Non-contributory benefits Bolivias social protection system

28 ESS-33 3.5. How fiscal space was created to finance the extension of non-contributory coverage? Because of the importance of social protection within national economies, creating fiscal space to finance the extension of coverage is one of the biggest challenges of social policy, as a universal policy usually requires the mobilization of a significant volume of resources. In Bolivia the expanded coverage of social protection programmes described above, largely in the form of non-contributory benefits, was made possible by the combination of two developments, each of which occurred in quite different political circumstances – and, one might say, almost in opposition to each other: a First, there was the massive sale of state assets to the private sector which occurred in the 1990s, known in Bolivia as the capitalization of state assets. 7 This process played a major role in the creation of the Collective Capitalization Fund FCC. The FCCs sole function was to support the BONOSOL, an annuity benefit payable to all Bolivians from the age of 65 years who were 21 years old or over in December 1995. It is important to bear in mind that this process of sale of state assets took place at the same time as the reform of the Bolivian pension system, which introduced individual accounts under the private administration of the Pension Fund Administrators AFP. BONOSOL was thus a crucial element in the economic policy aimed at the privatization of state assets. b Secondly, the re-nationalization of the hydrocarbon sector was decreed in 2006. Under the new law the State recovered full ownership, possession or control of the countrys natural hydrocarbon resources. Moreover, the nationalization law established a new scheme that changed radically the redeployment of revenue from the production of hydrocarbon: 82 per cent of revenue for the State and 18 per cent for private companies. As a result, the Bolivian States revenue from the exploitation and sale of hydrocarbons was multiplied, and this in turn brought a significant increase in fiscal revenue and hence fiscal space. The consolidation of Renta Dignidad, then, is the historical product of two politically and ideologically antagonistic processes. Its predecessor, BONOSOL was devised as an instrument of political compensation for the privatization of state assets during the rise of neoliberalism in Bolivia. At that early stage, it was a means of delivering a non- contributory pension scheme to a specific generation of Bolivians. The second phase, which consolidated the instrument´s financing and universality as a citizens right, occurred as a result of the transfer of political power into the hands of socialist leaders. As a way of creating fiscal space, the Bolivian method seems innovative, since it derives from a renegotiation of the terms for exploiting the countrys natural resources. In fact, since the 1990s Bolivias fiscal revenue has been growing almost continuously figure 8, 7 The capitalization involved increasing the capital of some state enterprises, through new contributions from private foreign investors, in an amount equal to their book value. Thus, 50 per cent of the shares passed into the hands of private investors, while the other 50 per cent were offered to Bolivian citizens those domiciled in the country and who reached the age of 21 years before 31 December 1995. These shares constituted the Collective Capitalization Fund FCC, whose administration was entrusted to the Pension Fund Administrators AFP of the mandatory social insurance scheme. The profits from the sale of these shares were BONOSOLs sole source of financing. The whole process was reversed in 2006 under the administration of President Juan Evo Morales, who was brought back into power by a referendum that took place in 2004. ESS-33 29 with total tax revenue growing from about 15.3 per cent of GDP in 1990 to 28.5 per cent in 2008. 8 Figure 8. Bolivia: Total tax revenue and hydrocarbons tax revenue, as a percentage of GDP 1990-2008 Source: Banco Central de Bolivia, 2009; World Bank, 2010. To a large extent Bolivias new fiscal space is attributable to government revenue from the production and sale of hydrocarbons. State taxes on revenue from hydrocarbons accounted for 5.3 per cent of GDP in 1995, rising to 9 per cent in 2005 and reaching 11.3 per cent of GDP by 2007. Including the revenue from taxes on hydrocarbons, Bolivias overall tax revenue in terms of GDP is now above the average for Latin America. One important factor that should be mentioned is the effort of the Bolivian State to increase the tax burden in other areas than the hydrocarbon sector, and in fact the tax burden, not counting hydrocarbons, has grown steadily for the past 15 years. Between 1995 and 2008 tax revenue not related to hydrocarbons, including social security contributions, increased from 12.2 per cent to 17.9 per cent of GDP figure 9. The behaviour of Bolivias fiscal pressure indicator speaks well of the policies for creating fiscal space undertaken in the country over the past 15 years. Given this process of creating fiscal space, the degree to which the new fiscal space has been allocated to development financing, particularly the promotion of social investment, is critical. 8 This includes social security contributions.