Macroeconomic and Welfare Effects of Public Infrastructure Investment in Five Latin American Countries

It has been widely documented that investment in infrastructure is important for economic growth, but little work has been done in relation to the impact of infrastructure investment on other macroeconomic variables. This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model of a small open economy to study the effects of public investment in infrastructure on output, consumption, private investment, trade balance and welfare. The model is parameterized and solved for five representative countries from The Initiative for the Integration of Regional Infrastructure in South America (IIRSA), which include: Bolivia, Chile, Brazil, Venezuela and Argentina. I also analyze the growth effects on GDP by increasing or decreasing the effectiveness index of infrastructure in each of these countries. Naturally output will grow at a larger rate, if infrastructure is handled with greater efficiency.Infrastructure, Economic Growth, Welfare

Liquidity Shocks and the Dollarization of a Banking System

This paper shows how uncertainty about liquidity demand can lead to a high degree of dollarization in the banking system. I study a model where the demand for currency in each period is random, and where it is easier for banks to borrow in local currency in times of crisis than in dollars. Banks choose a portfolio composed of local currency, dollars, and real loans. Compared to the anticipated transactions demand for each currency, I show that the bank will hold a relatively large amount of dollars and a relatively small amount of local currency. I also show the existence of a dollarization multiplier : as the anticipated transactions demand for dollars increases, the dollarization of the banking sector increases more than proportionately.Dollarization, Banking crisis, Banking System

Growth and Banking Structure in a Partially Dollarized Economy

This article illustrates how the industrial organization of a banking system affects economic growth in a partially dollarized economy. I study a model where banking competition has some potentially good and some potentially bad effects for growth. I analyze how important they are quatitatively and, surprisingly, they do not seem to matter much. The main reason for this is that while competition leads banks to offer consumers a "better deal" on their deposits, this does not lead to a large increase in the savings rate. The effect depends on the main structural parameter values of the economy. In particular, if there is a high demand for liquidity insurance. I calibrate the model for the Bolivian economy and show that the growth rates under both systems are not significantly different.General equilibrium and growth, Dollarization, Banking, Industrial Organization

Welfare Gains from Optimal Policy in a Partially Dollarized Economy

This paper evaluates welfare under optimal monetary and fiscal policy in a dynamic stochastic model of currency substitution and capital. It shows that in a partially dollarized economy, the main optimal policy results, i.e. the Friedman Rule and the zero capital tax, hold. Welfare implications of these optimal policies are computed for the Bolivian economy using a second-order approximation technique. The primary conclusions are that the welfare gains under optimal monetary policy are negligible. The welfare gains when optimal fiscal policy is considered alone or in conjunction with optimal monetary policy are sizable and come from the increase in real variables and also by the increase in real balances in local currency. Thus, welfare gains are negatively related to dollarization.Dollarization, Optimal Fiscal and Monetary Policy, Second-order approximation technique.

Effects of the Global Financial and Economic Crisis on the Bolivian Economy: A CGE Approach

This paper analyses the impact of the Global Financial Crisis on the Bolivian economy. The PEP 1-1 Standard Model has been employed to analyze the effects of a reduction in (i) the world export prices of mining and agriculture, (ii) the world demand of textiles, and (iii) transfers to households (i.e., remittances) from abroad. The model has been calibrated to a new 2006 SAM for Bolivia. The households have been disaggregated according to their location (urban and rural) and ethnicity (indigenous and non-indigenous). The factors of production have been disaggregated into skilled and unskilled labor, capital, and natural resources. Not surprisingly, our results highlight the relevance of the decrease in the export price of natural gas in explaining the negative effects of the Global Financial Crisis.Computable General Equilibrium Model, Financial Crisis, Forecasting and Simulation

Misallocation and Manufacturing TFP in the Market Liberalization Period of Bolivia

This paper analyzes productivity levels, dispersion and growth in the Bolivian Manufacturing Sector during the Market Liberalization Period: 1988-2001. These years are characterized first, by a period of macroeconomic stabilization and 1st Generation Reforms (1988-1993), second, by a period of privatization and 2nd Generation Reforms (1994-1997) and third, by a Post-reforms period (1998-2001). The 1st and 2nd Generation Reforms were framed in line with the Washington Consensus and their main objectives were to guarantee macroeconomic stability, to improve the efficiency and allocation of resources in the economy and to promote economic growth with fairness. We show that in contrast to what was expected, productivity in the manufacturing sector decreased steadily. We compute Total Factor Productivity (TFP), for the first time, using firm-level data and in addition we break down this measure in productivity per se and resource misallocation. We find that both issues contributed to the decline in productivity and if resource misallocation were eliminated, the gains in productivity would have been in the order of 60 percent, but the trend of productivity along time would have been the same, which means that there are also structural problems that affect productivity in Bolivia. In addition, we evaluate TFP considering exporting firms, size of firms, age of firms and geographical location.TFP, Market Structure, Manufacturing

La Economía del Cambio Climático en Bolivia: Análisis del Sector de Energía Eléctrica

