No returns allowed!

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The size of the informal economy in Bolivia is one of the largest in the world. According to the commonly used indicator produced by Schneider (2010), the size of Bolivia’s informal economy in 2005 reached an amazing 67 percent! That is, 67 percent of Bolivia’s GDP in 2005 was generated in the informal/shadow economy where no taxes are paid and no formal rules apply. [For comparison, the size of the informal economy in the U.S. during the same year was only 8 percent.]

What is sold in Bolivia’s informal economy? Mostly imported goods. Bolivia does not produce much more than natural gas, minerals and some agricultural products; everything else is imported and sold in informal markets. If you need to buy clothing, appliances, tools, cleaning products, furniture, electronics, construction material and even cars, there is a 67 percent probability that you will be buying those goods in informal “ferias” or flea markets. But careful, by the very nature of these markets, any type of warranties on those goods are meaningless. If the toaster you bought doesn’t toast, you are out of luck. You don’t have the right to return a product that you bought in an informal market to a merchant that brought it illegally (avoiding customs) into the country. Everybody knows that and Bolivians have gotten used to doing this type of “unprotected trade” for many years now.

Why do Bolivians put up with unprotected trade? Because the products are sold at incredibly low prices. Informal importers/merchants do not invest in big facilities or fancy stores, they do not train personnel on the technical details of the products, they do not offer insurance or other benefits to their workers, no custom duties or sale taxes are paid and, of course, no warranties are offered. All of those savings translate into more profits for the merchants and lower prices for the customers.

It was surprising, therefore, to read that the Bolivian government has just passed a law requiring merchants to offer warranties and accept product returns if these are defected. The new law is being promoted by the government agency responsible for “protecting consumers’ rights.” Really? Can such a law be enforceable in a country in which 67 percent of the economy happens in markets precisely characterized by the lack of formal rules? If it is enforceable, what are the unintended consequences? The obvious one is that prices will go up. Sellers will have to protect themselves against the risk of product returns. Will customers like to trade the possibility of returns for higher prices?

This is just another example of how seemingly well intentioned laws create unintended consequences that may make them in the end Pareto contracting. Would the agency responsible for protecting consumers’ rights be really protecting these rights if it, unintentionally, makes the goods more expensive?

Fighting against child labor

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The International Labor Organization (ILO) recently estimated that there are currently 12.5 million children working in Latin America (9.5 million of which work in activities considered “dangerous”). Recently, representatives of 25 Latin American countries signed an agreement and committed themselves to eliminate child labor by 2020.

I have never been a big fan of this type of rhetoric. Before “fighting” child labor and commiting ourselves to eliminate it, we should ask why is that child labor happens in the first place. Child labor is only the symptom of a deeper problem. In the overwellmingly majority of cases, children work because they don’t have other options. Children and their families depend crucially on the income they earn. While I wish that children wouldn’t have to work if they didn’t want to, I also recognize that if they are not allowed to, these children and their families will probably be in even more precarious situations. Thus, “eliminating” child labor because we don’t want to see kids working won’t solve the underlying problem of poverty that forced those kids to work. By formally forbidding child labor (like in Bolivia), we don’t help to solve the sources of the problem and make things even worse by limiting their possibilities.

Most children wouldn’t have to work if they parents did and could sustain the family’s needs. That is where the problem resides and the efforts should concentrate. But that is, of course, a bigger and more difficult problem to solve. It is always very tempting, therefore, to attack the symptoms rather than the disease itself.

How does the future look for Bolivia? I am pessimistic.

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Here are my reasons:

  • While Bolivia has been growing fast in recent years, and is predicted to be the fastest growing economy in South America next year, most of its success has been generated by increases in commodities’ export revenues (mainly natural gas and minerals). As the prices of these commodities decrease in the near future, however, export revenues will also decrease and Bolivia will not be able to sustain the fast growing pace. And why would the prices of these commodities decrease? There are strong signals in that direction. China’s economy is slowing down, Brazil – Bolivia’s major trading partner – is expected to suffer a drastic reduction of its growth rates, Argentina – an important buyer of Bolivia’s natural gas – is on the bring of economic collapse, etc.
  • The nationalization of hydrocarbon companies has left the country without the required investment capacity to explore for more deposits in Bolivia’s territory.
  • While Bolivia has kept in check its fiscal discipline, the increase in income has not been used to improve the institutional environment required to attract more investment. In fact, the judicial system is now less efficient and more corrupt and politicized than ever. Impartial justice is simply non-existent under Evo Morales’ regime.
  • Property rights are continuously affected and investing in Bolivia continues to be a risky adventure. Here are just a few examples. The government controls the prices of beef, chicken, flour, sugar and other foodstuff. The government also controls the exports of corn and soya, the tuition charged by private schools and the interest rate in the financial system. Moreover, the government obliges all companies to pay 14 salaries (instead of the normal 13) each year the country’s growth rate reaches 4.5%.
  • Corruption has increased tremendously. In fact, corruption in Bolivia is no longer the “normal” rent-seeking practice that a few bureaucrats always engage in in any country. The corruption in Bolivia is now also political and violent. Bureaucrats are not only after money but also after establishing a complete political control of the country a la Chavez or Correa.
  • Drug trafficking has exploded under Evo Morales’ regime and its behind the rampant increase in criminality.

While some analysts argue that the political stability achieved under Evo Morales is a positive factor, I will argue that such stability is precarious and based mainly on the economic boom described above. The minute the country stops experiencing the accelerated growth of recent years, the obvious presence of political abuse, the lack of institutional development and the increasing corruption and criminality will likely erode Evo Morale’s support quickly. Until that happens, the country would have wasted its most favorable economic circumstances in history.

Want a different opinion? Here is somebody that is optimistic.

