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Bolivia has reduced poverty substantially over the past decade by taxing hydrocarbons to fund a generous social safety net, but low gas prices and export demand loom large.

The ongoing Bolivian electoral crisis has kicked off widespread analysis of Evo Morales’ legacy leading the country. The headline numbers for poverty reduction are impressive: In about 11 years, Bolivia raised a quarter of its population out of poverty (using Bolivia’s poverty line) and more than halved extreme poverty (using the $1.90-per-day line from the World Development Indicators). Having lived and worked in Bolivia for several years, it is apparent to me that this progress will become much harder to maintain.

The policies underpinning Bolivia’s best-on-the-continent economic growth under Morales’ leadership have largely been built on prudent, Washington Consensus-style macroeconomic management (if you look past the rhetoric), combined with generous increases in the social safety net via a variety of new and improved transfer programs.

But look underneath spending to the revenue sources, and a red light emerges: The big social transfer programs are funded directly by Bolivia’s tax on hydrocarbons. This means that when natural gas prices or demand are high, abundant revenues makes it easier to run up budget surpluses and build up large foreign exchange reserves, which pay for anti-poverty efforts.

The problem now is that gas prices are low—and the demand for Bolivian gas specifically is running into major headwinds.

Revenue tightening is on the horizon

Bolivia was fortunate to have signed long-term contracts during a period of high international gas prices with its two biggest export partners, Brazil and Argentina, which locked in prices that were probably too high compared to the open market. But the major Brazilian contracts are now up for renegotiation, and both those importers are looking to develop domestic natural gas production while also reducing their imports. Likewise, the liquefied natural gas available on international markets is a cheaper substitute for Bolivia’s gas. Meanwhile, Argentina’s importing agency is already pushing for early renegotiation on a contract which ends in 2026.

Could Paraguay, Peru, or Chile provide some respite? An agreement is in place with Paraguay to build a pipeline for gas exports, but that isn’t slated to begin operations until 2024. Likewise, there’s no pipeline to Peru and Bolivia’s ongoing enmity with Chile precludes it as a gas partner (the 2003 Gas War was fought over a proposal to export gas via a Chilean port).

Reforming inefficient gas subsidies could ease the fiscal burden—but that’s easier said than done

One way to reduce the fiscal burden of lower prices would be to reform national gas subsidies. Fuel subsidies are typically an inefficient way of helping the poor, both since they encourage waste and because richer people tend to consume more energy. In a CGD paper last year, Roberto Laserna estimated Bolivia’s domestic gas subsidies cost up to $10.6 billion between 2005 and 2016, an average of $883 million per year. Anit Mukherjee and Alan Gelb have noted that that the same infrastructure Bolivia uses to deliver social transfers (like the pension system) could be deployed to deliver gas vouchers to citizens who depend on subsidies—replacing across-the-board fuel subsidies with programs targeted at the poor specifically. But the political economy of a gas subsidy reform would be immensely controversial—as Morales’ attempt to withdraw subsidies in 2010, which lasted all of five days, shows. In the current environment, the prospects for such a reform seem bleak.

Bolivia put the benefits of its gas boom to great effect in cutting poverty—but with a more pessimistic resource outlook ahead, the next five years are probably going to be more fiscally challenging for the next Bolivian government.

Thanks to Anit Mukherjee for his helpful input

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.