El presente estudio analiza los efectos del cambio climático sobre el sector de energía eléctrica en Bolivia durante los próximos 100 años tomando como base las proyecciones realizadas por el Modelo de Equilibrio General Computable (MEGC) de Jemio y Andersen (2009). Este modelo provee los insumos necesarios en términos de tendencias y magnitudes de las variables a ser usadas en las proyecciones. Se parte de la hipótesis que el cambio climático afectará a la generación de energía hidroeléctrica a través del efecto sobre los caudales de los ríos que suministran agua a las centrales hidroeléctricas del Sistema Interconectado Nacional (SIN). Concretamente, se espera una disminución en las precipitaciones con la consecuente disminución en el caudal, lo que reduciría la oferta de energía hidroeléctrica. Inicialmente se proyecta la demanda de energía eléctrica para los próximos 100 años, en base a la información de consumo de energía por sectores del Balance Energético Nacional (BEN). A partir de los consumos de los sectores residencial, industrial, comercial, minería y otros se proyecta la demanda en base a las tasas de crecimiento del consumo provistas por el modelo MEGC. Se empleó el supuesto que este es un mercado que siempre esta en equilibrio, es decir oferta es igual a demanda. Asimismo, se supone que en el escenario base, mitad de la oferta de energía eléctrica es termoeléctrica y la otra mitad es hidroeléctrica, tal como sucedía el año 1999 que es el año base para las proyecciones. Luego se proyecta la oferta según los escenarios A2 y B2 explotando la relación caudal de agua y potencia efectiva, diferenciando entre centrales hidroeléctricas de pasada y de embalse. Para las centrales de pasada se emplea una relación lineal entre potencia y caudal, mientras que para las centrales de embalse se emplean estimaciones de Mínimos Cuadrados Ordinarios (MCO) usando información semanal que nos permite relacionar el volumen embalsado con el caudal y luego con la generación de energía. El impacto económico del cambio climático en el sector se lo estima como el costo de producir la energía termoeléctrica adicional necesaria para cubrir la brecha generada por una menor oferta de energía hidroeléctrica y que permita cubrir la demanda del escenario base. Los resultados indican que producto del cambio climático habrá una reducción de energía hidroeléctrica de 18% según el escenario A2 y de 20% según el escenario B2, hacia el año 2100. El costo de cubrir estas brechas con energía termoeléctrica será de 0.05% y 0.06% del PIB en el año 2100, según los escenarios A2 y B2 respectivamente. Potencial hidroeléctrico, Bolivia tiene de sobra, lo que hace falta es invertir en una mayor generación de energía hidroeléctrica, no solo para cubrir la demanda creciente, sino también para mitigar los efectos del cambio climático a través de la disminución de los caudales en el occidente del país.Cambio Climático, Bolivia, Energía

Understanding Productivity Levels, Dispersion and Growth in the Leather Shoe Industry: Effects of Size and Informality

In this case study performed on the industrial sub-sector of manufacture of leather shoes in Bolivia, we use the Hsieh and Klenow model (2008) to determine the differences between productivity of larger and formal companies and productivity of smaller and informal companies. Our results reveal that there are not many differences in terms of productivity among these types of companies. We think that informality is indeed the most important factor that contributes to this phenomenon. Apparently, the decrease in costs associated with informality compensates to some extend the economies of scale of formal companies with bigger dimensions and better technology. A notable fact in the shoe manufacturing industry is that it had experienced an atomization process in the last years. This trend is the consequence of a progressive creation of many small informal companies instead of the consolidation of this industry in medium and large formal companies. In a way, informality has contributed to this process. First, because it allows the survival of less productive companies that if they were not informal, they would have to bear costs that would not allow them to continue in business. Second, because informality creates strong incentives for employees to start their own business. In the other hand, many costs associated to formality discourage legally operating companies to employ more people, raise capital and growth.Productivity, Informality, Bolivia

Technological Progress and Productivity in the Quinoa Sector

The main objective of this case study is to analyze the effect that a significant technological innovation in quinoa processing has had on the productivity of companies devoted to this activity and the impact of such an innovation on the growth and organization of the quinoa cluster in Bolivia, and its possible effects on the future. The study will explain how the boost engendered by technological innovation in quinoa processing has triggered a series of events that have allowed the establishment of an ambitious development program. The sector’s main companies and producer associations are part of this program, which is called the “Quinoa Alliance.” The program has become a unique opportunity for agro-industrial development in the Bolivian Altiplano, so far characterized by subsistence agriculture.Quinoa, saponin, unit operation, specific consumption, productivity

Public Expenditure Policy in Bolivia: Growth and Welfare

It has been widely documented that fiscal policy can promote economic growth, when it is based on an efficient provision of pubic capital. But little work has been done, in Bolivia, in relation to the macroeconomic and sectoral impacts of increasing public investment in infrastructure. This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model for a small open economy with five sectors: Non-tradable or services, importable or manufacturing, hydrocarbons, mining and agriculture. The model is parameterized and solved for the Bolivian economy and several interesting scenarios are simulated by changing government expenditures, taxes, country risk, Total Factor Productivity, effectiveness of public capital and terms of trade. This analysis is relevant for the Bolivian economy, because the government is using fiscal policy as one of its main tool to attack poverty and aims to put public investment as the foremost instruments to promote growth and welfare.Fiscal Policy, Infrastructure, Multisector Growth Model