Production Systems In Bolivia: What's In Place?

Bolivia's economy is largely driven by its natural resources, with raw mining materials, natural gas, and hydrocarbons among its largest exports. The country has also seen strong historical growth, recovering well from the economic impacts of the COVID-19 pandemic, and has a burgeoning agricultural sector. However, Bolivia faces several challenges, including high public debt, declining natural gas production, modest international reserves, and political instability.

The role of agriculture

Agriculture is one of the most important sectors in Bolivia's economy, contributing about 13% of GDP and accounting for just under 30% of total employment. In 2020, the agriculture sector contributed 14% of the value-added share to Bolivia's GDP, a nearly 2% increase from 2019. In 2003, agriculture, forestry, and fishing accounted for 14% of Bolivia's GDP, down from 28% in 1986.

In 2018, Bolivia produced 9.6 million tons of sugarcane, 2.9 million tons of soy, 1.2 million tons of maize, 1.1 million tons of potatoes, 1 million tons of sorghum, 700,000 tons of bananas, 541,000 tons of rice, 301,000 tons of wheat, and smaller yields of other crops. Bolivia's most lucrative agricultural product is coca, of which Bolivia is the world's third-largest cultivator.

Despite its importance, the agricultural sector in Bolivia faces several challenges. The lack of roads and easy access to ports hinder farmers from getting their produce to markets. A lack of credit for farmers is another long-standing problem, caused by government policies, the use of credit for political ends, and strict lending procedures. Bolivia also suffers from outdated farming technology and insufficient research and extension institutions. The traditional use of pricing policies that ensure lower food prices for urban residents also lessen incentives for farmers.

To improve the agricultural sector, the Bolivian government has implemented various initiatives. In 2012, the Agricultural Innovation and Services Project was launched to strengthen the capacity of the National Institute of Agriculture and Forestry Innovation (INIAF) to lead the national system for innovation in agriculture and forestry. Between 2012 and 2017, INIAF introduced at least 20 innovations in collaboration with national and international partner institutions, including new varieties of cereals and vegetables with high yields and greater tolerance to stress.

The Bolivian government has also prioritized improving irrigation infrastructure, declaring 2015-2025 as the "irrigation decade" and promising significant investment in irrigation systems. However, progress has been limited, and Bolivia continues to face challenges in maximizing the potential of its agricultural sector.

Energy and fossil fuels

Bolivia's energy needs are small but growing. The country's overall energy mix is dominated by fossil fuels, with natural gas and petroleum products supplying most of its energy in 2020. However, Bolivia has committed to transitioning to renewable energy sources, with a target of generating up to 80% of its power from renewables by 2025.

Fossil Fuels

Bolivia is the largest producer and exporter of natural gas in South America. The country has the second-largest natural gas reserves in the continent, with approximately 12.5 trillion cubic feet of reserves (both proven and estimated). Bolivia currently produces an average of 36 million cubic meters of gas per day, using 12 million cubic meters for domestic consumption and exporting the rest to Brazil and Argentina. Hydrocarbons, including natural gas, accounted for approximately 22% of Bolivia's exports in 2022.

The state-owned hydrocarbons company, Yacimientos Petroliferos Fiscales Bolivianos (YPFB), generally forms joint ventures with private companies for extraction services. Current hydrocarbons laws require that companies sell all production to YPFB and that domestic market demand be met before exporting. Bolivia became a net importer of fuel in April 2022 due to higher fuel prices and reduced exploration and production of natural gas.

Bolivia does not produce, consume, or import coal.

Renewable Energy

Bolivia's electricity production is based on thermoelectricity (71%), hydroelectricity (20%), and solar and wind power (9%). A quarter of the electricity generated in the country comes from renewables, and the government has launched the Bolivia Electric Plan 2020-2025 to support the expansion of the electricity grid with a focus on renewables.

In 2021, Bolivia's largest solar plant, the Oruro PV Solar Plant, came online, contributing to the national electricity grid. The country has several ongoing electricity generation projects, including hydroelectric, solar, combined cycle, and geothermic initiatives, as well as over 30 projects under study, including the construction of two biomass power plants. Bolivia plans to invest billions towards expanding its electric grid through 2025 to bring electricity to rural areas and meet domestic demand and export capacity.

Foreign investment

Bolivia's economy is largely driven by its natural resources, with the mining industry, particularly natural gas and zinc extraction, dominating its export economy. The country has also historically relied on a single-commodity focus, from silver to coca. Bolivia's economy is the 95th-largest in the world in nominal terms and the 87th-largest in purchasing power parity. It is classified as a lower-middle-income country by the World Bank.

Bolivia has implemented a far-reaching program of macroeconomic stabilisation and structural reform to maintain price stability, create conditions for sustained growth, and alleviate scarcity. Legislative reforms have encouraged private investment, particularly in the hydrocarbon and telecommunication sectors, with foreign investors being accorded national treatment and foreign ownership of companies enjoying virtually no restrictions.

