INTERNATIONALBANK FOR WORLD BANK R E T C N O E N STRUCTION PM AND DEVELO May 2006 No. 89 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank's Latin America and Caribbean Region BOLIVIA POVERTY ASSESSMENT: ESTABLISHING THE BASIS FOR PRO-POOR GROWTH Omar S. Arias and Magdalena Bendini Background - Poverty and Inequality in Bolivia people. About 40 percent of the population in the department of Bolivia faces high levels of persistent poverty and inequality. Santa Cruz is poor, although the poverty rate is only 20 percent During 1993-1999, growth rates averaging 4.7 percent annu- in the capital. ally, surpassing other Andean countries, resulted in a decline in urban poverty from 52 to 46 percent. These gains were Social indicators related to Unsatisfied Basic Needs and the quickly reversed due to economic shocks in the late 1990s. By Millennium Development Goals (MDG) improved significantly 2002, 65 percent of the population was living in poverty, and 40 during 1992-2001. For example, child and infant mortality rates percent in extreme poverty (See Table 1). In addition, income declined by 30 percent, net enrollment in primary education is inequality increased significantly during 1997-2002, making approaching 100 percent, and households without safe water Bolivia one of the countries in the region, along with Brazil and and adequate sanitation fell from 50 percent to 30 percent. Chile, with the highest income inequality. The high income However, Bolivia still ranks among the worst in the region in inequality reflects significant disparities in assets (e.g. ­ malnutrition, maternal and infant mortality rates, and is off track education and land), household size, and earnings gaps by to meet the MDG of universal completion of basic education. gender, ethnicity, location, and employment type. Bolivians' self- Bolivia's high perceptions of poverty and their poverty i n e q u a l i t y and measures transcends ru- of income pov- ral-urban and erty are both r e g i o n a l largely deter- boundaries. mined by em- Although an ployment, edu- overwhelming cation, access portion of the to assets and rural popula- basic services, tion lives in ethnicity and poverty, there location. Bo- are also large livians tend to pockets of ur- fall into income ban poverty. poverty--and Poverty is also consider concentrated t h e m s e l v e s in the valleys and the central highlands, especially in Potosí poor--when they are younger, uneducated, unemployed or and Chuquisaca, followed by Beni, La Paz and Oruro. Santa underemployed, indigenous, rural dwellers, and lacking basic Cruz and Cochabamba have lower poverty rates, but due to services. their large populations, they contain a large number of poor 1 There are, however, some differences in income and self the poor leave school early and end up working in low-paying poverty perception surrounding ethnicity and location. Boliv- jobs. ian Quechuas tend to self-rate themselves poorer than sug- gested by income poverty profiles, while the converse is true Constraints to Employment Creation ­ The for Aymaras. With equal access to basic services, rural Demand of Labor residents perceive themselves as less poor than urban inhabit- ants, although they are more likely to be income-poor. Thus, Bolivia's weak business environment hampers investment, exclusion and/or cultural factors (e.g., sense of empowerment productivity and job creation. Increased and improved physi- or identity) as well as location-specific characteristics (e.g., cal capital (linked to the adoption of new technologies) contrib- inequality, social capital) may affect Bolivians'self-perceptions uted little to growth, and overall labor productivity (GDP per of their welfare. worker) rose barely 0.5 percent per year during the economic boom, reflecting limited gains in labor productivity even in the most productive sectors (e.g., petroleum, food and textiles). The main overall policy lesson of the 2005 Bolivia Few small and medium enterprises (SMEs) grow larger. Small Poverty Assessment is that broad-based growth, sus- firms (10 or fewer employees) account for 83 percent of employ- tained over the long-term, is a fundamental condition to ment--largely unskilled--and 25 percent of output, while a few reduce poverty and inequality. However, this needs to large firms (50 or more workers) generate two-thirds of output be supported by policies to improve labor productivity and only 9 percent of employment, largely skilled. For smaller and job creation. This can be accomplished by: (i) firms, the high costs in time and money for registration and removing obstacles to the modernization and growth of operating licenses, high collateral requirements to obtain business, and their integration into the world economy; credit, and skilled labor bottlenecks are the most binding (ii) improving firm and labor regulations to facilitate factors. For larger firms, input costs, including credit and business modernization and sustainability, and provid- access to technology, and market size represent the most ing the framework and incentives for firms to participate binding constraints. More specifically, Bolivian firms face the and remain in the formal sector, especially for small and following constraints to enhance their productivity and growth medium-sized enterprises; and, (iii) strengthening hu- (World Bank 2001): man capital and social protection for the poor to en- hance their productivity and ability to market their A thin, localized market. Domestic trade is highly concen- labor. trated and there are a limited number of firms exporting (about 50 percent of large firms export, and only 20 percent of small- medium firms export). Why is Poverty and Inequality in Bolivia so High? Burdensome business regulations and weak institutions. Business registration is costly and subject to long delays, There are three main reasons for the persistent high levels of despite recent improvements. poverty and inequality. First of all, the short-lived benefits of Property is difficult to register and enforcement of con- the peak years of the mid-1990s reflect weaknesses in the tracts or