Falling into the Rentier Trap

Or How Evo Morales Is Missing an Opportunity


by | Oct 28, 2011

A lynched effigy with a warning sign that reads

“Thieves will be lynched” reads the warning sign on the effigy. Photo by Winifred Parker

“Why are you so quiet about the paper factory the government’s building in the middle of the rain forest, in Chapare?” I asked an environmental activist who has been making noise about water pollution, forest preservation, garbage treatment and every single environmental issue in Bolivia.

“Don’t worry,” he replied, “That plant will never work. It is a state company, remember?”

Although his comment was ironic, he certainly had a point. Eager to use the rents from natural resources to industrialize the economy, the Bolivian government has decided to invest in manufacturing plants all over the country. One of them is Papelbol, the paper factory mentioned above. Its home is in the middle of a fragile environment that has been almost destroyed during the last three decades of peasant settlements and coca cultivation: the Chapare region on the edge of the Amazons areas that has some of the heaviest rainfall in the world. As originally planned, the paper plant would engulf the remaining forest and contaminate the surrounding rivers.

Fortunately for the environment, as my friend said, Papelbol is not operating properly, and, chances are, will never do so.

It would not be the first time that something like that has happened in Bolivia. From the city of Potosí, in the Andean altiplano, you can see not only the magnificent Cerro Rico, which still gives its silver to the world, but also the Karachipampa mill. This is a huge melting plant for lead and zinc that never actually functioned, despite the US$250 million dollars invested in it 35 years ago.

These two examples—and there are many more—not only illustrate the questionable ability of the state to run productive companies, but also help us to understand the rentier trap and how it functions.

There is a growing literature on the so called natural resources curse. Most of it explores and describes the correlation between abundance of natural resources, and economic stagnation, expressed either as sluggish economic growth or as widespread development maladies, such as poverty, corruption and social conflict.

The problem, however, is not the abundance itself. There are many experiences of economic success and social wellbeing in countries endowed with a wealth of natural resources, and some cases of recent success based on that wealth. The problem seems to arise from the concentration of such abundance and its revenues, on the one hand, and specific social and institutional conditions, on the other. In fact, I call the rentier trap the convergence of three factors: rent concentration, weak institutions and social inequality. The rentier trap, in my view, impedes development because, once in motion, it re-creates weak institutional systems and reproduces poverty and inequality.

History shows that, if you pour money from natural resources exports into a country with high levels of poverty and inequality and with a weak democracy, it is very likely that the money will stir social conflicts. The political system will tend to grow even weaker because of escalating opportunities for corruption. Those who are poor and vulnerable have little power to organize and intervene successfully in the struggle over the control of those resources, and will remain as poor and excluded as before the export boom.

Such are the cases, for example, of Nigeria and Chad. The description also jibes with most of Venezuelan history and, currently, it is also applicable in Bolivia. The places that were not damaged by the sudden flow of abundant resources are those that already had strong institutions and more equitable societies such as Alaska and Norway.

Bolivian exports remained below $US one billion a year for decades until foreign investments expanded natural gas reserves and developed a dynamic export industry at the beginning of the century. After a difficult process of stabilization and institutional reforms, spanning from 1985 to 2000, the discovery of gas reserves and the prospect of increasing exports stirred expectations and people became impatient with the steady but slow process of economic growth and poverty reduction.

Anxious to control the incoming fiscal boom, social and political organizations appealed to the poor. They mobilized and were able to expel the traditional parties from government. In 2005, Evo Morales, the candidate of the Movement Towards Socialism (MAS), campaigned on taking control of natural resources and recovering them from the hands of private companies. He promised to create an industrialized economy in which the poor would get the benefits through better jobs and salaries, social security and improved public services.

The export boom was bigger than expected because of skyrocketing oil and mineral prices, fueled by the economic growth in China, India, Brazil and other emerging countries.

In fact, Bolivia is currently exporting six times more than during the 1990s; its fiscal revenues grew six times since 2005. But poverty is not declining at the same rate; public services are deteriorating in many areas, and social conflicts are on the rise. In spite of being reelected by more than 60% of the votes, which gave his party control over parliament, judiciary, electoral courts and most of the local governments, Morales’ rule is plagued by governance problems.

Even the hydrocarbons industry is in trouble. Declining investments have reduced the production for the internal market and Bolivia is using a large part of its revenues to import gas oil, gasoline and even liquefied gas for domestic use, as well as to pay for subsidies that increase with rising international oil prices.

The same social organizations that toppled the previous democratic governments and supported Evo Morales are getting disenchanted. So far, the Morales revolution has only been able to reform the constitution, expanding rights and making promises that are more difficult to fulfill than ever.

