Prepared for delivery at the 2019 Congress of the Latin American

Studies Association, Boston, USA, May 24 - May 27, 2019

Institutions and inequality in the Bolivian multiethnic society

Iván Omar Velásquez-Castellanos 1

trAndeS
Mayor de San Andres University (UMSA)

Ludwing Torres Carrasco 2

La Salle University

Abstract
Strong and solid institutions are considered as the key element for economic development; however, countries
differ greatly in the quality of their institutions. In the last years Latin America, has been an important decline
in levels of inequality and poverty, associated with changes in labor income, economic growth, commodity
boom, conditional transfer schemes and remittances among others. Bolivia's has registered reductions in
inequality and poverty, since 2000. However, levels of both are still around the average for Latin America.
Literature suggests that they are considered key to economic success; countries differ widely in institutional
quality. An equal distribution of income is a more fertile ground for good institutions. Countries with poor
institutions are also likely to have high inequality. For the Bolivian case, the data show high levels of inequality
accompanied by low institutional quality; over time, it is possible to verify that vertical inequality falls
moderately, but institutional quality deteriorates more than inequality, so it is important to see the dynamics
that comprise the different institutional components in Bolivia. In this paper, we will explore the possible
double relationship between income inequality and institutional quality. Specifically, it is suggested that, while
income inequality may cause subversion of institutions by the politically powerful rich elite, the reverse holds
as well, that is, that poor institutional quality results in a higher degree of inequality. This double causality
relationship is exhibited in a simple dynamic model and is then tested in a Bolivian framework. Moreover, this
research is intended to answer the question of how is institutional quality related to income inequality in Bolivia?
And through the modeling of data with a system of autoregressive vectors, the long-term relationship between
institutions and inequality is explored, finding that the high levels of inequality in Bolivia mean that an
improvement in Gini indexes does not necessarily imply a redistribution of resources, where Institutions,
instead of improving, get worse.

JEL Classification: O15, O17, D70

Key Words: Institutions, Inequality, Governance, Causality

1
The present research was carried out within the framework of the Postdoctoral Fellowship awarded by the Freie
Universität Berlin (FU-Berlin) and the postdoctoral stay at the Pontifical Catholic University of Peru (PUCP) through
the Postgraduate Program in Sustainable Development and Social Inequalities of the Andean Region (trAndeS).
Comments to: ivan.velasquez@kas.de, velasquezivanomar@gmail.com
2
Questions and comments: ludwingtorres@hotmail.com

1
1. Introduction
In Latin America in general and in Bolivia in particular, progress in terms of human development,
improvement of education, health and economic income indicators has been extremely slow. In spite
of this, in the last two decades (since 2000) the region experienced an economic boom phase resulting
from a boom in the prices of raw materials (minerals, gas, oil, agro-industrial products, among others)
in the induced world market. by a significant increase in demand for raw materials from China and
other South Asian countries such as India. The economic growth experienced by the region resulted
in a significant reduction of moderate and extreme poverty levels, as well as a reduction in levels of
income inequality. In fact, at a global level, Latin America is the only region that recorded a drop in
terms of income inequality (World Bank, 2016). According to data from ECLAC (2016) the Gini 3
coefficient that is used to measure income inequality fell between 2008 and 2015 in most countries, in
Bolivia income inequality was reduced from 0.63 to 0.45 between 2000 and 2015, from 0.58 to 0.46;
in Ecuador between 1999 and 2015 and from 0.56 to 0.44 in Peru in the same period. Another effect
of economic growth has been the increase in social mobility (Shorr, Damonte, Velásquez, 2018).
Significant percentages of low-income sectors could rise in the context of the extractive boom to
middle-income levels, while sectors of the middle classes saw their incomes rise to high levels. For
example, in Bolivia it is estimated that 25 percent of households with low incomes could rise to average
levels of income (UNDP, 2016). However, inequalities continue to be a persistently difficult problem
to reduce in Bolivia, not simply that of income but also that related to education, assets and coverage
in health.

The present investigation examines and seeks to relate, in a theoretical and empirical way, the variables
of inequality and institutions. Bi-directional causality is presumed, where first, as inequality increases,
the institutional quality in Bolivia falls, and in turn, secondly, with low-quality institutions, high
inequality is associated; which in the second instance is fulfilled for the Bolivian case.

Undoubtedly, there is ample literature and empirical evidence that relates analytical models where
economic conditions affect institutional quality, such is the case of (Acemoglu and Robinson, 2001)
who analyze institutions in the performance of economies, in their transition politics, from more
authoritarian to more democratic regimes, referencing that non democratic societies include
institutions that favor elites, which lead to greater inequality, to the point of concentration of wealth;
in turn, democracies with high inequality generate a limitation for the establishment of more
democratic governance processes, with institutional weakness biased to privileged groups; Through
the historical analysis of Latin American and Eastern European experiences carried out by these
authors, they realize that it is the institutions that make inequality prevail over time, trying to maintain
the interests of privileged groups, in this way pro-democracy situations are created. promote
redistributive improvements, with institutional improvements; similar findings achieved in the works
of (Rodrik, 1999), (Di Tella and Dornbusch, 1989), (Wallerstein, 1980).