The “border dollar” in Argentina

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A fantastic example of how the public protects itself (albeit illegally) against devaluations. Watch the video here: http://www.laterceratv.cl/index.php?m=video&v=38708

The official price of one dollar in Argentina today is 8.47 Argentinian pesos. It is, however, nearly impossible for the common Argentinian to buy dollars at that price. Black markets have, therefore, flourished. In black markets the current price of a dollar has reached almost 15 Argentinian pesos. That large differential indicates that the expectations are that the unofficial price of a dollar will continue to rise.

No surprises

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No surprises in the results of the Bolivian general election. Evo Morales has won his re-re-election (yes, he was re-elected twice) with 60% of the votes.

The whole process was evidently fraudulent. First, Evo Morales used a peculiar and illegitimate interpretation of the new constitution that allowed him to run for president and get re-elected twice. Second, the constitutional tribunal, the electoral committee and the judicial system clearly and, unambiguously, responded and continue to respond to Evo Morales and his political party. Third, Evo Morales unapologetically used the government budget to run his campaign. This evidence, together with a weak, uninspiring and divided opposition made Evo Morale’s victory a done deal before people even went to vote.

Coke forbidden from raising prices in Bolivia

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According to this article in newspaper La Razón, Bolivia’s Minister of Productive Development will take measures against Coca Cola’s decision to raise prices in Bolivia. The Coca Cola franchise in Bolivia had announced a few days ago that they were going to raise prices by approximately 10 cents of a dollar per bottle. The minister called the measure “unjustified” and “political.” And one wonders why Bolivia has a hard time attracting foreign (and even local) investment. Why can’t firm raise prices if market conditions call for it? This intervention is a terrible sign.

Bolivia has entered a dangerous process towards inflation. The country has been growing at a very high pace in recent years due to the massive increase in export revenues (mainly natural gas and minerals) which, together with the increase in drug trafficking activities and government expenditure, has increased liquidity by wide margins. The inflationary pressures have forced the Central Bank to sell bonds offering high interest rates (up to 7%) for four consecutive years in an effort to remove part of that liquidity. I would be curious to see how the government is going to deal with this problem after the general elections. Are they going to continue to call these price increases “political” and hope that that stops them?

El Caballo de Troya Para los Adolescentes Bolivianos

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La Cámara de Diputados está finalizando en estos días la redacción del Proyecto de Ley del Nuevo Código de Niño, Niña, Adolescente. Uno de los elementos centrales del proyecto es la regulación del empleo de adolescentes con el objetivo de que estos gocen de los mismos (y potencialmente más) derechos que los trabajadores adultos.

El proyecto establece, por ejemplo, que el salario y beneficios de los adolescentes no podrán ser menores a aquellos percibidos por adultos que realicen el mismo trabajo. Además, los empleadores deberán contar con autorización escrita de los padres aprobada por la Defensoría Municipal de la Niñez y Adolescencia y deberán otorgar a los adolescentes una hora diaria remunerada para estudiar. El proyecto también prohíbe explícitamente el trabajo de adolescentes en actividades como zafras, minería, pesca, ladrillería, recolección de basura, transporte público, trabajo doméstico, etc.

El proyecto tiene buenas intenciones. Todos queremos que los adolescentes (y cualquier trabajador) tengan las mejores condiciones de trabajo y compensaciones posibles. Lo que a los políticos típicamente se les escapa, sin embargo, es que estas mejoras no se materializaran por arte de magia con leyes como esta. Es más, estas leyes tienden a producir resultados completamente opuestos a los esperados.

El acuerdo de empleo entre adolescentes y empleadores responde a la oferta y la demanda. Los adolescentes generalmente tienen poca experiencia y no han terminado sus estudios y por tanto son más baratos de contratar que los adultos. Los adolescentes lo saben pero tienden a aceptar una compensación menor en vista de sus pocas oportunidades y con el fin de aprender el oficio. Esto pasa desde siempre y en todas partes. En países desarrollados, por ejemplo, es muy común que adolescentes trabajen después de la escuela por salarios muy bajos para aprender algún oficio, costearse necesidades o ahorrar para la universidad. En países pobres como Bolivia, el trabajo del adolescente va más allá y es, en muchos casos, crucial para la economía familiar.

Póngase en el lugar de un empresario. Si el proyecto es aprobado, contratar adolescentes resultará ahora más caro que contratar adultos. Como hemos dicho antes, los adolescentes tienen poca experiencia y estudios pero el empresario deberá pagarles el mismo salario que paga a los adultos. Adicionalmente, el empresario deberá pagar una hora diaria para que el adolescente estudie cosa que no tiene que hacer con sus empleados adultos. Además, el empresario tendrá que hacer el papeleo de autorización con la Defensoría Municipal de la Niñez y Adolescencia el cual, como todo tramite en Bolivia, será probablemente bastante engorroso. El empresario tendrá también que tener cuidado de no emplear al adolescente en actividades como la zafra, el transporte público, el trabajo doméstico, etc. Que haría usted en el lugar de este empresario? Simple. No contrataría más adolescentes. Resulta más barato y práctico contratar adultos. El resultado será, por tanto, completamente opuesto a la intención original: la ley generará un incremento substancial de desempleo entre adolescentes. Éstos, tendrán muchas menos oportunidades de aprender un oficio, no podrán ahorrar para sus estudios o contribuir a la economía familiar.

La única forma de generar mejoras salariales de forma sostenida y natural es a través de incrementos en la inversión productiva privada que genere una mayor demanda por trabajadores. Esto requiere, sin embargo, de una profunda mejora de las condiciones de inversión en Bolivia que establezca reglas de juego claras y estables. Proyectos de ley como este son atractivos por fuera pero, como el Caballo de Troya, guardan siempre sorpresas perversas por dentro.