Bolivia has again fallen into the rentier trap. Its democratic institutions were weak to begin with, as shown by the fact that they were unable to channel the uprisings that toppled Gonzalo Sánchez de Lozada in 2003 and Carlos Mesa in 2005, and that pushed Eduardo Rodríguez Veltzé to speed up presidential elections in 2005. But institutions are even weaker now after a forced constitutional reform that questioned all rules and authorities. Contraband has been growing along landlocked Bolivia’s extended border lines. Drug trafficking has expanded despite efforts to control coca cultivation; delinquency and insecurity are taking more lives and properties. Indeed, people are so fearful that lynchings are becoming a frequent practice, both in rural and in urban areas.

The government is making desperate efforts to control corruption after the third man in command, Santos Ramírez, was caught in a mafia-type scheme (2009), and a police general was trapped smuggling cocaine through Chile (2011). At the time of their arrests, Ramirez was managing the state oil company and General Sanabria was in charge of narcotics intelligence.

At the same time, public investments such as the paper factory are just not working. More than a billion dollars have already been invested in industrial plants with the same frustrating results. Most of them were located without regards to economic or environmental conditions, only to satisfy local pressures, just as infrastructure investments were often made to appease social unrest. Soccer fields, paved roads, subsidies, and union buildings have absorbed a big part of the resources brought by the bonanza, satisfying local interest groups but leaving intact the main causes of poverty and inequality.

All these problems are taking a toll on Morales’ popularity. Opinion polls show a sharp decline in favorable opinion on his government, and although most of his supporters are reluctant to make the President responsible for the bad governance, blaming instead his ministers and advisors, the majority is already stating that they will not vote again for Morales, according to reputable opinion polls.

The Bolivian authorities seem totally unaware of the problems I describe as the rentier trap. Their plans still focus on retaining and expanding their power, as if controlling weak institutions would give them the capacity to avoid social pressures and soothe the social unrest. They are still aiming to increase their control over fiscal revenues, forgetting past failures and ignoring current ones, and trying to renew their industrialization plans.

Luckily, not all is failure in Bolivia. Part of the natural gas revenues goes directly to the elderly, children and pregnant women through cash transfers. In 2009, for instance, cash transfers amounted close to US$286 million dollars, which represents around 1.3% of the Gross Domestic Product. Most of that goes to people older than 60 as a noncontributive pension, giving continuity to the Bonosol program, created during the first Sánchez de Lozada administration (1993-1997). This program is now called Renta Dignidad, and reaches more than 750,000 men and women. They only need to show their IDs to collect the money in monthly or yearly payments, as they choose.

Based on the success of this program, which proved its positive impact in lowering poverty, the Morales government created two additional cash transfer programs: “Juancito Pinto” and “Juana Azurduy.” The first is given to children who attend public schools and the second favors pregnant women who get medical attention at public facilities.

I think that these experiences seem to show an exit from the rentier trap. It is necessary to circumvent the state and to pulverize the concentrated flow of money, scattering it into little bits. Thus, it will literally rain money, spreading all natural rents all over the economy, giving consumer power to the people.

In fact, in November 2007 a group of Bolivian scholars, policy makers and opinion leaders suggested exactly that. This group, including former President Eduardo Rodríguez, Vice President Victor Hugo Cárdenas and Central Bank President Juan Antonio Morales, signed a manifesto saying:

We all are Bolivia, so we propose that all natural rents be distributed to all citizens, without intermediaries or [political] promises, directly and transparently, so that each person will decide how to use those resources for the benefit of their families and to contribute to the common progress.

Fundación Milenio, a La Paz-based think tank, has discussed the rationale behind this in a number of publications. Those reports show thoughtfulness in the use of cash transfers, evaluate the likely low inflationary impact of the distribution, estimate the resulting higher economic growth of expanding the domestic market, and look into the possible reduction in inequality and poverty that could be attained if natural rents would go directly to the people.

However, none of these arguments seem to persuade the Morales government to leave behind the illusionary path of state-led industrialization, nationalistic policies and political control of institutions.

As the rentier trap tightens, the opportunities for a good use of natural resources decline.

An engineer involved in the paper plant in the Chapare told me the plant will soon be put into operation by bringing cellulose pulp from Brazil. It is easy to imagine President Morales playing soccer during the plant inauguration and the Central Bank authorizing a new “credit” to subsidize its operations. But I am sure that such a success will last only as long as those subsidies, so that the paper plant will soon become another example of a sad period when Bolivia missed the chance to start a new path for development.

Fall 2011Volume XI, Number 1

Roberto Laserna got his doctoral degree from UC Berkeley in 1995. He has done extensive research on social and economic problems and worked as an international consultant and university professor in Bolivia (San Simón), Peru (El Pacifico) and United States (Princeton). His books include La democracia en el Chenko and La trampa del rentismo. He can be found on twitter @roblaser.

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