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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
ditures strongly and negatively affect transfers to house-
holds. This negative effect reduces consumption of trad-
ables and non-tradables, depressing aggregate demand.
As for public investment, it positively affects the econ-
omy by strengthening production in all sectors, although
growth and welfare gains are low.
These results are controversial, first because they indi-
cate that this combination of policies does not allow the
economy to surpass the 6-percent minimum growth rate
required to reduce poverty and second, because it seems
that public expenditure policies are not good for the econ-
omy. In order to investigate this situation we analyzed
several combined scenarios. The results show that vari-
ous macroeconomic indicators improve substantially when
a 10-percent increase in government expenditures is com-
bined with an increase the value added tax up to the Latin
American average and a 27.2-percent decrease in the hy-
drocarbons tax. This policy situation allows the economy
to grow by 5.48 percent, with 30.9-percent growth in the
hydrocarbons sector being the main driver behind this re-
sult.
The results remain far from ideal when analyzing the
steady-state,
i.e.
, the long-run effects. The analysis is then
complemented by simulation of TFP productivity boosts
across all sectors together with more effective provisions
of public capital. We found that the best combination of
fiscal policy instruments is the following: a 10-percent in-
crease in government expenditures and public investment
and a 15.4-percent increase in the effectiveness index of
public capital. This combination allows the government to
sustain social transfer policies and the economy grows by
12.3 percent in the long run. An additional increase in TFP
as per the PND (National Development Plan) goals would
allow the economy to grow by a further 17.2 percent and
transfers to be increased by 13.7 percent.
Finally, we simulated the dynamic transition paths for
these two noteworthy scenarios to look into another impor-
tant question: How long does it take the economy to reach
these steady states? It takes more than 100 years, but there
are also important effects in the medium run, particularly
in terms of productivity increases. In 5 years, output can
grow by an additional 6.4 percent, consumption rises by
6 percent and private investment increases by 9.7 percent.
After 10 years output grows by 7.7 percent and output is
10 percent higher in the 20-year timeframe. In conclusion,
larger productivity boosts are needed to promote growth
and welfare in the short-run.
The paper analyzed fiscal policy in Bolivia in an effort
to guide the decisions that a government will have to take
if it wants to use fiscal policy as the primary tool to pro-
mote development and structural transformations of the
Bolivian economy. The results should come as no surprise.
Fiscal policy alone is unable to generate growth rates: it
has to be accompanied by productivity boosts in every sec-
tor and public capital should also be deployed more effec-
tively. Improving TFP performance may not necessarily be
within the scope of fiscal policy, or perhaps there is a role
for the government by removing distortions from produc-
tion sectors.
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Revista de análisis estadístico
, 2 (2012), Vol. 4(2): 57-79
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