3 The Gini coefficient is a proxy indicator that measures income inequality, takes values between 0 to represent the absence
of inequality and 1 to represent the maximum inequality. The Gini coefficient is a proxi indicator which measures the
inequality of the income

2
A more egalitarian distribution and better institutions are a more fertile ground for economic
development as it relates (Benabou, 1996), who illustrates by the example of South Korea and the
Philippines, showing the distributive and institutional differences that make a Korea a leap in
economic development, with growth rates of more than 6 percent, in contrast to the Philippines that,
in the same period of time, remains stuck in growth rates of less than 2 percent, in response to rising
levels of income inequality and institutionality that responds to a kleptocracy, accompanied by a great
institutional weakness. (Alesina and Rodrik, 1994), (Lindner and Strulik, 2004), (Persson and Tabellini,
1992), find a similar pattern of inequality, institutions and economic development in an analysis
between countries.
However, it is important to conceptualize the understanding and meaning of institutions, which it
demarcates, as it refers (Berg, 2015) to fairer societies, including mechanisms of access to the labor
market and social security in a more equitable way, or the case of (Glaeser, Scheinkman, and Shleifer,
2003), where, on the contrary, institutions, in a view contrary to development, take subversive nuances,
with the presence of high corruption, weak political institutions, and the handling of the law in the
privilege of specific groups, generating a greater concentration of income, or a protectionist state, as
it relates (Korpi and Palme, 1998), where institutions are evaluated in terms of improvements to
poverty (for a particular group) or improvements in inequality (affecting a everything as a society),
what type of policies these foster, with what results, or the case that manifests (Levy and Temin, 2007),
where the institutions demarcate the type of distribution in a society, or the view of (North, 1992)
where institutions play a central role in economic development, understanding formal institutions such
as: laws and rights and non-formal ones, such as: customs, traditions, social norms ; which are prone
to development, if they capture profits from trade, ensure the rule of law and property rights, and
favor the specialization of work, and on the contrary are an anchor for development, if they generate
bureaucracy, increasing costs, or they are managed with a clientelistic gaze, which generates favoritism
for specific groups, with a greater concentration of power and accumulation of income.
For the present study, it is the data that demarcate the conceptualization of institutionality, considering
- based on standardized international quantifications - aspects such as political stability, regulatory
quality, management of the law, control of corruption, among others. interest, which will be contrasted
with measures of income distribution, mainly the Gini index, seeking to answer the question: How
does institutional quality relate to income inequality for the Bolivian case? Using the hypothesis that
Bolivia has high levels of inequality, a reduction in inequality does not necessarily imply a redistribution
of resources, where institutions, instead of improving, get worse.
Using data modeling with a system of autoregressive vectors (VAR), we explore the long-term
relationship between institutions and inequality, seeing adjustments and imbalances over time, and
simulating an endogeneous response to the change of a parameter of interest, to reason to contrast a
structural trend over time. In this way, this document is composed as follows, after this brief
introduction in section 2, the modeling that feeds the relations between institutions and inequality is
presented, element that provides the guideline for the empirical testing strategy that serves to respond
to the research question, which is developed in section 3, giving the specification of the data in section
4, the main findings are presented in section 5, and finally the conclusions and main findings are found
in section 6.

3
2. The model
Using the model proposed by (Chong and Gradstein, 2007), and verifying some theoretical elements
proposed by (Acemoglu and Robinson, 2001), modeling involves posing an economy composed of
families denoted by the subscript i, considering - at least - two generations: parents and children, whose
existence extends to a discrete period t.

The initial level of family income is given exogenously and is denoted by Yi,0 for period t and in
subsequent periods it will be determined endogenously by Yi, t. The distribution of income, initially
assumed, lognormal with parameters µ0 y σ20, where - consequently - the distribution in subsequent
periods is determined in an endogenos way; The assumption used by the model, for its correct
specification, is that in the coming periods the income distribution will be lognormal, having
parameters μt and σt2 as parameters.
In each period, individuals allocate their income to consumption ci, t and productive investment ki, t
+ 1 of a next period, and another type of non-productive investment ri, t + 1. 4By normalizing all
prices to the unit, the budget constraint is presented in equation (1):
(1)

The search for rents, it is assumed, seeks to capture a significant proportion of resources. By referring
resources, you can understand natural resources, such as public resources, which essentially belong to
everyone. Denoting A, as the amount of resources available in any period; The amount of resources
that corresponds to each family is presented in equation (2):

(2)

Where Qt + 1 is interpreted as a quantification of institutional level that is between:

0 ≤ Qt + 1 ≤ 1, where values closer to 1 represent a higher productivity of rent seeking, which will
relate a greater inequality in the allocation of resources. The production function is given in equation
(3):
(3)
With 0 ≤ α ≤ 1, showing the preference of the parents that are derived from the consumption
decisions and the income destined for the children, in an altruistic desire, which shows concern of a
better future between generations. Assuming, for simplicity, symmetric logarithmic preferences, the
utility function is expressed in (4):

4 This non-productive investment can be related to the Rent Seeking concept, understood as the search for rents through
the manipulation or exploitation of the political or economic environment, instead of obtaining benefits for economic
transactions and production of added wealth (Murphy, Shleifer , and Vishny, 1993).

4
 (4)
Where, in each period, economic decisions are made by parents; they first determine the level of
institutional quality and then distribute resources between consumption, productive investment and
rent seeking. The determination of institutional quality is given collectively, through a political process,
which is usually biased to particular interests. The analysis requires a retrospective view: given the level
of institutional quality, families determine their distribution of resources, and anticipate this decision,
given the political option that favored the institutional state. The maximization of the utility function
given by equation (4) is subject to the constraints equations (1) to (3), seeking the individual
optimization of consumption and investment, presented in equation (5):
(5)

Which implies a level of income, for the next period, given by equation (6):
(6)

Using (5), it is possible to verify how as productive investment increases and rent seeking decreases
with higher levels of institutional quality. From equation (6), it is possible to calculate the average
income level for the next period, with equation (7):
(7)

The differential shows that an increase in institutional quality leads to a reduction in income inequality;
on this, the relationship presented in equation (7) shows that income inequality affects average future
incomes as institutional quality reduces. The assumption of decreasing returns to scale, α <1, implies
that a differential that maintains the average level of inequality in high ranges decreases the average
income of the next period.
Maintaining the state of high income inequality is like increasing inequality, even when levels are high,
this shows a relationship between income inequality and institutionality, especially if the institutional
quality is low. It is possible to appreciate that the income inequality will only increase, if, and only if it
is fulfilled that:
(8)

(9)
What equations (8) and (9) show is that when the institutional quality is sufficiently low, it is when it
has no impact if the inequality remains high or little altered. If it is assumed that the determination of
institutional quality can include two extreme choices Qt = 0 referring to low institutional quality, or

