An- by the costs associated with shipment delays at customs. dean Community creates an anti-export bias for domes- tic producers. The Government may consider exploring The government should be pro-active in addressing impediments instruments that minimize those distortions. to cross-border trade. Export entrepreneurship is high, even though Bolivia July 2008 · Number 130 · 3 Over the medium term, the Government may con- In the medium term, the Government could pursue sider alternatives to the use of export bans for staple further reforms in customs and border control foods in order to contain price increases. Bans management, continuing the focus on decreasing jeopardize the long term supply of food products to corruption and smuggling. Areas for further improvement domestic markets, as producers have more incentives include: setting up a risk-based selectivity process for to shift their production to other products and the ef- inspections, relying on computerized databases; upgrading fectiveness of export bans is thus limited over time. core software from ASYCUDA++ to the next level, or Bans also encourage smuggling. transition to other software; upgrading IT hardware and other equipment for border stations and expanding joint (b) incentives regime integrated border facilities with neighboring countries; In the short term, a high-impact and relatively easy-to- setting up a system of border-crossing performance implement policy is to pay duty drawbacks in a timely indicators; and improving coordination between customs fashion, as delays burden firm finances and, hence, their and other border control agencies, especially SENASAG. production capability and competitiveness. Delays defeat the purpose of neutralizing the effects of tax policy for Another medium-term priority is to encourage the con- exporting firms. Customs control should be made more ef- solidation of air freight consignments and give truck ficient to ensure that duty-drawback relief is legitimate and trailers their own license plates. Air freight consolida- correctly executed. tion will facilitate export growth in producing regions without airports. Cochabamba in particular was identified In the short term, the authorities should continue to as having the potential to channel exports by air freight maintain a stable macroeconomic framework. Solid fiscal via Santa Cruz to North American and European mar- accounts, stable monetary policy, and controlled inflation kets. The current law considers tractor and trailer as a are critical to maintaining economic confidence and mak- single unit for purposes of registration. Allowing tractor ing long-term plans needed to develop value-added exports. units to have separate registration from trailers would en- able them to keep moving--and earning revenue--while A major priority over the medium term, with potentially trailers wait to unload and reload. substantial impact on FDI flows and exports, is to step up efforts to enhance the business environment. This (d) increasing the effectiveness of institutions to promote cross- would promote firm productivity and competitiveness and border trade encourage investment in non-traditional exports, which In the short term, a key policy priority offering high poten- would raise the volume of such exports. Political stability, tial returns is to revamp the trade promotion office CEP- anticorruption efforts, and reducing informality are key ROBOL by expanding its resources, stabilizing its institu- areas for further improvement. tional environment, and increasing the role of the private sector in CEPROBOL's operational support to exporters. (c) Backbone services A priority for policymakers in the short term is to (e) setting the foundations for exports diversification evaluate and revamp SENASAG-- the agency in Over the medium term, the government can boost charge of issuing phyto-sanitary certificates--to ensure export diversification by helping current and prospective that it fulfills its mandate in a sustainable manner. This exporters export higher volumes and for much longer mandate includes providing a sufficient budget to ensure periods using the revamped export promotion agency. adequate geographical reach and information systems Over the longer term, the authorities should develop consistent between destination market requirements and a diversification strategy that leverages the country's SENASAG services, appointing and training qualified natural resource endowment. Elements of the personnel, and clearly defining the regulatory framework strategy may include investing in activities related to and delimiting the relationship and responsibilities of the hydrocarbons or minerals such as in services, machinery, SENASAG relative to other government agencies. engineering product, or transport equipment; developing a trade regime that favors the emergence of new export about the authors activities; and promoting technological change in a. Country Economist, Economic Policy Sector, b. Economist, Economic manufacture and services. Policy Sector, Latin America and Caribbean Region, World Bank "en breve" is produced by the Knowledge and Learning Team of the Operations Services Department of the Latin America and the Caribbean Region of the World Bank - http://www.worldbank.org/lac 4 · July 2008 · Number 130