Testing the Hypothesis of Dutch Disease in the Bolivian Economy

Abstract

In recent years, Bolivia has experienced a strong inflow of foreign currency due in part to a sharp rise in prices of natural resources exports. This element along with the real exchange rate appreciation has created concern about whether the economy is experiencing the so-called Dutch Disease (DD). Based on conditions described in Oomes and Kalcheva (2007) to detect this economic phenomenon (real appreciation, slower manufacturing sector growth, prompt growth of services and higher wages), this document finds no empirical evidence on this phenomenon. In particular, neither an overvalued exchange rate nor a persistent misalignment of the real exchange rate, nor a manufacturing de-industrialization is observed. The evolution of the services sector, their prices and real wages do not respond to the dynamics of a sector boom. However, the document considers that the presence of this phenomenon deserves close scrutiny.