5
Qt = 1 with a high institutional quality. It is assumed that this decision is determined by political
decision, which has a bias to safeguard interests; this decision can be modeled on an identity that
accounts for the determination of the average voter:
(10)

Equation (10) shows in φ the political bias in favor of the emerging decision - which could privilege a
particular economic group -; for example, if φ = 0, the position of the average voter is decisive, when
this is φ = 1/2 the decision of the average income voter is decisive, an illustration could be given when
φ> 1/2, but it is valid to achieve the modeling with positions that change the decision to vote, and
therefore its institutionality, providing values other than φ.
The individual utility functions corresponding to the values provided by the two extreme institutional
quality frameworks include:
(11)

(12)

Achieving a profit differential between both values with:

(13)

In (13), income reductions provide a determination of the institutional quality that is a function of the
results of the average voter, in relation to the profit differential:

In equations (14), (15) and (16), it is possible to appreciate that when φ ≤ 1/2 is a positive indicator
of convergence to equilibrium, for a high level of institutional quality, however, the political bias can
be marked, so that individuals with incomes below the average, ie in the case of a φ> 1/2, then it is

6
possible that in these cases where the income inequality is measured by a large σt2, in such case the
level of institutional quality can be chosen.
For the analysis, it will be important to consider the initial point of the degree of inequality and thus
see its evolution over time, an appropriate statistic for this is to see the standard deviation of the
amount σt2.
From equation (10), it is possible to assume that a reduction in inequality, could generate
improvements in institutional quality, however, if the levels of inequality are too high, the marginal
reduction of inequality could be concordant with a weakening in the continuous institutional quality,
tending to that the individual income converges around the average income; In other words, if the
income inequality is initially high, the institutional quality would tend to remain unchanged or
deteriorate over time, which is why the initial conditions for the analysis matter.

3. The empirical strategy

In order to analyze the long-term dynamic relationship between inequality and institutions, we will try
to quantify the behavior of one variable in relation to the rest, pursuing two related elements: the
relationship causes effect and predictability. The first element of analysis involves verifying whether
the change in one variable has a lasting effect on the others, and the second element of analysis requires
verifying the behavior of a variable that allows predicting the behavior of the rest; for this, a system
of autoregressive vectors will be estimated, having the following specification:

In the specifications (17) and (18) the variables y and x represent inequality and institutional quality,
respectively, where L is the operator of lags, A; B; C and D are vectors of coefficients, nt and φt are
variables that capture unobservable factors5 over time, μi and νi are variables that capture unobservable
factors between observational units, έi; t and νi; t are stochastic perturbations that assume white noise,
and in Z we propose control covariates, which can be considered as variables determined in a
exogenous to the model, such as education, poverty, inflation, unemployment, among others of
interest.
As it comprises a conventional analysis of a structural VAR system, other related restrictions are not
imposed - unless they are necessary, according to the specification -, with this the covariance matrix
is generated, which allows the interpretation of the results, in a regression in its reduced shape; an
optimal structure of lags is chosen through the likelihood test, seeking to describe the dynamic
relationship between institutions and inequality, the direct impact of institutions on inequality, given
the past history in inequality, is given by the sum of the coefficients of the lags of institutional quality.

5 The current investigation involves verifying the data of the Bolivian case in the essence of temporal management, as a
series of time, however, when it is required in the analysis, the database extends its use to the panel, with data from all
countries of the world for which there is information for analysis

7
Using the properties of the lag operators, the sum of the impacts over time should be equal to the
unit, where - based on the VAR estimation - it is possible to quantify the individual impacts of each
lag, in order to achieve statistical inference, by reading the standard deviations. From the estimation
of the coefficients, it is possible to calculate the long-term effect of x on y, that is, of the institutional
quality on inequality, as well as the inequality on institutional quality. The long-term effect takes into
account the direct affectation of one variable over the other, given the past history of the first, and
the autoregressive properties of the second. With this, it is possible to estimate if the relationship
between variables follows a stable process, and to quantify the long-term effect of y on x, to say
something, like B (1) / [1 -A (1)].
Additionally, we seek to examine whether one of the variables of interest, to refer to the illustration:
institutions, helps the forecast of another system variable, for this two technical tools will be used, on
the one hand the Granger Causation Test, which seeks to verify if the coefficients of the polynomial
lag B are statistically significant, and on the other hand the quantification of the prognosis will be
achieved using a Response Impulse Function. It is important to highlight two technical elements of
interest, a quantification of impact and the Granger causality test, they are linked but do not relate the
same concept. There are cases where one variable has predictive power over another, however its
impact can be zero, since the coefficients related to lags can be canceled with each other, canceling
any effect over time. However, in the event that the quantification yields an impact statistically equal
to zero, this is not indicative of whether or not there is a Granger type causality.
In this sense, applying the Granger causality test will seek, in addition to quantification, to verify the
direction of the relationship between institutional quality measures and income inequality, in both
directions, thereby seeking to identify the long-term dynamic relationship, in order to ensure the
predictability of one variable over the others.

4. The data
The quantification used to measure income inequality includes the construction of the Gini index,
collected through the Household Surveys. The Household Survey is representative at the national,
departmental and rural urban levels, allowing a coverage of the Bolivian population and achieving a
harmonized series of expansion factors from 1996 to 2017.
Household surveys have as basic units of sampling households, but as units of analysis to the
individual, they can therefore be collated with other supplementary information obtained from the
same survey. As a background to the databases, it is important to point out that since 1978 the National
Institute of Statistics of Bolivia (INE) has been carrying out four different types of surveys: Permanent
Household Surveys (EPH), Integrated Household Surveys (EIH), the National Employment Surveys
(ENE) and the Surveys of Measurement of Living Conditions (MECOVI).
The last ones have been applied in the years 1999, 2000, 2001, 2002, 2003-2004, 2005, 2006, 2007,
2008 and 2009, 2011, 2012, 2013, 2014, 2015, 2016 and 2017; all the MECOVI Surveys 1999-2002,
the Continuous Household Survey 2003-2004, as well as the Household Surveys from 2004 to 2017,
are available on the official website of the National Institute of Statistics, Bolivia www.ine.gob.bo; and
they constitute the most current, and most extensive, series of information on the living conditions of
households.

