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Fiscal policy and economic growth: a simulation analysis for Bolivia
Analíti a
k
4
Revista de Análisis Estadístico
Journal of Statistical Analysis
cent for non-tradables, 13.2 percent for hydrocarbons and
10.4 percent in mining. We have re-calibrated the TFP pa-
rameters in each sector to obtain these growth rates in the
respective sectors. As we are using quarterly data, the
TFP parameters have been calibrated for quarterly rates of
growth.
19
Variables
∆
g
,
∆
τ
c
∆
g
,
∆
τ
c
and
∇
τ
xh
Simulated value
0.198, 0.1627 0.198, 0.1405 and 0.2328
c
m
−
6.14
5.12
c
n
−
2.00
3.68
Y
xh
−
0.50
30.88
Y
xa
0.34
1.08
Y
xm
0.30
1.32
Y
m
−
2.77
0.18
Y
n
−
2.00
3.68
p
n
−
4.75
1.11
Γ
/
GDP
0.00
0.00
i
−
6.29
6.53
I
6.95
9.09
C
−
3.85
4.32
Y
−
1.74
5.48
TU
−
3.77
4.30
Source: Author’s calculations
Table 5.
Change in steady-state values from a tax and expenditure policy (in percentages).
Rioja (2003) shows that raising public capital effective-
ness has large and positive effects on private investment,
consumption and welfare. We simulated a 5-percent in-
crease in the effectiveness level of the existing infrastruc-
ture network. This increases the value of
θ
to 0.644. The
first two columns in table 6 show the effects of increasing
TFP and
θ
, while the next columns show five combined
policy scenarios which give information on the best fiscal
policy for the Bolivian government to follow.
Comparing columns 1 and 2, we can see that both
changes positively impact the economy. Public and pri-
vate investment are affected similarly, while consumption
increases more when there is an increase in TFP, leading to
a larger increase in output (5.16 percent). The favourable
productivity boost lifts output in the non-tradable sector by
6.67 percent, while the increase in effectiveness has a larger
impact on output in the hydrocarbons sector, which rises
by 6.35 percent relative to the baseline. Welfare gains are
also larger in the TFP simulation than in the effectiveness
simulation, while the magnitudes of the increase of trans-
fers as a share of GDP are similar in both scenarios. A key
conclusion here is that productivity and effectiveness are
important sources of growth, but need to be accompanied
by fiscal policy to reach higher growth rates.
We combine productivity and effectiveness with gov-
ernment expenditures in the third and fourth columns. We
combine a 10-percent increase in government expenditures
with an increase in TFP in all sectors. The results show that
expansionary fiscal policy based on the increase in current
expenditure only increases output by 2.34 percent, while
transfers as a share of GDP fall by 36.61 percent. If we
add a 5-percent increase in
θ
, transfers as a share of GDP
still decrease by 21.42 percent, but output grows at a much
more satisfactory rate of 5.3 percent. These results indicate
that an increase in the effectiveness of public infrastructure
can enhance growth. The question is: How much does the
effectiveness index need to increase by for the government
to break the trade-off between transfers (social policy) and
growth.
20
The fifth column shows that the effectiveness index
must increase by 12.47 percent to 0.69 to maintain the social
policy. Furthermore, output grows by 9.71 percent, which
19
The PND presents the economic and planning strategy that the government will follow over the coming years to consolidate the process of
transforming the economy.
20
We do not consider a larger increase in TFP because this is more difficult to achieve. TFP is related to many things in the economy, but it is not
directly related to fiscal policy and only improves over time.
Analítika,
Revista de análisis estadístico
, 2 (2012), Vol. 4(2): 57-79
69