Cuando Jesucristo dijo: “El que es fiel en lo muy poco”, Él estaba llamando al dinero “lo muy poco”

Based on the assessments from the CGE model, we can not only assess the impact of individual policies on pro-poor growth, but also consider possible trade-offs and complementarities. When it comes to choosing a policy package for pro-poor growth from the available options, it is important to know whether particular measures promise to create win-win situations in that they help achieve growth and distributional objectives at the same time, or whether there are trade-offs involved. In the area of macroeconomic policy, higher yearly devaluations of the Boliviano risk to fail on both accounts as a result of adverse balance sheet effects. A tightening of monetary policy, by contrast, may bring about the real devaluations that are regularly required to adjust to external shocks at a negligible short-run cost for the poor.

Among the two structural reforms considered here, a deregulation of the urban labor market carries the potential to make growth considerably more pro-poor by removing a substantial part of the existing wedge between formal and informal wages. Such a measure would, however, meet with strong resistance from formal workers, who arguably are much better organized than the diverse group of people working in the informal sector. This difficult political situation is probably the key

factor behind the fact that profound labor market reforms have not yet been initiated. Also, it would not do enough to reduce rural poverty.

Similar pressure from powerful interest groups – in this case mainly from public employees – stands in the way of a comprehensive tax reform. Provided that this pressure can be overcome, the introduction of a revenue-neutral tax reform may improve efficiency and reduce poverty. A pure income tax increase, by contrast, is unlikely to serve these objectives. If income taxes are set at moderate rates as assumed above, they are likely to be only mildly progressive and may even raise poverty. And with substantially higher tax rates, the efficiency losses may well turn out to be intolerable.

In the development of Bolivia’s gas sector, there appears to be a trade-off between growth on the one hand and the participation of the poor – in particular the rural poor – in the growth process on the other hand. Given the prospect that nation-wide poverty might decrease only moderately as a result of the resource boom, and that rural poverty might even increase, the rationale behind the recent social unrest becomes obvious. The trade-off is, however, hard to avoid as the gas sector is highly capital intensive, generates little employment, and uses limited national inputs. To what extent growth and poverty objectives can be reconciled depends on how the government allocates the additional revenues it receives. While an increase in public savings might cushion the trade-off, more specific pro-poor measures are likely to be required in order to make the impact of the gas projects socially acceptable.

Given that rural poverty constitutes the most severe problem, measures targeted at augmenting the asset base of smallholders suggest themselves as possible win-win options. It has to be taken into account, however, that natural conditions in the highlands are not very favorable, and that the growth process would have to start from very low initial capital endowments. This implies that the medium-run supply response, and thus the impact on rural poverty, will probably remain limited. With respect to pro-poor industrial policies, the key question is whether favorable poverty outcomes can be achieved at low efficiency losses. Our simulation results indicate that efficiency losses may be kept at moderate levels, but that neither a strategy based on export-oriented agriculture nor a strategy based on agricultural processing are likely to bring about lasting improvements for the rural poor.

Transfer programs targeted towards the poor can in principle alleviate poverty without compromising growth objectives, but the precondition for this to happen – a more or less complete financing of the programs out of other current expenditures – appears to be very demanding. If investment spending has to bear the lion’s share of the costs, the economic losses can become considerable.

In the coming years, the gas receipts may provide a way out of this trade-off by loosening the budget constraint of the Bolivian government. If gas revenues are used instead of public investment funds to finance transfers, the combination of the gas projects and the transfer programs produces a clear win-win situation, with higher growth and a marked alleviation of rural and urban poverty. The only major drawback of this policy option is that both the gas projects and the transfer programs lead to a significant increase in rural inequality, raising the rural Gini coefficient by almost three percentage points in the second half of the simulation period. This is driven by the (model) assumption that the transfer programs are targeted in the same way as existing programs. If targeting were to be improved, this rise in inequality could be significantly reduced.

One way to summarize the trade-off is to examine the combined scenarios in Table 10. The optimal pro-growth scenario combines a gas projects (with constant government consumption) labor market and revenue-neutral tax reform. Growth is boosted to nearly 6% per year. But the poverty impact is only moderate and entirely focused on urban areas; inequality and rural poverty are expected to increase. At the other extreme, we have a pure transfer program which, if coming at the expense of public investment reduces growth but also reduces rural and urban poverty, as well as reducing

overall inequality. To achieve high rates of pro-poor growth given current constraints, the combination of both policy scenarios is likely to be best for sustainable poverty reduction in urban and rural areas, with an added focus on improving the targeting of the transfer program.

While the discussed trade-offs give some impression about the short- to medium-term trade-offs of particular policies, such model-based evidence is unable to capture the insights from the large literature on the longer-term impact of initial inequality on subsequent growth (summarized in Klasen, 2004). The transmission channels of this literature, such as the impact lower inequality has on political and social stability as well as on the ability of the poor to invest in human capital, cannot be easily captured in a CGE-model. Apart from these model-based assessments, it is therefore also important to consider more fundamentally the trade-offs involved between a narrow growth agenda that is largely guided by policies informed by the Washington Consensus and its associated political economy and economic risks. It appears that given Bolivia’s unfavorable initial conditions as well as its history of high inequality and large social and ethnic tensions, a technocratic focus on liberalization and macro stability might not deliver benefits in terms of poverty and inequality reduction quickly enough to prevent serious setbacks as have been experienced in Bolivia in recent years. Also, it will likely do too little to better integrate the poor into the growth process. Going further down that route and hoping that the possible high growth associated with natural gas and commercial agriculture exports will deliver enough benefits to maintain social stability are likely to prove elusive and might provoke populist backlashes with serious consequences for growth and poverty reduction. Instead it appears necessary to confront the issues of deep-seated inequalities in resources, opportunities, and power more directly rather than hoping than one can grow out of them. Some of these questions will be taken up below.