8
 For the construction of the Gini coefficient, the variable income of the final per capita household is
used, achieving the aggregation of the total income, labor and non-labor of the family, and dividing
by the number of members that composes it, on this variable, the index is constructed, ranged between
0 and 1, with 0 of perfect equality and 1 of total concentration of the income, they refer, by empirical
evidence, that values higher than 0.35, are related to economies with a high concentration of income
( Deininger and Squire, 1996), (Kuznets, 1955)6, (Ravallion, 2001).
In relation to the institutional quality data; There are three sources used in the present investigation:
(1) The Worldwide Governance Indicators (WGI) developed by Kaufmann, Kray and Mastruzzi 7, for
six dimensions of governance, with global data from 1996 to 2017. These indicators reflect the
institutional performance within each country, depending on the actions of the government in
exercise. The conceptualizations that make governance include: i. the process by which the current
government was elected, how it is monitored and what the mechanism of its replacement ii. the
current government's capacity to formulate and implement the planned policies, these can be
evaluated as the effectiveness of government and the regulatory quality of its actions iii. respect for
citizens and the institutional framework that governs social interactions between citizens and the
government, for example, links to the monitoring of the rule of law and the control of corruption,
thereby quantifying the indicators with specific breaks of time, that allow a better reading of the
data; it is presumed that these indicators are little changed over time, so it is suggested, as a result
of seeing trends, to associate them with political cycles, which show response in institutional
indicators, associated with different government administrations (Chong and Calderon, 2000) .
(2) Data from the International Country Risk Guide (ICRG), generated by the PRS Group for a review
of all countries in the world, building a ranking, which assigns an amount per risk component, such
as: i. government stability, ii. Corruption, iii. Management of law and order, iv. social accountability,
in democracy, v. bureaucratic quality 8.
(3) Data developed by Freedom House on civil liberties and political rights, generating an annual report
for each country, with an allocation of 1 to 7, where lower quantifications correspond to higher
levels of freedoms. For the empirical contrast, the ranges in the variables between 0 and 1 were
scaled, where higher levels imply greater liberties; in complementation the Gastil index is calculated,
defined as the simple average of the quantifications of freedoms and civil rights, referring that this
set of indicators has been calculated since 1970, taking into account the last report generated in
2018, from the data for 2017, and also data from the Institutional Investor Magazine are used,
which provide data on favorable environment for investment, by country, and the data also requires
a scale of 0 to 1, where higher quantifications they represent a better institutional environment. 9

6 The Gini index is the Gini coefficient expressed as a percentage, and is equal to the Gini coefficient multiplied by 100.
7 For more information about WGI, see: https://bit.ly/2W1E6h8
8 For more information of ICGR, see: https://bit.ly/2Py15xQ
9 To learn more about the data developed by the Freedom House, see:: https://freedomhouse.org/report-types/freedom-

world

9
 5. Results found
5.1. The level of Inequality
In Bolivia, poverty is a social problem that affects a sample of the population, however inequality
affects the important universe of the Bolivian population, which is a negative phenomenon for well-
being, therefore extreme income inequality in Bolivia is a national phenomenon that is related to access
to opportunities. Persistent high levels of inequality have a negative effect on the prospects for
economic growth and are associated with forms of economic exclusion (Justin, Litchfield and
Whitehead, 2003). Long evidence has shown that countries with high levels of inequality have low
levels of growth (Datt and Ravallion, 1992 and Kanbur and Lustig, 1999). Likewise, high levels of
inequality will impede social cohesion and increase social and political conflict. This will eventually
create insecurity and distrust among economic agents, which is a risk to economic growth and social
development (Justin, Litchfield and Whitehead, 2003). The Gini coefficient is one of the most
common used to measure income inequality, which is between 0 (perfect equality) and 1 (perfect
inequality), but typically its range is between 0.3 - 0.5 for expenses or per capita
Graph No 1 Inequality by geographic area at urban and rural level (1996-2016).
0.80

0.69
0.70
0.66
0.63 0.64 0.64 0.63 0.64
0.61 0.64
0.60 0.56
0.62 0.60 0.53
0.59 0.59 0.60 0.59 0.54 0.54 0.53 0.53
0.59 0.58 0.56 0.52
0.50 0.54 0.54 0.50 0.51
0.52 0.53 0.53 0.53 0.52 0.47 0.48
0.51 0.51 0.48
0.49 0.47 0.48 0.47
0.46 0.45
0.40 0.41
0.44 0.42
0.41 0.42 0.42

0.30
Gini Gini urbano Gini rural
0.20

0.10
Period Ex-Before Bonanza Bonanza Period Bonanza Period

0.00
1996 1997 1999 2000 2001 2002 2005 2006 2007 2008 2009 2011 2012 2013 2014 2015 2016

Source: National Institute of Statistics (National Employment Survey, November 1996 and 1997, Household
Survey -Measurement of Living Conditions Program, November - December 1999, 2000, 2001 and 2002 and
Survey of Homes2003-2004, 2005, 2006, 2007, 2008, 2009, 2011, 2012, 2013, 2014, 2015 y 2016).
Elaboration: Own

In the ex-ante period to the bonanza income inequality measured by the Gini coefficient was high
with respect to international standards 0.59 for 1996 and this level of inequality was behind those
registered in Brazil and Chile, a decade later in the ex-ante period to the bonanza with slight variations
from year to year did not change and in 2006 the Gini coefficient was 0.59, in a decade this indicator
had not changed substantially.

