|A major reason for President Evo Morales' success is the inclusion of the indigenous community in the formal economy.
Bolivian President Evo Morales last weekend won re-election by a smashing margin. His eight-year rule has weakened Bolivian property rights, indulged in frequent nationalizations and demonized capitalism. Yet it has also produced Bolivia's best growth rates in several decades, far better than the orthodox and admirable policies pursued in 1985-2003.
Thus Morales' policy of making Bolivian clocks run backwards seems reflected by the apparent successful defiance of theory in his economics. In reality, however, there is a fairly simple explanation, and it is an important lesson for other poor countries.
Morales, the first "indigenous" president of Bolivia, is a Latin American socialist. He enjoys denouncing capitalism, but not quite a standard one. His eccentricity was demonstrated a few months ago when he caused the clocks on the Bolivian Congress to run backwards, explaining that "clockwise" was a "Northern-Hemispherist" construct, derived from clocks following sundials in a hemisphere where sundial shadows advanced clockwise, and was hence not relevant to the Southern Hemisphere, where sundial shadows run counter-clockwise.
He's quite right. There can be no doubt that if clocks had been invented in Australia or Patagonia, their hands would run the other way. He is, however, pushing it in respect of Bolivia, where La Paz is sufficiently close to the Equator that, for part of the year, sundials work the same way as they do up north.
His economic policies have equally had a certain logic to them. Through nationalization and tearing up contracts, he has enabled the Bolivian state to quadruple its revenues from minerals and energy extraction at a time when prices were high and mining and energy companies would otherwise have made windfall profits from their rise. This has in turn enabled Morales to increase the Bolivian welfare state without drastically unbalancing the budget.
Indeed, aided by the windfall in resource revenues, his budgetary policies have been a model of restraint, far better than most other Latin American countries, or indeed than the rich nations of Europe, the US or Japan. Purely judged on his budgetary policies, we might well envisage for him a post-presidential career as the successor to US Treasury Secretary Jack Lew or British Chancellor of the Exchequer George Osborne!
The results of Bolivia's policies have been excellent. It has had an average growth rate of over 5% since he took office in 2006, with the 2008-09 recession survived with barely a hiccup. With the budget so close to balance, Bolivia's international debts are also modest, although a 2008 default on outstanding international bonds for a time made it difficult for the country to borrow. However, in late 2012, the hyper-liquid state of global bond markets enabled Bolivia to borrow again, raising US$500 million of ten-year money at a rate of only 4.875%.
This success is in marked contrast to the fate of the "neo-liberal" policies pursued from 1985 until 2003. During that period, while Bolivia ended hyperinflation, growth averaged only 3.1%, barely enough to keep up with the 2.3% annual population growth, and there were a number of grinding recessions.
It is thus a paradox for supporters of free-market policies: how does it happen that Morales' statist policies are rewarded with such success, whereas better policies pursued earlier brought results that were no more than mediocre?
Part of it is the effect of commodity prices, and of Morales' renegotiation of mining and energy contracts. If commodity and energy prices are low during the next five years, Bolivia will have considerable difficulties.
In other countries where anti-market policies have been tried, such as Argentina, resource prices provide more or less the entire rationale for the country's relative success. In Argentina, commodity prices were low during the 1990s, so relatively sound policies produced little success and ran up debts.
Since 2003, the combination of high commodities prices (in Argentina's case producing fine results from its privatized agricultural sector, albeit with government imposts also soaring) and the partial debt default of 2005 have brought riches. Argentina was already running a trade surplus, but using most of it for debt service so when the debt service disappeared money flowed in. As the Kirchner/Fernandez government has grown more profligate, Argentina's position has deteriorated, but in 2003-13 it had a good run.
But that doesn't entirely apply in Bolivia, where debt service was never especially onerous even before the 2008 default. However, there is another factor that may have made the difference. As Bolivia's first indigenous president, Morales has made great efforts to include the indigenous community - currently about 40% of Bolivia's population - in the formal economy, providing both welfare payments and job preferences to increase their participation.
This parallels the policy of Brazil's Luiz Inacio Lula da Silva, who also focused attention on the poorest members of Brazil's very unequal society through the "Bolsa familia", providing subsistence payments to the very poor in return for keeping their children in school and other basic elements of economic participation. Like Morales' Bolivia, Lula's Brazil enjoyed several years of unexpectedly robust growth before running into difficulty as the Leviathan state continued to expand and suck up resources.
It therefore appears that, in situations in which a large proportion of the population is so poor as not to participate properly in the economy, it is possible to achieve a "growth dividend" by bringing them into full participation. As they transition into full economic activity, their output allows the economy to grow significantly, producing extra output and extra tax revenue and enriching the economy as a whole.
This does not appear to apply to richer countries, such as Argentina, let alone the wealthy West. But in countries both poor and unequal, like Bolivia, even the best macroeconomic policies - such as were pursued in 1985-2003 - do not produce good results if they leave part of the workforce unutilized.
Similarly in Brazil, the improvement in growth between the 1994-2002 Cardoso administration and the 2002-10 Lula administration was not due to better economic policies, let alone to greater market confidence, but simply to the participation of Brazil's poorest in the economy and the multiplier benefits from their output.
There are two lessons to be drawn. First, in Africa in particular it will be necessary as countries get richer for mechanisms to be put in place whereby their poorer citizens can benefit. This especially applies to countries like South Africa, with exceptionally high inequality and an exceptionally corrupt state system that has raised only a small number of its African fellow citizens out of poverty. Indeed the unexpectedly poor economic growth rates in South Africa can directly be linked to the lack of participation in the formal economy by its poorer citizens, as the country has 25% unemployment.
Second, even decently capitalist governments need to make sure that their beautifully designed market economies extend right down the scale. There is little benefit in having an economy that would make Ludwig von Mises purr, if its benefits extend only to the top half of the income distribution, and the bottom half is mired in squalid shantytowns with no opportunities of bettering themselves.
In uplifting the very poorest, direct cash transfers with only simple conditionality are highly effective. A program such as the Bolsa Familia costs only a couple of percent of GDP, far less than massive infrastructure schemes, yet it reaches the poorest in society effectively. Complex programs designed to meet needs precisely, with massive administrative costs and rent-seeking at all levels, generally miss the poorest and most needy, and merely add bureaucratic bloat.
History also suggests that the simplistic cash-transfer approach to welfare works better. In Britain before 1834, the poor were given "outdoor relief" in the form of cash or food handouts, and therefore remained active in the economy. However the 1834 Poor Law, introduced by the foolish doctrinaire Whigs, invented the "workhouse" by which the poor were segregated from the rest of society in an institution deliberately designed to be "less eligible" and thoroughly unpleasant for its inmates.
The result was a mass of leftist propaganda, starting with Charles Dickens' Oliver Twist," an inexorable rise in the cost of welfare provision and a deterioration in low-end living standards. Thus by the time Charles Booth wrote Life and Labour of the People in London in 1889, many of the urban poor lived lives far more squalid than had their great-grandfathers a century earlier, in spite of the huge rise in living standards generally.
Capitalism needs to include the entire population, and it needs to do so through simple cash handouts and work opportunities, not through elaborate and counterproductive social engineering.