A State of Play Assessment of the Investment Climate in Bolivia - Essay Example

A of Play' Assessment of the Investment Climate in Bolivia A of Play' Assessment of the Investment Climate in Bolivia Titus Rock Manickam Order No. 265683 06 January 2009 Table of Contents Introduction...3 'State of Play' Assessment.4 Business Potential7 Current Possibilities.9 The Bolivian Government10 The Haves and Have-nots..11 A Word of Caution12 Conclusion.13 Sources and Figures14 A 'State of Play' Assessment of the Investment Climate in Bolivia Introduction Although a beautiful land, Bolivia is full of contrasts. It is a land of churches and lush greenery. Situated in the Amazon basin in South America, it is surrounded by forests and swamps. It is rich in flora and fauna but this is getting spoilt due to travelers' apathy although the government is trying to organize for better tourist culture and preservation of the topography and culture. Bolivia is a vast stretch of land admeasuring 418,683 square miles. Its population at 9.25 million is comparatively low. Two-third of the population consists of the ethnic Indians who suffer exploitation and struggle for an orderly market. Bolivia has rich oil and natural gas reserves. But it is unable to exploit these natural reserves due to political instability and anti-privatization sentiments. There is literacy rate of 87%. Chiquitania is located in the eastern parts of Bolivia and it is a peaceful place composed of a unique culture and history. Although modernization is taking place, its pace is slower than what it should be. Corruption and red tape is responsible for the slow growth. Bolivia is one of Latin America's poorest countries where education and health are below the regional average. The roads, water supply, and telecom services are of poor quality (Bolivia Microeconomic Constraints and Opportunities for Higher Growth, p6). 'State of Play' Assessment Chiquitania has tremendous potential for the tourism industry. But it is bogged down due to frequent road stoppages and poor road system. Hitherto, political conditions and bureaucratic requirements have discouraged tourism from reaching its peak level. Of course, the government may not be keen to push tourism at the cost of environmental degradation. Nevertheless, the overall economic climate is not favorable to industry. Of the industries present in the market in a study in 2000, tourism is conspicuous by its absence. There is no mention of tourism anywhere. Or if it is there, it is in the informal sector. Officially, tourism is almost non-existent (See Fig.3). Foods and drinks take the first spot, followed by furniture. The Bolivians like to eat and drink. They also have fondness for furniture. However, the zeal to push tourism is nowhere in the scheme of things for them. The real problem lies in the nature of the market in Bolivia. The size of the formal market is significantly smaller than the informal market. The problems in formalizing business far outweigh the benefits. Formidable bureaucratic controls including corruption choke a layman's inclination to run a legitimate business. Information to run business on statutory guidelines is lost in the maze of bureaucratic controls. Also, the cost to run a legitimate business is high due to taxes and other expenses. The problem is not isolated to tourism alone. It is faced by every industry. This has given rise to tightly regulated market where much of what is manufactured is consumed by the department itself. There is little scope for exports. For instance, in La Paz 70% of the sales was consumed within the city in the year 2000. So also in the cases of Santa Cruz and Cochabamba it was 74% and 51% respectively. Poor transport infrastructure is the main cause for the lack of exports by the firms to other regions. Figure 1 First of all, lack of political stability does not allow for big time investments. Then there is the tight bureaucratic control over formally establishing and maintaining tourist spots. Macroeconomic stabilization, trade liberalization, privatization, pension reform and institutional reforms have improved, but not to the desired extent. The per capita GDP growth rate averaged 2.6% in the 1990s. Most of the reason for this sluggish growth rate has been attributed to cumbersome red tape and a weak judiciary (Bolivia Microeconomic Constraints and Opportunities for Higher Growth, p24). Obviously, the sense of urgency is missing. The atmosphere for entrepreneurship and achievements is not poised for a take off for want of transparent and honest bureaucracy. Most of the small-scale industries are informal. The formalities to run a legitimate business is high and as such people prefer to take the informal route. Figure 2 Currently, the political dispensation is unlikely to create an atmosphere to improve business potentials although awareness for reforms is there. President Evo Morales' relation with the United States is too far from cordial to let a free market perform its role to ensure steadiness in business. Inadequate infrastructure, scarce supply of skilled labor and costly finance stunt whatever chance is left for business to improve. The problem is not country specific. The Figure 3 problem in one city may not be the same in another city. However, by and large, the mindset of the entire governance does not allow for a quick turnaround. The nation is also beset by work stoppages. These affects transport. Travel is an important ingredient of tourism. Business in the region of 88-95% is carried on between only three cities of La Paz, Santa Cruz and Cochabamba. The problem is symptomatic of the poor transportation means that exist in Bolivia. Business Potential Even though over a decade and half has passed since the introduction of economic reforms, the atmosphere is not exactly conducive for new businesses. The pace of economic growth is slow and there is no sign as of now to any prospects for its quickening. For business to thrive, it is important to have good infrastructure backed by right governance. Unfortunately, as of now, both are missing. The problem is compounded by the surrounding countries with a history of instability and drug cartels. People are generally exposed to culture of passivity and take greater pride in conservation of their culture and devote less attention to issues that make for modernization and transparency. Work is normally carried on informally. It is not feasible to carry on partnerships on a formal level. The procedure for registering partnerships is cumbersome and costly. There is the need to revamp the entire bureaucracy. There is also the need to look into procedures and remove obstacles that come in the way of doing good business. However, nothing is lost in giving the place a good look and given the right contacts the possibility exists for anyone who wants to do business in the area of tourism. It is important that those initiating business moves are themselves capable of handling the various government departments and the locals so that when the business does take place there is no room for disputes. Disputes, if