10
At urban level income inequality increased from 0.51 in 1996 to 0.53 in 2006 due to wage
heterogeneities in the labor market, this phenomenon was also similar at the rural level of 0.61 in 1996
rose to 0.64 in 2006. This reflects that income disparities, heterogeneous salary allocations and the
way in which they were accumulated were inequitable and did not undergo significant changes between
1996 and 2006 (Graph No 1). In the boom period, the increase in the national minimum wage, the
government's decision not to receive a remuneration higher than that of the President of the State. So
the income distribution effect, the conditional transfers among others generated a decrease of the Gini
coefficient of 0.59 in 2006 to 0.48 in 2013, -11 points were reduced inequality at the national level, at
urban level also reduced the inequality -11 points, from 0.53 in 2006 to 0.42 in 2013, a rural level from
0.64 to 0.53 between 2006 and 2013, with a reduction also of -11 points in the bonanza period.

In the ex post period of the bonanza, the national Gini reached 0.48, the urban Gini reached 0.41 and
the rural 0.51, reflecting the fact that income inequality and their heterogeneities are a pending agenda
problem. Below we show complementary measures of poverty that reflect its incidence, gap or
amplitude and severity. In terms of inequality10 other measures that reflect the level of inequalities
from household surveys, subsequently the poverty lines used in the present investigation are
presented.

Table No 1
Additional Measures of Poverty and Inequality (1996-2017)
Meassure 1996 1997 1999 2000 2001 2002 2005 2006 2007
Poverty
FGT (0) Incidence 0.65 0.64 0.63 0.66 0.63 0.63 0.61 0.60 0.60
FGT (1) Gap 0.20 0.21 0.22 0.25 0.23 0.22 0.17 0.17 0.20
FGT (2) Severity 0.14 0.14 0.13 0.15 0.14 0.13 0.09 0.09 0.11
Inequality
GINI 0.59 0.59 0.58 0.62 0.59 0.60 0.60 0.59 0.56
ATKINSON 0.28 0.27 0.35 0.40 0.33 0.40 0.30 0.35 0.33
THEIL 0.46 0.44 0.50 0.61 0.62 0.69 0.55 0.47 0.49
General Entropy 0,92 1,08 1,10 1,12 1,48 1,66 1,80 1,45 0,97

Measure 2008 2009 2011 2012 2013 2014 2015 2016 2017
Poverty
FGT (0) Incidence 0.57 0.51 0.45 0.43 0.39 0.39 0.39 0.39 0.34
FGT (1) Gap 0.21 0.15 0.17 0.18 0.16 0.19 0.20 0.18 0.17
FGT (2) Severity 0.13 0.08 0.09 0.11 0.09 0.11 0.14 0.12 0.11
Inequality
GINI 0.52 0.50 0.47 0.47 0.48 0.48 0.47 0.48 0.44
ATKINSON 0.30 0.24 0.31 0.38 0.40 0.44 0.52 0.58 0.58
THEIL 0.57 0.43 0.51 0.56 0.63 0.71 0.78 0.81 0.82
General Entropy 1,43 1,91 1,08 1,13 1,2 1,25 1,33 1,39 1,45

10Inequality: The Atkinson index is a measure of income inequality. It is one of several indices developed by the British
economist Anthony Barnes Atkinson. This index appears among the family of normative indexes enunciated in an article
of Atkinson of 1970, published in the Journal of Economic Theory. The measure is useful to determine which end of the
distribution contributed the most to the inequality observed. The Theil index is a measure of inequality based on Shannon's
entropy. It serves to measure and compare the distribution of income. According to Cotler, Pablo said index can be
disaggregated into a component of inequality within study groups, and another corresponding to inequality between
groups. In: https://es.wikipedia.org/wiki/%C3%8Antkinson

11
Source: National Institute of Statistics (National Employment Survey, November 1996 and 1997, Household
Survey - Measurement of Living Conditions Program, November - December 1999, 2000, 2001 and 2002 and
Survey of Homes2003-2004, 2005, 2006, 2007, 2008, 2009, 2011, 2012, 2013, 2014, 2015 y 2016, 2017).
Elaboration: Own.

Lines of moderate poverty and estimated values by geographical area (1996-2016)

Year Line of Poverty Urban Area Line of Poverty Rural Area
Moderate - Urban Estimated value Moderate - Rural Estimate Value
1996 295.78 0.52 214.03 0.84
1997 309.26 0.54 226.73 0.78
1999 323.64 0.51 237.10 0.84
2000 323.01 0.54 231.60 0.87
2001 320.87 0.54 231.47 0.78
2002 321.78 0.54 233.39 0.79
2005 358.45 0.51 281.52 0.78
2006 383.57 0.50 294.00 0.76
2007 463.43 0.51 360.06 0.77
2008 564.36 0.49 419.72 0.74
2009 572.22 0.44 424.38 0.66
2011 582.92 0.37 441.40 0.62
2012 597.34 0.35 460.84 0.61
2013 613.98 0.29 469.28 0.60
2014 629.47 0.31 480.38 0.58
2015 637.24 0.31 496.14 0.55
2016 646.93 0.30 507.28 0.56
Line of extreme poverty and estimated value by geographic area (1996-2016)

Year Line of Poverty Urban Area Line of Poverty Rural Area

Extreme - Urban Estimated value Extreme - Rural Estimated value
1996 148.78 0.24 96.22 0.68
1997 156.45 0.25 115.37 0.59
1999 171.81 0.24 134.73 0.70
2000 171.46 0.28 131.61 0.75
2001 170.44 0.26 131.53 0.60
2002 170.90 0.26 133.04 0.62
2005 197.17 0.24 160.47 0.63
2006 210.64 0.23 167.58 0.62
2007 253.20 0.24 205.23 0.64
2008 305.88 0.19 239.24 0.51
2009 311.47 0.16 247.31 0.45
2011 325.72 0.11 258.33 0.42
2012 335.21 0.12 273.83 0.41
2013 351.89 0.09 286.19 0.39
2014 365.78 0.08 295.73 0.36
2015 381.73 0.09 295.56 0.33
2016 395.98 0.08 304.13 0.34

12
Source: National Institute of Statistics (National Employment Survey, November 1996 and 1997, Household
Survey - Measurement of Living Conditions Program, November - December 1999, 2000, 2001 and 2002 and
Survey of Households 2003-2004, 2005, 2006, 2007, 2008, 2009, 2011, 2012, 2013, 2014, 2015 and 2016).
Elaboration: Own.

