2009 Index of Economic Freedom

Quick Facts

Population:

• 9.4 million

GDP (PPP):

• $36.8 billion
• 4.6% growth
• 3.6% 5-year compound annual growth
• $3937 per capita

Unemployment:

• 7.5%

Inflation (CPI):

• 8.7%

FDI Inflow:

• $240.1 million

Bolivia's economic freedom score is 53.6, making its economy the 130th freest in the 2009 Index. Its overall score is 0.5 point better than last year, with improvement in four of the 10 economic freedoms. Bolivia is ranked 23rd out of 29 countries in the South and Central America/Caribbean region, and its overall score is below the world average.

Bolivia enjoys a relatively high degree of fiscal freedom and trade freedom. Recent tax changes have centered around the hydrocarbon sector, including a direct tax on hydrocarbons and an increase in the excise tax on gas.

Poverty and inequality remain daunting challenges. Almost two decades of reform stopped hyperinflation and established some monetary stability, but other institutional weaknesses impede the creation of a more vibrant economy. Pervasive corruption and significant regulation are major hurdles for foreign and domestic investment. Rule of law is weak, and private property can be subject to bureaucratic interference, forced transactions, and expropriation. Restrictive labor laws hamper employment and productivity growth. More than 60 percent of the workforce is employed in the informal economy.

Background Back to the top

Bolivia has one of Latin America’s least developed economies. Fifty-five percent of the people are indigenous, and almost two-thirds live in poverty, mostly engaged in subsistence agriculture. From the mid-1980s until 2005, successive elected governments pursued economic and social reform with some success. President Sanchez de Lozada (1993–1997) reduced government economic intervention through partial privatization and lower taxes and tariffs. A 1999 economic downturn created fiscal pressures, and proposed tax hikes sparked social unrest. Mobs removed two presidents from office in 2003 and 2005, after which anti-market populist Evo Morales was elected Bolivia’s first indigenous president. Supported by Venezuelan President Hugo Chávez, Morales has pushed for a new constitution to expand executive power, land reform, and state control of key natural resources and industries, but he has been constrained by an opposition-controlled Senate and powerful state governors who want greater autonomy from the central government.

Business Freedom 58.5 Back to the top

The overall freedom to start, operate, and close a business is restricted by Bolivia's regulatory environment. Starting a business takes an average of 50 days, compared to the world average of 38 days. Obtaining a business license requires about the world average of 18 procedures and more than the world average of 225 days.

Trade Freedom 81.8 Back to the top

Bolivia's weighted average tariff rate was 4.1 percent in 2006. Inconsistencies in customs valuation, some import bans and restrictions, domestic preference in government procurement, cumbersome sanitary and phytosanitary rules, some export subsidies, and issues related to the enforcement and protection of intellectual property rights add to the costs of trade. Ten points were deducted from Bolivia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 84.8 Back to the top

Bolivia has a low income tax and a moderate corporate tax. The top income tax rate is 13 percent, and the corporate tax rate is 25 percent. Other taxes include a value-added tax (VAT) and a transaction tax. In the most recent year, overall tax revenue as a percentage of GDP was 27.0 percent.

Government Size 71.9 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 30.6 percent of GDP. In 2006, the government announced the nationalization of the hydrocarbon sector, and fiscal governance of energy wealth remains a serious concern.

Monetary Freedom67.9 Back to the top

Inflation is high and rising, averaging 7.3 percent between 2005 and 2007. Regulations control prices for most public utilities, petroleum products, and potable water. Fifteen points were deducted from Bolivia's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom20.0 Back to the top

The 1990 Investment Law provides for equal treatment of foreign and domestic firms. Both residents and non-residents may hold foreign exchange accounts. There are no restrictions or controls on payments, transactions, transfers, the purchase of real estate, access to foreign exchange, or repatriation of profits. Despite a relatively transparent investment code, foreign investment is hindered by arbitrary implementation, cumbersome bureaucracy, corruption, and uncertainty about future nationalizations. The government can expropriate property for the public good or when it does not fulfill a “social purpose.” In October 2007, Bolivia became the first country ever to withdraw from the International Center for the Settlement of Investment Disputes, which referees contract disagreements between foreign investors and host countries.

Financial Freedom60.0 Back to the top

Bolivia's financial system has been generally weak and poorly supervised. Social unrest and economic disruption have prevented significant improvement, though the system has grown and became more open, making it somewhat easier to get credit. Government-owned banks no longer exist, and as of 2007 there were 12 commercial banks, of which three were foreign-owned, and 45 non-bank financial institutions. Credit is allocated on market terms, but foreign borrowers may find it difficult to qualify for loans because domestic collateral is required. Financial-sector regulations and accounting standards are somewhat burdensome and do not fully conform to international standards. Despite legal authorization, the development of a modern securities exchange has been hindered by political and social unrest. Capital markets are focused on trading in government bonds, although corporate debt and mutual funds have grown in recent years. There are no restrictions on remittances or currency transfers.

Property Rights20.0 Back to the top

Although statutes guarantee property rights, the judicial process is time-consuming and subject to political influence and corruption. Enforcement of intellectual property rights is erratic and largely ineffective. Competing claims to land titles and the absence of reliable dispute resolution make acquisition of real property risky. Expropriation is a real possibility, as is illegal squatting on rural private property. The government's radical socialist vision, enshrined in its proposed draft constitution, has the potential to undermine private business activity and property rights.

Freedom From Corruption29.0 Back to the top

Corruption is perceived as pervasive. Bolivia ranks 105th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption disproportionately affects lower-income groups. A government report has rated the national police, customs, and justice system as the most corrupt institutions.

Labor Freedom41.9 Back to the top

Bolivia's restrictive employment regulations hinder job creation and productivity growth. The government has established minimum wages for the public and private sectors. The non-salary cost of employing a worker is moderate, but overall rigidity in hiring and firing is quite high.