Why is Bolivia's record of economic growth so wretched? This briefing argues that some of the answer may lie in the failure to develop the economic institutions necessary to progress from a factor-driven to an efficiency-driven economy. Property rights are uncertain, transactions costs are high, and the ability to co-operate economically is stunted. Why is this? Partly this comes from history: Bolivia developed as an economy centred on exploiting high-value minerals using cheap labour. The mines as large-scale, integrated operations had little need for market institutions other than property rights. The other part is the governance of Bolivia. The state is weak, but capable of conferring favours when handing out the rights to mine, drill or farm, or when granting monopoly privileges, import protection and tax exemptions. By being particular in its favours, the state becomes a valuable ally for large-scale vested economic interests. Crony capitalism is thus encouraged. But since the state is so particular, it lacks legitimacy and sooner or later, crises and protests bring down the administration. The result is a state poor in delivering public services and unable to create a level playing field, while frequent changes of government make for unstable economic policy.
IPPG Briefing Paper No. Six, DFID, London, UK, 3 pp.