Although variance and standard deviation are the most useful scatter measures in statistical analysis,
there are other techniques with which the dispersion of a data set can be measured. These additional
dispersion measures are quartiles, deciles and percentiles. Undoubtedly, inequality has decreased for
most of the countries of the region during the last 15 years, although inequality still remains high in
some others such as Bolivia. Inequality indicators are different ways of measuring aggregate
differences in income distribution, for example the Gini Index, as well as 90/10 are some of the most
used. The interactive chart (Graph No 2) shows the decile dispersion relation has evolved. A simple
and popular measure of inequality is the decile dispersion ratio, which presents the relationship
between average income or consumption of the richest 10 percent (for example, the 90th percentile)
by the poorest 10 percent (the 10th percentile).
This relationship is easily interpretable by expressing the income of the rich as multiples of that of the
poor. However, it does not take into account information on income in the middle of income
distribution and does not use the information on the distribution of income within the upper and
lower deciles or percentiles. Despite this, it shows that using household survey data the degree of
inequality between the few that have a lot (rich) and the many that have little (poor) was very high
according to international standards in the ex ante period of the bonanza.
In the period of the bonanza due to conditional transfers, bonuses, improvements in the minimum
wage and remittances, the gap was gradually reduced as a result of an income distribution effect. This
situation of reduction of the gap is best shown in the ex post period to the bonanza (Graph No 2), is
this negatively important gap still in terms of asymmetry and heterogeneities between rich and poor?
Unfortunately the answer is affirmative according to international standards, there is still a lot to do
in search of equity in Bolivia.

13
Graph 2
Ratio of the 90th percentile to the 10th percentile, decile 10 and the decile 1 - 1995-2017

Bonanza Period

Period Ex-Before Bonanza Period Ex-post Bonanza

Source: National Institute of Statistics (National Employment Survey, November 1996 and 1997, Household
Survey -Measurement of Living Conditions Program, November - December 1999, 2000, 2001 and 2002 and
Survey of Homes 2003-2004, 2005, 2006, 2007, 2008, 2009, 2011, 2012, 2013, 2014, 2015 y 2016, 2017).
Elaboration: Own.

5.2. Governability Data

Governance consists of the traditions and institutions under which the authority in a country is
exercised. This includes the process under which governments are elected, monitored and replaced;
the ability of the government to effectively formulate and implement sound public policies; and the
respect on the part of the governments to the citizens and to the state of the institutions that govern
the economic and social interrelation between them.

14
Graph 4. Governance data

Bonanza Period Period Ex-post Bonanza

Period Ex-Before Bonanza

Source: Worldwide Governance Indicators (WGI).

The Governance Indicators project, financed by the World Bank, since 1996 provides, through strong
measurements based on surveys and studies, instruments with which it is possible to analyze the state
of governance around the world. This project focuses on six dimensions:11 i) free opinion and
accountability by governments to society; ii) political stability and absence of violence; iii) government
effectiveness; iv) quality of regulation; v) rule of law; and vi) control of corruption. Indicators are
estimated and then a ranking of the economies is made by ranking them by percentiles, that is, by each
dimension the economies take values between 0 and 100, where a higher value means better location
within the ranking.

11
Voice and accountability; It captures the perception of the extent to which the citizens of a country are able to
participate in the selection of their government, as well as freedom of expression, freedom of association, and free
media. Political stability and absence of violence, crimes and terrorism; this aspect refers to the perception of the
population about possible events, not peaceful or unconstitutional, that could destabilize the current government.
This includes the case of terrorism and violence for political reasons. Regulatory quality; This interesting index refers
to the ability of the government to implement rules and policies that do not hinder the proper functioning of markets
(such as price controls or excessive regulation) and that, on the contrary, favor and promote the proper development
of business and foreign trade Government effectiveness; This indicator reflects the quality of the public service, the
level of commitment of the government with the implementation of adequate public policies and the effective
provision of public goods, as well as the degree of independence of the government with respect to political
pressures. Rule of Law, this indicator reflects the extent to which a country's social and economic relations are
governed by fair and predictable rules. This includes the level of confidence of citizens in the existing rules (and their
willingness to respect them), as well as their perception of the efficiency of the judicial system and the existence of
violent environments, among others. Control of corruption, the latest index of governance reflects the extent to
which citizens perceive that corruption exists in their country. Corruption, defined in broad strokes, refers to the
abusive use of public power in order to satisfy personal interests.

15
Graph 5. Governance index

Period Ex-post Bonanza

Bonanza Period

Period Ex-Before Bonanza

Source: Worldwide Governance Indicators (WGI).

Bolivia accumulates the criteria that define a low degree of governability (Graph 5). In terms of voice
and accountability, this indicator tries to capture the perception of citizens in the country about the
capacity they have to select their leaders, as well as if they enjoy freedom of expression, freedom to
associate and freedom of the press. Given the above, a country should show good results in this
indicator if the elections of the governors that are held in it are democratic and transparent, so also if
the freedom of expression is not threatened by the current rulers or pressure groups, and there is no
fear on the part of the citizens of the country to associate in related groups. In Bolivia, although there
have been elections and referendums as part of its democratic process, over the last few years this
variable has deteriorated due to the persistence of the government administration to continue and
perpetuate itself in power, as well as the situation of the free opinion and the accountability of the
rulers to society is worrying and shows a considerable lag compared to other economies in the region.
An analysis that could be obtained from the above is that in Bolivia there exists and has been little
willingness on the part of the rulers to undertake concrete actions that seek to improve the public
perception about the state of the process of rendering accounts. One effect of this, according to
Argandoña (2007), is that in this type of countries the perception of corruption tends to be also high.