property rights is uncertain. nature of the country's growth process. Growth during the Transactions and information costs are high, particularly 1990s was concentrated in natural resource-based (e.g., hydro- with regards to credit, technology and information on carbons) exports, which have a relatively low demand for foreign and domestic markets, accreditation, and contract unskilled labor. Negative shocks ­ such as the reversal of disputes. capital inflows, declining terms of trade, and the coca eradica- tion program ­ limited growth, reversing earlier progress to- Limited access to credit. The costly and high collateral re- wards poverty reduction. Moreover, the high returns to capital quired for lending, especially for smaller firms (over twice the compared to low returns to labor accentuated the already-high loan amount, and mostly through real estate guarantees), income inequality. reflects thin credit markets, ineffective assets registries, and insecure and costly debt recovery. Second, the low productivity of firms, particularly in the informal, labor-intensive sector, has held back the growth of High cost of logistics and risky input and output market both employment and wages. Burdensome business and labor conditions. Supply chains are weak due to expensive and slow market regulations discourage innovation and smaller compa- transportation (on a unit basis, 20 times costlier than in Brazil), nies from fully participating in the formal economy, scaling up, customs dispatching remains cumbersome and costly, the and improving productivity. quality of domestic services and inputs is poor (e.g., unreliable supply of power), and as a result, inventories/stock on materi- Third, the poor have inadequate opportunities to improve their als are high (36 to 50 days). human capital, despite recent progress in access to basic education. This results in low labor productivity and restricted Restrictive labor regulations. Well intended but outdated access to better-paying jobs. Moreover, faced with high labor legislation (dating back to 1943) prescribes generous opportunity costs and inadequate social protection, many of conditions for workers compared to other countries in the 2 region and elsewhere. This legislation--intending to protect fact, the self-employed perceive themselves as less poor than workers--ends up increasing the total labor cost, making firms, salaried workers with similar characteristics, an indication of particularly small ones, less competitive and discouraging the importance of non-monetary benefits of self-employment. equitable hiring in the formal market. As a result, it encourages informality, hindering productivity and employment creation. Due to the low productivity of workers in the informal sector, the informal salaried workers do appear to have a significant More specifically: earnings disadvantage when compared to salaried formal sec- Uncapped severance payments lead to dismissal costs 2 tor workers with the same skills and job characteristics, particu- to 3 times above most Andean neighbors and poor larly those at the bottom of the salary scale. In part this is countries in the region. possibly related to the lower access of informal firms to Non-wage benefits (e.g., pension, health) are about 50 programs to promote worker training, technology adaptation, percent of labor costs. or other kinds of productivity-enhancing interventions. Regulations restrict labor adjustments (including those due related to business cycle fluctuations, seasonal work, While there has been some migration from less developed to and overtime), and women's length of the work week and more developed regions, small migration flows limit the poten- night work. tial of migration to be an escape valve for the rural poor. For the rural-to-urban migrants, earnings were improved by migrating, Faced with few incentives to comply with regulations to start particularly for those at the bottom of the earnings scale. That and run a business, many firms particularly micro and small is, despite a potential lack of contacts and urban know-how, ones--remain outside the formal sector and lack access to migrants got competitive urban jobs for their skills. Thus, rural- formal institutions (e.g., credit and external markets). urban migration likely helped to reduce poverty directly and possibly indirectly through remittances. However, individuals Constraints to Human Capital Accumulation ­ from the poorest locations and indigenous household heads are more prone to rural-to-rural migration. The young, more The Supply of Labor educated, women, and small families are more likely to migrate The combination of high opportunity costs and low returns to to urban areas. As a result, while urban and rural labor markets education discourage children from poor families to stay in seem connected, the level of migration remains small reflecting school. The public education system, especially at the second- high costs of migration and possibly non-pecuniary factors ary level and in rural areas offers low quality education. that affect settlement decisions. Further, poor families face high opportunity costs and are often unable to afford keeping their children in school, instead Selected Policy Options to Reduce Poverty and needing them to help the family, either through income-gener- Inequality ating activities or domestic and agricultural chores. Restoring sustained economic growth and facilitating the Returns to education are low--six out of ten graduates from development of labor-intensive sectors are essential to reduce high school are at risk of poverty because of these low returns. Bolivia's poverty and inequality. However, to have a signifi- In rural areas, only a post-secondary education offers a signifi- cant impact on poverty reduction, this must be accompanied cant boost to earnings. Education also does not carry equal by policies that promote, among other things, broader social returns for all workers. Workers from poor families tend to investment, increased productivity and job creation. Specific receive lower returns to education, likely due to limited learning