At Crossroads, Bolivia May Choose Wrong Path

Get ready for the battle for the heart and mind of Bolivia’s new president, Evo Morales.

On one side are Cuba and Venezuela urging him to kick out foreign investors, seize their property and dispense from the government till until all are satisfied. On the other is the United States, which urges market-oriented reforms that could spur real economic growth and real long-term prosperity.

It’s hard to know which way Morales will turn. He is said to be an admirer of Chavez, and both Chavez and Castro were special guests at his recent inauguration. He has called President Bush a “terrorist” and was elected on an anti-globalization platform.

But he has moved to ensure potential investors in his country’s vast natural gas deposits that he has yet to adopt the model urged on him by Chavez and Castro. He’s also called for a “meeting of equals” with the United States to hash out differences and discuss a $600 million Millennium Challenge grant to improve Bolivia’s notoriously bad road network.

Morales leads one of the poorest countries in the Western Hemisphere. His countrymen earn about $1,000 per year, on average, and his GDP, about $9 billion, is less than that of Springfield, Ill., according to the U.S. Conference of Mayors. Unemployment tops 9 percent, and underemployment plagues a full third of the workforce.

His country is about three times the size of Montana. Yet, less than 3 percent of the land is arable, and much of that is used to grow coca for the manufacture of cocaine. What legitimate agriculture does exist revolves around soybeans, the market for which has collapsed in recent months. Beyond that, Bolivia relies on mineral exports -- principally silver, which has lost a quarter of its value in recent months, and tin, which has fallen about 11 percent.

Those natural gas deposits could bring jobs and money to Bolivia, but investors are waiting to see how this policy battle plays out.

Sadly, momentum seems to be going in the wrong direction. Reforms in the 1990s improved Bolivia’s score in the “Index of Economic Freedom,” published annually by The Heritage Foundation and The Wall Street Journal. The economy had grown at 4 percent or better for most of the 1990s, per-capita income had grown steadily from 1996 forward, and poverty rates hit near-record lows. This year, Bolivia’s score worsened; it’s barely within the “mostly free” category now. Economic growth has stalled, and poverty is rising again.

The Index uses 50 measures, refined into 10 categories, to gauge economic freedom in 157 countries worldwide. It assigns a score of 1-5, with 1 being best, in these categories, then averages them for an overall score. Countries that average less than 2 and are considered “free” economies earn twice what those in the 2-3 “mostly free” range earn and seven times what those in the “mostly unfree” (3-4) and “repressed” (more than 4) countries earn. Bolivia’s score today is 2.96.

Morales must act, and his plan better work. Bolivians have staged nearly 200 coups and counter-coups since they gained independence from Spain in 1825. Mobs have driven the last two presidents from power.

The question is how to achieve progress. If Morales opts to copy Chavez, the mobs will return for him. Under Chavez, the poverty rate in Venezuela has jumped from 43 percent to 53 percent in just six years, according to The Washington Post. Earnings have decreased from $5,005 per capita in 1996 to $4,575 in 2004, and GDP increased a mere 0.7 percent. Cuba has been kept afloat for 45 years by billions in subsidies from the Soviet Union before and Venezuela today.

If Morales wants a model, he should look south to Chile, where a commitment to economic freedom has brought dramatic growth and expanded prosperity. Chile’s “Index” score has improved from a middling 2.56 in 1996 to 1.86 in 2005 and 1.88 today, well within the “free” category.

With it, Chile’s economy has become less dependent on natural resources; foreign direct investment has reached $6.3 billion, compared to $149 million in Bolivia; growth has hummed along at 6 percent per year since 1990; and per capita GDP has climbed from $4,547 in 1996 to $5,448 -- among the highest in South America. Its poverty rate has dropped from 38.5 percent to 18.8 percent just since 1990, and extreme poverty now stands at less than 4 percent, according to The Washington Post.

Like Morales, Chile’s new president, Michelle Bachelet, calls herself a socialist. But, as The Washington Post said, “She doesn’t question the foundations of her country’s growing prosperity -- which are the very free trade, foreign investment and free markets that elsewhere in the region are demonized as ‘neo-liberalism.’”

Emulating Chile may lack the thumb-in-the-eye appeal of the Chavez approach. But it has the advantage of being effective as opposed to merely temporarily satisfying. With luck, it’s the path Morales will take.

Marc Miles, Ph.D., a senior fellow specializing in trade and economic issues at The Heritage Foundation, is a co-editor of the 2006 “Index of Economic Freedom.”