16
Graph 6. Voice and Accountability

Period Ex-post Bonanza

Period Ex-Before Bonanza Bonanza Period

Source: Worldwide Governance Indicators (WGI).

In fact, according to Transparency International in its ranking of the most transparent countries in
2018, Bolivia obtained 29 points in the Perception of Corruption Index. Their score has declined in
the last report, which means that Bolivians perceive an increase in corruption in the country's public
sector. The decrease of its score has caused that Bolivia worsens its position with respect to the rest
of the countries until the position 132, of the 180, so the perception of corruption of its inhabitants
is very high. The perception of corruption in the last five years in Bolivia has worsened, which has
been accompanied by a decline in its position in the international ranking of corruption, which means
that it is one of the countries where corruption is a latent and worrying problem. The economic
perception of this reflects that, if transparency in government management increases, through
adequate accountability, there is a greater possibility that acts of corruption can be discovered, and
therefore tend to be carried out with a minor. frequency. The importance of this is that if there is less
corruption, all the citizens of the country, regardless of their socio-economic situation and political
adherence, will have access to public services.
In Bolivia, political stability and the absence of violence also present low indicators, since its return to
democracy has registered a significant number of conflicts, according to several studies the social
conflict has a defining equidistance with economic growth. In the absence of social conflict, a society
is expected to have higher levels of economic growth. The presence of social conflicts such as the
blocking of roads disturbs and erodes the circuit of the market economy.

17
Graph 7. Political stability

Period Ex-post Bonanza

Period Ex-post Bonanza

Bonanza Period

Source: Worldwide Governance Indicators (WGI).

Social conflict affects business competitiveness, paralyzes the productive apparatus, increases
expenses, reduces revenues, makes markets lose, reduces investments, increases risk country status,
increases unemployment and generates many other pernicious effects that the end they end up
reducing economic growth. In countries where there is a latent danger of political instability,
investment, both local and foreign, is restricted, and because this is the most important source for the
creation of jobs and therefore of wealth and economic prosperity, in this type of countries, the
potential for greater growth and economic development is limited.

Table 2, Graph 3
Governance Indicators

18
Graph 8. Government effectiveness

Period Ex-post Bonanza

Period Ex-Before Bonanza Bonanza Period

Source: Worldwide Governance Indicators (WGI).

In what corresponds to the effectiveness of the government, this indicator of governability tries to
capture the perception of citizens about the quality of public services (infrastructure in general,
education, transport), the quality of the civil service and its degree of independence of political
pressures, the quality of the formulation and implementation of public policies and the credibility with
which the government enjoys its commitment to such policies. Undoubtedly the boom in the last
decade brought an improvement in social indicators and a significant amount of public investment
along with conditional transfers to the vulnerable, but in the aggregate the low institutional quality,
the problematic quality of the infrastructure in general, remains complicated. , and the problems of
poor educational quality and problematic health coverage. The low institutional quality refers to the
perception that the judicial system is lacking in independence, which generates high transaction costs;
hampering efficient market solutions; Likewise, and it is not something new, insufficient investment
and corruption in infrastructure hinders the commercialization of merchandise generating undesirable
effects for producers and the interconnection of markets; and finally, the poor quality of education
and health generate a poorly trained human capital with low productivity.
With respect to regulatory quality in the last 15 years (Table 2), it has fallen from 25.98 to 18.75,
showing that there is an incidence of policies that are contrary to the market, inadequate supervision
of banks, among other imposition of burdens due to excessive regulation. in some areas such as
foreign trade and commercial development. The low score obtained in this indicator is also explained
by the recent use of price controls and / or price bands, together with export restrictions on certain
products, policies that, instead of encouraging productive development, restrict their growth, and
therefore the creation of more formal employment.

19
Graph 9. Government effectiveness

Period Ex-post Bonanza

Period Ex-Before Bonanza Bonanza Period

Source: Worldwide Governance Indicators (WGI).

Regarding the above, the low score also has an explanation in the differentiated tax system that exists
in the country, which in some way punishes the formal productive sector since there are no effective
controls to punish those who hide behind the informality so as not to pay taxes; thus, rigid labor
regulations discourage contracting under the law due to its high relative cost for most of the country's
formal companies, which are small and medium-sized.
With regard to the rule of law, this dimension captures the degree to which agents in the country trust
and respect the rules that govern society, particularly if they are trusted and respected: contracts,
property rights, police, to the judicial system, as well as if there is a high degree of violence in citizen
insecurity. The low rating is explained by a low protection of property rights, above all intellectual,
this is due to the high degree of piracy that exists in the country; in the same way it is explained by the
high tax evasion, the general distrust in the police and in the judicial system.

20
Graph 10. Rule of Law - Compliance with the Law

Bonanza Period

Period Ex-post Bonanza

Period Ex-post Bonanza

Source: Worldwide Governance Indicators (WGI).

With respect to the control of Corruption, this last indicator refers to the perception that public power
is exercised for private benefit, including both small and large-scale forms of corruption, as well as the
capture of the State by select minorities and private interests. The reasons for this relative low location
is due, according to the study, to the fact that in the country corruption is practiced at all levels to
obtain favors for public services, that is, the culture of the famous bribes is practiced. And among the
public institutions that most receive these types of payment, the police and the judicial system
predominate, as shown by the ranking of public entities most reported in the Ministry of Transparency.
The costs to the country of the lack of control over corruption have already been outlined in some
way in the first point of this section, only adding that, although there is a need for laws to criminalize
acts of corruption, it is perhaps as much or more necessary that the control mechanisms exist to stop
it, that is to say, that the legal dispositions are effectively executed.

21
Graph 11. Control of Corruption

Period Ex-post Bonanza

Period Ex-Before Bonanza

Bonanza Period

Source: Worldwide Governance Indicators (WGI).

Graph 12. Freedom House indicators

Period Ex-post Bonanza

Period Ex-Before Bonanza

Bonanza Period

Source: Freedom House.