any, must be addressed locally. That is, for every dispute there must be a local contact and he must be capable of taking the responsibility of solving the issue. An outsider cannot solve disputes of local nature. An outsider does not enjoy similar rights. Luxury lodges are meant for select group of people who can afford the high cost of traveling by air and used to living in opulent styles. Undoubtedly, most of the customers will be foreigners. The organizers must have experience and expertise in handling luxury lodges abroad. The situation in Chiquitania is unique because of its history and culture. As such, the organizers must be capable of adapting to the local culture and customs (A Country Study: Bolivia). Chiquitania is a beautiful and unique place and it is one of the last frontiers in the world otherwise seized of the travails of modernization. Business must be quiet and blend with the general atmosphere. Two-thirds of the populations are descendants of the Incas who once ruled Bolivia. It will not be very difficult to get the green signal to start business. For a financially rich promoter it may take some time to get through government regulations, but the prospects to start work do exist. Current Possibilities There is potential for elitist luxury lodges if the approach is consistent and the initial volume of business is moderate. It is important to bear in mind that Chiquitania is a Catholic domain. If any business has to take place here it must have the blessings of the church. The church appears to have good influence in the lives of people. This may help to some extent in coordinating efforts with the government for business registration and licenses. Coordinating with the church may not guarantee in obtaining government clearances. However, it will help in getting access to the right people. The time to get government clearance may stretch to several weeks or months. But this is the way the department works. There is little that can be done to speed it up. Then there is also the issue of the premises where the lodges will be situated. Will it be prudent to buy the premises or rent them To begin, it may be good to take premises on rent for business purposes. The land must have enough to keep people with very high income active and engaged. There must be golf course, restaurant and bar, suites, swimming pools among other facilities to give customers a sense of involvement. Make proper ground work to ensure there is good rapport with government officials. The objective is to do business by inviting the very rich to spend quality leisure time in Chiquitania. The U.S. dollars have good acceptance in Bolivia. Other currencies such as the British pounds and Euros do not have such benefits. The Bolivian Government It is difficult to predict the moods of the Bolivian government. Over 200 coups and counter-coups have taken place here since Bolivia attained independence from Spain in 1825. Measures for reforms began in the 1990s and are being pursued but without much zeal. Expect some political disturbances now and then. Bolivia was under Spanish rule from the 16th century. By the end of the 17th century, it had depleted most of its mineral wealth. The country is named after Simon Bolivar who liberated the nation in 1825 from Spanish rule. But the country lost mineral rich slices of its land resources that extended to the Pacific Ocean to Chile after the Pacific war in 1879-1884. It even ceded a province rich in rubber to Brazil in 1903. And it lost 100,000 square miles of Gran Chaco in war with Paraguay in 1932-1935. A guerrilla war in 1965 by Major Ernesto (Che) Guevara with the backing of the Cubans was crushed by the military with assistance from the United States and Major Guevara was killed in October 1967. A string of military coup followed and in 1982 the military handed the government to civilian rule when Hernan Siles Zuazo became president. The country had the lowest per capita income in South America at that time (Bolivia). The reforms introduced in the early 1990s has slowly worked its way through and there is comparatively more stability now. However, the grip of the bureaucracy is strong as ever and it will be some time before we can feel that free market can operate in Bolivia. The Haves and Have-nots The two classes of indigenous Indian population and the white man have stratified society which has created the system of haves and have-nots. In this environment, progress will be slow. It will take time for reforms to take roots and bear fruits. Progress will happen because of the influence of the World Bank and its prodding to improve situation with funds made available by the World Bank. The World Bank periodically carries out studies and checks to see what needs to be done to improve economy. At the local level, however, there is pessimism due to institutional setbacks such as a weak judiciary. Figure 4 A Word of Caution As in the case of any poor economy, the local people find it easy to fleece the tourist. Avoid making local contacts unless they are appropriately introduced. Even at the government level, only communicate to the required extent. As much as possible, avoid traveling. Traveling is cumbersome and there are stoppages. The roads are also not well developed. Avoid traveling from one city to another. Do not eat anything given by unknown sources or those you have met recently. There are chances of the food item spiked with drugs that may leave you at the mercy of the provider. Conclusion The business of luxury lodges in Chiquitania appears to be good if after all the initial procedural requirements are met the promoters start getting their travelers from the world over. The procedural requirements and the poor state of roads do appear daunting. The promoters and organizers will have to handle these two issues in order to capably run the lodges. The organizers will have to make use of air travel to make one-stop destinations at the lodges after which the travelers can return by flight. Undoubtedly, promotional activities for tourism will produce good results. The place is idyllic and fantastic to be in for a break from the daily routine of the commercial world. The tradition, history and culture of Chiquitania are exceptionally rich and an average tourist cannot but marvel at these. But for the bureaucracy and poor infrastructure, Chiquitania is a great place to visit. Sources: A Country Study: Bolivia, http://lcweb2.loc.gov/frd/cs/botoc.html Background Note: Bolivia, http://www.state.gov/r/pa/ei/bgn/35751.htm Bolivia, http://www.infoplease.com/ipa/A0107345.html Bolivia Microeconomic Constraints and Opportunities for Higher Growth, http://www.ifc.org/ifcext/economics.nsf/AttachmentsByTitle/IC-Bolivia_ICA--English.pdf/$FILE/IC-Bolivia_ICA--English.pdf CIA - The World Fact Book, https://www.cia.gov/library/publications/the-world-factbook/geos/bl.html Figures Figures 1 to 4 - Bolivia Microeconomic Constraints and Opportunities for Higher Growth, http://www.ifc.org/ifcext/economics.nsf/AttachmentsByTitle/IC-Bolivia_ICA--English.pdf/$FILE/IC-Bolivia_ICA--English.pdf Read More