However, there are challenges to foreign investment in Bolivia. The country abrogated its Bilateral Investment Treaty (BIT) with the United States in 2012 and has not sought a positive bilateral economic and commercial relationship since. The 2009 constitution nationalised companies in "strategic" sectors, including fossil fuels, mining, telecommunications, and electricity. The Movement Towards Socialism (MAS) government favours nationalisation and "import substitution" for its statist economic model.

Bolivia's judicial system is also perceived as weak and politicised, making judicial recourse for investment disputes challenging. The country's investment climate is further impacted by economic uncertainty, interventionist policies, and a fragile economy vulnerable to external shocks.

Despite these challenges, there are opportunities for foreign investment in Bolivia, particularly in agriculture, energy, critical minerals, and mining. Bolivia's agricultural sector has grown exponentially in recent years, and the country is rich in non-renewable natural resources, with significant deposits of lithium that remain mostly undeveloped.

To attract more investment, each ministry may provide sector-specific incentives, and free industrial zones exist in several cities, offering eased customs procedures and stronger government support for productive investments. However, the implementation of mechanisms to offer such incentives has been inconsistent.

The World Bank and the International Finance Corporation (IFC) are also actively involved in promoting private sector development and foreign investment in Bolivia, with a focus on climate finance, financial inclusion, and foreign trade operations.

Economic growth

Bolivia has experienced strong historical economic growth, recovering well from the economic impacts of the COVID-19 pandemic. However, the country's economy is largely driven by its natural resources, and it remains a historically poor country. Bolivia's economy is heavily reliant on the export of natural resources, particularly natural gas, and the country has struggled to diversify its economy.

The Bolivian government has implemented several measures to promote economic growth and reduce poverty. For example, the government has prioritised public spending and increased domestic credit to maintain high economic growth. Additionally, the government has invested in the agricultural sector, which has grown exponentially in recent years. The government has also worked to improve infrastructure, such as roads and transportation networks, to support the production and export of goods.

To further boost economic growth, Bolivia needs to address several structural challenges. The country needs to reduce its high public debt and increase its international reserves. Additionally, Bolivia should encourage private investment and promote the development of the private sector. The country also needs to diversify its economy and reduce its reliance on natural gas exports, as gas reserves are limited.

The agricultural sector in Bolivia is a bright spot in the economy and has grown significantly in recent years. However, the sector needs access to new technologies and modern infrastructure to continue its growth. The manufacturing sector has also grown, with investments in soybean processing, textile production, and the production of wood products and soft drinks.

Overall, Bolivia has made significant progress in reducing poverty and promoting economic growth. However, the country continues to face challenges such as high public debt, limited international reserves, and a lack of economic diversification. By addressing these issues and promoting private sector development, Bolivia can further boost its economic growth and improve the lives of its citizens.

The manufacturing sector

The manufacturing industry consists of nine subsectors: food, beverages, and tobacco; textiles, garments, and leather goods; chemicals and plastics; timber, wood products, and furniture; paper products; non-metallic minerals; basic metal industries; metal production, equipment, and machinery; and other manufacturing. The food, textile, and metal industries contribute over 80% of all manufacturing output and over half of the sector's labour force.

The agricultural processing subsector includes milling wheat into flour, crushing oilseeds, refining sugar, blending coffee, milling cotton into textiles, canning fruits and vegetables, packing meat, and processing dairy products. Most agro-industries are located in the Santa Cruz Department. The textile industry, another major subsector, has played a declining role in the economy since 1970 as mining and hydrocarbons have become more prominent. The country's ten textile mills use local cotton and wool for their products, but the poor quality of garments, leather goods, and footwear, as well as the competition from smuggled goods, have hindered growth.

The chemical and plastics subsector produces a significant supply of local chemicals, plastics, medicines, industrial chemicals, gases, and insecticides. The output of this subsector is expected to increase with the gas pipeline project with Brazil and the manufacture of fertilizers and other petrochemicals. The wood and furniture industry remains under its potential, with the contraband wood trade thriving and Brazil benefiting most from the increased felling of Bolivian trees. Timber also feeds the paper industry, which consists of several dozen mostly urban firms producing paper products, newsprint, and cardboard.

The metal industries fabricate a wide range of ferrous and non-ferrous metal alloys, iron, steel, tubing, vehicles, appliances, batteries, electrical transformers, sewing machines, farm equipment, bicycles, and transport equipment. The construction industry is primarily fed by the manufacturing of non-metallic minerals and is made up of approximately 600 mostly small companies operating in the cities of La Paz, Santa Cruz, Cochabamba, and Oruro.

Bolivia's manufacturing sector faces several challenges, including a small domestic market, tight credit policies, high transportation costs, lack of infrastructure, insufficient skilled labour and managers, excessive contraband, and dependence on imported inputs. Additionally, the country's history of political instability, labour unrest, and structural bottlenecks have made it difficult to attract foreign investors.

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