Capital market development and economic growth in Bolivia

The issue of whether or not the financial sector contributes to the economy has been object of much discussion in the past few decades. While some argue that financial development has a great potential in generating economic growth, others maintain that it is economic growth that precedes financial development, that they are both mutually causal or, that there is no relationship between them at all. These contradictory viewpoints have been based on several empirical studies which have brought to light the large heterogeneity on the nature of this relationship among countries and have highlighted the importance of carrying out in-depth country-specific studies to assess this relationship in order to include country-specific characteristics in the analysis. Bolivia is one of the poorest countries in Latin America. It has experimented with many different economic policies in different moments of its history, going from nationalization to privatization, capitalization and, more recently, nationalization again. In spite of this, its economic growth rates have remained persistently low and have been largely determined by population growth. It is in this context that this thesis analyzes the relationship between the capital market and economic growth in Bolivia. The Bolivian capital market is of recent creation. The legal basis for its functioning was established in the late 1970’s, while the Bolivian Stock Exchange (Bolsa Boliviana de Valores) started operating just in 1989 and the trading of stocks was introduced in 1994. Currently, the most traded instruments are fixed-income securities, in particular, fixed-term deposits. Since their introduction in the Bolivian Stock Exchange in 1994 the trading of stocks has represented only a minor proportion of total trades and has never exceeded 3,7% of the total amount traded. The base of issuers is characterized by a large presence of financial institutions and a very modest participation of small and medium-sized enterprises which compose the largest group of firms in the country and are an important source of employment. The relationship between capital market development and economic growth is assessed by estimating bivariate and trivariate Vector Autoregressive models and performing Granger causality tests using quarterly time-series data from the period between 1994 and 2010. Measures of size and liquidity for both the stock market and the fixed-income security market are used and economic growth is measured with real GDP per capita. The main conclusion of the thesis is that the Bolivian capital market has not significantly contributed to the growth of the economy during the time period analyzed. This suggests that the stock market is too small and illiquid to contribute to economic growth; and that the fixed-income security market, although larger and more liquid, has also a limited impact on the economy. This does not imply, however, that the Bolivian capital market is unimportant or that it should not be considered as a means for promoting economic growth. It rather seems to suggest that there might be a threshold in terms of size and liquidity that must be reached before the capital market is able to influence the economic dynamics of the country. In addition, it may be presumed that the current configuration of issuers and investors participating in the Bolivian capital market, characterized by a predominant presence of firms coming from the financial sector and a very modest presence of enterprises from the productive sector, limits the possibility for this mechanism to boost economic growth.