22
Graph 13. ICGR indicators

Bonanza Period

Period Ex-post Bonanza Bonanza Period

6. Dynamic relationships and impulse response functions in the system

Table 3 (Annex) gives a summary of the basic statistics for all the indicators used in the analysis, as
well as in Table 4, it is possible to verify the matrix of simple correlations among the variables of
interest, synthesizing the results of the indicators of inequality with institutional quality indicators,
where negative correlations reflect theoretical agreement, showing that as inequality falls,
institutionality improves, these are the cases of political stability and corruption, with coefficients of
0.5 and 0.6, respectively. However, an important factor to consider is the positive correlations, which
account for a linear relationship, that as the inequality falls, the indicator of institutionality also falls; a
possible explanation of this result against intuitive comes from the theoretical explanation of the high
levels of inequality, where a reduction of it, does not necessarily imply a redistribution of resources
from the richest to the poorest, but a restructuring of the disparities However, it would be important
to corroborate the long-term relationship between variables, a situation that will be made later in the
document.

23
For the modeling, a specification of autoregressive vectors was generated, explained in section 4,
generating a set of equations with temporal lags, which allow verifying the possibility of a dynamic
relationship between variables. The objective of this specification is not the estimation of parameters 12,
but to verify the interrelation between the variables of interest, besides quantifying the effects of
shocks on the system13.
A first element to be tested, to verify the relationship between variables, is to account for the
exogeneity per block, as a generalization of the causality in the Granger sense applied to the
multivariate case. Tables 1 and 2 in annex, show this quantification, where the long-term relationship
is verified, as well as the bidirectional causality of the results, for example, in the case of governance,
it is possible to see that the bidirectional effect, on the one hand , it is possible to verify that the change
in a unit of the measure of governability, modifies the inequality in 0.048 in the period from 1996 to
2005 in the same sense, but this reduction becomes less marked in the period 2006 to 2017, where a
change unit of governance has a Gini change of 0.04, having a global effect for the entire period, from
1996 to 2017, of 0.05; On the other hand, as it reduces inequality, in turn it also reduces governability,
by 0.02 for the period from 1996 to 2005, by 0.04 for 2006 to 2017, and with an overall effect of 0.06
for the entire series of analyzes.
In the case of political stability and corruption, where the relationship is reversed, since before positive
unitary changes in political stability, a reduction of 0.07 in Gini is quantified, for the whole series, or
the case of a unitary increase in corruption, generates a reduction in inequality of 0.08. With the
impulse response functions, the change in interrelations resulting from a shock on a variable in the
system is measured, as is the case, changes in the system are tested against a shock of inequality
reduction, measured by the Gini index, for the In this case, in order to verify the change in time, a
response of 0.1, or its equivalence of 10 percentage points, is tested on the variables of institutional
quality. Graph 1 shows that before the shock that reduces inequality by 10 percentage points, it
generates oscillating alterations in governance, political stability, regulatory quality and corruption
control, with first a reduction in indicators, but then a marked increase, being able to interpret, as a
result, that - as the long-term relationship was proven - in a situation of high inequality in the
distribution of income, a pronounced Gini reduction, first causes the indicators of institutional quality
to fall over time, but then, in a broader horizon, all these improve, corroborating the theoretical
hypothesis of convergence, where in the long term, a more equal distribution of income is the
determining factor to achieve a better institutional quality.

12 The VAR specification, by construction, is overparameterized, where many of the coefficients may be statistically non-
significant; In addition to this, it is important to consider that for the correct specification, the choice of optimal lags was
considered, as well as the deterministic components, which include linear tendencies, dummies of stationality and
stationarity, as well as intertemporal variations.
13 It is important to note that, in essence, it is considered that all variables are considered potentially endogenous

24
7. Final considerations
Strong institutions are considered as the key element for economic development, however countries
differ greatly in the quality of their institutions. As a recurrent pattern, it refers to countries with weak
institutions that exhibit high inequality. For the Bolivian case, the data show high levels of inequality
accompanied by low institutional quality; it is verified in the study period that the inequality falls
moderately, but the institutionality deteriorates a lot.
In Bolivia, poverty is a social problem that affects a sample of the population, however inequality
affects the important universe of the Bolivian population, which is a negative phenomenon for well-
being, therefore extreme income inequality in Bolivia is a national phenomenon that is related to access
to opportunities.
Bolivia accumulates the criteria that define a low degree of governability. In terms of voice and
accountability, political stability and absence of violence; government effectiveness; quality of
regulation; rule of law; and control of corruption, indicators that in the last period have deteriorated
and there is a considerable lag compared to other economies in the region.
Through data modeling with a system of autoregressive vectors, the long-term relationship between
institutions and inequality is explored, finding that the high levels of inequality in Bolivia mean that an
improvement in Gini indexes does not necessarily imply a redistribution of resources, where
Institutions, instead of improving, get worse.
It was verified through the matrix of simple correlations between the variables of interest, synthesizing
the results of the inequality indicators with institutional quality indicators, where negative correlations
reflect theoretical agreement, showing that as inequality falls, institutionality improves. However, an
important fact to consider are the positive correlations, which account for a linear relationship, that
as the inequality falls, the indicator of institutionality also falls; due to the high levels of inequality in
Bolivia, where a reduction in inequality does not necessarily imply a redistribution of resources from
the richest to the poorest, but a restructuring of the disparities.

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26
 Annexed
Table 1. Simple correlation matrix

Table 2. Dynamic relationship between institutions-inequality, inequality-institutions (2)

27
Graph No 1. Functions boost response of improvements in income redistribution on
governance indicators

Graph No 2. Functions impulse response of improvements in redistribution of income on the

indicators of free

28
Graph No 3 Functions boost response to improvements in income redistribution on ICRG
indicators

A. Worldwide Governance Indicators (WGI) Índice de gobernabilidad

29
Table 3 Summary of basic statistics

Table 4 Simple Correlation Matrix

30