policy options are elaborated below: outcomes, as a result of low quality schooling in poor areas, as well as health and nutrition deficiencies limiting early-child- Removing obstacles to firm modernization and growth and hood development, and limited access to the better paying jobs furthering their integration into the world economy by: for their skills. Continuing ongoing efforts to simplify procedures and lowering the cost of business registration and operation. Bolivia's urban informal sector is large and heterogeneous. In Implementing incentives (for example, limited, tax credits) 2002, more than 55 percent of the labor force was in the informal to adopt new technologies, including in manufacturing, sector, either as self-employed (40 percent) or salaried workers not just hardware and software, but also management (15 percent). An additional 10 percent of workers were unpaid, techniques and worker training, and in agriculture small- principally working in family businesses or as apprentices. scale rural technology and new crop varieties. Promoting expanded access to prudent financing for Informal employment largely reflects the low opportunity costs SMEs. and non-income benefits of informality. For many Bolivians, it Increasing participation in world markets, in particular offers a competitive alternative to low-productivity formal through enacting free trade agreements that will deepen sector jobs or no work at all. As well, self-employment may be exports and promote investment and technology transfer. more attractive to groups of the population, such as women Encouraging the creation of producer/exporter associa- seeking flexible work hours to balance their work and family tions to reduce the cost of information to take advantage obligations, or the indigenous who may face less discrimina- of trade and other market opportunities. tion as independent workers than as company employees. In 3 Modernizing business and labor regulations, and facilitating Improving labor market equity and opportunities by: formal sector participation, including: Reducing obstacles to employment by expanding pre- Reducing the cost of registration and business expan- school facilities and child care centers to facilitate sion for micro and SMEs. This could be accomplished by women's and migrants'labor force participation. further rationalizing documentation requirements (e.g., Training in high schools and colleges on relevant skills outdated notarization practices) and government fees, demanded in the labor market and encouragement of labor and streamlining on-line business portals for registering market intermediation services fit to market needs. and licensing in municipal government offices. Using the newly developed consumption poverty map to Establishing pilot initiatives that provide small firms target interventions aimed at income generation of the incentives to become formal, encouraging small firms poor. and producers to bid for government contracts, extend- Strengthening pro-poor community investments and ing partial credits of value added taxes for eligible firms, workfare programs. and offering business development services (access to market credit, judicial services, management and ac- Conclusions counting practices) with special emphasis on supporting innovation initiatives and export production. Bolivia's growth prospects remain vulnerable to domestic insta- Streamlining labor bility and external circum- regulations that stances. Because of the currently limit the depth and breadth of pov- ability of firms to erty in Bolivia, and the expand and con- skewed income distribution, tract along with the high GDP per capita growth economic cycles, rates about 4 to 5 percent per and reducing the year are necessary in the me- cost of mandated dium and longer term, if the labor benefits. country's poverty level is to Simplifying, reduc- be significantly reduced. ing the cost, and The national MDG target of increasing the reducing the incidence of ex- transparency of treme poverty in half by 2015 government bu- could be achieved with reaucracy proce- growth rates in this range, dures required to along with other pro-poor access technol- policy interventions. Even ogy, quality certifi- higher per capita growth is cation, accredita- needed to meet the MDG of tion, and dispute reducing poverty in half. resolution. Economic simulations indicate that the country can improve its Strengthening institutions and coordinating relevant future growth potential through a comprehensive strategy of public agencies (e.g., Superintendency of Enterprises mutually-reinforcing reforms that includes macroeconomic sta- and the Labor Ministry) to reduce duplication and trans- bility. actions costs. Notes Strengthening human capital and social protection for the poor to enhance their productivity and ability to market their This article is based on the 2005 Bolivia Poverty Assessment: laborby: Establishing the Basis for Pro-Poor Growth Report No. Raising the quality of the education system, particularly 28068-BO developed by a Bank team led by Omar Arias, and for the poor. with contributions from Bolivia's UDAPE- Unidad de Análisis Filling coverage gaps in universal basic education, im- de Políticas Sociales y Económicas and INE- Instituto Nacional proving secondary education transitions and access to de Estadística. quality higher education for poor students, and address- See alsoWorld Bank, 2001, Bolivia Microeconomic Constraints ing low quality and inequalities in education achieve- and Opportunities for Higher Growth - Climate Investment ment at all levels with results-based management, espe- Assessment, Report No. 24746-BO, Washington, D.C. cially in municipalities with weak education outcomes. Implementing a conditional cash transfer program that About the authors provides incentives for very poor families with children- Omar Arias is a Senior Economist and Magdalena Bendini at-risk to keep them in school and use preventive health was a Junior Professional Associate in the Poverty Group and nutrition services. of the Latin America and Caribbean Region of the World Bank. 4